Chapter 16 - Multiple Choice Questions

1. A budget a. is a substitute for management b. is an aid to management c. can operate or enforce itself d. is the responsibility of the accounting department

B is correct Section Budgeting basics A budget is an aid to management. 2. Accounting generally has the responsibility for a. setting company goals b. expressing the budget in financial terms c. enforcing the budget d. administration of the budget

B is correct Section Budgeting basics Accounting is generally responsible for expressing the budget in financial terms. 3. Which one of the following is not a benefit of budgeting? a. It facilitates the coordination of activities b. It provides definite objectives for evaluating performance c. It provides assurance that the company will achieve its objectives d. It requires all levels of management to plan ahead on a recurring basis

C is correct Section Budgeting basics An assurance that the company will achieve its objectives is not a benefit of budgeting. 4. Budgeting is usually most closely associated with which management function? a. Planning b. Directing c. Motivating d. Controlling

A is correct Section Budgeting basics Budgeting is usually most closely associated with planning.

6.

A common starting point in the budgeting process is a. expected future net income b. past performance c. to motivate the sales force d. a clean slate, with no expectations

B is correct Section Budgeting basics Accounting is generally responsible for expressing the budget in financial terms. 7. A budget period should be a. monthly b. for a year or more c. long-term d. long enough to provide an obtainable goal under normal business conditions

D is correct Section Budgeting basics A budget period should be long enough to provide an obtainable goal under normal business conditions.

11.

Long-range planning a. generally presents more detailed information than an annual budget b. generally encompasses a longer period of time than does an annual budget c. is usually more accurate than an annual budget d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis B is correct Section Budgeting basics Long-range planning generally encompasses a longer period of time than does an annual budget.

14.

A set of interrelated budgets that constitutes a plan of action for a specified period of time is known as a a. master budget b. madam budget c. authoritarian budget d. centralised budget

A is correct

Section The master budget A set of interrelated budgets that constitutes a plan of action for a specified period of time is known as a master budget.

17.

The starting point in preparing a master budget is the preparation of the a. production budget b. sales budget c. purchasing budget d. personnel budget

B is correct Section The master budget The starting point in preparing a master budget is the preparation of the sales budget.

18.

If there were 30,000 kilograms of raw material on hand on 1 January, 60,000 kilograms are desired for inventory at 31 January, and 180,000 kilograms are required for January production, how many kilograms of raw material should be purchased in January? a. 150,000 kilograms b. 240,000 kilograms c. 120,000 kilograms d. 210,000 kilograms

D is correct Section The master budget 210,000 kilograms of raw material should be purchased in January (180,000 + 60,000 30,000). 19. The total direct labour hours required in preparing a direct labour budget are calculated using the a. sales forecast b. production budget c. direct materials budget d. sales budget

B is correct Section The master budget The total direct labour hours required in preparing a direct labour budget are calculated using the production budget.

20.

The direct materials and direct labour budgets provide information for preparing the a. sales budget b. production budget c. manufacturing overhead budget d. cash budget

D is correct Section The master budget The direct materials and direct labour budgets provide information for preparing the cash budget. 21. A sales forecast a. shows a forecast for the firm only b. shows a forecast for the industry only c. shows forecasts for the industry and for the firm d. plays a minor role in the development of the master budget

C is correct Section The master budget A sales forecast shows forecasts for the industry and for the firm.

22.

Which of the following is not an operating budget? a. Direct labour budget b. Sales budget c. Production budget d. Cash budget

D is correct Section The master budget The cash budget is not an operating budget. 23. Which of the following is not a financial budget? a. Capital expenditure budget b. Cash budget c. Manufacturing overhead budget d. Budgeted statement of financial position

C is correct Section The master budget The manufacturing overhead budget is not a financial budget.

25.

An overly optimistic sales budget may result in a. increases in selling prices late in the year b. insufficient inventories c. increased sales during the year d. excessive inventories

D is correct Section The master budget An overly optimistic sales budget may result in excessive inventories.

26.

In a production budget, total required units are the budgeted sales units plus a. beginning finished goods units b. desired ending finished goods units c. desired ending finished goods units plus beginning finished goods units d. desired ending finished goods units minus beginning finished goods units

D is correct Section The master budget In a production budget, total required units are the budgeted sales units plus desired ending finished goods units minus beginning finished goods units. 27. The direct materials budget details 1. the quantity of direct materials to be purchased. 2. the cost of direct materials to be purchased. a. 1 b. 2 c. both 1 and 2 d. neither 1 nor 2

C is correct Section The master budget The direct materials budget details the quantity of direct materials to be purchased as well as the cost of those direct materials.

28.

The production budget shows expected unit sales of 16,000. Beginning finished goods units are 2,800. Required production units are 16,800. What are the desired ending finished goods units? a. 2,000 b. 2,800 c. 3,200 d. 3,600

D is correct Section The master budget The desired ending finished goods units are 3,600 (16,800 + 2,800 16,000).

30.

The production budget shows that expected unit sales are 16,000. The total required units are 18,000. What are the required production units? a. 2,000 b. 3,000 c. 4,000 d. cannot be determined from the data provided

D is correct Section The master budget Required production units cannot be determined as there is no information on beginning or ending inventory. 31. The direct materials budget shows: Units to be produced Total kilograms needed for production Total materials required What are the direct materials per unit? a. 1.08 kilograms b. 2.0 kilograms c. 2.2 kilograms d. cannot be determined from the data B is correct Section The master budget Direct materials per unit are 2.0 kilograms (6,000 / 3,000). 3,000 6,000 6,600

32.

The direct materials budget shows: Desired ending direct materials Total materials required Direct materials purchases 12,000 kilograms 18,000 kilograms 15,800 kilograms

The total direct materials needed for production is a. 6,000 kilograms b. 2,200 kilograms c. 3,800 kilograms d. 33,800 kilograms A is correct Section The master budget Total direct materials needed for production is 6,000 kilograms (18,000 12,000).

33.

If the required direct materials purchases are 8,000 kilograms and the direct materials required for production is three times the direct materials purchases, and the beginning direct materials are three and a half times the direct materials purchases, what are the desired ending direct materials in kilograms? a. 20,000 b. 4,000 c. 12,000 d. 8,000

C is correct Section The master budget The desired ending direct materials are 12,000 kilograms. 34. Which of the following expenses would not appear on a Selling and Administrative Expense Budget? a. Sales commissions b. Depreciation c. Property taxes d. Indirect labour

D is correct Section The master budget Indirect labour would not appear on a selling and administrative expenses budget.

38.

A company determined that the budgeted cost of producing a product is $20 per unit. On 1 June there were 20,000 units on hand, the sales department budgeted sales of 75,000 units in June, and the company desires to have 30,000 units on hand on 30 June. The budgeted cost of goods manufactured for June would be a. $1,300,000 b. $1,900,000 c. $1,500,000 d. $1,700,000

D is correct Section The master budget The budgeted COGM for June would be $1,700,000 ((75,000 + 30,000 20,000) units x $20).

40.

In practice cash budgets are often prepared for the budget period on a a. daily basis b. weekly basis c. monthly basis d. quarterly basis

C is correct Section The master budget In practice cash budgets are often prepared for the budget period on a monthly basis. 41. The financial budgets include the a. cash budget and the selling and administrative expense budget b. cash budget and the budgeted balance sheet c. budgeted balance sheet and the budgeted income statement d. cash budget and the production budget

B is correct Section The master budget The financial budgets include the cash budget and the budgeted balance sheet.

44.

The following information was taken from Sloan Ltds cash budget for the month of July: Beginning cash balance $90,000 Cash receipts 57,000 Cash disbursements 102,000 If the company has a policy of maintaining a minimum end of the month cash balance of $75,000, the amount the company would have to borrow is a. $30,000 b. $15,000 c. $45,000 d. $18,000

A is correct Section The master budget The company would have to borrow $30,000 ($90,000 + 57,000 102,000 = $45,000, 75,000 45,000 = 30,000). 45. The cash budget reflects a. all revenues and all expenses for a period b. expected cash receipts and cash disbursements from all sources c. all the items that appear on a budgeted income statement d. all the items that appear on a budgeted balance sheet

B is correct Section The master budget The cash budget reflects expected cash receipts and cash disbursements from all sources. 46. The following credit sales are budgeted by Roswell Company: January February March April $34,000 50,000 70,000 60,000

The company's past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of April is a. $61,720 b. $56,000 c. $60,000 d. $58,800 C is correct Section The master budget The anticipated cash inflow for the month is $60,000. (($60,000 x .7) + (70,000 x .2) + (50,000 x .08))

48.

A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were: January February March $ 80,000 48,000 120,000

The cash inflow in the month of March is expected to be a. $90,400 b. $68,400 c. $72,000 d. $86,400 A is correct Section The master budget The cash inflow for the month of March is expected to be $90,400 (($120,000 x .6) + ( 48,000 x .3) + (80,000 x .05)). 49. Which one of the following items would never appear on a cash budget? a. Office salaries expense b. Interest expense c. Depreciation expense d. Travel expense

C is correct Section The master budget Depreciation expense would never appear on a cash budget. 50. The financing section of a cash budget is needed if there is a cash deficiency or if the ending cash balance is less than a. the prior years b. management's minimum required balance c. the amount needed to avoid a service charge at the bank d. the industry average

B is correct Section The master budget The financing section of a cash budget is needed if there is a cash deficiency or if the ending cash balance is less than managements minimum required balance.

52.

In the cash budget, total available cash less cash disbursements a. equals ending cash balance b. must equal total cash receipts c. is the excess of available cash over cash disbursements d. equals the amount of financing

C is correct Section The master budget In the cash budget, total available cash less cash disbursements is the excess of available cash over cash disbursements. 53. Which of the following does not appear as a separate section on the cash budget? a. Cash receipts b. Cash disbursements c. Capital expenditures d. Financing

C is correct Section The master budget Capital expenditures do not appear as a separate section on the cash budget. 54. The projection of financial position at the end of the budget period is found on the a. budgeted income statement b. cash budget c. budgeted balance sheet d. sales budget

C is correct Section Preparing the budgeted financial statements The projection of financial position at the end of the budget period is found on the budgeted balance sheet.

55.

The culmination of preparing operating budgets is the a. budgeted balance sheet b. production budget c. cash budget d. budgeted income statement

D is correct Section Preparing budgeted financial statements The culmination of preparing operating budgets is the budgeted income statement.

59.

What is the proper preparation sequencing of the following budgets? 1. Budgeted balance sheet 2. Sales Budget 3. Selling and Administrative Budget 4. Budgeted income statement 1, 2, 3, 4 2, 3, 1, 4 2, 3, 4, 1 2, 4, 1, 3

a. b. c. d.

C is correct Section Preparing budgeted financial statements The proper preparation sequence is sales budget, selling and administrative budget, budgeted income statement and budgeted balance sheet.

61.

The budgeted balance sheet is a. a projection of financial position at the beginning of the budget period b. developed from the budgeted balance sheet for the preceding year c. prepared before the cash budget d. none of these

B is correct Section Preparing budgeted financial statements The budgeted balance sheet is developed from the budgeted balance sheet for the preceding year. 62. An appropriate activity index for a university for budgeting faculty positions would be a. faculty hours worked b. the number of administrators c. the credit hours taught by a department d. the number of days in the school term

C is correct

64.

Which one of the following budgets would be prepared for a manufacturing company but not for a merchandiser? a. Direct labour budget b. Cash budget c. Sales budget d. Budgeted statement of financial performance

A is correct Section Budgeting in non-manufacturing entities The direct labour budget would not normally be prepared for a merchandiser. 66. The formula for determining budgeted merchandise purchases is budgeted a. production + desired ending inventory beginning inventory b. sales + beginning inventory desired ending inventory c. cost of goods sold + desired ending inventory beginning inventory d. cost of goods sold + beginning inventory desired ending inventory

C is correct Section Budgeting in non-manufacturing entities The formula for determining budgeted merchandise purchases is budgeted COGS + desired ending inventory beginning inventory.

71.

For a merchandiser, the starting point for the development of the master budget is the a. cash budget b. sales budget c. selling and administrative expenses budget d. budgeted income statement

B is correct Section Budgeting in non-manufacturing entities For a merchandiser, the starting point for the development of the master budget is the sales budget.

72.

Instead of a production budget, a merchandiser will prepare a a. pseudo-production budget b. merchandise purchases budget c. master time sheet d. sales forecast

B is correct Section Budgeting in non-manufacturing entities Instead of a production budget, a merchandiser will prepare a merchandise purchases budget. 73. Not-for-profit entities budget on a. a revenue and expense basis b. an accrual basis c. the basis of cash flows d. a modified accrual basis

C is correct Section Budgeting in non-manufacturing entities Non-for-profit entities budget on the basis of cash flows.

77.

A projection of budget data at various levels of activity is presented in a a. favourable budget b. flexible budget c. unfavourable budget d. static budget

B is correct Section Flexible budgets A projection of budget data at various levels of activity is presented in a flexible budget. 78. Management by exception is an approach in which managers review budgets a. on a random basis throughout the budget period b. of exceptional managers only c. that have material differences between actual and budgeted objectives d. that are flexible

C is correct

Section Management by exception Management by exception is an approach in which managers review budgets that have material differences between actual and budgeted objectives.

79.

Top management notices a variation from budget and an investigation of the difference reveals that the department manager could not be expected to have controlled the variation. Which of the following statements is applicable? a. Department managers should be held accountable for all variances from budgets for their departments b. Department managers should only be held accountable for controllable variances for their departments c. Department managers should be credited for favourable variances even if they are beyond their control d. Department managers' performances should not be evaluated based on actual results to budgeted results

B is correct Section The concept of responsibility accounting Departmental managers should only be held accountable for controllable variances for their departments. 80. If budgets are to be effective, all of the following must be present except a. acceptance at all levels of management b. research and analysis in setting realistic goals c. shareholders' approval of the budget d. sound organisational structure

C is correct Section The concept of responsibility accounting If budgets are to be effective, it does not rely on shareholders approval of the budget.

82.

An unrealistic budget is more likely to result when it a. has been developed in a top down fashion b. has been developed in a bottom up fashion c. has been developed by all levels of management d. is developed with performance appraisal usages in mind

A is correct Section The concept of responsibility accounting An unrealistic budget is more likely to result when it has been developed in a top down fashion.