Chap 010

Chapter 10
Strategy and the Master Budget
Multiple Choice Questions
1. The master budget for a given accounting period has all the following except:
A.
B.
C.
D.
E.
It consists of a series of operating and financial budgets.

It is considered the "grand plan of action" for the upcoming period.
It culminates in a set of pro forma financial statements.
It is considered an important planning document for many organizations.
It is based on the actual level of sales activity for the period.
2. "Budgetary slack" occurs when:
A. Employees refuse to adhere to budgeted plans and operations.

B. The budget is so difficult to meet that employees slack-off from work.
C. An authoritative, or imposed, budgeting process is used.
D. In order to "meet" budget objectives, employees ask for resources in excess of
what they need.
E. Employees ask for fewer resources than they need, in order to continuously
improve.
3. A master budget is typically prepared for:
A.
B.
C.
D.
E.
A period of one year.

Top management only.
Strategic planning purposes only.
Strategic business units only.
Operating activities only.
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
4. The successful use of a budgeting system generally involves all of the following
except which item?
A. Acceptance and support by key management people.

B. A sense of ownership by those assigned to carry out the budgeting process.
C. The budgets are technically correct and reasonably accurate.
D.
The budgets include "budgetary slack."
E. The set of budgets in the master budget articulate with one another.
5. All of the following are ways of setting the budget, except:
A.
B.
C.
D.
E.
Negotiation-based budgeting.
Two-stage budgeting.
Participative budgeting.
Authoritative budgeting.
All of the above are ways of setting the budget.
6. Revision of a completed and approved budget:
A. Should be conducted whenever actual events differ significantly from those

envisioned when the budget was prepared.
B. Reduces employee commitment to achieve budgeted performance.
C.
Should be discouraged.
D. May discourage diligence in its initial preparation.
E.
Is never needed under Kaizen budgeting.
7. The process of planning business actions in the near future and expressing them as
formal plans of action is called:
A.
B.
C.
D.
E.
Budgeting.
Goal congruence.
Budgetary slack.
Resource consumption accounting.
Financial Accounting.
8. A plan of dollar amounts to be spent on long-term projects is called a:
A.
B.
C.
D.
E.
Cash budget.
Capital budget.
Rolling budget.
Sales budget.
Rolling financial forecast.
9. A plan that shows the cash balance on hand at the beginning of a budget period,
expected cash flow from operations, cash flows from investing activities, cash flows
from financing activities, and an ending cash balance is called a(n):
A.
B.
C.
D.
E.
Capital budget.
Financial budget.
Financial flows budget.
Cash budget.
Cash receipts budget.
10. A comprehensive or overall formal plan for a business that includes specific plans for
expected sales, the units of product to be produced, the merchandise (or materials)
to be purchased, the manufacturing, selling, administrative, and general expense to
be incurred, the long-term assets to be purchased, and the amounts of cash to be
borrowed or loans to be repaid, as well as a budgeted income statement and balance
sheet, is called a:
A.
B.
C.
D.
E.
Master budget.
Kaizen budget.
Capital expenditures budget.
Continuous budget.
Operating budget.
11. A plan that states the units or costs of merchandise to be purchased by a retailer or
wholesaler during the budget period is called a:
A.
B.
C.
D.
E.
Production budget.
Merchandise purchases budget.
Accounts payable budget.
Cash payments budget.
Cost of goods sold budget.
12. A plan showing the units of goods expected to be sold and the expected revenue
from sales is called the:
A.
B.
C.
D.
E.
Cash budget.
Sales receipts budget.
Selling expense budget.
Sales budget.
13. The practice of maintaining budgets for the same number of future periods, revising
those budgets as each period is completed and adding a new budget each period, is
called:
A.
B.
C.
D.
E.
Master budgeting.
Cyclical budgeting.
Zero-based budgeting (ZBB).
Rolling budgets (or, rolling financial forecasts).
Kaizen (or continuous-improvement) budgeting.
14. An accounting statement that presents predicted amounts of the company's assets,
liabilities, and stockholders' equity as of the end of the budget period is called a(n):
A.
B.
C.
D.
E.
Master balance sheet.

Budgeted income statement.
Pro forma balance sheet.
Pro forma cash flow statement.
Operating balance sheet.
15. Which of the following budgets is not a financial budget?
A.
B.
C.
D.
Sales budget.
Budgeted cash-flow statement.
Budgeted balance sheet.
16. Which of the following is not a potential benefit of having a sound budgeting
process?
A.
B.
C.
D.
E.
Improved decision-making.
Improved performance-evaluation process.
Improved coordination of business activities.
Improved motivation for company employees.
Lower acceptance rate for capital budgeting projects.
17. Which of the following budgets must be completed before preparing a cash budget?
A.
B.
C.
D.
E.

Rolling budget.
Cash financing budget.
Pro forma income statement.
18. Which of the following statements about budgeting is not true?
A.
B.
C.
D.
E.
Budgeting is designed to be an aid to planning and control.

Budgets create standards for performance evaluation.
Budgets help coordinate the activities of the entire organization.
Budgeting forces managers to think ahead and formalize long-range objectives.
Budgeting eliminates the need for day-to-day monitoring of operations.
19. Which of the following factors is least likely to be considered in preparing a sales
budget?
A.
B.
C.
D.
E.
Plant capacity.
General economic and industry conditions.
Past sales volume.
The cash budget.
Proposed selling expenses.
20. Sales forecasts are the first step in the budgeting process of a merchandising firm
because:
A.
The revenue data are easiest to generate.
B.
Sales information is precise in amount.
C. Sales personnel have the quickest access to data.
D. Sales forecasts are the most objective of all budgeted activities.
E. Almost all activities of a firm emanate from (i.e., are linked to) estimated sales
demand.
21. Sales forecasting by its nature is:
A.
B.
C.
D.
E.
Precise.
Deterministic in nature.
Objective.
Somewhat subjective.
Mechanical.
22. Budgeting for production (i.e., units to be produced in an upcoming budget period):
A.
Is simply an extension of the sales forecast.
B. Is prepared after the materials purchases budget is prepared.
C. Involves the sales budget and both beginning and ending finished goods inventory
amounts.
D. Is not needed under a JIT production philosophy.
E. Is normally the first major step in the master budgeting process.
23. Maintaining a constant production level in a firm has the advantage of:
A.
Minimizing the amount of inventory held.
B.
Allowing a stable employment level.
C. Meeting customers' changing expectations in terms of demand volume.
D. Supporting the organization's move to JIT (just-in-time).
E. Allowing the firm to compete successfully as a differentiator.
24. The budgeted income statement and budgeted balance sheet benefit a business
primarily in terms of the ability of the organization to:
A. Meet stockholder requests for planning information from the organization.

B. Narrow the range of budgeted estimates to a manageable subset.
C. Deal with uncertainty inherent in the budgeting process.
D. Summarize the impact of the firm's financial and operating activities for an
upcoming period.
E. Satisfy the disclosure requirements of generally accepted accounting principles
(GAAP).
25. The focal point in budgeting for a service organization is likely to be:
A.
Capital assets acquisition.
B.
Raw material utilization.
C.
Human resource (i.e., personnel) planning.
D.
Cost minimization.
E. The process of mission development and goal specification.
26. Which of the following is not an alternative approach to traditional budgeting
practices?
A.
B.
C.
D.
E.
Kaizen budgeting.
Zero-based budgeting (ZBB)
Activity-based budgeting (ABB)
Time-driven activity based budgeting (TDABB)
Operations budgeting
27. Zero-base budgeting (ZBB) differs from traditional budgeting in terms of its
requirement to:
A. Justify budgeted operations and associated spending.

B. Consider the time-value of money in the budgeting process.
C. Start the budgeting process from the lowest level of the organization, the "zero
base."
D. Incorporate continuous-improvement standards in the set of financial and
operating budgets.
E.
Maximize the existence of "budgetary slack."
28. A "participative" budget is a(n):
A.
Good two-way communication device.
B. Relatively inexpensive and efficient approach to budget preparation.
C.
"Top down" approach.
D.
"Zero-based" approach.
E. Alternative budgeting approach to traditional budgeting.
29. Unless properly controlled, a "bottom-up" budgeting process can lead to:
A.
B.
C.
D.
E.
Excessively tight (i.e., difficult-to-achieve) budgets.

Easy budget targets.
Excessive downward communication.
Reduced incentives for participation.
Reduced levels of "budgetary slack."
30. Budgeting provides all of the following except:
A. A means to communicate the organization's short-term goals to its employees.

B. Support for management functions of planning and coordinating activities of the
organization.
C.
A means to anticipate problems.
D.
An ethical framework for decision-making.
E.
A basis for motivating employee behavior.
31. Financial budgets include the:
A.
B.
C.
D.
E.

Projected income statement.
Budgeted selling and administrative expenses.
Sales budget.
Budgeted retained earnings statement.
32. The effect of increasing the targeted (i.e., desired) ending inventory for a given
budget period has the following effect on the production budget for the period:
A. Increases the required production for the budget period.

B. Has no effect on the required production for the budget period.
C. Has an indeterminate effect (i.e., additional information is required).
D.
None of the above.
33. The authorization function of budgets is especially important for government and notfor-profit (NFP) entities, where budgeted amounts often serve both as approvals of
planned activities (or programs) and as:
A.
B.
C.
D.
E.
Measures of quality.
Indicators of performance.
Certification of actions.
Ceilings for expenditures.
The basis for contract negotiations.
34. Which one of the following is a plan that will allow a manufacturing firm to satisfy its
sales goals and have on hand the desired amount of inventory at the end of the
budget period?
A.
B.
C.
D.
E.
Direct materials usage budget.

Sales budget.
Selling and administrative expense budget.
Production budget.
Sales forecast.
35. Which one of the following shows the direct materials required for production and
their budgeted cost?
A.
B.
C.
D.
E.

Budgeted cost of goods sold.
Direct materials purchases budget.
Production budget.
Direct materials cost budget.
36. Which of the following is not an advantage of using a "highly achievable target" when
constructing budgets?
A. Increasing managers' commitment to achieving budget targets.

B. Increasing the risk that managers will engage in "earnings management" behavior.
C. Improving predictability of earnings or operating results.
D. Decreasing the cost of achieving organizational control.
E. Enhancing the usefulness of a budget as a planning and coordinating tool.
37. A negotiated budgeting process is:
A.
Less effective than an authoritative budget.
B. An alternative way to express a "bottom-up" approach to budget preparation.
C. A combination of "top-down" and "bottom-up" approaches to budget preparation.
D. Less costly to implement than an imposed (i.e., authoritative) budget.
E. Is generally completed after one round of negotiation.
38. The cash budget does not include:
A.
B.
C.
D.
E.
Cash inflows from the collection of receivables.

Cash outflows for purchases of direct materials.
Cash outflows for acquisition of fixed (long-term) assets.
All sales revenues.
Interest paid and interest received.
39. Which one of the following is a budgeting process that requires managers to prepare
budgets based on in-depth reviews of all budget items?
A.
B.
C.
D.
E.
Flexible budgeting.
Continuous budgeting.
Activity-based budgeting (ABB).
Kaizen budgeting.
Zero-base budgeting (ZBB).
40. Which one of the following is a budgeting approach that explicitly demands
continuous improvement and that incorporates expected improvements in the
resultant budget?
A.
B.
C.
D.
E.
Flexible budgeting.
Time-driven activity-based budgeting (TDABB).
Kaizen budgeting.
41. Consistency between goals of the firm and the goals of its employees is referred to
as:
A.
B.
C.
D.
E.
Goal optimization.
Goal conformance.
Goal congruence.
Goal internalization.
Goal compensation.
42. A significant advantage of using either an activity-based budgeting (ABB) or a timedriven activity-based budgeting (TDABB) system is:
A. Reduction in the cost of developing budget amounts.

B. Estimation of the cost of unused capacity, as a by-product of the budgeting
process.
C. Increased levels of budgetary slack, which has a positive influence on motivation.
D. Elimination of the need to generate a sales forecast for the upcoming period.
E. The incorporation of continuous-improvement standards within the budgets.
43. Budgets can serve as the standard against which actual performance is measured.
When compensation is based on this comparison, the organization is said to use:
A.
B.
C.
D.
E.
Fixed performance contracts.

Rolling financial forecasts.
Continuous-improvement budgets.
Variable compensation contracts.
A linear compensation plan.
44. Critics (e.g., The Beyond Budgeting Roundtable) of traditional budgeting assert that
the budgeting process:
A. Reflects too much of a "bottom-up" process, which is costly and inefficient.

B. Puts too much pressure on individuals to attain the budget, at whatever cost.
C. Makes too much use of so-called linear compensation plans.
D.
Unnecessarily incorporates excessive detail.
45. Zero-base budgeting (ZBB):
A. Involves the review of changes made to an organization's original budget.

B. Does not provide a projection of annual expenditures.
C. Has as the primary objective to reduce budget expenditures to zero.
D. Involves rigorous review of each cost item before inclusion in the budget.
E.
Emphasizes zero increase in expenditures.
46. Wild West Fashion expects the total costs of goods sold to be $30,000 in November
and $60,000 in December for one of its young adult suits. Management also wants to
have on hand at the end of each month 10 percent of the expected total cost of sales
for the following month. What dollar amount of suits should be purchased in
November?
A.
B.
C.
D.
E.
$26,000.
$27,000.
$33,000.
$36,000.
$60,000.
47. ACEM Hardware purchased 5,000 gallons of paint in March. The store had 1,500
gallons on hand at the beginning of March, and expects to have 1,000 gallons on
hand at the end of March. What is the budgeted number of gallons to be sold during
March?
A.
B.
C.
D.
E.
3,500.
4,500.
5,000.
5,500.
7,500.
48. Joe's Mart policy is to have 20% of the next month's sales on hand at the end of the
current month. Projected sales for August, September, and October are 25,000 units,
20,000 units, and 30,000 units, respectively. How many units must be purchased in
September?
A.
B.
C.
D.
E.
16,000.
17,000.
22,000.
26,000.
28,000.
49. Cripe Corporation maintains ending inventory for each month at 5% of the following
month's sales. It predicted the following sales (in units) for the first four months of
the coming year:
How many units should be produced in March?
A.
B.
C.
D.
E.
2,810.
2,850.
2,970.
2,990.
4,250.
50. LeMinton Company expects the following credit sales for the first five months of the
year: January, $25,000; February, $40,000; March, $30,000; April, $36,000, May
$40,000. Experience has shown that payment for the credit sales is received as
follows: 60% in the month of sale, 25% in the first month after sale, 12% in the
second month after sale, and the remainder is uncollectible. How much cash can
LeMinton Company expect to collect in March as a result of credit sales?
A.
B.
C.
D.
E.
$18,000.
$28,600.
$30,000.
$31,000.
$32,040.
51. The Johann's Professional Service Company expects 70% of sales for cash and 30%
on credit. The company collects 80% of its credit sales in the month following sale,
15% in the second month following sale, and 5% are not collected. Expected sales for
June, July, and August are $48,000, $54,000, and $44,000, respectively. What are the
company's expected total cash receipts in August?
A.
B.
C.
D.
E.
$45,920.
$61,400.
$87,600.
$50,400
$15,120
52. Blake Company has $15,000 cash at the beginning of June and anticipates $50,000 in
cash receipts and $34,500 in cash disbursements. The company requires a minimum
cash balance of $20,000. Any excess cash over the minimum desired balance is used
to pay down debts. Blake has an agreement with its bank to borrow as needed or to
repay loans as funds become available. As of May 31, the company owes $15,000 to
the bank. The balance of the loan on June 30 will be:
A.
B.
C.
D.
E.
$4,500.
$9,500.
$15,000.
$19,500.
$25,500.
Gorberchev Food Processing expects to have 20,000 units of finished goods inventory
on hand on March 31 and reports the following expected sales (in units) for the first
four months:
At the end of each month the company desires its finished goods ending inventory to
be 20% of the next month's projected sales (in units).
53. The budgeted production (in units) for Gorberchev Food Processing for April should
be:
A.
B.
C.
D.
E.
112,000.
120,000.
127,200.
128,000.
142,000.
54. The budgeted production (in units) for Gorberchev Food Processing for May should
be:
A.
B.
C.
D.
E.
112,000.
134,000.
140,000.
142,000.
146,000.
Doanne Food Processing expects to have 36,000 pounds of raw materials inventory
on hand on March 31, the end of the current year. The company budgets the
following production (in units) for the first four months of the coming year:
At the end of each month the firm desires its ending raw material inventory to be
10% of the next month's production needs. A finished unit requires three pounds of
raw materials.
55. Doanne's budgeted purchases for raw materials (in pounds) during April should be:
A.
B.
C.
D.
E.
224,000.
360,000.
363,000.
399,000.
435,000.
56. Doanne's budgeted purchases (in pounds) for raw materials during June should be:
A.
B.
C.
D.
E.
414,000.
420,000.
426,000.
456,000.
498,000.
57. Oracle Supply Co. supply forecasts purchases of 15,000 widgets in June. It sells the
widget at $12.00 per unit. The company has 1,000 units on hand on June 1. The
desired ending inventory of widgets on June 30 is to be 20% lower than the beginning
inventory. Total June sales for widgets are anticipated to be (in dollars):
A.
B.
C.
D.
E.
$177,600.
$180,000.
$182,400.
$189,600.
$192,000.
58. Salich Manufacturing Corporation has provided the following sales budget
information:
Cash sales are normally 40% of total sales and the credit sales are expected to be
collected in their entirety in the month following the month of sale. The amount of
cash expected to be received from customers in September is:
A.
B.
C.
D.
E.
$24.000.
$55,000.
$57,000.
$58,000.
$60,000.
59. Worton Distributing expects its September sales to be 25% higher than its August
sales of $150,000.Purchases were $100,000 in August and are expected to be
$120,000 in September. All sales are on credit and are expected to be collected as
follows: 30% in the month of the sale and 70% in the following month. Purchases are
paid 25% in the month of purchase and 75% in the following month. The beginning
cash balance on September 1 is $10,000. The ending cash balance on September 30
would be:
A.
B.
C.
D.
E.
$56,250.
$56,500.
$65,250.
$66,250.
$76,250.
60. Tony's Fashions forecasts sales of $300,000 for the quarter ended December 31.Its
gross profit rate is 20% of sales, and its September 30 inventory is $100,000.If the
December 31 inventory is targeted at $40,000, budgeted purchases for the quarter
should be:
A.
B.
C.
D.
E.
$140,000.
$160,000.
$180,000.
$200,000.
$240,000.
Boone Co.'s sales, based on past experience, are 20% cash sales and 80% credit
sales. Credit sales are typically collected as follows: 40% in the month of sale, 50% in
the month after the sale, and 10% in the second month. On December 31, the
accounts receivable balance is $54,000, of which $12,000 is from November sales.
Total sales for January and February are budgeted to be $100,000 and $120,000,
respectively.
61. What are Boone Co.'s budgeted cash receipts for January?
A.
B.
C.
D.
E.
$74,200.
$85,000.
$87,000.
$94,200.
$99,000.
62. What are Boone Co.'s budgeted cash receipts for February?
A.
B.
C.
D.
E.
$85,400.
$95,000.
$106,600.
$109,400.
$112,900.
Ardel Co. budgeted to sell 200,000 units of Zbox in September. Production of one unit
of Zbox required two pounds of aluminum and five pounds of steel powder. The
beginning inventory and the desired ending inventory in units are:
63. How many units of Zbox are to be manufactured by Adel Co. during September?
A.
B.
C.
D.
E.
150,000.
189,000.
200,000.
201,000.
202,000.
64. How many pounds of aluminum powder does Ardel Co. need to purchase during
September if Ardel plans to manufacture 150,000 units of Zbox in September?
A.
B.
C.
D.
E.
143,000 pounds.
157,000 pounds.
286,000 pounds.
293,000 pounds.
300,000 pounds.
65. How many pounds of steel powder does Ardel Co. need to purchase during
A.
B.
C.
D.
E.
725,000 pounds.
745,000 pounds.
750,000 pounds.
755,000 pounds.
775,000 pounds.
Information pertaining to Yekstop Corp.'s sales revenue is presented below.
Management estimates that 4% of credit sales are eventually uncollectible. Of the

collectible credit sales, 65% are likely to be collected in the month of sale and the
remainder in the month following the sale. The company desires to begin each month
with an inventory equal to 75% of the sales projected for the month. All purchases of
inventory are on open account; 30% will be paid in the month of purchase, and the
remainder paid in the month following the month of purchase. The purchase costs are
approximately 60% of the selling prices.
66. Total budgeted cash collections for Yekstop Corp. in December are:
A.
B.
C.
D.
E.
$556,512.
$375,216.
$495,080.
$502,568.
$506,780.
67. Total budgeted cash collections in January by Yekstop Corp. are:
A.
B.
C.
D.
E.
$556,512.
$375,216.
$421,728.
$464,006.
$502,568.
68. Total budgeted inventory purchases in November by Yekstop Corp. are:
A.
B.
C.
D.
E.
$258,750.
$316,350.
$384,000.
$489,150.
$527,250.
69. Total budgeted inventory purchases in December by Yekstop Corp. are:
A.
B.
C.
D.
E.
$86,250.
$140,400.
$226,650.
$258,750.
$345,000.
70. Budgeted December cash payments by Yekstop Corp. for December inventory
purchases are:
A.
B.
C.
D.
E.
$67,995.
$103,500.
$158,655.
$241,500.
$289,440.
71. Budgeted cash payments in November for November inventory purchases by Yekstop
Corp. are:
A.
B.
C.
D.
E.
$76,625.
$94,905.
$115,200.
$161,280.
$221,445.
72. Budgeted cash payments in December for November inventory purchases by Yekstop
Corp. are:
A.
B.
C.
D.
E.
$76,625.
$94,905.
$115,200.
$161,280.
$221,445.
73. Budgeted January cash payments for December inventory purchases by Yekstop
Corp. are:
A.
B.
C.
D.
E.
$67,995.
$103,500.
$158,655.
$241,500.
$289,440.
Fresplanade Co. had the following historical pattern for its credit sales:
75% collected in the month of sale
12% collected in the first month after sale
8% collected in the second month after sale
3% collected in the third month after sale
2% uncollectible
The sales on open account (credit sales) have been budgeted for the last six months
of the year as shown below:
July $72,000
August $84,000
September $96,000
October $108,000
November $120,000
December $102,000
74. The estimated total cash collections by Fresplanade Co. during December from
accounts receivable is:
A.
B.
C.
D.
E.
$113,160.
$101,400.
$143,640.
$125,640.
$102,420.
75. The estimated total cash collections by Fresplanade Co. during November from
collection of accounts receivable is:
A.
B.
C.
D.
E.
$113,160.
$101,400.
$143,640.
$125,640.
$102,420.
76. The estimated total cash collections by Fresplanade Co. during October from
A.
B.
C.
D.
E.
$113,160.
$101,400.
$143,640.
$125,640.
$102,420.
77. The estimated cash collection by Fresplanade Co. during September from credit sales
in July, August, and September is:
A.
B.
C.
D.
E.
$83,160.
$79,380.
$87,840.
$54,000.
$71,640.
78. The estimated cash collection by Fresplanade Co. during August from July and August
credit sales is:
A.
B.
C.
D.
E.
$83,160.
$79,380.
$87,840.
$54,000.
$71,640.
79. The estimated cash collections during July from credit sales made in July by
Fresplanade Co. is:
A.
B.
C.
D.
E.
$83,160.
$79,380.
$87,840.
$54,000.
$71,640.
Brownsville Novelty Store prepared the following budget information for the month of
May:
Sales are budgeted at $360,000. All sales are on account and a provision for bad
debts is made
monthly at three percent of sales.
Inventory was $84,000 on April 30 and an increase of $12,000 is planned for May
31.
All inventory is marked to sell at cost plus fifty percent.
Estimated cash disbursements for selling and administrative expenses for the
month are $48,000.
Depreciation for May is projected at $6,000.
80. Brownsville's budgeted cost of goods sold (CGS) in May is:
A.
B.
C.
D.
E.
$120,000.
$180,000.
$198,000.
$252,000.
$240,000.
81. Brownsville's budgeted cost of inventory purchased in May is:
A.
B.
C.
D.
E.
$120,000.
$180,000.
$198,000.
$252,000.
$240,000.
82. Brownsville's budgeted gross profit in May is:
A.
B.
C.
D.
E.
$120,000.
$180,000.
$198,000.
$252,000.
$240,000.
83. Brownsville's budgeted bad debts expense for May is:
A.
B.
C.
D.
E.
$7,200.
$10,800.
$7,560.
$5,400.
$14,400.
84. Brownsville's budgeted operating income for May is:
A.
B.
C.
D.
E.
$72,000.
$66,000.
$55,200.
$61,200.
$43,200.
Graham Corporation's budgeted production schedule for the coming year is as

follows:
Quarter
Quarter
Quarter
Quarter
1
2
3
4
=
=
=
=
22,500
19,000
17,000
24,000
units
units
units
units
Each unit of product requires three pounds of direct material. The company's policy is
to begin each quarter with 30% of that quarter's direct materials production
requirements.
Graham expects to have 50,000 pounds of direct materials on hand at the beginning
of Quarter 1.
85. What would be Graham's budgeted direct materials purchases in the first quarter?
A.
B.
C.
D.
E.
17,500 pounds.
34,600 pounds.
37,750 pounds.
67,100 pounds.
84,600 pounds.
86. What would be Graham's budgeted direct materials purchases in the second
quarter?
A.
B.
C.
D.
E.
53,850 pounds.
55,200 pounds.
57,000 pounds.
58,800 pounds.
72,300 pounds.
87. What would be Graham's budgeted direct materials purchases in the third quarter?
A.
B.
C.
D.
E.
19,100 pounds.
44,700 pounds.
51,000 pounds.
57,300 pounds.
72,600 pounds.
General Manufacturing expects to have 40,000 pounds of raw materials inventory on

hand on June 30, the end of the current year. The company has budgeted the
following production for the first four months of the coming year:
For the budgeting period, the firm desires each month's ending raw materials
inventory to be 20% of the next month's production needs. A finished unit requires
two pounds of raw materials.
88. General Manufacturing's budgeted purchases of raw materials during July (in lbs.)
should be:
A.
B.
C.
D.
E.
48,000 lbs.
200,000 lbs.
208,000 lbs.
248,000 lbs.
296,000 lbs.
89. General Manufacturing's budgeted purchases of materials during September should

be:
A.
B.
C.
D.
E.
60,000 lbs.
228,000 lbs.
248,000 lbs.
284,000 lbs.
300,000 lbs.
90. Which of the following best describes the process of sales forecasting?
A.
Multiple sales forecasting tools are available.
B. Trend analysis cannot be used for sales forecasting.
C. Econometric models cannot be used for sales forecasting because of their inherent
complexity.
D. Sales forecasting works best with a simple visual plotting of past data on a graph.
E. Generally speaking, the level of unfilled back order and credit policies of the
company in question can be ignored since these represent competitive responses.
91. _________ is a process of varying key estimates to identify those variables that are
most critical to a decision (or a model, such as a budget):
A.
B.
C.
D.
E.
A demand forecast
Sensitivity analysis
Regression analysis
Pareto analysis
Linear optimization analysis
92. Assume only the specified parameters change in a sensitivity analysis. If the
contribution margin increases by $2 per unit, then operating profits will:
A.
B.
C.
D.
Also increase by $2 per unit.

Increase by less than $2 per unit.
Decrease by $2 per unit.
Increases, but by an indeterminate amount.
93. Assume that only the specified parameters change in a sensitivity analysis. The
contribution margin ratio increases when:
A.
B.
C.
D.
Total short-term fixed costs increase.

Total short-term fixed costs decrease.
Variable cost per unit increases.
Variable cost per unit decreases.
94. The process of examining how a change in a single item in a budget (e.g., sales
volume) affects one or more items in the budget (e.g., budgeted sales revenue and
budgeted operating income) is generally referred to as:
A.
B.
C.
D.
E.
Flexible budgeting.
Linear programming.
Uncertainty programming.
What-if analysis.
95. Which of the following are alternatives to traditional budgeting approaches?
A.
B.
C.
D.
E.
Volume-based budgeting and zero-base budgeting (ZBB).

Activity-based budgeting (ABB) and volume-based budgeting.
Kaizen budgeting and volume-based budgeting.
Activity-based budgeting (ABB), kaizen budgeting, and zero-base budgeting (ZBB).
Activity-based budgeting (ABB), kaizen budgeting, and volume-based budgeting.
Capital One produces a single product, which it sells for $8.00 per unit. Variable costs
per unit equal $3.20. The company expected total short-term fixed costs to be $7,200
for the coming month, at the projected sales level of 20,000 units. Management is
considering several alternative actions designed to improve operating results. In
conjunction with this, they have created a profit-planning model, which can be used
to evaluate different scenarios.
96. What is Capital One's current break-even point in terms of number of units for the
month?
A.
B.
C.
D.
1,500 units.
2,250 units.
3,330 units.
4,000 units.
97. Suppose that Capital One's management believes that a $1,600 increase in the
monthly promotion costs will provide a boost to sales. By what amount must sales
increase during the month to justify the contemplated expenditure? Round answer up
to the nearest whole number.
A.
B.
C.
D.
E.
200 units.
334 units.
400 units.
668 units.
None of the above.
98. Capital One's management believes that a 10% reduction in the selling price will
increase sales volume by 10%. If this plan is implemented, then:
A.
B.
C.
D.
E.
Profit should increase by approximately $8,000 per month.

Profit should remain approximately the same.
Profit should decrease by approximately $8,000 per month.
99. A budgeting system that has, in effect, a budget for a set number of periods (i.e., a
constant planning horizon) at all times is called a(n):
A.
B.
C.
D.
E.
Financial budget
Operating budget
Rolling financial forecast
Capital budget
Master budget
100 All of the following represent alternative approaches to the traditional budget.
preparation process except which one?
A.
B.
C.
D.
E.
Master budgeting.
Kaizen budgeting.
Continuous-improvement budgeting.
101 Which one of the following is not a way to deal with uncertainty in the budget.
preparation process?
A.
B.
C.
D.
E.
Linear programming.
What-if analysis.
Monte Carlo Simulation (MCS).
Scenario analysis.
Sensitivity analysis.
102 The proper treatment of the cost of unused capacity, as identified through the use of
.
an activity-based budgeting (ABB) system, is:
A. To charge the amount to customers whose uneven orders caused the unused
capacity.
B. To charge the amount to a "deferred asset" account on the balance sheet.
C. To change the amount to a "deferred credit" account on the balance sheet.
D. To charge the amount to all products produced during the area (via overhead
application rates).
E. To charge the amount to the product line, department, or a given manager within
the organization where the decision to acquire the capacity was made.
103 The type of compensation plan that focuses on the difference between actual
.
performance (sales, operating income, etc.) and budgeted performance is refers to:
A. The use of flexible budgets for performance evaluation.

B. The use of the master budget for performance evaluation.
C.
The use of "rolling financial forecasts."
D.
The use of a fixed-performance contract.
E.
The use of a Kaizen forecast.
104 The act of encouraging non-value-adding actions on the part of management in order
.
to improve indicated performance is referred to as:
A.
B.
C.
D.
E.
Goal congruency.
Gaming the performance indicator.
The use of fixed-performance contract.
Linear optimization analysis.
The use of a relative-performance contract.
105 The practice of managers knowingly including a higher amount of expenditures (or
.
lower amount of revenue) in the budget than they actually believe will occur is
called:
A.
B.
C.
D.
E.
Goal congruency.
Resource capacity planning.
Budgetary slack.
Kaizen budgeting.
106 Which of the following is NOT true regarding the use of linear compensation plans?
.
A. Such plans encourage "gaming" behavior on the part of managers.
B. Such plans strongly link managerial compensation to the agreed-upon budget.
C. Under such plans, managerial reward is independent of budgetary targets.
D. Under such plans, managerial reward is based principally on actual performance.
E. Under such plans, managerial reward is based on what managers actually do, not
what they do relative to what they say they can do.
107 Which of the following is NOT a characteristic of Kaizen Budgeting?
.
A. These budgets reflect continuous-improvement standards.
B. These budgets adjust required resource demands based on targeted efficiency and
productivity gains.
C. This approach to budgeting can be used in conjunction with both traditional and
activity-based budgeting.
D. The approach can be used internally, but not for external purposes (e.g., in
budgeting supplier costs).
E. Cost decreases in the budget are the result of performing the activities more
efficiently and with higher quality.
Essay Questions
108 Explain benefits of implementing a master budgeting system.

.
109 Contrast operating budgets and financial budgets. How do these budgets relate to
.
the master budget for a period? What is the culmination of the master budgeting
process?
110 In both activity-based and time-driven activity-based systems we calculate cost.

driver rates for support activities (e.g., the cost to ship an item or the cost to process
a customer order) and it is asserted that these rates are best determined by dividing
budgeted resource costs (for a given cost pool) by the practical capacity of
resources supplied.
Required:
1. What is the primary advantage of using practical capacity as the volume level for
determining cost allocation rates in an ABC or TDABC system?
2. What is the appropriate accounting treatment for unused capacity costs for a
given accounting period?
111 Uncertainty and the Budgeting Process: As indicated in the text, the validity of pro.
forma financial statements that are produced as part of the master budgeting
process is affected by the accuracy of the forecasted data going into the component
budgets. Such data are subject to various levels of uncertainty. For this reason,
accountants need to understand ways of dealing with uncertainty in the budgeting
process.
Required: Define and distinguish among the following ways of handling uncertainty
in the budgeting process:
1. What-if analysis (give at least one concrete example)
2. Sensitivity analysis
3. Scenario analysis.
112 List factors that should be considered in developing a sales forecast for an upcoming
.
budget period.
113 What is zero-base budgeting (ZBB) and how does this approach to budgeting
.
compare to what can be considered "traditional budgeting"? How is ZBB
implemented in practice?
114 What is the focus of activity-based budgeting (ABB)? What is the principal advantage
.
of ABB?
115 Contrast the budgeting unit (or focus) under a traditional budgeting system and
.
under an activity-based budgeting (ABB) system.
116 Flowers Inc. has budgeted cost of goods sold for August of $1,000 for plastic flowers.
.
Management also wants to have $500 in inventory at the end of the month to
prepare for the fall season. Beginning inventory in August was $400. What dollar
amount of plastic flowers should be purchased to meet the above objectives?
117 Lighting Inc.'s sales budget showed the following projections for the coming year:
.
Inventory on December 31 of the current year is expected to be 20,000 units. The

quantity of finished goods inventory at the end of each quarter was to equal seven
percent of the next quarter's budgeted units to be sold.
Required: Calculate the units to be produced during the third quarter.
118 Lovely Pet Store has budgeted cost of goods sold for May of $6,000 for flea collars.
.
prepare for the summer season. Beginning inventory in May was $200.
Required: What dollar amount of flea collars should be purchased to meet the
above objectives?
119 Allmakes Software budgeted August purchases of new software at $140,000.The

.
store had software costing $6,000 on hand at the beginning of August, and to cover
part of anticipated back-to-school sales in September they expect to have $15,000 of
software on hand at the end of August.
Required: What was the budgeted cost of goods sold for August?
120 Helen Auger has seen the Centicle Group, a not-for-profit, in-home health care
.
organization, grow during the past ten years to a $500 million revenue, multi-state
organization. Helen was promoted to her controller position six months ago, after
serving capably in several financial accounting positions at the Centicle Group.
At a Budget Review Committee meeting last Friday, several committee members
expressed frustration with the pace of the budget development. They described the
newly introduced "bottom up" system of participative budgeting as "unwieldy,"
"slow-paced," and "repetitive." Helen's objective in introducing the participative
approach was to involve to a much greater extent lower level supervisors and
employees. Helen is meeting with the Budget Review Committee again tomorrow
when she plans to explain the advantages of "bottom up" versus "top down"
approaches to the budgeting process.
Required: Helen has asked you to help her prepare for tomorrow's meeting by
preparing the following:
1. A 40 -50 word description of participative budgeting, including some basic
advantages of this approach to budgeting.
2. A brief, one-paragraph explanation of the concept of "budget ownership," one of
the values that participative ("bottom up") budgeting is said to have.
121 A business develops a budget for many reasons beyond wanting to know what future
.
profits will be. Comment on the role of a firm's strategic goals in both the master
budget and the capital budget.
122 Kurt Helfter graduated with a B.S. degree in Mechanical Engineering and joined
.
Andrew Consulting, a firm specializing in HVAC (heating, ventilation, and air
conditioning) for small to medium-size business structures. Kurt is knowledgeable in
the use of CAD (computer-assisted design) and was pleased during his initial
employment to find Andrew Consulting a leader in the use of CAD software.
During Kurt's third year at Andrew, he felt a sense of unease with the firm's slow
pace in updating computer hardware and software. Although not directly involved in
budgeting for the firm, Kurt has been satisfied with the resources that Andrew
provided for his use. Kurt felt the need to detail his concerns in a memo to his
superior, in which he requested significant investment in computer resources to
"allow us to respond to clients' needs, both in quantity and quality." Kurt was
surprised and hurt when he received his superior's response, which suggested that
resource allocation in the firm is decided at a higher administrative level. "But all I
wanted to do was help keep our firm competitive," Kurt responded to his boss when
visiting him about the rejection memo. "Sorry, Kurt," his boss said, "That's how things
get done in this firm." Kurt now feels lost, wondering if it's time to look for another
job.
Does this situation suggest what type of budgeting process the company is using? Is
there a problem with individual and company goal congruence in Andrew Consulting?
If so, how might Kurt's supervisor have prevented the problem?
123 Discuss the components of each of the following manufacturing cost budgets:
.
1. Production budget
2. Direct materials purchases budget
3. Direct labor budget
4. Factory overhead budget
5. Cost of goods manufactured budget
6. Cost of goods sold budget.
124 Ardan Company's sales budget showed the following projections for the coming year:
.

quantity of finished goods inventory at the end of each quarter was to equal five
Required: Calculate the units to be produced during the second quarter.
125 Information pertaining to Yeks Company's budgeted sales revenue for the first
.
quarter of the year is presented below.
Management estimated that four percent of credit sales would be uncollectible. Of

the collectible credit sales, 60% would be collected in the month of sale and the
remainder in the month following the sale.
Required: Calculate total budgeted cash collections in February.
126 The budget committee for Amacom Company, with the help of the district sales
.
manager, projects sales of 80,000 units of its primary product next year. The budget
committee and key executives have decided that finished goods inventory should be
decreased from the 10,000 units expected at the end of the current year, to 7,000
units at the end of next year. Each unit of finished product requires three units of
material MPS15 and six units of material NAV23. At the end of the current year, the
inventory of material MPS15 is expected to be 10,000 units and material NAV23 is
expected to be 20,000 units. The budget committee believes that these material
inventories can be reduced by 80% during the coming year because of the newly
installed supply chain system.
Required
1. Calculate the number of units Amacom expects to produce during the next year.
2. Compute the number of units that should be purchased of each of the raw
materials in order to produce the budgeted units and comply with inventory policy.
127 Willard Company anticipates that its fixed manufacturing overhead costs will be
.
$50,000 during the next period. Its variable manufacturing overhead is expected to
be $8 per unit produced.
Required
1. What amount of overhead should be budgeted if the production budget shows that
40,000 units are to be produced?
2. What amount of overhead should be budgeted if the production budget shows that
50,000 units are to be produced?
3. Compute the total overhead cost per unit for requirements 1 and 2.
128 Uecker Enterprise expects sales of 20,000 units of T1 in September. T1is its most
.
popular high performance desktop model. The sales manager is confident that,
between October and December, the total sales will have a 50% growth rate each
month from the month before. Each unit requires 40 sets of the Alpha-5 chip. The
firm has a policy to maintain inventory at the end of each month equal to 1% of the
following month's estimated sales. The same policy applies also to the chips and
components required to assemble the finished product.
1. What is the budgeted production (in units) for each of the months September,
October, and November?
2. How many sets of Alpha-5 does the company plan to purchase in September and
in October?
129 Enterprise Tax Services (ETS) provides tax planning. The company billed 5,000 hours
.
at $100 per hour for the year just completed. ETS, in planning next year's operations,
is focusing on increasing the company's share of the market. It proposes to do that
by hiring more tax specialists and by lowering its billing rate by 20% for work done
by these new specialists. ETS estimates that revenues generated from existing staff
would increase in total by 40% as a result of the new billing policy and that the
additional specialists will provide additional billings of 3,000 hours (at the reduced
rate) during the coming year.
Required: Compute the budgeted revenue amount for next year based on ETS's
plans and projections.
130 Transcript Company is preparing a cash budget for February. The company has
.
$150,000 cash at the beginning of February and anticipates total sales of $800,000,
consisting of 25% cash sales and 75% credit card sales. The bank charges 3 percent
for credit card transactions. The company sets its selling price at 160 percent of the
cost of purchases and pays for each month's purchases at the end of the month.
Other cash disbursements are $20,000 per month plus 4% of total sales. In addition,
a $600,000 note will be due in February for equipment purchased last August.
Transcript Company has an agreement with its bank to maintain a cash balance of
$100,000.
Required: What amount, if any, must the company borrow during February?
131 West Company budgeted the following credit sales during the current year:
.
September, $75,000; October, $108,000; November, $90,000; December, $96,000.
Experience has shown that cash from the credit sales is received as follows: 10% in
the month of sale, 50% in the first month after sale, 35% in the second month after
sale, and 5% is uncollectible. All collections in the month of sale are subject to 2
percent cash discount.
Required: How much total cash can West Company expect to collect in November?
132 In preparing a budget for the first three months of the year starting in October,
.
Dubya Company is planning the number of units of merchandise to order each
month. The company's policy is to have 40% of the next month's sales on hand at
the end of the current month. Projected sales for October, November, and December
are 40,000 units, 50,000 units, and 100,000 units, respectively.
Required: How many units must be ordered in November?
133 The Shoecraft Company's budgeted sales for January, February, and March of
.
$80,000, $60,000, and $50,000, respectively. Seventy percent of sales are on credit.
The company collects 60% of its credit sales in the month following sale, 35% in the
second month following sale, and 5% is not collected. Shoecraft mailed all
statements to credit customers at the end of the month with a term of 1/30, n/60.
What are Shoecraft's expected cash receipts for March?
134 Papa Joe, Inc., is preparing its budget for the second quarter of the calendar year.
.
The following unit sales data have been forecasted:
Desired ending inventory each month: 30% of next month's estimated sales (in units)
Required:
1. How many units should be budgeted for production in June?
2. How many units should be budgeted for production in the second quarter?
135 Dockille, Inc., is preparing its budget for the second quarter of the calendar year. The
.
following sales data (in units) have been forecasted:
Additional information:
Desired ending inventory each month--Finished goods: 30% of next month's sales
Desired ending inventory each month--Raw materials: 25% of next month's
production needs
Number of raw material units required per finished unit: 4
Required: How many units of raw materials should be purchased in the 2 ndquarter?
136 Olde Corporation is preparing a cash budget for the first two months of the coming
.
year. The following data have been forecasted:
Additional data:
(1) Sales are 40% cash and 60% credit. The term of credit sales is 2/10, n/30. The
collection pattern for credit sales is 80% in the month following the month of sale (of
which 75% are collected within 10 days), and 20% in the month thereafter. Total
sales in December of the prior year were $1,000,000.
(2) Purchases are all on credit, with 40% paid in the month of purchase and the
balance the following month.
(3) Operating expenses are paid in the month incurred.
(4) The firm desires to maintain its cash balance at $150,000 at the end of each
month.
(5) Loans are used to maintain the minimum cash balance. At the end of each month,
interest of 1% per month is paid on the outstanding loan balance as of the beginning
of the month. Repayments are made (at the end of the month) whenever the cash
balance exceeds $150,000.
Required: Prepare the cash budget, in the form of a statement of cash flow, for
February. What is the amount of the loan balance at the end of the month (after loan
repayments, if any)?
137 Grey Company is considering replacing its existing cutting machine with a new
.
machine that, according to the manufacturer, is more efficient in terms of energy
consumptiona variable cost of production. In this regard, it would like to do some
financial planning, including "what-if" analysis. Budgeted information regarding the
two machines is as follows:
Required:
1. Determine the sales volume at which the costs are the same for both machines.
2. What amount of sales, in dollars, for the new machine would produce a 10% profit
margin (i.e. ratio of operating profit to sales = 10%)?
138 As indicated in the text, sensitivity analysis is an important tool for dealing with
.
uncertainty in the budget preparation process. Which estimates, out of all that
management has to deal with, do you think are the most critical in terms of
developing the master budget for the typical profit-seeking organization?
139 One of the behavioral considerations in implementing a budgeting system has to do

.
with the issue of budgetary slack. What are the positive and negative aspects of
building slack into budgets from top management's point of view, and the
employee's point of view (i.e., the individual responsible for building slack into the
budget)?
140 Omni, Inc. manages a medical-expense reimbursement program for colleges and
.
universities throughout the United States. University employees submit claims for
reimbursement of medical expenses from reimbursement accounts established each
year by the employees. Omni then processes reimbursement requests, verifies the
legitimacy of each request, computes the deductible and co-payment required,
determines whether the employee's expense reimbursement account has adequate
funds available, and, if applicable, issues a reimbursement check to the eligible
employee.
Omni employs three different types of clerks who manage these reimbursement
accounts: managers, clerical staff-1, and clerical staff-2. The managers are each paid
$50,000 per year, clerical staff-1 employees are paid $40,000 per year, while clerical
staff-2 employees are paid $35,000 per year. Based on prior experience, for every
150,000 claims processed per year, Omni needs to budget for one manager's
position, two clerical staff-1 positions, and six clerical staff-2 positions.
Last year, Omni processed 2 million reimbursement claims, and employed 14
managers, 30 clerical staff-1 employees, and 83 clerical staff-2 employees.
Required
1. Based on the data provided, calculate the cost savings or excess staffing costs for
Omni during the most recent year. (Assume that the policy of the company is to hire
only full-time employees.)
2. What managerial insights are suggested on the basis of your analysis? If you were
attempting to judge the processing efficiency of Omni's staff, what additional
information might you want to have?
141 The Bambola Doll Company produces a single product: an inexpensive plastic toy
.
doll. This item sells for $4.00 per unit, and has variable costs (manufacturing plus
marketing) of $2.50 per unit. Monthly fixed costs amount to approximately $60,000.
Last month, sales reached 100,000 units. Management would like to do some
financial planning, the end result of which wouldit is hopedbe even better future
financial performance. As a management accountant you have been asked to
construct a planning model and to conduct "what-if" analyses with the model you
develop.
Management has told you to consider the following options, all of which have the
potential to increase the profitability of the company:
A) Increase monthly promotional and advertising costs.
B) Increase raw material quality and increase the product selling price.
C) Increase the product selling price, with no increase in the raw material costs.
Required:
1. The sales manager of the company is fairly confident that a well-done marketing
campaign could increase sales volume substantially, perhaps as much as doubling
sales from the current position. The president of the company would like to increase
operating profits by 50% over those of the most recent month. You are asked to
determine how much the company could afford to spend on an intensive marketing
campaign, in order to achieve the projected doubling of sales volume?
2. As an alternative to 1 above, assume that the company increases the quality of its
raw materials going into the manufacturing of its product. This increase would result
in a new variable cost per unit of $3.00. What is the required increase in selling price
per unit that would be needed to maintain the same break-even volume as currently
exists?
3. As a final alternative, assume that the company has decided to increase the
selling price of its product by $1 per unit, with no accompanying marketing and
promotion campaign. What is the unit sales volume needed, with the new selling
price, for the company to make the same amount of profit as it did last month?
142 Over the years, alternative approaches to traditional budgeting practices have been
.
proposed to facilitate budget preparation and usefulness. First, define what is meant
by the term "traditional budgeting." Next, compare and contrast the following
alternative budgeting approaches to a traditional budgeting process: Zero Base
Budgeting (ZBB); Activity-Based Budgeting (ABB); Time-Driven ABB; and, kaizen
budgeting.
143 Compare and contrast traditional budgeting and activity-based budgeting (ABB)
.
along the following dimensions: budgeting unit; primary focus; time orientation; roles
of suppliers and customers; and, control objective.
144 As indicated in the text, one of the behavioral issues associated with budgeting deals
.
with the linkage of employee compensation to budgeted performance. In this regard,
distinguishbetween so-called fixed performance contracts (i.e., a traditional
approach) and the following two recommended alternatives: (1) linear compensation
plans, and (2) the use of relative performance (relative improvement) contracts along
with "rolling financial forecasts." With respect to the use of fixed performance
contracts, define what is meant by the term "gaming the performance indicator."
With respect to the use of relative performance contracts, define what is meant by
the term "rolling financial forecasts."
145 One of the behavioral considerations associated with the budgeting process relates
.
to the difficulty level embodied in the budget (i.e., how difficult or easy it is to
achieve budgeted results).
1. Explain the negative consequences of budgetary targets that are too easy or too
difficult to achieve.
2. What is meant by the term "highly achievable (budget) target"?
3. What are the primary advantages of using "highly achievable targets" in terms of
budgetary expectations?
146 Transcript Company is preparing a cash budget for February.

.
The company has $150,000 cash at the beginning of February and anticipates total
sales of $800,000, consisting of 25% cash sales and 75% bank credit-card sales.
The bank charges 3 percent for credit-card deposits.
The firm sets its selling price at 160 percent of the cost of purchases and pays the
cost of each month's sales at the end of the month.
Operating expenses are $45,000 per month, of which $25,000 is depreciation
expense. Selling expenses (commissions) amount to 4 percent of total sales dollars.
In addition, a $600,000 note will be due in February for equipment purchased last
August. In addition to the principal amount, interest for one month (at 12% per
annum) will be paid in February.
Transcript Company has an agreement with its bank to maintain a minimum cash
balance of $100,000.
Required: Prepare in good form a cash budget that shows the amount, if any, that
the company must borrow during February. Separate your budget, at a minimum,
into the following categories:
Beginning Cash Balance
Operating Cash Flows (Both Inflows and Outflows)
Cash Balance before Financing Effects
Financing Activity
Ending Cash Balance
Chapter 10 Strategy and the Master Budget Answer Key
Multiple Choice Questions
1.
The master budget for a given accounting period has all the following except:
A. It consists of a series of operating and financial budgets.

B. It is considered the "grand plan of action" for the upcoming period.
C. It culminates in a set of pro forma financial statements.
D. It is considered an important planning document for many organizations.
E. It is based on the actual level of sales activity for the period.
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the role of budgets in the overall management process
2.
"Budgetary slack" occurs when:
A. Employees refuse to adhere to budgeted plans and operations.

B. The budget is so difficult to meet that employees slack-off from work.
C. An authoritative, or imposed, budgeting process is used.
D. In order to "meet" budget objectives, employees ask for resources in excess of
what they need.
E. Employees ask for fewer resources than they need, in order to continuously
improve.
Difficulty: 1 Easy
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
3.
A master budget is typically prepared for:
A.
B.
C.
D.
E.
A period of one year.

Top management only.
Strategic planning purposes only.
Strategic business units only.
Operating activities only.
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the importance of strategy and its role in the master budgeting process
4.
The successful use of a budgeting system generally involves all of the following
except which item?
A.
Acceptance and support by key management people.
B. A sense of ownership by those assigned to carry out the budgeting process.
C. The budgets are technically correct and reasonably accurate.
D.
The budgets include "budgetary slack."
E. The set of budgets in the master budget articulate with one another.
Difficulty: 1 Easy
5.
All of the following are ways of setting the budget, except:
A.
B.
C.
D.
E.
Negotiation-based budgeting.
Two-stage budgeting.
Authoritative budgeting.
All of the above are ways of setting the budget.
Difficulty: 2 Medium
6.
Revision of a completed and approved budget:
A. Should be conducted whenever actual events differ significantly from those

envisioned when the budget was prepared.
B. Reduces employee commitment to achieve budgeted performance.
C.
Should be discouraged.
D.
May discourage diligence in its initial preparation.
E.
Is never needed under Kaizen budgeting.
Learning Objective: 10-03 Outline the budgeting process
7.
The process of planning business actions in the near future and expressing them
as formal plans of action is called:
A.
B.
C.
D.
E.
Budgeting.
Goal congruence.
Budgetary slack.
Resource consumption accounting.
Financial Accounting.
Difficulty: 1 Easy
8.
A plan of dollar amounts to be spent on long-term projects is called a:
A.
B.
C.
D.
E.
Cash budget.
Capital budget.
Rolling budget.
Sales budget.
Rolling financial forecast.
Difficulty: 1 Easy
9.
A plan that shows the cash balance on hand at the beginning of a budget period,
expected cash flow from operations, cash flows from investing activities, cash
flows from financing activities, and an ending cash balance is called a(n):
A.
B.
C.
D.
E.
Capital budget.
Financial budget.
Financial flows budget.
Cash budget.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting
schedules
10.
A comprehensive or overall formal plan for a business that includes specific plans
for expected sales, the units of product to be produced, the merchandise (or
materials) to be purchased, the manufacturing, selling, administrative, and general
expense to be incurred, the long-term assets to be purchased, and the amounts of
cash to be borrowed or loans to be repaid, as well as a budgeted income
statement and balance sheet, is called a:
A.
B.
C.
D.
E.
Master budget.
Kaizen budget.
Capital expenditures budget.
Continuous budget.
Operating budget.
Difficulty: 1 Easy
schedules
11.
A plan that states the units or costs of merchandise to be purchased by a retailer

or wholesaler during the budget period is called a:
A.
B.
C.
D.
E.
Production budget.
Merchandise purchases budget.
Accounts payable budget.
Cash payments budget.
Difficulty: 1 Easy
schedules
12.
A plan showing the units of goods expected to be sold and the expected revenue
from sales is called the:
A.
B.
C.
D.
E.
Cash budget.
Sales receipts budget.
Selling expense budget.
Sales budget.
Difficulty: 1 Easy
schedules
13.
The practice of maintaining budgets for the same number of future periods,
revising those budgets as each period is completed and adding a new budget each
period, is called:
A.
B.
C.
D.
E.
Master budgeting.
Cyclical budgeting.
Zero-based budgeting (ZBB).
Rolling budgets (or, rolling financial forecasts).
Kaizen (or continuous-improvement) budgeting.
Difficulty: 1 Easy
14.
An accounting statement that presents predicted amounts of the company's

assets, liabilities, and stockholders' equity as of the end of the budget period is
called a(n):
A.
B.
C.
D.
E.
Master balance sheet.

Budgeted income statement.
Pro forma cash flow statement.
Operating balance sheet.
Difficulty: 1 Easy
schedules
15.
Which of the following budgets is not a financial budget?
A.
B.
C.
D.
Sales budget.
Budgeted cash-flow statement.
Budgeted balance sheet.
schedules
16.
Which of the following is not a potential benefit of having a sound budgeting

process?
A.
B.
C.
D.
E.
Improved decision-making.
Improved performance-evaluation process.
Improved coordination of business activities.
Improved motivation for company employees.
Lower acceptance rate for capital budgeting projects.
Difficulty: 1 Easy
17.
Which of the following budgets must be completed before preparing a cash

budget?
A.
B.
C.
D.
E.

Rolling budget.
Cash financing budget.
Pro forma income statement.
schedules
18.
Which of the following statements about budgeting is not true?
A. Budgeting is designed to be an aid to planning and control.

B.
Budgets create standards for performance evaluation.
C. Budgets help coordinate the activities of the entire organization.
D. Budgeting forces managers to think ahead and formalize long-range objectives.
E. Budgeting eliminates the need for day-to-day monitoring of operations.
Difficulty: 1 Easy
19.
Which of the following factors is least likely to be considered in preparing a sales

budget?
A.
B.
C.
D.
E.
Plant capacity.
General economic and industry conditions.
Past sales volume.
The cash budget.
Proposed selling expenses.
Difficulty: 3 Hard
schedules
20.
Sales forecasts are the first step in the budgeting process of a merchandising firm
because:
A.
The revenue data are easiest to generate.
B.
Sales information is precise in amount.
C.
Sales personnel have the quickest access to data.
D. Sales forecasts are the most objective of all budgeted activities.
E. Almost all activities of a firm emanate from (i.e., are linked to) estimated sales
demand.
schedules
21.
Sales forecasting by its nature is:
A.
B.
C.
D.
E.
Precise.
Deterministic in nature.
Objective.
Somewhat subjective.
Mechanical.
Difficulty: 1 Easy
schedules
22.
Budgeting for production (i.e., units to be produced in an upcoming budget

period):
A.
Is simply an extension of the sales forecast.
B. Is prepared after the materials purchases budget is prepared.
C. Involves the sales budget and both beginning and ending finished goods
inventory amounts.
D.
Is not needed under a JIT production philosophy.
E. Is normally the first major step in the master budgeting process.
schedules
23.
Maintaining a constant production level in a firm has the advantage of:
A.
Minimizing the amount of inventory held.
B.
Allowing a stable employment level.
C. Meeting customers' changing expectations in terms of demand volume.
D. Supporting the organization's move to JIT (just-in-time).
E. Allowing the firm to compete successfully as a differentiator.
schedules
24.
The budgeted income statement and budgeted balance sheet benefit a business
primarily in terms of the ability of the organization to:
A. Meet stockholder requests for planning information from the organization.

B. Narrow the range of budgeted estimates to a manageable subset.
C. Deal with uncertainty inherent in the budgeting process.
D. Summarize the impact of the firm's financial and operating activities for an
upcoming period.
E. Satisfy the disclosure requirements of generally accepted accounting principles
(GAAP).
schedules
25.
The focal point in budgeting for a service organization is likely to be:
A.
B.
C.
D.
E.
Capital assets acquisition.

Raw material utilization.
Human resource (i.e., personnel) planning.
Cost minimization.
The process of mission development and goal specification.
Learning Objective: 10-06 Identify unique characteristics of budgeting for service companies
Topic: Service
26.
Which of the following is not an alternative approach to traditional budgeting

practices?
A.
B.
C.
D.
E.
Kaizen budgeting.
Zero-based budgeting (ZBB)
Operations budgeting
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activitybased budgeting; time-driven activity-based budgeting; and kaizen budgeting)
27.
Zero-base budgeting (ZBB) differs from traditional budgeting in terms of its

requirement to:
A. Justify budgeted operations and associated spending.

B. Consider the time-value of money in the budgeting process.
C. Start the budgeting process from the lowest level of the organization, the "zero
base."
D. Incorporate continuous-improvement standards in the set of financial and
operating budgets.
E.
Maximize the existence of "budgetary slack."
28.
A "participative" budget is a(n):
A.
Good two-way communication device.
B. Relatively inexpensive and efficient approach to budget preparation.
C.
"Top down" approach.
D.
"Zero-based" approach.
E.
Alternative budgeting approach to traditional budgeting.
29.
Unless properly controlled, a "bottom-up" budgeting process can lead to:
A.
B.
C.
D.
E.
Excessively tight (i.e., difficult-to-achieve) budgets.

Easy budget targets.
Excessive downward communication.
Reduced incentives for participation.
Reduced levels of "budgetary slack."
30.
Budgeting provides all of the following except:
A. A means to communicate the organization's short-term goals to its employees.

B. Support for management functions of planning and coordinating activities of
the organization.
C.
A means to anticipate problems.
D.
An ethical framework for decision-making.
E.
A basis for motivating employee behavior.
Difficulty: 1 Easy
31.
Financial budgets include the:
A.
B.
C.
D.
E.

Projected income statement.
Budgeted selling and administrative expenses.
Sales budget.
Budgeted retained earnings statement.
Difficulty: 1 Easy
schedules
32.
The effect of increasing the targeted (i.e., desired) ending inventory for a given
budget period has the following effect on the production budget for the period:
A. Increases the required production for the budget period.

B. Has no effect on the required production for the budget period.
C. Has an indeterminate effect (i.e., additional information is required).
D.
None of the above.
Difficulty: 1 Easy
Learning Objective: 10-03 Outline the budgeting process
33.
The authorization function of budgets is especially important for government and

not-for-profit (NFP) entities, where budgeted amounts often serve both as
approvals of planned activities (or programs) and as:
A.
B.
C.
D.
E.
Measures of quality.
Indicators of performance.
Certification of actions.
Ceilings for expenditures.
The basis for contract negotiations.
Difficulty: 1 Easy
34.
Which one of the following is a plan that will allow a manufacturing firm to satisfy
its sales goals and have on hand the desired amount of inventory at the end of the
budget period?
A.
B.
C.
D.
E.

Sales budget.
Selling and administrative expense budget.
Production budget.
Sales forecast.
schedules
35.
Which one of the following shows the direct materials required for production and
their budgeted cost?
A.
B.
C.
D.
E.

Budgeted cost of goods sold.
Direct materials purchases budget.
Production budget.
Direct materials cost budget.
Difficulty: 1 Easy
schedules
36.
Which of the following is not an advantage of using a "highly achievable target"

when constructing budgets?
A. Increasing managers' commitment to achieving budget targets.

B. Increasing the risk that managers will engage in "earnings management"
behavior.
C. Improving predictability of earnings or operating results.
D. Decreasing the cost of achieving organizational control.
E. Enhancing the usefulness of a budget as a planning and coordinating tool.
37.
A negotiated budgeting process is:
A.
Less effective than an authoritative budget.
B. An alternative way to express a "bottom-up" approach to budget preparation.
C. A combination of "top-down" and "bottom-up" approaches to budget
preparation.
D. Less costly to implement than an imposed (i.e., authoritative) budget.
E.
Is generally completed after one round of negotiation.
Difficulty: 1 Easy
38.
The cash budget does not include:
A.
B.
C.
D.
E.
Cash inflows from the collection of receivables.

Cash outflows for purchases of direct materials.
Cash outflows for acquisition of fixed (long-term) assets.
All sales revenues.
Interest paid and interest received.
schedules
39.
Which one of the following is a budgeting process that requires managers to

prepare budgets based on in-depth reviews of all budget items?
A.
B.
C.
D.
E.
Flexible budgeting.
Continuous budgeting.
Kaizen budgeting.
Difficulty: 1 Easy
40.
Which one of the following is a budgeting approach that explicitly demands

continuous improvement and that incorporates expected improvements in the
resultant budget?
A.
B.
C.
D.
E.
Flexible budgeting.
Time-driven activity-based budgeting (TDABB).
Kaizen budgeting.
Difficulty: 1 Easy
41.
Consistency between goals of the firm and the goals of its employees is referred to
as:
A.
B.
C.
D.
E.
Goal optimization.
Goal conformance.
Goal congruence.
Goal internalization.
Goal compensation.
Difficulty: 1 Easy
42.
A significant advantage of using either an activity-based budgeting (ABB) or a

time-driven activity-based budgeting (TDABB) system is:
A.
Reduction in the cost of developing budget amounts.
B. Estimation of the cost of unused capacity, as a by-product of the budgeting
process.
C. Increased levels of budgetary slack, which has a positive influence on
motivation.
D. Elimination of the need to generate a sales forecast for the upcoming period.
E. The incorporation of continuous-improvement standards within the budgets.
43.
Budgets can serve as the standard against which actual performance is measured.
When compensation is based on this comparison, the organization is said to use:
A.
B.
C.
D.
E.
Fixed performance contracts.

Rolling financial forecasts.
Continuous-improvement budgets.
Variable compensation contracts.
A linear compensation plan.
Difficulty: 3 Hard
44.
Critics (e.g., The Beyond Budgeting Roundtable) of traditional budgeting assert

that the budgeting process:
A. Reflects too much of a "bottom-up" process, which is costly and inefficient.

B. Puts too much pressure on individuals to attain the budget, at whatever cost.
C. Makes too much use of so-called linear compensation plans.
D.
Unnecessarily incorporates excessive detail.
Difficulty: 3 Hard
45.
Zero-base budgeting (ZBB):
A. Involves the review of changes made to an organization's original budget.

B.
Does not provide a projection of annual expenditures.
C. Has as the primary objective to reduce budget expenditures to zero.
D. Involves rigorous review of each cost item before inclusion in the budget.
E.
Emphasizes zero increase in expenditures.
46.
Wild West Fashion expects the total costs of goods sold to be $30,000 in November
and $60,000 in December for one of its young adult suits. Management also wants
to have on hand at the end of each month 10 percent of the expected total cost of
sales for the following month. What dollar amount of suits should be purchased in
November?
A.
B.
C.
D.
E.
$26,000.
$27,000.
$33,000.
$36,000.
$60,000.
1. Required Purchases = Budgeted Sales + Desired Ending Inventory - Beginning

Inventory
2. Therefore, Required Purchases = $30,000 + ($60,000 0.1) - ($30,000 0.1) =
$33,000
schedules
47.
ACEM Hardware purchased 5,000 gallons of paint in March. The store had 1,500
gallons on hand at the beginning of March, and expects to have 1,000 gallons on
hand at the end of March. What is the budgeted number of gallons to be sold
during March?
A.
B.
C.
D.
E.
3,500.
4,500.
5,000.
5,500.
7,500.
Budgeted sales (units) = Beginning inventory (units) + Purchases during the

month (units) - Expected ending inventory (units) = 1,500 units + 5,000 units 1,000 units = 5,500 units
Difficulty: 1 Easy
schedules
48.
Joe's Mart policy is to have 20% of the next month's sales on hand at the end of
the current month. Projected sales for August, September, and October are 25,000
units, 20,000 units, and 30,000 units, respectively. How many units must be
purchased in September?
A.
B.
C.
D.
E.
16,000.
17,000.
22,000.
26,000.
28,000.
Required purchases (units) = Budgeted sales (units) + desired ending inventory

(units) - beginning inventory (units) = 20,000 + (30,000 0.2) - (20,000 0.2) =
20,000 units + 6,000 units - 4,000 units = 22,000 units
Difficulty: 1 Easy
schedules
49.
Cripe Corporation maintains ending inventory for each month at 5% of the

following month's sales. It predicted the following sales (in units) for the first four
months of the coming year:
How many units should be produced in March?
A.
B.
C.
D.
E.
2,810.
2,850.
2,970.
2,990.
4,250.
Required production = Estimated sales + Desired ending inventory - Beginning

inventory = 3,000 + (2,800 0.05) - (3,000 0.05) = 3,000 + 140 units - 150
units = 2,990 units
Difficulty: 1 Easy
schedules
50.
LeMinton Company expects the following credit sales for the first five months of
the year: January, $25,000; February, $40,000; March, $30,000; April, $36,000,
May $40,000. Experience has shown that payment for the credit sales is received
as follows: 60% in the month of sale, 25% in the first month after sale, 12% in the
second month after sale, and the remainder is uncollectible. How much cash can
LeMinton Company expect to collect in March as a result of credit sales?
A.
B.
C.
D.
E.
$18,000.
$28,600.
$30,000.
$31,000.
$32,040.
Estimated collections in March = Estimated collections from credit sales in March

+ Estimated collections from credit sales made in February + Estimated collections
from credit sales made in January = ($30,000 0.6) + ($40,000 0.25) + (25,000
0.12) = $18,000 + $10,000 + $3,000 = $31,000.
schedules
51.
The Johann's Professional Service Company expects 70% of sales for cash and 30%
on credit. The company collects 80% of its credit sales in the month following sale,
15% in the second month following sale, and 5% are not collected. Expected sales
for June, July, and August are $48,000, $54,000, and $44,000, respectively. What
are the company's expected total cash receipts in August?
A.
B.
C.
D.
E.
$45,920.
$61,400.
$87,600.
$50,400
$15,120
Total budgeted cash receipts in August = Cash sales in August + Collection of

credit sales from July + Collection of credit sales from June = ($44,000 0.7) +
($54,000 0.3 0.8) + ($48,000 0.3 0.15) = $30,800 + $12,960 + $2,160 =
$45,920.
schedules
Topic: Service
52.
Blake Company has $15,000 cash at the beginning of June and anticipates $50,000
in cash receipts and $34,500 in cash disbursements. The company requires a
minimum cash balance of $20,000. Any excess cash over the minimum desired
balance is used to pay down debts. Blake has an agreement with its bank to
borrow as needed or to repay loans as funds become available. As of May 31, the
company owes $15,000 to the bank. The balance of the loan on June 30 will be:
A.
B.
C.
D.
E.
$4,500.
$9,500.
$15,000.
$19,500.
$25,500.
1. Cash balance before loan payoff = Beginning cash balance + cash receipts cash disbursements = $15,000 + $50,000 - $34,500 = $30,500.
2. Projected excess cash = Available cash balance - minimum cash balance
requirement = $30,500 - $20,000 = $10,500.
3. New balance of loan = Existing balance - loan pay-off amount = $15,000 $10,500 = $4,500.
schedules
Gorberchev Food Processing expects to have 20,000 units of finished goods

inventory on hand on March 31 and reports the following expected sales (in units)
for the first four months:
At the end of each month the company desires its finished goods ending inventory
to be 20% of the next month's projected sales (in units).
53.
The budgeted production (in units) for Gorberchev Food Processing for April should
be:
A.
B.
C.
D.
E.
112,000.
120,000.
127,200.
128,000.
142,000.
Budgeted production (units) = Estimated sales (units) + Desired ending inventory

(units) - Beginning inventory (units) = 120,000 units + (140,000 0.2) units 20,000 units = 128,000 units.
schedules
54.
The budgeted production (in units) for Gorberchev Food Processing for May should
be:
A.
B.
C.
D.
E.
112,000.
134,000.
140,000.
142,000.
146,000.
Budgeted production (units) = Estimated sales (units) + Desired ending inventory

(units) - Beginning inventory (units) = 140,000 + (150,000 0.2) - (140,000
0.2) = 142,000.
Difficulty: 1 Easy
schedules
Doanne Food Processing expects to have 36,000 pounds of raw materials

inventory on hand on March 31, the end of the current year. The company budgets
the following production (in units) for the first four months of the coming year:
At the end of each month the firm desires its ending raw material inventory to be
10% of the next month's production needs. A finished unit requires three pounds of
raw materials.
55.
Doanne's budgeted purchases for raw materials (in pounds) during April should
be:
A.
B.
C.
D.
E.
224,000.
360,000.
363,000.
399,000.
435,000.
1. Budgeted materials (lbs.) for April's production = (120,000 units 3

pounds/unit) = 360,000 pounds
2. Desired April ending inventory of raw materials = 10% of May's production
needs = (10% 130,000 units 3 pounds/unit) = 39,000 pounds.
3. Budgeted purchases of raw materials in April = Budgeted materials usage in
April + Desired end-of-month raw materials inventory - Beginning-of-month
inventory of raw materials = 360,000 pounds + 39,000 pounds - 36,000 pounds
(given) = 363,000 pounds.
schedules
56.
Doanne's budgeted purchases (in pounds) for raw materials during June should
be:
A.
B.
C.
D.
E.
414,000.
420,000.
426,000.
456,000.
498,000.
1. Budgeted pounds raw material on hand on May 31 = (10% 140,000 units) 3

pounds/unit = 42,000 pounds
2. Desired June ending inventory of raw materials = (10% 120,000 units) 3
pounds/unit = 36,000 pounds
3. Budgeted raw materials pounds needed for June production = (140,000 units
3 pounds/unit) = 420,000 pounds
4. Budgeted purchases of raw materials during June, in pounds = Budgeted raw
materials to meet June's production + Desired June ending inventory of raw
materials - Beginning-of-June inventory of raw materials = 420,000 pounds +
36,000 pounds - 42,000 pounds = 414,000 pounds.
schedules
57.
Oracle Supply Co. supply forecasts purchases of 15,000 widgets in June. It sells the
widget at $12.00 per unit. The company has 1,000 units on hand on June 1. The
desired ending inventory of widgets on June 30 is to be 20% lower than the
beginning inventory. Total June sales for widgets are anticipated to be (in dollars):
A.
B.
C.
D.
E.
$177,600.
$180,000.
$182,400.
$189,600.
$192,000.
1. Desired June 30 ending inventory of widgets = [(1 - 0.2) 1,000 units] = 800
units
2. Budgeted sales (in units), June = Beginning-of-month inventory + Budgeted
purchases, June - Desired end-of month inventory = 1,000 units + 15,000 units 800 units = 15,200 units
3. Budgeted sales (in dollars), June = Budgeted sales (in units) Budgeted selling
price per unit = 15,200 units $12.00/unit = $182,400.
Difficulty: 1 Easy
schedules
58.
Salich Manufacturing Corporation has provided the following sales budget

information:
Cash sales are normally 40% of total sales and the credit sales are expected to be
collected in their entirety in the month following the month of sale. The amount of
cash expected to be received from customers in September is:
A.
B.
C.
D.
E.
$24.000.
$55,000.
$57,000.
$58,000.
$60,000.
1. August credit sales = [$55,000 (1 - 0.4)] = $33,000

2. September cash sales = ($60,000 0.4) = $24,000
3. Total cash expected to be received from customers in September = Collection of
August credit sales + September cash sales = $33,000 + $24,000 = $57,000
Difficulty: 1 Easy
schedules
59.
Worton Distributing expects its September sales to be 25% higher than its August
sales of $150,000.Purchases were $100,000 in August and are expected to be
$120,000 in September. All sales are on credit and are expected to be collected as
follows: 30% in the month of the sale and 70% in the following month. Purchases
are paid 25% in the month of purchase and 75% in the following month. The
beginning cash balance on September 1 is $10,000. The ending cash balance on
September 30 would be:
A.
B.
C.
D.
E.
$56,250.
$56,500.
$65,250.
$66,250.
$76,250.
1. Beginning cash balance (given) = $10,000

2. Cash receipts from credit sales made in August ($150,000 0.70) = $105,000
3. Cash receipts from credit sales made in September ([$150,000 1.25] 0.30)
= $56,250
4. Cash disbursements from purchases made in August ($100,000 0.75) =
$75,000
5. Cash disbursements from purchases made in September ($120,000 0.25) =
$30,000
6. Ending cash balance = Beginning cash balance + Cash receipts from credit
sales made in August + Cash receipts from credit sales made in September - Cash
disbursements from purchases made in August - Cash disbursements for
purchases made in September = $10,000 + $105,000 + $56,250 - $75,000 $30,000 = $66,250
Difficulty: 3 Hard
schedules
60.
Tony's Fashions forecasts sales of $300,000 for the quarter ended December 31.Its
gross profit rate is 20% of sales, and its September 30 inventory is $100,000.If the
December 31 inventory is targeted at $40,000, budgeted purchases for the
quarter should be:
A.
B.
C.
D.
E.
$140,000.
$160,000.
$180,000.
$200,000.
$240,000.
1. Beginning inventory (given) = $100,000

2. Gross Profit on this period's estimated sales = $300,000 20% = $60,000
3. Estimated cost of goods sold during the quarter = Estimated sales - estimated
gross profit = $300,000 - $60,000 = $240,000
4. Desired ending inventory = $40,000 (given)
5. Required inventory purchases to meet desired ending inventory = Estimated
cost of goods sold during the period + desired ending inventory (at cost) beginning inventory (at cost) = $240,000 + $40,000 - $100,000 = $180,000
schedules
Boone Co.'s sales, based on past experience, are 20% cash sales and 80% credit
sales. Credit sales are typically collected as follows: 40% in the month of sale, 50%
in the month after the sale, and 10% in the second month. On December 31, the
accounts receivable balance is $54,000, of which $12,000 is from November sales.
Total sales for January and February are budgeted to be $100,000 and $120,000,
respectively.
61.
What are Boone Co.'s budgeted cash receipts for January?
A.
B.
C.
D.
E.
$74,200.
$85,000.
$87,000.
$94,200.
$99,000.
1. January budgeted cash receipts from November credit sales = $12,000 (given)
2. December 31 accounts receivable balance from December sales = ($54,000 $12,000) = $42,000
3. Total December credit sales = (42,000 0.6) = $70,000
4. Portion of December credit sales expected to be received in January = $42,000 $7,000 = $35,000
6. January cash sales = (100,000 20%) = $20,000
7. January credit sales = $100,000 - $20,000 = $80,000
8. January cash receipts from January credit sales = ($80,000 40%) = $32,000
9. Total budgeted January cash receipts = Cash receipts from November credit
sales + December credit sales collected in January + January cash sales + Cash
receipts from collection of January credit sales = $12,000 + $35,000 + $20,000 +
$32,000 = $99,000
schedules
62.
What are Boone Co.'s budgeted cash receipts for February?
A.
B.
C.
D.
E.
$85,400.
$95,000.
$106,600.
$109,400.
$112,900.
1. Cash sales in February = $120,000 0.20 = $24,000

2. Collection in February of a portion of February's credit sales = ($120,000
0.80) 0.40 = $38,400
3. Collection in February of a portion of January's credit sales = ($100,000 0.80)
0.50 = $40,000
4. Determination of Total December credit sales: (a) December 31 Gross Accounts
Receivable = $54,000. (b) Portion of December's Gross Accounts Receivable
attributable to November's credit sales = $12,000 (given). (c) Therefore,
December 31st gross accounts receivable attributable to December sales =
$54,000 - $12,000 = $42,000 (which is 60% of total December sales). (d)
Therefore, total credit sales in December = ($42,000 0.6) = $70,000.
4. Portion of December credit sales budgeted to be received in February =
($70,000 10%) = $7,000
5. Budgeted cash receipts for February = Cash sales in February + Collection in
February of a portion of February's credit sales + Collection in February of a
portion of January's credit sales + Collection in February of a portion of
December's credit sales = $24,000 + $38,400 + $40,000 + $7,000 = $109,400
schedules
Ardel Co. budgeted to sell 200,000 units of Zbox in September. Production of one
unit of Zbox required two pounds of aluminum and five pounds of steel powder.
The beginning inventory and the desired ending inventory in units are:
63.
How many units of Zbox are to be manufactured by Adel Co. during September?
A.
B.
C.
D.
E.
150,000.
189,000.
200,000.
201,000.
202,000.
Units to be produced = Estimated sales (units) + Desired ending inventory (units) Beginning Inventory (units) = 200,000 units + 13,000 units - 24,000 units =
189,000 units.
Difficulty: 1 Easy
schedules
64.
How many pounds of aluminum powder does Ardel Co. need to purchase during
A.
B.
C.
D.
E.
143,000
157,000
286,000
293,000
300,000
pounds.
pounds.
pounds.
pounds.
pounds.
1. 1 unit of output (Zbox) = 2 lbs. aluminum

2. Aluminum requirements for planned production = 150,000 units 2 lbs/unit =
300,000 lbs.
3. Beginning inventory, aluminum = 30,000 lbs. (given)
4. Desired ending aluminum inventory = 23,000 lbs. (given)
5. Required purchases, aluminum = Production requirement + Desired ending
inventory - Beginning inventory = 300,000 lbs. + 23,000 lbs. - 30,000 lbs. =
293,000 lbs.
Difficulty: 1 Easy
schedules
65.
How many pounds of steel powder does Ardel Co. need to purchase during
A.
B.
C.
D.
E.
725,000
745,000
750,000
755,000
775,000
pounds.
pounds.
pounds.
pounds.
pounds.
1. 1 unit of output (Zbox) = 5 lbs. steel powder

2. Steel powder requirements for planned production =150,000 units 5 lbs/unit
= 750,000 lbs.
3. Beginning inventory, steel powder = 26,000 lbs. (given)
4. Desired ending inventory, steel powder = 31,000 lbs. (given)
5. Required purchases, steel powder = Production requirement + Desired ending
inventory - Beginning inventory = 750,000 lbs. + 31,000 lbs. - 26,000 lbs. =
755,000 lbs.
Difficulty: 1 Easy
schedules
Information pertaining to Yekstop Corp.'s sales revenue is presented below.
Management estimates that 4% of credit sales are eventually uncollectible. Of the

collectible credit sales, 65% are likely to be collected in the month of sale and the
remainder in the month following the sale. The company desires to begin each
month with an inventory equal to 75% of the sales projected for the month. All
purchases of inventory are on open account; 30% will be paid in the month of
purchase, and the remainder paid in the month following the month of purchase.
The purchase costs are approximately 60% of the selling prices.
66.
Total budgeted cash collections for Yekstop Corp. in December are:
A.
B.
C.
D.
E.
$556,512.
$375,216.
$495,080.
$502,568.
$506,780.
1. December cash sales = $125,000

2. December credit sales collected in December = ($450,000 0.96) 0.65 =
$280,800
3. November credit sales collected in December = ($288,000 0.96) 0.35 =
$96,768
4. Total budgeted cash collections in December = December cash sales +
December credit sales collected in December + November credit sales collected in
December = $125,000 + $280,800 + $96,768 = $502,568
schedules
67.
Total budgeted cash collections in January by Yekstop Corp. are:
A.
B.
C.
D.
E.
$556,512.
$375,216.
$421,728.
$464,006.
$502,568.
1. January cash sales = $78,000

2. January credit sales collected in January = ($234,000 0.96) 0.65 =
$146,016
3. December credit sales collected in January = ($450,000 0.96) 0.35 =
$151,200
4. Total budgeted cash collections in January = January cash sales + January credit
sales collected in January + December credit sales collected in January = $78,000
+ $146,016 + $151,200 = $375,216
schedules
68.
Total budgeted inventory purchases in November by Yekstop Corp. are:
A.
B.
C.
D.
E.
$258,750.
$316,350.
$384,000.
$489,150.
$527,250.
1. November sales, at cost = ($384,000 60%) = $230,400

2. Desired November Beginning Inventory, at selling prices = (75% $384,000) =
$288,000
3. Desired November Beginning Inventory, at cost = $288,000 60% = $172,800
4. Desired November Ending Inventory, at selling prices = (75% $575,000) =
$431,250
6. Total budgeted inventory purchases in November = November sales, at cost +
Desired ending inventory (at cost) - Beginning inventory (at cost) = $230,400 +
$258,750 - $172,800 = $316,350
schedules
69.
Total budgeted inventory purchases in December by Yekstop Corp. are:
A.
B.
C.
D.
E.
$86,250.
$140,400.
$226,650.
$258,750.
$345,000.
1. December sales, at cost = ($575,000 60%) =$345,000

2. Desired Beginning Inventory, Decemberat selling prices = (75% $575,000)
= $431,250
3. Desired Beginning Inventory, Decemberat cost = $431,250 60% =
$258,750
4. Desired Ending Inventory, Decemberat selling prices = (75% $312,000) =
$234,000
5. Desired Ending inventory, Decemberat cost = $234,000 60% = $140,400
6. Total budgeted inventory purchases in December = December sales (at cost) +
December ending inventory (at cost) - December beginning inventory (at cost) =
$345,000 + $140,400 - $258,750 = $226,650
schedules
70.
Budgeted December cash payments by Yekstop Corp. for December inventory

purchases are:
A.
B.
C.
D.
E.
$67,995.
$103,500.
$158,655.
$241,500.
$289,440.

= $431,250
$258,750
$234,000
$345,000 + $140,400 - $258,750 = $226,650
7. $226,650 30% = $67,995
schedules
71.
Budgeted cash payments in November for November inventory purchases by

Yekstop Corp. are:
A.
B.
C.
D.
E.
$76,625.
$94,905.
$115,200.
$161,280.
$221,445.
1. November sales, at cost = ($384,000 60%) = $230,400

$288,000
$431,250
$258,750 - $172,800 = $316,350
7. Budgeted cash payments in November for November's inventory purchases =
$316,350 30% = $94,905
schedules
72.
Budgeted cash payments in December for November inventory purchases by

Yekstop Corp. are:
A.
B.
C.
D.
E.
$76,625.
$94,905.
$115,200.
$161,280.
$221,445.
1. November sales, at cost = ($384,000 60%) =$230,400

$288,000
$431,250
$258,750 - $172,800 = $316,350
7. Budgeted cash payments in December for November's inventory purchase =
$316,350 70% = $221,445
schedules
73.
Budgeted January cash payments for December inventory purchases by Yekstop

Corp. are:
A.
B.
C.
D.
E.
$67,995.
$103,500.
$158,655.
$241,500.
$289,440.

= $431,250
$258,750
$234,000
$345,000 + $140,400 - $258,750 = $226,650
7. Budgeted January cash payments for December's inventory purchases =
$226,650 70% = $158,655
schedules
Fresplanade Co. had the following historical pattern for its credit sales:
75% collected in the month of sale
12% collected in the first month after sale
8% collected in the second month after sale
3% collected in the third month after sale
2% uncollectible
The sales on open account (credit sales) have been budgeted for the last six
months of the year as shown below:
July $72,000
August $84,000
September $96,000
October $108,000
November $120,000
December $102,000
74.
The estimated total cash collections by Fresplanade Co. during December from
A.
B.
C.
D.
E.
$113,160.
$101,400.
$143,640.
$125,640.
$102,420.
Estimated cash collections during December from A/R = Portion of December's

credit sales collected in December + Portion of November's credit sales collected
in December + Portion of October's credit sales collected in December + Portion of
September's credit sales collected in December = [$102,000 0.75] + [$120,000
0.12] + [$108,000 0.08] + [$96,000 0.03] = $102,420
Difficulty: 1 Easy
schedules
75.
The estimated total cash collections by Fresplanade Co. during November from
collection of accounts receivable is:
A.
B.
C.
D.
E.
$113,160.
$101,400.
$143,640.
$125,640.
$102,420.
Estimated total cash collections during November from collection of A/R = Portion
of November's credit sales collected in November + Portion of October's credit
sales collected in November + Portion of September's credit sales collected in
November + Portion of August's credit sales collected in November = [$120,000
0.75] + [$108,000 0.12] + [$96,000 0.08] + [$84,000 0.03] = $113,160
Difficulty: 1 Easy
schedules
76.
The estimated total cash collections by Fresplanade Co. during October from
A.
B.
C.
D.
E.
$113,160.
$101,400.
$143,640.
$125,640.
$102,420.
Estimated cash collections during October from accounts receivable = Portion of

October's credit sales collected in October + Portion of September's credit sales
collected in October + Portion of August's credit sales collected in October +
Portion of July's credit sales collected in October = [$108,000 0.75] + [$96,000
0.12] + [$84,000 0.08] + [$72,000 0.03] = $101,400
Difficulty: 1 Easy
schedules
77.
The estimated cash collection by Fresplanade Co. during September from credit
sales in July, August, and September is:
A.
B.
C.
D.
E.
$83,160.
$79,380.
$87,840.
$54,000.
$71,640.
Estimated cash collection during September for credit sales from July, August, and
September = Portion of September's credit sales collected in September + Portion
of August's credit sales collected in September + Portion of July's credit sales
collected in September = [$96,000 0.75] + [$84,000 0.12] + [$72,000 0.08]
= $87,840
Difficulty: 1 Easy
schedules
78.
The estimated cash collection by Fresplanade Co. during August from July and
August credit sales is:
A.
B.
C.
D.
E.
$83,160.
$79,380.
$87,840.
$54,000.
$71,640.
Estimated cash collections during August from credit sales made in July and
August = Portion of credit sales from August collected in August + Portion of credit
sales from July collected in August = [$84,000 0.75] + [$72,000 0.12] =
$71,640
Difficulty: 1 Easy
schedules
79.
The estimated cash collections during July from credit sales made in July by
Fresplanade Co. is:
A.
B.
C.
D.
E.
$83,160.
$79,380.
$87,840.
$54,000.
$71,640.
Estimated collection of accounts receivable in July from credit sales made in July =
$72,000 0.75 = $54,000
Difficulty: 1 Easy
schedules
Brownsville Novelty Store prepared the following budget information for the month
of May:
Sales are budgeted at $360,000. All sales are on account and a provision for bad
debts is made
monthly at three percent of sales.
Inventory was $84,000 on April 30 and an increase of $12,000 is planned for May
31.
All inventory is marked to sell at cost plus fifty percent.
Estimated cash disbursements for selling and administrative expenses for the
month are $48,000.
Depreciation for May is projected at $6,000.
80.
Brownsville's budgeted cost of goods sold (CGS) in May is:
A.
B.
C.
D.
E.
$120,000.
$180,000.
$198,000.
$252,000.
$240,000.
1. Budgeted sales (May) = $360,000 (given)

2. Sales = 1.5 Inventory cost (i.e., CGS)
3. Therefore, Budgeted cost of goods sold (May) = Sales 1.5 = $360,000 1.5 =
$240,000
Difficulty: 1 Easy
schedules
81.
Brownsville's budgeted cost of inventory purchased in May is:
A.
B.
C.
D.
E.
$120,000.
$180,000.
$198,000.
$252,000.
$240,000.
1. Inventory increase during May (at cost) = $12,000 (given)

2. Budgeted cost of inventory purchased during May = Budgeted cost of goods
sold, May + Budgeted increase in inventory during May (at cost) = ($360,000
1.5) + $12,000 = $240,000 + $12,000 = $252,000
Difficulty: 1 Easy
schedules
82.
Brownsville's budgeted gross profit in May is:
A.
B.
C.
D.
E.
$120,000.
$180,000.
$198,000.
$252,000.
$240,000.
1. Budgeted sales (May) = $360,000 (given)

2. Sales = 1.5 Inventory cost (i.e., CGS)
3. Therefore, Budgeted cost of goods sold (May) = Sales 1.5 = $360,000 1.5 =
$240,000
4. Budgeted gross profit = Budgeted sales - Budgeted cost of goods sold =
$360,000 (given) - $240,000 = $120,000
Difficulty: 1 Easy
schedules
83.
Brownsville's budgeted bad debts expense for May is:
A.
B.
C.
D.
E.
$7,200.
$10,800.
$7,560.
$5,400.
$14,400.
Budgeted bad debts expense = Budgeted Sales Estimated bad debts % =

$360,000 (given) 3% (given) = $10,800
Difficulty: 1 Easy
schedules
84.
Brownsville's budgeted operating income for May is:
A.
B.
C.
D.
E.
$72,000.
$66,000.
$55,200.
$61,200.
$43,200.
Budgeted operating income = Sales - CGS - Estimated selling & administrative

expenses - Depreciation expense - Estimated bad debts expense = $360,000 ($360,000 1.50) - $48,000 - $6,000 - $10,800 = $55,200
schedules
Graham Corporation's budgeted production schedule for the coming year is as

follows:
Quarter
Quarter
Quarter
Quarter
1
2
3
4
=
=
=
=
22,500
19,000
17,000
24,000
units
units
units
units
Each unit of product requires three pounds of direct material. The company's
policy is to begin each quarter with 30% of that quarter's direct materials
production requirements.
Graham expects to have 50,000 pounds of direct materials on hand at the
beginning of Quarter 1.
85.
What would be Graham's budgeted direct materials purchases in the first quarter?
A.
B.
C.
D.
E.
17,500
34,600
37,750
67,100
84,600
pounds.
pounds.
pounds.
pounds.
pounds.
1. Desired ending inventory, Quarter 1 = [(19,000 units 3 lbs/unit) 0.30] =

17,100 lbs.
2. Lbs. of direct materials needed for Quarter 1 production = 22,500 units 3
lbs/unit = 67,500 lbs.
3. Required purchases (pounds) = Materials required for production + Desired
ending inventory - Beginning inventory = 67,500 lbs. + 17,100 lbs. - 50,000 lbs. =
34,600 lbs.
schedules
86.
What would be Graham's budgeted direct materials purchases in the second

quarter?
A.
B.
C.
D.
E.
53,850
55,200
57,000
58,800
72,300
pounds.
pounds.
pounds.
pounds.
pounds.
1. Lbs. of direct materials at beginning of Quarter 2 = [(19,000 units 3 lbs/unit)

0.30] = 17,100 lbs.
2. Desired ending inventory of materials, Quarter 2 = [(17,000 units 3 lbs/unit)
0.30] = 15,300 lbs.
4. Required direct material purchases, Quarter 2 = Production requirements +
Desired ending inventory - Beginning inventory = 57,000 lbs. + 15,300 lbs. - 17,
100 lbs. = 55,200 lbs.
schedules
87.
What would be Graham's budgeted direct materials purchases in the third

quarter?
A.
B.
C.
D.
E.
19,100
44,700
51,000
57,300
72,600
pounds.
pounds.
pounds.
pounds.
pounds.
1. Estimated beginning inventory of direct materials, Quarter 3 = 17,000 units 3

lbs/unit 0.30 = 15,300
2. Desired ending inventory of direct materials, Quarter 3 = [(24,000 units 3
lbs/unit) 0.30] = 21,600 lbs.
4. Required purchases of direct materials, Quarter 3 = Production requirements +
Desired ending inventory - Beginning inventory = 51,000 lbs. + 21,600 lbs. 15,300 lbs. = 57,300 lbs.
schedules
General Manufacturing expects to have 40,000 pounds of raw materials inventory

on hand on June 30, the end of the current year. The company has budgeted the
following production for the first four months of the coming year:
For the budgeting period, the firm desires each month's ending raw materials
inventory to be 20% of the next month's production needs. A finished unit requires
two pounds of raw materials.
88.
General Manufacturing's budgeted purchases of raw materials during July (in lbs.)
should be:
A.
B.
C.
D.
E.
48,000 lbs.
200,000 lbs.
208,000 lbs.
248,000 lbs.
296,000 lbs.
1. Targeted ending inventory of raw materials, July = (0.20 120,000 units 2

lbs/unit) = 48,000 lbs.
2. Raw materials needed for July's production = (2 lbs/unit 100,000 units) =
200,000 lbs.
3. Beginning inventory of raw materials, July = 40,000 lbs. (given)
4. Required purchases of raw materials, July = Production requirements (July) +
Desired ending inventory of raw materials - Beginning inventory of raw materials =
200,000 lbs. + 48,000 lbs. - 40,000 lbs. = 208,000 lbs.
schedules
89.
General Manufacturing's budgeted purchases of materials during September

should be:
A.
B.
C.
D.
E.
60,000 lbs.
228,000 lbs.
248,000 lbs.
284,000 lbs.
300,000 lbs.
1. Targeted ending inventory of raw materials, September = (0.20 110,000 units

2 lbs/unit) = 44,000 lbs.
2. Raw materials needed for September's production = (2 lbs/unit 150,000 units)
= 300,000 lbs.
3. Beginning inventory of raw materials, September = (0.20 150,000 units 2
lbs/unit) = 60,000 lbs.
4. Required purchases of raw materials, September = Production requirements
(September) + Desired ending inventory of raw materials - Beginning inventory of
raw materials = 300,000 lbs. + 44,000 lbs. - 60,000 lbs. = 284,000 lbs.
schedules
90.
Which of the following best describes the process of sales forecasting?
A.
Multiple sales forecasting tools are available.
B.
Trend analysis cannot be used for sales forecasting.
C. Econometric models cannot be used for sales forecasting because of their
inherent complexity.
D. Sales forecasting works best with a simple visual plotting of past data on a
graph.
E. Generally speaking, the level of unfilled back order and credit policies of the
company in question can be ignored since these represent competitive
responses.
schedules
91.
_________ is a process of varying key estimates to identify those variables that are
most critical to a decision (or a model, such as a budget):
A.
B.
C.
D.
E.
A demand forecast
Sensitivity analysis
Regression analysis
Pareto analysis
Linear optimization analysis
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
92.
Assume only the specified parameters change in a sensitivity analysis. If the

contribution margin increases by $2 per unit, then operating profits will:
A.
B.
C.
D.
Also increase by $2 per unit.

Increase by less than $2 per unit.
Decrease by $2 per unit.
Increases, but by an indeterminate amount.
Difficulty: 1 Easy
93.
Assume that only the specified parameters change in a sensitivity analysis. The
contribution margin ratio increases when:
A.
B.
C.
D.
Total short-term fixed costs increase.

Total short-term fixed costs decrease.
Variable cost per unit increases.
Variable cost per unit decreases.
Difficulty: 1 Easy
94.
The process of examining how a change in a single item in a budget (e.g., sales
volume) affects one or more items in the budget (e.g., budgeted sales revenue
and budgeted operating income) is generally referred to as:
A.
B.
C.
D.
E.
Flexible budgeting.
Linear programming.
Uncertainty programming.
What-if analysis.
Difficulty: 1 Easy
95.
Which of the following are alternatives to traditional budgeting approaches?
A. Volume-based budgeting and zero-base budgeting (ZBB).

B. Activity-based budgeting (ABB) and volume-based budgeting.
C.
Kaizen budgeting and volume-based budgeting.
D. Activity-based budgeting (ABB), kaizen budgeting, and zero-base budgeting
(ZBB).
E. Activity-based budgeting (ABB), kaizen budgeting, and volume-based
budgeting.
Difficulty: 1 Easy
Capital One produces a single product, which it sells for $8.00 per unit. Variable
costs per unit equal $3.20. The company expected total short-term fixed costs to
be $7,200 for the coming month, at the projected sales level of 20,000 units.
Management is considering several alternative actions designed to improve
operating results. In conjunction with this, they have created a profit-planning
model, which can be used to evaluate different scenarios.
96.
What is Capital One's current break-even point in terms of number of units for the
month?
A.
B.
C.
D.
1,500
2,250
3,330
4,000
units.
units.
units.
units.
1. Fixed cost per month = $7,200

2. Contribution margin per unit = Selling price per unit - variable cost per unit =
$8.00/unit - $3.20/unit = $4.80/unit.
3. Therefore, break-even point = $7,200 $4.80/unit = 1,500 units per month
Difficulty: 1 Easy
97.
Suppose that Capital One's management believes that a $1,600 increase in the
monthly promotion costs will provide a boost to sales. By what amount must sales
increase during the month to justify the contemplated expenditure? Round answer
up to the nearest whole number.
A.
B.
C.
D.
E.
200 units.
334 units.
400 units.
668 units.
None of the above.
1. Contribution margin per unit = Selling price per unit - variable cost per unit =
$8.00/unit - $3.20/unit = $4.80/unit
2. Incremental fixed cost per month = $1,600
3. Therefore, incremental sales volume needed to cover incremental fixed cost per
month = $1,600 $4.80/unit = 334 units.
Difficulty: 1 Easy
98.
Capital One's management believes that a 10% reduction in the selling price will
increase sales volume by 10%. If this plan is implemented, then:
A.
B.
C.
D.
E.

Profit should remain approximately the same.
1. New selling price per unit = $8.00 0.90 = $7.20

2. New level of sales volume = 20,000 1.10 = 22,000 units
3. New level of operating income = 22,000 units ($7.20 - $3.20)/unit = $88,000
4. Original level of operating income = 20,000 units ($8.00 - $3.20)/unit =
$96,000
5. Therefore, change in monthly operating income = $88,000 - $96,000 = ($8,000)
99.
A budgeting system that has, in effect, a budget for a set number of periods (i.e., a
constant planning horizon) at all times is called a(n):
A.
B.
C.
D.
E.
Financial budget
Operating budget
Rolling financial forecast
Capital budget
Master budget
Difficulty: 1 Easy
100. All of the following represent alternative approaches to the traditional budgetpreparation process except which one?
A.
B.
C.
D.
E.
Master budgeting.
Kaizen budgeting.
Continuous-improvement budgeting.
Difficulty: 1 Easy
101. Which one of the following is not a way to deal with uncertainty in the budgetpreparation process?
A.
B.
C.
D.
E.
Linear programming.
What-if analysis.
Monte Carlo Simulation (MCS).
Scenario analysis.
Sensitivity analysis.
Difficulty: 1 Easy
102. The proper treatment of the cost of unused capacity, as identified through the use
of an activity-based budgeting (ABB) system, is:
A. To charge the amount to customers whose uneven orders caused the unused
capacity.
B. To charge the amount to a "deferred asset" account on the balance sheet.
C. To change the amount to a "deferred credit" account on the balance sheet.
D. To charge the amount to all products produced during the area (via overhead
application rates).
E. To charge the amount to the product line, department, or a given manager
within the organization where the decision to acquire the capacity was made.
103. The type of compensation plan that focuses on the difference between actual
performance (sales, operating income, etc.) and budgeted performance is refers
to:
A.
B.
C.
D.
E.
The use of flexible budgets for performance evaluation.

The use of the master budget for performance evaluation.
The use of "rolling financial forecasts."
The use of a fixed-performance contract.
The use of a Kaizen forecast.
104. The act of encouraging non-value-adding actions on the part of management in

order to improve indicated performance is referred to as:
A.
B.
C.
D.
E.
Goal congruency.
Gaming the performance indicator.
The use of fixed-performance contract.
Linear optimization analysis.
The use of a relative-performance contract.
Difficulty: 1 Easy
105. The practice of managers knowingly including a higher amount of expenditures (or
lower amount of revenue) in the budget than they actually believe will occur is
called:
A.
B.
C.
D.
E.
Goal congruency.
Resource capacity planning.
Budgetary slack.
Kaizen budgeting.
Difficulty: 1 Easy
106. Which of the following is NOT true regarding the use of linear compensation
plans?
A.
B.
C.
D.
Such plans encourage "gaming" behavior on the part of managers.

Such plans strongly link managerial compensation to the agreed-upon budget.
Under such plans, managerial reward is independent of budgetary targets.
Under such plans, managerial reward is based principally on actual
performance.
E. Under such plans, managerial reward is based on what managers actually do,
not what they do relative to what they say they can do.
107. Which of the following is NOT a characteristic of Kaizen Budgeting?
A. These budgets reflect continuous-improvement standards.

B. These budgets adjust required resource demands based on targeted efficiency
and productivity gains.
C. This approach to budgeting can be used in conjunction with both traditional and
activity-based budgeting.
D. The approach can be used internally, but not for external purposes (e.g., in
budgeting supplier costs).
E. Cost decreases in the budget are the result of performing the activities more
efficiently and with higher quality.
Difficulty: 1 Easy
Essay Questions
108. Explain benefits of implementing a master budgeting system.
Answer may vary

Feedback: The benefits that can be derived from implementing a master budgeting
system include:
1. The preparation of budgets forces management to plan ahead and to establish
goals and objectives.
2. Budgeting compels each department or division to make plans that are in
congruence with the plans of other departments or divisions as well as the
objectives of the entire firm.
3. Budgeting assists resource allocation.
4. The budgeting process promotes internal communication and coordination.
5. Budgets provide guidelines for day-to-day operations, clarify duties to be
performed, assign responsibility for these duties and gauges for controlling
operations.
6. Budgets provide framework for measuring performance.
Difficulty: 1 Easy
109. Contrast operating budgets and financial budgets. How do these budgets relate to
the master budget for a period? What is the culmination of the master budgeting
process?
Answer may vary

Feedback: Operating budgets deal with uses of resources in operating activities
and with the acquisition of these resources, while financial budgets identify
sources and uses of funds for the budgeted operations and the expected operating
results for the period. The combination of operating budgets and financial budgets
for a period constitutes the master budget for a period. The culmination of the
master budgeting process is a set of pro forma financial statements (e.g.,
budgeted income statement and budgeted balance sheet).
Difficulty: 1 Easy
110. In both activity-based and time-driven activity-based systems we calculate costdriver rates for support activities (e.g., the cost to ship an item or the cost to
process a customer order) and it is asserted that these rates are best determined
by dividing budgeted resource costs (for a given cost pool) by the practical
capacity of resources supplied.
Required:
1. What is the primary advantage of using practical capacity as the volume level
for determining cost allocation rates in an ABC or TDABC system?
2. What is the appropriate accounting treatment for unused capacity costs for a
given accounting period?
Answer may vary

Feedback: 1. Beyond logical consistency (the numerator and the denominator of
the cost-allocation rates are both consistentthe numerator represents the cost of
resources supplied while the denominator represents the capacity of resources
supplied), the use of practical capacity facilitates resource capacity planning. How?
By allowing us at the end of each period to estimate the cost of unused capacity
for each activity or process. This estimate is defined as the difference between the
total cost of resources supplied (i.e., the numerator used when the cost-allocation
rates under ABC/TDABC were developed) and the cost of resources actually used
during the period, where the latter amount is equal to the product of each activitycost rate (based on practical capacity) and the actual activity units used during the
period. Such information allows for a better management of the supply of and
demand for capacity-related costs.
2. Unused capacity costs should NOT be assigned to products produced or
customers served during the period. To do so would overestimate the resource
demands of these cost objects. Rather, these costs should be assigned to the level
(product line, department, or a given manager) within the organization where the
decision was made to acquire the capacity in question.
111. Uncertainty and the Budgeting Process: As indicated in the text, the validity of proforma financial statements that are produced as part of the master budgeting
process is affected by the accuracy of the forecasted data going into the
component budgets. Such data are subject to various levels of uncertainty. For this
reason, accountants need to understand ways of dealing with uncertainty in the
budgeting process.
Required: Define and distinguish among the following ways of handling
uncertainty in the budgeting process:
1. What-if analysis (give at least one concrete example)
2. Sensitivity analysis
3. Scenario analysis.
Answer may vary

Feedback: 1. What-if analysis: this is probably the simplest way to address
uncertainty in the budget-preparation process. Essentially, we examine how a
change in one or more budgetary items (e.g., forecasted sales, in units) affects
another variable or budget of interest (e.g., the production budget). Other
questions such as the following could be addressed through What-if analyses: (a)
what would be the impact on operating income of a 7% increase in direct material
costs for an upcoming period? (b) What would be the impact on operating income
of a 7% increase in direct material costs accompanied by a commensurate
percentage increase in selling price per unit? (c) What would be the impact on the
production budget for a given period if the targeted ending inventory decreased
from, say, 30% to 20% of the following month's projected sales? (d) What would be
the effect on budgeted operating income (or cash flow from operations) of a
reduction in targeted ending inventories (e.g., from 30% to 20% of the following
month's projected sales)?
2. Sensitivity analysis: this refers to the process of determining the sensitivity of
a given output (e.g., sales budget, in dollars) to changes in one or more underlying
components of the model (e.g., selling price per unit). Alternatively, we could
examine the sensitivity of a set of pro forma financial statements to various
assumptions made in preparing the component or constituent budgets. Ultimately,
our goal would be to determine the extent to which a change in the forecasted
value of one or more budgetary inputs (e.g., estimated sales forecast, in units)
affects individual budgets (e.g., sales budget) and the set of pro forma financial
statements ultimately produced by the master budgeting process. The example in
the text (Exhibit 10.17) shows estimated operating income at three different levels
of estimated sales demand (in units) and three different levels of selling price per
unit, when all other budgetary inputs are held constant. The goal of the analysis is
to assess whether and to what extent budgeted operating income changes in
response to changes in the two sales-related budgetary inputs.
3. Scenario analysis: this approach looks at a small number of realistic scenarios
(i.e., combinations of planning-model inputs) and the resulting impact of each
scenario on a budget of interest (e.g., operating income or cash flow from

operations). One commonly recommended approach is to prepare a set of budgets
based on a "best case scenario" (regarding budget-model inputs), a "worst-case
scenario," and a "most-likely scenario." The best-case scenario would reflect the
optimistic (but realistic) values for sales volume, selling price per unit, etc., while
the worst-case scenario would reflect just the opposite, that is, the most
pessimistic (but realistic) combination of budgeting-model inputs. The range of
outcomes for the scenarios examined gives us an idea of how bad or good things
might be; the range of possible outcomes (e.g., budgeted operating income)
provides a rough measure of risk. Extensions to basic scenario analysis can be
accomplished by assigning (subjective) probabilities to each of the various
scenarios, or through the use of Monte Carlo Simulation (MCS).
112. List factors that should be considered in developing a sales forecast for an
upcoming budget period.
Answer may vary

Feedback: Factors that should be considered in sales forecasting include:
1)
2)
3)
4)
5)
6)
7)
Current sales levels and trends of sales in the past few years
General economic and industry conditions
Competitor actions and operating plans
Pricing policies
Credit policies
Advertising and promotional activities
Unfilled backorders.
Difficulty: 1 Easy
schedules
113. What is zero-base budgeting (ZBB) and how does this approach to budgeting
compare to what can be considered "traditional budgeting"? How is ZBB
implemented in practice?
Answer may vary

Feedback: Zero-base budgeting (ZBB) is a budgeting process that requires
managers to prepare budgets from "ground zero" and as such can be compared to
a "traditional budgeting" process that is incremental in nature; the primary focus
of a traditional budget is on changes to the current operating budget. By contrast,
a ZBB process allows no activities or functions to be included in the budget unless
managers can justify the need for having them. Zero-base budgeting requires
managers or budgeting teams to perform in-depth reviews and analyses of all
budget items. A ZBB process encourages managers to be aware of activities or
functions that have outlived their usefulness or that have become a waste of
resources.
Difficulty: 1 Easy
114. What is the focus of activity-based budgeting (ABB)? What is the principal
advantage of ABB?
Answer may vary

Feedback: Activity-based budgeting (ABB) is budgeting process that focuses on
costs of activities or cost drivers necessary for production and sales. Proponents of
ABB maintain that this budgeting process results in more accurate resource
planning: sales/output volume is forecasted, then activity requirements are
determined, then spending for resources (activities) is estimated. In this model,
planners are better able to budget resource requirements for a given level of
output.
Difficulty: 1 Easy
115. Contrast the budgeting unit (or focus) under a traditional budgeting system and
under an activity-based budgeting (ABB) system.
Answer may vary

Feedback: 1. The budgeting unit for traditional budgeting is expressed as the cost
of functional areas/departments or spending categories (e.g., salaries,
depreciation, utilities).
2. The budgeting unit for activity-based budgeting (ABB) is expressed as the cost
of performing activities (e.g., executing a purchase order, shipping an order,
inspection of a lot, scheduling a production run).
Difficulty: 1 Easy
116. Flowers Inc. has budgeted cost of goods sold for August of $1,000 for plastic
flowers. Management also wants to have $500 in inventory at the end of the
month to prepare for the fall season. Beginning inventory in August was $400.
What dollar amount of plastic flowers should be purchased to meet the above
objectives?
Answer may vary

Feedback: Budgeted purchases = Budgeted cost of goods sold (CGS) + Desired
ending inventory - Beginning inventory = $1,000 + $500 - $400 = $1,100
Difficulty: 1 Easy
schedules
117. Lighting Inc.'s sales budget showed the following projections for the coming year:

quantity of finished goods inventory at the end of each quarter was to equal seven
Required: Calculate the units to be produced during the third quarter.
Answer may vary

Feedback:
Difficulty: 1 Easy
schedules
118. Lovely Pet Store has budgeted cost of goods sold for May of $6,000 for flea collars.
prepare for the summer season. Beginning inventory in May was $200.
Required: What dollar amount of flea collars should be purchased to meet the
above objectives?
Answer may vary

Feedback: Required purchases = Estimated sales (at cost) + Desired ending
inventory - Beginning inventory = $6,000 + $300 - $200 = $6,100
Difficulty: 1 Easy
schedules
119. Allmakes Software budgeted August purchases of new software at $140,000.The

store had software costing $6,000 on hand at the beginning of August, and to
cover part of anticipated back-to-school sales in September they expect to have
$15,000 of software on hand at the end of August.
Required: What was the budgeted cost of goods sold for August?
Answer may vary

Feedback:
Difficulty: 1 Easy
schedules
120. Helen Auger has seen the Centicle Group, a not-for-profit, in-home health care
organization, grow during the past ten years to a $500 million revenue, multi-state
organization. Helen was promoted to her controller position six months ago, after
serving capably in several financial accounting positions at the Centicle Group.
At a Budget Review Committee meeting last Friday, several committee members
expressed frustration with the pace of the budget development. They described
the newly introduced "bottom up" system of participative budgeting as "unwieldy,"
"slow-paced," and "repetitive." Helen's objective in introducing the participative
approach was to involve to a much greater extent lower level supervisors and
employees. Helen is meeting with the Budget Review Committee again tomorrow
when she plans to explain the advantages of "bottom up" versus "top down"
approaches to the budgeting process.
Required: Helen has asked you to help her prepare for tomorrow's meeting by
preparing the following:
1. A 40 -50 word description of participative budgeting, including some basic
advantages of this approach to budgeting.
2. A brief, one-paragraph explanation of the concept of "budget ownership," one of
the values that participative ("bottom up") budgeting is said to have.
Answer may vary

Feedback: 1. Participative ("bottom up") budgeting is an approach to the
budgeting process that requires an upward flow of information, goal setting and
justification. The primary objective is to get employees to "buy into" the final
budget because they are truly involved in its preparation. Advantages of
participative budgeting include:
1. Better data comes from the person who creates the data.
2. People involved in a process feel included.
3. People who help set their own goals are likely to be more motivated to achieve
those goals.
4. Better communication links are created through the participative budgeting
process.
5. More realistic levels of "slack" are created.
6. A sense of "ownership" develops for those involved in the budgeting process.
2. "Budget ownership" develops from a sense that "I helped create this." This
sense of owning leads to a better attitude, more effective budget preparation,
more realistic budget data, and a heightened understanding of the budget and
evaluation processes. Although the participative approach requires more initial
employee time, the rewards (more realistic budgets, higher employee motivation,
and the general sense of really being involved) can more than offset the higher
cost and slower pace in budget development.
Topic: Service
121. A business develops a budget for many reasons beyond wanting to know what
future profits will be. Comment on the role of a firm's strategic goals in both the
master budget and the capital budget.
Answer may vary

Feedback: Strategic goals can be either short-term or long-term. If short-term, the
master budget should reflect those stated strategic goals in terms of revenue
creation or resource allocation. Capital budgets normally reflect long-term
strategic goals, for example, expansion of physical facilities or addition of a
product line. The master budget should serve as the device that shows how
strategic goals can be realized.
AACSB: Analytic
Difficulty: 1 Easy
Topic: Strategy
122. Kurt Helfter graduated with a B.S. degree in Mechanical Engineering and joined
Andrew Consulting, a firm specializing in HVAC (heating, ventilation, and air
conditioning) for small to medium-size business structures. Kurt is knowledgeable
in the use of CAD (computer-assisted design) and was pleased during his initial
employment to find Andrew Consulting a leader in the use of CAD software.
During Kurt's third year at Andrew, he felt a sense of unease with the firm's slow
pace in updating computer hardware and software. Although not directly involved
in budgeting for the firm, Kurt has been satisfied with the resources that Andrew
provided for his use. Kurt felt the need to detail his concerns in a memo to his
superior, in which he requested significant investment in computer resources to
"allow us to respond to clients' needs, both in quantity and quality." Kurt was
surprised and hurt when he received his superior's response, which suggested that
resource allocation in the firm is decided at a higher administrative level. "But all I
wanted to do was help keep our firm competitive," Kurt responded to his boss
when visiting him about the rejection memo. "Sorry, Kurt," his boss said, "That's
how things get done in this firm." Kurt now feels lost, wondering if it's time to look
for another job.
Does this situation suggest what type of budgeting process the company is using?
Is there a problem with individual and company goal congruence in Andrew
Consulting? If so, how might Kurt's supervisor have prevented the problem?
Answer may vary

Feedback: Kurt believed the company would maintain its competitive edge by
updating computer hardware and software. His personal goal is now in conflict with
what he sees as the company's failure to achieve one of its goals, whether stated
or not.
Communication seems poor in this situation, and the failure of Andrew Consulting
management to include all employees in the budgeting process has made this
particular situation worse. One significant advantage of participative (bottom up)
budgeting is the high level of communication it requires between administrative
levels. Kurt's boss has obviously adjusted to the existing budgeting process, which
appears to be a "top down" traditional system. He should have let Kurt know how
the existing budgeting system operated, and then have served as a conduit for
Kurt's suggestions.
Topic: Strategy
123. Discuss the components of each of the following manufacturing cost budgets:
1.
2.
3.
4.
5.
6.
Production budget
Direct materials purchases budget
Direct labor budget
Factory overhead budget
Cost of goods manufactured budget
Answer may vary

Feedback: 1. A production budgetthis schedule shows the number of units to
be produced for an upcoming period, as a function of: the units of finished goods
on hand at the beginning of the period, the estimated sales (in units) for the
period, the desired (or targeted) finished goods inventory, and shows the number
of units to be produced.
2. A direct materials purchases budgetthis schedule shows, in both physical
units and in dollars, the amount of materials, parts, and components to be
purchased for an upcoming period, as a function of: the amount of direct materials
needed to meet planned production; the desired (i.e., targeted) ending inventory
of direct materials, and the amount of direct materials on hand at the beginning of
the budget period.
3. A direct labor budget shows, by labor class (e.g., semiskilled vs. skilled), the
labor hours and associated labor cost (based on budgeted wage rates) needed to
meet planned production for an upcoming period.
4. A factory overhead budget. This schedule uses the overhead base (or driver)
to determine the total budgeted factory overhead (broken down into fixed and
variable subcategories) for an upcoming period. Typically, line items for individual
overhead cost components are included on this schedule.
5. The Cost of Goods Manufactured Budget shows the budgeted
manufacturing cost, broken down in three cost elements (direct materials, direct
labor, and manufacturing overhead), for planned production.
6. The Cost of Goods Sold Budget shows the budgeted total manufacturing cost
associated with forecasted sales volume. It is equal to: Cost of Goods
Manufactured + Desired (Targeted) Ending Inventory of Finished Goods - Beginning
Inventory of Finished Goods.
schedules
124. Ardan Company's sales budget showed the following projections for the coming
year:

quantity of finished goods inventory at the end of each quarter was to equal five
Required: Calculate the units to be produced during the second quarter.
Answer may vary

Feedback:
Difficulty: 1 Easy
schedules
125. Information pertaining to Yeks Company's budgeted sales revenue for the first
quarter of the year is presented below.
Management estimated that four percent of credit sales would be uncollectible. Of

the collectible credit sales, 60% would be collected in the month of sale and the
remainder in the month following the sale.
Required: Calculate total budgeted cash collections in February.
Answer may vary

Feedback:
schedules
126. The budget committee for Amacom Company, with the help of the district sales
manager, projects sales of 80,000 units of its primary product next year. The
budget committee and key executives have decided that finished goods inventory
should be decreased from the 10,000 units expected at the end of the current
year, to 7,000 units at the end of next year. Each unit of finished product requires
three units of material MPS15 and six units of material NAV23. At the end of the
current year, the inventory of material MPS15 is expected to be 10,000 units and
material NAV23 is expected to be 20,000 units. The budget committee believes
that these material inventories can be reduced by 80% during the coming year
because of the newly installed supply chain system.
Required
1. Calculate the number of units Amacom expects to produce during the next year.
2. Compute the number of units that should be purchased of each of the raw
materials in order to produce the budgeted units and comply with inventory
policy.
Answer may vary

Feedback:
1.
2.
schedules
127. Willard Company anticipates that its fixed manufacturing overhead costs will be
$50,000 during the next period. Its variable manufacturing overhead is expected
to be $8 per unit produced.
Required
1. What amount of overhead should be budgeted if the production budget shows
that 40,000 units are to be produced?
2. What amount of overhead should be budgeted if the production budget shows
that 50,000 units are to be produced?
3. Compute the total overhead cost per unit for requirements 1 and 2.
Answer may vary

Feedback: 1. Budgeted overhead if 40,000 units are produced = Budgeted Fixed
Overhead + Budgeted Variable Overhead = $50,000 + ($8/unit 40,000 units) =
$370,000
2. Budgeted overhead if 50,000 units are produced = Budgeted Fixed Overhead +
Budgeted Variable Overhead = $50,000 + ($8 x 50,000) = $450,000
3. Overhead cost per unit when 40,000 units are produced: $370,000 40,000
units = $9.25 per unit; Overhead cost per unit when 50,000 units are produced:
$450,000 50,000 units = $9 per unit. In other words, the cost per unit has
decreased because spreading the fixed costs ($50,000) over a greater number of
units in (2) relative to (1).
Difficulty: 1 Easy
schedules
128. Uecker Enterprise expects sales of 20,000 units of T1 in September. T1is its most
popular high performance desktop model. The sales manager is confident that,
between October and December, the total sales will have a 50% growth rate each
month from the month before. Each unit requires 40 sets of the Alpha-5 chip. The
firm has a policy to maintain inventory at the end of each month equal to 1% of
the following month's estimated sales. The same policy applies also to the chips
and components required to assemble the finished product.
1. What is the budgeted production (in units) for each of the months September,
October, and November?
2. How many sets of Alpha-5 does the company plan to purchase in September
and in October?
Answer may vary

Feedback:
schedules
129. Enterprise Tax Services (ETS) provides tax planning. The company billed 5,000
hours at $100 per hour for the year just completed. ETS, in planning next year's
operations, is focusing on increasing the company's share of the market. It
proposes to do that by hiring more tax specialists and by lowering its billing rate
by 20% for work done by these new specialists. ETS estimates that revenues
generated from existing staff would increase in total by 40% as a result of the new
billing policy and that the additional specialists will provide additional billings of
3,000 hours (at the reduced rate) during the coming year.
Required: Compute the budgeted revenue amount for next year based on ETS's
plans and projections.
Answer may vary

Feedback: 1. Budgeted revenue from existing staff = 1.40 (5,000 $100) =
$700,000
2. Budgeted revenue from new staff = (3,000 hours [80% $100/hour]) =
$240,000
3. Total budgeted revenue = $700,000 + $240,000 = $940,000
Difficulty: 1 Easy
Topic: Service
130. Transcript Company is preparing a cash budget for February. The company has
$150,000 cash at the beginning of February and anticipates total sales of
$800,000, consisting of 25% cash sales and 75% credit card sales. The bank
charges 3 percent for credit card transactions. The company sets its selling price
at 160 percent of the cost of purchases and pays for each month's purchases at
the end of the month. Other cash disbursements are $20,000 per month plus 4%
of total sales. In addition, a $600,000 note will be due in February for equipment
purchased last August. Transcript Company has an agreement with its bank to
maintain a cash balance of $100,000.
Required: What amount, if any, must the company borrow during February?
Answer may vary

Feedback:
schedules
131. West Company budgeted the following credit sales during the current year:
September, $75,000; October, $108,000; November, $90,000; December,
$96,000. Experience has shown that cash from the credit sales is received as
follows: 10% in the month of sale, 50% in the first month after sale, 35% in the
second month after sale, and 5% is uncollectible. All collections in the month of
sale are subject to 2 percent cash discount.
Required: How much total cash can West Company expect to collect in
November?
Answer may vary

Feedback:
Difficulty: 1 Easy
schedules
132. In preparing a budget for the first three months of the year starting in October,
Dubya Company is planning the number of units of merchandise to order each
month. The company's policy is to have 40% of the next month's sales on hand at
the end of the current month. Projected sales for October, November, and
December are 40,000 units, 50,000 units, and 100,000 units, respectively.
Required: How many units must be ordered in November?
Answer may vary

Feedback:
Difficulty: 1 Easy
schedules
133. The Shoecraft Company's budgeted sales for January, February, and March of
$80,000, $60,000, and $50,000, respectively. Seventy percent of sales are on
credit. The company collects 60% of its credit sales in the month following sale,
35% in the second month following sale, and 5% is not collected. Shoecraft mailed
all statements to credit customers at the end of the month with a term of 1/30,
n/60. What are Shoecraft's expected cash receipts for March?
Answer may vary

Feedback:
Difficulty: 1 Easy
schedules
134. Papa Joe, Inc., is preparing its budget for the second quarter of the calendar year.
The following unit sales data have been forecasted:
Desired ending inventory each month: 30% of next month's estimated sales (in
units)
Required:
1. How many units should be budgeted for production in June?
2. How many units should be budgeted for production in the second quarter?
Answer may vary

Feedback:
schedules
135. Dockille, Inc., is preparing its budget for the second quarter of the calendar year.
The following sales data (in units) have been forecasted:
Additional information:
Desired ending inventory each month--Finished goods: 30% of next month's sales
Desired ending inventory each month--Raw materials: 25% of next month's
production needs
Number of raw material units required per finished unit: 4
Required: How many units of raw materials should be purchased in the
2ndquarter?
Answer may vary

Feedback:
Difficulty: 3 Hard
schedules
136. Olde Corporation is preparing a cash budget for the first two months of the coming
year. The following data have been forecasted:
Additional data:
(1) Sales are 40% cash and 60% credit. The term of credit sales is 2/10, n/30. The
collection pattern for credit sales is 80% in the month following the month of sale
(of which 75% are collected within 10 days), and 20% in the month thereafter.
Total sales in December of the prior year were $1,000,000.
(2) Purchases are all on credit, with 40% paid in the month of purchase and the
balance the following month.
(3) Operating expenses are paid in the month incurred.
(4) The firm desires to maintain its cash balance at $150,000 at the end of each
month.
(5) Loans are used to maintain the minimum cash balance. At the end of each
month, interest of 1% per month is paid on the outstanding loan balance as of the
beginning of the month. Repayments are made (at the end of the month)
whenever the cash balance exceeds $150,000.
Required: Prepare the cash budget, in the form of a statement of cash flow, for
February. What is the amount of the loan balance at the end of the month (after
loan repayments, if any)?
Answer may vary

Feedback:
Difficulty: 3 Hard
schedules
137. Grey Company is considering replacing its existing cutting machine with a new
machine that, according to the manufacturer, is more efficient in terms of energy
consumptiona variable cost of production. In this regard, it would like to do some
financial planning, including "what-if" analysis. Budgeted information regarding the
two machines is as follows:
Required:
1. Determine the sales volume at which the costs are the same for both machines.
2. What amount of sales, in dollars, for the new machine would produce a 10%
profit margin (i.e. ratio of operating profit to sales = 10%)?
Answer may vary

Feedback: 1. Total cost equation (per month), existing machine: TC = $32,000 +
$44X, where X = outputTotal cost equation (per month), new machine: TC =
$40,000 + $40X, where X = output
Setting the two equations equal, we have:
$32,000 + $44X = $40,000 + $40X
4X = $8,000
X = $8,000 4 = 2,000 units per month (the so-called break-even volume)
2. Required sales level, in dollars, to generate a target pre-tax profit of 10% on
sales, under the new machine:
Let X = required sales level (in dollars) to earn targeted profit
Let Q = required sales volume in units to earn targeted profit
Then, given a sales price of $55 per unit, we have: X = $55Q
The basic profit equation is:
CM - FC = pre-tax (operating) profit
[($55 - $40)/unit Q] - $40,000 = (10%) $55Q
$15Q - $5.5Q = $40,000
Q = [$40,000 $9.50/unit] = 4,211 units
R = $55Q = $55/unit 4,211 units = $231,605
Difficulty: 3 Hard
138. As indicated in the text, sensitivity analysis is an important tool for dealing with
uncertainty in the budget preparation process. Which estimates, out of all that
management has to deal with, do you think are the most critical in terms of
developing the master budget for the typical profit-seeking organization?
Answer may vary

Feedback: The most critical estimates are the estimates related to sales demand.
These estimates provide the basis upon which all, or at least most of, the other
plans in the master budget are based. In this sense, it is the "cornerstone" of the
master budgeting process.
Other critical estimates are those relating to the consumption of each factor of
production (such as raw materials, labor, and machine capacities) by each unit of
production since these estimates will play an important role in estimating total
resource requirements and estimating costs.
Difficulty: 1 Easy
139. One of the behavioral considerations in implementing a budgeting system has to

do with the issue of budgetary slack. What are the positive and negative aspects
of building slack into budgets from top management's point of view, and the
employee's point of view (i.e., the individual responsible for building slack into the
budget)?
Answer may vary

Feedback: Employee's Perspective:
From the employee's perspective, there are probably two benefits from building
slack into the budget. First, the employee may be able to obtain excess resources
to achieve desired goals. Consequently, this may reduce pressure on the employee
and reduce job anxiety. Second, senior management may lower their work
expectations of the employee. This may also lead to lower pressure on the
employee to perform. Either way, the end result is a reduction in job-related stress
for the employee. However, if incentives are graduated in such a way that
achieving higher and higher goals provides the employee with more and more
compensation in the form of bonuses, then the employee may lose income by
selecting lower goals.
Top Management's Point of View:
From top management's point of view, employees who build in slack are either
using unnecessary resources to achieve a goal that should have been achievable
with fewer resources, or they are understating their performance capabilities (e.g.,
intentionally underestimating sales demand or overstating the cost of planned
production). Thus, the organization is either not running as efficiently as it can, or
is losing potential productivity from employees who are not working as hard as
they can. In some cases, senior management may believe that employees build in
slack to relieve job pressure. If burnout of employees has been occurring in the
organization then perhaps senior management may be more forgiving and view
some slack building as necessary to keep their employees from quitting.
Topic: Strategy
140. Omni, Inc. manages a medical-expense reimbursement program for colleges and
universities throughout the United States. University employees submit claims for
reimbursement of medical expenses from reimbursement accounts established
each year by the employees. Omni then processes reimbursement requests,
verifies the legitimacy of each request, computes the deductible and co-payment
required, determines whether the employee's expense reimbursement account has
adequate funds available, and, if applicable, issues a reimbursement check to the
eligible employee.
Omni employs three different types of clerks who manage these reimbursement
accounts: managers, clerical staff-1, and clerical staff-2. The managers are each
paid $50,000 per year, clerical staff-1 employees are paid $40,000 per year, while
clerical staff-2 employees are paid $35,000 per year. Based on prior experience,
for every 150,000 claims processed per year, Omni needs to budget for one
manager's position, two clerical staff-1 positions, and six clerical staff-2 positions.
Last year, Omni processed 2 million reimbursement claims, and employed 14
managers, 30 clerical staff-1 employees, and 83 clerical staff-2 employees.
Required
1. Based on the data provided, calculate the cost savings or excess staffing costs
for Omni during the most recent year. (Assume that the policy of the company is to
hire only full-time employees.)
2. What managerial insights are suggested on the basis of your analysis? If you
were attempting to judge the processing efficiency of Omni's staff, what additional
information might you want to have?
Answer may vary

Feedback: 1. With 2,000,000 medical claims, Omni should employ the following
staff (at budgeted processing capabilities):
a) Managers: 13.33 = ((2,000,000 150,000) 1)
b) Clerical Staff-1: 26.67 = ((2,000,000 150,000) 2)
c) Clerical Staff-2: 80.00 = ((2,000,000 150,000) 6)
Under the assumption that Omni hires only full-time people, it must round up to a
full employee. Thus, the budgeted number of people for last year's actual volume
of claims processed is: 14 managers, 27 clerical staff-1, and 80 clerical staff-2. The
total cost of this group would be $4,580,000 = (14 $50,000) + (27 $40,000) +
(80 $35,000).
The actual cost to this group was $4,805,000 = (14 $50,000) + (30 $40,000)
+ (83 $35,000). Therefore, during the past year there was an excess laborrelated claims-processing cost of $225,000 (= $4,805,000 - $4,580,000) created
by having 3 more senior clerks than budgeted and 3 more junior clerks than
budgeted.
2. The issue is why the clerical group is employing more people than it should for
the workload it faces. There are various reasons for this result, including training
inefficiencies, continued growth requiring more people, an inappropriate standard,
overestimating requirements when hiring took place, and processing inefficiencies.
The report from the manager of this unit should identify the amount of the excess
spending, its cause, and what will be done to correct the variance.
Note, however, that processing cost is but one important performance dimension.
In assessing employee performance, quality, processing speed, accuracy, and
other nonfinancial performance indicators might be monitored as part of the ongoing control process.
Topic: Service
Topic: Strategy
141. The Bambola Doll Company produces a single product: an inexpensive plastic toy
doll. This item sells for $4.00 per unit, and has variable costs (manufacturing plus
marketing) of $2.50 per unit. Monthly fixed costs amount to approximately
$60,000. Last month, sales reached 100,000 units. Management would like to do
some financial planning, the end result of which wouldit is hopedbe even
better future financial performance. As a management accountant you have been
asked to construct a planning model and to conduct "what-if" analyses with the
model you develop.
Management has told you to consider the following options, all of which have the
potential to increase the profitability of the company:
A) Increase monthly promotional and advertising costs.
B) Increase raw material quality and increase the product selling price.
C) Increase the product selling price, with no increase in the raw material costs.
Required:
1. The sales manager of the company is fairly confident that a well-done marketing
campaign could increase sales volume substantially, perhaps as much as doubling
sales from the current position. The president of the company would like to
increase operating profits by 50% over those of the most recent month. You are
asked to determine how much the company could afford to spend on an intensive
marketing campaign, in order to achieve the projected doubling of sales volume?
2. As an alternative to 1 above, assume that the company increases the quality of
its raw materials going into the manufacturing of its product. This increase would
result in a new variable cost per unit of $3.00. What is the required increase in
selling price per unit that would be needed to maintain the same break-even
volume as currently exists?
3. As a final alternative, assume that the company has decided to increase the
selling price of its product by $1 per unit, with no accompanying marketing and
promotion campaign. What is the unit sales volume needed, with the new selling
price, for the company to make the same amount of profit as it did last month?
Answer may vary

Feedback: 1. Target profit level (coming month) = 150% existing operating profit
per month
Existing profit level = CM - FC = [($4.00 - $2.50)/unit 100,000 units] - $60,000
= $150,000 - $60,000 = $90,000
Next month's profit target = $90,000 1.50 = $135,000
Let X = the maximum amount that can be spent on advertising. If sales volume
doubles, then new volume = 2 100,000 units = 200,000 units per month. Then,
[($4.00 - $2.50)/unit 200,000 units)] - $(60,000 + X) = $135,000 and, X =
$105,000
2. Let X = required units to break-even. In the current situation, we have:

[($4.00 - $2.50)/unit X] - $60,000 = $0
X = 40,000 units per month
Now, let sp = the required selling price per unit. Thus,
[(sp - $3.00)/unit 40,000 units] - $60,000 = $0\ sp = $4.50 per doll (i.e., an
increase of $0.50 per unit)
In other words, if everything else is held constant, the company must increase its
selling price by the same dollar increase as the increase in its variable cost per
unit if it wants to maintain the same profit level (including a profit level of $0, the
break-even point).
3. Again, let X = required sales volume (to earn the same profit as the company
earned last year, assuming only an increase in the selling price per unit)
Existing operating profit per month (part 1 above) = $90,000
Therefore: [(($5.00 - $2.50)/unit) X] - $60,000/month = $90,000/month, and, X
= 60,000 units
Difficulty: 3 Hard
Topic: Strategy
142. Over the years, alternative approaches to traditional budgeting practices have
been proposed to facilitate budget preparation and usefulness. First, define what is
meant by the term "traditional budgeting." Next, compare and contrast the
following alternative budgeting approaches to a traditional budgeting process:
Zero Base Budgeting (ZBB); Activity-Based Budgeting (ABB); Time-Driven ABB;
and, kaizen budgeting.
Answer may vary

Feedback: 1. Traditional budgeting:a traditional budgeting process is
incremental in nature, i.e., starts with the information from the most recent
budget. Such budgetary amounts are then adjusted (upwards or downwards),
usually by some percentage amount. This process inherently assumes that most, if
not all, current activities and functions will continue into the budget period. As
such, the primary focus in a typical budgeting process is on changes to the current
operating budget.
2. Zero-base budgeting (ZBB):as implied by its name, ZBB requires budgeting
each period from a zero starting point, i.e., from a zero base (hence the name
ZBB). This practice can be compared to traditional budgets that in many cases are
"incremental in nature" (e.g., "last year's amount, plus 5%"). ZBB specifies that no
activities or functions can be included in the budget unless specifically justified.
ZBB requires budgeting teams to perform in-depth reviews of all budget items.
3. Activity-based budgeting (ABB): ABB is based on cost information generated
by a traditional activity-based cost (ABC) system, that is, a system that relies on a
framework of cost drivers classified as unit-level, batch-level, customer-sustaining,
and product-sustaining level. ABB essentially works backwards from planned sales
(volume and mix) forecasts for an upcoming period to determine budgeted support
activities needed to support those plans. Finally, the cost of resources needed to
perform this expected set of activities is budgeted. In short, ABB focuses on the
activities and associated support resources (costs) needed to satisfy the projected
level of customer demand for an upcoming period.
4. Time-driven activity-based budgeting (TDABB): as indicated in Chapter 5,
TDABC is a modern extension (actually, a simplification) of traditional ABC. TDABC
allocates most support (indirect) costs not on the basis of unit-level, batch-level,
and product-level cost drivers by on the basis of time-based equations. That is,
resource consumption for each indirect/support cost pool is viewed as a function of
time. As with activity-based budgeting (ABB), TDABB works backwards from
forecasted sales volume and sales mix to estimate resource spending needed to
support production and sales plans. That is, the organization estimates resource
requirements in each process/department that would occur IF the production and
sales forecasts for the upcoming period were realized. Advocates of TDABC posit
that TDABB streamlines, potentially in a significant way, the budget-preparation
process.
5. Kaizen budgeting: under this approach, the budget incorporates continuousimprovement expectations. That is, successive budgets adjust resource demands
and resource consumption based on targeted efficiency and productivity gains.
Note that such budgets can be used both internally as well as externally (e.g., in
conjunction with suppliers).
Difficulty: 3 Hard
143. Compare and contrast traditional budgeting and activity-based budgeting (ABB)
along the following dimensions: budgeting unit; primary focus; time orientation;
roles of suppliers and customers; and, control objective.
Answer may vary

Feedback:
144. As indicated in the text, one of the behavioral issues associated with budgeting
deals with the linkage of employee compensation to budgeted performance. In this
regard, distinguishbetween so-called fixed performance contracts (i.e., a
traditional approach) and the following two recommended alternatives: (1) linear
compensation plans, and (2) the use of relative performance (relative
improvement) contracts along with "rolling financial forecasts." With respect to the
use of fixed performance contracts, define what is meant by the term "gaming the
performance indicator." With respect to the use of relative performance contracts,
define what is meant by the term "rolling financial forecasts."
Answer may vary

Feedback: Under a "traditional model" employee reward/compensation is linked to
budgetary performance, that is, comparison of actual results to budgeted results
(where budgeted results are determined along the lines discussed in Chapter 10).
This type of compensation/reward plan is sometimes referred to as a "fixed
performance contract" because actual performance (ales, operating income, net
income, return on sales, return on investment, etc.) is compared to a fixed
(budgeted) target. Experience shows that such an incentive model can have
undesirable consequences (e.g., it may encourage managers to submit biased
information in their budgets, that is, excessive amounts of budgetary slack").
Another dysfunctional consequence of using fixed performance contracts is that
such contracts may encourage managers to game the performance indicator,
that is, to take actions that make the performance indicator look better but that do
not increase the value of the firm.
Given criticisms of so-called "fixed performance contracts," at least two alternative
plans have been introduced:
(a) Linear Compensation Plansthe idea here is essentially to sever the
relationship between budgets and managerial compensation. In such a situation,
managerial reward is a linear function of actual performance, and not a function of
actual performance relative to budgets: the greater the actual performance, the
greater the managerial reward. Put another way, such a plan rewards individuals
for what they actually do, not what they do relative to what they say they can do.
(b) Relative Performance (Relative Improvement) Contractsunder this
plan managers would be rewarded for how their respective business units perform
relative to some appropriate benchmark performance, not relative to a fixed
budget target. To complement the use of relative performance contracts, some
recommend the use of "rolling financial forecasts" rather than a traditional
master annual master budget (as described in the text). Such forecasts provide a
constant planning horizon but more important are disassociated from performance
evaluation and control. The overall intent is to motivate and allow employees to
adapt to changing environments (including newly identified competitive threats)
145. One of the behavioral considerations associated with the budgeting process
relates to the difficulty level embodied in the budget (i.e., how difficult or easy it is
to achieve budgeted results).
1. Explain the negative consequences of budgetary targets that are too easy or too
difficult to achieve.
2. What is meant by the term "highly achievable (budget) target"?
3. What are the primary advantages of using "highly achievable targets" in terms
of budgetary expectations?
Answer may vary

Feedback: 1. The issue of the "difficulty level" of the budget target relates to the
motivational/incentive effects of the budget. An overly easy ("loose") budget may
fail to encourage employees to give their best efforts. On the other hand, a budget
target that is very difficult to achieve (i.e., one that is overly "tight") may
discourage managers from even trying to attain it. Man would agree, therefore,
that budget targets should be somewhere near these two extremes, i.e.,
challenging yet attainable.
2. The notion of a "highly achievable" is an attempt to specify or operationalize
what is meant by a "challenging yet attainable" budget target. One set of
researchers has indicated that such budgets are those that are achievable by most
managers 80%-90% of the time.
3. Based on the research by Merchant and Manzoni (1989) and Merchant (1990),
the following behavioral benefits are associated with the use of "highly achievable
budgetary targets," particularly when accompanied by extra rewards for
performances exceeding the target.
Increasing managers' commitment to achieving the budget target
Maintaining managers' confidence in the budget
Decreasing the cost of organizational control
Reducing the risk that managers will engage in harmful "earnings management"
practices
or violate corporate ethical standards
Allowing effective and efficient managers greater operating flexibility
Improving the predictability of earnings or operating results
Enhancing the usefulness of a budget as a planning and coordinating tool
146. Transcript Company is preparing a cash budget for February.

The company has $150,000 cash at the beginning of February and anticipates
total sales of $800,000, consisting of 25% cash sales and 75% bank credit-card
sales.
The bank charges 3 percent for credit-card deposits.
The firm sets its selling price at 160 percent of the cost of purchases and pays
the cost of each month's sales at the end of the month.
Operating expenses are $45,000 per month, of which $25,000 is depreciation
expense. Selling expenses (commissions) amount to 4 percent of total sales
dollars.
In addition, a $600,000 note will be due in February for equipment purchased
last August. In addition to the principal amount, interest for one month (at 12% per
annum) will be paid in February.
Transcript Company has an agreement with its bank to maintain a minimum cash
balance of $100,000.
Required: Prepare in good form a cash budget that shows the amount, if any,
that the company must borrow during February. Separate your budget, at a
minimum, into the following categories:
Beginning Cash Balance
Operating Cash Flows (Both Inflows and Outflows)
Cash Balance before Financing Effects
Financing Activity
Ending Cash Balance
Answer may vary

Feedback:
schedules

Chap 010

Uploaded by

Document Informationclick to expand document information

Copyright:

Available Formats

Chap 010

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 010

Uploaded by

Copyright:

Available Formats

Chapter 10

Strategy and the Master Budget

Multiple Choice Questions

It consists of a series of operating and financial budgets.

2. "Budgetary slack" occurs when:

A. Employees refuse to adhere to budgeted plans and operations.

A period of one year.

A. Acceptance and support by key management people.

6. Revision of a completed and approved budget:

A. Should be conducted whenever actual events differ significantly from those

8. A plan of dollar amounts to be spent on long-term projects is called a:

Master balance sheet.

15. Which of the following budgets is not a financial budget?

Cash receipts budget.

18. Which of the following statements about budgeting is not true?

Budgeting is designed to be an aid to planning and control.

A. Meet stockholder requests for planning information from the organization.

A. Justify budgeted operations and associated spending.

Excessively tight (i.e., difficult-to-achieve) budgets.

30. Budgeting provides all of the following except:

A. A means to communicate the organization's short-term goals to its employees.

Pro forma balance sheet.

A. Increases the required production for the budget period.

Direct materials usage budget.

Direct materials usage budget.

A. Increasing managers' commitment to achieving budget targets.

Cash inflows from the collection of receivables.

A. Reduction in the cost of developing budget amounts.

Fixed performance contracts.

A. Reflects too much of a "bottom-up" process, which is costly and inefficient.

A. Involves the review of changes made to an organization's original budget.

How many units should be produced in March?

Information pertaining to Yekstop Corp.'s sales revenue is presented below.

Management estimates that 4% of credit sales are eventually uncollectible. Of the

67. Total budgeted cash collections in January by Yekstop Corp. are:

68. Total budgeted inventory purchases in November by Yekstop Corp. are:

69. Total budgeted inventory purchases in December by Yekstop Corp. are:

81. Brownsville's budgeted cost of inventory purchased in May is:

82. Brownsville's budgeted gross profit in May is:

83. Brownsville's budgeted bad debts expense for May is:

84. Brownsville's budgeted operating income for May is:

Graham Corporation's budgeted production schedule for the coming year is as

General Manufacturing expects to have 40,000 pounds of raw materials inventory on

89. General Manufacturing's budgeted purchases of materials during September should

Also increase by $2 per unit.

Total short-term fixed costs increase.

95. Which of the following are alternatives to traditional budgeting approaches?

Volume-based budgeting and zero-base budgeting (ZBB).

Profit should increase by approximately $8,000 per month.

A. The use of flexible budgets for performance evaluation.

108 Explain benefits of implementing a master budgeting system.

110 In both activity-based and time-driven activity-based systems we calculate cost.

Inventory on December 31 of the current year is expected to be 20,000 units. The

119 Allmakes Software budgeted August purchases of new software at $140,000.The

Inventory on December 31 of the current year is expected to be 3,000 units. The

Management estimated that four percent of credit sales would be uncollectible. Of

139 One of the behavioral considerations in implementing a budgeting system has to do

146 Transcript Company is preparing a cash budget for February.