William Carey University - ACC 222

Chapter 23 Operational Budgeting

 TRUE/FALSE  Questions

1)The total quality management approach to budgeting sets budgeted amounts at levels that can be achieved through reasonably efficient operations.

2. The typical starting point of a master budget would be to prepare a budgeted balance sheet.

3. A flexible budget allows management to spend more or less for labor and materials without regard to the amount of production.

4. A company that is profitable may not have sufficient cash on hand to meet their immediate needs.

5. In a master budget the sales forecast would be dependent upon the budgeted production figures.

6. Flexible budgets can be prepared for sales budgets but not for productions budgets.

7. In a flexible budget both variable and fixed costs will vary with the level of activity.

8. The behavioral approach to budgeting has as its goal the complete elimination of inefficiency.

9. A budget prepared using the total quality management approach is always achievable by departments within a company.

10. A performance report can be easily adjusted to show budgeted revenues and costs at different levels of activity.

11. A company's operating cycle is the time between purchases of direct materials and conversion of these materials back into cash.

12. The operating cycle is the average time required to manufacture products for sale.

13. Because a budget is merely a forecast of future events, its benefits are extremely narrow and limited.

14. Under the "total quality management" philosophy, budgeted amounts should be set at realistic and achievable levels rather than at levels representing absolute efficiency.

15. If the behavioral approach is employed to determine the levels at which budgeted amounts are set, then reasonable and achievable levels should be used.

16. A master budget is a comprehensive financial plan setting forth the financial and operational goals of a business.

17. A master budget actually includes a number of related budgets.

18. In preparing a master budget, budgeted levels for production, manufacturing costs, and operating expenses normally are determined after preparing the sales forecast.

19. If the total quality management approach is employed to determine the level at which budgeted amounts are set, then absolute efficiency is assumed.

20. A cash budget determines the maximum limit amount of money that can be spent during the period.

21. The preparation of a budgeted balance sheet requires consideration of the budgeted capital expenditures and budgeted net income.

22. A debt service budget summarizes cash payments required for interest, and includes those required to pay down principal.

23. If a budget is to provide a basis for evaluating departmental performance, departmental managers should not know what their budget targets are until after the budget period has ended.

24. Flexible budgeting may be viewed as combining the concepts of budgeting with cost- volume-profit analysis.

Multiple Choice Questions

25. A budget that adds a new month when the current month ends is called a:
    1. Capital budget.
    2. Master budget.
    3. Rolling budget.
    4. There is no such budget.

26. The benefits of budgeting include all of the following except:
    1. Enabling the company to produce more for less cost.
    2. Assigning responsibility for situations that require corrective action.
    3. Coordinating activities between departments within the organization.
    4. Creating standards for evaluating performance.

27. A master budget usually includes all of the following except:
    1. A sales forecast.
    2. A cash budget.
    3. A projected tax return.
    4. Projected financial statements.

28. A master budget can be used as a(n):
    1. Aid to planning.
    2. Evaluation tool.
    3. Means to coordinate activities.
    4. All of the above.

29. As the volume of output increases:
    1. Variable costs per unit will increase.
    2. Variable costs per unit will decrease.
    3. Variable costs per unit will not change.
    4. Variable costs in total will decrease.

30. As the volume of output decreases:
    1. Fixed costs per unit will increase.
    2. Fixed costs per unit will decrease.
    3. Fixed costs per unit will not change.
    4. Fixed costs in total will decrease.

31. Which of the following is not a benefit of a careful and thorough budgeting process?
    1. Budgeting increases management's awareness of the company's external economic environment.
    2. Budgeted net income assures the company of operating profitably.
    3. The budget may provide advance warning of pending problems.
    4. Budgets provide a yardstick for evaluating future performance.

32. Which philosophy in setting budgeted amounts assumes both the complete elimination of inefficiencies and a level of absolute efficiency?
    1. The behavioral approach.
    2. The total quality management approach.
    3. Both philosophies.
    4. Neither philosophy.

33. Costs that rise and fall proportionately with the volume of output are often referred to as:
    1. Variable costs.
    2. Flexible costs.
    3. Idle capacity costs.
    4. Uncontrollable costs.

34. Which of the following is not a characteristic of the total quality approach to setting budgetary targets?
    1. Absolute efficiency.
    2. A perception that the budget is fair.
    3. Budgetary targets that are unattainable.
    4. Budgeted performance expectations that cannot be exceeded.

35. When budgeted amounts are set at reasonable and achievable levels:
    1. They reflect a "total quality management" philosophy of management.
    2. A highly efficient department should fall slightly short of budget standards.
    3. Meeting the budgeted amounts ensures a maximum level of profitability.
    4. Failure to stay within the budget is viewed as an unacceptable level of performance.

36. A segment of a master budget relating to that portion of a business under the control of a particular manager is termed a:
    1. Performance report.
    2. Production report.
    3. Responsibility budget.
    4. Cash budget.

37. Which of the following is not considered an operating budget?
    1. Manufacturing cost budget.
    2. Production schedule.
    3. Capital expenditures budget.
    4. Sales forecast.

38. Which element of a master budget would normally be prepared first?
    1. A production budget.
    2. A cash budget.
    3. A budget of operating expenses.
    4. A sales forecast.

39. Which of the following is a major component of a master budget?
    1. A production throughput schedule.
    2. A machinery maintenance schedule.
    3. A manufacturing cost budget.
    4. An employee training budget.

40. Which of the following is considered an operating budget estimate?
    1. The prepayments budget.
    2. The debt service budget.
    3. The manufacturing cost budget.
    4. The capital expenditures budget.

41. The sales forecast directly affects many elements of the master budget. Which of the following would be least affected by short-term fluctuations in the sales forecasts?
    1. The production schedule.
    2. The budgeted income statement.
    3. The capital expenditures budget.
    4. The operating expense budget.

42. The production schedule in units:
    1. Cannot be prepared until the budgeted income statement is completed.
    2. Is dependent upon the sales forecast for the period.
    3. Is based upon the manufacturing cost budget, that is, upon the level of funds available for manufacturing costs.
    4. Is the starting point in the preparation of the master budget.

43. Preparation of a budgeted income statement does not require:
    1. Estimates of cost of goods sold.
    2. Estimates of the timing of cash receipts and payments.
    3. Preparation of a sales forecast.
    4. Anticipation of operating expenses.

44. Which of the following is considered a financial budget estimate?
    1. The manufacturing cost budget.
    2. The cost of goods sold budget.
    3. The operating expense budget.
    4. The prepayments budget.

45. Which element of a master budget would normally be prepared last?
    1. A cash budget.
    2. A budgeted balance sheet.
    3. A budgeted income statement.
    4. A production budget.

46. A cash budget is affected directly by each of the following except:
    1. A capital expenditures budget.
    2. A sales forecast.
    3. A manufacturing cost budget.
    4. A budgeted income statement.

47. In a cash budget, the budgeted level of cash receipts depends on all of the following except:
    1. The sales forecast.
    2. The credit terms offered to customers.
    3. The credit terms offered by suppliers.
    4. Experience in collecting receivables.

48. A budget that can be adjusted easily to show budgeted revenues, costs, and cash flows at different levels of activity is known as:
    1. A flexible budget.
    2. A master budget.
    3. A production budget.
    4. A multi-level budget.

49. If the volume of output of a factory for the month of June is 50,000 units, while the budgeted output was 40,000 units:
    1. Comparison of budgeted results and actual results will be misleading unless the company uses a flexible budget.
    2. Actual fixed costs per unit may be expected to exceed budgeted levels.
    3. Actual cost per unit will be higher than standard cost per unit.
    4. Both total production costs and unit production costs should be approximately 25% above budgeted levels.

50. A flexible budget is one that:
    1. Is revised monthly in the light of changing business conditions.
    2. Is a compromise plan reflecting diverse views of various supervisors.
    3. Contains estimated cost data for several different levels of activity.
    4. Separates factory overhead between the variable and fixed portions.

51. A flexible budget:
    1. Consists of advance estimates of costs and expenses for various possible levels of activity.
    2. Is designed to be adjusted at frequent intervals for changes in the general price level.
    3. Is better suited for use with a job cost system than a standard cost system.
    4. Cannot be prepared when a standard cost system is in use.

52. Flexible budgeting may be viewed as combining the concepts of budgeting and:
    1. Incremental analysis.
    2. Product costing.
    3. Cost-volume-profit analysis.
    4. Financial statement analysis.

53. Flexible budgeting may be used for profit centers by applying cost-volume-profit relationships to the actual level of:
    1. Units produced.
    2. Resources consumed.
    3. Costs incurred.
    4. Sales achieved.

54. In a flexible budget for a profit center which of the following items would not be expected to vary with the level of activity?
    1. Revenue.
    2. Fixed manufacturing overhead.
    3. Direct materials cost.
    4. Variable manufacturing overhead.

The following information is from the manufacturing budget and budgeted financial statements of Altman Corp.:

55. Refer to the information above. For the year, budgeted purchases of direct materials amounted to:

A. $344,000.

B. $328,000.

C. $360,000.

D. $370,000.

56. Refer to the information above. For the year, budgeted cash payments to suppliers amounted to:

A. $344,000.

B. $350,000.

C. $334,000.

D. $354,000.

57. Wateredge Corporation has budgeted a total of $361,800 in costs and expenses for the upcoming quarter. Of this amount, $45,000 represents depreciation expense and $7,300 represents the expiration of prepayments. Wateredge's current payables balance is $265,000 at the beginning of the quarter. Budgeted payments on current payables for the quarter amount to $370,000. The company's estimated current payables balance at the end of the quarter is: A. $179,500.

B. $204,500.

C. $203,500.

D. $310,000.

58. Sherman has budgeted sales for the upcoming quarter as follows:

The desired ending finished goods inventory for each month is one-half of next month's budgeted sales. Three pounds of direct material are required for each unit produced. If direct material costs $5 per pound, and must be paid for in the month of purchase, the budgeted direct materials purchases (in dollars) for April are:

A. $17,500

B. $40,500.

C. $26,250.

D. $38,250.

On March 1, Hugh Corporation plans to borrow $550,000 from the Scotland State Bank by signing a 12%, 15-year note payable. The note calls for 180 monthly payments of $6,000, which includes both interest and principal components.

59. Refer to the information above. Hugh's budgeted interest expense for March is: A. $500.

B. $2,444.

C. $5,500.

D. $6,000.

60. Refer to the information above. Of Hugh's budgeted debt service cost of $6,000 in March, the amount applied to the principal of the note totals:

A. $500.

B. $4,000.

C. $4,500.

D. $5,000.

Ross Corporation makes all sales on account. The June 30th balance sheet balance in its accounts receivable is $400,000, of which $240,000 pertain to sales that were made during June. Budgeted sales for July are $1,250,000. Ross collects 70% of sales in the month of sale; 20% in the following month; and the final 10% in the second month after the sale.

61. Refer to the information above. What are Ross's budgeted collections for July? A. $800,000.

B. $939,000.

C. $1,083,000.

D. $915,000.

62. Refer to the information above. What is the budgeted balance of Ross's accounts receivable as of July 31?

A. $375,000.

B. $399,000.

C. $415,000.

D. $396,000.

Approximately 60% of all sales are collected in the month of the sale, 30% is collected in the following month, and 10% is collected in the month thereafter.

63. Refer to the information above. Budgeted collections from customers in October total: A. $39,000.

B. $27,000.

C. $31,000.

D. $110,000.

64. Refer to the information above. Budgeted collections from customers in November total: A. $32,000.

B. $53,000.

C. $59,000.

D. $48,000.

65. Refer to the information above. Budgeted collections from customers in December total: A. $55,000.

B. $60,000.

C. $64,000.

D. $59,000.

66. Arnstrong, Inc. uses a flexible budget. Armstrong produced 16,000 units in May incurring direct materials cost of $20,480. Its master budget for the year projected direct materials cost of $362,500, at a production volume of 290,000 units. A flexible budget for May should reflect direct materials cost of:

A. $20,480.

B. $20,000.

C. $21,000.

D. $19,750.

Skelton Corporation had planned to produce 50,000 units of product during the first quarter of the current year. The company prepared the following budget on May 1:

During the first quarter, Carson produced 60,000 units and incurred total manufacturing costs of $180,000.

67. Refer to the information above. Which of the following amounts should not be included in Skelton's flexible budget at a 60,000-unit level?
    1. Direct materials used, $43,200.
    2. Direct labor, $54,000.
    3. Variable overhead, $27,000.
    4. Fixed manufacturing overhead, $70,200.

68. Refer to the information above. A performance report for Skelton's first quarter of operations using a flexible budget approach would show:
    1. Actual costs over budget by $1,300
    2. Actual costs over budget by $11,700
    3. Actual costs over budget by $15,150
    4. Total costs per the flexible budget of $194,400.

69. Refer to the information above. The cost-volume relationship used to prepare Skelton's flexible budget for various production levels includes:
    1. Fixed cost of $1.17 per unit.
    2. Manufacturing overhead costs of $1.43 per unit.
    3. Variable costs of $2.07 per unit.
    4. Total cost of $3.05 per unit.

Baskin Promotions, Inc. sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 80,000 T-shirts:

Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income.

If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 60,000 T-shirts.

70. Refer to the information above. In a flexible budget for sales of 60,000 T-shirts, how much would Baskin budget for operating expenses?

A. $238,800.

B. $338,800.

C. $218,400.

D. $418,400.

71. Refer to the information above. What unit cost did Baskin use in budgeting the cost of goods sold for the year?

A. $6.

B. $10.25.

C. $17.50.

D. Some other amount.

72. Refer to the information above. Assume Baskin actually achieves the 60,000 unit sales level, and that net income actually earned at this level was $70,000. A performance report would indicate that net income was:
    1. $2,660 over budget.
    2. $43,120 under budget.
    3. $90,000 under budget.
    4. At the budgeted level.

CHAPTER 23                        

QUIZ A                                   

Indicate the best answer for each question in the space provided.

                  1    Which of the following is not normally a characteristic of a profit rich, cash poor company?

1. 1. Low inventory turnover.
   2. High accounts receivable turnover.
   3. High operating income, but low cash flow from operations.
   4. A long operating cycle.

                  2    Which of the following is not considered a benefit from budgeting?

1. Limited managerial perspectives.
2. Advance warning of problems.
3. Better coordination among activities.
4. A measure of performance evaluation.

                  3    Which of the following is a characteristic of the behavioral approach to setting budget targets?

1. Complete elimination of inefficiency.
2. Complete elimination of non-value-adding activities.
3. Constant need for improvement.
4. Achievable performance expectations.

                4 Which of the following is not normally considered an element of a master budget?

1. The production schedule.
2. The employee turnover budget. c The operating expense budget. d The cash budget.

                  5    Which budget typically serves as a starting point in developing a master budget?

1. The sales budget.
2. The cost of goods sold budget. c The employee turnover budget. d           The manufacturing cost budget.

CHAPTER 23                        

QUIZ B                                   

Use the following data for questions 1 through 3.

The following budget for the 60,000-unit product level was prepared for the Production Department for September:

Budgeted (60,000 Units)

Variable costs:

Direct materials cost............................................................................ $ 42,000

Direct labor..........................................................................................     51,000

Variable overhead................................................................................    36,000

Fixed costs:

Manufacturing overhead...................................................................... 66,000

Total manufacturing costs....................................................................... $195,000

During September, the Production Department actually produced 70,000 units at a total manufacturing cost of $210,000.

                  1    Refer to the above data. Which of the following is not an accurate amount to be included in a flexible budget prepared for the 70,000-unit level of production?

1. 1. Total overhead cost, $108,000.
   2. Total manufacturing costs, $217,500.
   3. Direct materials, $49,000.
   4. Direct labor, $59,500.

                  2    Refer to the above data. A performance report prepared for September operations under a flexible budget approach would show:

1. Actual costs under budget by $6,500.
2. Total costs per flexible budget of $215,000.
3. Actual costs under budget by $21,500.
4. Actual costs over budget by $15,000.

                  3    Refer to the above data. The cost-volume relationship used to prepare the flexible budget for this department includes:

1. Manufacturing overhead cost of $1.00 per unit.
2. Fixed cost of $0.83 per unit.
3. Total cost of $2.98 per unit.
4. Variable costs of $2.15 per unit.

                    4 The Company’s actual manufacturing costs for the month of May totaled $144,000, while the budgeted manufacturing costs were $162,000. Comparison of the budgeted costs with actual amounts:

1. Is not significant unless the budgeted and actual figures are based upon the same level of production.
2. Demonstrates that the Manufacturing Department operated very efficiently during May.
3. Indicates that production cost per unit was 10% below budgeted cost per unit.
4. Indicates that the Company produced only 90% of the number of units budgeted for production in May.

                  5    A flexible budget is used to evaluate:

1. Costs that should have been incurred for a level of output achieved.
2. Costs that should have been incurred for a level of output considered to be normal.
3. How variable unit costs change as output changes.
4. How flexible management was at adapting to changes in business conditions.

CHAPTER 23                        

QUIZ C                                

The cost accountant for Sherman’s Co. prepared the following monthly performance report relating to the Production Department.

.

1. Refer to the above data. Compute the amounts that should be included for each of the following in a flexible budget prepared at an 11,000-unit level of production:

1. 1. Direct materials: $                  

1. 2. Direct labor: $                   

1. 3. Fixed manufacturing overhead: $

2. Refer to the above data. Assume that a revised performance report is prepared for the 11,000-unit level of production using a flexible budget approach. Compute the cost variances for each of the following. Indicate whether each variance is favorable (F) or unfavorable (U).

1. Direct materials variance from flexible budget: $

2. Direct labor variance from flexible budget: $              

3. Total manufacturing overhead variance from flexible budget: $          

CHAPTER 23                        

 QUIZ D                               

1. Hayden Corporation budgeted its cost of finished goods manufactured at $500,000 for May. Its May 31 finished goods inventory budgeted to be twice the level of its May 1 finished goods inventory. The cost of goods sold budget for May has been set at $450,000.

Hayden’s finished goods inventory at May 31 is budgeted at: $            

2. Suffolk Corporation expects to incur $360,000 in expenses during June (excluding interest and taxes). Of this amount, depreciation is budgeted at $70,000, and expired prepayments are budgeted at $35,000. Suffolk’s current payables total $60,000 at June 1 and are budgeted to increase to

$70,000 by June 30.

Payments on current payables budgeted for June total: $           

3. Weaver Corporation pays its debt service costs in full each month. April debt service costs are budgeted at $9,000. However, of this amount, only $1,000 represents a reduction principal. The company expects to issue no new debt during the month.

What cash disbursement amount will be shown on Weaver’s debt service budget? $        

4. Bergen Corporation’s accounts receivable remain outstanding approximately 42 days, whereas its inventory remains in stock approximately 12 days before it is sold. It takes suppliers approximately 7 days to deliver inventory to Bergen once an order is received.

Jasper’s operating cycle is:               days

5. As budgeted output per the flexible budget increases, per-unit fixed costs (increase/decrease):

CHAPTER 23 SELF-TEST QUESTIONS FROM TEXTBOOK

Choose the best answer for each of the following questions and insert the identifying letter in the space provided.

                 1       Which of the following statements correctly describe relationships within the master budget? (More than one answer may be correct.)

1. 1. The manufacturing budget is based in large part upon the sales forecast.
   2. In many elements of the master budget, the amounts budgeted for the upcoming quarter are reviewed and subdivided into monthly budget figures.
   3. The manufacturing cost budget affects the budgeted income statement, the cash budget, and the budgeted balance sheet.
   4. The capital expenditures budget has a greater effect upon the budgeted income statement than it does upon the budgeted balance sheet.

                  2 During the first quarter of its operations, Morris Mfg. Co. expects to sell 50,000 units and create an ending inventory of 20,000 units. Variable manufacturing costs are budgeted at $10 per unit, and fixed manufacturing costs at $100,000 per quarter. The company’s treasurer expects that 80% of the variable manufacturing costs will require cash payment during the quarter and that 20% will be financed through accounts payable and accrued liabilities. Only 50% of the fixed manufacturing costs are expected to require cash payments during the quarter.

In the cash budget, payments for manufacturing costs during the quarter will

total:

a       $800,000.

b       $610,000.

c       $600,000.

d       $450,000.

                  3 Rodgers Mfg. Co. prepares a flexible budget. The original budget forecasted sales of 100,000 units @ $20, and operating expenses of $300,000 fixed plus $2 per unit. Production also was budgeted at 100,000 units. Actual sales and production for the period totaled 110,000 units. When the budget is adjusted to reflect these new activity levels, which of the following budgeted amounts will increase, but by less than 10%?

1. Sales revenue.
2. Variable manufacturing costs.
3. Fixed manufacturing costs.
4. Total operating expenses.