Budgeting Theories

1. Which of the following best describes the role of top management in the budgeting process?a. Needs to separate the budgeting process and the business planning process into two separate processesb. Needs to be involved, inclosing using the budget process to communicate goals.c. Lacks the detailed knowledge of the daily operations and should limit their involvement.d. Should be involved only in the approval process.

2. The objectives upon which an annual profit plan is most effectively based area. A combination of financial, quantitative and qualitative measures.b. Qualitative measures of organizational activity such as product innovation leadership, product quality

levels and product safety.c. Quantitative measures such as growth in unit sales, number of employees and manufacturing capacityd. Financial measures such as net income, return on investment, and earnings per share.

3. The budget that describes the long-term position ,goals, and objectives of an entity within its environment is thea. Strategic Budgetb. Cash management budgetc. Operating Budgetd. Capital Budget

4. When budgets are used to evaluate performance and to set limits on spending, the process will often result in departments adding something “extra: to ensure the budgets will be met. This “extra” is

a. Budgetary slackb. Continuous Budgetingc. Strategic planningd. Management by objectives

5. An advantage of participatory budgeting is that ita. Encourages acceptance of the budget by employeesb. Yield information known to management but not to employees.c. Reduces the effect on the budgetary process of employee biasesd. Minimizes the cost of developing budgets

6. The budgeting process should be one that motivates managers and employees to work toward organizational objectives. Which of the following is least likely to motivate managers?

a. Holding subordinates accountable for the items they controlb. Use of management by exceptionc. Having top management set budget levelsd. Participation by subordinates in the budgetary process.

7. In an organization that plans by using comprehensive budgeting, the master budget isa. A budget of a not-for-profit organization after it is approved by the appropriate authoritative body.b. The current budget updated for operations for part of the current year.c. The booklet containing budget guidelines, policies, and forms to use in the budgeting processd. A compilation of all the separate operational and financial budget schedules of the organization.

8. A budget manual, which enhances the operation of a budget system, is most likely to includea. Documentation of the accounting system softwareb. Employee hiring policiesc. Distribution instructions for budget schedulesd. A chart of accounts

9. A budget is often the result of a management by objectives (MBO) program. A characteristic of MBO isa. A flexible time frame for achievement of objectives.b. Establishment of objectives through both top-down and bottom-up processes.c. Statement of objectives in general termsd. Development of a single measure of employee performance.

10. The production budget process usually begins with thea. Sales Budgetb. Manufacturing overhead budgetc. Direct Materials Budgetd. Direct Labor Budget

11. A budgeta. A short term financial planb. Covers at least two yearsc. Is only a control toold. Is a long –term plan

12. Which of the following is not an advantage of budgetinga. It improves communication and coordinationb. It provides a standard for performance evaluationc. It forces managers to pland. It guarantees an improvement in organizational efficiency

13. A moving, 12-month budget that is updated monthly isa. Always used by firms that prepare a master budgetb. A continuous budgetc. A master budgetd. Not used by industrial firms

14. Which of the following is not part of the operating budgeta. The selling and administrative expense budgetb. The capital budgetc. The cost of goods sold budgetd. The production budget

15. The first step in preparing the sales budget is toa. Increase sales beyond the forecast levelb. Assess the desired ending inventory of finished goodsc. Prepare a sales forecastd. Review the production budget carefully

16. Which of the following is needed to prepare the production budget?a. Units of materials in ending inventoryb. Expected unit salesc. Direct labor needed for productiond. Direct materials needed for production

17. Which of the following is needed to prepare a budgeted income statement?a. The capital expenditure budgetb. Last year’s income statementc. Budgeted selling and administrative expensed. The production budget

18. Select the one budget below that is not an operating budgeta. Cash budgetb. Overhead budgetc. Cost of good sold budgetd. Production budget

19. The percentage of accounts receivable that are uncollectible can be ignored for cash budgeting because a. For most of the companies, it is not a material amountb. It appears on the budgeted income statementc. It is include in cash salesd. No cash is received from an account that defaults

20. An ideal budgetary system is one thata. Encourages goal-congruence behaviourb. Encourages dysfunctional behaviourc. Encourages myopic behaviourd. Encourages subversion of an organization’s goals

21. A difference between standard costs used for cost control and budgeted costs.a. Cannot exists because they should be the same amountsb. Can exist because budgeted costs are historical costs, whereas standard costs are based on engineering

studies.c. Can exist because standard costs represent what costs should be, whereas budgeted costs represent

expected actual costs.d. Can exist because standard costs must be determined after the budget is completed.

22. Which of the following statements regarding the difference between a flexible budget and a static budget is true?

a. Variances will always be larger with a flexible budget than with a static budgetb. A flexible budget includes only variable costs whereas a static budget includes only fixed costs.c. A flexible budget provides cost allowances for different levels of activity, whereas a static budget

provides costs for one level of activity.d. A flexible budget primarily is prepared for planning purposes, whereas a static budget is prepared for

performance evaluation.23. Pro forma financial statements are part of the budgeting process. Normally, the last proforma statement

prepared is thea. Statement of manufacturing costsb. Statement of cash flowsc. Statement of costs of good soldd. Income statement

24. A budget expressed in units of materials, number of employees, or number of manhours or service units rather than in pesos is known as

a. Traditional budgetb. Physical budgetc. Progressive Budgetd. Planning Budget

25. This budgeting system places the burden of proof on the manager to justify authority to spend any money whether or not there was spending in the previous period. Different ways of performing the same activity and different levels of effort for the activity is evaluated. This system is called

a. Budgeting by responsibility and authorityb. Budgeting by alternativesc. Zero-based budgetingd. Scenario

26. A systematized approach known as zero-based budgeting( ZBB)a. Divided the activities of individual responsibility centers into a series of packages that are prioritized.b. Present planned activities for a period of time but does not present a firm commitment.c. Commences with either the current level of spending or projected whichever is lowerd. Classifies the budget by the prior year’s activity and estimates the benefits arising from each activity.

27. The information contained in a cost of goods manufactured budget most directly relates to thea. Materials used, direct labor, overhead applied, and finished goods inventories budgetsb. Materials used, direct labor, overhead applied, work in process inventories and finished goods

inventories budgetc. Materials used, direct labor, overhead applied and work in process inventories budgetsd. Materials used, direct labor, overhead applied, and ending work in process

28. Budgetary slack can be described best as:a. The planned underestimation of budgeted expensesb. A plug number used to achieve a present level of operating incomec. The planned overestimation of budgeted expensesd. The elimination of certain expenses to enchance budgeted income

29. Which of the following best describes the role of top management in the budgeting process? Top managementa. Should be involved into the approval processb. Lacks the detailed knowledge of the daily operations and should limit its environmentc. Needs to separate the budgeting process and the business planning into two separate processd. Needs to be involved, including using the budget process to communicate goals

30. For the company that does not have resource limitation, in what sequence would following budgets be prepared?

a. Sales budget, Inventory budgets, Production budget, Purchases budget, Cash budgetb. Sales budget, inventory budget, production budget, cash budget, purchases budgetc. Sales budget, production budget, inventory budget, purchases budget, cash budgetd. Production budget, inventory budget, sales budget, cash budget, purchases budget

31. The person responsible for directing and coordinating the organizations overall budget processa. Budget Directorb. Chief financial plannerc. Comptrollerd. Budget master

32. Which of the following is not truea. In creating a sales forecast, outside factors such as the state of the economy, should be consideredb. One approach to forecasting sales is the bottom up approachc. The production budget is prepared in units and pesosd. The sales forecast is done before the sales budget

33. The first step in creating the master budget is the creation of a. Sales budgetb. Cash budgetc. Direct labor budgetd. Production budget

34. The ending finished goods inventory budget supplies information needed for the a. Cost of goods sold budgetb. Budgeted income statementc. Cash budgetd. Sales budget

35. A company has had stable sales and production for several years. Next year, sales are expected to increase by at least 50%. Assuming that the company maintains its policy for desired ending inventories of finished product and direct materials purchases, what will likely effect on the desired ending inventory of finished goods?

a. It will be twice the size of the desired ending inventory of raw materialsb. It will stay the samec. It will decreased. It will increase

36. In budgeting direct labor hours for the coming year, it is important toa. Multiply production units by the labor wage rateb. Divide production in units by the direct labor hours per unitc. Multiply production in units by the direct labor hours per unitd. Subtract direct labor hours per unit from production in units

37. A company has provided a sales budget for the next four months. It bases its production budget on the sales budget, and has a policy that each month’s ending inventory of finished product must be equal to 25% of the following month’s sales needs. The direct materials purchases budget is based on the production budget. The company policies for each month’s ending inventory of raw materials is that they must be equal to 10% of the following months production needs for raw materials. Given this information, the company can prepare direct material purchases budgets for how many months?

a. One b. Two c. Three d. Four

38. Which of the following is true?a. Service firms need not prepare a master budgetb. The budgeted balance sheet is prepared after the cash budgetc. The cash budget is prepared before the direct materials purchases budgetd. The production budget is the first budget to be prepared in the master budget

39. Tactical planning usually involves which of the levels of managementa. Operationalb. Middle and Topc. Middled. Top

40. A company that maintains a raw material inventory, which is based on the following month’s production needs, will purchase less material than it uses in a month where:

a. Sales exceeds productionb. Production exceeds salesc. Planned production exceeds the next month’s planned productiond. Planned production is less than the next month’s planned production.

41. A budget manual, which enhance the operation of a budget, is most likely to includea. A chart of accountsb. Distribution instruction for budget schedulesc. Documentation of the accounting system softwared. Company policies regarding the authorization of transactions

42. _____ occur(s) when manager ask subordinates to discuss their ideas about the budget, but no joint decision making occurs.

a. Authoritative budgetb. Stretch budgetc. Consultative budgetd. Budget slack

43. The budgeting tool or process in which estimates of revenues and expenses are prepared for each product beginning with the product’s research and development phase and trace through to its customer support phase

a. Master budgetb. Activity based budgetc. Zero based budgetd. Life – cycle budget

44. Which of the following statements regarding selling and administrative budgets is most accurate?a. Selling and Admin budgets need to be detailed in order that the key assumptions can be better

understood.b. Selling and Admin budgets are difficult to allocate by month and are best presented as one number for

the entire yearc. Selling and Admin budgets are fixed in natured. Selling and Admin budgets are usually optional

45. A planning calendar in budgeting is thea. Calendar period covered by the budgetb. Schedule of activities for the development and adoption of the budgetc. Calendar period covered by the annual budget and the long range pland. Sales forecast by months in the annual budget period

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a. Schedule 1:Sales BudgetJanuary February March Total

Units 40,000 50,000 60,000 150,000× Selling Price $ 205 $ 205 $ 205 $ 205 Sales $8,200,000 $10,250,000 $12,300,000 $30,750,000

b. Schedule 2: Production BudgetJanuary February March Total

Sales (Schedule 1) 40,000 50,000 60,000 150,000Desired endingInventory 40,000 48,000 48,000 48,000 Total needs 80,000 98,000 108,000 198,000Less: BeginningInventory 32,000 40,000 48,000 32,000 Units to beproduced 48,000 58,000 60,000 166,000

c. Schedule 3: Direct Materials Purchases BudgetMetal Component Metal Component Metal Component Metal

ComponentUnits tobe produced 48,000 48,000 58,000 58,000 60,000 60,000 166,000 166,000× Directmaterials 10 6 10 6 10 6 10 6 Productionneeds 480,000 288,000 580,000 348,000 600,000 360,000

1,660,000 996,000Desiredendinginventory 290,000 174,000 300,000 180,000 308,000* 184,800* 308,000 184,800 Total needs 770,000 462,000 880,000 528,000 908,000 544,800

1,968,000 1,180,800Less:Beginninginventory (240,000) (144,000 (290,000) (174,000) (300,000) (180,000) (240,000) (144,000) Directmaterials tobe purchased 530,000 318,000 590,000 354,000 608,000 364,800

1,728,000 1,036,800× Cost per unit $ 8 $ 5 $ 8 $ 5 $ 8 $ 5 $ 8 $ 5 Total cost $4,240,000 $1,590,000 $4,720,000 $1,770,000 $4,864,000 $1,824,000 $13,824,000 $5,184,000

* April production = 60,000 + (62,000 × 0.80) – 48,000 = 61,600Desired ending inventory of metal = (61,600 × 10) × 0.50Desired ending inventory of components = (61,600 × 6) × 0.50

d. Schedule 4: Direct Labor BudgetJanuary February March Total

Units to beproduced(Schedule 2) 48,000 58,000 60,000 166,000× Direct labor timeper unit (hours) 3 3 3 3 Total hoursNeeded 144,000 174,000 180,000 498,000× Cost per hour $ 14.25 $ 14.25 $ 14.25 $ 14.25 Total cost $2,052,000 $2,479,500 $2,565,000 $7,096,500

e. Schedule 5: Overhead Budget

January February March TotalBudgeted directlabor (Schedule 4) 144,000 174,000 180,000 498,000× Variableoverhead rate $2.40 $2.40 $2.40 $2.40 Budgetedvariable overhead $345,600 $417,600 $432,000 $1,195,200Budgetedfixed overhead 338,000 338,000 338,000 1,014,000

Total overhead $683,600 $755,600 $770,000 $2,209,200

f. Schedule 6: Selling and Administrative Expenses BudgetJanuary February March Total

Planned sales(Schedule 1) 40,000 50,000 60,000 150,000× Variable sellingand admistrativeexpenses per unit $ 3.60 $ 3.60 $ 3.60 $ 3.60 Total variable exp $144,000 $180,000 $216,000 $540,000Fixed selling andadministrativeexpensesSalaries $ 50,000 $ 50,000 $ 50,000 $150,000Depreciation 40,000 40,000 40,000 120,000Other 20,000 20,000 20,000 60,000Total fixed exp $110,000 $110,000 $110,000 $330,000Total selling andAdministrativexpenses $254,000 $290,000 $326,000 $870,000

g. Schedule 7: Ending Finished Goods Inventory BudgetUnit cost computation:Direct materials:Metal (10 lbs. × $8) = $80Comp. (6 units × $5) = 30 $110.00Direct labor (3 × $14.25) = 42.75Overhead:Variable (3 × $2.40) 7.20Fixed [3 × ($1,014,000/498,000)] 6.11 *Total unit cost $166.06*RoundedFinished goods = Units × Unit costinventory = 48,000 × $166.06= $7,970,880

h. Schedule 8: Cost of Goods Sold BudgetDirect materials used (Schedule 3)Metal (1,660,000 × $8)*……………………………………… $13,280,000Components (996,000 × $5)**……………………………… 4,980,000 $18,260,000Direct labor used (Schedule 4)……………………………… 7,096,500Overhead (Schedule 5)………………………………………… 2,209,200Budgeted manufacturing costs…………………………… $27,565,700Add: Beginning finished goods(32,000 × $166.06)***………………………………………… 5,313,920Cost of goods available for sale…………………………… $32,879,620Less: Ending finished goods (Schedule 7)………………… 7,970,880Budgeted cost of goods sold……………………………… $24,908,740*166,000 units × 10 lbs per unit

**166,000 units × 6 components per unit***See Schedules 2 and 7