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CHAPTER 9

BUDGETARY PLANNING

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT

True-False Statements1. 1 K 9. 2 C 17. 3 K 25. 4 K sg33. 3 K2. 1 C 10. 2 C 18. 3 C 26. 5 C sg34. 3 K3. 1 C 11. 2 C 19. 3 C 27. 5 C sg35. 5 K4. 1 C 12. 2 C 20. 3 C 28. 6 K sg36. 6 C5. 1 C 13. 2 K 21. 3 C 29. 6 C6. 1 K 14. 2 K 22. 3 K 30. 6 C7. 2 K 15. 2 C 23. 3 C sg31. 1 K8. 2 K 16. 3 K 24. 3 C sg32. 2 K

Multiple Choice Questions37. 1 K 62. 3 K 87. 3 C 112. 5 AP 137. 6 C38. 1 K 63. 3 AP 88. 3 AP 113. 5 C 138. 6 K39. 1 K 64. 3 C 89. 3 AP 114. 5 K 139. 6 C40. 1 C 65. 3 C 90. 3 AP 115. 5 C 140. 6 C41. 1 C 66. 3 K 91. 3 AP 116. 5 K 141. 6 C42. 1 C 67. 3 C 92. 3 AP 117. 5 C 142. 6 C43. 2 K 68. 3 C 93. 3 AP 118. 5 K 143. 6 C44. 2 C 69. 3 C 94. 3 AP 119. 5 AP 144. 6 C45. 2 C 70. 3 K 95. 3 AP 120. 5 AP 145. 6 C46. 2 C 71. 3 C 96. 3 AP 121. 5 K 146. 6 C47. 2 C 72. 3 AN 97. 3 AP 122. 5 AP st147. 1 K48. 2 C 73. 3 C 98. 3 AP 123. 5 K sg148. 1 K49. 2 C 74. 3 K 99. 3 AP 124. 5 C st149. 2 K50. 2 C 75. 3 K 100. 3 AP 125. 5 AP sg150. 2 K51. 2 C 76. 3 AP 101. 3 AP 126. 5 C st151. 3 K52. 2 K 77. 3 AP 102. 3 AP 127. 5 AP sg152. 3 AP53. 2 K 78. 3 AP 103. 3 AP 128. 5 AP st153. 4 K54. 2 K 79. 3 AP 104. 5 AP 129. 5 AP sg154. 5 AP55. 2 K 80. 3 AP 105. 3 AP 130. 5 AP st155. 5 K56. 2 K 81. 3 AP 106. 5 AP 131. 5 AP sg156. 5 AP57. 2 K 82. 3 AP 107. 4 AP 132. 5 AP sg157. 6 K58. 2 K 83. 3 C 108. 4 C 133. 5 AP sg158. 6 K59. 2 C 84. 3 C 109. 4 K 134. 5 AP60. 2 C 85. 3 K 110. 5 AP 135. 5 AP61. 2 AP 86. 3 C 111. 5 AP 136. 5 AP

Brief Exercises159. 3 AP 161. 3 AP 163. 5 AP 165. 5 AP 167. 5 AP160. 3 AP 162. 3 AP 164. 5 AP 166. 5 AP 168. 5 AP

sg This question also appears in the Study Guide.

Test Bank for Managerial Accounting, Fifth Edition

st This question also appears in a self-test at the student companion website.

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY

Exercises169. 3 AP 175. 3 AP 181. 3,4 AP 187. 5 AP 193. 5,6 AP170. 3 AP 176. 3 AP 182. 4 AP 188. 5 C 194. 6 AP171. 3 AP 177. 3 C 183. 4 AP 189. 5 AP 195. 6 C172. 3 AP 178. 3 AP 184. 5 AP 190. 5 AP173. 3 AP 179. 3 AP 185. 5 AP 191. 5 AP174. 3 AP 180. 3 AP 186. 5 AP 192. 5 AP

Completion Statements196. 1 K 199. 2 K 202. 2 K 205. 3 K197. 1 K 200. 2 K 203. 3 K 206. 5 K198. 2 K 201. 2 K 204. 3 K 207. 6 K

Matching208. 1 K

Short-Answer Essay209. 1 K 211. 3 K 213. 3 K210. 1 K 212. 2 K 214. 3 K

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Study Objective 1

1. TF 4. TF 31. TF 39. MC 42. MC 196. C 209. SA2. TF 5. TF 37. MC 40. MC 147. MC 197. C3. TF 6. TF 38. MC 41. MC 148. MC 208. Ma

Study Objective 2

7. TF 13. TF 45. MC 51. MC 57. MC 150. MC8. TF 14. TF 46. MC 52. MC 58. MC 198. C9. TF 15. TF 47. MC 53. MC 59. MC 199. C

10. TF 32. TF 48. MC 54. MC 60. MC 200. C11. TF 43. MC 49. MC 55. MC 61. MC 201. C12. TF 44. MC 50. MC 56. MC 149. MC 202. C

Study Objective 3

16. TF 63. MC 75. MC 87. MC 99. MC 170. Ex 203. C17. TF 64. MC 76. MC 88. MC 100. MC 171. Ex 204. C18. TF 65. MC 77. MC 89. MC 101. MC 172. Ex 205. C19. TF 66. MC 78. MC 90. MC 102. MC 173. Ex 210. SA20. TF 67. MC 79. MC 91. MC 103. MC 174. Ex 213. SA21. TF 68. MC 80. MC 92. MC 151. MC 175. Ex 214. SA22. TF 69. MC 81. MC 93. MC 152. MC 176. Ex23. TF 70. MC 82. MC 94. MC 159. BE 177. Ex24. TF 71. MC 83. MC 95. MC 160. BE 178. Ex33. TF 72. MC 84. MC 96. MC 161. BE 179. Ex34. TF 73. MC 85. MC 97. MC 162. BE 180. Ex62. MC 74. MC 86. MC 98. MC 169. Ex 181. Ex

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Budgetary Planning

Study Objective 4

25. TF 108. MC 153. MC 182. Ex107. MC 109. MC 181. Ex 183. Ex

Study Objective 5

26. TF 113. MC 121. MC 129. MC 154. MC 168. BE 189. Ex27. TF 114. MC 122. MC 130. MC 155. MC 182. Ex 190. Ex35. TF 115. MC 123. MC 131. MC 156. MC 183. Ex 191. Ex

104. MC 116. MC 124. MC 132. MC 163. BE 184. Ex 192. Ex106. MC 117. MC 125. MC 133. MC 164. BE 185. Ex 193. Ex110. MC 118. MC 126. MC 134. MC 165. BE 186. Ex 206. C111. MC 119. MC 127. MC 135. MC 166. BE 187. Ex112. MC 120. MC 128. MC 136. MC 167. BE 188. Ex

Study Objective 6

28. TF 36. TF 139. MC 142. MC 145. MC 158. MC 195. Ex29. TF 137. MC 140. MC 143. MC 146. MC 193. Ex 207. C30. TF 138. MC 141. MC 144. MC 157. MC 194. Ex

Note: TF = True-False BE = Brief Exercise C = CompletionMC = Multiple Choice Ex = Exercise Ma = MatchingSA = Short-Answer Essay

CHAPTER STUDY OBJECTIVES1. Identify the benefits of budgeting. The primary advantages of budgeting are that it (a)

requires management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater management awareness, and (f) motivates personnel to meet planned objectives.

2. State the essentials of effective budgeting. The essentials of effective budgeting are (a) sound organizational structure, (b) research and analysis, and (c) acceptance by all levels of management.

3. Identify the budgets that comprise the master budget. The master budget consists of the following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manu-facturing overhead, (f) selling and administrative expense, (g) budgeted income statement, (h) capital expenditure budget, (i) cash budget, and (j) budgeted balance sheet.

4. Describe the sources for preparing the budgeted income statement. The budgeted income statement is prepared from (a) the sales budget, (b) the budgets for direct materials, direct labor, and manufacturing overhead, and (c) the selling and administrative expense budget.

5. Explain the principal sections of a cash budget. The cash budget has three sections (receipts, disbursements, and financing) and the beginning and ending cash balances.

6. Indicate the applicability of budgeting in nonmanufacturing companies. Budgeting may be used by merchandisers for development of a merchandise purchases budget. In service enterprises budgeting is a critical factor in coordinating staff needs with anticipated services. In not-for-profit organizations, the starting point in budgeting is usually expenditures, not receipts.

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TRUE-FALSE STATEMENTS1. Budgets are statements of management's plans stated in financial terms.

Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

2. A benefit of budgeting is that it provides definite objectives for evaluating performance.

Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

3. A budget can be a means of communicating a company's objectives to external parties.

Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4. A budget can be used as a basis for evaluating performance.

Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

5. A well-developed budget can operate and enforce itself.

Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

6. The budget itself and the administration of the budget are the responsibility of the accounting department.

Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

7. Effective budgeting requires clearly defined lines of authority and responsibility.

Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

8. The flow of input data for budgeting should be from the highest levels of responsibility to the lowest.

Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

9. Budgets can have a positive or negative effect on human behavior depending on the manner in which the budget is developed and administered.

Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Management, AICPA PC: Interaction, IMA: Performance Measurement

10. A budget can facilitate the coordination of activities among the segments of a large company.

Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

11. The longer the budget period, the more reliable the estimates of future outcomes.

Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

12. The budget committee has the responsibility for coordinating the preparation of the budget.

Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation

13. The budget is developed within the framework of a sales forecast.

Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

14. Budgeting and long-range planning are two terms that describe the same process.

Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

15. Long-range plans are used more as a review of progress toward long-term goals rather than an evaluation of specific results to be achieved.

Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

16. The master budget reflects management's long-term plans encompassing five years or more.

Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

17. The master budget consists of operating and financial budgets.


18. Financial budgets must be completed before the operating budgets can be prepared.

Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

19. The direct materials budget must be completed before the production budget because the quantity of materials available for production must be known.


20. The number of direct labor hours needed for production is obtained from the production budget.

Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

21. A manufacturing overhead budget is not needed if the company develops a predeter-mined overhead rate to apply overhead.


22. The manufacturing overhead budget generally has separate sections for variable, mixed, and fixed costs.

Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

23. A production budget should be prepared before the sales budget.


24. The direct materials budget contains both quantity and cost data.

Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

25. The budgeted income statement indicates the expected profitability of operations for the next year.


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26. If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.

Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

27. The budgeted balance sheet is prepared entirely from the budgets for the current year.


28. The starting point when budgeting for a not-for-profit organization is generally to budget expenditures first.


29. A merchandiser has a merchandise purchases budget rather than a production budget.

Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

30. A critical factor in budgeting for a service firm is to determine the amount of products to purchase.

Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

31. The budget itself and the administration of the budget are entirely accounting responsibilities.

Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

32. Financial planning models and statistical and mathematical techniques may be used in forecasting sales.


33. The direct materials budget is derived from the direct materials units required for production plus desired ending direct materials units less beginning direct materials units.

Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

34. The manufacturing overhead budget shows the expected manufacturing overhead costs.


35. In order to develop a budgeted balance sheet, the previous year's balance sheet is needed.


36. In service enterprises, the critical factor in budgeting is coordinating materials and equipment with anticipated services.

Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.1. T 7. T 13. T 19. F 25. T 31. F2. T 8. F 14. F 20. T 26. F 32. T3. F 9. T 15. T 21. F 27. F 33. T4. T 10. T 16. F 22. F 28. T 34. T5. F 11. F 17. T 23. F 29. T 35. T6. F 12. T 18. F 24. T 30. F 36. F

MULTIPLE CHOICE QUESTIONS37. Why are budgets useful in the planning process?

a. They provide management with information about the company's past performance.b. They help communicate goals and provide a basis for evaluation.c. They guarantee the company will be profitable if it meets its objectives.d. They enable the budget committee to earn their paycheck.

Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

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


39. Accounting generally has the responsibility fora. setting company goals.b. expressing the budget in financial terms.c. enforcing the budget.d. administration of the budget.

Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

40. Which one of the following is not a benefit of budgeting?a. It facilitates the coordination of activities.b. It provides definite objectives for evaluating performance.c. It provides assurance that the company will achieve its objectives.d. It requires all levels of management to plan ahead on a recurring basis.

Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

41. Budgeting is usually most closely associated with which management function?a. Planningb. Directingc. Motivatingd. Controlling

Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

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42. Which of the following items does not follow from the adoption of a budget?a. Promote efficiencyb. Deterrent to wastec. Basis for performance evaluationd. Guarantee of accomplishing the profit objective

Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

43. Which is true of budgets?a. They are voted on and approved by stockholders.b. They are used in the planning, but not in the control, process.c. There is a standard form and structure for budgets.d. They are used in performance evaluation.

Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

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

Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

45. If budgets are to be effective, all of the following must be present excepta. acceptance at all levels of management.b. research and analysis in setting realistic goals.c. stockholders' approval of the budget.d. sound organizational structure.

Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation

46. If budgets are to be effective, there must bea. a history of successful operations.b. independent verification of budget goals.c. an organizational structure with clearly defined lines of authority and responsibility.d. excess plant capacity.

Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation

47. It is important that budgets be accepted bya. division managers.b. department heads.c. supervisors.d. all of these.

Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation

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Budgetary Planning

48. Which of the following statements about budget acceptance in an organization is true?a. The most widely accepted budget by the organization is the one prepared by top

management.b. The most widely accepted budget by the organization is the one prepared by the

department heads.c. Budgets are hardly ever accepted by anyone except top management.d. Budgets have a greater chance of acceptance if all levels of management have

provided input into the budgeting process.


49. Top management notices a variation from budget and an investigation of the difference reveals that the department manager could not be expected to have controlled the variation. Which of the following statements is applicable?a. Department managers should be held accountable for all variances from budgets for

their departments.b. Department managers should only be held accountable for controllable variances for

their departments.c. Department managers should be credited for favorable variances even if they are

beyond their control.d. Department managers' performances should not be evaluated based on actual results

to budgeted results.

Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Business Economics

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

Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Business Economics

51. A budget is most likely to be effective ifa. it is used to assess blame when things do not occur according to plans.b. it is not used to evaluate a manager's performance.c. employees and managers at the lower levels do not get involved in the budgeting

process.d. it has top management support.


52. In many companies, responsibility for coordinating the preparation of the budget is assigned toa. the company's independent certified public accountants.b. the company's internal auditors.c. the company's board of directors.d. a budget committee.

Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation

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53. A budget period should bea. monthly.b. for a year or more.c. long-term.d. long enough to provide an obtainable goal under normal business conditions.


54. If a company has adopted continuous budgeting, the budget will show plans fora. every day.b. a full year ahead.c. the current year and the next year.d. at least five years.


55. The most common budget period isa. one month.b. three months.c. six months.d. one year.


56. Budget development for the coming year usually startsa. a year in advance.b. the first month of the year to be budgeted.c. several months before the end of the current year.d. the last month of the previous year.

Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation

57. The budget committee would not normally include thea. research director.b. treasurer.c. sales manager.d. external auditor.


58. The budget committee in a company is often headed by thea. president.b. controller.c. treasurer.d. budget director.


59. Long-range planninga. generally presents more detailed information than an annual budget.b. generally encompasses a longer period of time than an annual budget.c. is usually more accurate than an annual budget.d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis.

Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

60. Long-range planning usually encompasses a period of at leasta. six months.b. 1 year.c. 5 years.d. 10 years.

Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

61. Which of the following is not a proper match-up?a. Long range planning ←→ Strategies

b. Budgeting ←→ Short-term goals

c. Long-range planning ←→ 5 years

d. Budgeting ←→ Long-term goals

Ans: D, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

62. Which is the last step in developing the master budget?a. Preparing the budgeted balance sheetb. Preparing the cost of goods manufactured budgetc. Preparing the budgeted income statementd. Preparing the cash budget

Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

63. If there were 60,000 pounds of raw materials on hand on January 1, 120,000 pounds are desired for inventory at January 31, and 360,000 pounds are required for January production, how many pounds of raw materials should be purchased in January?a. 300,000 poundsb. 480,000 poundsc. 240,000 poundsd. 420,000 pounds

Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

64. The total direct labor hours required in preparing a direct labor budget are calculated using thea. sales forecast.b. production budget.c. direct materials budget.d. sales budget.

Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

65. The direct materials and direct labor budgets provide information for preparing thea. sales budget.b. production budget.c. manufacturing overhead budget.d. cash budget.

Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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66. A sales forecasta. shows a forecast for the firm only.b. shows a forecast for the industry only.c. shows forecasts for the industry and for the firm.d. plays a minor role in the development of the master budget.

Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

67. Which of the following is not an operating budget?a. Direct labor budgetb. Sales budgetc. Production budgetd. Cash budget


68. Which of the following is not a financial budget?a. Capital expenditure budgetb. Cash budgetc. Manufacturing overhead budgetd. Budgeted balance sheet

Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

69. Which of the following is done to improve the reliability of the sales forecast?a. Employ financial planning modelsb. Lengthen the planning horizon to more than a yearc. Rely solely on outside consultantsd. Use the sales forecasts from the previous year

Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

70. The financial budgets include thea. cash budget and the selling and administrative expense budget.b. cash budget and the budgeted balance sheet.c. budgeted balance sheet and the budgeted income statement.d. cash budget and the production budget.

Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

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

Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

72. The following information is taken from the production budget for the first quarter:

Beginning inventory in units 1,200Sales budgeted for the quarter 456,000Capacity in units of production facility 472,000

How many finished goods units should be produced during the quarter if the company desires 3,200 units available to start the next quarter?a. 458,000b. 454,000c. 474,000d. 459,200

Ans: A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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


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

Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

75. The direct materials budget details1. the quantity of direct materials to be purchased.2. the cost of direct materials to be purchased.

a. 1b. 2c. both 1 and 2d. neither 1 nor 2

Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

76. The production budget shows expected unit sales of 32,000. Beginning finished goods units are 5,600. Required production units are 33,600. What are the desired ending finished goods units?a. 4,000b. 5,600c. 6,400d. 7,200

Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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77. The production budget shows expected unit sales are 50,000. The required production units are 52,000. What are the beginning and desired ending finished goods units, respectively?

Beginning Units Ending Unitsa. 5,000 3,000b. 3,000 5,000c. 2,000 5,000d. 5,000 2,000

Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

78. The production budget shows that expected unit sales are 48,000. The total required units are 54,000. What are the required production units?a. 6,000b. 9,000c. 12,000d. Cannot be determined from the data provided.


79. The direct materials budget shows:

Units to be produced 3,000Total pounds needed for production 12,000Total materials required 13,200

What are the direct materials per unit?a. .44 poundsb. 4.0 poundsc. 4.4 poundsd. Cannot be determined from the data provided.


80. The direct materials budget shows:

Desired ending direct materials 48,000 poundsTotal materials required 72,000 poundsDirect materials purchases 63,200 pounds

The total direct materials needed for production isa. 24,000 pounds.b. 8,800 pounds.c. 15,200 pounds.d. 135,200 pounds.

Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

81. If the required direct materials purchases are 18,000 pounds, the direct materials required for production is three times the direct materials purchases, and the beginning direct materials are three and a half times the direct materials purchases, what are the desired ending direct materials in pounds?a. 45,000b. 9,000c. 27,000d. 18,000

Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

82. Cromwell Company makes and sells umbrellas. The company is in the process of preparing its Selling and Administrative Expense Budget for the last half of the year. The following budget data are available:

Variable Cost Per Unit Sold Monthly Fixed CostSales commissions $0.60 $ 3,000Shipping 1.20Advertising 0.30Executive salaries 20,000Depreciation on office equipment 4,000Other 0.35 14,000

Expenses are paid in the month incurred. If the company has budgeted to sell 6,000 umbrellas in October, how much is the total budgeted variable selling and administrative expenses for October?a. $12,600b. $13,800c. $76,200d. $14,700

Ans: D, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

83. Which of the following expenses would not appear on a selling and administrative expense budget?a. Sales commissionsb. Depreciationc. Property taxesd. Indirect labor

Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

84. Which of the following would not appear as a fixed expense on a selling and admini-strative expense budget?a. Freight-outb. Office salariesc. Property taxesd. Depreciation

Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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85. A master budget consists ofa. an interrelated long-term plan and operating budgets.b. financial budgets and a long-term plan.c. interrelated financial budgets and operating budgets.d. all the accounting journals and ledgers used by a company.

Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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

Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

87. Which one of the following is not needed in preparing a production budget?a. Budgeted unit salesb. Budgeted raw materialsc. Beginning finished goods unitsd. Ending finished goods units

Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

88. A company budgeted unit sales of 136,000 units for January, 2011 and 160,000 units for February, 2011. The company has a policy of having an inventory of units on hand at the end of each month equal to 30% of next month's budgeted unit sales. If there were 40,800 units of inventory on hand on December 31, 2010, how many units should be produced in January, 2011 in order for the company to meet its goals?a. 143,200 unitsb. 136,000 unitsc. 128,800 unitsd. 184,000 units


89. At January 1, 2011, Estrada, Inc. has beginning inventory of 2,000 surfboards. Estrada estimates it will sell 5,000 units during the first quarter of 2011 with a 12% increase in sales each quarter. Estrada’s policy is to maintain an ending inventory equal to 25% of the next quarter’s sales. Each surfboard costs $100 and is sold for $150. How much is budgeted sales revenue for the third quarter of 2011?a. $225,000b. $975,000c. $940,800d. $6,272


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Budgetary Planning

90. Grayson.Com plans to sell 4,000 purple lawn chairs during May, 3,800 in June, and 4,000 during July. The company keeps 15% of the next month’s sales as ending inventory. How many units should Grayson.Com produce during June?a. 3,830b. 4,400c. 3,770d. Not enough information to determine.


91. Jacobsen, Inc. is planning to sell 200 buckets and produce 190 buckets during March. Each bucket requires 500 grams of plastic and one-half hour of direct labor. Plastic costs $10 per 500 grams and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Jacobsen has 300 kilos of plastic in beginning inventory and wants to have 200 kilos in ending inventory. How much is the total amount of budgeted direct labor for March?a. $1,500b. $3,000c. $1,425d. $2,850


92. Lester Production is planning to sell 600 boxes of ceramic tile, with production estimated at 580 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Lester has 2,600 pounds of clay mix in beginning inventory and wants to have 3,000 pounds in ending inventory.

What is the total amount to be budgeted for manufacturing overhead for the month?a. $1,914b. $1,980c. $7,656d. $7,920



What is the total amount to be budgeted for direct labor for the month?a. $1,740b. $6,960c. $1,800d. $27,840


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What is the total amount to be budgeted in pounds for direct materials to be purchased for the month?a. 25,520b. 25,120c. 25,920d. 26,800


95. Davies Nursery plans to sell 160 potted plants during April and 120 units in May. Davies Nursery keeps 15% of the next month’s sales as ending inventory. How many units should Davies Nursery produce during April?a. 154b. 166c. 160d. 178


96. Neufeld Company makes and sells widgets. The company is in the process of preparing its Selling and Administrative Expense Budget for the month. The following budget data are available:

Item Variable Cost Per Unit Sold Monthly Fixed CostSales commissions $1 $7,500Shipping $3Advertising $4Executive salaries $90,000Depreciation on office equipment $3,000Other $2 $4,500

Expenses are paid in the month incurred. If the company has budgeted to sell 60,000 widgets in October, how much is the total budgeted selling and administrative expenses for October?a. $705,000b. $105,000c. $697,500d. $600,000

Ans: A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

97. DeVito Exports, Inc. budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels are planned for the fiscal year of July 1, 2010 to June 30, 2011:

June 30, 2011 June 30, 2010Raw Materials 3,000 kilos 2,000 kilos

Three kilos of raw materials are needed to produce each unit of finished product. If DeVito Exports plans to produce 280,000 units during the 2010-2011 fiscal year, how many kilos of materials will the company need to purchase for its production during the year?a. 841,000b. 843,000c. 840,000d. 839,000


98. The following information is taken from the production budget for the first quarter:

Beginning inventory in units 900Sales budgeted for the quarter 342,000Production capacity in units 354,000

How many finished goods units should be produced during the quarter if the company desires 2,400 units available to start the next quarter?a. 343,500b. 340,500c. 355,500d. 344,400


99. Sandler Company has 6,000 units in beginning finished goods. The sales budget shows expected sales to be 24,000 units. If the production budget shows that 28,000 units are required for production, what was the desired ending finished goods?a. 2,000.b. 6,000.c. 10,000.d. 18,000.


100. Andersen Company required production for June is 66,000 units. To make one unit of finished product, three pounds of direct material Z are required. Actual beginning and desired ending inventories of direct material Z are 150,000 and 165,000 pounds, respectively. How many pounds of direct material Z must be purchased?a. 189,000.b. 198,000.c. 204,000.d. 213,000.


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101. Walton Company determines that 27,000 pounds of direct materials are needed for production in July. There are 1,600 pounds of direct materials on hand at July 1 and the desired ending inventory is 1,400 pounds. If the cost per unit of direct materials is $3, what is the budgeted total cost of direct materials purchases?a. 79,200.b. 80,400.c. 81,600.d. 82,800.


102. Giles Company is preparing its direct labor budget for May. Projections for the month are that 16,700 units are to be produced and that direct labor time is three hours per unit. If the labor cost per hour is $12, what is the total budgeted direct labor cost for May?a. 579,600.b. 590,400.c. 601,200.d. 648,000.


103. Flint Company estimates its sales at 120,000 units in the first quarter and that sales will increase by 12,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.

Production in units for the third quarter should be budgeted ata. 147,000.b. 138,000.c. 183,000.d. 144,000.


104. Flint Company estimates its sales at 120,000 units in the first quarter and that sales will increase by 12,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.

Cash collections for the third quarter are budgeted ata. $2,034,000.b. $2,952,000.c. $3,546,000.d. $4,104,000.

Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

105. Haley Company estimates its sales at 100,000 units in the first quarter and that sales will increase by 10,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.

Production in units for the third quarter should be budgeted ata. 122,500.b. 115,000.c. 152,500.d. 120,000.


106. Haley Company estimates its sales at 100,000 units in the first quarter and that sales will increase by 10,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.

Cash collections for the third quarter are budgeted ata. $2,373,000.b. $3,444,000.c. $4,137,000.d. $4,788,000.


107. A company determined that the budgeted cost of producing a product is $30 per unit. On June 1, there were 60,000 units on hand, the sales department budgeted sales of 225,000 units in June, and the company desires to have 90,000 units on hand on June 30. The budgeted cost of goods manufactured for June would bea. $5,850,000.b. $8,550,000.c. $6,750,000.d. $7,650,000.


108. Of the following items, which one is not obtained from an individual operating budget?a. Selling and administrative expensesb. Accounts receivablec. Cost of goods soldd. Sales


109. Which of the following statements about a budgeted income statement is not true?a. The budgeted income statement is prepared after the financial budgets are prepared.b. The budgeted income statement is prepared on the accrual basis of accounting.c. The budgeted income statement can be prepared in a multiple-step format.d. The budgeted income statement is prepared using the individual operating budgets.

Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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110. A company has budgeted direct materials purchases of $200,000 in March and $320,000 in April. Past experience indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next month. During April, the following items were budgeted:

Wages Expense $100,000Purchase of office equipment 48,000Selling and Administrative Expenses 32,000Depreciation Expense 24,000

The budgeted cash disbursements for April area. $432,000.b. $284,000.c. $464,000.d. $488,000.


111. Morrison Company has the following budgeted sales: January $80,000, February $120,000, and March $100,000. 40% of the sales are for cash and 60% are on credit. For the credit sales, 50% are collected in the month of sale, and 50% the next month. The total expected cash receipts during March are:a. $112,000.b. $106,000.c. $105,000.d. $100,000.

Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

112. Neal Merchandising Company expects to purchase $90,000 of materials in July and $105,000 of materials in August. Three-quarters of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. How much will August's cash disbursements for materials purchases be?a. $67,500b. $78,750c. $101,250d. $105,000


113. The single most important output in preparing financial budgets is thea. sales forecast.b. determination of the unit cost of the product.c. cash budget.d. budgeted income statement.

Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

114. Which of the following does not appear as a separate section on the cash budget?a. Cash receiptsb. Cash disbursementsc. Capital expendituresd. Financing

Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

115. The financing section of a cash budget is needed if there is a cash deficiency or if the ending cash balance is less thana. the prior years.b. management's minimum required balance.c. the amount needed to avoid a service charge at the bank.d. the industry average.


116. Beginning cash balance plus total receiptsa. equals ending cash balance.b. must equal total disbursements.c. equals total available cash.d. is the excess of available cash over disbursements.


117. The projection of financial position at the end of the budget period is found on thea. budgeted income statement.b. cash budget.c. budgeted balance sheet.d. sales budget.


118. What is the proper preparation sequencing of the following budgets?1. Budgeted Balance Sheet2. Sales Budget3. Selling and Administrative Budget4. Budgeted Income Statement

a. 1, 2, 3, 4b. 2, 3, 1, 4c. 2, 3, 4, 1d. 2, 4, 1, 3


119. Munson Company reported the following information for 2011:

October November DecemberBudgeted sales $930,000 $870,000 $1,080,000

• All sales are on credit.• Customer amounts on account are collected 50% in the month of sale and 50% in the

following month.

How much cash will Munson receive in November?a. $435,000b. $975,000c. $900,000d. $870,000

Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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120. The following information was taken from Noble Company’s cash budget for the month of July:

Beginning cash balance $300,000Cash receipts 190,000Cash disbursements 340,000

If the company has a policy of maintaining a minimum end of the month cash balance of $250,000, the amount the company would have to borrow isa. $100,000.b. $50,000.c. $150,000.d. $60,000.

Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

121. The cash budget reflectsa. all revenues and all expenses for a period.b. expected cash receipts and cash disbursements from all sources.c. all the items that appear on a budgeted income statement.d. all the items that appear on a budgeted balance sheet.

Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

122. The following credit sales are budgeted by Peckman Company:

January $136,000February 200,000March 280,000April 240,000

The company's past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of April isa. $246,880.b. $224,000.c. $240,000.d. $235,200.


123. Owens Company's cash budget showed total available cash less cash disbursements. What does this amount equal?a. Ending cash balanceb. Total cash receiptsc. The excess of available cash over cash disbursementsd. The amount of financing required


124. Which one of the following sections would not appear on a cash budget?a. Cash receiptsb. Financingc. Investingd. Cash disbursements


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Budgetary Planning

125. A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were:

January $240,000February 144,000March 360,000

The cash inflow in the month of March is expected to bea. $271,200.b. $205,200.c. $216,000.d. $259,200.

Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

126. Which one of the following items would never appear on a cash budget?a. Office salaries expenseb. Interest expensec. Depreciation expensed. Travel expense


127. Zimmer Company reported the following information for 2011:

October November DecemberBudgeted sales $230,000 $220,000 $270,000Budgeted purchases $120,000 $128,000 $144,000


following month. • Cost of goods sold is 35% of sales. • Zimmer purchases and pays for merchandise 60% in the month of acquisition and

40% in the following month. • Accounts payable is used only for inventory acquisitions.

How much cash will Zimmer receive during November?a. $110,000b. $245,000c. $225,000d. $220,000

Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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128. Zimmer Company reported the following information for 2011:

October November DecemberBudgeted sales $230,000 $220,000 $270,000Budgeted purchases $120,000 $128,000 $144,000

• Cost of goods sold is 35% of sales. • Zimmer purchases and pays for merchandise 60% in the month of acquisition and

40% in the following month. • Accounts payable is used only for inventory acquisitions.

How much is the budgeted balance for Accounts Payable at October 31, 2011?a. $48,000b. $72,000c. $102,000d. $51,200

Ans: A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

129. Wesley Company reported the following information for 2011:

October November DecemberBudgeted sales $620,000 $580,000 $720,000

• All sales are on credit. • Customer amounts on account are collected 50% in the month of sale and 50% in the

following month.

How much is the November 30, 2011 budgeted Accounts Receivable?a. $600,000b. $360,000c. $310,000d. $290,000

Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

130. Troyer Company reported the following information for 2011:

October November DecemberBudgeted purchases $180,000 $192,000 $216,000

• Operating expenses are: Salaries, $75,000; Depreciation, $30,000; Rent, $15,000; Utilities, $21,000

• Operating expenses are paid during the month incurred.• Accounts payable is used only for inventory acquisitions.

How much is the budgeted amount of cash to be paid for operating expenses in November?a. $303,000b. $111,000c. $141,000d. $333,000


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Budgetary Planning

131. During September, the capital expenditure budget indicates a $280,000 purchase of equipment. The ending September cash balance from operations is budgeted to be $40,000. The company wants to maintain a minimum cash balance of $20,000. What is the minimum cash loan that must be planned to be borrowed from the bank during September? a. $220,000b. $240,000c. $260,000d. $300,000


132. Swift, Inc. has budgeted its activity for December according to the following information:

1. Sales at $400,000, all for cash.2. Budgeted depreciation for December is $10,000.4. The cash balance at December 1 was $10,000.5. Selling and administrative expenses are budgeted at $40,000 for December and

are paid for in cash.6. The planned merchandise inventory on December 31 and December 1 is $12,000.7. The invoice cost for merchandise purchases represents 75% of the sales price. All

purchases are paid in cash.

How much are the budgeted cash disbursements for December?a. $230,000b. $340,000c. $350,000d. $328,000


133. Pierce Merchandising Company expects to purchase $90,000 of materials in March and $105,000 of materials in April. Three-quarters of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. In addition, a 2% discount is received for payments made in the month of purchase. How much will April's cash disbursements for materials purchases be?a. $66,150 b. $81,150 c. $99,675d. $90,000


134. On January 1, Matzke Company has a beginning cash balance of $84,000. During the year, the company expects cash disbursements of $680,000 and cash receipts of $580,000. If Matzke requires an ending cash balance of $80,000, Matzke Company must borrowa. $64,000.b. $80,000.c. $96,000.d. $184,000.


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135. Meyerhoff Company has the following budgeted sales: July $100,000, August $150,000, and September $125,000. 40% of the sales are for cash and 60% are on credit. For the credit sales, 50% are collected in the month of sale, and 50% the next month. The total expected cash receipts during September area. $140,000.b. $132,500.c. $131,250.d. $125,000.


136. Nunley Company's direct materials budget shows total cost of direct materials purchases for April $300,000, May $360,000 and June $420,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for June area. $396,000.b. $384,000.c. $360,000.d. $312,000.


137. Which one of the following budgets would be prepared for a manufacturer but not for a merchandiser?a. Direct labor budgetb. Cash budgetc. Sales budgetd. Budgeted income statement

Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

138. The formula for determining budgeted merchandise purchases is budgeteda. production + desired ending inventory – beginning inventory.b. sales + beginning inventory – desired ending inventory.c. cost of goods sold + desired ending inventory – beginning inventory.d. cost of goods sold + beginning inventory – desired ending inventory.


139. Which one of the following is a problem resulting from a service company being overstaffed?a. Labor costs will be disproportionately low.b. Profits will be higher because of the additional salaries.c. Staff turnover may increase.d. Revenue may be lost.


140. The master budget for a service enterprisea. will have the same types of budgets as a merchandiser.b. may include a sales budget for sales revenue.c. will not include a budgeted income statement.d. includes a service revenue budget based on expected client billings.

Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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Budgetary Planning

141. Budgeting in not-for-profit organizationsa. is not important because they are not profit-oriented.b. usually starts with budgeting expenditures, rather than receipts.c. is necessary only if some product is produced and sold.d. consists entirely of budgeted contributions.


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


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


144. Company A is a manufacturer and Company B is a merchandiser. What is the difference in the budgets the two entities will prepare?a. Company A will prepare a production budget, and Company B will prepare a

merchandise purchases budget.b. Company A will prepare a sales forecast, and Company B will prepare a sales budget.c. Company B will prepare a production budget, and Company A will prepare a

merchandise purchases budget.d. Both companies will prepare the same types of budgets.

Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

145. An appropriate activity index for a college or university for budgeting faculty positions would be thea. faculty hours worked.b. number of administrators.c. credit hours taught by a department.d. number of days in the school term.


146. A critical factor in budgeting for a service firm is toa. hire professional staff to perform the budgeting work.b. coordinate professional staff needs with anticipated services.c. classify all personnel as either variable or fixed.d. budget expenditures before anticipated receipts.


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147. The primary benefits of budgeting include all of the following except ita. requires only top management to plan ahead and formalize their future goals.b. provides definite objectives for evaluating performance.c. creates an early warning system for potential problems.d. motivates personnel throughout the organization.


148. The responsibility for expressing management's budgeting goals in financial terms is performed by thea. accounting department.b. top management.c. lower level of management.d. budget committee.


149. Coordinating the preparation of the budget is the responsibility of thea. treasurer.b. president.c. chief accountant.d. budget committee.

Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

150. For better management acceptance, the flow of input data for budgeting should begin with thea. accounting department.b. top management.c. lower levels of management.d. budget committee.


151. In the direct materials budget, the quantity of direct materials to be purchased is computed by adding direct materials required for production toa. desired ending direct materials.b. beginning direct materials.c. desired ending direct materials less beginning direct materials.d. beginning direct materials less desired ending direct materials.


152. Unger Company has 12,000 units in beginning finished goods. If sales are expected to be 60,000 units for the year and Unger desires ending finished goods of 15,000 units, how many units must the company produce?a. 57,000b. 60,000c. 63,000d. 75,000


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Budgetary Planning

153. The important end-product of the operating budgets is thea. budgeted income statement.b. cash budget.c. production budget.d. budgeted balance sheet.


154. On January 1, Patel Company has a beginning cash balance of $21,000. During the year, the company expects cash disbursements of $170,000 and cash receipts of $145,000. If Patel requires an ending cash balance of $20,000, the company must borrowa. $16,000.b. $20,000.c. $24,000.d. $46,000.


155. The budget that is often considered to be the most important financial budget is thea. cash budget.b. capital expenditure budget.c. budgeted income statement.d. budgeted balance sheet.


156. Hendrix Company's direct materials budget shows total cost of direct materials purchases for January $125,000, February $150,000 and March $175,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for March area. $165,000.b. $160,000.c. $150,000.d. $130,000.


157. A purchases budget is used instead of a production budget bya. merchandising companies.b. service enterprises.c. not-for-profit organizations.d. manufacturing companies.


158. Which of the following statements is incorrect?a. A continuous twelve-month budget results from dropping the month just ended and

adding a future month.b. The production budget is derived from the direct materials and direct labor budgets.c. The cash budget shows anticipated cash flows.d. In the budget process for not-for-profit organizations, the emphasis is on cash flow

rather than on revenue and expenses.

Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.37. b 55. d 73. d 91. c 109. a 127. c 145. c38. b 56. c 74. d 92. a 110. c 128. a 146. b39. b 57. d 75. c 93. a 111. b 129. d 147. a40. c 58. d 76. d 94. c 112. c 130. b 148. a41. a 59. b 77. b 95. a 113. c 131. c 149. d42. d 60. c 78. d 96. a 114. c 132. b 150. c43. d 61. d 79. b 97. a 115. b 133. c 151. c44. b 62. a 80. a 98. a 116. c 134. c 152. c45. c 63. d 81. c 99. c 117. c 135. b 153. a46. c 64. b 82. d 100. d 118. c 136. a 154. c47. d 65. d 83. d 101. b 119. c 137. a 155. a48. d 66. c 84. a 102. c 120. a 138. c 156. a49. b 67. d 85. c 103. a 121. b 139. c 157. a50. a 68. c 86. b 104. c 122. c 140. d 158. b51. d 69. a 87. b 105. a 123. c 141. b52. d 70. b 88. a 106. c 124. c 142. b53. d 71. d 89. c 107. d 125. a 143. b54. b 72. a 90. a 108. b 126. c 144. a

BRIEF EXERCISES

BE 159

Hale Co. manufactures beanies. The budgeted units to be produced and sold are below:

Expected Production Expected SalesAugust 3,500 2,900September 2,800 3,900

It takes 24 yards of yarn to produce a beanie. The company's policy is to maintain yarn at the end of each month equal to 5% of next month's production needs and to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated production needs. The cost of yarn is $0.20 a yard. At August 1, 4,200 yards of yarn were on hand.

InstructionsCompute the budgeted cost of purchases.

Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 159 (5 min.)

Units to be produced 3,500Yards needed per unit 24 Yards needed for production 84,000Add: Desired materials ending inventory (yards) (5% × 2,800 × 24) 3,360Less: Beginning inventory on hand (yards) (5% × 3,500 × 24) (4,200)Yards needed to purchase 83,160Cost per yard $0.20Budgeted cost of purchases $16,632

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Budgetary Planning

BE 160

The budget components for Harper Company for the quarter ended June 30 appear below. Harper sells trash cans for $12 each. Budgeted production for the next three months is:

April 26,000 unitsMay 46,000 unitsJune 29,000 units

Harper desires to have trash cans on hand at the end of each month equal to 20 percent of the following month’s budgeted sales in units. On March 31, Harper had 4,000 completed units on hand. Seven pounds of plastic are required for each trash can. At the end of each month, Harper desires to have 10 percent of the following month’s production material needs on hand. At March 31, Harper had 18,200 pounds of plastic on hand. The materials used in production costs $0.60 per pound. Each trash can produced requires 0.10 hours of direct labor.

InstructionsCompute the cost of the plastic inventory at the end of May.

Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation


Cost of ending inventory = (10% × 29,000) × 7 × $0.60 per pound = $12,180

BE 161

Ivey, Inc. makes and sells buckets. Each bucket uses 3/4 pound of plastic. Budgeted production of buckets in units for the next three months is as follows:

April May JuneBudgeted production 21,000 22,000 24,000

The company wants to maintain monthly ending inventories of plastic equal to 25% of the following month's budgeted production needs. The cost of plastic is $2.20 per pound.

InstructionsPrepare a direct materials purchases budget for the month of May.

Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation


Buckets to be produced during May 22,000Pounds of plastic needed for each bucket 3/4 Total pounds of plastic needed for production 16,500Add ending inventory, pounds of plastic desired (25% × 24,000 × 3/4) 4,500Less beginning inventory, pounds of plastic (25% × 22,000 × 3/4) (4,125)Pounds of plastic needed to purchase 16,875Cost per pound $2.20Estimated cost of purchases for May $37,125

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BE 162

The budget components for Goebel Company for the quarter ended June 30 appear below. McLeod sells trash cans for $12 each. Budgeted sales and production for the next three months are:

Sales ProductionApril 20,000 units 26,000 unitsMay 50,000 units 46,000 unitsJune 30,000 units 29,000 units

Goebel desires to have trash cans on hand at the end of each month equal to 20 percent of the following month’s budgeted sales in units. On March 31, Goebel had 4,000 completed units on hand. Seven pounds of plastic are required for each trash can. At the end of each month, Goebel desires to have 10 percent of the following month’s production material needs on hand. At March 31, Goebel had 18,200 pounds of plastic on hand. The materials used in production cost $0.60 per pound. Each trash can produced requires 0.10 hours of direct labor.

InstructionsDetermine how much the materials purchases budget will be for the month ending April 30.



Production of trash cans expected during April (given) 26,000Pounds of plastic per trash can 7 Total pounds of plastic needed for sales production 182,000Add ending plastic inventory desired (10% × 46,000 × 7) 32,200Total pounds of plastic needed 214,200Less beginning inventory of plastic on hand (given) (18,200)Pounds of plastic to be purchased 196,000Cost per pound of plastic $0.60Cost of direct materials purchases $117,600

BE 163

Hudson Company reported the following information for 2011:

October November December Budgeted sales $300,000 $320,000 $360,000 Budgeted purchases $120,000 $128,000 $144,000


following month.

InstructionsCompute the amount of cash Hudson will receive during November.


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Budgetary Planning


From November sales: $320,000 × 40% = $128,000From October sales: $300,000 × 60% = $180,000Total = $128,000 + $180,000 = $308,000

BE 164

Harwood Company budgeted the following information for 2011:

May June JulyBudgeted purchases $104,000 $110,000 $102,000

• Cost of goods sold is 40% of sales. Accounts payable is used only for inventory acquisitions.• Harwood purchases and pays for merchandise 60% in the month of acquisition and 40% in

the following month. • Selling and administrative expenses are budgeted at $40,000 for May and are expected to

increase 5% per month. They are paid during the month of acquisition. In addition, budgeted depreciation is $10,000 per month.

• Income taxes are $38,400 for July and are paid in the month incurred.

InstructionsCompute the amount of budgeted cash disbursements for July.



Cash disbursements:Cash paid for July purchases (60% × $102,000) $ 61,200Cash paid for June purchases (40% * $110,000) 44,000Cash paid for July selling and admin ($40,000 × 1.05 × 1.05) 44,100Cash paid for income taxes 38,400

Total cash disbursements $187,700

BE 165

Gunkle Company has budgeted direct materials purchases of $400,000 in March and $600,000 in April. Past experience indicates that the company pays for 60% of its purchases in the month of purchase and the remaining 40% in the next month. Other costs are all paid during the month incurred. During April, the following items were budgeted:

Wages expense $120,000Purchase of office equipment 200,000Selling and administrative expenses 126,000Depreciation expense 18,000

InstructionsCompute the amount of budgeted cash disbursements for April.


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Payment of March purchases ($400,000 × 40%) $160,000Payment of April purchases ($600,000 × 60%) 360,000Wages expense 120,000Purchase of office equipment 200,000Selling and administrative expenses 126,000Total budgeted cash disbursements $966,000

BE 166

Ferguson Inc. provided the following information:

April May JuneProjected merchandise purchases $92,000 $78,000 $66,000

• Ferguson pays 40% of merchandise purchases in the month purchased and 60% in the following month.

• General operating expenses are budgeted to be $31,000 per month of which depreciation is $3,000 of this amount. Ferguson pays operating expenses in the month incurred.

• Ferguson makes loan payments of $4,000 per month of which $450 is interest and the remainder is principal.

InstructionsCalculate budgeted cash disbursements for May.



Budgeted cash disbursements for purchases:Cash paid for May purchases ($78,000 × 40%) $ 31,200Cash paid for April purchases ($92,000 × 60%) 55,200

Budgeted cash paid for purchases 86,400Budgeted cash payments for operating expenses ($31,000 – $3,000) 28,000Budgeted cash payments for loan ($4,000 – $450) 3,550Budgeted cash payments for interest 450 Total budgeted cash disbursements for May $118,400

BE 167

Fischer, Inc. provided the following information:

March April MayProjected merchandise purchases $65,000 $75,000 $70,000

• Fischer pays 40% of merchandise purchases in the month purchased and 60% in the following month.

• General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000 of this amount. Fischer pays operating expenses in the month incurred.

InstructionsCalculate Fischer’s budgeted cash disbursements for May.


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Budgetary Planning


Cash paid for merchandise purchases:May purchases: $70,000 × 40% = $28,000April purchases: $75,000 × 60% = 45,000

Cash paid for operating expenses ($20,000 − $2,000) 18,000Budgeted cash disbursements for May $91,000

BE 168

The beginning cash balance is $15,000. Sales are forecasted at $600,000 of which 80% will be on credit. 70% of credit sales are expected to be collected in the year of sale. Cash expenditures for the year are forecasted at $375,000. Accounts Receivable from previous accounting periods totaling $9,000 will be collected in the current year. The company is required to make a $15,000 loan payment and an annual interest payment on the last day of every year. The loan balance as of the beginning of the year is $90,000, and the annual interest rate is 10%.

InstructionsCompute the excess of cash receipts over cash disbursements.



Cash collections:Accounts receivable collected $ 9,000Cash sales: 20% × $600,000 120,000Credit sales: (80% × $600,000) × 70% 336,000

Cash expenditures (375,000)Loan payment (15,000)Interest payment (10% × $90,000) (9,000)Net increase in cash $ 66,000

EXERCISESEx. 169

Eckert Company has budgeted the following unit sales:

2010 Units April 25,000May 50,000June 75,000July 45,000

Of the units budgeted, 40% are sold by the Southern Division at an average price of $15 per unit and the remainder are sold by the Eastern Division at an average price of $12 per unit.

InstructionsPrepare separate sales budgets for each division and for the company in total for the second quarter of 2011.


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Solution 169 (15–20 min.)

ECKERT COMPANYSales Budget

For the Quarter Ended June 30, 2011

Southern Division April May June Total Expected unit sales 10,000 20,000 30,000 60,000Unit selling price $15 $15 $15 $15

Total sales $150,000 $300,000 $450,000 $900,000

Eastern DivisionExpected unit sales 15,000 30,000 45,000 90,000Unit selling price $12 $12 $12 $12

Total sales $180,000 $360,000 $540,000 $1,080,000

Total CompanyExpected unit sales 25,000 50,000 75,000 150,000

Total sales $330,000 $660,000 $990,000 $1,980,000

Ex. 170

Ensley, Inc. makes and sells a single product, widgets. Three pounds of wackel are needed to make one widget. Budgeted production of widgets for the next few months follows:

September 25,000 unitsOctober 31,000 units

The company wants to maintain monthly ending inventories of wackel equal to 20% of the following month's production needs. On August 31, 15,000 pounds of wackel were on hand.

InstructionsHow much wackel should be purchased in September?



Expected sales in units during September 25,000Pounds of wackel needed per widget × 3Pounds of wackel needed for September sales units 75,000Add: ending inventory desired (20% × 31,000 units × 3 pounds) 18,600Less: beginning inventory on hand (15,000)Pounds of wackel needed to be purchased 78,600

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Budgetary Planning

Ex. 171

Berry Company manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be produced are as follows:

Units of Product2011 Regular Deluxe Total July 10,000 15,000 25,000August 6,000 10,000 16,000September 9,000 14,000 23,000October 8,000 12,000 20,000

It takes 3 pounds of direct materials to produce the Regular product and 5 pounds of direct materials to produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials on hand at the end of each month equal to 30% of the next month's production needs for the Regular product and 20% of the next month's production needs for the Deluxe product. Direct materials inventory on hand at June 30 were 9,000 pounds for the Regular product and 15,000 pounds for the Deluxe product. The cost per pound of materials is $5 Regular and $7 Deluxe.

InstructionsPrepare separate direct materials budgets for each product for the third quarter of 2011.



BERRY COMPANYDirect Materials Budget—Regular

For the Quarter Ended September 30, 2011

July August September Total Units to be produced 10,000 6,000 9,000Direct materials per unit × 3 × 3 × 3Total pounds needed for production 30,000 18,000 27,000Add: Desired ending direct materials (pounds) 5,400 8,100 7,200*Total materials required 35,400 26,100 34,200Less: Beginning direct materials (pounds) 9,000 5,400 8,100Direct materials purchases 26,400 20,700 26,100Cost per pound × $5 × $5 × $5Total cost of direct materials purchases $132,000 $103,500 $130,500 $366,000*30% × (8,000 × 3)

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Solution Ex. 171 (Cont.)

BERRY COMPANYDirect Materials Budget—Deluxe

For the Quarter Ended September 30, 2011

July August September Total Units to be produced 15,000 10,000 14,000Direct materials per unit × 5 × 5 × 5Total pounds needed for production 75,000 50,000 70,000Add: Desired ending direct materials (pounds) 10,000 14,000 12,000*Total materials required 85,000 64,000 82,000Less: Beginning direct materials (pounds) 15,000 10,000 14,000Direct materials purchases 70,000 54,000 68,000Cost per pound × $7 × $7 × $7Total cost of direct materials purchases $490,000 $378,000 $476,000 $1,344,000*20% × (12,000 × 5)

Ex. 172

Wyatt Company has budgeted the following unit sales:

2011 Units January 10,000February 8,000March 9,000April 11,000May 15,000

The finished goods units on hand on December 31, 2010, was 2,000 units. Each unit requires 2 pounds of raw materials that are estimated to cost an average of $4 per pound. It is the company's policy to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated sales. They also have a policy of maintaining a raw materials inventory at the end of each month equal to 30% of the pounds needed for the following month's production. There were 5,760 pounds of raw materials on hand at December 31, 2010.

InstructionsFor the first quarter of 2011, prepare (1) a production budget and (2) a direct materials budget.



(1) WYATT COMPANYProduction Budget

For the Quarter Ended March 31, 2011

January February March Total Expected unit sales 10,000 8,000 9,000Desired ending finished goods units 1,600 1,800 2,200*Total required units 11,600 9,800 11,200Less: Beginning finished goods units 2,000 1,600 1,800Required production units 9,600 8,200 9,400 27,200

*April units: 11,000 × 20%.

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Budgetary Planning

Solution Ex. 172 (Cont.)(2) WYATT COMPANY

Direct Materials BudgetFor the Quarter Ended March 31, 2011

January February March Total Units to be produced 9,600 8,200 9,400Direct materials per unit × 2 × 2 × 2Total pounds needed for production 19,200 16,400 18,800Desired ending direct materials (pounds) 4,920 5,640 7,080**Total materials required 24,120 22,040 25,880Less: Beginning direct materials (pounds) 5,760 4,920 5,640Direct materials purchases 18,360 17,120 20,240Cost per pound × $4 × $4 × $4Total cost of direct materials purchases $73,440 $68,480 $80,960 $222,880

**April units: 11,800 × 2 = 23,600 × 30%.

Ex. 173

Eilert Company has budgeted the following unit sales:

2011 2012 Quarter Units Quarter Units

1 70,000 1 60,0002 40,0003 50,0004 80,000

The finished goods inventory on hand on December 31, 2010 was 14,000 units. It is the company's policy to maintain a finished goods inventory at the end of each quarter equal to 20% of the next quarter's anticipated sales.

InstructionsPrepare a production budget for 2011.



EILERT COMPANYProduction Budget

For the Year Ended December 31, 2011

Quarter 1 2 3 4 Total

Expected unit sales 70,000 40,000 50,000 80,000Desired ending finished goods units 8,000 10,000 16,000 12,000*Total required units 78,000 50,000 66,000 92,000Less: Beginning finished goods units 14,000 8,000 10,000 16,000Required production units 64,000 42,000 56,000 76,000 238,000

*2011 Q1: 60,000 units × 20% = 12,000.

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Ex. 174

The following facts are known:

• The total pounds needed for production are 2 times the units to be produced.

• The desired ending direct materials inventory is 20% of the total pounds needed for production.

• The beginning direct materials inventory is equal in number to 10% of the units to be produced.

• Cost per pound is $5.

• Total cost of the direct materials purchases is $920,000.

InstructionsPrepare a direct materials budget for the period.



Let X = total units to be produced.Then total pounds needed equals 2X.Desired ending inventory is .20 × 2X.The beginning inventory is .10X.

The direct materials budget is:Units to be produced X 80,000*Direct materials per unit 2 × 2Total pounds needed for production 2X 160,000Add: Desired ending direct materials .2(2X) .4X 32,000Total materials required 2.4X 192,000Less: Beginning direct materials .10X 8,000Direct materials purchases 2.3X 184,000Cost per pound $5 × 5Total cost of direct materials purchases $920,000

*2X + .2(2X) – .1X = 184,0002X + .4X – .1X = 184,000

2.3X = 184,000X = 80,000

Ex. 175

Grove, Inc. produces rulers from plastic resin. Grove has estimated production and sales of rulers in units for the next 2 months as:

May June Estimated production 28,000 32,000Estimated sales 33,000 24,000

Each ruler requires 0.25 pounds of resin. The cost of resin is $4.50 per pound. Grove wants to have 20% of the next month's materials requirements on hand at the end of each month.

InstructionsPrepare a direct materials purchases budget for the month of May.


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Budgetary Planning


GROVE, INC.Direct Materials Purchases Budget

Month of May

Estimated production in units for May 28,000Pounds needed per unit × .25Total pounds needed for production 7,000Less: beginning inventory (20% × 28,000 × .25 lbs.) (1,400)Add: ending inventory desired (20% × 32,000 × .25 lbs.) + 1,600Pounds needed for production in May 7,200Cost per pound × $4.50Total cost of purchases of materials $32,400

Ex. 176

Little Company is preparing its direct labor budget for 2011 from the following production budget based on a calendar year:

Quarter Units 1 40,0002 20,0003 30,0004 50,000

Each unit requires 2 hours of direct labor. The union contract provides for a 10% increase in wage rate to $11 per hour on October 1.

InstructionsPrepare a direct labor budget for 2011.



LITTLE COMPANYDirect Labor Budget


Quarter 1 2 3 4 Total

Units to be produced 40,000 20,000 30,000 50,000Direct labor time (hours) per unit × 2 × 2 × 2 × 2Total required direct labor hours 80,000 40,000 60,000 100,000Direct labor cost per hour × $10* × $10 × $10 × $11Total direct labor cost $800,000 $400,000 $600,000 $1,100,000 $2,900,000

*$11 ÷ 110% = $10.

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Ex. 177

For each item given, identify the budget in which it will appear. If an item will appear on more than one budget, then indicate as many budgets as are relevant.

Budget Code:

DM Direct Materials BudgetDL Direct Labor BudgetP Production BudgetS Sales BudgetC Cash BudgetBBS Budgeted Balance SheetBIS Budgeted Income StatementSA Selling and Administrative Expense BudgetMOH Manufacturing Overhead Budget

____________ 1. Ending cash balance

____________ 2. Total selling and administrative expenses

____________ 3. Total sales (in dollars)

____________ 4. Interest expense

____________ 5. Ending raw materials inventory (in dollars)

____________ 6. Ending finished goods inventory (in dollars)

Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 10, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation


BBS, C 1. Ending cash balance SA, BIS 2. Total selling and administrative expenses S, BIS 3. Total sales (in dollars) C, BIS 4. Interest expense BBS, DM 5. Ending raw materials inventory (in dollars) BBS, BIS 6. Ending finished goods inventory (in dollars)

Ex. 178

Oakes Company is preparing its master budget for 2011. Relevant data pertaining to its sales budget are as follows:

Sales for the year are expected to total 4,000,000 units. Quarterly sales are 25%, 30%, 15%, and 30%, respectively. The sales price is expected to be $2.00 per unit for the first quarter and then be increased to $2.20 per unit in the second quarter.

InstructionsPrepare a sales budget for 2011 for Oakes Company.


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Budgetary Planning


OAKES COMPANYSales Budget


Quarter 1 2 3 4 Year

Unit sales 1,000,000 1,200,000 600,000 1,200,000 4,000,000Unit selling price × $2.00 × $2.20 × $2.20 × $2.20 Var. Total sales $2,000,000 $2,640,000 $1,320,000 $2,640,000 $8,600,000

Ex. 179

Temple Company combines its operating expenses for budget purposes in a selling and administrative expense budget. For the first quarter of 2011, the following data are developed:

1. Sales: 20,000 units; unit selling price: $352. Variable costs per dollar of sales:

Sales commissions 6%Delivery expense 2%Advertising 4%

3. Fixed costs per quarter:Sales salaries $24,000Office salaries 17,000Depreciation 6,000Insurance 2,000Utilities 1,000

InstructionsPrepare a selling and administrative expense budget for the first quarter of 2011.



TEMPLE COMPANYSelling and Administrative Expense Budget

For the Quarter Ended March 31, 2011

Variable expensesSales commissions ($700,000 × 6%) $ 42,000Delivery expense ($700,000 × 2%) 14,000Advertising ($700,000 × 4%) 28,000

Total variable 84,000Fixed expenses

Sales salaries $ 24,000Office salaries 17,000Depreciation 6,000Insurance 2,000Utilities 1,000

Total fixed 50,000Total selling and administrative expenses $134,000

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Ex. 180

Ogleby Company is preparing its manufacturing overhead budget for 2011. Relevant data consist of the following.Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000.

Direct labor: Time is 1 hour per unit.

Variable overhead costs per direct labor hour: Indirect materials $0.90; indirect labor $1.20; and maintenance $0.50.

Fixed overhead costs per quarter: Supervisory salaries $40,000; depreciation $16,000; and maintenance $12,000.

InstructionsPrepare the manufacturing overhead budget for the year, showing quarterly data.



OGLEBY COMPANYManufacturing Overhead Budget

For the Year Ending December 31, 2011

Quarter 1 2 3 4 Year

Variable costsIndirect materials ($.90/hour) $9,000 $10,800 $12,600 $14,400 $46,800Indirect labor($1.20/hour) 12,000 14,400 16,800 19,200 62,400Maintenance($.50/hour) 5,000 6,000 7,000 8,000 26,000

Total variable 26,000 31,200 36,400 41,600 135,200Fixed costs

Supervisory salaries 40,000 40,000 40,000 40,000 160,000Depreciation 16,000 16,000 16,000 16,000 64,000Maintenance 12,000 12,000 12,000 12,000 48,000

Total fixed 68,000 68,000 68,000 68,000 272,000Total manufacturing overhead $94,000 $99,200 $104,400 $109,600 $407,200

Direct labor hours 10,000 12,000 14,000 16,000 52,000Manufacturing overhead rate

per direct labor hour $7.83($407,200 ÷ 52,000)

Ex. 181

Garza Company has accumulated the following budget data for the year 2011.

1. Sales: 30,000 units, unit selling price $50.2. Cost of one unit of finished goods: Direct materials 2 pounds at $5 per pound, direct labor 1.5

hours at $12 per hour, and manufacturing overhead $6 per direct labor hour.3. Inventories (raw materials only): Beginning, 10,000 pounds; ending, 15,000 pounds.4. Raw materials cost: $5 per pound.5. Selling and administrative expenses: $160,000.6. Income taxes: 30% of income before income taxes.

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Budgetary Planning

Ex. 181 (Cont.)Instructions(a) Prepare a schedule showing the computation of cost of goods sold for 2011.(b) Prepare a budgeted income statement for 2011.

Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Hard, Min: 16, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation


(a)

GARZA COMPANYComputation of Cost of Goods Sold


Cost of one unit of finished goods:Direct materials (2 × $5).......................................................................................... $10Direct labor (1.5 × $12)............................................................................................ 18Manufacturing overhead (1.5 × $6).......................................................................... 9

Total................................................................................................................... $37

30,000 units × $37 = $1,110,000.

(b)

GARZA COMPANYBudgeted Income Statement


Sales (30,000 × $50)............................................................................. $1,500,000Cost of goods sold (see part (a))........................................................... 1,110,000Gross profit........................................................................................... 390,000Selling and administrative expenses..................................................... 160,000Income before income taxes................................................................. 230,000Income tax expense ($230,000 × 30%)................................................. 69,000Net income............................................................................................ $ 161,000

Ex. 182

The Northeast Regional Division of Platt Wholesale Corporation has been requested to prepare a quarterly budgeted income statement for 2011. The regional manager expects that sales in the first quarter of 2011 will increase by 10% over the same quarter of the preceding year and will then increase by 5% for each succeeding quarter in 2011.

The corporate head office has requested that the regional manager maintain an inventory in dollars equal to 25% of the next quarter's sales. Quarterly purchases average 55% of quarterly sales. Budgeted ending inventory on December 31, 2010 is $176,000. Quarterly salaries are $20,000 plus 5% of sales. All salaries are classified as sales salaries. Other quarterly expenses are estimated to be as follows:

Rent expense $24,000Depreciation on office equipment $12,000Utilities expense $3,600Miscellaneous expenses 2% of sales

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Ex. 182 (Cont.)

The income statement for the first quarter of 2010 was as follows:

Income StatementFor the Quarter Ended March 31, 2010

Sales..................................................................................................... $640,000Cost of goods sold................................................................................ 352,000Gross profit........................................................................................... 288,000Operating expenses

Sales salaries................................................................................ $52,000Rent expense................................................................................. 24,000Depreciation................................................................................... 12,000Utilities........................................................................................... 3,600Miscellaneous................................................................................ 12,800

Total operating expenses....................................................... 104,400Net income............................................................................................ $183,600

InstructionsPrepare a budgeted quarterly income statement in tabular form for the first quarter of 2011. (Show computations.)



PLATT WHOLESALE CORPORATIONNortheast Regional DivisionBudgeted Income Statement

For the Quarter Ended March 31, 2011Sales (1).............................................................................................................. $704,000Cost of goods sold (2).......................................................................................... 378,400Gross profit.......................................................................................................... 325,600Operating expenses

Sales salaries (3).......................................................................................... 55,200Rent expense............................................................................................... 24,000Depreciation................................................................................................. 12,000Utilities.......................................................................................................... 3,600Miscellaneous (4)......................................................................................... 14,080

Total operating expenses...................................................................... 108,880Net income.......................................................................................................... $216,720

(1) Sales Qtr. 1 $640,000 × 110% = $704,000(2) Cost of goods sold

Beginning inventory $176,000Purchases ($704,000 × 55% = $387,200) 387,200Cost of goods available 563,200Ending inventory ($704,000 × 105% = $739,200 × 25% = $184,800) 184,800Cost of goods sold $378,400

(3) Sales salaries: $20,000 + ($704,000 × .05) = $55,200.(4) Miscellaneous expenses: $704,000 × .02 = $14,080.

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Budgetary Planning

Ex. 183

In September 2011, the budget committee of Noyes Company assembles the following data:1. Expected Sales

October $900,000November 850,000December 800,000

2. Cost of goods sold is expected to be 60% of sales.3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold.4. The beginning inventory at October 1 will be the desired amount.

InstructionsPrepare the budgeted income statement for October through gross profit on sales, including a cost of goods sold schedule.



NOYES COMPANYBudgeted Income Statement

For the Month Ended October 31, 2011

Sales $900,000Cost of goods sold

Inventory, October 1 $108,000Purchases 534,000Cost of goods available for sale 642,000Less: Inventory, October 31 102,000Cost of goods sold 540,000

Gross profit $360,000

Supporting Computations:Budgeted cost of goods sold (1) $540,000Desired ending merchandise inventory (2) 102,000Total 642,000Less: Beginning merchandise inventory (3) 108,000Budgeted merchandise purchases $534,000

October(1) $900,000 × 60% = $540,000.(2) ($850,000 × 60%) × 20% = $102,000.(3) $540,000 × 20% = $108,000.

Ex. 184

Molina, Inc. provided the following information:

July August Projected sales $110,000 $130,000Projected merchandise purchases $65,000 $70,000

• Molina estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 22% in the second month following the sale. Three percent of all sales are estimated to be bad debts.

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Ex. 184 (Cont.)• Molina pays 30% of merchandise purchases in the month purchased and 70% in the following

month.

• General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000 of this amount. Molina pays operating expenses in the month incurred.

• Molina makes loan payments of $3,000 per month of which $400 is interest and the remainder is principal.

InstructionsCalculate Molina's budgeted cash disbursements for August.



Cash paid for merchandise purchases:August purchases: $70,000 × 30% $ 21,000July purchases: $65,000 × 70% 45,500

Cash paid for operating expenses ($20,000 – $2,000) 18,000Cash paid for loan ($3,000 – $400) 2,600Cash paid for interest 400Budgeted cash disbursements for August $87,500

Ex. 185

Kirby Company has budgeted sales revenues as follows:

Budgeted Sales RevenuesJanuary $55,000February 75,000March 90,000April 70,000May 50,000June 35,000

Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible.

InstructionsPrepare a schedule which shows expected cash receipts from sales for the months of April, May, and June.


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Budgetary Planning


KIRBY COMPANYExpected Cash Receipts from Sales

For the Quarter Ended June 30

April May June February sales

Credit sales: ($75,000 × .80 × .05) $ 3,000

March salesCredit sales:

($90,000 × .80 × .30) 21,600($90,000 × .80 × .05) $ 3,600

April salesCredit sales:

($70,000 × .80 × .60) 33,600($70,000 × .80 × .30) 16,800($70,000 × .80 × .05) $ 2,800

Cash sales: ($70,000 × .20) 14,000

May salesCredit sales:

($50,000 × .80 × .60) 24,000($50,000 × .80 × .30) 12,000

Cash sales: ($50,000 × .20) 10,000

June salesCredit sales: ($35,000 × .80 × .60) 16,800Cash sales: ($35,000 × .20) 7,000

Total cash receipts $72,200 $54,400 $38,600

Ex. 186

Dalton Company has budgeted sales revenues as follows:

June July August Credit sales $135,000 $145,000 $ 90,000Cash sales 90,000 255,000 195,000Total sales $225,000 $400,000 $285,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory purchases are:

June $300,000July 250,000August 105,000

Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month, (b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000 cash.

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Ex. 186 (Cont.)

The company wishes to maintain a minimum cash balance of $50,000 at the end of each month. The company borrows money from the bank at 8% interest if necessary to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $50,000. Assume that borrowed money in this case is for one month.

InstructionsPrepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory.



DALTON COMPANYCash Budget

For the Two Months of July and August

July August Beginning cash balance $ 50,000 $ 50,000Add: Receipts

Collections from customers 141,000 112,000Cash sales 255,000 195,000Total receipts 396,000 307,000

Total available cash 446,000 357,000Less: Disbursements

Purchases 275,000 177,500Selling and administrative expenses 48,000 48,000Dividends 103,000Equipment purchase 30,000Total disbursements 426,000 255,500

Excess (deficiency) of available cash over disbursements 20,000 101,500Financing

Borrowings 30,000Repayments (30,200)*

Ending cash balance $ 50,000 $ 71,300

*30,000 × 8% × 1/12 = $200 + $30,000 = $30,200.

Schedule of Expected Collections from Customers

Credit sales July August June (135,000) $ 54,000July ($145,000) 87,000 $ 58,000August ($90,000) 54,000

Total collections $141,000 $112,000

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Budgetary Planning

Solution 186 (Cont.)Schedule of Expected Payments for Purchases of Inventory

Inventory purchases July August June ($300,000) $150,000July ($250,000) 125,000 $125,000August ($105,000) 52,500

Total payments $275,000 $177,500

Ex. 187

Baxter Co.’s projected sales are as follows:

August $320,000September $360,000October $440,000

Baxter estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale. Two percent of all sales are estimated to be bad debts.

InstructionsHow much are Baxter Co.'s budgeted cash receipts for October?



Collections from October sales: $440,000 × 30% $132,000Collections from September sales: $360,000 × 50% 180,000Collections from August sales: $320,000 × 18% 57,600Total budgeted cash receipts for October $369,600

Ex. 188

The City National Bank has asked Donham, Inc. for a budgeted balance sheet for the year ended December 31, 2011. The following information is available:

1. The cash budget shows an expected cash balance of $75,000 at December 31, 2011.

2. The 2011 sales budget shows total annual sales of $900,000. All sales are made on account and accounts receivable at December 31, 2011 are expected to be 10% of annual sales.

3. The merchandise purchases budget shows budgeted cost of goods sold for 2011 of $600,000 and ending merchandise inventory of $105,000. 20% of the ending inventory is expected to have not yet been paid at December 31, 2011.

4. The December 31, 2010 balance sheet includes the following balances: Equipment $294,000, Accumulated Depreciation $120,000, Common Stock $270,000, and Retained Earnings $48,000.

5. The budgeted income statement for 2011 includes the following: depreciation on equipment $15,000, federal income taxes $24,000, and net income $66,000. The income taxes will not be paid until 2012.

6. In 2011, management does not expect to purchase additional equipment or to declare any dividends. It does expect to pay all operating expenses, other than depreciation, in cash.

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Ex. 188 (Cont.)InstructionsPrepare an unclassified budgeted balance sheet at December 31, 2011.

Ans: N/A, SO: 5, Bloom: C, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation


DONHAM, INC.Budgeted Balance Sheet

December 31, 2011

AssetsCash...................................................................................................... $ 75,000Accounts receivable.............................................................................. 90,000Merchandise inventory.......................................................................... 105,000Equipment............................................................................................. $294,000Less: Accumulated depreciation ($120,000 + $15,000)......................... 135,000 159,000

Total assets................................................................................... $429,000

Liabilities and Stockholders' EquityAccounts payable.................................................................................. $ 21,000Income taxes payable........................................................................... 24,000Common stock...................................................................................... 270,000Retained earnings................................................................................. 114,000

Total liabilities and stockholders' equity......................................... $429,000

Ex. 189

The management of Farmer Company estimates that credit sales for August, September, October, and November will be $360,000, $500,000, $560,000, and $320,000, respectively. Experience has shown that collections are made as follows:

In month of sale 25%In first month after sale 60%In second month after sale 10%

InstructionsDetermine the collections from customers in October and November. Show all computations.


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Budgetary Planning


Collections from Customers October NovemberAugust Sales

($360,000 × .10) $ 36,000 $ -0-September Sales

($500,000 × .60) 300,000($500,000 × .10) 50,000

October Sales($560,000 × .25) 140,000($560,000 × .60) 336,000

November Sales($320,000 × .25) -0- 80,000

Total collections $476,000 $466,000

Ex. 190

The beginning cash balance is $20,000. Sales are forecasted at $800,000 of which 80% will be on credit. 70% of credit sales are expected to be collected in the year of sale. Cash expenditures for the year are forecasted at $500,000. Accounts receivable from previous accounting periods totaling $12,000 will be collected in the current year. The company is required to make a $20,000 loan payment and an annual interest payment on the last day of the year. The loan balance as of the beginning of the year is $120,000, and the annual interest rate is 10%.

InstructionsHow much will be reported as 'cash' on the budgeted balance sheet?



Cash collections:Accounts receivable collected $ 12,000Cash sales: 20% × $800,000 160,000Credit sales: (80% × $800,000) × 70% 448,000

Cash expenditures (500,000)Loan payment (20,000)Interest payment (10% × $120,000) (12,000)Net increase in cash 88,000Add: beginning cash balance 20,000Ending cash balance $108,000

Ex. 191

Lambert Company has budgeted sales revenue as follows for the next 4 months:

February $200,000March 160,000April 140,000May 220,000

Past experience indicates that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and 3% in the second month following the sale. The other 2% is uncollectible.

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Ex. 191 (Cont.)InstructionsPrepare a schedule which shows expected cash receipts from sales for the month of May.



LAMBERT COMPANYExpected Cash Receipts from Sales

For the Month Ended May 31

March salesCredit sales: ($160,000 × .80 × .03) $ 3,840

April salesCredit sales: ($140,000 × .80 × .35) 39,200

May salesCredit sales: ($220,000 × .80 × .60) 105,600Cash sales: ($220,000 × .20) 44,000Total cash receipts $192,640

Ex. 192

SEK Company's budgeted sales and direct materials purchases are as follows.

Budgeted Sales Budgeted D.M. PurchasesJanuary $300,000 $60,000February 330,000 70,000March 400,000 82,000

SEK's sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale, 50% in the month following sale, and 36% in the second month following sale; 4% are uncollectible. SEK's purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month of purchase, and 60% in the month following purchase.

Instructions(a) Prepare a schedule of expected collections from customers for March.(b) Prepare a schedule of expected payments for direct materials for March.


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Budgetary Planning


(a)SEK COMPANY

Expected Collections from Customers

March March cash sales (40% × $400,000)...................................................................$160,000Collection of March credit sales

[(60% × $400,000) × 10%].............................................................................. 24,000Collection of February credit sales

[(60% × $330,000) × 50%]............................................................................. 99,000Collection of January credit sales

[(60% × $300,000) × 36%]............................................................................. 64,800Total collections....................................................................................$347,800

(b)

SEK COMPANYExpected Payments for Direct Materials

March March cash purchases (50% × $82,000)............................................................. $41,000Payment of March credit purchases

[(50% × $82,000) × 40%]............................................................................... 16,400Payment of February credit purchases

[(50% × $70,000) × 60%]............................................................................... 21,000Total payments...................................................................................... $78,400

Ex. 193

Frontenac Landscaping Inc. is preparing its budget for the first quarter of 2011. The next step in the budgeting process is to prepare a cash receipts schedule and a cash payments schedule. To that end the following information has been collected.

Clients usually pay 60% of their fee in the month that service is provided, 30% the month after, and 10% the second month after receiving service.

Actual service revenue for 2010 and expected service revenues for 2011 are: November 2010, $120,000; December 2010, $110,000; January 2011, $130,000; February 2011, $160,000; March 2011, $170,000.

Purchases on landscaping supplies (direct materials) are paid 40% in the month of purchase and 60% the following month. Actual purchases for 2010 and expected purchases for 2011 are: December 2010, $21,000; January 2011, $18,000; February 2011, $22,000; March 2011, $27,000.

Instructions(a) Prepare the following schedules for each month in the first quarter of 2011 and for the quarter

in total:(1) Expected collections from clients.(2) Expected payments for landscaping supplies.

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Ex. 193 (Cont.)(b) Determine the following balances at March 31, 2011:

(1) Accounts receivable.(2) Accounts payable.

Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation


(a) (1)

FRONTENAC LANDSCAPING INC.Schedule of Expected Collections From Clients

For the Quarter Ending March 31, 2011 January February March Quarter

November ($120,000)......... $12,000 $ 12,000December ($110,000)......... 33,000 $11,000 44,000January ($130,000)............ 78,000 39,000 $13,000 130,000February ($160,000)........... 96,000 48,000 144,000March ($170,000)........................ 102,000 102,000

Total collections............ $123,000 $146,000 $163,000 $432,000

(2)

FRONTENAC LANDSCAPING INC.Schedule of Expected Payments for Landscaping Supplies

For the Quarter Ending March 31, 2011 January February March Quarter

December ($21,000)........... $12,600 $12,600January ($18,000).............. 7,200 $10,800 18,000February ($22,000)............. 8,800 $13,200 22,000March ($27,000)................. 10,800 10,800

Total payments............. $19,800 $19,600 $24,000 $63,400

(b) (1) Accounts receivable at March 31, 2010: ($160,000 × 10%) + ($170,000 × 40%) = $84,000

(2) Accounts payable at March 31, 2010: ($27,000 × 60%) = $16,200

Ex. 194

In May 2011, the budget committee of Carney Stores assembles the following data in preparation of budgeted merchandise purchases for the month of June.

1. Expected sales: June $750,000, July $900,000.2. Cost of goods sold is expected to be 70% of sales.3. Desired ending merchandise inventory is 40% of the following (next) month's cost of goods

sold.4. The beginning inventory at June 1 will be the desired amount.

Instructions(a) Compute the budgeted merchandise purchases for June.

(b) Prepare the budgeted income statement for June through gross profit.


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Budgetary Planning

Solution 194 (12 min.)(a)

CARNEY STORESMerchandise Purchases Budget

For the Month Ending June 30, 2011 Budgeted cost of goods sold ($750,000 × 70%)............................................ $525,000Add: Desired ending merchandise inventory

($900,000 × 70% × 40%)......................................................................... 252,000Total............................................................................................................... 777,000Less: Beginning merchandise inventory

($525,000 × 40%).................................................................................... 210,000Required merchandise purchases................................................................. $567,000

(b)

CARNEY STORESBudgeted Income Statement

For the Month Ending June 30, 2011 Sales.............................................................................................................. $750,000Cost of goods sold (70% × $750,000)............................................................ 525,000Gross profit.................................................................................................... $225,000

Ex. 195

In September 2011, the management of Gerber Company assembles the following data in preparation of budgeted merchandise purchases for the months of October and November.

1. Expected SalesOctober $1,500,000November 2,100,000December 2,700,000

2. Cost of goods sold is expected to be 68% of sales.

3. Desired ending merchandise inventory is 25% of the next month's cost of goods sold.

4. The beginning inventory at October 1 will be the desired amount.

InstructionsCompute the budgeted merchandise purchases for October and November. Use a columnar format with separate columns for each month.

Ans: N/A, SO: 6, Bloom: C, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation


GERBER COMPANYMerchandise Purchases Budget

For the Months of October and November, 2011

October NovemberBudgeted cost of goods sold $1,020,000 $1,428,000Desired ending merchandise inventory 357,000 459,000Total 1,377,000 1,887,000Less: Beginning merchandise inventory 255,000 357,000Required merchandise purchase $1,122,000 $1,530,000

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Solution 195 (Cont.)

October November$1,500,000 × 68% = $1,020,000 $2,100,000 × 68% = $1,428,000$1,428,000 × 25% = $357,000 $2,700,000 × 68% × 25% = $459,000$1,020,000 × 25% = $255,000

COMPLETION STATEMENTS196. A _________________ is a formal written statement of management's plans expressed in

financial terms.

Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

197. A budget is a primary means of ________________ agreed upon objectives throughout the business organization.


198. Effective budgeting is dependent on an _________________________ in which authority and responsibility are clearly defined.


199. The budget should have the support of _________________ and should be an important basis for _________________________ by comparing actual results to expected results.


200. Many companies use ____________________________ budgets by dropping the month just ending and adding a future month.


201. A __________________ is responsible for coordinating the preparation of the budget in many companies.


202. A major difference between the annual budget and long-range planning is the ____________________ over which the data pertain.


203. The ____________________ is the starting point in preparing the master budget.


204. The formula for developing a production budget is ___________________ plus ______________________ minus _______________________.


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Budgetary Planning

205. The ________________ is a set of interrelated budgets that constitutes a plan of action for a specified period of time.


206. Three major sections of a cash budget are (1) ___________________, (2) ____________________, and (3) ______________________.


207. The two major differences between the master budgets of a merchandiser and a manufacturer are that the merchandiser will have a ______________________ budget and will not have __________________ budgets.


Answers to Completion Statements196. budget 203. sales budget197. communicating 204. budgeted sales units,198. organizational structure desired ending finished goods units,199. top management, evaluating beginning finished goods units

performance 205. master budget200. continuous twelve-month 206. cash receipts, cash disbursements,201. budget committee financing202. time period 207. merchandise purchases, manufacturing

MATCHING

208. Match the items below by entering the appropriate code letter in the space provided.

A. Budget F. Production budgetB. Financial budgets G. Cash budgetC. Budget committee H. Long-range planningD. Master budget I. Direct materials budgetE. Sales forecast J. Sales budget

____ 1. A selection of strategies to achieve long-term goals.

____ 2. An estimate of expected sales for the budget period.

____ 3. Budgets that indicate the cash resources needed for expected operations and planned capital expenditures.

____ 4. The projection of potential sales for the industry and the company's expected share of such sales.

____ 5. Management's plans expressed in financial terms for a specified future time period.

____ 6. A projection of anticipated cash flows.

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Matching 208 (Cont.)

____ 7. A group responsible for coordinating the preparation of the budget.

____ 8. A projection of production requirements to meet expected sales.

____ 9. A set of interrelated budgets that constitute a plan of action for a specified time period.

____ 10. An estimate of the quantity and cost of direct materials to be purchased.


Answers to Matching

1. H 6. G2. J 7. C3. B 8. F4. E 9. D5. A 10. I

SHORT-ANSWER ESSAY QUESTIONS

S-A E 209

(a) What is a budget?(b) How does a budget contribute to good management?

Ans: N/A, SO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 209

(a) A budget is a formal written statement of management's plans for a specified future time period, expressed in financial terms.

(b) A budget aids management in planning because it represents the primary means of communicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes an important basis for evaluating performance.

S-A E 210

Budgeting can be an important management tool if implemented properly. Identify several positive results when budgets are used properly. Since budgets affect people, identify several negative aspects if budgets are not implemented properly.


Solution 210

When budgets are used properly, positive results can include: managers are required to plan ahead, there are definite objectives for performance evaluation, there is an early warning system for potential problems, there is coordination of activities within the business, there is greater management awareness of the entity's overall operations, and there are positive behavior patterns by motivating personnel to meet planned objectives. However, if budgets are not implemented properly, negative results can include discouragement of additional effort to meet goals, poor morale of managers, and lack of commitment to budget goals.

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Budgetary Planning

S-A E 211

Budgeting and long-range planning are both important aids to management in achieving a company's goals and objectives. Briefly distinguish between budgeting and long-range planning and indicate how they help managers perform their functions.


Solution 211

Budgeting is preparing a detailed formal written summary of management's plans for a specified future time period (usually one year), in financial terms. Long-range planning involves the selection of strategies to achieve long-term (at least five years) goals and the development of policies and plans to implement the strategies. Budgeting and long-range planning differ in time periods involved, emphasis, and the amount of detail presented. Budgets help managers in planning and controlling operations for the coming year, while long-range planning assists managers in broad long-term goal-setting, policy development, and planning.

S-A E 212

What is participative budgeting? What are its potential benefits? What are its potential shortcomings?


Solution 212

Participative budgeting involves the use of a "bottom to top" approach, which requires input from lower level management during the budgeting process so as to involve employees from various levels and areas within the company. The potential benefits of this approach are lower level managers have more detailed knowledge of the specifics of their job, and thus should be able to provide better budgetary estimates. In addition, by involving lower level managers in the process, it is more likely that they will perceive the budget as being fair and reasonable. One disadvantage of participative budgeting is that it takes more time, and thus costs more. Another disadvantage of participative budgeting is that it may enable managers to game the system through such practices as budgetary slack.

S-A E 213 (Ethics)

Sam Kohler is a new production manager. After a great deal of effort, including considerable market research, he completes his budget and submits it to his boss, Betty Grimm. Without even looking at it, she asks him what his "fudge factor" was, and which items contained the most slack. Sam, very surprised, responds that he doesn't use any "fudge factor," and that all his figures are honest. Ms. Grimm counters by asking him how he would respond if he had to cut about 20% from his budget, as it is. She tells him that most budgets are trimmed in committee, and he had better be ready. She returns the budget to him, and tells him to come back with something reasonable.

Required:1. Is it ethical to build slack into a budget? Explain.2. Was it ethical for Ms. Grimm to refuse to accept a budget without slack? Briefly explain.

Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

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Solution 213

1. Either answer may be correct. Slack may be seen as an estimate of how much the actual results may vary from the predictions. As such, it is perfectly legitimate to add some slack, as in this case. On the other hand, it is certainly possible that a great deal of padding may be added to a budget, with the manager preparing the budget hoping that the amount to be trimmed will not exceed the amount of the padding. The decision as to whether the addition of slack is unethical depends upon whether budgeting guidelines are followed. Any secretive method of adding padding to one's own budget would be unethical.

2. As Sam Kohler's superior, Ms. Grimm has the obligation to correct his mistakes. Apparently, in this particular company, budgets are trimmed in committee, with the expectation that all budgets contain some expenses that could be removed without harm to the company. Sam must continue to be honest. One way to do that would be for Sam to submit his trimmed budget, and then note the costs that are most likely to exceed the budget, and by how much. This would give Ms. Grimm the ability to intelligently defend his budget while in committee.

S-A E 214 (Communication)

At Lakeside Manufacturing, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume. Ed Klinger, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process.

Required:You are the accounting manager. Write a memo to Mr. Klinger. Explain why the ending inventory figure should be extremely accurate, with as little slack as possible.

Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 214

TO: Ed KlingerFROM: Mary BarnesSUBJECT: Budgets

At our last budget meeting, you mentioned that you put plenty of slack into all your budgets, so that you could better survive budget reductions. You remember that I specifically asked about your ending inventory estimates, and you said that those had plenty of slack as well.

Please reconsider adding slack to the ending inventory estimates. Those estimates are used by all other departments in calculating their budgets. In other words, they rely on your figures being accurate. If you estimate much too high for inventory, the other departments will experience stockouts, as they will have counted on your having more goods ready than you will be able to produce. If, as is more likely, you understate the number of units you will have on hand, we will experience increased storage costs and related spoilage. We will also have spent money to produce more units than the next department can use.

I understand your desire to ensure that your budgets are reasonable. However, I am sure also that you see that we depend upon your inventory numbers. Please make sure that these numbers are as precise as possible.

(signed)

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