Budgeting Flashcards
Which of the following are considered to be objectives of budgeting?
1) Authorisation
2) Expansion
3) Performance evaluation
4) Resource allocation
A - 4 only
B - 1, 2, and 4 only
C - 1, 3 and 4 only
D - 1, 2, and 3 only
C - 1, 3 and 4 only
Which of the following is not one of the main purposes of a budget?
A - To compel planning
B - To communicate targets to the managers responsible for achieving the budget
C - To inform shareholders of performance in meeting targets
D - To establish a system of control by comparing budgeted and actual results
C - To inform shareholders of performance in meeting targets
Budgets are prepared for internal use and are not usually communicated to shareholders.
Which two of the following statements relating to budgets are correct?
A - A budget covers periods longer than one year and is used for strategic planning
B - The budget committee coordinates the preparation and administration of budgets.
C - The budget committee is responsible for the preparation of functional budgets
D - A budget manual will contain instructions governing the preparation of budgets.
E - A budget is usually prepared by the shareholders of a company.
B - The budget committee coordinates the preparation and administration of budgets.
D - A budget manual will contain instructions governing the preparation of budgets.
When preparing the master budget, which of the following tasks would normally be carried out first?
A - Calculate the overhead absorption rate
B - Establish the organisation’s long-term objectives
C - Identify the principal budget factor
D - Prepare the sales budget
B - Establish the organisation’s long-term objectives
Which three of the following are steps in the preparation of a budget?
A - Arrange overdraft facilities
B - Identify the principal budget factor
C - Prepare a budgeted income statement
D - Budget the resources for production
E - Complete the audit of the prior year’s results
B - Identify the principal budget factor
C - Prepare a budgeted income statement
D - Budget the resources for production
Which of the following is a principal budget factor?
A - The highest value item of cost
B - A factor which limits the activities of an undertaking
C - A factor common to all budget centres
D - A factor controllable by the manager of the budget centre
B - A factor which limits the activities of an undertaking
Which of the following could be principal budget factors?
1 - Sales Demand
2 - Machine capacity
3 - Key raw materials
4 - Cash flow
A - 1 and 2 only
B - 1, 2, 3 and 4
C - 1, 2 and, 3
D - 1, 2 and 4
B - 1, 2, 3 and 4
Sales demand is usually the principal budget factor. However, the identification of a principal budget
factor depends on what factor limits the organisation’s activities and so is the limiting factor.
All of the factors listed could therefore be the principal budget factor in certain circumstances
Which of the following is not a functional budget?
A - Purchases budget
B - Cash budget
C - Sales budget
D - Marketing cost budget
B - Cash budget
Part of the overall master budget
For a company that does not have any production resource limitations, which of the following sets out the correct sequence for budget preparation?
A - Production budget, finished goods inventory budget, sales budget, then materials usage budget
B - Sales budget, finished goods inventory budget, production budget, then materials usage budget
C - Sales budget, production budget, finished goods inventory budget, then materials usage budget
D - Sales budget, finished goods inventory budget, materials usage budget, then production budget
B - Sales budget, finished goods inventory budget, production budget, then materials usage budget
Sales would be the principal budget factor (as there are no production resource limitations) and so
this is the first budget to be prepared.
Inventory adjustments in the finished goods inventory budget indicate the production requirements for the production budget. Once the level of production is known, the materials usage budget can be prepared.
Which two of the statements below correctly complete the following sentence?
The master budget:
A - will include a budgeted balance sheet and a budgeted income statement prepared on the accruals basis
B - will include a cash budget
C - is usually prepared before the functional budgets
D - details the timetable for the preparation of the various budgets
E - includes the instructions for the completion of the budget forms and the responsibilities of the personnel involved
A - will include a budgeted balance sheet and a budgeted income statement prepared on the accruals basis
B - will include a cash budget
The master budget consists of a budgeted balance sheet, a budgeted income statement and a cash
budget. It is prepared from the information in the functional budgets, and is therefore the last to be
prepared.
Instructions for the preparation of the budgets will be contained in the budget manual.
A budget timetable is drawn up at the start of the budgetary process, and is not included in the
master budget
Which of the following expressions is correct?
A - Opening inventory + sales – closing inventory = production (in units)
B - Opening inventory + sales + closing inventory = production (in units)
C - Closing inventory + sales – opening inventory = production (in units)
D - Closing inventory – sales – opening inventory = production (in units)
C - Closing inventory + sales – opening inventory = production (in units)
A company is preparing its production budget for product Z for the forthcoming year
Budgeted sales of product Z are 1,500 units. Opening inventory is 120 units and the company wants to reduce inventories at the end of the year by 10%
The budgeted number of units of product Z to be produced is:
A - 1,392
B - 1,488
C - 1,500
D - 1,512
B - 1,488
Budgeted sales 1,500
Less inventory reduction (120 × 10%) (12)
———–
Budgeted production 1,488
Research Ltd purchases a chemical and refines it before onward sale. Budgeted sales of the refined chemical are as follows:
Litres:
January 40,000
February 50,000
March 30,000
1) The target month-end inventory of unrefined chemical is 30% of the chemical needed for the following month’s budgeted production.
2) The targeted month-end inventory of refined chemical is 30% of next month’s budgeted sales
Calculate the budgeted purchases of unrefined chemical for January:
A - 56,200 litres
B - 49,750 litres
C - 48,250 litres
D - 43,400 litres
D - 43,400 litres
Closing inventory of refined:
(30% of next month’s sales)
Dec: 12,000
Jan: 15,000
Feb: 9,000
Sales for the month:
Jan: 40,000
Feb: 50,000
Less opening inventory of refined:
Jan: (12,000)
Feb: (15,000)
—-
Jan: 55,000 - 12,000 = 43,000
Feb: 59,000 - 15,000 = 44,000
Closing inventory of unrefined:
(30% of next month’s requirements of refined)
Dec: 12,900
Jan: 13,200
Total production requirement:
Jan: 43,000 + 13,200
Less opening inventory: (12,900)
—–
Budgeted purchases 43,300
When preparing a material purchases budget, which of the following is the quantity to be purchased?
A - Materials required for production – opening inventory of materials – closing inventory of materials
B - Materials required for production – opening inventory of materials + closing inventory of materials
C - Opening inventory of materials + closing inventory of materials – materials required for production
D - Opening inventory of materials – materials required for production – closing inventory of materials
B - Materials required for production – opening inventory of materials + closing inventory of materials
Barlow plc manufactures two products, Vip and Bip. It intends to produce 2,000 units of each product in the next year to meet the sales budget.
Each Vip requires 2 kg of material Z and 1 kg of material Y and each Bip requires 3 kg of material Z and 4 kg of material Y
At present there are 200 kg of Z and 500 kg of Y in inventory
Barlow plc intends to increase the inventory levels of these materials by the end of the year to 600 kg of Z and 800 kg of Y
Material Z costs £4 per kg and material Y costs £5 per kg
What is the total materials purchases for the next year?
A - £86,900
B - £90,000
C - £93,100
D - £96,400
C - £93,100
Material Z: per kg
Vip 2,000 x 2kg of Z = 4,000
Bip 2,000 x 3kg of Z = 6,000
—-
Total usage = 10,000
Increase in inventory = 400
—-
Materials purchase budget = 10,400
Cost per kg £4
10,400 x 4 = £41,600
Material Y:
Vip 2,000 x 1kg of Y = 2,000
Bip 2,000 x 4kg of Y = 8,000
—-
Total usage = 10,000
Increase in inventory = 300
———
Materials purchase budget = 10,300
Cost per kg = £5
—–
10,300 x £5 = £51,500
Total materials purchases = £41,600 + 51,500 =
£93,100
A retailing company makes a gross profit of 25% on sales. The company plans to increase inventory by 10% in June. The budgeted sales revenue for June is £25,000. Opening inventory on 1 June is valued at £5,000
What are the budgeted inventory purchases for June?
A - £18,250
B - £19,125
C - £19,250
D - £25,500
C - £19,250
Cost of sales for June (£25,000 × 0.75) = 18,750
Increase in inventory (£5,000 × 0.10) = 500
———–
Budgeted inventory purchases = 19,250
Budgeted sales of X for December are 18,000 units. At the end of the production process for X, 10% of production units are scrapped as defective. Opening inventories of X for December are budgeted to be 15,000 units and closing inventories will be 11,400 units. All inventories of finished goods must have successfully passed the quality control check.
The production budget for X for December, in units, is:
A - 12,960
B - 14,400
C - 15,840
D - 16,000
D - 16,000
Budgeted sales =18,000
Budgeted reduction in finished goods = (3,600)
———
Budgeted production of completed units 14,400
Allowance for defective units (10% of output = 1/9 of input) = 1,600
——–
Production budget 16,000
The quantity of material in the material purchases budget is greater than the quantity of material in the material usage budget.
Which of the following statements can be inferred from this situation?
A - Wastage of material occurs in the production process.
B - Finished goods inventories are budgeted to increase.
C - Raw materials inventories are budgeted to increase
D - Raw materials inventories are budgeted to decrease
C - Raw materials inventories are budgeted to increase
Once the material usage budget has been prepared, based on the budgeted production volume,
the usage is adjusted for the budgeted change in materials inventories in order to determine the
required budgeted purchases. If purchases exceed production requirements this means that raw material inventories are being increased
George has been asked by his bank to produce a budgeted income statement for the six months ending on 31 March 20X4
He forecasts that monthly sales will be £3,000 for October, £4,500 for each of November and December and £5,000 per month from January 20X4 onwards.
Selling price is fixed to generate a margin on sales of 33 1/3 %
Overhead expenses (excluding depreciation) are estimated at £800 per month
He plans to purchase non-current assets on 1 October costing £5,000, which will be paid for at the end of December and are expected to have a five-year life, at the end of which they will possess a nil residual value
The budgeted net profit for the six months ending 31 March 20X4 is:
A - £3,200
B - £3,700
C - £3,950
D - £8,200
B - £3,700
Sales (3,000 + (2 × 4,500) + (3 × 5,000)) 27,000
Cost of sales (2/3 × £27,000) (18,000)
———
Gross profit 9,000
Running expenses (6 × £800) 4,800
Depreciation (£5,000 × 20% × 6/12) 500
——-
(5,300)
Net profit 3,700
At the beginning of March 20X2, a company has an opening balance of £60,000 on its receivables ledger. Sales of £160,000 have been budgeted for March and it is budgeted that 60% of these will be settled in March after a cash discount of 2.5%
If 23% of the opening receivables are still outstanding at the end of March, what will be the budgeted receivables figure at that date?
A - £76,200
B - £77,800
C - £80,200
D - £110,200
B - £77,800
23% of opening receivables 13,800
40% of March sales 64,000
———-
77,800
Note that an adjustment does not have to be made for the settlement discount in this case as the
question states that 60% of the sales will be settled, rather than that 60% of the gross invoice value
will be received
A retailing company budgets to maintain inventories at the end of each month which are sufficient to meet the budgeted sales requirements for the following month. Two months’ credit will be received from suppliers of inventory.
Budgeted sales, which earn a gross profit margin of 20% of sales value, are as follows:
January 28,300
February 26,100
March 33,800
April 30,690
The budgeted balance sheet as at the end of March will show a payables balance of:
A - £47,920
B - £51,592
C - £59,900
D - £64,490
B - £51,592
Payables balance at end of March = February and March purchases
The purchases for each month are equal to the sales requirement for the following month.
Payables balance at end of March = March and April cost of sales
= £(33,800 + 30,690) × 0.8
= £51,592
A company’s master budget contains the following budgeted income statement.
Sales revenue (5,000 units) = 120,000
Variable materials cost = 24,000
Variable labour cost = 32,500
Variable overhead =13,000
Fixed overhead = 41,000
————
110,500
Budgeted net profit 9,500
The company’s management are considering a change in the materials specification. This would reduce the materials cost per unit by 10%. The reduced product quality would necessitate a 2% reduction in the selling price and the sales volume would fall by 5%.
The revised budgeted net profit for the period would be:
A - £3,620
B - £6,975
C - £9,025
D - £9,375
B - £6,975
Sales revenue £120,000 × 0.98 × 0.95 = 111,720
Variable materials cost £24,000 × 0.9 × 0.95 = 20,520
Variable labour cost £32,500 × 0.95 = 30,875
Variable overhead £13,000 × 0.95 =12,350
Fixed overhead 41,000
————–
(104,745)
————
Budgeted net profit 6,975
Which two of the following statements are correct?
A - A forecast and a budget are essentially the same thing.
B - A budget must be quantified if it is to be useful for planning and control purposes.
C - A budget provides the basic unit rates to be used in the preparation of standards for control purposes.
D - The sales budget must always be prepared first
E - An organisation’s long term plan provides the framework within which an annual budget is set.
B - A budget must be quantified if it is to be useful for planning and control purposes.
E - An organisation’s long term plan provides the framework within which an annual budget is set.
A company has recorded the following costs over the last six months.
Month: 1 Cost: 74,000 Units produced: 3,000
Month: 2 Cost: 72,750 Units produced: 1,750
Month: 3 Cost: 73,250 Units produced: 2,000
Month: 4 Cost: 75,000 Units produced: 2,500
Month: 5 Cost: 69,500 Units produced: 1,500
Month: 6 Cost: 72,750 Units produced: 2,000
Using the high-low method, which of the following represents the total cost equation?
A - Total cost = 61,250 + (1.25 × quantity)
B - Total cost = 65,000 + (3 × quantity)
C - Total cost = 65,000 + (1.25 × quantity)
D - Total cost = 61,250 + (3 × quantity)
B - Total cost = 65,000 + (3 × quantity)
Highest production: 3,000 units at £74,000
Lowest production: 1,500 units at £69,500
3,000 - 1,500 = 1,500 units
74,00 - 69,500 = 4,500
Variable cost per unit = £4,500/1,500 = £3 per unit
Total cost = fixed cost + (£3 × quantity)
£74,000 = fixed cost + (£3 × 3,000)
Fixed cost = £74,000 – £9,000
= £65,000
A company has recorded the following costs over the last four months.
Month: 1 Cost: 21,995 Units produced: 1,050
Month: 2 Cost: 19,540 Units produced: 1,090
Month: 3 Cost: 19,000 Units produced: 750
Month: 4 Cost: 17,200 Units produced: 700
Using the high-low method, the expected cost of producing 950 units is:
A - £17,030
B - £18,700
C - £20,625
D - £23,343
B - £18,700
Highest output: 1,090 units
Less lowest output: (700)
—-
390 units
Cost of highest output: 19,540
Less lowest output; (17,200)
—
2,340
Variable cost per unit = £2,340/390 = £6
Fixed cost at a production level of 1,090 units = £19,540 – (1,090 × £6) = £13,000
(Note that the fixed cost will be the same if calculated at the lowest production level, but not if production levels other than the ones used in the calculation of variable cost are used.)
Variable cost (950 × £6) 5,700
Fixed cost 13,000
———-
18,700
The following estimates of possible sales revenue and cost behaviour for a one-year period relate to one of AB Company’s products:
60% Activity Level:
Sales and production (units) = 36,000
Sales revenue = £432,000
Production costs
Variable and fixed: £366,000
Sales dist. and admin costs: vari and fix = £126,000
100%
Sales and production (units) = 60,000
Sales revenue = £720,000
Production costs
Variable and fixed: £510,000
Sales dist. and admin costs: vari and fix = £150,000
The budgeted level of activity for the current year is 60,000 units, and fixed costs are incurred evenly
throughout the year.
There was no inventory of the product at the start of the first quarter, in which 16,500 units were made and 13,500 units were sold. Actual fixed costs were the same as budgeted.
AB Company uses absorption costing. You may assume that sales revenue and variable costs per unit are as budgeted
What is the value of the fixed production costs that were absorbed by the product in the first
quarter?
A - £33,750
B - £37,500
C - £41,250
D - £66,000
C - £41,250
Production costs:
Fixed plus variable
60,000 = £510,000
vs
36,000 = £366,000
——
144,000 difference
Sales costs:
60,000 = £150,000
36,000 = 126,000
—-
24,000
Costs for 24,000 units (60-36) = £144,000 production, £24,000 sales
Variable costs per unit =
144,000/24,000 = £6 production and £1 sales
Production:
Total costs of 60,000 units
= 510,000
Less variable costs: 60,000 x £6 = (360,000)
—
Fixed costs: 150,000
Sales
Total costs of 60,000 units
= 150,000
Less variable costs: 60,000 x £1 = (60,000)
—-
Fixed costs = 90,000
The rate of absorption of fixed production overheads will therefore be £150,000/60,000 = £2.50 per
unit.
The fixed production overhead absorbed by the product would be 16,500 units produced × £2.50 =
£41,250
The following data have been extracted from the budget working papers of BL Ltd.
Production volume:
1,000 £/unit
Variable materials: 4.00
Variable labour: 3.50
Production overhead 1: 6.00
Production overhead 2: 4.00
2,000 £/unit
Variable materials: 4.00
Variable labour: 3.50
Production overhead 1: 4.20
Production overhead 2: 2.00
The total fixed cost and variable cost per unit is:
A - Total fixed cost: £3,600; Variable cost per unit: £9.90
B - Total fixed cost: £4,000; Variable cost per unit: £11.70
C - Total fixed cost: £7,600; Variable cost per unit: £7.50
D - Total fixed cost: £7,600; Variable cost per unit: £9.90
D - Total fixed cost: £7,600; Variable cost per unit: £9.90
Department 1:
Total production overhead cost for 1,000 = 1,000 × £6 = 6,000
Total production overhead cost for 2,000 = 2,000 × £4.20 = 8,400
—————–
Increase in units = 1,000 and increase in price between the 2 = 2,400
Variable overhead cost per unit = £2.40 (2,400/1,000)
Fixed overhead cost = £6,000 – (1,000 × £2.40)
= £3,600
Department 2:
Total production overhead cost for 1,000 = 1,000 × £4 = 4,000
Total production overhead cost for 2,000 = 2,000 × £2 = 4,000
The production overhead cost in department 2 is wholly fixed
Variable cost per unit:
Variable materials £4.00
Variable labour £3.50
Production overhead 1 £3,600 fixed cost and £2.40 variable cost per unit
Production overhead 2 total fixed cost £4,000
Total fixed cost = £3,600 + 4,000 = £7,600
Variable = 4 + 3.50 + 2.40 = 9.90
