BUDGETING

Question 1

is a formal written statement of management’s plans for a specified time period, expressed in financial terms.

Answer 1

budget

Question 2

The primary benefits of budgeting are as follows:
✓ It requires all levels of management to plan ahead.
✓ It provides definite objectives for evaluating performance.
✓ It creates an early warning system for potential problems.
✓ It facilitates the coordination of activities within the business.
✓ It results in greater management awareness of the entity’s overall operations.
✓ It motivates personnel throughout the organization

Answer 2

Benefits of Budgeting

Question 3

In order to be effective management tools, budgets must be based upon:
▪ A sound organizational structure in which authority and responsibility are clearly defined.
▪ Research and analysis to determine the feasibility of new products, services, and operating techniques.
▪ Management acceptance which is enhanced when all levels of management participate in the preparation of the budget, and the budget has the support of top management.

Answer 3

Essentials of Effective Budgeting

Question 4

results from dropping the month just ended and adding a future month.

Answer 4

continuous twelve-month budget

Question 5

is a budget and planning process in which each manager must justify a department’s entire budget from a base of zero every period.

Answer 5

Zero-based budgeting

Question 6

estimates a product’s revenues and expenses over its entire life cycle beginning with research and development, proceeding through the introduction and growth stages, into the maturity stage, and finally, into the harvest or decline stage.

Answer 6

Life-cycle budget

Question 7

assumes the continuous improvement of products and processes, usually by way of many small innovations rather than major changes.

Answer 7

Kaizen budgeting

Question 8

The responsibility for coordinating the preparation of the budget is assigned to

Answer 8

budget committee

Question 9

the selection of strategies to achieve long-term goals and the development of policies and plans to implement the strategies. Long-range plans contain considerably less detail than budgets.

Answer 9

Long-range planning

Question 10

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

Answer 10

master budget

Question 11

the starting point in preparing the master budget.

Answer 11

Sales Budget

Question 12

shows the units that must be produced to meet anticipated sales.

Answer 12

Production Budget:

Question 13

provides the basis for the budgeted costs for each manufacturing cost element.

Answer 13

production budget

Question 14

shows both the quantity and cost of direct materials to be purchased.

Answer 14

Direct Materials

Question 15

contains the quantity (hours) and cost of direct labor necessary to meet production requirements

Answer 15

Direct Labor

Question 16

shows the expected variable and fixed manufacturing overhead costs for the budget period.

Answer 16

Manufacturing Overhead:

Question 17

projects anticipated selling and administrative expenses for the budget period. This budget classifies expenses as either variable or fixed. This budget is also used in preparing the budgeted income statement and the cash budget.

Answer 17

Selling and Administrative Expense

Question 18

the important end-product of the operating budgets.
▪ This budget indicates the expected profitability of operations for the budget period.
▪ The budgeted income statement provides the basis for evaluating company performance.
o Cash Budget: shows anticipated cash flow

Answer 18

Budgeted Income Statement

Question 19

shows anticipated cash flows.
▪ Because cash is so vital, this budget is often considered to be the most important financial budget.

Answer 19

Cash Budget

Question 20

data for various levels of activity. In essence, the flexible budget is a series of static budgets at different levels of activity.

Answer 20

flexible budget projects budget

Question 21

means that top management’s review of a budget report is focused either entirely or primarily on differences between actual results and planned objectives.

Answer 21

Management by exception

Question 22

usually expressed as a percentage difference from budget

Answer 22

Materiality

Question 23

exception guidelines are more restrictive for controllable items than for items the manager cannot control.

Answer 23

Controllability of the item

Question 24

A budget is
a. A planning tool
b. A control tool
c. A means of communicating goals to the firm’s divisions
d. All of the above

Question 25

The preparation of an organization’s budget
a. Forces management to look ahead and try to see the future of the organization
b. Requires that the entire management team work together to make and carry out the yearly plan
c. Makes performance review possible at all levels of management
d. All of the above

Question 26

Which of the following benefits could an organization reasonably expect from an effective budget program?
a. Better control of the organization’s costs
b. Better coordination of an organization’s activities
c. Better communication of the organization’s objectives
d. All of the above

Question 27

Which of the following statements is true?
a. All organizations have the same set of budgets
b. All organizations are required to budget
c. Budgets are a quantitative expression of an organization’s goals and objectives
d. Budgets should never be used to evaluate performance

Question 28

The primary role of the budget committee is to
a. Justify the budget to the executive committee of the board of directors
b. Decide on general policies, compile the budget, and manage the budget process
c. Settle disputes among operating executives during the development of the annual operating plan
d. Develop the annual profit plan by selecting the alternatives to be adopted from the suggestions submitted by the various operating segments

Question 29

The comprehensive set of budgets that serves as a company’s overall financial plan is commonly known as
a. An integrated budget
b. A pro-forma budget
c. A master budget
d. A financial budget

Question 30

The master budget usually includes
a. An operating budget
b. A capital budget
c. Pro forma financial statements
d. All of the above

Question 31

Chronologically, the first part of the master budget to be prepared would be the
a. Sales budget
b. Production budget
c. Cash budget
d. Pro forma financial statements

Question 32

A budget that includes a 12-month planning period at all times is called a ____________ budget
a. Pro forma
b. Flexible
c. Master
d. Continuous

Question 33

A company’s plan for the acquisition of long-lived assets, such as buildings and equipment, is commonly called a
a. Pro-forma budget
b. Master budget
c. Financial budget
d. Capital budget

Question 34

A company is budgeting its equipment needs on an on-going basis, with a new quarter being added to the budget as the current quarter is completed. This type of budget is most commonly known as a
a. Capital budget
b. Rolling budget
c. Revised budget
d. Pro-forma budget

Question 35

The budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows comprise
a. The final portion of the master budget
b. The first step of the master budget
c. The portion of the master budget prepared after the sales forecast and before the remainder of the operational budgets
d. The second step of the master budget

Question 36

Which of the following is not an “operating” budget?
a. Sales budget
b. Production budget
c. Purchases budget
d. Capital budget

Question 37

Budgeted production for a period is equal to
a. The beginning inventory + sales – the ending inventory
b. The ending inventory + sales – the beginning inventory
c. The ending inventory + the beginning inventory – sales
d. Sales – the beginning inventory + purchases

Question 38

Which of the following equations can be used to budget purchases?
(BI = beginning inventory, EI = ending inventory desired, CGS = budgeted cost of goods sold, P = budgeted purchases)
a. P = CGS + BI – EI
b. P = CGS + BI
c. P = CGS + EI + BI
d. P = CGS + EI – BI

Question 39

A company that maintains a raw material inventory, which is based on the following month’s production needs, will purchase less material than it uses in a month where
a. Sales exceed production
b. Production exceeds sales
c. Planned production exceeds the next month’s planned production
d. Planned production is less than the next month’s planned production

Question 40

If a company has a policy of maintaining an inventory of finished goods at a specified percentage of the next month’s budgeted sales, budgeted production for January will exceed budgeted sales for January when budgeted
a. February sales exceed budgeted January sales
b. January sales exceed budgeted December sales
c. January sales exceed budgeted February sales
d. December sales exceed budgeted January sales

Question 41

Which of the following represents a proper sequencing in which the budgets below are prepared?
a. Direct Material Purchases, Cash, Sales
b. Production, Sales, Income Statement
c. Sales, Balance Sheet, Direct Labor
d. Sales, Production, Manufacturing Overhead

Question 42

Which of the following items would not be found in the financing section of the cash budget?
a. Cash payments for debt retirement
b. Cash payments for interest
c. Dividend payments
d. Payment of accounts payable

Question 43

Which of the following is least likely to be affected if unit sales for this month are lower than budgeted?
a. Production for this month
b. Cash receipts for next month
c. Production for next month
d. Inventory at the end of this month

Question 44

If cash receipts from customers are greater than sales, which of the following is most likely to be true?
a. Accounts receivable will decrease
b. Cash balance will increase
c. Outstanding debt will decrease
d. The company will show a profit