Question 1

``` Johnson Co., distributor of candles, has reported the following budget assumptions for year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson's only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of year 1. What is the budgeted gross margin for year 1? A. $60,000 B. $70,000 C. $75,000 D. $87,500 ```

Accepted Answer

B. $70,000 Gross Profit ($70,000) is determined by subtracting Cost of Goods Sold ($350,000) from Sales ($420,000). Sales is calculated by multiplying a markup of 20% based on cost of goods sold (i.e., $420,000 = 1.2($350,000). Cost of Goods Sold is easily determined by using an accounts payable T-account to calculate purchases of $350,000 by using the cash paid of $300,000 and the beginning and ending balances of accounts payable ($100,000 and $150,000, respectively).

Question 2

The basic difference between a master budget and a flexible budget is that a master budget is A. Based on one specific level of production, and a flexible budget can be prepared for any production level within a relevant range. B. Only used before and during the budget period, and a flexible budget is only used after the budget period. C. Based on a fixed standard, whereas a flexible budget allows management latitude in meeting goals. D. For an entire production facility, whereas a flexible budget is applicable to single departments only. Correct!

Accepted Answer

A. Based on one specific level of production, and a flexible budget can be prepared for any production level within a relevant range. A master, also called a static, budget is developed for planning and resource allocation purposes. Therefore, it is based on one specific level of activity. A flexible budget, as its name implies, can be developed for any activity level within the range that the firm has the capacity to produce.

Question 3

``` Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes? A. Accounts payable. B. Mortgages payable. C. Bonds payable. D. Common stock. ```

Accepted Answer

A. Accounts payable The percentage of sales forecasting method is used to define operating costs such as cost of goods sold, supplies expense, sales discounts, etc. It also defines the percentage of sales that are collected in cash and the percentage of purchases that are paid for in cash and, consequently, accounts payable.

Question 4

``` Which of the following types of budgets is the last budget to be produced during the budgeting process? A. Cash. B. Capital. C. Cost of goods sold. D. Marketing. ```

Accepted Answer

A. Cash. The cash budget is the last budget to be prepared and includes a plan for earning and financing all of the strategic action plans of the enterprise and other incidental issues earning and requiring cash flow.

Question 5

Lon Co.'s budget committee is preparing its master budget on the basis of the following projections: Sales $2,800,000 Decrease in inventories 70,000 Decrease in accounts payable 150,000 Gross margin 40% ``` What are Lon's estimated cash disbursements for inventories? A. $1,040,000. B. $1,200,000. C. $1,600,000. D. $1,760,000. ```

Accepted Answer

D. $1,760,000 First, purchases must be computed, and then the estimated payments to be made on accounts payable. With inventory declining, purchases must equal cost of sales less the decline in inventory. In other words, purchases are less than cost of sales if inventory declines. If the gross margin is 40% of sales, then cost of sales is 60% of sales. Purchases = cost of sales - inventory decline = (.60)($2,800,000) - $70,000 = $1,610,000 If accounts payable (AP) is to decrease, payments on AP must exceed purchases. Estimated payments on AP = $1,610,000 + $150,000 decrease in AP = $1,760,000.

Question 6

A static budget contains which of the following amounts? A. Actual costs for actual output. B. Actual costs for budgeted output. C. Budgeted costs for actual output. D. Budgeted costs for budgeted output.

Accepted Answer

D. Budgeted costs for budgeted output A static budget is a comprehensive financial plan produced at the beginning of the year for the entire enterprise and does not change (or flex) during the year. Thus, it uses budgeted costs based on budgeted output.

Question 7

Is flexible budget is appropriate for a marketing budget and direct material usage budget ?

Accepted Answer

Yes Flexible budgets are budgets produced at different activity levels. Direct material usage budgets are commonly prepared for different activity levels to indicate the level of cost that should be incurred at those levels. The actual cost is then compared with the budget for the level of activity actually attained. The comparison is much more relevant for evaluation purposes than would be the comparison between the actual and the master or static budgets if the level of activity in the master and static budgets were not the same. The same idea applies for marketing cost, although there typically is less "flex" in this type of budgeted cost. A good proportion of the marketing cost is fixed. Other portions are variable (e.g., commissions). Both costs, however, can be expressed as part of a flexible budget. Many flexible budgets include fixed components. The term "flexible" budget does not imply the exclusion of fixed costs.

Question 8

Lanta Restaurant compares monthly operating results with a static budget. When actual sales are less than budget, would Lanta usually report favorable variances on variable food costs and fixed supervisory salaries? Variable food costs Fixed supervisory salaries Yes Yes Yes No No Yes No No

Accepted Answer

Variable food costs Fixed supervisory Yes No When sales are lower than in the static budget, total actual variable costs will also be lower than in the static budget, because variable costs per unit are constant. A favorable variance results. At lower sales levels, lower variable costs are expected. However, there should be no variance for fixed salaries. The level of fixed cost budgeted should be the same as actually incurred.

Question 9

What is the required unit production level given the following factors? ``` Units Projected sales 1,000 Beginning inventory 85 Desired ending inventory 100 Prior-year beginning inventory 200 A. 915. B. 1,015. C. 1,100. D. 1,215. ```

Accepted Answer

B. 1,015. Since the desired ending inventory is 15 units more than the beginning inventory, production must be 15 units greater than the projected sales level of 1,000 units.

Question 10

A 2005 cash budget is being prepared for the purchase of Toyi, a merchandise item. The budgeted data are as follows: ``` Cost of goods sold for 2005 $300,000 Accounts payable 1/1/05 20,000 Inventory - 1/1/05 30,000 12/31/05 42,000 Purchases will be made in 12 equal monthly amounts and paid for in the following month. What is the 2005 budgeted cash payment for the purchase of Toyi? A. $295,000. B. $300,000. C. $306,000. D. $312,000. ```

Accepted Answer

C. $306,000. Budgeted cash payment = accounts payable at 1/1/05 + (11/12)purchases for purchases in 2005 =$20,000 + (11/12)($312,000) = $306,000 Only 11/12 of the 2005 purchases, i.e., the purchases made in the first eleven months, will be paid for in 2005 under the company's policy of payment for purchases.

Question 11

When a manager is concerned with monitoring total cost, total revenue, and net profit conditioned upon the level of productivity, an accountant would normally recommend Flexible budgeting Standard costing Yes Yes Yes No No Yes No No

Accepted Answer

Flexible budgeting Standard costing Yes Yes Both are important in evaluating results. Profit is heavily dependent on the level of output achieved. Thus, the flexible budget allows a benchmark for evaluating the actual performance at that output level. Standard costs allow an evaluation of the efficiency with which inputs have been used, and the effectiveness of the procurement function. Both have an important effect on cost and profit.

Brainscape's Knowledge GenomeTM

Budgeting Flashcards

Brainscape's Knowledge Genome^TM