Chapter 17 Budgeting Flashcards

1
Q

Smart Co. uses a static budget. When actual sales are less than budget, Smart would report favorable variances on which of the following expense categories?

A

Yes
No
This answer is correct.
Sales commissions expense is a variable cost that varies directly with sales. If Smart Co.’s sales are less than budget, its sales commissions expense also is less than budget. Building rent is a fixed cost, so no variance due to sales volume occurs.

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2
Q

RedRock Company uses flexible budgeting for cost control. RedRock produced 10,800 units of product during October, incurring indirect materials costs of $13,000. Its master budget for the year reflected indirect materials costs of $180,000 at a production volume of 144,000 units. A flexible budget for October production would reflect indirect materials costs of

A

This answer is correct.
The cost of indirect materials for 144,000 units was expected to be $180,000. Consequently, the unit cost of indirect materials is $1.25 ($180,000 ÷ 144,000). Multiplying the $1.25 unit cost times the 10,800 units produced results in an expected total indirect materials cost of $13,500.

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3
Q

Why would a manufacturer compare results with budgets?

A

Budgets without evaluation of possibilities and constraints are not achievable goals.
This answer is correct.
Budgets exist to (1) identify resources needed to achieve a goal and plan to obtain them in advance and (2) provide a quantifiable goal or target. Thus, unrealistic budgets, or those that do not recognize constraints, have no value.

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4
Q

When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on the

A

Budget adjusted to the actual level of activity for the period being reported.
This answer is correct.
If a report is to be used for performance evaluation, the planned cost column should be based on the actual level of activity for the period. The ability to adjust amounts for varying activity levels is the primary advantage of flexible budgeting.

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5
Q

Which of the following inputs would be most beneficial to consider when management is developing the capital budget?

A

Profit center equipment requests.
This answer is correct.
The capital budget is part of the financial budget, so its emphasis is on obtaining the funds needed to acquire operating assets. It may be prepared more than a year in advance to allow time to plan financing of major expenditures for such long-term assets as equipment, buildings, and land. Thus, profit center equipment requests are directly relevant to development of the capital budget.

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