Chapter 8

Question 1

Which of the following is not a benefit of budgeting?

Answer 1

The budgeting process can uncover potential bottlenecks before (rather than as) they occur.

Question 2

The system of accountability in which managers are held responsible for those items of revenue and costs—and only those items—over which they can exert significant control is referred to as ________.

Answer 2

responsibility accounting

The basic idea underlying responsibility accounting is that a manager should be held responsible for those items—and only those items—that the manager can actually control to a significant extent.

Question 3

Which of the following explains why operating budgets generally span a period of one year?

Answer 3

Companies choose a span of one year to correspond to their fiscal years.

Operating budgets generally cover a one-year period to correspond to the company’s fiscal year.

Question 4

Which of the following is not a benefit of self-imposed budgets?

Answer 4

Lower-level managers are encouraged to create budgetary slack since they are more knowledgeable of day-to-day operations.

Question 5

Which of the following is true of self-imposed (participative) budgets?

Answer 5

Self-imposed budgets give managers at all levels of an organization an opportunity to provide input into the budgeting process.

Question 6

The budgeting process begins with the preparation of the ______ budget.

Answer 6

sales

Question 7

What is the amount of budgeted sales revenue for the fourth quarter?
Budgeted unit sales 1,500 1,300 1,400 1,300 5,500

Percentage of sales collected in the quarter of the sale 75%
Percentage of sales collected in the quarter after the sale 25%

Answer 7

$32,500

Budgeted sales revenue for the fourth quarter = 1,300 units × $25 = $32,500

Question 8

What is the amount of cash that is expected to be collected during the second quarter as a result of sales made during the first quarter?
Budgeted unit sales 1,500 1,300 1,400 1,300 5,500

Percentage of sales collected in the quarter of the sale 75%
Percentage of sales collected in the quarter after the sale 25%

Answer 8

$9,375

First quarter sales = 1,500 units × $25 per unit = $37,500

Amount of cash expected to be collected during the second quarter from sales made during the first quarter = First quarter sales of $37,500 × 25% = $9,375

Question 9

What is the total amount of expected cash collections for the third quarter?
Budgeted unit sales 1,500 1,300 1,400 1,300 5,500

Percentage of sales collected in the quarter of the sale 75%
Percentage of sales collected in the quarter after the sale 25%

Answer 9

$34,375

Second quarter sales = 1,300 units × $25 per unit = $32,500

Third quarter sales = 1,400 units × $25 per unit = $35,000

Total expected cash collections during the third quarter = Amount collected from second quarter sales of $8,125 (or $32,500 × 25%)+ Amount collected from third quarter sales of $26,250 (or $35,000 × 75%) = $34,375

Question 10

For a production budget, the ______ is the beginning inventory for the year.

Answer 10

beginning inventory for the first quarter

Question 11

Which of the following is a major factor that should be taken into consideration while planning the desired level of inventories?

Answer 11

Costs of carrying inventory.

Question 12

Vineyard Corporation, a manufacturer of fine wines, began the year with 20,000 bottles in inventory. The company estimated the budgeted sales for the four quarters of the current year to be 200,000 bottles, 150,000 bottles, 250,000 bottles, and 400,000 bottles, respectively. The management feels that an ending inventory of 10% of the subsequent quarter’s sales is appropriate. What are the production needs for the first quarter?

Answer 12

195,000 bottles

Production needs for the first quarter = Budgeted sales of 200,000 bottles + Ending inventory of 15,000 bottles – Beginning inventory of 20,000 bottles = 195,000 bottles

Question 13

Vineyard Corporation, a manufacturer of fine wines, began the year with 20,000 bottles in inventory. The company estimated the budgeted sales for the four quarters of the current year to be 200,000 bottles, 150,000 bottles, 250,000 bottles, and 400,000 bottles, respectively. The management feels that an ending inventory of 10% of the subsequent quarter’s sales is appropriate. What is the desired ending inventory for the second quarter?

Answer 13

25,000 bottles

The desired ending inventory for the second quarter = Third quarter sales of 250,000 bottles × Ending inventory percentage of 10% = 25,000 bottles

Question 14

The purpose of preparing a direct materials budget is to ________.

Answer 14

estimate the quantity of raw materials to be purchased

Question 15

In a direct materials budget, the desired ending raw materials inventory for the year is equal to the ________.

Answer 15

desired ending raw materials inventory for the last period

Question 16

Perry, Inc. desires to maintain the ending inventory of raw materials at 40 percent of the next quarter’s raw material needs. What is the cost of raw materials to be purchased in the first quarter?

Required production in units of finished goods 15,000 12,500 7,500 15,000
Required production in units of finished goods 4 4 4 4
Units of raw materials needed to meet production 60,000 50,000 30,000 60,000
Desired units of ending raw materials inventory 24,000
Total units of raw materials needed
Units of beginning raw materials inventory 16,000
Units of raw materials to be purchased
Unit cost of raw materials $ 5 $ 5 $ 5 $ 5
Cost of raw materials to be purchased

Answer 16

$320,000

Desired units of ending raw materials inventory in first quarter = Second quarter’s raw materials needs of 50,000 units × 40% = 20,000 units

Units of raw materials to be purchased = Units of raw materials needed to meet production of 60,000 units + Desired units of ending raw materials inventory of 20,000 units – Units of beginning raw materials inventory of 16,000 units = 64,000 units

Cost of raw materials to be purchased in the first quarter = Units of raw materials to be purchased of 64,000 units × $5 per unit = $320,000

Question 17

Companies prepare direct labor budgets to ________.

Answer 17

avoid labor shortages

Question 18

Pro Clean Company, a manufacturer of hand sanitizers, intends to produce 40,000 units in the third quarter and 35,000 units in the fourth quarter. Each unit requires 0.50 direct labor-hours (DLHs) and the cost of direct labor per hour is $18. What would be the total direct labor cost for the fourth quarter?

Answer 18

$315,000

Total direct labor cost for the fourth quarter = 35,000 units × 0.50 DLHs per unit × $18 = $315,000

Question 19

William Corporation has a contract with the labor union which guarantees its workers pay for at least 40,000 hours every quarter. Based on its direct labor budget for the current year, the company estimated it will need 39,000 direct labor-hours during the fourth quarter to produce 13,000 units of finished goods. Each unit requires 3 direct labor-hours (DLHs) and the cost of direct labor per hour is $12 per hour. What is the total direct labor cost for the fourth quarter?

Answer 19

$480,000

Even though the total direct labor-hours worked in the fourth quarter were 39,000 hours, William’s contract with the labor union guarantees its workers pay for at least 40,000 hours every quarter.

As a result:

Fourth quarter total direct labor cost = 40,000 hours × $12 = $480,000

Question 20

What is the budgeted variable manufacturing overhead for the year?

Precision Company estimates its machine-hour requirements for the four quarters to be 35,000 hours, 20,000 hours, 15,000 hours, and 30,000 hours respectively. The variable manufacturing overhead rate is $4 per machine-hour. The fixed manufacturing overhead is $50,000 per quarter, which includes $20,000 of depreciation expense.

Answer 20

$400,000

Variable manufacturing overhead for the year = Variable manufacturing overhead rate per machine-hour × Total machine-hours required for the year

Variable manufacturing overhead for the year = $4 × 100,000 machine-hours = $400,000

Question 21

What is the predetermined overhead rate for the year?

Precision Company estimates its machine-hour requirements for the four quarters to be 35,000 hours, 20,000 hours, 15,000 hours, and 30,000 hours respectively. The variable manufacturing overhead rate is $4 per machine-hour. The fixed manufacturing overhead is $50,000 per quarter, which includes $20,000 of depreciation expense.

Answer 21

$6 per machine hour

Predetermined overhead rate = (Variable manufacturing overhead + Fixed manufacturing overhead) ÷ Total machine-hours required

Predetermined overhead rate = [($4 × 100,000 machine-hours) + ($50,000 per quarter × 4 quarters)] ÷ 100,000 machine-hours or ($400,000 + $200,000) / 100,000 machine-hours = $6 per machine hour

Question 22

The value of the ending inventory is calculated by multiplying the number of units in ending inventory by the ________.

Answer 22

unit product cost

Question 23

Which of the following is deducted from the total selling and administrative expense budget to determine the cash disbursements for selling and administrative expense budget?

Answer 23

Depreciation expense

Question 24

A company determines that the number of units sold is the cost driver for its variable selling and administrative expense budget. The product of its variable selling and administrative rate and budgeted unit sales will be ________.

Answer 24

total budgeted variable selling and administrative expenses

Question 25

How much cash will the company need to borrow?

Striker Company estimates its expected cash receipts for the period to be $80,000 and its expected cash disbursements to be $70,000. The beginning cash balance for the period was $5,000. The management wants to maintain a minimum cash balance of $40,000.

Answer 25

$25,000

Excess (deficiency) of cash available over disbursements = Beginning cash balance + Cash receipts − Cash disbursements

Excess (deficiency) of cash available over disbursements = $5,000 + $80,000 − $70,000 = $15,000

Amount to be borrowed = Minimum cash balance − Excess (deficiency) of cash available over disbursements

Amount to be borrowed = $40,000 − $15,000 = $25,000

Question 26

In a budgeted income statement, _________ is subtracted from sales to arrive at gross margin.

Answer 26

cost of goods sold

Question 27

Smarton Company is in the process of preparing its budgeted income statement. It has determined its estimated gross margin to be $90,000. The company also expects to incur selling and administrative expenses of $30,000 and interest expense of $12,000. What is Smarton’s budgeted net income?

Answer 27

$48,000

Budgeted net income = Gross margin – Selling and administrative expenses – Interest expense

Budgeted net income = $90,000 – $30,000 – $12,000 = $48,000

Question 28

For the budget period ending December 31 of the current year, Aaron Corporation estimates its ending balances for cash as $4,000, accounts receivable as $16,000, finished goods inventory as $12,000, and raw materials inventory as $8,000. Invoices relating to raw materials in the amount of $14,000 are expected to be unpaid as of December 31. What is the amount of total current assets that will be reported on the budgeted balance sheet?

Answer 28

$40,000

Total current assets = Cash + Accounts receivable + Finished goods inventory + Raw materials inventory

Total current assets = $4,000 + $16,000 + $12,000 + $8,000 = $40,000

Question 29

Film Studio, Inc. has beginning retained earnings of $80,000 and expects to earn net income of $70,000 during the budget period. What would be the budgeted ending balance in retained earnings if the company pays dividends of $50,000?

Answer 29

$100,000

Ending retained earnings = Beginning retained earnings + Net income - Dividends;

Ending retained earnings = $80,000 + $70,000 − $50,000 = $100,000

Question 30

Budgeting expenses for areas other than manufacturing are shown on the ______ budget.

Answer 30

Selling and administrative

Question 31

The receipts section of the cash budget lists:

Answer 31

all cash inflows except from financing.

Question 32

Borrowing money is required whenever:

Answer 32

the cash excess is less than the minimum required cash balance
- there is a cash deficiency.

Question 33

A company’s planned net profit that serves as a benchmark against which subsequent company performance can be measured is shown on the budgeted _____ _______.

Answer 33

income statement

Question 34

Developing goals and preparing various budgets to achieve those goals is part of the ______.

Answer 34

planning

Question 35

Many managers believe that being empowered to create their own self-_____ budgets is the most effective method of budget preparation

Answer 35

imposed

Question 36

A manager cannot complain that the budget was unrealistic and impossible to meet when a(n) __________ - ______ budget is in place.

Answer 36

self-imposed

Question 37

When a manager creates a budget that is too easy to attain, _________ occurs

Answer 37

budgetary slack

Question 38

Budgetary slack occurs when a manager submits a budget that is:

Answer 38

too easy to attain

Question 39

Budgets:

Answer 39

• coordinate the activities of the entire organization by integrating the plans of its various parts
• define goals and objectives that can serve as benchmarks for evaluating subsequent performance
• and the budgeting process can uncover potential bottlenecks before they occur
• force managers to think about and plan for the future

Question 40

T or f] Control involves developing goals and preparing various budgets to achieve those goals

Answer 40

False

Question 41

Working hours required to satisfy the production budget are shown on the _____ budget

Answer 41

direct labor

Question 42

A detailed plan for the future that is usually expressed in formal quantitative terms is a(n)

Answer 42

budget

Question 43

Which of the following budgets are needed to calculate unit product costs?

Answer 43

direct materials budget

• direct labor budget
• oh budget

Question 44

A number of separate but interdependent budgets that formally lay out a company’s sales, production, and financial goals is contained in the _____ budget.

Answer 44

master

Question 45

Because all other parts of the budget depend on it, if the ____ budget is inaccurate, the rest of the budget will be inaccurate

Answer 45

sales

Question 46

Both the production and selling and administrative expense budgets are prepared using information directly from the _____ budget.

Answer 46

sales

Question 47

In a manufacturing company, the _______ budget is used to determine the budgets for manufacturing costs, including the direct materials budget, the direct labor budget, and the manufacturing overhead budget.

Answer 47

production

Question 48

The cash budget uses information from several other budgets. Which of the following budgets is NOT used to prepare the cash budget?

Answer 48

production budget

Question 49

In a manufacturing company, which budget is used as the basis for creating the direct materials budget, the direct labor budget, and the manufacturing overhead budget.

Answer 49

production budget

Question 50

The cash budget:

Answer 50

is prepared near the end of the master budget process.

Question 51

In a manufacturing company, the _____ _______ budget details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

Answer 51

direct materials

Question 52

Risks of not knowing in advance how much labor time will be needed throughout the budget period include:

Answer 52

• low employee morale
• labor shortage
• erratic layoffs.

Question 53

All costs of production other than direct materials and direct labor are shown on the _________ ______ budget.

Answer 53

manufacturing overhead

Question 54

The cost of unsold units is computed on the _____ budget

Answer 54

ending finished goods inventory

Question 55

True or false: For most companies a single, annual cash budget is sufficient.

Answer 55

False

Question 56

A budgeting balance sheet is developed using data from the _____ of the budget period and data contained in the various schedules

Answer 56

beginning

Question 57

All costs of production other than direct materials and direct labor are shown on the _______ budget.

Answer 57

manufacturing overhead

Question 58

To prepare a budgeted balance sheet as of December 31, 2016, data is needed from the:

Answer 58

balance sheet as of December 31, 2015.

Question 59

In a manufacturing company, the ________ budget shows the number of units that must be manufactured to satisfy sales needs and provide for the desired ending inventory.

Answer 59

production

Question 60

The first line of the direct labor budget consists of the budgeted units expected to be _____ during the period.

Answer 60

produced

Question 61

What number does the direct materials budget take directly from the production budget?

Answer 61

required production