P1SB Planning, Budgeting, Forecasting

Question 1

Which of the following is not a significant reason for planning in an organization?

a) Promoting coordination among operating units.
b) Forcing managers to consider expected future trends and conditions.
c) Developing a basis for controlling operations.
d) Enabling selection of personnel for open positions.

Answer 1

d) Enabling selection of personnel for open positions.

Question 2

“Strategy” is a broad term that usually means the selection of overall objectives. Strategic analysis ordinarily excludes the:

a) Trends that will affect the entity’s markets.
b) Target production mix and schedule to be maintained during the year.
c) Forms of organization structure that would best serve the entity.
d) Best ways to invest in research, design, production, distribution, marketing, and administrative activities.

Answer 2

b) Target production mix and schedule to be maintained during the year.

Strategic plans are long-term, and therefore the product mix for the current year is not a strategic plan.

Question 3

Which one of the following is most important to a successful budgeting effort?

a) Experienced analysts
b) Integrated budget software
c) Reliable forecasts and trend analysis
d) Top management support

Answer 3

d) Top management support

The support of top management is critical to gain the support of lower-level managers, and the support of lower-level managers is critical in order to gain the support of the affected employees. Without this support from above, the budget effort will be wasted because personnel will not take the process seriously.

Question 4

Which one of the following best describes the role of top management in the budgeting process? Top management:

a) Should be involved only in the approval process.
b) Lacks the detailed knowledge of the daily operations and should limit its involvement.
c) Needs to be involved, including using the budget process to communicate goals.
d) Needs to separate the budgeting process and the business planning process into two separate processes.

Answer 4

c) Needs to be involved, including using the budget process to communicate goals.

Top management must be involved in the budgeting process and their involvement includes using the budget as a means to communicate company goals.

Question 5

The budgeting process should be one that motivates managers and employees to work toward organizational goals. Which one of the following is least likely to motivate managers?

a) Participation by subordinates in the budgetary process.
b) Having top management set budget levels.
c) Use of management by exception.
d) Holding subordinates accountable for the items they control.

Answer 5

b) Having top management set budget levels.

If top management sets the budget levels without any input from others in the company, those charged with fulfilling the budget goals will not support the budget as their own.

Question 6

Which of the following should not be included in a company’s internal analysis process?

a) Issues relating to creating value for the company’s customers.
b) Understanding the company’s capacity for innovation.
c) Evaluation of environmental issues that may affect the company’s profitability.
d) Weak areas within the internal organization that should be improved.

Answer 6

c) Evaluation of environmental issues that may affect the company’s profitability.

Evaluation of environmental issues that could affect the company’s profitability is not included in a company’s internal analysis process because this type of analysis is not internal, but rather a factor that uncovers external opportunities and threats.

Question 7

Contingency planning is a process that companies undertake to:

a) make certain that their capacity will be able to meet the expected demand as well as decide how to obtain this capacity
b) Determine how to obtain the necessary financing for the future
c) understand how customer expectations have changed
d) Prepare for future, external events

Answer 7

d) Prepare for future, external events

Contingency planning is preparation for “what if” events that are typically external and unpredictable. It produces alternatives that will prepare the organization to respond nimbly if required. This scenario planning is particularly important for companies that can be impacted by new technologies, changing government regulations or entry of competitors into the marketplace. Even though contingency planning can be expensive because it involves developing multiple plans or alternatives, if often leads to greater savings than the cost of the planning should unforeseen events occur.

Question 8

A company is preparing the sales budget for two potential products. Both products require the use of the same manufacturing equipment, which is only available for 60 hours each month. The contribution margin of product A is $95 per unit and the contribution margin of product B is $55 per unit. Product A requires 4 hours of machine time per unit and product B requires 2.5 hours per unit. In order to efficiently allocate the equipment resources, the company should manufacture

a) product A, because the contribution margin is more per unit than product B
b) Product B, because they can produce more units of product than product A.
c) product A, because it will make better use of the equipment than product B
d) Product B, because it will make better use of the equipment than product A.

Answer 8

c) product A, because it will make better use of the equipment than product B

The contribution per machine hour for product A is 95/4,or $23.75. The contribution per machine hour for product B is 55/2.5 or $22. Assuming customer demand is adequate to permit the company to sell all the product A it produces, the company should produce product A because its contribution per machine hour required for production is higher than that of product B.

Question 9

ChecmKing uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for $105,000, and 2 units of raw materials are required to produce 1 unit of final product. In November, the company produced 12,000 units of product. The standard cost for material allowed for the output was $60,000, and there was an unfavorable quantity vairance of $2,5000.

ChemKing’s standard price for one unit of material is:
a) $2
b) $2.50
c) $3
d) $5

Answer 9

b) $2.50

The total standard cost allowed for the actual output is $60,000. Two units of raw material are allowed for each unit produced and the company produced 12,000 units. Therefore, the standard quantity allowed for the actual output is 12,000 x 2, or 24,000 units. The standard price for one unit of material is $60,000/24,000 units of direct materials, or $2.50 per unit of direct materials

Question 10

ChecmKing uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for $105,000, and 2 units of raw materials are required to produce 1 unit of final product. In November, the company produced 12,000 units of product. The standard cost for material allowed for the output was $60,000, and there was an unfavorable quantity vairance of $2,500.

The units of material used to produce November output totaled:
a) 12,000 units
b) 12,500 units
c) 23,000 units
d) 25,000 units

Answer 10

d) 25,000 units

The variance formula is (AQ - SQ) X SP. SQ can be calculated because the company produced 12,000 units, and two units of raw materials are required for each unit of output. Therefore, the standard quantity for the actual output is 24,000 units. The standard price per unit of raw material can also be calculated because the standard cost allowed for the actual output is $60,000. Since the standard quantity for the actual output is 24,000 units, the standard price per unit of raw material is $60,000/24,000, or $2.50. The quantity variance is $2,500 unfavorable. Therefore, the formula is:
(AQ-24,000) X $2.50 = $2,500

Solving for AQ, we get AQ = 25,000

Question 11

what is the variance formula?

Answer 11

(AQ - SQ) X SP

where AQ = actual quantity
SQ = standard quantity
SP = Standard price

Question 12

By finalizing a statement describing the company’s purpose, the scope of its products, and the market that it serves, management is providing a foundation to establish

A. A strategy that sets out the criteria for attaining a competitive advantage
B. Long-term objectives that when achieved will result in the fulfillment of the company’s mission.
C. A vision of what the company aims to become in the future
D. Short-term goals that when accomplished will lead to operational excellence

Answer 12

B. Long-term objectives that when achieved will result in the fulfillment of the company’s mission.

The STEM provides a definition of a company’s mission

Question 13

A company’s budgeting process for direct labor begins by determining an average wage rate for all its production employees when manufacturing one unit of production. This rate becomes part of the company’s budgeted standard cost for indirect labor. A management consultant who advised the company on its budgeting process said that when determining the budgeted standard cost for direct labor, the wage rate

A. Should be determined only after the quantity standard for direct labor is defined
B. Can be calculated at any point during the budgeting process.
C. Is calculated at the end of the budgeting process once all relevant costs are known
D. Can be defined only after determining the budgeted standard cost for direct materials

Answer 13

A. Should be determined only after the quantity standard for direct labor is defined

The wages of direct labor will vary based on the types of work, product complexity and employee skills. It is therefor necessary to determine how much labor is needed based on these various factors. At that point, when the quantity requirement for the different types of labor has been defined and thus the total wage cost is known, it is possible to determine the standard cost for direct labor.

Question 14

Formula for activity based costs

Answer 14

Total cost
——————
Total hours
= cost per hour

Cost for A = cost per hour * hours incurred

Question 15

A budget developed by using budgeted prices and budgeted costs based on the actual output in the budget period is

A. flexible budget
B. Continuous budget
C. Life-cycle budget
D. Operating budget

Answer 15

A. Flexible budget

Question 16

The concurrent action of basic competitive forces as defined by Porter’s 5 forces model determines the

A. Strategy that a firm should follow to achieve its objectives
B. Rivalry inside the industry
C. Entrance barriers that potential players must face to get into the industry
D. Long-term profitability and the competitive intensity of the industry

Answer 16

D. Long-term profitability and the competitive intensity of the industry

Michael Porter developed a comprehensive model of the structure of industries and competition. One feature is his analysis of the five competitive forces that determine long term profitability measured by long term return on investment. This analysis determines the attractiveness of an industry.

Question 17

After leading the market for the past decade, the growth of product ABC is slowing down. In this stage of its life cycle, the product is still generating significant amounts of cash flows that cover the company’s investment into new product innovations. According to the BCG Growth-Share Matrix, product ABC is most likely an example of a

A. Star
B. Cash cow
C. Question mark
D. dog

Answer 17

B. Cash cow

It is high-market share (dominating the market for the past decade) but low growth (continuously slowing down) product. It also generates a huge amount of cash flows.

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Question 18

The major objectives of budgeting are to

A. Foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among the organization’s segments.
B. Foster the planning of operations, facilitate the identification of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates
C. Define responsibility centers, provide a framework for performance evaluation, and promote communication and coordination among the organization’s segments
D. Define responsibility centers, facilitate the identification of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates.

Answer 18

A. Foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among the organization’s segments.

The process of budgeting forces a company to establish goals, determine the resources necessary to achieve those goals and anticipate future difficulties in their achivement.

Question 19

The management of a company has just completed a thorough review of its strategic goals and formulated the company’s long-term and short-term objectives. The most appropriate next step for the company is the development of a

A. Financial budget
B. Operating budget
C. Capital budget
D. Master budget

Answer 19

D. Master budget

A master budget translates the organization’s short-term objectives into action steps.

Question 20

When properly developed and administered, budgets provide the following advantage to the organization except to

A. Provide a structure for measuring performance
B motivate managers and other employees
C. Ensure that the organization makes a profit
D. Promote the efficient allocation of resources

Answer 20

C. Ensure that the organization makes a profit

Question 21

In developing the budget for the next year, which one of the following approaches would most likely result in a successful budget with the greatest amount of positive motivation and goal congruence?

A. Permit the divisional manager to develop the goal for the division that in the manager’s view will generate the greatest amount of profits.
B. Have senior management develop the overall goals and permit the divisional manager to determine how these goals will be met
C. Have the divisional and senior management jointly develop goals and objectives while constructing the corporation’s overall plan of operation.
D. Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan

Answer 21

D. Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan

Question 22

All of the following statements concerning standard costs are correct EXCEPT that

A. Time and motion studies are often used to determine standard costs.
B. Standard costs are usually set for one year
C. Standard costs can be used in costing inventory accounts
D. Standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis.

Answer 22

D. Standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis.

Question 23

When compared with ideal standards, practical standards

A. Produce lower per unit product costs
B. Result in a less desirable basis for the development of budgets.
C. Incorporate very generous allowances for spoilage and worker inefficiencies.
D. Serve as a better motivating target for manufacturing personnel.

Answer 23

D. Serve as a better motivating target for manufacturing personnel.

Ideal standards are those achieved under ideal working conditions and are, therefore, difficult to achieve under realistic working conditions. Practical standards are developed under actual working conditions and are, therefore, a better motivating target for manufacturing personnel.

Question 24

After performing a thorough study of Michigan Company’s operations, an independent consultant determined that the firm’s labor standards were probably too tight. Which one of the following facts would be inconsistent with the consultant’s conclusion?

A. A review of performance reports revealed the presence of many unfavorable efficiency variances
B. Michigan’s budgeting process was well-defined and based on a bottom-up philosophy
C. Management noted that minimal incentive bonuses have been paid in recent periods
D. Production supervisors found several significant fluctuations in manufacturing volume, with short-term increases on output being followed by rapid, sustained declines.

Answer 24

B. Michigan’s budgeting process was well-defined and based on a bottom-up philosophy

Question 25

Contribution per hour

Answer 25

contribution margin of product /
product produced by the total hours

This metric represents the amount of revenue that is generated for each hour of labor

Question 26

Process of designing the roadmap to a successful execution of the organization’s strategy

Answer 26

Strategic Planning

Question 27

Time ranges for operational plans, medium-term plans, and long-term plans

Answer 27

• Operational plan = 1 to 2 years
• Middle-term plan = 3 to 5 years
• Long-term = More than 5 years

Question 28

activities which relate to the conversion of input to outputs, delivery and after-sales service such as
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and sales
- Customer support service

Answer 28

Primary activity

Question 29

activities other than those relating primary activities such as
- Procurement
- Technology development
- Human resources
- Infrastructure of the firm

Answer 29

secondary activity

Question 30

Porter’s 5-forces

Answer 30

1. Risk of entry by potential competitors
2. Intensity of rivalry among established companies within an industry
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Closeness of substitutes to an industry’s products

Question 31

What are three external factors that a company should analyze during the strategic planning process?

Answer 31

1. The industry in which the company operates
2. The country in which the company operates
3. The macro-economic environment in which the company operates

Question 32

List Porter’s generic strategies

Answer 32

• cost leadership
• differentiation
• focused-cost leadership
• focused-differentiation

Question 33

What is meant by the term “SWOT Analysis”

Answer 33

SWOT Analysis is a planning tool and technique with the primary purpose of magnifying strengths, eliminating weakness, pursuing external opportunities, and disarming threats.

• Strengths
• Weakness
• Opportunities
• Threats

Question 34

What is meant by the term “PEST Analysis”

Answer 34

PEST Analysis is the examination of Political, Economic, Social, and Technological factors affecting an entity during the strategic planning process

Question 35

High growth, High Market Share in the BCG Growth-Share matrix

Answer 35

STAR

Question 36

High growth, Low Market Share in the BCG Growth-Share matrix

Answer 36

QUESTION MARK

Question 37

Low growth, High Market Share in the BCG Growth-Share matrix

Answer 37

CASH COW

Question 38

Low growth, Low Market Share in the BCG Growth-Share matrix

Answer 38

DOG

Question 39

What is “Standard Cost”

Answer 39

Standard costs are predetermined costs assigned to a unit of output

Question 40

What is the difference between a standard cost and a budgeted cost?

Answer 40

Standard costs are expressed on a per unit basis while budgeted costs are presented as total costs

Question 41

What is the difference between an ideal standard and a currently attainable standard?

Answer 41

An ideal (theoretical) standard is the maximum efficiency that a company may achieve. Ideal standards assume perfection and are often called “tight” standards.

Currently attainable (practical) standards are challenging but attainable under normal conditions.

Question 42

What are the three key elements for developing a standard cost for direct materials?

Answer 42

1. Quality
2. Quantity
3. Price

Question 43

What is meant by the term “Quantitative Methods”

Answer 43

Quantitative methods are statistical techniques that make predictions about future periods by using numerical measures and prior information to predict future events

Question 44

Three types of quantitative methods

Answer 44

• Regression analysis
• Learning curve analysis
• Expected value

Question 45

What is regression analysis?

Answer 45

Regression analysis is used to predict the outcome based on a given set of conditions

Question 46

Formula to calculate a simple regression analysis

Answer 46

y = a+bx

where
y = dependent variable (total cost)
a = the y-intercept or the value of y when x=0 (fixed cost)
b = slope or the coefficient of the independent variable (variable cost per unit)
x = independent variable (cost driver)

Question 47

What is learning curve analysis?

Answer 47

Learning curve analysis is a model used to determine how long it will take to produce products as the number of units to produce increases

Question 48

Some drawbacks to using regression analysis

Answer 48

1. Regression analysis cannot be used if historical data is not available
2. Even if historical data is available, the use of regression analysis will be obsolete if the data are not relevant to the company’s current situation

Question 49

Four key ingredients of a budget

Answer 49

1. Realism
2. Consistency
3. Flexibility
4. Measurability

Question 50

What is the descending (top to bottom) schedule that comprises a Master Budget?

Answer 50

OPERATING BUDGET:
1. sales budget
2. production budget
3a. direct labor budget
3b. direct materials budget
4. sales and administrative budget
5. budget income statement

FINANCIAL BUDGET:
6. capital expense budget
7. budgeted income statement
8. budgeted balance sheet

Question 51

The ______ budget is developed from the inputs of the individual departments of an entity such as the operations, marketing, human resources, accounting and administration department

Answer 51

Annual/master budget (aka the annual business plan)

Question 52

_______ budgets are created based on the completion of a specific project rather than the entity as a whole such as the creation of a new factory

Answer 52

Project budget

Question 53

________ budgets are started from scratch without relying on past performance. All items in the budget must be justified as if the budget was started from zero.

Answer 53

Zero-based budgeting

Question 54

____ budget adds a new budget month and drops the recently ending month on a recurring basis. With this method, the budget is kept up to date with the operating environment.

Answer 54

Continuous (rolling) budgets

Question 55

_______ budgets are prepared by adjusting budgeted revenues and expenses based on actual outputs. They adjust to changes in actual revenue levels.

Answer 55

Flexible budgeting

Question 56

How does a budget containing inaccurate data impact an organization’s future performance?

A. The organization can forecast the effect of economic changes
B. The organization is unable to obtain financing and capital needs
C. The organization is unable to properly plan and set attainable goals
D. The organization can make adjustments the following year

Answer 56

C. The organization is unable to properly plan and set attainable goals

Because budgets play a key role in planning business operations, communicating organizational goals, organizing jobs and processes, and maintaining control, inaccurate budget data can have far-reaching adverse effects throughout the organization. Budgets help determine where to deploy resources needs, when new financing or capital expenditures are needed, and how to effectively manage inventory. Organizations use budgets to estimate earnings and spending during a specified period of time. Future budgets are based on previous financial records and are adjusted to reflect business and economic changes. Inaccurate data can cause inaccurate planning.

Question 57

Which information is needed to develop an effective budget?

A. Historical financial data, projected expenses, and anticipated revenues
B. Historical financial data only
C. Historical expenses and revenues
D. Projected expenses and anticipated revenues

Answer 57

A. Historical financial data, projected expenses, and anticipated revenues

An effective budget starts with historical data at its base. It’s important to have accurate historical data and sound projected data so that benchmark figures can be used to evaluate success or failure. Projected expenses and anticipated revenues are used to adjust historical data to create a realistic budget that will meet the goals and objectives of the organization. Because budgets outline the expected income and costs, they communicate expected operational results. Companies use this as a blueprint to then assign accountability for tasks and identify the means by which goals would be achieved.

Question 58

Which budgeting method does not use performance data from prior year as the basis for budget figure?

A. Authoritative budgeting
B. Zero-based budgeting
C. Capital budgeting
D. Participative budgeting

Answer 58

B. Zero-based budgeting

It disregards historical data and focuses only on data needed to produce future results. For each budget period, figures are determined based on the organization’s goals. Zero-based budgeting has proven effective as a tool for reducing budgetary slack, when implemented periodically, such as one out of every three or four years of the budget cycle. It is not necessary to use zero-based budgeting every year to reduce the occurrence of budgetary slack.

Question 59

What type of information is used when performing a regression analysis?

A. Production schedule
B. Projected sales or revenues
C. Return on investment
D. Interest rates

Answer 59

D. Interest rates

Regression analysis is a statistical method that measures the relationship between a dependent variable and a series of changing, or independent, variables. It would be helpful in determining how changing variables, such as interest rates and taxes, would affect the price of a variable like a financial investment. By measuring the historical changes of the independent variables in relation to the dependent variable, the future value of the dependent variable can be predicted. It has also been useful in predicting trends.

Question 60

A learning curve

A. Shows the efficiencies gained from experience
B. Uses historical data as a basis for forecasting
C. Uses statistical techniques for forecasting
D. Determines inefficiencies in the production process

Answer 60

A. Shows the efficiencies gained from experience.

A learning curve is a graphical depiction of the efficiencies gained from experience. It shows the relationship between the number of units produced and the time spent per unit. Learning curve analysis is used to make pricing decisions, schedule labor and production resources, develop capital budgets, and set wage rates. The theory is that cost per unit of output will decrease as learning and experience are gained. An individual learning a task will gradually become more efficient and less hesitant, thereby making fewer mistakes, learning to automate, and adjusting performance.

Question 61

Which forecasting technique gives more weight to newer data and less weight to older data?

A. Time series analysis
B. Exponential smoothing
C. Multiple regression analysis
D. Payback technique

Answer 61

B. Exponential smoothing

Exponential smoothing uses a weighted moving average of historical data as the forecasting basis, giving more weight to recent data and less weight to older data. New data is given more weight because the future is more likely to resemble the recent past rather than the distant past. Exponential smoothing is used for short-term forecasting for financial market and economic data. To calculate exponential smoothing, a new forecast is the sum of the old forecast plus a percentage of the difference between the old forecast and the actual data for that same time period.

Question 62

Organizations use Kaizen budgeting to

A. Allocate funds and resources to projects
B. Determine how the budget will attain the organization’s goals
C. Continually improve the budgeting process
D. Allocate funds and resources based on activity or process

Answer 62

C. Continually improve the budgeting process

In Kaizen, each aspects of the budgeting process is evaluated to implement improvements to be incorporated into the next budgeting cycle. It favors small changes on a regular basis, rather than infrequent but sweeping changes. Kaizen is the Japanese term for “continuous improvement.” Project budgeting allocates money and resources to individual projects such as the construction of facilities, acquisition of land, or purchase of equipment. Zero-based budgeting requires budgeted figures to be justified for each new budget period, and show how the budget will attain the goals of the organization. Activity based budgeting, based on activities and business processes, forecasts labor and financial resources needed to achieve an organization’s goals.

Question 63

A master budget’s purpose is to

A. Control the day to day operations of the organization
B. Determine the goals of the organization for a 10 year period
C. Allocate resources for capital expansion
D. Allow for changes in the budget based on performance

Answer 63

A. Control the day to day operations of the organization

The master budget is also known as the annual budget: it’s compilation of the budgets of each individual department, and consists of sales, production and cash budgets, and forecasted balance sheet. The annual budget outlines the organization’s plans for its fiscal year and controls the day to day operations, setting priorities for accomplishing the long-term goals of the organization by allocating resources to each of the activities outlined in the organization’s strategic plan.

Question 64

What is the major difference between a static budget and a flexible budget?

Answer 64

The number of production levels that are used in the forecast.

Static budgets forecast one level of production results for a given budget period, and the associated costs. Flexible budgets project revenues and costs for several production levels. Static budgets often differ from actual results, since assumptions about input and output values are made prior to the start of the budget period and are not changed. A flexible budget is based on actual output, and when compared with the static budget, variances become apparent. Flexible budgeting allows for change during the budget period; management can see variances between budget and actual results and take action to improve performance. Flexible budgets compare actual costs with projected costs for the actual production level in order to provide greater control over costs.

Question 65

Which of the following is NOT considered part of the production budget?

A. Manufacturing costs
B. Distribution costs
C. Inventory levels
D. Supervisor salaries

Answer 65

B. Distribution costs

Distribution costs are a part of the selling and administrative budget. The production budget is an estimate of the amount of product an organization will need to produce during the budget period. This production budget consists of overhead costs that are directly related to manufacturing, and includes forecasts for material, labor, manufacturing supplies, supervisor salaries, factory maintenance, equipment repair, and utilities. Management uses the sales budget and forecasted inventory levels to determine the production budget.

Question 66

A contribution margin is the difference between

Answer 66

The total revenues and the total variable costs of a product

The contribution margin is the difference between the total revenues received from a product, and the total variable costs incurred by that product. The money represented by the margin can be used for fixed costs and to produce profits. The contribution margin also helps determine if a product can be sold below the normal sales price when manufacturing capacity is not being fully utilized, and is useful indicator for evaluation of management and employee performance.

Question 67

Which one of the following techniques would most likely be used to analyze reductions in the time required to perform a task as experience with the task increase?

a. regression analysis
b. learning curve analysis
c. sensitivity analysis
d. normal probability analysis

Answer 67

b. learning curve analysis

Learning curve analysis is a function that shows how labor hours per unit declines as units of production increase due to workers learning and becoming better at their jobs.

Question 68

The sales manager of Serito Doll Company has suggested that an expanded advertising campaign costing $40,000 would increase the sales and profits of the company. He has developed the following probability distribution for the effect of the advertising campaign on company sales.

sales increase (units) ———- Profitability
15,000 ——————————- .10
30,000 ——————————- .35
45,000 ——————————- .10
60,000 ——————————- .25
75,000 ——————————- .20

The company sells the dolls at $5.20 each. The cost of each doll is $3.20. Serito’s expected incremental profit, if the advertising campaign is adopted, would be

a. $6,500.00
b. $46,500.00
c. $53,000.00
d. $93,000.00

Answer 68

c. $53,000.00

Increased units sold = .1(15,000) + .35(30,000) + .1(45,000) + .25(60,000) + .2(75,000) = 46,500 units

Increased profit = [46,500 x ($5.20-$3.20)] - $40,000
= $93,000 - $40,000 = $53,000

Question 69

Superior Industries’ sales budget shows quarterly sales for the next year as follows:
Quarter1: 10,000 units
Quarter2: 8,000 units
Quarter3: 12,000 units
Quarter4: 14,000 units

Company policy is to have finished goods inventory at the end of each quarter equal to 20 percent of next quarter’s sales. Budgeted production for the second quarter of the next year would be

Answer 69

8,800 units

Ending inventory (20% x next quarter sales)
Quarter 1: quarter 2 sales x 20% = 1,600 units of ending inventory
Quarter 2: quarter 3 sales x 20% = 2,400 units of ending inventory

Opening Inventory
Quarter 2: 1,600 units (quarter 1 ending inventory)

Beginning inventory: 1,600
+ production (balancing figure)
- sales: 8,000
Ending inventory: 2,400

Question 70

What is budgeting?

Answer 70

Budgeting is a process which involves the formulation of a plan and the translation of the goals of that plan into a quantitative expression of the means of attaining the goals. A budget represents a quantitative expression of proposed management actions for a set period of time

Question 71

What is activity based budgeting?

Answer 71

Activity based budgeting is a cost allocation system which allocates costs based on drivers used by each activity.

Question 72

What is job order costing?

Answer 72

Job order costing is a system for allocating cost to groups of unique products, each job becomes a cost center for which costs are accumulated.

Question 73

What is variance analysis?

Answer 73

Variance analysis is comparison of planned results to figure out inefficiencies in the operational process.

Question 74

The budgeting tool or process where estimates of revenues and expenses are prepared for each product beginning with the product’s research and development phase and traced through to its customer support phase is

Answer 74

Life cycle budget

Question 75

A budgeting technique in which budgets are prepared using activity-based costing where costs are allocated to department based on the level of activity consumed

Answer 75

Activity-based budgeting (ABB)

Question 76

Budgeting technique that starts from scratch, without using prior year’s numbers. It is forward looking and therefore, focuses on constant cost justification.

Answer 76

Zero-based budgeting

Question 77

Budgeting technique that starts with the prior year’s budget and produces increments into the future based upon the prior year’s results and coming year’s expectations

Answer 77

Incremental budgeting

Question 78

Jura Corporation is developing standards for the next year. Currently XZ-26, one of the material components, is being purchased for $35.45 per unit. It is expected that the component’s cost will increase by approximately 10% next year and the price could range from $38.75 to $44.18 per unit depending on the quantity purchased. The appropriate standard for XZ-26 for next year should be set at the:

A. Current actual cost plus forecasted 10% price increase
B. Lowest purchase price in the anticipated range to keep pressure on purchasing to always buy in the lowest price range
C. Highest price in the anticipated range to ensure that there are only favorable purchase price variances
D. Price agreed upon by the purchasing manager and the appropriate level of company management

Answer 78

D. Price agreed upon by the purchasing manager and the appropriate level of company management

Practical standards are prepared after considering historical and industry trends. These set a realistic target which are achievable and are developed under actual working conditions so that unrealistic targets do not hamper employee morale. However, care should be taken to not set very low targets which, in turn, lead to idle time and low efforts by the employees. In this case, setting the price agreed upon by the purchase manager and the appropriate level of company management is the most practical approach.

Question 79

Sherman Company uses a performance reporting system that reflects the company’s decentralization of decision making. The departmental performance report shows one line of data for each subordinate who reports to the group vice president. The date presented show the actual costs incurred during the period, the budgeted costs, and all variances from the budget for that subordinate’s department. Sherman is using a type of system called

a. Flexible budgeting
b. contribution budgeting
c. program budgeting
d. responsibility accounting

Answer 79

d. responsibility accounting

An organization needs to have ways of assigning responsibility to the budgets they develop. In financial management, this means comparison of expected results to actual outcomes. This is known as a variance. The calculation and analysis of variances is essential to enable an organization to achieve its objectives and assign responsibility for achievement as well as failures of budget.

Sherman Company shows the actual costs incurred during the period, the budgeted costs, and all variances from the budget for that subordinate’s department to assign the responsibility. Sherman Company is using responsibility accounting.

Question 80

Tut Company’s selling and administrative costs for the month of August, when it sold 20,000 units, were as follows:

• variable costs: $18.60/unit, total $372,000
• Step cost: $4.25/unit, total $85,000
• Fixed Costs: $8.80/unit, total $176,000
• Total selling and administrative costs: $31.65/unit, $633,000

The variable costs represent sales commissions paid at the rate of 6.2% of sales. The step costs depend on the number of salespersons employed by the company. In August there were 17 persons on the sales force. However, two members have taken early retirement effective August 31. It is anticipated that these positions will remain vacant for several months. Total fixed costs are unchanged within a relevant range of 15,000 to 30,000 units per month. Tut is planning a sales price cut of 10%, which it expects will increase sales volume to 24,000 units per month. If Tut implements the sales price reduction, the total budgeted selling and administrative costs for the month of September would be:

Answer 80

$652,760.00

Given that the variable costs are sales commissions @6.2% of sales, it is obvious that the per unit (and total) variable costs shall change in September.

Considering $18.60 per unit of variable costs was 6.2% of unit sales price, the per unit selling price should be 18.60 * (100/6.2) = $300

Tut is planning a sales price cut of 10%. Hence, revised sales price = $300 x 90% = $270

*sales price per unit: $270
* units sold: 24,000
* sales revenue: $6,480,000
* variable costs (6.2% of revenue): $401,760

it also stated that the step costs are related to numbers of salesperson in the company. Since the number has gone down from 17 to 15, revised step costs are as below:
* step costs = (85,000/17) * 15 = $75,000

Further, it is also given that fixed costs shall remain the same. Therefore, the total budgeted selling and administrative costs for the month of September would be:
variable cost: 401,760
+) step cost: 75,000
+) fixed cost: 176,000
———————————
= $652,760.00

Question 81

A company that manufactures furniture is establishing its budget for the upcoming year. All of the following items would appear in its overhead budget except for the

a. overtime paid to the workers who perform production scheduling
b. cost of glue used to secure the attachment of the legs to the tables
c. fringe benefits paid to the production supervisor
d. freight charges paid for the delivery of raw materials to the company

Answer 81

d. freight charges paid for the delivery of raw materials to the company

Freight charges, also known as carriage inwards, are the costs incurred to facilitate the incoming delivery of raw materials which are ultimately used in the manufacturing of the final product. Such costs are directly related with the purchase of direct materials and are accordingly included in the direct materials budget.

Overhead budget, on the other hand, summarizes all costs which are indirectly related to the production process. Overtime paid to workers performing production scheduling cannot be termed as direct labor. Cost of glue, although used to complete the tables, is an indirect material cost. Fringe benefits paid to production supervisor is also a part of employee benefits costs. However, wages and salaries paid to such supervisor would have performed part of the direct labor costs.

Question 82

Automite Company is an automobile replacement parts dealer in a large metropolitan community. Automite is preparing its sales forecast for the coming year. Data regarding both Automite’s and industry sales of replacement parts as well as both the used and new automobile sales in the community for the last ten years have been accumulated. If Automite wants to determine if there is an historical trend in the growth of its sales as well as the growth of industry sales of replacement parts, the company would employ which of the following?

a. Learning curve techniques
b. Statistical sampling
c. Time series analysis
d. Simulation techniques

Answer 82

c. Time series analysis

Time series analysis consist of measuring variables at predetermined time intervals to find patterns and behavioral tends. This can prove especially useful for managers to forecast the future values of those variables and control them. Time series analysis use time as the independent variable and some other dependent variable, in this case sales.

Question 83

Which one of the following items should be done first when developing a comprehensive budget for a manufacturing company?

a. development of the production budget
b. development of a sales budget
c. determination of the Direct Labor budget
d. Preparation of a pro forma income statement

Answer 83

B. Development of a sales budget

The order of preparation of each component of master budget is as follows:

• Sales budget
• Production budget
• Direct materials budget
• Direct Labor budget
• Overhead budget
• Cost of Goods Sold Budget
• Selling and administrative expense budget
• Pro forma income statement
• Pro forma Balance Sheet
• Pro forma Statement of Cash Flows

Development of a sales budget should be done first when developing a comprehensive budget because it is required to prepare the production budget. Production Budget is required to prepare Direct Labor Budget. Both the sales budget and production budget are needed to prepare a pro forma income statement.

Question 84

Orion Corporation is preparing a cash budget for the six months beginning January 1. Shown below are the company’s historical collection pattern and the budgeted credit sales for the period.

• 65% collected in the month of sale
• 20% collected in the first month after sale
• 10% collected in the second month after sale
• 4% collected in the third month after sale
• 1% uncollectible
• Jan: $160,000
• Feb: $185,000
• Mar: $190,000
• Apr: $170,000
• May: $200,000
• Jun: $180,000

The estimated total cash collection during April from accounts receivable would be

Answer 84

$173,400

The estimated total cash collection during April from accounts receivable would be:

• From April Sales (65%) = $170,000 x 65% = $110,500
• From March Sales (20%) = $190,000 x 20% = $38,000
• From February Sales (10%) = $185,000 x 10% = $18,500
• From January Sales (4%) = $160,000 x 4% = $6,400

Total Cash Collection (April) = $110,500 + $38,000 + $18,500 + $6,400 = $173,400

Question 85

A company is conducting a risk analysis on a project. One task has a risk probability estimated to be 0.15. The task has a budget of $35,000. If the risk occurs, it will cost $6,000 to correct the problem caused by the risk event. What is expected monetary value of the risk event?

a. $900
b. $4,350
c. $5,250
d. $6,150

Answer 85

a. $900

Expected value is a weighted average of all the values the variable can take, with the respective probabilities as weights.

($6,000 x 0.15) + ($0 x 0.85) = $900