ACG Chapter 8

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

Costs of carrying inventory.

Given budgeted sales of 10,000 units, desired ending inventory of 5,000 units, and beginning inventory of 2,000 units, required production is:

Reason: 10,000 + 5,000 - 2,000 = 13,000

The following is a schedule of the projected unit sales of Western Company, which manufactures casual wear. Each unit sells for $25. The company began the period with a beginning accounts receivable balance of $10,000. Choose the correct answer from the options provided. Quarter First Second Third Fourth Year Budgeted unit sales 1,500 1,300 1,400 1,300 Year 5,500 Percentage of sales collected in the quarter of the sale 75% Percentage of sales collected in the quarter after the sale 25% What is the total amount of expected cash collections for the third quarter?

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

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

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

Which of the following budgets are directly based on information from the sales budget?

Selling and administrative expense budget Production budget

Which of the following is needed to prepare a sales budget?

The budgeted number of units to be sold

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. What is the budgeted variable manufacturing overhead for the year?

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

Companies prepare direct labor budgets to ________.

avoid labor shortages

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

budget

Gathering feedback to ensure that the plan is being followed is referred to as

control

In companies that do not use a self-imposed budgeting process, profit targets are generally set by:

top managers

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

unit product cost

Budgets

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

True or false: The definition of responsibility accounting states that senior management is directly responsible for every decision made by lower level managers.

False

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

Production budget

Budgets:

communicate management's plan throughout the organization

A 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed is called a(n) ___ or perpetual budget

continuous

The cash budget:

is prepared near the end of the master budget process

The amount of goods to be purchased from suppliers during the period is shown on the _______ budget.

merchandise purchases

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

sales

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

too easy to attain

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 ________.

total budgeted variable selling and administrative expenses

Month -Expected Sales January $120,000 February $150,000 March $160,000 April $200,000 May $220,000 June $250,000 Experience has shown that 60% of sales are collected in the month of sale and 40% are collected the month after sale. Calculate expected cash collections for the month of April.

$184,000 Reason: April collections will be from sales in April and sales in March (since April is the month after March). Expected cash collections = 40% of March sales ($64,000) + 60% of April sales ($120,000).

Highly achievable budget targets:

-are used in most companies -may generate greater management commitment to the budget -may help build manager confidence

The purpose of a budget should be to:

-establish goals -measure operating results -isolate areas needing attention

When profit targets are set by top managers:

-waste may occur -too much slack may be allowed -goals may be unrealistically high

January 12,000 February 15,000 March 16,000 April 20,000 May 22,000 June 25,000 If desired ending inventory is 25% of next month's sales, the number of units to be produced in March is:

17,000 Reason: March sales 16,000 + Ending inventory (25% of April sales) 5,000 - Beginning inventory (25% of March sales) 4,000 = 17,000 units to be produced

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?

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

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?

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

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?

Budgeted net income = Gross margin - Selling and administrative expenses - Interest expense Budgeted net income = $90,000 - $30,000 - $12,000 = $48,000

The following is a schedule of the projected unit sales of Western Company, which manufactures casual wear. Each unit sells for $25. The company began the period with a beginning accounts receivable balance of $10,000. Choose the correct answer from the options provided. Quarter First Second Third Fourth Year Budgeted unit sales 1,500 1,300 1,400 1,300 Year 5,500 Percentage of sales collected in the quarter of the sale 75% Percentage of sales collected in the quarter after the sale 25% What is the amount of budgeted sales revenue for the fourth quarter?

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

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

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

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?

Depreciation expense

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?

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

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?

Ending retained earnings = Beginning retained earnings + Net income - Dividends; Ending retained earnings = $80,000 + $70,000 − $50,000 = $100,000

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?

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

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. How much cash will the company need to borrow?

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

The following is a schedule of the projected unit sales of Western Company, which manufactures casual wear. Each unit sells for $25. The company began the period with a beginning accounts receivable balance of $10,000. Choose the correct answer from the options provided. Quarter First Second Third Fourth Year Budgeted unit sales 1,500 1,300 1,400 1,300 Year 5,500 Percentage of sales collected in the quarter of the sale 75% Percentage of sales collected in the quarter after the sale 25% 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?

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

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

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

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. What is the predetermined overhead rate for the year?

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

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?

Production budget

Which of the following is not a benefit of budgeting?

The budgeting process enables managers to uncover bottlenecks as they occur.

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?

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

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?

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

A detailed plan for the future that is usually expressed in formal quantitative terms is:

a budget

Recognizing individuals at all levels of the organization as team members whose views and judgments are valued by top management is an advantage of:

a self-imposed budget

Master budget schedules:

answer several key questions for a company are based on estimates and assumptions.

The annual master budget file includes the ________ from last year because it is needed for the schedule of expected cash collections.

balance sheet

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

beginning inventory for the first quarter

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

budgetary slack

The final schedule of the master budget is the:

budgeted balance sheet

required production formula

budgeted sales+ end inv - beg inv

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

cost of goods sold

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

desired ending raw materials inventory for the last period

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

direct materials

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

estimate the quantity of raw materials to be purchased

True or false: Control involves developing goals and preparing various budgets to achieve those goals.

false

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

imposed

If inventory levels are _______, the result can lead to lost sales or last-minute, high-cost production efforts.

insufficient

Using budget assumptions when preparing the master budget:

makes it easier to answer "what-if" questions

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

master

An essential management tool that communicates management's plans throughout the organization, allocates resources and coordinates activities is the ___ ___

master budget

The amount of goods for resale to be purchased from suppliers during the period is shown on the ___ ___ budget

merchandise purchase

Using a budget to blame or pressure employees to do a better job leads to:

mistrust

A perpetual budget keeps managers focused at least one year ahead by adding one:

month to the end of the budget as each month comes to a close

If a budget initiated by top management has targets that are set too high:

motivation will suffer

Operating budgets generally cover a ________ period.

one-year

A budget that is prepared with the full cooperation of managers at all levels is a self-imposed or ___ budget

participative

Developing goals for the budget is _____, while_______ involves steps taken to ensure that steps towards meeting the goal are being followed.

planning, controlling

Budgets are used for two distinct purposes: ______ and ______.

planning; control

In a manufacturing company, the ___ budget is prepared right after the sales budget

production

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.

production

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.

production

The budgeted income statement does NOT rely on information from the _______ budget.

production

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 ________.

responsibility accounting

under the concept of ___ ___, managers should only be held accountable for items they can actually control

responsibility accounting

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

sales

The first step in the budgeting process is preparing the ______ budget.

sales

The first step in the budgeting process is the preparation of the ___ budget.

sales

To calculate total sales on the sales budget, multiply budgeted sales in units by:

sales price per unit

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

self-imposed

A likely consequence of excessive inventory levels is

storage problems