Chapter 6

38) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows: T-SHIRTS SWEATSHIRTS Production and sales volume 60,000 units 35,000 units Selling price $16.00 $29.00 Direct material $ 2.00 $ 5.00 Direct labor $ 4.50 $ 7.20 Manufacturing overhead $ 2.00 $ 3.00 Gross profit $ 7.50 $13.80 Selling and administrative $ 4.00 $ 7.00 Operating profit $ 3.50 $ 6.80 What is the projected decline in operating income if the direct materials costs of T-Shirts increase to $3.50 per unit and direct labor costs of Sweatshirts increase to $13.00 per unit? A) $293,000 B) $90,000 C) $203,000 D) $473,000

A) $293,000

1) Which of the following is true of responsibility accounting? A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility center. B) It is an arrangement of lines of responsibility and authority within a responsibility center. C) It explicitly incorporates continuous improvement and changes due to learning curve. D) It examines how a result will change if the original plan is not achieved.

A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility center.

9) Which of the following statements is true of budgets? A) Master budgets express management's operating and financial plans. B) Financial budgets are prepared before the master budget is prepared. C) Operating budgets are prepared independently of the master budget. D) Financial budgets are working documents at the core of the budgeting process.

A) Master budgets express management's operating and financial plans.

10) ________ is the usual starting point for budgeting. A) The revenues budget B) The estimated net income C) The production budget D) The cash budget

A) The revenues budget

7) Which of the following is a reason why top managers want lower-level managers to participate in the budgeting process? A) To benefit from their experience with the day-to-day aspects of running the business. B) To reduce the time and cost expended in the budgeting process. C) To ensure that they do not introduce any budgetary slack. D) To ensure that the budgets are administered rigidly given the changing market conditions.

A) To benefit from their experience with the day-to-day aspects of running the business.

6) A company's actual performance should be compared against budgeted amounts for the same accounting period so that ________. A) adjustments for future conditions can be included B) to avoid any feedback from the budgets due to past miscues C) inefficiencies of the past year can be included D) a rolling budget can be implemented

A) adjustments for future conditions can be included

14) Budgets should ________. A) be flexible B) be administered rigidly C) only be developed for short periods of time D) include only variable costs

A) be flexible

2) Which of the following is a financial budget? A) budgeted balance sheet B) cash receivables budget C) production budget D) cost of goods sold budget

A) budgeted balance sheet

5) Sensitivity analysis helps managers evaluate risks ________. A) by showing the effects of changes to the original data or an underlying assumption B) by identifying inconsistencies in underlying assumptions and actual conditions C) by removing the effects of foreign currency exposure and other uncontrollable factors D) by identifying gaps in the production process using information on setups needed to manufacture products

A) by showing the effects of changes to the original data or an underlying assumption

3) ERP systems store vast quantities of information about the materials, machines and equipment, labor, power, maintenance, and setups needed to manufacture different products. This helps simplify the budgeting process as ERP systems ________. A) can quickly calculate the manufacturing and nonmanufacturing costs based on a given sales quantity B) automatically identify and record changes in processes involved in producing products C) identify which underlying assumptions are likely to change D) always use a rolling budget ensuring that a budget is always available for a specified future period

A) can quickly calculate the manufacturing and nonmanufacturing costs based on a given sales quantity

13) High inventory levels increase the ________. A) cost of carrying inventory, the costs of quality, and shrinkage costs B) revenues and expected profits C) cost of equity, cost of debt, and cost of short-term funds D) cost of materials, the costs of overhead, and opportunity costs

A) cost of carrying inventory, the costs of quality, and shrinkage costs

10) Participation of employees in the budgeting process helps ________. A) create greater commitment towards the budget B) create demanding but achievable budget C) decrease deviations from the budget D) secure communication of sensitive information

A) create greater commitment towards the budget

15) The number of units in the sales budget and the production budget may differ because of a change in ________. A) finished goods inventory levels B) overhead charges C) direct material inventory levels D) sales returns and allowances

A) finished goods inventory levels

5) A limitation of using past performance as a basis for judging actual results is that ________. A) future conditions can be different from the past B) any undervaluation of profits in the past period is likely to continue C) any subsequent change in accounting treatment will distort performance evaluation D) they tend to distort results when current and past conditions are similar

A) future conditions can be different from the past

2) Kaizen refers to incorporating cost reductions ________. A) in each successive budgeting period B) in each successive sales forecast C) in all customer service centers D) in all areas of the organization

A) in each successive budgeting period

7) A master budget ________. A) is the initial plan of what the company intends to accomplish in the period and evolves from both the operating and financing decisions B) is a substitute for the management functions of planning and coordination C) improves companies' market capitalization and evolves from both the investing and financing decisions D) provides an ethical framework for decision making

A) is the initial plan of what the company intends to accomplish in the period and evolves from

8) Which of the following is generally expressed through a short-run budget? A) operational plans B) expansion plans C) strategic plans D) startup plans

A) operational plans

5) The regional sales office manager of a national firm is most likely responsible for a(n) ________. A) revenue center B) investment center C) cost center D) profit center

A) revenue center

7) The order to follow when preparing the operating budget is ________. A) revenues budget, production budget, and direct manufacturing labor costs budget B) costs of goods sold budget, production budget, and cash budget C) revenues budget, manufacturing overhead costs budget, and production budget D) cash expenditures budget, revenues budget, and production budget

A) revenues budget, production budget, and direct manufacturing labor costs budget

2) Which of the following is a component of operating budgets? A) sales budget B) budgeted statement of cash flows C) capital expenditures budget D) budgeted balance sheet

A) sales budget

5) Operating decisions primarily deal with ________. A) the best use of scarce resources B) how to obtain funds to acquire resources C) acquiring equipment and buildings D) satisfying stockholders

A) the best use of scarce resources

50) The use of activity-based budgeting is growing because of ________. A) the increased use of activity-based costing B) the increased use of kaizen costing C) increases in work-in-process inventory D) increases in direct materials inventory

A) the increased use of activity-based costing

24) Esther Baskets Company expects to manufacture and sell 20,000 baskets in 2016 for $5 each. There are 4,000 baskets in beginning finished goods inventory with target ending inventory of 5,000 baskets. The company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 2016 budgeted income statement? A) $105,000 B) $100,000 C) $95,000 D) $55,000

B) $100,000

8) In which order are the following developed? First to last: A = Production budget B = Direct materials costs budget C = Budgeted income statement D = Revenues budget A) ABDC B) DABC C) DCAB D) CABD

B) DABC

6) ________ include a budgeted statement of cash flows and a budgeted balance sheet. A) Revenue budgets B) Financial budgets C) Operating budgets D) Production budgets

B) Financial budgets

12) Which of the following is a benefit of budgeting? A) It helps investors to value stocks. B) It helps managers gather information for improving future performance. C) It helps managers to take marketing decisions. D) It helps in increasing market capitalization of the company.

B) It helps managers gather information for improving future performance.

4) Which of the following best describes a rolling budget? A) It is a budget that outlines the amount required to roll over debt in a future period. B) It is a budget that is always available for a specified future time period. C) It is a budget that outlines budgeted expenses. D) It is a budget that is submitted to a bank at the beginning of every month as per a loan covenant.

B) It is a budget that is always available for a specified future time period.

16) Which of the following is a benefit of keeping inventory levels low? A) It reduces setup costs. B) It reduces shrinkage costs. C) It reduces the loss from lost sales. D) It reduces inventory turnover.

B) It reduces shrinkage costs.

4) Which of the following is true of master budgets? A) They include only financial aspects of a plan and exclude nonfinancial aspects. B) They aid in coordinating what needs to be done to implement a plan. C) They aid in quantifying the expectations of all stakeholders. D) They must be administered rigidly after they are committed to.

B) They aid in coordinating what needs to be done to implement a plan.

54) Which of the following statements is true about activity-based budgeting? A) activity-based budgeting estimates total costs more accurately than cost-based budgeting B) activity-based budgeting provides more detailed information than cost-based budgeting C) activity-based budgeting is cheaper than cost-based budgeting D) activity-based budgeting is simpler to implement than cost-based budgeting

B) activity-based budgeting provides more detailed information than cost-based budgeting

19) Total finished units to be produced is based on the ________. A) direct material purchase budget B) budgeted sales units C) direct material usage budget D) budgeted manufacturing overhead

B) budgeted sales units

5) Kaizen budgeting is driven by ________. A) management B) employees C) stockholders D) creditors

B) employees

21) Which of the following is required to arrive at the budgeted units to be produced in a year? A) estimated direct materials inventory required at the end of the year B) estimated finished goods inventory required at the end of the year C) amount of direct materials to be used during the year D) amount of manufacturing overhead to be incurred

B) estimated finished goods inventory required at the end of the year

13) Responsibility accounting ________. A) emphasizes controllability B) focuses on who should be asked about the information C) attempts to assign blame for problems to a specific manager D) attempts to create a decentralized organization

B) focuses on who should be asked about the information

6) Financing decisions primarily deal with ________. A) the use of scarce resources B) how to obtain funds to acquire resources C) acquiring equipment and buildings D) preparing financial statements for stockholders

B) how to obtain funds to acquire resources

9) A controllable cost is any cost that can be ________ by a responsibility center manager for a period of time. A) controlled B) influenced C) segregated D) excluded

B) influenced

11) The sales forecast should be primarily based on ________. A) statistical analysis B) input from sales managers and sales representatives C) production capacity D) input from the board of directors

B) input from sales managers and sales representatives

6) A regional manager of a restaurant chain in charge of finding additional locations for expansion is most likely responsible for a(n) ________. A) revenue center B) investment center C) cost center D) profit center

B) investment center

7) Silas has been recently promoted to head his department. He is responsible for maximizing the profits of the department and to ensure that the earnings are ploughed back into the business. Silas is most likely to head a (n) ________. A) revenue center B) investment center C) cost center D) profit center

B) investment center

3) Tom Magic Company manufactures various kinds of toys for different age groups. The company's flagship product is Rx. The company currently requires 8.50 labor hours to manufacture per unit of Rx. The company believes that because of numerous small improvements in the process, it will require 0.10 labor-hours less and hence will only 8.40 labor-hours in the next quarter. It will require 8.35 and 8.25 labor-hours in third and fourth quarter. The company has adopted ________. A) activity based budgeting B) kaizen budgeting C) zero-based budgeting D) cost-based budgeting

B) kaizen budgeting

2) Financial analysts use the projected cash flow statement to ________. A) determine the tax effect of cash expenses B) plan for short-term cash investments C) analyze the impact of non-cash expense on income statement D) project depreciation expense

B) plan for short-term cash investments

10) A stretch budget is a budget that ________. A) crosses more than one responsibility center B) represents a challenging, but achievable level of performance C) is impossible to implement in a cost center D) is designed to include the effects of exchange rate fluctuations

B) represents a challenging, but achievable level of performance

10) A master budget forces managers to examine the business as they plan, so they can ________. A) detect inaccurate historical records to avoid errors in budgets B) set expectations against which actual results can be compared C) complete the budgeting task on time D) ensure that only financial risks and opportunities are incorporated

B) set expectations against which actual results can be compared

52) Activity-based-costing analysis makes no distinction between ________. A) direct-materials inventory and work-in-process inventory B) short-run variable costs and short-run fixed costs C) parts of the supply chain D) components of the value chain

B) short-run variable costs and short-run fixed costs

11) Which of the following is the fundamental purpose of responsibility accounting? A) to penalize managers for inefficiency B) to gather information that will enable future improvement C) to create an efficient and centralized organization D) to evaluate the performance of managers

B) to gather information that will enable future improvement

9) To reduce budgetary slack management may ________. A) incorporate stretch or challenge targets B) use external benchmark performance measures C) award bonuses for achieving budgeted amounts D) reduce projected cost targets by 10% across all areas

B) use external benchmark performance measures

49) Juan Sugita Manufacturing expects to produce and sell 12,000 units of Big, its only product, for $20 each. Direct material cost is $3 per unit, direct labor cost is $10 per unit, and variable manufacturing overhead is $6 per unit. Fixed manufacturing overhead is $24,000 in total. Variable selling and administrative expenses are $1 per unit, and fixed selling and administrative costs are $3,000 in total. According to generally accepted accounting principles, inventoriable cost per unit of Big would be ________. A) $13.00 per unit B) $14.00 per unit C) $21.00 per unit D) $18.50 per unit

C) $21.00 per unit

25) Orange Corporation has budgeted sales of 16,000 units, targeted ending finished goods inventory of 4,000 units, and beginning finished goods inventory of 2,000 units. How many units should be produced next year? A) 22,000 units B) 20,000 units C) 18,000 units D) 16,000 units

C) 18,000 units

3) Which of the following is a limitation of using past performance as a basis for judging actual results? A) It does not account for productivity increases over the periods. B) It increases the incentive for managers to introduce budgetary slack. C) It does consider inefficiencies of previous periods. D) It increases the tendency of senior managers exaggerating changes in future conditions as opposed to

C) It does consider inefficiencies of previous periods.

56) Which one of the following is a benefit of activity-based budgeting? A) It uses a single cost driver for batch-level activities or higher. B) It is the most convenient method of budgeting as it requires minimal effort. C) It provides detailed information that improves decision making. D) It is the most efficient method to budget direct costs and trace them to individual cost objects.

C) It provides detailed information that improves decision making.

1) Which of the following is true of budgets when they are administered thoughtfully? A) They eliminate subjectivity in performance evaluation. B) They can eliminate the uncertainty faced by a company. C) They promote coordination within the subunits of a company. D) They are a substitute the planning and coordination functions of management.

C) They promote coordination within the subunits of a company.

1) Financial planning models ________. A) are not used in the budgeting process B) are not useful for sensitivity analysis C) are mathematical representations of the relationships affecting the budget process D) are used for nonfinancial aspects of budgeting

C) are mathematical representations of the relationships affecting the budget process

11) Managers who feel that top management does not believe in the budget are most likely to ________. A) pick up the slack and participate in the budgeting process B) to face little interference in the day-to-day aspects of running the business C) be inactive participants in the budgeting process D) convert the budget to a shorter more reasonable time period

C) be inactive participants in the budgeting process

17) Budgeted production equals ________. A) beginning finished goods inventory + budgeted unit sales - targeted ending finished goods inventory B) targeted ending finished goods inventory + beginning finished goods inventory - budgeted unit sales C) budgeted unit sales + targeted ending finished goods inventory - beginning finished goods inventory D) budgeted unit sales + targeted ending finished goods inventory + beginning finished goods inventory

C) budgeted unit sales + targeted ending finished goods inventory - beginning finished goods inventory

1) The ________ is required to prepare the cash budget of an organization. A) statement of shareholder's equity B) budgeted balance sheet C) capital expenditures budget D) budgeted statement of cash flow

C) capital expenditures budget

4) Kaizen budgeting involves ________. A) large cost reductions B) management directed improvements C) continual small cost reductions D) continual small revenue increases

C) continual small cost reductions

1) The Japanese use the term kaizen when referring to________. A) scarce resources B) pro forma financial statements C) continuous improvement D) the sales forecast

C) continuous improvement

4) A maintenance manager of a theatre is most likely to be responsible for a(n) ________. A) revenue center B) investment center C) cost center D) profit center

C) cost center

53) Activity-based budgeting makes it easier to ________. A) determine a rolling budget B) prepare pro forma financial statements C) determine how to reduce costs D) execute a financial budget

C) determine how to reduce costs

23) Which of the following information is required by a company's manager while preparing a manufacturing overhead costs budget? A) estimated incentives to be paid to marketing personnel B) estimated expense for office supplies C) estimated expense for maintenance of factory building D) rent expense for lease of office building

C) estimated expense for maintenance of factory building

13) Rolling budgets help management to ________. A) better review the past calendar year B) deal with a 5-year time frame C) focus on the upcoming budget period D) rigidly administer the budget

C) focus on the upcoming budget period

55) Activity-based budgeting ________. A) uses one cost driver such as direct labor-hours B) uses only output-based cost drivers such as units sold C) focuses on activities necessary to produce and sell products and services D) classifies costs by functional area within the value chain

C) focuses on activities necessary to produce and sell products and services

8) A manager of a revenue center is responsible ________. A) for only the profits of his center B) for investments, revenues, and costs C) for only the revenues of his center D) for both, the revenues and costs of his center

C) for only the revenues of his center

8) Demanding but achievable targets tend to ________. A) be set by subordinate managers to create intrinsic reasons to achieve targets B) create unnecessary anxiety that de-motivates employees C) improve performance of employees when they are closer to the target D) be perceived as ambitious with little chance of success in achieving targets

C) improve performance of employees when they are closer to the target

12) A company using responsibility accounting system decides to exclude all uncontrollable costs from a manager's performance report. Jenson is the machine supervisor. Which of the following costs will impact Jenson's performance report? A) rent and taxes paid on by the company B) cost of materials used in manufacture C) machine maintenance cost D) cost of power consumed by the plant

C) machine maintenance cost

2) Which of the following departments is most likely to be a cost center? A) sales department of a company selling industrial tools B) call center of a company that serves customers and cross-sells other products C) maintenance department of a luxury resort D) research department of a company providing consultancy services

C) maintenance department of a luxury resort

3) The cash flow statement includes ________. A) cash discount on sales B) cash outflow towards insurance premium C) sales revenues of the organization D) interest accrued on an investment

C) sales revenues of the organization

2) Financial planning software packages assist management with ________. A) assigning responsibility to various levels of management B) identifying the target customer C) sensitivity analysis in their planning and budgeting activities D) achieving greater commitment from lower management

C) sensitivity analysis in their planning and budgeting activities

51) Activity-based budgeting would separately estimate ________. A) the cost of overhead for a department B) a plant-wide cost-driver rate C) the cost of a setup activity D) All of these answers are correct.

C) the cost of a setup activity

14) The revenues budget identifies ________. A) expected cash flows for each product B) actual sales from last year for each product C) the expected level of sales for the company D) the variance of sales from actual for each product

C) the expected level of sales for the company

9) The budgeting process is most strongly influenced by ________. A) the capital budget B) the budgeted statement of cash flows C) the sales forecast D) the production budget

C) the sales forecast

14) A primary consideration in assigning a cost to a responsibility center is ________. A) whether the cost is fixed or variable B) whether the cost is direct or indirect C) who can best control the change in that cost D) where in the organizational structure the cost was incurred

C) who can best control the change in that cost

26) For next year, Roberto, Inc., has budgeted sales of 15,000 units, targeted ending finished goods inventory of 750 units, and beginning finished goods inventory of 450 units. All other inventories are zero. How many units should be produced next year? A) 14,700 units B) 15,000 units C) 15,300 units D) 16,200 units

D) 16,200 units

27) Antique Brass Company has budgeted sales volume of 120,000 units and budgeted production of 108,000 units, while 20,000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory? A) 20,000 units B) 32,000 units C) 12,000 units D) 8,000 units

D) 8,000 units

1) Which of the following is true of a budget? A) Budgets are used to express only the operational plans and not the strategic plans of a company. B) Budgets do not account for nonfinancial aspects of the upcoming period. C) Budgets are most useful when they are planned independent of the company's strategic plans. D) Budgets help managers to revise their plans and strategies.

D) Budgets help managers to revise their plans and strategies.

11) Should Violet increase the selling price in 2016? A) Yes, because sales revenue increases for 2016. B) Yes, because gross margin increases for 2016. C) No, because sales volume decreases for 2016. D) No, because operating income decreases for 2016.

D) No, because operating income decreases for 2016.

10) Which of the following statements is true about responsibility accounting statements? A) Responsibility accounting excludes controllable costs. B) Responsibility accounting segregates fixed costs and variable costs. C) Responsibility accounting excludes fixed costs and variable costs. D) Responsibility accounting segregates uncontrollable costs from controllable costs.

D) Responsibility accounting segregates uncontrollable costs from controllable costs.

3) The operating budget process generally concludes with the preparation of the ________. A) production budget B) cash flow statement C) research and development budget D) budgeted income statement

D) budgeted income statement

5) The ________ is a component of financial budgets. A) cost of goods sold budget B) marketing costs budget C) distribution costs budget D) cash budget

D) cash budget

3) Budgets are used to ________. A) increase the book value of its assets B) communicate with external stakeholders C) calculate the income tax liability D) formulate company strategies

D) formulate company strategies

9) Which of the following is referred to as the bottom-up aspect of the budgeting process? A) lower-level managers setting their individual targets that aggregate to be the company-wide target B) senior managers consulting middle- and lower-level managers to investigate any deviations from the budget C) lower-level managers implementing the budgets with senior managers monitoring progress and investigating deviations D) lower-level managers providing inputs to the budgeting process based on their specialized knowledge

D) lower-level managers providing inputs to the budgeting process based on their specialized knowledge

12) Costs such as supervision, depreciation, maintenance, supplies, and power. are included in the ________. A) capital expenditures budget B) distribution costs budget C) revenues budget D) manufacturing overhead budget

D) manufacturing overhead budget

22) When direct material and direct labor is the limiting factor, revenue budgets are usually based on ________. A) expected demand of the company's products B) the capital in the budget period C) the supply of indirect material and labor in the market D) maximum units that can be manufactured

D) maximum units that can be manufactured

4) Challenging budgets tend to ________. A) discourage out-of-the-box and creative thinking as there is very little room for error B) set unrealistic expectations and are perceived as overly ambitious and unachievable C) increase anxiety without motivation not meeting them is viewed as a failure D) motivate improved performance as employees work more intensely to avoid failure

D) motivate improved performance as employees work more intensely to avoid failure

20) Which of the following is most likely to be a cost driver for the variable portion of marketing costs? A) percentage of markup on cost B) number of units produced C) increase in revenues attributable to such marketing D) number of units units sold

D) number of units units sold

4) The cash budget is a schedule of expected cash receipts and disbursements that ________. A) requires an aging of accounts receivable and accounts payable B) is a self-liquidating cycle C) is prepared immediately after the sales forecast D) predicts the effect on the cash position at given levels of operations

D) predicts the effect on the cash position at given levels of operations

2) A budget is an end product of negotiations among senior and subordinate mangers because ________. A) budgeting is their mutual responsibility B) senior managers alone cannot spare the time required for the budgeting process C) senior managers are responsible for providing information on competitors performance and subordinate managers are responsible for information on external market conditions D) senior managers want stiffer targets and subordinates want relatively easy targets

D) senior managers want stiffer targets and subordinates want relatively easy targets

3) Which of the following departments is most likely to be a profit center? A) the accounting department of a company that also assists in budgeting process B) the research and development department of a company C) the sales department of a company whose objective is to maximize the revenues D) the consulting department of a law firm

D) the consulting department of a law firm

1) Which of the following is a factor while choosing the period of a budget? A) the frequency of interim financial statements B) the estimated period required to achieve budget targets C) the general economic trend D) the motive for creating the budget

D) the motive for creating the budget

18) Best products, an Atlanta based company, is in the midst of its budgeting process. It has already prepared its direct materials usage budget and is now in the process of preparing its direct material purchase budget. In addition to the details gathered to prepare the direct materials usage budget, Best also must know ________. A) the level of direct material inventory to be maintained B) the ratio of direct materials to cost of goods sold C) the beginning direct materials inventory level D) the quantity of direct materials to be purchased

D) the quantity of direct materials to be purchased

4) When performing a sensitivity analysis, if the selling price per unit is increased, then the ________. A) per unit fixed administrative costs will increase B) per unit direct materials purchase price will increase C) total volume of sales will increase D) total costs for sales commissions and other nonmanufacturing variable costs will increase

D) total costs for sales commissions and other nonmanufacturing variable costs will increase