account test #3 multiple choice

The main difference between a flexible budget and a static budget is that the static budget is not adjusted for changes in the level of activity.

TRUE

The master budget consists of a number of separate but interdependent budgets.

TRUE

One of the weaknesses of budgets is that they are of little value in uncovering potential bottlenecks.

FALSE

Residual income can be used most effectively in comparing the performance of divisions of different size.

FALSE

Return on investment (ROI) equals margin multiplied by sales.

FALSE

The cash budget is the starting point in preparing the master budget.

FALSE

The production budget is typically prepared prior to the sales budget.

FALSE

When preparing a direct materials budget, beginning inventory for raw materials should be added to production needs, and desired ending inventory should be subtracted to determine the amount of raw materials to be purchased.

FALSE (direct material budget)

The expected cash collections from customers in December are:

Schedule of Expected Cash Collections

All other things the same, an increase in unit sales will normally result in an increase in the return on investment.

TRUE

An advantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income.

TRUE

Cash collections in a schedule of cash collections typically consist of collections on sales made to customers in prior periods plus collections on sales made in the current budget period.

TRUE

Comparing a static planning budget to actual costs is not a good way to assess whether variable costs are under control.

TRUE

If activity is higher than expected, total fixed costs should be higher than expected. If activity is lower than expected, total fixed costs should be lower than expected.

TRUE

In a flexible budget, when the activity declines, the total variable cost also declines.

TRUE

The budgeted income statement is typically prepared before the budgeted balance sheet.

TRUE

"Assume a company's sales budget for July estimates 15,000 units sold. The variable selling and administrative expense used for budgeting purposes is $4.00 per unit sold. The total budgeted fixed selling and administrative expense for July is $80,000 including depreciation of $15,000. What is the total budgeted selling and administrative expense for July?"

(15,000 x 4.00) + 80,000 don't use depreciation since it is included in the 80,000

Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment? 1. Return on Investment (Y/N) 2. Residual Income (Y/N)

1. No 2. No

Which of the following performance measures will increase if inventory decreases and all else remains the same? 1. Return on Investment (Y/N) 2. Residual Income (Y/N)

1. Yes 2. Yes

"Assume a company's estimated sales for January, February, and March are 38,000 units, 39,000 units, and 37,000 units, respectively. The company always maintains ending finished goods inventory equal to 20% of next month's unit sales. What is the required production in units for January?"

39,000 x 20%= ending inventory 38,000 x 20%= beginning inventory (ending inv. - beginning inv.) + 38,000 = SOLUTION

If the company wishes to maintain a minimum cash balance of $30,000 at the end of every month, then its borrowings at the beginning of May will equal?

Cash Budget

How many pounds of raw material need to be purchased in April?

Direct Materials Budget

"Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its return on investment is less than 12%."

FALSE

A change in sales has no effect on margin and turnover.

FALSE

Fixed costs should not be included in a flexible budget because they do not change when the level of activity changes.

FALSE

Land held for possible plant expansion would be included as an operating asset when computing return on investment (ROI).

FALSE

Which of the following would be considered an operating asset in return on investment computations? a. land being held for plant expansion. b. treasury stock. c. accounts receivable d. common stock.

c. accounts receivable

Which of the following will not result in an increase in return on investment (ROI), assuming other factors remain the same? a. reduction in expenses. b. increase in net operating income. c. increase in operating assets. d. increase in sales.

c. increase in operating assets.

There are various budgets within the master budget. One of these budgets is the production budget. Which of the following BEST describes the production budget? a. it details the required direct labor hours. b. it details the required raw materials purchases. c. it is calculated based on the sales budget and the desired ending inventory d. it summarizes the costs of producing units for the budget period.

c. it is calculated based on the sales budget and the desired ending inventory

Which of the following may appear on a flexible budget performance report: a. An unfavorable activity variance. b. A favorable revenue variance. c. An unfavorable spending variance. d. All of the above may appear on a flexible budget performance report.

d. All of the above may appear on a flexible budget performance report.

When using a flexible budget, a decrease in activity within the relevant range:

decrease total costs

A budget that is based on the actual activity of a period is known as a:

flexible budget

When preparing a direct materials budget, the required purchases of raw materials in units equals:

raw materials needed to meet the production schedule + desired ending inventory of raw materials − beginning inventory of raw materials.

The usual starting point for a master budget is:

the sales forecast or sales budget.

One disadvantage of budgeting is that budgeting makes it more difficult to coordinate the plans and activities of departmental managers

FALSE

Which of the following would not be included in operating assets in return on investment calculations?

Factory building rented to (and occupied by) another company.

The production budget is typically prepared prior to the sales budget.

TRUE

The use of return on investment (ROI) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole.

TRUE

To help assess how well a manager has controlled costs, actual costs should be compared to what the costs should have been for the actual level of activity.

TRUE

Using a flexible budget, actual results can be compared to what costs should have been at the actual level of activity.

TRUE

When used in return on investment (ROI) calculations, turnover equals sales divided by average operating assets.

TRUE

he number of units to be produced in a period can be determined by adding the expected sales to the desired ending inventory and then deducting the beginning inventory.

TRUE (production budget)

In a flexible budget, what will happen to fixed costs as the activity level increases?

The fixed cost per unit will decrease.