Accounting Chapter 8

Ending Finished Goods Inventory Budget

A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet.

Sales Budget

A detailed schedule showing expected sales expressed in both dollars and units.

Which of the following is true of a self-imposed budget?

Managers at all levels participate in preparing the budget. (Self-imposed budgets are prepared with the full cooperation of and active participation from managers at all levels. Individuals at all levels are recognized as members and their views and judgments are valued by top management.)

Identify the major sections of the cash budget from the following.

The cash excess or deficiency section The disbursements section The financing section The receipts section

Planning

The process of establishing goals and specifying how to achieve them.

Control

The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change.

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 variable selling and administrative expense budget (When variable selling and administrative expense budget depend on the number of units sold, the variable selling and administrative rate multiplied by the budgeted sales give the total variable selling and administrative expense budget.)

Continuous budgets ensure that managers do not become too narrowly focused on short-term results and keep them focused for at least one year ahead.

True

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

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

For the budget period ending December 31, 2015, 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. Raw materials worth $14,000 will be unpaid. What would be the amount of accounts payable reported on the budgeted balance sheet?

$14,000

Striker Company determines its expected receipts for the period to be $80,000 and expected disbursements to be $70,000. The beginning cash balance for the period was $5,000. The management wants to maintain a minimum balance of $40,000. What is the required borrowing assuming that the bank lends only in multiples of $10,000?

$30,000 (Required borrowing to maintain a minimum cash balance of $40,000 is $25,000. Because the bank lends only in multiples of $10,000, Striker would need to borrow at least $30,000.)

For the budget period ending December 31, 2015, 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. Raw materials worth $14,000 will be unpaid. Determine the amount of total current assets that will be reported on the budgeted balance sheet.

$40,000

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 would be Smarton's budgeted net income?

$48,000 (Budgeted net income on Smarton's budgeted income statement would be $48,000. $48,000 = $90,000 - $30,000 - $12,000.)

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. Calculate Precision Surgical Company's predetermined overhead rate for the year.

$6 per machine-hour (Predetermined overhead rate = (Variable manufacturing overhead + Fixed manufacturing overhead) / Total machine-hours required; $6 = (($4 × 100,000 machine-hours) + ($50,000 per quarter × 4 quarters)) / 100,000 machine-hours or ($400,000 + $200,000) / 100,000 machine-hours.)

Continuous Budget

A 12-month budget that rolls forward one month as the current month is completed.

Perpetual Budget

A 12-month budget that rolls forward one month as the current month is completed.

Budget

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

Cash Budget

A detailed plan showing how cash resources will be acquired and used over a specific time period.

Direct Materials Budget

A detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

Production Budget

A detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs.

Manufacturing Overhead Budget

A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period.

Direct Labor Budget

A detailed plan that shows the direct labor-hours required to fulfill the production budget.

Merchandise Purchases Budget

A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period.

Selling and Administrative Expense Budget

A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period.

Budget Committee

A group of key managers who are responsible for overall budgeting policy and for coordinating the preparation of the budget.

Participative Budget

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement.

Self Imposed Budget

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement.

Master Budget

A number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet.

Responsibility Accounting

A system of accountability in which managers are held responsible for those items of revenue and cost-and only those items-over which they can exert significant control. The managers are held responsible for differences between budgeted and actual results.

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

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 (Factors considered for planning the desired level of inventories are costs of carrying inventory and costs of lost sales.)

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

Some manufacturing overhead costs such as depreciation are non-cash expenses and are not considered in the preparation of the manufacturing overhead budget.

False (Non-cash manufacturing overhead costs do not cause cash outflows, but they are still overhead expenses and are included in the budget. However, they are subtracted from total manufacturing overhead to determine the expected cash disbursements.)

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

False (The budgeting process begins with the preparation of the sales budget. The sales budget is a detailed schedule showing the expected sales for the budget period.)

Which of the following is a reason that companies prepare direct labor budgets?

To avoid labor shortages (Companies prepare direct labor budgets to adjust the labor force according to the production schedule and to avoid the risk of labor shortages or costs of idle capacity.)

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

beginning inventory for the first quarter

In a budgeted income statement, _________ is subtracted from net operating income to arrive at net income.

interest expense (We subtract interest expense from net operating income to determine the net income.)

In a production budget, the production needs for the year equals ______.

the sum of production needs for the four quarters

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

$25,000 (Required borrowing to maintain a minimum cash balance of $40,000 is $25,000. $25,000 = $40,000 - (($80,000 - $70,000) + $5,000).

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 to produce, and the cost of direct labor per hour is $18. What would be the total direct labor cost for the fourth quarter?

$315,000 (Total direct labor cost for the fourth quarter = $315,000; $315,000 = 35,000 units × 0.50 direct labor-hour per unit × $18.)

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. Calculate the variable manufacturing overhead for the year.

$400,000 (Variable manufacturing overhead for the year = Variable manufacturing overhead rate per machine-hour × Total machine-hours required for the year; $400,000 = $4 × 100,000 machine-hours.)

Vineyard Corporation, a manufacturer of fine wines, began the year 2012 with 20,000 bottles in inventory. The company estimated the budgeted sales for the four quarters of 2012 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

Vineyard Corporation, a manufacturer of fine wines, began the year 2012 with 20,000 bottles in inventory. The company estimated the budgeted sales for the four quarters of 2012 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 is 25,000 bottles (third quarter sales of 250,000 bottles × ending inventory percentage of 10% = 25,000 bottles)