Chapter 6 - Budgets

*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 Objective 6.3

C) estimated expense for maintenance of factory building

*80) 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

*7) What is budgeted cost of goods sold for 2016?* A) $720,000 B) $582,400 C) $691,200 D) $640,000 Objective 6.4

B) $582,400 Explanation: B) Cost of goods sold in 2015 per unit: $640,000/160,000 units = $4 per unit Number of units sold in 2016 = 160,000 × 0.91 = 145,600 units × $4 per unit = $582,400.

*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 Objective 6.2

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

*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 Objective 6.3

C) the expected level of sales for the company

*72) Prescher Company sells three products with the following seasonal sales pattern:* Products Quarter A B C 1 40% 30% 10% 2 30% 20% 30% 3 20% 20% 50% 4 10% 30% 10% The annual sales budget shows forecasts for the different products and their expected selling price per unit to be as follows: Product Units Selling Price A 50,000 $ 16 B 125,000 40 C 62,500 24 Required: Prepare a sales budget, in units and dollars, by quarters for the company for the coming year. First Second Third Fourth Quarter Quarter Quarter Quarter Total Product A Sales (in units) 20,000 15,000 10,000 5,000 50,000 - Price per unit $16 $16 $16 $16 $16 Sales (in dollars) $320,000 $240,000 $160,000 $80,000 $800,000 Product B Sales (in units) 37,500 25,000 25,000 37,500 125,000 - Price per unit $40 $40 $40 $40 $40 Sales (in dollars) $1,500,000 $1,000,000 $1,000,000 $1,500,000 $5,000,000 Product C Sales (in units) 6,250 18,750 31,250 6,250 62,500 - Price per unit $24 $24 $24 $24 $24 Sales (in dollars) $150,000 $450,000 $750,000 $150,000 $1,500,000

*Total sales:* First Quarter $1,970,000 Second Quarter $1,690,000 Third Quarter $1,910,000 Fourth Quarter $1,730,000 Total $7,300,000

*21) Describe the benefits of preparing an operating budget to an organization.* Objective 6.1

- A well-prepared operating budget should *serve as a guide* for a company to follow during the budgeted period. It is not "set in stone." If new information or opportunities arise the budget should be adjusted. - A well-prepared operating budget *assists management with the allocation of scarce resources*. It can help management see trouble spots in advance, and then management can decide where to allocate its limited resources. - A well-prepared operating budget *fosters communication and coordination among various segments of the company.* The process of preparing a budget requires managers from different functional areas to work together and communicate performance levels they both want and can attain. - A well-prepared operating budget *can become the performance standard against which firms can compare the actual results.*

*78) Describe operating and financial budgets and give at least two examples of each discussed in the textbook.*

- Operating budgets specify the expected outcomes of any selling, manufacturing, purchasing, labor management, R&D, marketing, distribution, customer service, and administrative activities during the planning period. Operations personnel use these plans to guide and coordinate activities during the planning period. Examples of operating budgets include the revenues budget, production budget, direct materials costs budget, direct manufacturing labor costs budget, manufacturing overhead budget, and budgets for R&D, marketing, distribution, customer service, and administrative activities. -Financial budgets are used to evaluate the financial consequences of a proposed decision. Examples of financial budgets include the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of cash flows.

*71) Listed below are elements of the master budget. Determine whether each budget is an operating budget or a financial budget. Place an O for operating budget or F for a financial budget.* 1. Capital expenditures budget 2. Cost of goods sold budget 3. Revenues budget 4. Budgeted statement of cash flows 5. Distribution costs budget 6. Marketing costs budget 7. Cash budget 8. Direct materials cost budget 9. Budgeted balance sheet 10. Budgeted income statement

1. F 6. O 2. O 7. F 3. O 8. O 4. F 9. F 5. O 10. O

Answer the following questions using the information below: Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016: Beginning inventory Ending inventory Direct materials 1,000 units 1,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 400 units 500 units *35) What are the 2016 budgeted production costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?* A) $12,200; $61,000; $18,300 B) $12,000; $60,000; $18,000 C) $2,000; $10,000; $3,000 D) $2,000; $0; $4,500

A) $12,200; $61,000; $18,300 Explanation: A) Budgeted cost for direct materials = $12,200 [6,100 units × $2]. Budgeted cost for direct manufacturing labor = $61,000 [6,100 units × $10]. Budgeted manufacturing overhead = $18,300 [6,100 × $3].

*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 Explanation: A) (60,000 × $1.50) + (35,000 × $5.80) = $293,000

*10) What is budgeted cost of goods sold for 2016?* A) $89,250 B) $98,250 C) $15,750 D) $257,040 Objective 6.4

A) $89,250 Explanation: A) Budgeted cost of goods sold = $105,000 × 0.85 = $89,250

*8) Should Kramer increase the selling price in 2016?* A) Yes, because operating income increases for 2016. B) Yes, because sales revenue increases for 2016. C) No, because sales volume decreases for 2016. D) No, because gross margin decreases for 2016. Objective 6.4

A) Yes, because operating income increases for 2016. Explanation: A) Yes, because it would result in an increase in operating income compared to 2015 ( 2016 operating income would be: $982,800 -$582,400 (COGS)-$260,000 (operating expenses, which are fixed) = $140,400 compared to $60,000 in 2015.

*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 Objective 6.2

A) adjustments for future conditions can be included

*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 Objective 6.1

A) budgeted balance sheet

*3) ERP systems store vast quantities of information about the materialsmachines 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 Objective 6.4

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 Objective 6.3

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

*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 Objective 6.2

A) future conditions can be different from the past

*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 Objective 6.1

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

*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 Objective 6.3

A) the level of direct material inventory to be maintained

*79) Discuss the importance of the sales forecast and items that influence its accuracy.*

All other budgets are based on information from the sales forecast. The sales forecast is a challenge to predict because its accuracy depends on the ability to forecast the state of the general economy changes in the industry, actions of the competition, and developments in technology. Each of these items affects individual products or product lines and are quantified and aggregated to obtain the sales forecast.

Answer the following questions using the information below: Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016: Prime Luxuria Selling price $200 $500 Direct materials 20 50 Direct labor 40 150 Manufacturing overhead 40 100 Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria. Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016. *40) What is the amount budgeted for purchase of Crimpson in 2016?* A) $31,500 B) $10,250 C) $30,500 D) $10,000

B) $10,250 Explanation: B) Budgeted amount for purchase of Crimpson = [$10 × (1125 units (Luxuria units produced) - 100 units (Units in hand)] = $10,250; Number of units of Luxuria to be produced = [1,000 units (Estimated sales) + 200 units (Budgeted ending inventory) - 75 units (Opening inventory)] = 1,125 units.

*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 Objective 6.3

B) $100,000 Explanation: B) Sales revenue = 20,000 baskets × $5 = $100,000

Answer the following questions using the information below: Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016: Beginning inventory Ending inventory Direct materials 24,000 units 24,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 2,000 units 2,500 units *30) On the 2016 budgeted income statement, what amount will be reported for cost of goods sold?* A) $139,800 B) $136,000 C) $132,600 D) $153,000

B) $136,000 Explanation: B) The cost per unit is $6.80 ($2 + $4 + $0.80). Therefore, the total cost of goods sold is $136,000 ($6.80 × 20,000).

Answer the following questions using the information below: Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016: Beginning inventory Ending inventory Direct materials 24,000 units 24,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 2,000 units 2,500 units *28) On the 2016 budgeted income statement, what amount will be reported for sales?* A) $246,000 B) $240,000 C) $312,000 D) $318,000 Objective 6.3

B) $240,000 Explanation: B) 20,000 units sold × $12 per pool cue = $240,000

Answer the following questions using the information below: Violet Sales Corp reports the year-end information from 2016 as follows: Sales (35,000 units) $280,000 Cost of goods sold 105,000 Gross margin 175,000 Operating expenses 150,000 Operating income $ 25,000 Violet is developing the 2016 budget. In 2016 the company would like to increase selling prices by 3.5%, and as a result expects a decrease in sales volume of 15%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. *9) What is budgeted sales for 2016?* A) $291,200 B) $246,330 C) $302,400 D) $322,000 Objective 6.4

B) $246,330 Explanation: B) Budgeted sales in 2016: Selling prices in 2015 were $8 per unit ($280,000/35,000 units); increase selling price by 3.5% in 2016 means new selling price per unit in 2016 is $8.28 per unit; 2016 sales volume will be 35,000 units × .85 = 29,750 units times $8.28 per unit = $246,330

Answer the following questions using the information below: Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016: Prime Luxuria Selling price $200 $500 Direct materials 20 50 Direct labor 40 150 Manufacturing overhead 40 100 Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria. Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016. *41) What is the total budgeted cost of sold for Meridian Industries in 2016?* A) $500,000 B) $600,000 C) $700,000 D) $800,000

B) $600,000 Explanation: B) Budgeted cost of goods sold for Prime = [3,000 units (Estimated sales) × $100 (Cost per unit)] = $300,000. Budgeted cost of goods sold for Luxuria = [1,000 units (Estimated sales) × $300 (Cost per unit)] = $300,000. Total cost of goods sold = $300,000 + $300,000 =$600,000.

Answer the following questions using the information below: Wallace Company provides the following data for next year: Month Budgeted Sales January $120,000 February 108,000 March 132,000 April 144,000 The gross profit rate is 35% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 20% of next month's sales, stated at cost. *45) What is the amount of purchases budgeted for January?* A) $63,960 B) $70,440 C) $78,000 D) $92,040

B) $70,440 Explanation: B) Budgeted purchases for January = $70 440 ($78,000* − $21,600 + $14,040**) *$120,000 × (100% − 35%) = $78,000 **$108,000 × (100% − 35%) × 20% = $14,040

Answer the following questions using the information below: Shamokin Manufacturing produces a Tourbillon watch movement called OM362. Shamokin expects to sell 10,000 units of OM362 and to have an ending finished inventory of 2,000 units. Currently, it has a beginning finished inventory of 800 units. Each unit of OM362 requires two labor operations, one labor hour of assembling and two labor hours of polishing. The direct labor rate for assembling is $10 per assembling hour and the direct labor rate for polishing is $12.50 per polishing hour. *47) The expected number of hours of direct labor for OM362 Bigger is ________.* A) 8,800 hours of assembling; 17,600 hours of polishing B) 11,200 hours of assembling; 22,400 hours of polishing C) 17,600 hours of assembling; 8,800 hours of polishing D) 22,400 hours of assembling; 11,200 hours of polishing

B) 11,200 hours of assembling; 22,400 hours of polishing Explanation: B) 10,000 + 2,000 - 800 = 11,200 (11,200 × 1) = 11,200 hours of assembling; (11,200 × 2) = 22,400 hours of polishing

Answer the following questions using the information below: Furniture Inc. estimates the following number of mattress sales for the first four months of 2016: Month Sales January 22,000 February 30,800 March 28,600 April 35,200 Finished goods inventory at the end of December is 6,600 units. Target ending finished goods inventory is 20% of the next month's sales. *43) How many mattresses need to be produced in January 2016?* A) 15,400 mattresses B) 21,560 mattresses C) 28,460 mattresses D) 34,160 mattresses

B) 21,560 mattresses Explanation: B) Number of mattresses to be produced in January = [22,000 units (Estimated sales) + 6,160 units (Budgeted ending inventory for January × 20%) - 6,600 units (Beginning inventory)] = 21,560 mattresses.

Answer the following questions using the information below: Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016: Prime Luxuria Selling price $200 $500 Direct materials 20 50 Direct labor 40 150 Manufacturing overhead 40 100 Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria. Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016. *39) How many units of Prime watches must be produced in 2016?* A) 3,350 units B) 3,150 units C) 3,000 units D) 2,800 units

B) 3,150 units Explanation: B) Number of units of Prime to be produced = [3,000 units (Estimated sales) + 350 units (Budgeted ending inventory) - 200 units (Opening inventory)] = 3,150 units.

Answer the following questions using the information below: Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016: Beginning inventory Ending inventory Direct materials 1,000 units 1,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 400 units 500 units *33) How many ceramic vases should be produced in 2016?* A) 5,900 vases B) 6,100 vases C) 7,000 vases D) 6,000 vases

B) 6,100 vases Explanation: B) Number of vases to be produced = 6,000 units (Estimated sales) + 500 units (Budgeted ending inventory) - 400 units (Opening inventory) = 6,100 units.

Answer the following questions using the information below: Furniture Inc. estimates the following number of mattress sales for the first four months of 2016: Month Sales January 22,000 February 30,800 March 28,600 April 35,200 Finished goods inventory at the end of December is 6,600 units. Target ending finished goods inventory is 20% of the next month's sales. *44) How many mattresses should be produced in the first quarter of 2016?* A) 88,880 mattresses B) 81,840 mattresses C) 60,280 mattresses D) 51,920 mattresses

B) 81,840 mattresses Explanation: B) January February March Total (For the quarter) Estimated sales 22,000 30,800 28,600 81,400 Less: Opening inventory 6,600 6,160 5,720 6,600 15,400 24,640 22,880 74,800 Add: Closing inventory 6,160 5,720 7,040 7,040 (20% of next month's sales) Budgeted production 21,560 30,360 29,920 81,840

*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 Objective 6.3

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 Objective 6.3

B) Financial budgets

*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. Objective 6.3

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. Objective 6.3

B) It reduces shrinkage costs.

*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 Objective 6.3

B) budgeted sales units

*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 Objective 6.3

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

*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 Objective 6.1

B) how to obtain funds to acquire resources

*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 Objective 6.3

B) input from sales managers and sales representatives

*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

*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 Explanation: C) The inventoriable cost as per GAAP is $21 ($3 + $10 + $6 + ($24,000 / 12,000 units)). As per GAAP, variable and fixed selling and administrative overhead costs are not inventoriable.

Answer the following questions using the information below: Shamokin Manufacturing produces a Tourbillon watch movement called OM362. Shamokin expects to sell 10,000 units of OM362 and to have an ending finished inventory of 2,000 units. Currently, it has a beginning finished inventory of 800 units. Each unit of OM362 requires two labor operations, one labor hour of assembling and two labor hours of polishing. The direct labor rate for assembling is $10 per assembling hour and the direct labor rate for polishing is $12.50 per polishing hour. *48) The expected cost of direct labor for OM362 is ________.* A) $350,000 B) $378,000 C) $392,000 D) $420,000

C) $392,000 Explanation: C) Expected cost of direct labor for OM362 = 11,200 units (Estimated units to be manufactured) × [($10 (assembling) + ($12.50 × 2) (polishing)] = $392,000.

Answer the following questions using the information below: Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016: Beginning inventory Ending inventory Direct materials 24,000 units 24,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 2,000 units 2,500 units *31) What are the 2016 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?* A) $48,000; $96,000; $19,200 B) $44,000; $88,000; $17,600 C) $41,000; $82,000; $16,400 D) $40,000; $80,000; $16,000

C) $41,000; $82,000; $16,400 Explanation: C) Direct materials = 20,500 × $2.00 = $41,000; Direct manufacturing labor = 20,500 × $4.00 = $82,000; Manufacturing overhead = 20,500 × $0.80 = $16,400

*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 Objective 6.3

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

Answer the following questions using the information below: The following information pertains to the January operating budget for Casey Corporation a retailer: Budgeted sales are $200,000 for January Collections of sales are 50% in the month of sale and 50% the next month Cost of goods sold averages 70% of sales Merchandise purchases total $150,000 in January Marketing costs are $3,000 each month Distribution costs are $5,000 each month Administrative costs are $10,000 each month *36) For January, budgeted gross margin is ________.* A) $100,000 B) $140,000 C) $60,000 D) $50,000

C) $60,000 Explanation: C) $200 000 - (.70 × $200,000) = $60,000

Answer the following questions using the information below: Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016: Prime Luxuria Selling price $200 $500 Direct materials 20 50 Direct labor 40 150 Manufacturing overhead 40 100 Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria. Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016. *42) What is the total budgeted cost of goods manufactured in 2016?* A) $600,000 B) $625,500 C) $652,500 D) $667,500

C) $652,500 Explanation: C) Budgeted cost of goods manufactured for Prime = [3,150 units (Estimated units to be manufactured) × $100 (Cost per unit)] = $315,000. Budgeted cost of goods manufactured for Luxuria = [1,125 units (Estimated units to be manufactured) × $300 (Cost per unit)] = $337,500. Total cost of goods sold = $315,00 + $337,500 =$652,500

Answer the following questions using the information below: Wallace Company provides the following data for next year: Month Budgeted Sales January $120,000 February 108,000 March 132,000 April 1 44,000 The gross profit rate is 35% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 20% of next month's sales, stated at cost. *46) What is the amount of purchases budgeted for February?* A) $32,214 B) $70,200 C) $73,320 D) $95,160

C) $73,320 Explanation: C) Budgeted purchases for February = $73,320 ($70,200* − $14,040 + $17,160**) *$108,000 × (100% − 35%) = $70,200 **$132,000 × (100% − 35%) × 20% = $17,160

Answer the following questions using the information below: Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016: Beginning inventory Ending inventory Direct materials 1,000 units 1,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 400 units 500 units *34) On the 2016 budgeted income statement, what amount will be reported for cost of goods sold?* A) $105,000 B) $91,500 C) $90,000 D) $88,500

C) $90,000 Explanation: C) Cost of goods sold is $90,000 [6,000 × ($2 + $10 + $3)].

Answer the following questions using the information below: Kramer Enterprises reports year-end information from 2015 as follows: Sales (160,000 units) $960,000 Cost of goods sold 640,000 Gross margin 320,000 Operating expenses 260,000 Operating income $60,000 Kramer is developing the 2016 budget. In 2016 the company would like to increase selling prices by 12.5%, and as a result expects a decrease in sales volume of 9%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. *6) What is budgeted sales for 2016?* A) $1,080,000 B) $1,000,000 C) $982,800 D) $873,600 Objective 6.4

C) $982,800 Explanation: C) Budgeted sales = $960,000 × 1.125 × 0.91 = $982,800

*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 Objective 6.3

C) 15,300 units Explanation: C) Units to be produced next year = 15,000 units (estimated sales) + 750 units (budgeted ending inventory) - 450 units (opening inventory) = 15,300 units

*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 Objective 6.3

C) 18,000 units Explanation: C) Number of units to be produced next year = 16,000 units (estimated sales) + 4,000 units (budgeted ending inventory) - 2,000 units (opening inventory) = 18,000 units.

Answer the following questions using the information below: Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016: Beginning inventory Ending inventory Direct materials 24,000 units 24,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 2,000 units 2,500 units *29) How many pool cues need to be produced in 2016?* A) 22,500 cues B) 22,000 cues C) 20,500 cues D) 19,500 cues

C) 20,500 cues Explanation: C) 20,000 units (Budgeted sales) + 2,500 (Budgeted ending inventory) - 2,000 (Beginning inventory) = 20,500 cues

*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 changes in current conditions. Objective 6.2

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.

*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

*77) Christy Enterprises reports the year-end information from 2015 as follows:* Sales (100,000 units) $500,000 Less: Cost of goods sold 300,000 Gross profit 200,000 Operating expenses (includes $20,000 of Depreciation) 120,000 Net income $ 80,000 Christy is developing the 2016 budget. In 2016 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 2016.

Christy Enterprises Budgeted Income Statement For the Year 2016 Sales (95,000 × $5.50) $522,500 Cost of goods sold (2016 sales × 62%) 323,950 Gross profit 198,550 Less: Operating expenses [($1.00 × 95,000] + $20,000) 115,000 Net income $ 83,550

Answer the following questions using the information below: Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016: Beginning inventory Ending inventory Direct materials 1,000 units 1,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 400 units 500 units *32) On the 2016 budgeted income statement, what amount will be reported for sales?* A) $122,000 B) $118,000 C) $140,000 D) $120,000

D) $120,000 Explanation: D) Total sales = 6,000 units × $20 = $120,000.

Answer the following questions using the information below: The following information pertains to the January operating budget for Casey Corporation a retailer: Budgeted sales are $200,000 for January Collections of sales are 50% in the month of sale and 50% the next month Cost of goods sold averages 70% of sales Merchandise purchases total $150,000 in January Marketing costs are $3,000 each month Distribution costs are $5,000 each month Administrative costs are $10,000 each month *37) For January, the amount budgeted for the nonmanufacturing costs budget is ________.* A) $78,000 B) $10,000 C) $168,000 D) $18,000

D) $18,000 Explanation: D) $3,000 + $5,000 + $10,000 = $18,000

*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 Objective 6.3

D) 8,000 units Explanation: D) 108,000 units (Budgeted production) + 20,000 units (Beginning finished goods inventory) - 120,000 units (Budgeted sales) = 8,000 units (Budgeted ending finished goods inventory)

*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. Objective 6.4

D) No, because operating income decreases for 2016. Explanation: D) $257,040 - $89,250 = $167,790 (Gross margin); $167,790 - $150,000 = $17,790 (Operating income). No, because there would be a decrease in operating income compared to 2016.

*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 Objective 6.3

D) cash budget

*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 Objective 6.3

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 Objective 6.3

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 Objective 6.2

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 sold Objective 6.3

D) number of units sold

*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 Objective 6.3

D) the motive for creating the budget

*60) TRUE or FALSE: A company usually prepares a budget for nonmanufacturing costs after preparing all operating budgets.*

FALSE Explanation: A company usually prepares a budget for nonmanufacturing costs along with operating budgets.

*63) TRUE or FALSE: Cost-based budgeting is a budgeting method that focuses on the budgeted cost of the activities necessary to produce and sell products and services.*

FALSE Explanation: Activity-based budgeting is a budgeting method that focuses on the budgeted cost of the activities necessary to produce and sell products and services.

*69) TRUE or FALSE: As budgeting is not a cross-functional activity it tends to be accurate and reliable with regard to forecasts.*

FALSE Explanation: Budgeting is a cross-functional activity involving inputs from different business functions of the value chain.

*14) TRUE or FALSE: After a budget is agreed upon and finalized by the management team the amounts should NOT be changed for any reason.* Objective 6.2

FALSE Explanation: Budgets should not be administered rigidly but rather should be adjusted for changing conditions.

*15) TRUE or FALSE: Even in the face of changing conditions, attaining the original budget is critical.* Objective 6.2

FALSE Explanation: Changing conditions usually call for a change in plans. Attaining the budget should not be an end in itself.

*58) TRUE or FALSE: Cost of goods sold budget takes inputs from both ending inventories budget and nonmanufacturing costs budget.*

FALSE Explanation: Cost of goods sold budget does not take any input from nonmanufacturing costs budget.

*18) TRUE or FALSE: Financing decisions deal with how to best use the limited resources of an organization.* Objective 6.1

FALSE Explanation: Financing decisions deal with how to obtain funds to acquire resources needed for the organization.

*19) TRUE or FALSE: It is best to compare this year's performance with last year's actual performance rather than this year's budget.* Objective 6.2

FALSE Explanation: It is best to compare this year's performance with this year's budget because inefficiencies and different conditions may be reflected in last year's actual performance amounts.

*64) TRUE or FALSE: The production cost budget identifies how each product is manufactured.*

FALSE Explanation: The bill of materials identifies how each product is manufactured specifying all materials, the sequence in which the materials are used, the quantity of materials in each finished unit, and the work centers where the operations are performed.

*66) TRUE or FALSE: The revenues budget is prepared after all other operating budgets are prepared.*

FALSE Explanation: The revenues budget is generally the starting point for preparing operating budgets and is generally the first operating budget to be prepared.

*62) TRUE or FALSE: The revenues budget should be based on the cost of goods sold budget.*

FALSE Explanation: The revenues budget provides input to the cost of goods sold budget.

*61) TRUE or FALSE: The use of activity-based cost drivers gives rise to zero-based budgeting.*

FALSE Explanation: The use of activity-based cost drivers gives rise to activity-based budgeting.

*11) TRUE or FALSE: A budget is the quantitative expression of a proposed plan of action by management for a specified period.* Objective 6.1

TRUE

*12) TRUE or FALSE: A budget generally includes both financial and nonfinancial aspects of the plan.* Objective 6.1

TRUE

*13) TRUE or FALSE: An organization's strategy matches its capabilities with the opportunities in the marketplace to accomplish its objectives.* Objective 6.1

TRUE

*16) TRUE or FALSE: Lower-level managers will not actively participate in the budget process if they perceive upper management does not believe in the process.* Objective 6.2

TRUE

*19) TRUE or FALSE: The feedback from budgets can lead to changes in plans and strategies.* Objective 6.1

TRUE

*20) TRUE or FALSE: Budgeted financial statements are called pro forma statements.* Objective 6.1

TRUE

*57) TRUE or FALSE: A rolling budget is the same as a continuous budget.*

TRUE

*65) TRUE or FALSE: The manufacturing labor budget depends on wage rates, production methods, and hiring plans.*

TRUE

*67) TRUE or FALSE: Activity-based budgeting provides better decision-making information than budgeting based solely on output-based cost drivers (units produced units sold, or revenues).*

TRUE

*68) TRUE or FALSE: Activity-based costing analysis takes a long-run perspective and treats all activity costs as variable costs.*

TRUE

*70) TRUE or FALSE: Activity-based budgeting would permit the use of multiple drivers and multiple cost pools in the budgeting process.*

TRUE

*22) Bob and Dale have just purchased a small honey manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company's main problem was an improper budgeting function. The company made a good product and market potential was great.* Required: Describe the usual budgeting cycle that well-managed companies adopt?* Objective 6.1

The usual budgeting cycle that well-managed companies adopt consists of the following three steps: 1. Before the start of the period managers and management accountants work together to develop plans for the company as a whole and the performance of its subunits, taking into account the company's past performance, market feedback, and anticipated future changes. 2. At the beginning of the period, managers are provided with a framework that outlines specific financial or nonfinancial expectations against which actual results will be compared. 3. During the course of the year, management accountants and managers investigate any deviations from plans and take corrective action, if necessary.

*75) Favata Company has the following information:* Month Budgeted Sales June $60,000 July 51,000 August 40,000 September 70,000 October 72,000 In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for July through September. July Aug Sept Total Desired ending inventory $ 8,400 $14,700 $15,120 $15,120 Plus COGS 35,700 28,000 49,000 112,700 Total needed 44,100 42,700 64,120 127,820 Less beginning inventory 10,710 8,400 14,700 10,710

Total purchases $33,390 $34,300 $49,420 $117,110

*74) Perry Company has provided the following information:* Month Budgeted Sales March $200,000 April 212,000 May 204,000 June 218,000 July 210,000 In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for April through June. April May June Total Desired ending inventory $36,720 $39,240 $37,800 $113,760 Add: Cost of goods sold 127,200 122,400 130,800 380,400 Total needed 163,920 161,640 168,600 494,160 Less: Opening inventory 38,160 36,720 39,240 114,120

Total purchases budget: $125,760 $124,920 $129,360 $380,040 Explanation: Desired ending inventory is for example for April: $204,000 × .60 × .30=$36,720. Cost of goods sold is for example for April: $212,000 × .60 = $127,200 Opening inventory for example for April: $212,000 × .60 × .30 = $38,160

*76) Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.90 per foot of framing, $8.00 per square foot of glass, and $4 per square foot of backing. Ending inventory of materials should be 150% of beginning inventory. Purchases are paid for in the month acquired.* Required: a. Determine the quantity of framing, glass, and backing that is to be purchased during August. b. Determine the total costs of direct materials for August purchases.

a. Framing Glass Backing Desired ending inventory* 2250 750 750 Production needs (10,000 units)** 40,000 10,000 20,000 Total needs 42,250 10,750 20,750 Less: Beginning inventory 1,500 500 500 Purchases planned 40,750 10,250 20,250 b. Cost of direct materials: Framing (40,750 × $0.90) $36,675.00 Glass (10,250 × $8.00) 82,000.00 Backing (20,250 × $4) 81,000.00 Total $199,675.00 * 1,500 × 1.5 = 2,250 framing 500 × 1.5 = 750 glass 500 × 1.5 = 750 backing ** 10,000 × 4 feet of framing = 40,000 feet of framing 10,000 × 1 square foot of glass = 10,000 square feet of glass 10,000 × 2 square feet of backing = 20,000 square feet of backing

*73) Lubriderm Corporation has the following budgeted unit sales for the next six-month period:* Month Unit Sales June 90,000 July 120,000 August 210,000 September 150,000 October 180,000 November 120,000 There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month. Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds. Required: a. Prepare production budgets in units for July, August, and September. b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.

a. July August September Budgeted sales 120,000 210,000 150,000 Add: Required ending inventory 42,000 30,000 36,000 Total inventory requirements 162,000 240,000 186,000 Less: Beginning inventory 24,000 42,000 30,000 Budgeted production 138,000 198,000 156,000 b. July August September Production in units 138,000 198,000 156,000 Targeted ending inventory in lbs.* 297,000 234,000 **252,000 Production needs in lbs.*** 690,000 990,000 780,000 Total requirements in lbs. 987,000 1,224,000 1,032,000 Less: Beginning inventory in lbs. ****207,000 297,000 234,000 Purchases needed in lbs. 780,000 927,000 798,000 Cost ($8 per lb.) × $8 × $8 × $8 Total material purchases $6,240,000 $7,416,000 $6,384,000 * 0.3 times next month's needs ** (180,000 + 24,000 - 36,000) times 5 lbs. × 0.3 *** 5 lbs. times units to be produced, across row **** (690,000 × .3) = 207,000 lbs., etc. row across Production needs in lbs.*** 690,000 990,000 780,000 Total requirements in lbs. 987,000 1,224,000 1,032,000 Less: Beginning inventory in lbs. ****207,000 297,000 234,000 Purchases needed in lbs. 780,000 927,000 798,000 Cost ($8 per lb.) × $8 × $8 × $8 Total material purchases $6,240,000 $7,416,000 $6,384,000 * 0.3 times next month's needs ** (180,000 + 24,000 - 36,000) times 5 lbs. × 0.3 *** 5 lbs. times units to be produced, across row **** (690,000 × .3) = 207,000 lbs., etc. row across