Section B Quiz

Which one of following budgets is regarded as the foundation of the master budget?

Sales The sales budget is the foundation of the master budget. It is the first budget prepared in the master budget process.

Sewing Masters produces curtains and sells each curtain for $40. Sewing Masters often sees a spike in sales in March and April due to spring cleaning. The company plans to sell 257,000 curtains in the month of April. At the end of March, it expects to have 52,000 curtains in inventory, and it would like to have 15,000 curtains in inventory at the end of April. What is the company's budgeted sales revenue for April?

$10,280,000 Budgeted revenue is calculated as "Budgeted Unit Sales × Budgeted Selling Price." Each curtain is expected to sell for $40 and a total of 257,000 curtains are expected to be sold. This results in budgeted sales revenue of $10,280,000 (257,000 × $40). Therefore, this is the correct answer.

Techgear Inc. manufactures specialty suits for triathletes. For the month of January, it projects the following selling and administrative expenses: sales commissions, 4% of sales; shipping expense, $4,500; advertising and marketing costs payable next month, $12,000; electric and water utilities, $750; corporate office depreciation for computers, $8,800; bad debt expense, $8,000. Sales for the month of January equal $400,000. What is the total of cash costs that will be reported on the cash budget?

$21,250 A cash budget is based on expected cash flows for a specific period of time, not accrual accounting expenses. Non-cash expenses such as depreciation expense and allowance for bad debts and expenses not to be paid in the current period are not included. In this example the cash outflows for January are $16,000 for sales commissions ($400,000 × 4%), $4,500 for shipping expense, and $750 for electric and water utilities. This is a total of $21,500. Therefore, this is the correct answer.

Casteel Lawn Service is preparing its direct labor budget for the first quarter of the year. The firm provides a variety of mowing, clean-up, and planting services. The total direct labor budget for the first quarter is $22,200. The firm expects 300 small jobs which take 1 hour each, 200 medium jobs which take 1.75 hours each, and 100 large jobs which take 2.75 each. What is Casteel's direct labor cost per hour?

$24.00 The total direct labor budget is calculated as "Expected Hours Needed × Direct Labor Cost Per Hour." Rearranging this results in direct labor per hour being calculated as "Total Direct Labor Budget ÷ Expected Hours Needed." In this example 300 hours are needed for small jobs (300 × 1 hour), 350 hours for medium jobs (200 × 1.75), and 275 hours for large jobs (100 × 2.75). This sums to 925 total hours. Since the total direct labor budget is $22,200, the direct labor cost per hour is $24.00 ($22,200 ÷ 925). Therefore, this is the correct answer.

PB Popcorn manufactures gourmet caramel corn, cheese corn, and other flavors of popcorn. It expects production of 266 cartons and sales of 280 cartons of popcorn in the next quarter. Each carton requires 5 direct labor hours and employees are paid $18 per hour. Manufacturing overhead is applied at 120% of direct labor cost. What is the total amount of budgeted manufacturing overhead for the quarter?

$28,728 Manufacturing overhead refers to manufacturing costs that are not directly traceable to products. In this example manufacturing overhead is allocated as 120% of direct labor dollars. This means that overhead will be $1.20 for every $1.00 in direct labor. To produce 266 cartons, 1,330 hours of direct labor will be required. At a wage rate of $18 per hour, budgeted total direct labor dollars would be $23,940 (1,330 × $18). This results in budgeted manufacturing overhead of $28,728 ($23,940 × 120%). Therefore, this is the correct answer.

A merchandising company has computed that its required merchandise purchases are $342,720. The company's beginning inventory is budgeted at $100,800, and its desired ending inventory is budgeted at $107,520. What is the company's budgeted cost of goods sold?

$336,000 For a merchandising company, cost of goods sold is defined as "Budgeted Beginning Inventory + Budgeted Merchandise Purchases − Desired Ending Inventory." Using the numbers in this example results in cost of goods sold of $336,000 ($100,800 + $342,720 − $107,520). Therefore, this is the correct answer.

LDM Co. is preparing its direct materials budget for the month. The desired ending inventory of direct materials at the end of the month is 96,000 yards. The company has budgeted to purchase 138,000 yards during the month. Assuming there is no beginning inventory, what is the amount of total direct materials budgeted to be used during the month for production?

42,000 yards This answer is incorrect. The budget for total materials to be purchased is calculated as "Materials for Production + Desired Ending Inventory − Beginning Inventory." Rearranging these figures results in materials for production being calculated as "Total Materials to Be Purchased - Desired Ending Inventory + Beginning Inventory." This answer added total Materials to be purchased to desired ending inventory instead of subtracting it.

Which of the following statements concerning best practices in budgeting is correct?

A blend of the authoritative (or top-down) approach and the participative (or bottom-up) approach is a best practice for budgeting.

A company wants to develop a budget that is suitable to plan activities in an environment of rapid changes. Which budgeting system would be the most appropriate system to use for this purpose?

A continuous or rolling budgeting system. Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the budget stays up-to-date with the operating environment. Because a continuous or rolling budgeting system results in up-to-date budgets, it is the most appropriate system to use for planning activities in an environment of rapid changes.

Budgets are

A deterrent to waste Budgets can provide many benefits to an organization. One benefit is to establish expectations and limits for spending. By establishing limits on spending, the likelihood of wasteful spending is decreased. Therefore, this is the correct answer.

Which of the following statements concerning the preparation of a flexible budget is correct?

A flexible budget is prepared after a period is over and actual activity is known. Correct. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual activity level would be. Variable costs are adjusted based on changes in volume while fixed costs remain the same. It can only be prepared after a period is over and actual activity is known.

Which of the following statements correctly describes a disadvantage of using a master budgeting system?

A master budgeting system is based on a set of assumptions that may not come true.

A company wants to develop a budget that includes plans for all aspects of the organization. Which budgeting system would be the most appropriate system to use for this purpose?

A master budgeting system.

Which of the following statements concerning mission statements is not correct?

A mission statement expresses an organization's success in terms of its contribution to society.A mission statement expresses an organization's success in terms of its contribution to society. A mission statement provides a clear statement about how the organization will work toward achieving its vision. A vision statement, not a mission statement, expresses an organization's success in terms of its contribution to society; therefore, this is the correct answer.

A clothing company is evaluating two possible locations for a new retail store. The company's research indicates that Location A has a 45% probability of generating $400,000 in cash flow, and a 55% probability of generating $325,000 in cash flow. Location B has a 25% probability of generating $600,000 in cash flow, and a 75% probability of generating $250,000 in cash flow. Based on the expected value for each location, the company should choose Location:

A, because its expected value is $21,250 higher than Location B. An expected value is the weighted average value of possible outcomes. The probabilities for a given scenario must equal 100%. In this problem, the expected cash flow value for Location A equals $358,750 (($400,000 × 45%) + ($325,000 × 55%)) and the expected value for Location B equals $337,500 (($600,000 × 25%) + ($250,000 × 75%)). This company should choose Location A because its expected value is $21,250 higher than Location B's expected value ($358,750 − $337,500).

________ is/are shown on the _____________.

Advertising expense; selling and administrative expense budget The selling and administrative budget details expected spending on non-manufacturing items. One type of selling and administrative expense is advertising expense. Therefore, this is the correct answer.

Identify which of the following statements is most accurate in regard to budgeting and strategy implementation:

Budgeting is focused on short-term objectives. Short-term objectives and processes must be constantly evaluated and adjusted to ensure alignment with long-term objectives and the organization's overall strategy.

Practical Pianos Company is analyzing their cash budget for the year. It appears that there won't be sufficient cash in the organization at a key point in the next year. Which of the following is not an approach that Practical Pianos Company can use to solve the cash need?

Establish a less strict credit policy that will accelerate cash collections.'

Which phrase best describes a use of a pro forma income statement?

Evaluating whether profitability targets will be met. Correct. The pro forma income statement provides information on expected revenues, expenses, and income for a given period of time. As a result, it can be used to evaluate whether profitability targets will be met.

"A higher authority, other than the team that developed a budget, must review and approve the budget." How does this contribute to a successful budget?

Higher authorities will be able to identify flaws and discrepancies in a budget. Higher authorities are in a better position to identify flaws and discrepancies in a budget. They are also capable of identifying unrealistic goals and targets set in the budget. Moreover, they also vouch for the adequacy of the targets. Managers sometimes set low targets which are easily attainable in order to meet performance standards. However, this affects organizational goals in the long run.

Murphy Harvey, Inc. has completed one year of operations. For the upcoming year, the board of directors has prepared a budget planning its course of actions throughout the year. However, the company's CFO is of the opinion that cost standards will not accurately predict future costs. Which of the following conditions will most likely justify the CFO's view?

If raw materials will not be available at the prices estimated in the budget. If resources are available at a price higher than the price estimated in the budget, the company will incur more costs than estimated.

Which of the following is a characteristic of long-range planning?

It is used to review progress rather than as a basis for control. Long-range plans lack the detail of a budget so they are not used as a basis for control; rather, they are used to assess the progress made toward achieving long-range goals. This is the correct answer

A country's political environment will likely affect which of the following?

Long-range planning but not budgeting Long-range planning requires a company to consider factors that will likely impact the company over the long term, while budgeting typically covers periods of one year or less. A country's political environment includes items such as regulatory action and taxes. These items are likely to impact long-range decisions more than short-run decisions. The political environment will likely affect long-range planning but not budgeting; therefore, this is the correct answer.

An organization is planning their master budget. They begin by listing all their expected cash outflows, including employee salaries and benefits, utilities, program expenses, insurance, vehicle registration and maintenance, and rent expenses. This organization is likely which of the following?

Not-for-profit The master budget is a set of budgets that establish an organization's plans for a period of time. It consists of operating budgets (what an organization plans to do) and financial budgets (where it expects to get needed financial resources from). Since this organization did not list expected sales (in units) or selling prices, it is not likely to be a for-profit organization. Rather, it is likely to be a not-for-profit organization. Therefore, this is the correct answer.

Budgets are a management tool used to do which of the following?

Plan and control the direction of a company's operations. A company uses budgets to allocate resources to different areas of the company, ensure that sufficient resources are available, signal strategic priorities, and establish performance expectations. Budgets enable a company to plan and control the direction of the company's operations. Therefore, this is the correct answer.

How do the pro forma financial statements link back to the strategic plan?

Pro forma financial statements link back to the strategic plan as a feedback evaluation loop.

Devin's Custom Construction designs and builds custom houses for consumers. Customers have several base plans to choose from, and modifications can be made from those plans. The modifications can range from being very minor to significant. The houses generally take from three months to one year to design and build, depending on the amount of customization. What is the best type of budgeting for this business situation?

Project budgeting The best type of budgeting for this business situation would be project budgeting. Project budgeting focuses on one particular project or venture. It estimates the cost, time, and resources needed to plan and execute a particular project in an organization. Project budgeting is best suited to the unique nature of custom home building.

Which statement is correct concerning preparing a sales budget?

Sales forecasts should be based on both statistical analysis and qualitative analysis techniques. Correct. A sales budget is an estimate of expected unit sales and expected selling prices. One way to determine expected unit sales is to use statistical analysis techniques such as regression analysis and time series analysis. These techniques have the advantage of being able to incorporate a large amount of data in an objective way. In addition, qualitative techniques that rely on sales managers' judgment and experience are also useful as these can provide information that statistical techniques cannot. Using both of these types of techniques results in better forecasts than relying on only one type of technique.

Which of the following statements is true concerning situational analysis as it is used in strategic planning?

Situational analysis is used to analyze an organization's external and internal environment. Situational analysis, based on scenario analysis and contingency planning, helps an organization analyze both its internal and external environments. Situational analysis can employ specific tools such as SWOT analysis, Porter's Five Forces analysis, and PESTLE analysis. Therefore, this is the correct answer.

Which of the following best describes the function of strategic analysis?

Strategy addresses the objectives of an organization and evaluates the risks of alternative strategies. Strategy addresses the objectives of the organization and evaluates the risks of alternative strategies.

Which of the following statements is correct concerning the use of a cash budget?

The cash budget can be used to determine the feasibility of increasing R&D expenditures during a year. Correct. A cash budget provides a summary of budgeted cash inflows and outflows from all sources for a given period of time. This information can be used to determine the budgeted ending cash balance. Having an estimate of cash on hand can help a company determine the feasibility of increasing R&D expenditures during a year.

The board of directors of Edith Research Group has prepared the budget for the next quarter and decided to review the company's performance after each quarter. At the end of the first quarter, the variances of actual performance from the budgets were examined and the reasons for the variances were recorded. The company also collected feedback from the employees on improvements for the budget. Identify the flaw, if any, in the budget cycle of Edith Research Group.

The company is not taking corrective actions to reduce the variance. In a budget cycle, when variance from a budget is discovered, it should be examined and corrective actions should be taken when possible.

Why is a company's sales budget developed before the production budget?

The company only wants to produce as many units as it expects to sellThe company only wants to produce as many units as it expects to sell The sales budget is used to determine expected revenue. It is based on the sales forecast (expected units to be sold) and expected selling prices. By developing the production budget after the sales budget, a company can produce only as many units as it expects to sell (before any changes in inventory). Therefore, this is the correct answer.

How does the selling and administrative expense budget differ from the direct labor budget?

The direct labor budget is based on the number of units to be produced, whereas the selling and administrative expense budget is based on the number of units the company expects to sell. The selling and administrative budget details the expected amount to be paid for selling and administrative expenses. It is based on the expected units to be sold and the expected variable and selling administrative expenses. The direct labor budget details the amount of labor needed and the expected amount to be paid in wages to direct labor workers. It is based on the number of units expected to be produced, the expected amount of labor hours required to complete each finished unit, and the expected hourly wage to be paid. Therefore, this is the correct answer.

Which of the following budgets do not affect the cash budget?

The direct materials, direct labor, manufacturing overhead, selling and admin, sales, and capital expenditures budgets all affect the cash budget.

The personnel manager of Martin Power Inc. does not consider equipment downtime and worker breaks during the determination of standard costs for direct labor. Evaluate the effect of the manager's action.

The labor efficiency variance will be higher.

Which of the following is not a component of the selling and administrative expense budget?

The production line manager This is a manufacturing overhead expense, not a selling and administrative expense.

Francisco Corp. is in the business of manufacturing plastic bottles. In the current quarter, $100,000 was provided for materials procurement and 10,000 bottles were produced against a budgeted production of 8,500 bottles. However, the extra production of 1,500 bottles had to be sold immediately at a price lower than the market price. Identify the most likely flaw in the budget prepared by Francisco Corp. which led to a sale at lower prices.

The storage capacity required was underestimated. Due to a lack of storage space, the extra production of bottles had to be sold immediately at a lower price.

Fukui Electronics is preparing its budgeted production for the coming quarter. The company plans to produce 6,000 units and will require 18,000 pounds of direct materials for production. The total materials required for the quarter are 19,800 pounds. What are the direct materials per unit?

The total materials required to be purchased for the quarter is calculated as "Materials needed for Production + Desired Ending Inventory − Expected Beginning Inventory." Materials needed for production is calculated as "Expected Production × Direct Materials per Unit." Rearranging this results in direct materials per unit being calculated as "Materials Needed for Production ÷ Expected Production." In this example the direct materials per unit would be 3.3 pounds if the total materials required is used instead of the materials required for production in the numerator (19,800 ÷ 6,000). Therefore, this is an incorrect answer.

Which of the following correctly describes the cost of goods sold (COGS) formula?

The traditional COGS formula begins with direct materials purchases, which is adjusted by adding beginning and subtracting ending direct materials inventory to compute the cost of direct materials used in production. This cost is combined with direct labor used and manufacturing overhead costs applied in production. The total production costs (i.e., total manufacturing costs) are adjusted by adding beginning and subtracting ending finished goods inventory to determine the COGS computation.

Rowan Catering is a service company that employs 12 full-time chefs and 150 part-time servers. The company frequently caters 50 parties each week in a large metro area; however, with the downturn in the economy, they have only been averaging 28 parties per week. How will this affect their direct labor budget?

Their direct labor budget will decrease, which means they will likely need to lay off some employees. Direct labor is a variable cost, meaning that the total amount budgeted for direct labor changes in direct proportion to changes in expected volume. As the number of parties per week decreases, less direct labor will be needed. This means the direct labor budget will decrease and some employees will likely need to be laid off. Therefore, this is the correct answer.

Which of the following is not a step in an ideal budget process?

Top management defines strategic direction for budget participants. Budget participants outside of top management prepare an initial budget draft. The initial budget draft is submitted for final review and approval. Top management approves the final budget. The initial budget draft is submitted for final review and approval. An ideal budget process blends ideas from an authoritative (top-down) approach with ideas from a participative (bottom-up) approach. In the ideal approach, the initial budget draft is reviewed by the next level of management, not immediately submitted for final review and approval. Having the next level of management provide a "fresh look" at the initial draft is likely to improve the budget as they may have insights the initial drafters do not have. Immediately submitting the initial draft for final approval will make this improvement impossible; therefore, this is the correct answer.

As compared to a bottom-up budget, a top-down budget is ________.

less likely to be realistic A company needs to have realistic information about its operations and industry to create a realistic budget. The best source for this information is likely the people heavily involved in the company's day-to-day operations. A bottom-up approach to budgeting means information from lower levels of a company, the bottom, is shared with higher levels, the top. In a top-down approach, the higher levels of a company create budgets that are then distributed to the lower levels of the company to be implemented. Since upper management is not likely to have the most realistic information about operations and the industry, a top-down approach is less likely than a bottom-up approach to create a more realistic budget. Therefore, this is the correct answer.