Module 6 – Budgeting Systems

Revision materials

TRUE/FALSE

1. Budgeting helps management anticipate and adjust for trouble spots in advance.

2. The master budget reflects the impact of operating decisions, but not financing decisions.

3. To create greater commitment to the budget, top-management should create the budget
and then share it with lower-level managers.

4. A four-quarter rolling budget encourages management to be thinking about the next 12

months.

5. It is best to compare this year’s performance with last year’s actual performance rather than
this year’s budget.

6. When administered wisely, budgets promote communication and coordination among the
various subunits of the organization.

7. The sales forecast should primarily be based on statistical analysis with secondary input from
sales managers and sales representatives.

8. The operating budget is that part of the master budget that includes the capital
expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of
cash flows.

9. When the operating budget is used as a control device, managers are more likely to be
motivated to budget higher sales than actually anticipated.

10. Research has shown that challenging budgets (rather than budgets that can be easily
attained) are energizing and improve performance.
MULTIPLE CHOICE

1. Generally speaking, budgets are not used to:

A. identify a company's most profitable products.
B. evaluate performance.
C. create a plan of action.
D. assist in the control of profit and operations.
E. facilitate communication and coordinate activities.

2. Which of the following choices correctly denotes managerial functions that are
commonly associated with budgeting?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

3. A company's expected receipts from sales and planned disbursements to pay bills is
commonly called a:
A. pro-forma budget.
B. master budget.
C. financial budget.
D. profit plan.
E. cash budget.
4. Which of the following would be considered when preparing a company's sales
forecast?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

5. Swamp Fox has the following sales forecasts for its hip waders next year:
First Quarter..10,000 pairs
Second Quarter.5% increase over first quarter
Third Quarter3% decrease from second quarter
Fourth Quarter..8% increase over first quarter

What is Swamp Fox's estimated sales in units for next year?

A. 41,485 pairs.
B. 38,300 pairs.
C. 40,000 pairs.
D. 40,685 pairs.
E. Some other amount.

6. Bird plans to sell 5,000 units each quarter next year. During the first two quarters each
unit will sell for $12; during the last two quarters the sales price will increase $1.50
per unit. What is Bird's estimated sales revenue for next year?
A. $240,000.
B. $255,000.
C. $270,000.
D. $244,000.
E. Some other amount.
7. Bison Sporting Goods sells bicycles throughout the northeastern United States. The
following data were taken from the most recent quarterly sales forecast:

On the basis of the information presented, how many bicycles should the company
purchase in August?
A. 1,860.
B. 1,950.
C. 2,040.
D. 2,250.
E. Some other amount.

8. Coleman, Inc. anticipates sales of 50,000 units, 48,000 units, and 51,000 units in July,
August, and September, respectively. Company policy is to maintain an ending
finished-goods inventory equal to 40% of the following month's sales. On the basis of
this information, how many units would the company plan to produce in August?
A. 48,000.
B. 49,200.
C. 49,800.
D. 50,600.
E. Some other amount.

9. To derive the raw material to purchase during an accounting period, an accountant

would calculate the raw material required for production and then:
A. add the beginning raw-material inventory and the desired ending raw-material
inventory.
B. subtract the beginning raw-material inventory and the desired ending raw-material
inventory.
C. add the beginning raw-material inventory and subtract the desired ending raw-
material inventory.
D. add the desired ending raw-material inventory and subtract the beginning raw-
material inventory.
E. add the desired ending raw-material inventory and subtract both the beginning raw-
material inventory and the expected units to be sold.
10. Quattro began operations in April of this year. It makes all sales on account, subject to
the following collection pattern: 30% are collected in the month of sale; 60% are
collected in the first month after sale; and 10% are collected in the second month after
sale. If sales for April, May, and June were $60,000, $80,000, and $70,000,
respectively, what were the firm's budgeted collections for the quarter?
A. $121,000.
B. $140,000.
C. $153,000.
D. $175,000.
E. Some other amount.

11. Consider the following statements about companies that are involved with
international operations:
I. Budgeting for these firms is often very involved because of fluctuating values in
foreign currencies.
II. Multinational firms may encounter hyperinflationary economies.
III. Such organizations often face changing laws and political climates that affect
business activity.
Which of the above statements is (are) true?
A. I only.
B. III only.
C. I and II.
D. II and III.
E. I, II, and III.

12. If a manager builds slack into a budget, how would that manager handle estimates of
revenues and expenses?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
 Solutions
True/False

1. Answer: True

2. Answer: False
The master budget reflects the impact of operating decisions and financing decisions.

3. Answer: False
To create greater commitment to the budget, lower-level managers should participate in
creating the budget.

4. Answer: True

5. Answer: False
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.

6. Answer: True

7. Answer: False
The sales forecast should be primarily based on input from sales managers and sales
representatives with secondary input from statistical analysis.

8. Answer: False
Described is the financial budget part of the master budget, not the operating budget.

9. Answer: False
When the operating budget is used as a control device, managers are less likely to be
motivated to budget higher sales than actually anticipated.

10. Answer: True

MCQs

1. A

2. B

3. E

4. D

5. A
(10,000) + (10,000 x 1.05) + (10,000 x 1.05 x 0.97) + (10,000 x 1.08)
= 10,000 + 10,500 + 10,185 + 10,800 = 41,485

6. B
(5,000 x 2 x 12) + (5,000 x 2 x 13.50) = $255,000

7. C
(1,950 – 210 + 300) = 2,040

8. B
(48,000 – 19,200) + 20,400 = 49,200

9. D

10. C
(1005 of April) + (90% of May) + (30% of June)

11. E

12. B