Budgeting Quiz 2

Multiple Choice
Identify the choice that best completes the statement or answers the question.

Fact Pattern for #1: Berol Company plans to sell 200,000 units of finished product in July and
anticipates a growth rate in sales of 5% per month. The desired monthly ending inventory in
units of finished product is 80% of the unit of finished next month’s estimated sales. There are
150,000 finished units in inventory on June 30. Each product requires 4 pounds of direct
materials at a cost of $1.20 per pound. There are 800,000 pounds of direct materials in
inventory on June 30.

____ 1. Berol Company’s production requirement in units of finished product for the 3-month period
ending September 30 is
a. 638,000 units. c. 665,720 units.
b. 712,025 units. d. 630,500 units.
____ 2. Which one of the following best describes the role of top management in the budgeting
process? Top management
a. Lacks the detailed knowledge of the daily operations and should limit their
involvement.
b. Needs to be involved, including using the budget process to communicate
goals.
c. Should be involved only in the approval process.
d. Needs to separate the budgeting process and the business planning process
into two separate processes.

____ 3. Which one of the following is not a characteristic of a successful budget process?
a. Gaining top management’s support.
b. Setting specific expectations to compare to actual results.
c. Using market feedback to assist in setting expectations.
d. Implementing the budget as the only benchmark for performance evaluation.
____ 4. Which one of the combinations listed correctly depicts the chronological order of preparation for
the following budgets?
I. Cost of goods sold budget
II. Production budget
III. Purchases budget
IV. Administrative budget

a. I, II, III, IV. c. IV, II, III, I.

b. II, III, I, IV. d. III, II, IV, I.
Fact Pattern for #5-9: The following information was adapted from a question on Part 4 of
the December 1990 CMA examination that concerned preparation of a pro forma statement of
cost of goods sold. The following is Watson Corporation’s pro forma statement of cost of goods
sold for the year ended August 31, Year 2.

Watson Corporation
Pro Forma Statement of Cost of Goods Sold
For the Year Ending August 31, Year 2
($000 omitted)

Direct materials:
Materials inventory, 9/1/Yr 1 $ 1,200
Materials purchased 11,400
Materials available for use 12,600
Materials inventory, 8/31/Yr 1,480
Direct materials consumed $11,120
Direct labor 980
Factory overhead:
Indirect materials 1,112
General factory overhead 2,800 3,912
Cost of goods manufactured 16,012
Add: finished goods inventory 9/1/Yr 1 930
Cost of goods available for sale 16,942
Less: finished goods inventory, 8/31/Yr 2 (377)
Cost of goods sold $16,565

The results for the first quarter required the following changes in the budget assumptions:

 The estimated production in units for the fiscal year should be revised from 140,000 to
145,000 units with the balance of production being scheduled in equal segments over
the last 9 months of the year. The actual first quarter’s production was 25,000 units.
 The planned inventory for finished goods of 3,300 units at the end of the fiscal year
remains unchanged and will be valued at the average manufacturing cost for the year.
The finished goods inventory of 9,300 units on September 1, Year 1, had dropped to
9,000 units by November 30, Year 1.
 Due to a new labor agreement, the labor rate will increase 8% effective June 1, Year 2,
the beginning of the fourth quarter, instead of the previously anticipated effective date
of September 1, Year 2, the beginning of the next fiscal year.
 The assumptions remain unchanged for direct materials inventory at 16,000 units for the
beginning inventory and 18,500 units for the ending inventory. Direct materials
inventory is valued on a FIFO basis. During the first quarter, direct materials for 27,500
units of output were purchased for $2,200,000. Although direct materials will be
purchased evenly for the last 9 months, the cost of the direct materials will increase by
5% on March 1, Year 2, the beginning of the third quarter. One unit of raw material is
used in each unit of product.
 Indirect materials costs will continue to be projected at 10% of the cost of direct
materials consumed.
 One-half of general factory overhead is considered fixed.
____ 5. Watson’s revised pro forma cost of goods sold is closest to
a. $17,760,000 c. $16,565,000
b. $17,377,000 d. $16,942,000
____ 6. Watson’s revised pro forma cost of goods sold statement will report direct materials purchased
of
a. $11,600,000 c. $11,400,000
b. $12,120,000 d. $11,800,000
____ 7. Watson’s revised pro forma cost of goods manufactured is
a. $16,012,000 c. $17,760,000
b. $15,430,000 d. $16,830,000
____ 8. Watson’s revised pro forma amount of direct labor cost is
a. $1,096,200 c. $1,037,400
b. $1,058,400 d. $980,000
____ 9. Watson’s revised pro forma ending direct materials inventory is
a. $1,554,000 c. $1,280,000
b. $1,480,000 d. $1,520,136
____ 10. Myers Company uses a calendar year and prepares a cash budget for each month of the year.
Which one of the following items should be considered when developing July’s cash budget?
a. Federal income tax and Social Security tax withheld from employees’ June
paychecks to be remitted to the Internal Revenue Service in July.
b. Recognition that 0.5% of the July sales on account will be uncollectible.
c. Quarterly cash dividends scheduled to be declared on July 15 and paid on
August 6 to shareholders of record as of July 25.
d. Property taxes levied in the last calendar year scheduled to be paid quarterly
in the coming year during the last month of each calendar quarter.

____ 11. Which one of the following schedules would be the last item to be prepared in the normal
budget preparation process?
a. Cash budget. c. Direct labor budget.
b. Cost of goods sold budget. d. Manufacturing overhead budget.
____ 12. Adams Manufacturing, Inc., produces farm tractors. The details of its budgeted cost of goods
manufactured schedule should come from which of the following schedules?
a. Purchases, direct labor, manufacturing overhead, finished goods, and
work-in-process.
b. Direct materials used, direct labor, manufacturing overhead, and
work-in-process.
c. Cost of goods sold plus or minus the change planned in finished goods.
d. Purchases, raw material, work-in-process, and finished goods.
 Fact Pattern for #13: Scarborough Corporation manufactures and sells two products,
Thingone and Thingtwo. Scarborough’s budget department gathered the following data to
project sales and budget requirements:

Projected Sales
Product Units Price
Thingone 60,000 $ 70
Thingtwo 40,000 100

Projected Inventories -- in units

Product Expected Desired
January 1 December 31
Thingone 20,000 25,000
Thingtwo 8,000 9,000

To produce one unit of Thingone and Thingtwo, the following raw materials are used:

Raw Material Unit Thingone Thingtwo

A lb. 4 5
B lb. 2 3
C each 0 1

Projected direct labor requirements and rates are as follows:

Thingone -- 2 hours per unit at $3 per hour

Thingtwo -- 3 hours per unit at $4 per hour

Overhead is applied at the rate of $2 per direct labor hour.

____ 13. What is Scarborough’s raw materials budget in quantities?

A B C

a. 465,000 253,000 41,000

b. 501,000 285,000 48,000
c. 533,000 314,000 54,000
d. 469,000 256,000 42,000

____ 14. In developing a comprehensive budget for a manufacturing company, which one of the
following items should be done first?
a. Determination of manufacturing capacity.
b. Development of a sales plan.
c. Determination of the advertising budget.
d. Development of the capital budget.
____ 15. The starting point for creating a master budget for a proprietary secretarial school would be
a. Forecasting enrollment.
b. Preparing a capital expenditure budget.
c. Preparing the student recruiting budget.
d. Estimating salaries of the instructors.
____ 16. The budget that describes the long-term position and objectives of an entity within its
environment is the
a. Strategic budget. c. Operating budget.
b. Capital budget. d. Cash management budget.
____ 17. Which one of the following is not an advantage of activity-based budgeting?
a. Better identification of resource needs.
b. Reduction of planning uncertainty.
c. Linking of costs to outputs.
d. Identification of budgetary slack.
____ 18. The production budget process usually begins with the
a. Sales budget. c. Direct materials budget.
b. Direct labor budget. d. Manufacturing overhead budget.

Fact Pattern for #19: Streeter Company produces plastic microwave turntables. Sales for the
next year are expected to be 65,000 units in the first quarter, 72,000 units in the second
quarter, 84,000 units in the third quarter, and ally maintains a finished goods inventory at the
end of each 66,000 units in the fourth quarter. Streeter usually maintains a finished goods
inventory at the end of each quarter equal to one half of the units expected to be sold in the
next quarter.

____ 19. How many units should Streeter produce in the second quarter?
a. 75,000 c. 84,000
b. 72,000 d. 78,000
____ 20. In developing the budget for the next year, which one of the following approaches would
produce the greatest amount of positive motivation and goal congruence?
a. Have the divisional and senior management jointly develop goals and the
divisional manager develop the implementation plan.
b. Have the divisional and senior management jointly develop goals and
objectives while constructing the corporation’s overall plan of operation.
c. Have senior management develop the overall goals and permit the divisional
manager to determine how these goals will be met.
d. Permit the divisional manager to develop the goal for the division that in the
manager’s view will generate the greatest amount of profits.

____ 21. Zero-based budgeting forces managers to

a. Justify all expenditures at the beginning of every budget period.
b. Estimate a product’s revenues and expenses over its expected life cycle.
c. Formulate a budget by objective rather than function.
d. Prepare a budget based on historical costs.
____ 22. Which one of the following items would have to be included for a company preparing a schedule
of cash receipts and disbursements for calendar Year 1?
a. The amount of uncollectible customer accounts for Year 1.
b. The borrowing of funds from a bank on a note payable taken out in June Year
1 with an agreement to pay the principal and interest in June Year 2.
c. A purchase order issued in December Year 1 for items to be delivered in
February Year 2.
d. Dividends declared in November Year 1 to be paid in January Year 2 to
shareholders of record as of December Year 1.
____ 23. The finance department of a large company has prepared a master budget with very limited
expense budgets for each department. The department managers are worried about being held
accountable for these assigned targets, but senior management wants to keep spending
reduced to allow for contingencies and strategic adjustments to the company-wide master
budget. Based on this information, this budget process is
a. A successful budgeting process because it will encourage the associates to
work their hardest to meet the goals.
b. A successful budgeting process because it will be a very useful tool to hold
people accountable for overspending.
c. Not a successful budgeting process because management has left too much
room for strategic unknowns.
d. Not a successful budgeting process because it has not been widely accepted by
the employees.

Fact Pattern for #24: Information pertaining to Noskey Corporation’s sales revenue is
presented in the following table:

November December January

Year 1 Year 1 Year 2
(Actual) (Budget) (Budget)
Cash sales $ 80,000 $100,000 $ 60,000
Credit sales 240,000 360,000 180,000
Total sales $320,000 $460,000 $240,000

Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are
collectible, 60% are collected in the month of sale and the remainder in the month following the
sale. Quantity of inventory equal to next month’s cost of sales, and gross profit margin is 30%.
All purchases of inventory purchased is are on account; 25% are paid in the month of purchase,
and the remainder are paid in the month following the purchase.

____ 24. Noskey Corporation’s budgeted cash collections in December Year 1 from November Year 1
credit sales are
a. $136,800 c. $228,000
b. $84,000 d. $91,200
____ 25. A firm develops an annual cash budget in order to
a. Ascertain which capital expenditure projects are feasible and which capital
expenditure projects should be deferred.
b. Support the preparation of its cash flow statement for the annual report.
c. Determine the opportunity costs of alternative sales and production strategies.
d. Avoid the opportunity costs of noninvested excess cash and minimize the cost
of interim financing.
____ 26. Each unit of Product XK-46 requires three direct labor hours. Employee benefit costs are treated
as direct labor costs. Data on direct labor are

Number of direct employees 25

Weekly productive hours per employee 35
Estimated weekly wages per employee $245
Employee benefits (related to weekly wages) 25%

The standard direct labor cost per unit of Product XK-46 is

a. $36.75 c. $21.00
b. $29.40 d. $26.25
____ 27. Which one of the following statements best describes budgetary slack?
a. The practice of management assigning relaxed budgetary goals after the
company achieves the first several months of the annual budget.
b. The total amount that actual expenses are below budgeted expenses and
actual revenues exceed budgeted revenues.
c. The margin of error assigned to each cost center to encourage the manager to
budget accurately and consistently.
d. The practice of understating budgeted revenues or overestimating budgeted
costs to make budgeted targets more achievable.

____ 28. Crossfield Furniture Outlet needs to expand its warehouse capacity and is concerned about how
this project will impact the financial outlook. Crossfield will hire a contractor to perform the
work. Because the company’s margins are small and cash is always tight, Crossfield will need to
use a bank loan to finance the project. The budget for this project, which is expected to take 6
months, should include the contractor’s bid price plus which of the following?
I. Interest expense on the bank loan.
II. Incremental insurance expense.
III. Incremental property tax expense.

a. II and III only. c. I only.

b. I, II, and III. d. II only.
____ 29. Ward Corporation’s current year-end sales totaled $240 million, and its ending cash balance
was $20 million. Ward anticipates its sales for the upcoming year will be $260 million. On
average, 10% of a year’s sales will be collected during the following year. Assume Ward has no
uncollectible accounts. Ward also anticipates cash expenses of $240 million and depreciation of
$5 million. During the next year, Ward intends to spend $30 million cash for capital
improvements. If Ward’s policy is to have a minimum of $10 million cash available at the
beginning of each year, its budgeted cash flow projections indicate that it will need outside
financing of
a. $0 c. $2 million
b. $26 million d. $7 million
____ 30. The cash receipts budget includes
a. Funded depreciation. c. Loan proceeds.
b. Extinguishment of debt. d. Operating supplies.
____ 31. Bootstrap Corporation anticipates the following sales during the last 6 months of the year:

July $460,000
August 500,000
September 525,000
October 500,000
November 480,000
December 450,000

20% of Bootstrap’s sales are for cash. The balance is subject to the collection pattern shown
below.

Percentage of balance collected in the month of sale 40%

Percentage of balance collected in the month following sale 30%
Percentage of balance collected in the second month following sale 25%
Percentage of balance uncollectible 5%

What is the planned net accounts receivable balance as of December 31?

a. $360,000 c. $294,000
b. $367,500 d. $279,300
____ 32. The pro forma statement of employee benefit costs, a budget schedule that is prepared as part
of an organization’s annual profit plan, would include costs related to
a. All payroll-related deductions withheld from employees and company-paid
benefits.
b. Employees’ net wages and salaries and the related company-paid benefits.
c. Employees’ gross wages and salaries and the related company-paid benefits.
d. Company-paid benefits and company-paid payroll taxes.
____ 33. After the goals of the company have been established and communicated, the next step in the
planning process is development of the
a. Production budget. c. Selling and administrative budget.
b. Sales budget. d. Direct materials budget.
____ 34. All of the following are advantages of top-down budgeting as opposed to participatory
budgeting, except that it
a. May limit the acceptance of proposed goals and objectives.
b. Reduces the time required for budgeting.
c. Facilitates implementation of strategic plans.
d. Increases coordination of divisional objectives.
____ 35. A continuous (rolling) budget
a. Is one of the budgets that is part of a long-range strategic plan, unchanged
unless the strategy of the company changes.
b. Is a plan that is revised monthly or quarterly, dropping one period and adding
another.
c. Presents the plan for only one level of activity and does not adjust to changes
in the level of activity.
d. Presents the plan for a range of activity so the plan can be adjusted for
changes in activity.
____ 36. The budgeting technique that is most likely to motivate managers is
a. Top-down budgeting.
b. Program budgeting and review technique.
c. Bottom-up budgeting.
d. Zero-based budgeting.
____ 37. In preparing its cash budget for April, Brown Co. made the following projections:

Sales $4,000,000
Gross margin (based on sales) 25%
Decrease in inventories 160,000
Decrease in accounts payable for inventories 275,000

For April, the estimated cash disbursements for inventories were

a. $3,275,000 c. $2,565,000
b. $2,840,000 d. $3,115,000
____ 38. Diana Stinson, Cherry Valley, Inc.’s factory manager, had lost her patience. Six months ago,
she appointed a team from the production and service departments to finalize the allocation of
costs and setting of standard costs. They were still feuding, so she hired Brennan and Rose, a
large consulting firm, to resolve the matter. All of the following are potential consequences of
having the standards set by Brennan and Rose except that
a. The standards may appear to lack management support.
b. Brennan and Rose may not fully understand Cherry Valley’s manufacturing
process, resulting in suboptimal performance.
c. Employees could react negatively since they did not participate in setting the
standards.
d. There could be dissatisfaction if the standards contain costs that are not
controllable by the unit held responsible.

____ 39. Brown Company estimates that monthly sales will be as follows:

January $100,000
February 150,000
March 180,000

Historical trends indicate that 40% of sales are collected during the month of sale, 50% are
collected in the month following the sale, and 10% are collected two months after the sale.
Brown’s accounts receivable balance as of December 31 totals $80,000 ($72,000 from
December’s sales and $8,000 from November’s sales). The amount of cash Brown can expect to
collect during the month of January is
a. $133,000 c. $84,000
b. $108,000 d. $76,800
____ 40. Maximilian Computer Company uses a comprehensive budgeting system in planning its annual
operations. Which of the following best describes the information needed to determine the
budgeted cost of circuit boards to be purchased for use in building its laptop computer? Assume
one circuit board is used in each laptop.
a. Begin with budgeted laptop sales in units, deduct the desired ending inventory
of circuit boards, add the expected beginning inventory of circuit boards, and
multiply the resulting amount by the purchase cost per circuit board.
b. Begin with budgeted laptop production in units, add the desired ending
inventory of circuit boards, deduct the expected beginning inventory of circuit
boards, and multiply the resulting amount by the budgeted purchase cost per
circuit board.
c. Begin with budgeted laptop sales in units, add the desired ending inventory of
circuit boards, deduct the expected beginning inventory of circuit boards, and
multiply the resulting amount by the budgeted purchase cost per circuit board.
d. Begin with budgeted laptop production in units, deduct the desired ending
inventory of circuit boards, add the expected beginning inventory of circuit
boards, and multiply the resulting amount by the purchase cost per circuit
board.

____ 41. When compared with ideal standards, practical standards

a. Result in a less desirable basis for the development of budgets.
b. Produce lower per-unit product costs.
c. Serve as a better motivating target for manufacturing personnel.
d. Incorporate very generous allowance for spoilage and worker inefficiencies.
____ 42. A systemized approach known as zero-based budgeting (ZBB)
a. Presents a statement of expectations for a period of time but does not present
a firm commitment.
b. Classifies budget requests by activity and estimates the benefits arising from
each activity.
c. Divides the activities of individual responsibility centers into a series of
packages that are prioritized.
d. Presents the plan for only one level of activity and does not adjust to changes
in the level of activity.
 Fact Pattern for#43: Daffy Tunes manufactures a toy rabbit with moving parts and a built-in
voice box. Projected sales in units for the next 5 months are as follows:

Month Projected
Sales in Units
January 30,000
February 36,000
March 33,000
April 40,000
May 29,000

Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per
rabbit. Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is
$2.00 per rabbit, and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead
applicable to rabbit production is $12,000 per month. Daffy’s policy is to manufacture 1.5 times
the coming month’s projected sales every other month, starting with January (i.e.,
odd-numbered months) for February sales, and to manufacture 0.5 times the coming month’s
projected sales in alternate months (i.e., even-numbered months). This allows Daffy to allocate
limited manufacturing resources to other products as needed during the even-numbered
months

____ 43. Daffy Tunes’ unit production budget for toy rabbits for January is
a. 14,500 units. c. 45,000 units.
b. 54,000 units. d. 16,500 units.
____ 44. The purpose of project budgeting is to identify, evaluate, and select beneficial projects that
require
a. Commitments of large sums of funds, and the appropriate time frame is the
year being budgeted.
b. Commitments of large sums of funds, and the appropriate time frame is over
the project’s life cycle.
c. Large budgeted expenses on the income statement, and the appropriate time
frame is over the project’s life cycle.
d. Large budgeted expenses on the income statement, and the appropriate time
frame is the year being budgeted.
____ 45. Alton Machine Company has established a strategic initiative to increase operating income by
increasing market share through being the lower-cost provider. Assuming the total market size
remains the same, and based on the information provided below, has Alton achieved the stated
objectives?

Current Year Next Year

Revenues $ 325,000 $ 325,000
Cost of goods sold 152,000 146,000
Gross margin $ 173,000 $ 179,000
Operating costs
Marketing 100,000 100,000
Administrative 50,000 50,000
Operating income $ 23,000 $ 29,000

Units sold 1,000 1,000

a. No, because Alton did not reduce marketing and administrative costs.
b. Yes, because the statements show a reduced cost of goods sold.
c. Yes, because Alton was able to lower costs and increase operating income.
d. No, because it does not appear that Alton has increased market share.

Fact Pattern for #46: Tidwell Corporation sells a single product for $20 per unit. All sales are
on account, with 60% collected in the month of sale and 40% collected in the following month.
A partial schedule of cash collections for January through March of the coming year reveals the
following receipts for the period:

Cash Receipts
January February March
December receivables $32,000
From January sales 54,000 $36,000
From February sales 66,000 $44,000

Other information includes the following:

 Inventories are maintained at 30% of the following month’s sales.

 Tidwell desires to keep a minimum cash balance of $15,000. Total payments in January
are expected to be $106,500, which excludes $12,000 of depreciation expense. Any
required borrowings are in multiples of $1,000.
 The December 31 balance sheet for the preceding year revealed a cash balance of
$24,900.

____ 46. Ignoring income taxes, the financing Tidwell will need in January to maintain the firm’s
minimum cash balance is
a. $23,000 c. $8,000
b. $11,000 d. $10,600
____ 47. Which of the following statements apply to the continuous budget methodology?
I. The current financial forecast reflects the most recent monthly results and any material
changes to the company’s outlook or economy.
II. Forecasts are updated every few months, reassessing the company’s outlook several
times a year.
III. The decision-making process to develop the budget takes place during the fourth
quarter of the prior year being budgeted.

a. II and III only. c. I and II only.

b. I and III only. d. I, II, and III.
____ 48. Which one of the following statements regarding selling and administrative budgets is most
accurate?
a. Selling and administrative budgets are fixed in nature.
b. Selling and administrative budgets need to be detailed in order that the key
assumptions can be better understood.
c. Selling and administrative budgets are usually optional.
d. Selling and administrative budgets are difficult to allocate by month and are
best presented as one number for the entire year.

____ 49. A company uses a type of budgeting that focuses on the cost of the processes required to
produce and sell products and services. This type of budgeting is known as
a. Process budgeting. c. Controllability budgeting.
b. Activity-based budgeting. d. Master activity budgeting.
____ 50. A manufacturer of men’s t-shirts had the following information for last year.

Number of shirts sold and produced 125,000

Sale price per shirt $40
Direct manufacturing $10/shirt
Setup cost $100/setup hour
Setup hours 10,000
Shipping costs $200/shipment
Number of shipments 4,000
Administrative cost $8/shirt

The company’s operating profit last year was

a. $2,750,000 c. $950,000
b. $1,950,000 d. $3,750,000
____ 51. Reaction, Inc., has prepared budgets for the next 5 months: May, June, July, August, and
September. As soon as May results are reported, Reaction will add October to their budget
plans. What type of budget system is Reaction using?
a. Project budgeting. c. Flexible budgeting.
b. Continuous budgeting. d. Activity-based budgeting.
____ 52. Pro forma financial statements are part of the budgeting process. Normally, the last pro forma
statement prepared is the
a. Income statement. c. Statement of cash flows.
b. Statement of cost of goods sold. d. Capital expenditure plan.
____ 53. Bryan Corporation, a retailer, uses flexible budgeting as a planning tool. The company’s original
budget for the upcoming year is shown below.

Sales $90,000,000
Cost of goods sold 36,000,000
Administrative expenses (all fixed) 21,000,000
Advertising expense 9,000,000
Sales commissions 6,750,000
Other marketing expenses (all fixed) 9,250,000
Operating income $ 8,000,000

The manager of Bryan’s Marketing Department believes sales volume will increase by 10% if
the advertising budget is increased by $5,000,000. Should Bryan approve the increased
advertising request?
a. Yes, because the increase in sales is $4,000,000 greater than the increase in
advertising costs.
b. No, because operating income would decrease by $275,000.
c. Yes, because operating income would increase by $400,000.
d. No, because advertising is 10% of sales, so the maximum increase in sales
would be $900,000.

____ 54. All of the following are advantages of the budgeting process except that the budget
a. Establishes benchmarks to identify unsatisfactory organizational performance.
b. Allocates resources on an as-needed basis.
c. Forces management to assess the future objectives of the company.
d. Facilitates communication among organizational units.

____ 55. The financial budget process includes

a. The budgeted statement of cash flows.
b. The capital budget.
c. The cash budget.
d. All of the answers are correct.
____ 56. The preparation of a comprehensive master budget culminates with the preparation of the
a. Capital investment budget.
b. Cash management and working capital budget.
c. Strategic budget.
d. Production budget.
____ 57. All of the following would appear on a projected schedule of cost of goods manufactured
except for
a. Ending work-in-process inventory.
b. The cost of raw materials used.
c. Applied manufacturing overhead.
d. Beginning finished goods inventory.
____ 58. Marietta Thomas, Amador Corporation’s vice president of planning, has seen and heard it all.
She has told the corporate controller that she is “.... very upset with the degree of slack that
veteran managers use when preparing their budgets.” Thomas has considered implementing
some of the following activities during the budgeting process.
1. Develop the budgets by top management and issue them to lower-level operating units.
2. Study the actual revenues and expenses of previous periods in detail.
3. Have the budgets developed by operating units and accept them as submitted by a
company-wide budget committee.
4. Share the budgets with all employees as a means to reach company goals and
objectives.
5. Use an iterative budgeting process that has several “rounds” of changes initiated by
operating units and/or senior managers.

Which one of these activities should Amador implement in order to best remedy Thomas’
concerns, help eliminate the problems experienced by Amador, and motivate personnel?
a. 2, 4, and 5. c. 2 and 3.
b. 2 and 4. d. 1 only.
____ 59. Rock Industries has four divisions. In the quest to develop a more achievable budget for the
coming year, the chief executive officer has elected to develop the company’s budget by using
a decentralized bottom-up budget approach. Chip Jarrett is production manager in one of the
divisions. Jarrett’s involvement in the budget process this year will probably
a. Be negligible.
b. Require development of a production budget based on the prior year’s
manufacturing activity.
c. Require development of a production budget after receiving the division’s
projected sales forecast.
d. Require development of a production budget that is forwarded to the Budget
Department.

Fact Pattern for #60: Paradise Company budgets on an annual basis for its fiscal year. The
following beginning and ending inventory levels (in units) are planned for the fiscal year of July
1 through June 30:

Jul 01 Jun 30
Raw material* 40,000 50,000
Work-in-process 10,000 20,000
Finished goods 80,000 50,000

* Two units of raw material are needed to produce each unit of finished product.

____ 60. If 500,000 complete units were to be manufactured during the fiscal year by Paradise
Company, the number of units of raw materials to be purchased is
a. 1,000,000 units. c. 990,000 units.
b. 1,020,000 units. d. 1,010,000 units.
____ 61. Sanford has a beginning cash balance of $10,000 and expects $40,000 in cash receipts for each
of the next 2 months. Typically, disbursements total about $20,000 per month. Sanford’s
payables policy has been to pay the bills upon receipt to maintain good vendor relationships
and take advantage of any discounts. In month 1, the company also expects a one-time
$40,000 bill for a patent application. Based on this information, select the statement below that
reflects the most appropriate action that Sanford should take relative to the company’s cash
position during the 2-month period.
a. Sanford should finance the $40,000 payment over a longer term, but with a
higher interest rate.
b. No action is necessary as Sanford will have sufficient cash during the 2-month
period.
c. Sanford should defer disbursements to maintain a desired level of cash.
d. Sanford should arrange a short-term line of credit large enough to cover the
projected $10,000 shortfall during the first month.

____ 62. Individual budget schedules are prepared to develop an annual comprehensive or master
budget. The budget schedule that would provide the necessary input data for the direct labor
budget would be the
a. Raw materials purchases budget.
b. Sales forecast.
c. Production budget.
d. Schedule of cash receipts and disbursements.
____ 63. Which of the following is normally included in the financial budget of a firm?
a. Budgeted balance sheet. c. Selling expense budget.
b. Direct materials budget. d. Sales budget.
____ 64. Medico has found that its annual budgets are quickly outdated once actual data is recorded.
Sometimes actual preparations have already begun for the period being budgeted by the time
the annual budget is finished, which leaves no time to react to changing factors. Medico wants
the budget to be as up-to-date as possible, and management is willing to revise budgets as
needed. Which budgeting solution would be most appropriate for Medico?
a. Zero-based budgeting. c. Flexible budgeting.
b. Activity-based budgeting. d. Continuous budgeting.
____ 65. Which of the following statements regarding budgets is false?
a. Budgets are used only as a planning function.
b. Budgets present organizational plans in a formal, logical, and integrated
manner.
c. Budgets may be developed for cash flows or labor usage.
d. A budget is a plan that contains a quantitative statement of expected results.
____ 66. The use of the master budget throughout the year as a constant comparison with actual results
signifies that the master budget is also a
a. Zero-base budget. c. Capital budget.
b. Flexible budget. d. Static budget.
____ 67. In an organization that plans by using comprehensive budgeting, the master budget is
a. A compilation of all the separate operational and financial budget schedules of
the organization.
b. The current budget updated for operations for part of the current year.
c. The booklet containing budget guidelines, policies, and forms to use in the
budgeting process.
d. A budget of a not-for-profit organization after it is approved by the appropriate
authoritative body.

____ 68. Ineffective budget control systems are characterized by

a. Use of budgets as a planning but not a control tool.
b. All of the answers are correct.
c. Lack of timely feedback in the use of the budget.
d. Use of budgets for harassment of individuals rather than motivation.
____ 69. Media Co. manufactures televisions. The following direct labor information relates to the
manufacture of televisions.

Number of workers 60
Number of product hours per week, per worker 40
Hours required to make 1 unit 3
Weekly wages per worker $600
Employee benefits treated as direct labor costs 20% of wages

What is the standard direct labor cost per unit?

a. $45 c. $54
b. $36 d. $18
____ 70. Which one of the following best describes the capital budget?
a. It sets the long-range goals of the company, including consideration of all
available resources.
b. It assesses the long-term needs of the company for plant and equipment
purchases.
c. It ensures that there are sufficient funds available for the operating needs of
the company.
d. It results in the cash requirements during the operating cycle.