Chapter_9_Profit_Planning.pdf

Chapter 9 - Profit Planning 1. A strategic plan identifies strategies for future activities and operations, generally covering at least five years. a. True b. False ANSWER: True

2. Budgets are financial plans for the future. a. True b. False ANSWER: True

3. The master budget is composed of operating budgets and financial budgets. a. True b. False ANSWER: True

4. Control is achieved by comparing actual results with budgeted results on a periodic basis. a. True b. False ANSWER: True

5. Planning is looking ahead to see what actions should be taken to realize particular goals. a. True b. False ANSWER: True

6. Budgets identify objectives and the actions needed to achieve them because they are foresighted financial plans. a. True b. False ANSWER: True

7. A firm should develop a strategic plan before preparing a budget. a. True b. False ANSWER: True

8. A firm acquires information that can be used to improve decision making from a budgetary system. a. True b. False ANSWER: True

C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning 9. Comparing actual results with budgeted results on a periodic basis provides control in a budgetary system. a. True b. False ANSWER: True

10. A large difference between actual and planned results is feedback that the system is providing adequate control. a. True b. False ANSWER: False

11. Communication and coordination are served by budgets. a. True b. False ANSWER: True

12. The master budget is typically a comprehensive financial plan for the organization for the past fiscal year. a. True b. False ANSWER: False

13. A continuous budget is a moving 12-month budget. a. True b. False ANSWER: True

14. The department manager reviews the budget, provides policy guidelines and budgetary goals, and resolves differences that arise as the budget is prepared, approves the final budget, and monitors the actual performance of the organization as the year unfolds. a. True b. False ANSWER: False

15. The budget director is the person responsible for directing and coordinating the organization's overall budgeting process. a. True b. False ANSWER: True

16. The first budget to be prepared is the sales budget. a. True b. False ANSWER: True C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning 17. The production budget is prepared in units and in dollars. a. True b. False ANSWER:

False

RATIONALE: The production budget is prepared in units only, not dollars.

18. The direct materials purchases budget is based on the sales budget. a. True b. False ANSWER:

False

RATIONALE: The direct materials purchases budget is based on the production budget.

19. There are as many direct materials purchases budgets as there are products. a. True b. False ANSWER: False

20. The direct labor budget includes: units to be produced, direct labor time needed per unit, and total direct labor cost for the period. a. True b. False ANSWER: True

21. The selling and administrative expenses budget is part of the operating budgets. a. True b. False ANSWER: True

22. The sales budget is used directly in the development of the production budget. a. True b. False ANSWER: True

23. In preparing the direct labor budget, the average wage rate is used to calculate total direct labor cost. a. True b. False ANSWER: True


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Chapter 9 - Profit Planning 24. The cash budget includes the beginning balance of cash, cash receipts, cash disbursements, and the ending balance of cash. a. True b. False ANSWER: True

25. If the initial cash budget indicates a cash deficiency, the company must go out of business. a. True b. False ANSWER: False

26. Cash receipts must be at least as much as sales. a. True b. False ANSWER: False

27. Cash budgets are often prepared monthly or even weekly. a. True b. False ANSWER: True

28. The output of the cost of goods sold budget is entered into the pro forma balance sheet. a. True b. False ANSWER:

False

RATIONALE: The output of the cost of goods sold budget is entered into the pro forma income statement.

29. Individual behavior that is in basic conflict with the goals of the organization is called goal congruence. a. True b. False ANSWER:

False

RATIONALE: Individual behavior that is in basic conflict with the goals of the organization is called dysfunctional behavior.

30. Pseudoparticipation is one of the potential problems with participative budgeting. a. True b. False ANSWER: True

31. Budgets should be based on ideal standards to encourage everyone to reach for the highest level of performance. a. True b. False ANSWER: False C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning 32. Ideally, managers are held accountable for controllable costs. a. True b. False ANSWER: True

33. Myopic behavior is one of the advantages of participative budgeting. a. True b. False ANSWER: False

34. Monetary incentives include salary increases, bonuses, and promotions. a. True b. False ANSWER: True

35. __________________ is looking ahead to see what actions should be taken to realize particular goals. ANSWER: Planning

36. The ________________ plots a direction for an organization’s future activities and operations; it generally covers at least five years. ANSWER: strategic plan

37. Budgets improve _________________. ANSWER: decision making

38. The _________________ is the comprehensive financial plan for the organization as a whole. ANSWER: master budget

39. A __________________ __________________ is a moving 12-month budget. ANSWER: continuous budget

40. The controller of the company usually serves as the __________________. budget direc director tor ANSWER: budget 41. The cash budget and budgeted balance sheet s heet are part of the ________________. ANSWER: financial budget

42. The _______________ tells how many units must be produced to meet sales needs and to satisfy ending inventory requirements. productio tion n budg budget et ANSWER: produc


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Chapter 9 - Profit Planning 43. The _________________ __________________ _ shows the expected cost of all production costs other than direct materials and direct labor. ANSWER: overhead budget

44. Salaries expense, advertising expense and depreciation expense would be included in the __________ _____ __________ __________ _______ __ budget b udget.. ANSWER: selling and administrative expenses

45. The basic structure of a ______________ includes cash receipts, cash disbursements, any excess or deficiency of cash, and financing. ANSWER: cash budget

46. _________________ _________________ consists of beginning cash balance and the expected cash receipts. ANSWER: Cash available

47. The alignment of managerial and organizational goals is often referred to as _______________. ANSWER: goal congruence

48. ____________________ is individual behavior that is in basic conflict with the goals of the organization. ANSWER: Dysfunctional behavior

49. ______________ ______________ are the means an organization uses to influence a manager to exert effort to achieve an organization’s goals. ANSWER: Incentives

50. Examples of ________________ include job enrichment, increased responsibility and autonomy, and recognition programs. programs. ANSWER: nonmonetary incentives

51. __________________ _____________________ ___ allows subordinate managers considerable say in how the budgets are established. ANSWER: Participative budgeting

52. ___________________ ___________________ exists when a manager deliberately underestimates revenues or overestimates cost in an effort to make the future period appear less attractive in the budget than they think it will be in reality. ANSWER: Budgetary slack

53. When top management assumes total control of the budgeting process and only seeks s eeks superficial participation from lower-level managers this is known as ________________. pseudopar partic ticipa ipatio tion n ANSWER: pseudo 54. _________________ _________________ are used to ensure that budgeted costs can be realistically compared with costs for actual levels of activity. ANSWER: Flexible budgets


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Chapter 9 - Profit Planning 55. Which of the following is an advantage of budgeting? a. Forces managers to plan. b. Provide Providess inform informatio ation n usefu usefull for for contro control. l. c. Provides information for improved decision making. d. Improves communication. e. All of these. these. ANSWER: e

56. Which of the following is a use of budgets for control? a. Plans can be made for the future. b. If condit conditions ions change change between between the format formation ion of of the budget budget and the curren currentt time, time, budgets budgets can be be quickly quickly adapted. c. Budgets set a standard against which results can be compared. d. Communication is improved. improved. e. All of these. these. ANSWER: c

57. Which of the following budgets can be used for control? a. Production Production budget b. Cash budget budget c. Budgeted income statement d. Selling and administrative expense budget e. All of these ANSWER: e

58. In a (n) ____, as one month expires, an additional month in the future is added to the budget so that the company always has a 12-month plan on hand. a. continuous budget b. financ financial ial bud budget get c. operational budget d. yearly budget e. master budget ANSWER: a

59. The ____ is the person responsible for directing and coordinating the organization's overall budget process. a. budget master b. contr controll oller er c. chief financial financial planner d. budget director e. chief accountant ANSWER: d C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning 60. Looking backward to determine what actually happened and comparing it with the previously planned outcomes is a. control. b. commu communic nicati ating. ng. c. decision making. d. strategic planning. e. budgeting. ANSWER: a

61. Budgets are a. key components of planning. b. financial financial plans plans for the future future.. c. an identifier of objectives and the actions needed to achieve them. d. used for communication and coordination. e. all of these. ANSWER: e

62. The master budget is a. the selective financial plan for the organization as a whole. b. typically typically for a 1-year 1-year period period correspond corresponding ing to to the fiscal year of the the company company.. c. broken down into daily and weekly budgets. d. used for misinformation and coordination. e. all of these. ANSWER: b

63. Which of the following is not true? true? a. The sales forecast is done before the sales budget. b. The master budget budget is the the compreh comprehensive ensive plan for the the organiz organization ation as a whole. whole. c. The production budget budget is prepared in units and dollars. d. One approach to forecasting sales is the bottom-up approach. e. In creating the sales forecast, outside factors such as the state of the economy, should be considered. ANSWER: c

64. The first step in creating the master budget is the creation of the a. production budget. b. direct direct labor labor budget. budget. c. cash budget. budget. d. sales budget. e. budgeted income statement. ANSWER: d


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Chapter 9 - Profit Planning 65. The budget that describes how many units must be produced in order to meet sales needs and ending inventory objectives is the a. production budget. b. direct direct materials materials purchases purchases budget. budget. c. cash budget. budget. d. budgeted income statement. e. none of these. ANSWER: a

66. Direct materials needed for production is calculated by a. multiplying units to be produced by direct materials per unit. b. subtracti subtracting ng units units to to be produced produced from direct direct material materialss per unit. c. dividing units to be produced by direct materials per unit. d. adding units to be produced to direct materials per unit. e. subtracting direct materials per unit from units to be produced. ANSWER: a

67. In preparing the overhead budget, many companies use a. activity-based costing. costing. b. multipl multiplee drive drivers rs for for a simple simple bud budget. get. c. participative participative costing. d. a unit-based driver such as direct labor hours. e. none of these. ANSWER: d

68. Which of the following statements is true? a. The overhead budget is typically composed of variable overhead and fixed overhead. b. The direct direct labor budget uses uses an average average wage rate for direct labor. labor. c. The production budget budget is not converted into dollars. dollars. d. The sales budget includes both units and dollars. e. All of these. these. ANSWER: e

69. The ending finished goods inventory budget supplies information needed for the a. sales budget. budget. b. cash budget. budget. c. budgeted income statement. d. cost of goods sold budget. e. all of these. ANSWER: d


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Chapter 9 - Profit Planning 70. Which of the following budgets are needed to calculate a budgeted unit cost? a. Direct materials purchases budget b. Direct Direct labor labor budget budget c. Overhead budget d. Direct materials purchases budget and overhead budget e. Direct materials purchases budget, direct labor budget, and overhead budget ANSWER: e

71. The selling and administrative expenses budget includes a. cost of goods sold. b. overhead. overhead. c. fixed production production expense. d. variable cost of selling. e. all of these. ANSWER: d

72. Budgeted operating income includes a. budgeted interest expense. b. budgeted budgeted income income taxes. taxes. c. budgeted cost of goods sold. d. budgeted net income. e. none of these. ANSWER: c

73. Depreciation expense on sales equipment appears in i n a separate line on which of the following budgets? a. Cash budget b. Selling Selling and administ administrati rative ve expenses expenses bud budget get c. Direct labor budget d. Production budget e. Overhead budget ANSWER: b


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Chapter 9 - Profit Planning 74. Rodriquez Company budgeted the following sales in units: January February March

30,000 20,000 40,000

Rodriquez's policy is to have 20% of the following month's sales in inventory. On January 1, inventory equaled 7,500 units. February production in units is a. 20,000. b. 28,0 28,000 00.. c. 40,000. d. 26,500. 26,500. e. 24,000. ANSWER: RATIONALE:

e January 30,000 4,000 34,000 7,500 26,500

Sales + Desired EI Units needed − Beginning inventory Production

February 20,000 8,000 28,000 4,000 24,000

75. A company has had stable sales and production for several years. Next year, sales are expected to increase by at least 50%. Assuming that the company maintains its policy for desired ending inventories of finished product and direct materials purchases, what will be the likely effect on the desired ending inventory of finished product? a. It will increase b. It will decrease c. It will stay the same d. It will be twice the size of the desired ending inventory of raw materials e. None of these ANSWER: a

76. A company expects the following sales for the coming year: 1st Quarter Units 40,000 Average selling price $5 Budgeted sales revenue for the year is a. $1,050,000

2nd Quarter 30,000 $5

3rd Quarter 60,000 $5

4th Quarter 80,000 $6

b. $1,2 $1,260 60,0 ,000 00 c. $1,155,000 d. $1,130,000 e. it is impossible to tell from this information ANSWER:

d

RATIONALE: Budgeted sales = [(40,000 + 30,000 + 60,000) × $5] + (80,000 × $6) = $1,130,000 C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning 77. A company provided the following information on sales for the coming year: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Units 40,000 40,000 30,000 80,000 Average selling price $5 $5 $5 $6 Assuming that the beginning inventory is 3,000 units, and that the company policy is to have 25% of the next quarter's sales in ending inventory, which quarter will have the lowest production? a. Quarter 4 b. Quarter 3 c. Quarter 2 d. Quarter 1 e. All quarters have the same production ANSWER:

c

RATIONALE: Production budget:

Sales + Desired ending inventory Units needed − Beginning inventory Production

Qtr 1 40,000 10,000 50,000 − 3,000 47,000

Qtr 2 40,000 7,500 47,500 − 10,000 37,500

Qtr 3 30,000 20,000 50,000 − 7, 7,500 42,500

Qtr 4 80,000

Since Quarter 4 must have production that is at least 60,000 (80,000 + some level of desired ending inventory − 20,000), Quarter 2 is the lowest. 78. Belant Company budgeted 200,000 units of production for June, 210,000 units for July and 300,000 units for August. Each unit requires 0.25 direct labor hours. How many direct labor hours are budgeted for August? a. 50,000 b. 5,00 5,000 0 c. 75,000 d. 52,500 e. 300 300,00 ,000 0 ANSWER:

c

RATIONALE: Direct labor hours = 0.25 × 300,000 = 75,000

79. In budgeting direct labor hours for the coming year, it is important to a. multiply production in units by the direct labor hours per unit. b. divide divide product production ion in units units by the direct direct labo laborr hour hourss per per unit. unit. c. subtract production in units from the direct labor hours per unit. d. subtract direct labor hours per unit from production in units. e. multiply production in units by the labor wage rate. ANSWER: a


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Chapter 9 - Profit Planning 80. Galvern Company provided the following data for July: Direct materials Direct labor Overhead Beginning finished goods Ending finished goods Production in units What is the cost of goods sold? a. $165,000

$50,000 $25,000 $90,000 $15,000 $34,000 10,000

b. $146 $146,0 ,000 00 c. $214,000 d. $184,000 e. $75 $75,00 ,000 0 ANSWER:

b

RATIONALE: Cost of goods manufactured = $50,000 + $25,000 + $90,000 = $165,000 Cost of goods sold = $165,000 + $15,000 − $34,000 = $146,000

81. A production budget is most important for which of the following? a. retail stores stores b. manufac manufacturi turing ng firms firms c. not-for-profit agencies d. local government agencies e. all of these ANSWER: b

82. A company requires 200 pounds of plastic plast ic to meet the production needs of a product. It currently has 20 pounds of plastic plastic invent inventory. ory. The desired desired endin ending g invent inventory ory of plastic plastic is is 60 pou pounds. nds. How many pou pounds nds of plasti plasticc should should be budgete budgeted d for for purch purchasin asing g durin during g the the coming coming period? period? a. 200 pounds b. 240 240 pou pounds nds c. 260 pounds d. 280 pounds e. 160 pounds ANSWER:

b

RATIONALE: Pounds of plastic to purchase = 200 + 60 − 20 = 240


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Chapter 9 - Profit Planning 83. A company plans on selling 400 units. The selling price per unit is $5. There are 40 units in beginning inventory, and the company would like to have 75 units in ending inventory. How many units should be produced for the coming period period?? a. 435 b. 400 400 c. 365 d. 2,000 e. 2,035 a

ANSWER:

RATIONALE: Units to produce = 400 + 75 − 40 = 435

84. A company has provided a sales budget for the next four months. It bases its production budget on the sales budget, and has a policy that each month's ending inventory of finished product must be equal to 25% of the following month's sales needs. The direct materials purchases budget is based on the production budget. The company's policy policy for for each each month's month's ending ending inven inventory tory of raw raw materi materials als is is that that they they must must be equal equal to 10% of the the follow following ing month's production needs for raw materials. Given this information, the company can prepare direct materials purchases purchases budgets budgets for how how many many months? months? a. One b. Two c. Three d. Four e. Five ANSWER:

b

RATIONALE: Four months of sales budgets allows the calculation of three months of production budgets. The fourth month is impossible without the fifth month of sales to figure the desired ending inventory for month four. Similarly, three months of production budgets allows calculation for t wo months worth of direct materials purchases budgets. The third month is impossible without the fourth month of production to figure the desired ending inventory for month three.

85. Which of the following is the most common starting point in the information gathering process for budgeting? a. The personnel forecast forecast b. The sales forecast c. The production forecast d. The projected income statement ANSWER: b

86. Which of the following is an operating budget? a. Budgeted statement of cash flows b. Capital Capital expendi expenditure turess budge budgett c. Budgeted income statement d. Cash budget ANSWER: c


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Chapter 9 - Profit Planning 87. What is the formula used to compute the units to be produced? a. Units produced produced = Units sold b. Units Units prod produce uced d = Units Units sold sold + Units Units in beginn beginning ing invento inventory ry + Units Units in ending ending invento inventory ry c. Units produced = Units sold + Units in beginning inventory − Units in ending inventory d. Units Produced = Units sold − Units in beginning inventory + Units in ending inventory ANSWER: d

88. Candace Company produces and sells pillows. It expects to sell 10,000 pillows in the next year and had 1,000 pillows pillows in finished finished goods goods invento inventory ry at at the end of the the prior prior year. year. Candac Candacee would would like to compl complete ete opera operation tionss next next year with at least 1,250 completed pillows in inventory. There is no ending work-in-process inventory. The pillows sell for $5 each. How many pillows would be produced in the next year? a. 10,000 pillows b. 11,0 11,000 00 pill pillow owss c. 11,250 pillows d. 10,250 pillows ANSWER:

d

RATIONALE: SUPPORTING CALCULATIONS: 10,000 + 1,250 − 1,000 = 10,250 pillows

89. Bright Lamp Company manufactures lamps. The estimated number of lamp sales for the last three months of the current year are as follows: Month Sales October 10,000 November November 14,0 14,000 00 December 13,000 Finished goods inventory at the end of September was 3,000 units. Ending finished goods inventory is budgeted to equal 25% of the next month's sales. Bright Lamp expects to sell the lamps for $25 each. In January of the next year, sales are projected at 16,000 lamps. How many lamps should be produced in November? a. 11,000 lamps b. 10,50 10,500 0 lamps lamps c. 14,000 lamps d. 13,750 lamps lamps ANSWER:

d

RATIONALE: SUPPORTING CALCULATIONS: (13,000 × 0.25) + 14,000 − (14,000 × 0.25) = 13,750 lamps

90. In going from the sales budget to the production budget, adjustments to the sales budget need to be made for a. finished goods inventories. b. cash receipts. c. factory overhead overhead costs. d. selling expenses. ANSWER: a C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning 91. Watson Corporation manufactures boxes. The estimated numbers of boxes sold for the first three months of the current year are as follows: Month Sales January 3,000 February 4,200 March 3,900 Finished goods inventory at the end of December was 600 units. Ending finished goods inventory is equal to 20% of the next month's sales. Watson Corporation expects to sell the boxes for $5 each. April sales are projected at 4,500 boxes. boxes. How many boxes should should be produced produced in in February February?? a. 4,140 boxes b. 4,200 4,200 box boxes es c. 4,260 boxes d. 3,900 boxes ANSWER:

a

RATIONALE: SUPPORTING CALCULATIONS: 4,200 + (0.20 × 3,900) − (0.20 × 4,200) = 4,140 boxes Figure 9-1. Saphire Company budgeted the following production in units for the second quarter of the year:

April May June

45,000 38,000 42,000

Each unit requires four pounds of raw material. Saphire's policy is to have 30% of the following month's production needs for materials in inventory. This policy was met in March. 92. Refer to Figure 9-1. Raw materials purchases budgeted for May in pounds equal: a. 156 156,80 ,800 0 b. 202, 202,40 400 0 c. 45,600 d. 171,600 e. 225 225,60 ,600 0 ANSWER: RATIONALE:

a Production × materials per unit Raw materials for production Desired ending inventory Raw materials needed Less: beginning inventory Purchases


April 45,000 ×4 180,000 45,600 225,600 (54,000) 171,600

May 38,000 × 4 152,000 50,400 202,400 (45,600) 156,800

June 42,000 × 4 168,000

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Chapter 9 - Profit Planning 93. Refer to Figure 9-1. Desired ending inventory for April in pounds equals: a. 45,600 b. 11,4 11,400 00 c. 10.500 d. 38,300 e. 54,000 ANSWER: RATIONALE:

a Production × materials per unit Raw materials for production Desired ending inventory Raw materials needed Less: beginning inventory Purchases

April 45,000 × 4 180,000 45,600 225,600 (54,000) 171,600

May 38,000 × 4 152,000 50,400 202,400 (45,600) 156,800

June 42,000 × 4 168,000

Figure 9-2. Kenner Company produces two products: SR200 and TX500. Budgeted sales for four months are as follows:

SR200 SR TX500 May 8,000 20,000 June 13,000 32,000 July 11,000 39,000 August 18,000 46,000 Kenner's ending inventory policy is that SR200 should have 15% of next month's sales in ending inventory and TX500 should have 40% of next month's sales in ending inventory. On May 1, there were 1,200 units of SR200 and 9,000 units of TX500. TX500 requires 6 units of component A. (SR200 does not use component A.) There were 30,000 units of component A in inventory on May 1. Kenner wants to have 20% of the following month's production needs in inventory for Component A. 94. Refer to Figure 9-2. How many units of TX500 are budgeted for production in June? a. 47,600 b. 34,8 34,800 00 c. 32,000 d. 45,000 e. 12,800 ANSWER: RATIONALE:

b Sales Desired ending inventory Units needed Less: beginning inventory Production


May 20,000 12,800 32,800 (9,000) 23,800

June 32,000 15,600 47,600 (12,800) 34,800

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Chapter 9 - Profit Planning 95. Refer to Figure 9-2. What is the budgeted production of SR200 for May in units? a. 8,750 b. 9,95 9,950 0 c. 8,000 d. 1,200 e. 10,500 ANSWER: RATIONALE:

a Sales Desired ending inventory Units needed Less: beginning inventory Production

May 8,000 1,950 9,950 (1,200) 8,750

June 13,000 1,650 14,650 (1,950) 12,700

96. Refer to Figure 9-2. What is the budgeted amount of component A to be purchased in May? a. 41,760 b. 142, 142,80 800 0 c. 154 154,56 ,560 0 d. 164,600 e. 66,600 ANSWER: RATIONALE:

c Production × units of component A Component A needed for production Desired ending inventory Units needed Less: beginning inventory Production


May 23,800 ×6 142,800 41,760 184,560 (30,000) 154,560

June 34,800 ×6 208,800

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Chapter 9 - Profit Planning 97. Refer to Figure 9-2. What is the desired ending inventory of component A for May? a. 86,000 b. 180, 180,00 000 0 c. 58,500 d. 41,760 e. 30,000 ANSWER: RATIONALE:

d Production × units of component A Component A needed for production Desired ending inventory* Units needed Less: beginning inventory Production

May 23,800 ×6 142,800 41,760 184,560 (30,000) 154,560

June 34,800 ×6 208,800

*208,800 × 20% = 41,760 Figure 9-3. Zion Company manufactures sneakers. Production of their new sneaker for the coming three months is budgeted as follows:

August September October

26,000 48,000 31,000

Each sneaker requires 1.5 hours of direct labor time. Direct labor wages average $13 per hour. Monthly overhead averages $8 per direct labor hour plus fixed overhead of $4,300. 98. Refer to Figure 9-3. What is the direct labor cost budgeted for September? a. $820,000 b. $750 $750,0 ,000 00 c. $140,000 d. $936,000 e. $625,000 ANSWER:

d

RATIONALE: September direct labor cost = 48,000 × 1.50 × $13 = $936,000


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Chapter 9 - Profit Planning 99. Refer to Figure 9-3. What is the total overhead budgeted for the month of September? a. $680,000 b. $580 $580,3 ,300 00 c. $142,100 d. $460,000 e. $362,100 ANSWER:

b

RATIONALE: Budgeted overhead = ($8 × 48,000 × 1.50) + $4,300 = $580,300 Figure 9-4. Bickford Company plans to sell 135,000 units in November and 180,000 units in December. Bickford's policy is that 10% of the following month's sales must be in ending inventory. inventory. On November 1, there were 14,000 units in inventory.

It takes 30 minutes of direct labor time to make one unit. Direct labor wages average $17 per hour. Variable overhead is applied at the rate of $5 per direct labor hour. Fixed overhead is budgeted at $56,500 per month. 100. Refer to Figure 9-4. What is the direct labor cost budgeted for November? a. $1,181,500 b. $950 $950,6 ,600 00 c. $707,600 d. $2,152,000 e. $622,800 ANSWER:

a

November er produc production tion = 135,0 135,000 00 + (0.10 (0.10 × 180,000 180,000)) − 14,000 = 139,000 units RATIONALE: Novemb Direct labor hours = 0.50 hours per unit × 139,000 = 69,500 hours Direct labor cost = $17 × 69,500 = $1,181,500 101. Refer to Figure 9-4. What is the budgeted production in units for November? a. 100 100,00 ,000 0 b. 140, 140,00 000 0 c. 121 121,00 ,000 0 d. 125,600 e. 139 139,00 ,000 0 ANSWER:

e

November er produc production tion = 135,0 135,000 00 + (0.10 (0.10 × 180,000 180,000)) − 14,000 = 139,000 units RATIONALE: Novemb


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Chapter 9 - Profit Planning 102. Refer to Figure 9-4. What is the budgeted overhead for November? a. $444,500 b. $280 $280,7 ,700 00 c. $404,000 d. $348,420 e. $192,920 ANSWER:

c

November er produc production tion = 135,0 135,000 00 + (0.10 (0.10 × 180,000 180,000)) − 14,000 = 139,000 units RATIONALE: Novemb Direct labor hours = 0.50 hours per unit × 139,000 = 69,500 hours Budgeted overhead for November = ($5 × 69,500) + 56,500 = $404,000 Figure 9-5. Sully Company provided the following information for last month.

Production in units Direct materials cost Direct labor cost Overhead cost Sales commission per unit sold Price per unit sold Fixed selling and administrative expense There were no beginning and ending inventories. 103. Refer to Figure 9-5. What is Sully's cost of goods sold per unit? a. $12.60

3,000 $7,000 $10,000 $9,600 $4 $29 $7,000

b. $8.87 $8.87 c. $10.00 d. $12.50 e. $16.60 ANSWER:

b

RATIONALE: Direct materials cost Direct labor cost Overhead cost Total manufacturing costs Units produced Cost of goods sold per unit


$7,000 $10,000 $9,600 $26,600 3,000 $8.87

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Chapter 9 - Profit Planning 104. Refer to Figure 9-5. What is gross margin for Sully Company last month? a. $54 $54,00 ,000 0 b. $64, $64,60 600 0 c. $32 $32,40 ,400 0 d. $47,400 e. $60 $60,40 ,400 0 ANSWER:

e

RATIONALE: Sales ($29 × 3,000) Cost of goods sold ($7,000 + 10,000 + 9,600) Gross margin

$87,000 26,600 $60,400

105. Refer to Figure 9-5. What is operating income for Sully Company for last month? a. $24 $24,00 ,000 0 b. $34, $34,60 600 0 c. $49 $49,40 ,400 0 d. $27,400 e. $41 $41,40 ,400 0 ANSWER:

e

RATIONALE: Sales ($29 × 3,000) Cost of goods sold ($7,000 + 10,000 + 9,600) Gross margin Less: commission ($4 × 3,000) Less: fixed selling and admin. expense Operating income

$87,000 26,600 $60,400 (12,000) (7,000) $41,400

Figure 9-10. Connor Company produces speaker systems for cars. Estimated sales (in units) in January are 40,000; in February 37,000; and in March 34,000. Each unit is priced at $60. Connor wants to have 35% of the following month's sales in ending inventory. That requirement was met on January 1.

Each speaker system requires 3 boxes and 15 yards of wire. Boxes cost $4 each and wire is $0.60 per yard. Connor wants to have 20% of the following month's production needs in ending raw materials inventory. On January 1, Connor had 24,000 boxes and 100,000 yards of wire in inventory. 106. Refer to Figure 9-10. What is Connor's expected sales revenue for February? a. $2,020,000 b. $1,9 $1,900 00,0 ,000 00 c. $60 d. $1,125,000 e. $2,220,000 ANSWER:

e

RATIONALE: February revenue = 37,000 × $60 = $2,220,000


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Chapter 9 - Profit Planning 107. Refer to Figure 9-10. How many units does Connor expect to produce in February? a. 25,700 b. 30,5 30,500 00 c. 23,750 d. 35,950 e. 25,000 ANSWER: RATIONALE:

d Sales Desired ending inventory (35%) Units needed Less: beginning inventory Production

January 40,000 12,950 52,950 (14,000) 38,950

February 37,000 11,900 48,900 (12,950) 35,950

108. Refer to Figure 9-10. How many boxes does Connor expect to purchase in January? a. 159 159,65 ,650 0 b. 114, 114,42 420 0 c. 214 214,55 ,550 0 d. 148,500 e. 138 138,42 ,420 0 ANSWER: RATIONALE:

b Production × raw materials per unit Raw materials for production Desired ending inventory Units needed Less: beginning inventory Purchases in units

January 38,950 ×3 116,850 21,570 138,420 (24,000) 114,420

February 35,950 ×3 107,850

Figure 9-11. Pallen Company estimated sales of 11,000 units at $40 each, unit cost of goods sold of $22, marketing expense of $65,000 and a 10% commission on each unit sold. Administrative expense is budgeted at $50,000. 109. Refer to Figure 9-11. What is total selling expense? a. $65 $65,00 ,000 0

b. $44, $44,00 000 0 c. $84 $84,00 ,000 0 d. $109,000 e. $39 $39,00 ,000 0 ANSWER:

d

RATIONALE: Total selling expense = $109,000

109,000 = $65,000 + ($40 × 0.10 × 11,000) C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning 110. Refer to Figure 9-11. What is Pallen's budgeted operating income? a. $281,000 b. $39, $39,00 000 0 c. $198,000 d. $83,000 e. $440,000 ANSWER:

b

RATIONALE: Budgeted operating income = $39,000 39,000 = ($40 × 11,000) − ($22 × 11,000) − $109,000* − $50,000

*109,000 = $65,000 + ($40 × 0.10 × 11,000) = Budgeted Marketing Expenses 111. Budgets are prepared in which of the following orders? a. production production budget, sales budget, direct labor budget b. product production ion bud budget, get, cost of goods goods sold sold budg budget, et, direct direct labor labor bud budget get c. sales budget, cash budget, production production budget d. sales budget, production budget, budget, direct materials purchases budget e. production budget, cash budget, budget, direct materials purchases budget ANSWER: d

112. Suppose that a company has the following accounts receivable collection pattern: Paid in the month of sale Paid in the month following sale

30% 70%

All sales are on credit. If credit sales for January and February are $200,000 and $100,000 respectively, the cash collection for February is a. $210,000 b. $100 $100,0 ,000 00 c. $130,000 d. $140,000 e. $170,000 ANSWER:

e

RATIONALE: Cash from January sales (0.7 × $200,000) Cash from February sales (0.3 × $100,000) Cash received in February


$140,000 30,000 $170,000

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Chapter 9 - Profit Planning 113. Which of the following statements is true? a. The production budget is the first budget to be prepared in the master budget. b. The cash cash budget budget is prepared prepared before before the the direct materials purchases purchases budget. budget. c. The budgeted balance balance sheet is prepared after the cash budget. d. Service firms need not prepare a master budget. e. The cost of goods sold budget is prepared before the direct labor and overhead budgets. ANSWER: c Figure 9-9. Yummy Jams Company produces a line of jams. Yummy's estimated production of jars of jam for the fourth quarter of the year is as follows:

October November November December

75,000 98,0 98,000 00 63,000

Each jar requires half a pound of berries. Yummy prefers to buy the freshest berries, so its policy is to have just 3% of the following month's production needs in ending inventory. On October 1, the company had 1,125 pounds of berries berries in inventory inventory.. Yummy's Yummy's pays $0.60 $0.60 per per pound pound of berrie berries. s. It buys all berrie berriess on account account and and typically typically pays 40% of a month's purchases in that month, and the remaining 60% the following month. 114. Refer to Figure 9-9. How many pounds of berries will wi ll be purchased during the month of November? a. 23,375 b. 48,4 48,475 75 c. 39,925 d. 41,950 e. 49,945 ANSWER: RATIONALE:

b Production × 0.50 lbs Berries needed for production Desired ending inventory Berries needed Less: beginning inventory Berries purchases in pounds


October November 75,000 98,000 × 0.50 × 0.50 37,500 49,000 1,470 945 38,970 49,945 (1,125) (1,470) 37,845 48,475

December 63,000 × 0.50 31,500

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Chapter 9 - Profit Planning 115. Refer to Figure 9-9. What is the dollar cost of purchases for October? a. $19 $19,92 ,925 5 b. $22, $22,70 707 7 c. $18 $18,45 ,450 0 d. $23,300 e. $33 $33,32 ,320 0 ANSWER:

b

RATIONALE:

Production × 0.50 lbs Berries needed for production Desired ending inventory Berries needed Less: beginning inventory Berries purchases in pounds × 0.60 per pound Total direct materials cost

October 75,000 × 0.50 37,500 1,470 38,970 (1,125) 37,845 × 0.60 22,707

116. Refer to Figure 9-9. How much cash is paid in November for berry purchases (rounded to the nearest dollar)? a. $25 $25,25 ,258 8 b. $21, $21,08 088 8 c. $28 $28,90 ,900 0 d. $19,963 e. $32 $32,21 ,212 2 ANSWER:

a

RATIONALE: Cash paid in November for purchases: October purchases November purchases Total

$22,707 × 0.60 = 13,624.20 $29,085 × 0.40 = 11,634.00 $25,258.20

117. Bank loan officers would find which of the following budgets to be one of the most important in determining whether or not to give a company a loan? a. Sales budget b. Produc Production tion bud budget get c. Budgeted income statement d. Budgeted balance sheet e. Cash budget ANSWER: e


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Chapter 9 - Profit Planning 118. A company anticipates selling $200,000 of goods, of which $15,000 will probably be uncollectible. Which of the following statements is true? a. $15,000 does not appear on the cash budget. b. $215,00 $215,000 0 is added to the the cash cash budget. budget. c. $15,000 is subtracted from the cash budget. d. $185,000 appears as a disbursement on the cash budget. e. None of these. ANSWER: a

119. A company's planned borrowings and repayments appear on the a. production budget. b. selling selling and administ administrati rative ve expe expenses nses bud budget. get. c. interest income budget. d. cash budget. e. operating budget. budget. ANSWER: d

120. The planned ending cash balance for the year appears on which of the following statements? a. Budgeted income statement b. Budgeted Budgeted balance balance sheet c. Production Production budget d. Budgeted cash receipts e. Budgeted cash disbursements ANSWER: b

121. Gilbert Company purchased $40,000 of goods in July and expects to purchase $60,000 of goods in August. Gilbert typically pays for 25% of purchases in the month of purchase and 75% in the following month. What are Gilbert Company's total expected cash disbursements for purchases in the month of August? a. $65 $65,00 ,000 0 b. $40, $40,00 000 0 c. $45 $45,00 ,000 0 d. $60,000 e. $100,000 ANSWER:

c

RATIONALE: Expected cash disbursements = ($40,000 × 0.75) + ($60,000 × 0.25) = $45,000


P a g e 2 7

Chapter 9 - Profit Planning 122. Which of the following appears on the budgeted balance sheet? a. Estimated Estimated sales b. Estimated Estimated cost of goods goods sold c. Estimated ending accounts receivable d. Estimated fixed selling expense e. Estimated fixed factory overhead ANSWER: c

123. Cash budgeting is important to which of the following? a. retail stores stores b. manufac manufacturi turing ng firms firms c. not-for-profit agencies d. local government agencies e. all of these ANSWER: e

124. Ressen Company finds that typically 30% of a month's sales are for cash. Payments on accounts receivable are 60% in the month of sale and 38% in the month following sale. Budgeted sales for June are $100,000, for July $140,000, and for August $120,000. What are the total cash receipts budgeted for July? a. $127,400 b. $85, $85,40 400 0 c. $122,000 d. $262,000 e. $140,000 ANSWER: RATIONALE:

a Cash sales ($140,000 × 0. 0.30) Payments on account for sales in: June ($100,000 × 0.7 × 0.38) July ($140,000 × 0.70 × 0.60) Total cash receipts


July $ 42,000 26,600 58,800 $127,400

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Chapter 9 - Profit Planning 125. Schrandt Company, an importer and retailer of Polish pottery and kitchenware, prepares a monthly master budget. Data for the July master budget are given below: The June 30th balance sheet follows: Cash $ 25,000 Accounts payable $ 45,000 Accounts receivable 110,000 Capital stock 300,000 Inventory 54,000 Retained earnings 94,000 Building and equipment (net) 250,000 Actual sales for June and budgeted sales for July, August, and September are given below: June $137,500 July 360,000 August 400,000 September 320,000 Sales are 20% for cash and 80% on credit. All credit sales are collected in the month following the sale. There are no bad debts. The gross margin percentage is 40% of sales. The desired ending inventory is equal to 25% of the following month's sales. One fourth of the purchases are paid for in the month of purchase and the others are purchased on account and paid in full the following month. The monthly cash operating expenses are $43,000, and the monthly depreciation expenses are $7,000. What is the balance of the accounts receivable at the end of July? a. $110,000 b. $288 $288,0 ,000 00 c. $360,000 d. $398,000 ANSWER:

b

RATIONALE: SUPPORTING CALCULATIONS: 80% × 360,000 = $288,000


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Chapter 9 - Profit Planning 126. June Corporation has the following sales forecasts for the first three months of the current year: Month Sales January $36,000 February 24,000 March 40,000 75% of sales are collected in the month of the sale and the remainder is collected in the following month. Accounts receivable balance (January 1) $22,800 Cash balance (January 1) 22,000 Minimum cash balance needed 20,000 What is the cash balance at the end of January, assuming that cash is received only from customers and that $48,000 is paid out during January? a. $19 $19,40 ,400 0 b. $23, $23,80 800 0 c. $20 $20,60 ,600 0 d. $21,000 ANSWER:

b

RATIONALE: SUPPORTING CALCULATIONS: $22,000 + $22,800 + (0.75 × $36,000) − $48,000 = $23,800 Figure 9-6. Toscano Company makes all its sales on account. Accounts receivable payment experience is as follows:

Percent paid in the month of sale Percent paid in the month after the sale Percent paid in the second month after the sale Toscano provided information on sales as follows:

25% 64% 5%

May $140,000 June $115,000 July $126,000 August (expected) $132,000 127. Refer to Figure 9-6. How much of May's sales are expected to be uncollectible? a. $8,400 b. $5,0 $5,000 00 c. $2,500 d. $7,200 e. $0 ANSWER:

a

RATIONALE: May uncollectible sales = $140,000 × 0.06 = $8,400

6% is obtained by the following: 1.00 − (0.25 + 0.64 + 0.05) = 0.06


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Chapter 9 - Profit Planning 128. Refer to Figure 9-6. How much of June credit sales are expected to be collected in the month of July? a. $30 $30,00 ,000 0 b. $60, $60,00 000 0 c. $36 $36,00 ,000 0 d. $73,600 e. $80 $80,00 ,000 0 ANSWER:

d

RATIONALE: June credit sales collected in July = $115,000 × 0.64 = $73,600

129. Refer to Figure 9-6. What is budgeted cash to be collected on account for the month of August? a. $45 $45,00 ,000 0 b. $132 $132,0 ,000 00 c. $119,390 d. $150,000 e. $154,600 ANSWER:

c

RATIONALE: From June ($115,000 × 0.05) From July ($126,000 × 0.64) From August ($132,000 × 0.25) Total cash expected

$5,750 80,640 33,000 $119,390

Figure 9-7. Lambert Company purchased $140,000 $140,000 of goods in September and expects to purchase $130,000 of goods in October. Lambert typically pays for 20% of purchases in the month of purchase and 80% in the following month.

Every month, Lambert must make the following payments: Rent Wages Utilities Telephone Loan on equipment

$ 5,000 14,000 3,000 400 1,200

In mid-October, Lambert expects to buy a new computer for $4,500 using the company credit card. Typically, the credit card bill is paid in full in the following month. September credit card purchases totaled $6,000. 130. Refer to Figure 9-7. What is Lambert's expected cash disbursement in October for purchases of goods? a. $140,000 b. $130 $130,0 ,000 00 c. $112,000 d. $138,000 e. $26 $26,00 ,000 0 ANSWER:

d

RATIONALE: Cash payments for goods in October = ($140,000 × 0.80) + ($130,000 × 0.20) = $138,000 C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

P a g e 3 1

Chapter 9 - Profit Planning 131. Refer to Figure 9-7. What are the total cash disbursements expected by Lambert during the month of October? a. $167,600 b. $172 $172,1 ,100 00 c. $161,600 d. $55,600 e. $60 $60,10 ,100 0 ANSWER:

a

RATIONALE: Rent Wages Utilities Telephone Loan on equipment Payments for goods ($140,000 × 0.80) + ($130,000 × 0.20) Payment for September credit card purchases Total cash disbursements in October

$ 5,000 14,000 3,000 400 1,200 138,000 6,000 $167,600

Figure 9-8. Cohlmia Company makes all its sales on account. Cohlmia's accounts receivable payment experience is as follows:

Percent paid in the month of sale Percent paid in the month after the sale Percent paid in the second month after the sale Cohlmia provided information on sales as follows:

20% 75% 2%

September $100,000 October $120,000 November November $200 $200,0 ,000 00 December (expected) $250,000 132. Refer to Figure 9-8. What are the expected cash receipts in the month of November? a. $200,000 b. $40, $40,00 000 0 c. $190,000 d. $132,000 e. $114,000 ANSWER:

d

Novemberr cash receipts receipts = ($200,00 ($200,000 0 × 0.20) + ($120,00 ($120,000 0 × 0.75) + ($100,0 ($100,000 00 × 0.02) = $132,00 $132,000 0 RATIONALE: Novembe


P a g e 3 2

Chapter 9 - Profit Planning 133. Refer to Figure 9-8. What are the expected cash receipts in December? a. $202,400 b. $210 $210,4 ,400 00 c. $50 $50,00 ,000 0 d. $250,000 e. $179,000 ANSWER:

a

RATIONALE: December cash receipts = ($250,000 × 0.20) + ($200,000 × 0.75) + ($120,000 × 0.02) = $202,400

134. The following forecasted sales pertain to Micah Company: Month April May June July Collection pattern: 60% in month of sale 40% in month following the sale

Sales $200,000 250,000 150,000 100,000

Accounts receivable as of March 31 $35,000 Finished goods inventory as of March 31 4,000 units The company has a selling price of $10 per unit and expects to maintain ending inventories equal to 20% of the next month's sales. How many units are expected to be produced in April? a. 21,000 units b. 19,0 19,000 00 units units c. 25,000 units d. 20,000 units ANSWER:

a

RATIONALE: SUPPORTING CALCULATIONS: ($200,000 / $10) + [($250,000 / $10) × 0.20] − 4,000 = 21,000 units

135. The alignment of managerial and organizational goals is referred to as goal a. congruence. congruence. b. partic participa ipatio tion. n. c. pseudoparticipation. d. feedback. e. incentives. ANSWER: a


P a g e 3 3

Chapter 9 - Profit Planning 136. Traditional organization theory uses which of the following to motivate workers? a. Bonuses Bonuses b. Self-esteem Self-esteem c. Nature of the work itself d. Increased responsibility responsibility e. Job satisfaction ANSWER: a

137. ____ occurs when a manager deliberately underestimates revenues or overestimates costs. a. Budgetary slack b. Pseudop Pseudoparti articipa cipation tion c. Goal congruence d. Setting standards too high e. None of these ANSWER: a

138. Which of the following is true of the master budget? a. Monthly budgets budgets are derived by dividing the master budget by 12. b. Fixed costs cannot cannot change change from one month month to another. another. c. Variable costs cannot change from one month to another. d. The master budget can reflect seasonal effects. e. None of these. ANSWER: d

139. Which of the following is not an an advantage of participative budgeting? a. It fosters a sense of creativity in managers. b. It encoura encourages ges the the introduc introduction tion of of budgetar budgetary y slack. slack. c. It encourages greater goal congruence. congruence. d. It encourages a higher level of performance. e. It fosters a sense of managerial responsibility. ANSWER: b

140. Which of the following is an advantage of participative budgeting? a. It fosters pseudoparticipation. b. It encourages encourages budgetar budgetary y slack. c. It tends to discourage goal congruence. d. It fosters a sense of responsibility. e. There are no advantages of participative budgeting. ANSWER: d


P a g e 3 4

Chapter 9 - Profit Planning 141. Which of the following is an example of myopic behavior? a. Promotion of deserving deserving employees. b. Reducing Reducing expenditu expenditures res on on preven preventive tive maintenan maintenance. ce. c. Increased spending on research and development. d. Productivity training for new employees. e. Buying cheaper materials of the same quality to decrease the amount spent on raw materials. ANSWER: b


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Chapter 9 - Profit Planning 142. Varney Company makes rolling suitcases. Its sales budget for four months is: Month Unit Sales March 15,000 April 20,000 May 40,000 June 60,000 Varney's policy is that ending inventory of finished suitcases should equal 30% of the next month's sales. Beginning inventory (March 1) is 5,300 suitcases. Each suitcase required 1.5 yards of ballistic nylon. The ending inventory policy for nylon is that 20% of the following month's production needs must be on hand. On March 1, Varney had 10,450 yards of nylon in inventory. A. B. C. D. E.

What What is the the des desir ired ed endi ending ng inve invent ntor ory y of of sui suitc tcas ases es for for Apr April il?? What What is the the bud budge gete ted d pro produ duct ctio ion n of of sui suitc tcas ases es for for Apr April il?? What What is the the desi desire red d end endin ing g inv inven ento tory ry of nylo nylon n for for Marc March? h? What What are are the the bud budge gete ted d yar yards ds of of nyl nylon on to be purc purcha hase sed d in Marc March? h? Assuming each suitcase required two yards of ballistic nylon, what is the desired ending inventory of nylon for March?

ANSWER:

A. B.

12,000 (see table below) 26,000 (see table below)

Sa S ales + Desired EI Units needed − Beginning inventory Pr Production

March 15,000 6,000 21,000 − 5,300 15,700

April 20,000 12,000 32,000 − 6,000 26,000

C.

7,800 yards (26,000 × 1.5 × 20%)

D.

20,900 yards (see table below)

Production × 1.5 yds nylon Nylon Nylon neede needed d for for prod producti uction on + Desired ending inventory Nylon Nylon needed needed − Beginning inventory Purchases of nylon in yards E.


March 15,700 × 1.5 23,5 23,550 50 + 7,800 31,3 31,350 50 − 10,450 20,900

May 40,000 18,000 58,000 − 12,000 46,000

April 26,000 × 1.5 39,0 39,000 00

10,400 yards (26,000 × 2 × 20%)

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Chapter 9 - Profit Planning 143. Borland Company makes backpacks. Its production budget for two months is: Month Budgeted production in units June 35,000 July 50,000 Borland uses two types of labor to make the backpacks: cutting labor and sewing labor. Each backpack requires 6 minutes, on average, of cutting labor. Each backpack requires 24 minutes of sewing labor. Borland has fixed overhead of $4,400 per month and variable overhead of $3 per direct labor hour. A. B. C. D.

How How man many y hou hours rs of cutt cuttin ing g lab labor or are are bud budge gete ted d for for July July?? How How man many y hou hours rs of sewi sewing ng labo laborr are are budg budget eted ed for for Jul July? y? What What is the the tot total al amou amount nt of budg budget eted ed dire direct ct labo laborr hou hours rs for for Jul July? y? What What is is the the budg budget eted ed tot total al ove overh rhea ead d for for the the mont month h of of July July??

ANSWER:

A. B. C. D.

Budgeted cutting labor = (6 / 60) × 50,000 = 5,000 hours Budgeted sewing labor = (24 / 60) × 50,000 = 20,000 hours Budg Budget eted ed dire direct ct labo laborr hour hourss = 5,00 5,000 0 + 20,0 20,000 00 = 25,0 25,000 00 Budgeted total overhead = $4,400 + ($3 × 25,000) = $79,400


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Chapter 9 - Profit Planning 144. Abrams Bottling Company sells fruit-flavored colas. Estimated sales in cartons for May, June, and July are 1,000, 3,000 and 5,000 respectively. The price is forecast at $5 per carton. Abrams requires that finished goods ending inventory be 20% of the next month's sales. Inventory was 500 units on May 1. Each carton requires 12 oz of fruit syrup and 130 oz of carbonated water. Materials ending inventory is 10% of the next month's production needs. May 1 inventory met that requirement. A. B. C. D. E. F.

Budgeted revenue for May is $ ______ ___ ______ ______ ___ ______ ___ ___ . Budgeted revenue for July is $ ______ ___ ______ ______ ______ ___ ___ . Production in May is ___ ______ cartons. ___ ______ ______ ______ ___ cartons. Production in June is ___ ______ cartons. ___ ______ ______ ______ ___ cartons. Purchases of syrup in May is ______ ounces. ___ ______ ______ ______ ______ ___ ounces. Purchases of carbonated water in May is ______ ounces. ___ ______ ___ ______ ___ ______ ___ ounces.

ANSWER:

A.

Budgeted revenue for May = $5,000 [5,000 = 1,000 × $5]

B.

Budgeted re revenue fo for Ju July = $25,000 [25,000 = 5,000 × $5]

C.

Production in in Ma May = 1,100 ca cartons. [1,100 = 1,000 + 600 − 500]

D.

Production in in Ju June = 3,400 ca cartons. [3,400 = 3,000 + 1,000 − 600]

E.

Pur Purchas chases es of syru syrup p in May May = 15,96 5,960 0 ounc ounces es.. [15,960 = (1,100 × 12) + (3,400 × 12 × 0.10) − (1,100 − (1,100 × 12 × 0.10)]

F.

Purc Purcha hase sess of carb carbon onat ated ed wate waterr in May May = 172, 172,90 900 0 ounc ounces es.. [172,900 = (1,100 × 130) + (3,400 × 130 × 0.10) − (1,100 − (1,100 × 130 × 0.10)]

145. Karam Inc. has compiled the following data in order to put together their first quarter operating budget for 20XX: January 35,000

February 31,000

March 38,000

April 29,000

Sales (units) Additional information: Karam sells each unit for $95. Company policy is to have 30% of next month’s sales (in units) in ending finished goods inventory. This policy was met in December. Company policy is to have 40% of next month’s production needs in ending raw materials inventory. The producti production on needs needs for April April is 95,500. 95,500. This policy policy was was met in Decemb December. er. It takes three pounds of material to produce each unit and the cost is $2.75/pound. Required: A. Prepare a sales budget for the January, February and March and for the first quarter in total. B. Prepare a production budget for January, February and March and for the first quarter in total. C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

P a g e 3 8

Chapter 9 - Profit Planning C. Prepare a direct materials purchases budget for January, February and March and for the first quarter in total. ANSWER:

A.

Sales in units Unit selling price Budgeted sales

Karam Inc. Sales Budget For the Quarter Ended March 31, 20XX January February March 35,000 31,000 38,000 × $95 × $95 × $95 $95 $3,325,000 $2,945,000 $3,610,000

B.

Sales in units (given) Desired ending inventory (31,000 × 0.30; 38,000 × 0.30; 29,000 × 0.30) Total needs

Karam Inc. Production Budget For the Quarter Ended March, 31, 20XX January February 35,000 31,000

Less: Beginning inventory (35,000 × 0.30; 31,000 × 0.30; 36,000 × 0.30) Units to be produced

C.


March 38,000

Total 104,000

9,300 44,300

11,400 42,400

8,700 46,700

8,700 112,700

(10,500) 33,800

(9,300) 33,100

(11,400) 35,300

(10,500) 102,200

Karam Inc. Production Budget For the Quarter Ended March, 31, 20XX January February 33,800 33,100 × 3 × 3 101,400 99,300

Units to be produced Direct materials per unit Production needs Desired ending inventory (99,300 × 0.40; 105,900 × 0.40; 95,500 (given) × 0.40) Total needs Less: Beginning inventory (35,000 × 0.30; 31,000 × 0.30; 36,000 × 0.30) Direct materials to be purchased Cost per pound Total purchase cost

Total 104,000 × $95 $9,880,000

March 35,300 × 3 105,900

Total 102,200 × 3 306,600

39 39,720 141,120

42,360 141,660

38,200 144,100

38,200 344,800

(40,560) 100,560 × $2.75 $276,540

(39,720) 101,940 × $2.75 $280,335

(42,360) 101,740 × $2.75 $279,785

(40,560) 304,240 × $2.75 $836,660 P a g e 3 9

Chapter 9 - Profit Planning

146. Boyle Company has put together the following data in order to complete their operating budget for the second quarter in 20XX: April Ap May June July Sales (units) 73,200 68,900 65,400 67,300 Additional information: Company policy requires 60% of next month’s sales (in units) be in ending inventory. This policy was met in March. It takes 2.5 hours of direct labor to produce one unit. The average wage cost is $14. Variable overhead rate is $6 per direct labor hour and fixed overhead is $15,000 per month. Required: A. Prepare a production budget for April, May, June and the quarter in total. B. Prepare a direct labor budget for April, May, June and the quarter in total. C. Prepare an overhead budget for April, May, June and the quarter in total.

ANSWER:

A.

B

Boyle Company Production Budget For the Quarter Ended June 30, 20XX April May J une Sales in units 73,200 68,900 65,400 Desired ending inventory (68,900 × 0.60; 65,400 × 0.60; 67,300 × 0.60) 41 41,340 39,240 40,380 Total needs 114,540 108,140 105,780 Less: beginning inventory (73,200 × 0.60; 68,900 × 0.60; 65,400 × 0.60) (43,920) (41,340) (39,240) Units to be produced 70,620 66,800 66,540

(43,920) 203,960

Boyle Company Direct Labor Budget For the Quarter Ended June 30, 20XX April May J une Units to be produced 70,620 66,800 66,540 Direct labor hours per unit × 2.5 × 2.5 × 2.5 Total hours needed 176,550 167,000 166,350 Average wage rate per hour × $14 $14 × $14 $14 × $14 $14 Total direct labor cost $2,471,700 $2,338,000 $2,328,900

Total 203,960 × 2.5 509,900 × $14 $7,138,600

C


Boyle Company Overhead Budget For the Quarter Ended June 30, 20XX April May

J une

Total 207,500

40,380 247,880

Total P a g e 4 0

Chapter 9 - Profit Planning Budgeted direct labor hours Variable overhead rate Budgeted variable overhead Budgeted fixed overhead Total overhead

176,550 × $6 $1,059,300 15,000 $1,074,300

167,000 × $6 $1,002,000 15,000 $1,017,000

166,350 × $6 $998,100 15,000 $1,013,100

509,900 × $6 $3,059,400 45,000 $3,104,400

147. Jones Corporation has the following budgeted sales for the selected s elected four-month period: Month July August September October

Unit Sales 20,000 35,000 25,000 30,000

Sales price per unit is $180 Plans are to have an inventory of finishe product equal to 20% of the unit sales for the fini shed d product next month. There was 4,000 units in beginning inventory on July 1st. Three pounds of materials are required for each unit produced. Each pound of material . . Desired ending inventory for September is 25,200 pounds of material. Beginning inventory for July was 20,700 pounds of material. Each unit requires 0.6 hours of direct labor and the average wage rate is $16 per hour. Variable overhead rate is $3.50 per direct labor hour. There is also fixed overhead of $22,000 per month. The company pays a 3% commission on sales. Company has fixed selling and administrative expenses as follows: Rent $6,000/month Utilities $1,200/month Advertising $400/month Office Salaries $35,000/month Required: A. Prepa Prepare re a sales sales bud budge gett for for July, July, Augu August, st, and and Sept Septem embe berr and and in total total for for the the qua quarte rter. r. B. Prepar Preparee prod product uction ion bud budget getss for for July, July, August, August, and Septem September ber and in total total for the quarte quarter. r. Prepare a direct materials purchases budget in pounds and dollars for July, August, and C. September and in total for the quarter. Prepare a direct labor budget in hours and total cost for July, August and September and D. in total for the quarter. E. Prepa Prepare re an an over overhe head ad bud budge gett for for July, July, Augu August st and and Sep Septem tembe berr and and in total total for for the the quar quarte ter. r. Prepare a selling and administrative expenses budget for July, August and September and F. in total for the quarter. Prepare an ending finished goods inventory budget for the quarter (Hint: You have G. already calculated the desired ending finished goods inventory quantity. Assume a stable per unit unit rate and round round the the per unit unit fixed fixed factory factory overhea overhead d rate to two decimal places.) H. Prep Prepar aree a cost cost of good goodss sol sold d bud budge gett for for the the qua quart rter er Prepare a budged income statement for the quarter-the company falls into the 35% tax I. bracket for for income income taxes. C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

P a g e 4 1

Chapter 9 - Profit Planning ANSWER:

Units to be sold Sales price Total sales dollars

Sales Budget July August 20,000 35,000 × $180 × $180 $3,600,000 $6,300,000

Sales Add: Desired ending inventory Total needs Less: Beginning inventory Units to be produced

Units to be produced × lbs per unit Pounds needed Desired ending inventory Total needs Less beginning inventory Purchases needed × $20.00/lb Total purchase cost

Units to be produced × 0.60 of direct labor hours per unit Direct labor hours needed × $16.00 per hour Total direct labor cost

Labor hours × variable rate per hour Total variable OH C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

September 25,000 × $180 $4,500,000

Production Budget July August $20,000 $35,000 $7,000 $5,000 $27,000 $40,000 ($4,000) ($7,000) $23,000 $33,000

Direct Materials Budget July August 23,000 33,000 × 3 × 3 69,000 99,000 29,700 23,400 98,700 122,400 (20,700) (29,700) 78,000 92,700 × $20 $20 × $20 $20 $1,560,000 $1,854,000

Total 80,000 × $180 $14,400,000

Se September $25,000 $6,000 $31,000 ($5,000) $26,000

September 26,000 × 3 78,000 25,200 103,200 (23,400) 79,800 × $20 $20 $1,596,000

Total $80,000 $6,000 $86,000 ($4,000) $82,000

Total 82,000 × 3 246,000 25,200 271,200 (20,700) 250,500 × $20 $20 $5,010,000

Direct Labor Budget July August 23,000 33,000 × 0.60 × 0.60 13,800 19,800 × $16.00 × $16.00 $220,800 $316,800

September Se 26,000 × 0.60 15,600 × $16.00 $249,600

Total 82,000 × 0.60 49,200 × $16.00 $787,200

Overhead Budget July August 13,800 19,800 × $3.50 × $3.50 $48,300 $69,300

September Se 15,600 × $3.50 $54,600

Total 49,200 × $3.50 $172,200 P a g e 4 2

Chapter 9 - Profit Planning Fixed overhead Total overhead

Variable selling expense Fixed expenses: Rent Ut Utilities Ad Advertising Office salaries Total

$22,000 $70,300

$22,000 $91,300

$22,000 $76,600

Selling and Administrative Budget July August September Se $108,000 $189,000 $135,000

6,000 1,200 400 35,000 $150,600

6,000 1,200 400 35,000 $231,600

6,000 1,200 400 35,000 $177,600

$66,000 $238,200

Total $432,000

18,000 3,600 1,200 105,000 $559,800

Ending Finished Goods Inventory Budget Desired ending inventory (6,000 × $72.50) $435,000

Direct materials ($20 × 3) Direct labor (0.60 × $1 $16) Overhead: Variable overhead (0.60 × $3 $3.50) Fixed overhead [0.60 × ($ ($66,000 / 49,200)] Unit cost

Cost of Goods Sold Budget Direct materials (82,000 × $60) Direct labor (82,000 × 0.60 × $16.00) Overhead [(82,000 × 0.60 × $3.50) + $66,000] Add: Beginning inventory (4,000 × $7 $72.50) Goods available for sale Less: Ending inventory Cost of goods sold

Budgeted Income Statement Sales ($180 × 80,000) Cost of goods sold Gross margin Less: Variable selling and administrative Fixed selling and administrative expenses Operating income Less: Income taxes (Operating income × 35%) Net income income C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

$60.00 9.60 2.10 0.80 $72.50

$4,920,000 787,200 238,200 290,000 6,235,400 (435,000) $5,800,400

$14,400,000 5,800,400 $8,599,600 432,000 127,800 $8,039,800 2,813,930 $5,2 $5,225 25,8 ,870 70 P a g e 4 3

Chapter 9 - Profit Planning

148. Rapid-Lube provides oil changes and lubes. The estimated number of oil changes for April and May are 3,600 and 4,000. Each oil change takes 12 minutes of direct labor. The wage rate is $10 per hour. Overhead is $3,700 per month and $2 per oil change. A. B. C. D.

Budgeted direct labor for April is $ ______ ___ ______ ______ ___ ______ ___ ___ . Budgeted direct labor for May is $ ______ ___ ______ ______ ___ ______ ___ ___ . Budgeted overhead for April is $ ______ ___ ______ ______ ______ ______ ___ . Budgeted overhead for May is $ ______ ___ ______ ______ ______ ______ ___ .

ANSWER:

A.

Budgete eted dir direc ectt la labor fo for Ap April = $7 $7,200 $7,200 = [3,600 × (12 / 60) × $10]

B.

Bud Budgeted eted direc irectt lab labor for for May May = $8,0 $8,00 00 $8,000 = [4,000 × (12 / 60) × $10]

C.

Budg udgeted ted overh erhead ead for April pril = $10,900 900 $10,900 = $3,700 + ($2 × 3,600)

D.

Budgeted ov overhead fo for Ma May = $11,700 $11,700 = $3,700 + ( $2 × 4,000)


P a g e 4 4

Chapter 9 - Profit Planning 149. Terrill Company makes and sells two types of shaving cream: foamy, and gel. Last year, Foamy sold for $2.30 per can, and Gel sold for $3.15 per can. Sales volume was as follows: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Foamy $76,000 $80,000 $82,000 $70,000 Gel $50,000 $80,000 $90,000 $60,000 Terrill expects sales for Foamy to increase by 5% over the same quarter last year. The Gel price will increase to $3.50, but aggressive advertising is expected to raise volume by 5% in quarters 1 and 4 and by 10% in quarters 2 and 3. Prepare a sales budget for the coming year. ANSWER:

Foamy Gel

Quarter 1 $183,540 183,750

Quarter 2 $193,200 308,000

Quarter 3 $198,030 346,500

Quarter 4 $169,050 220,500

Supporting calculations: Foamy Gel

Quarter 1 $2.30 × (76,000 × 1. 1.05) $3.50 × (50,000 × 1.05)

Quarter 2 $2.30 × (80,000 × 1.05) $3.50 × (80,000 × 1.10)

Foamy Gel

Quarter 3 $2.30 × (82,000 × 1. 1.05) $3.50 × (90,000 × 1. 1.10)

Quarter 4 $2.30 × (70,000 × 1.05) $3.50 × (60,000 × 1.05) 1.05)


P a g e 4 5

Chapter 9 - Profit Planning 150. Allison Company makes luggage. One popular model is the Traveler (a 21" wheeled carry-on). Budgeted sales for this model are: Month Unit Sales March 25,000 April 34,000 May 50,000 June 70,000 Desired ending inventory is 20% of the next month's sales. Inventory on March 1 is 3,100 units. Prepare a producti production on budge budgett for as many many months months as possible. possible. ANSWER:

Sales + Desired ending inventory Units needed Less: beginning inventory Production

March 25,000 6,800 31,800 (3,100) 28,700

April 34,000 10,000 44,000 (6,800) 37,200

May 50,000 14,000 64,000 (10,000) 54,000

NOTE: A producti production on budget budget for June is impossib impossible le because because estimated estimated July July sales sales (on (on which which June's June's desired ending inventory are based) are unknown. 151. CutMaster Salons anticipates giving 100 permanents in May, 130 in June, and 120 in July. CutMaster needs one permanent permanent wave wave kit for each each perm, perm, along along with with two two boxes boxes of wave tissues. tissues. Its inventory inventory policy is to have have 10% 10% of the following month's materials needs on hand. On May 1, there were 15 wave kits and four boxes of wave tissues on hand. (Round any fractions of a unit to the nearest whole unit.) A. B. C. D.

The wave kits to be purchased in May equal ______ ___ ______ ______ ______ ______ ___ . The wave kits to be purchased in June equal ______ ___ ______ ______ ______ ______ ___ . The boxes of tissues to be purchased in May equal ______ ___ ______ ___ ______ ___ ______ ___ . The boxes of tissues to be purchased in June equal ______ ___ ______ ___ ______ ___ ______ ___ .

ANSWER:

A.

May wave kit purchases = 98 98 = 100 + 13 − 15

B.

June wave kit purchases = 129 129 = 130 + 12 − 13

C.

May pu purchases of of ti tissue bo boxes = 222 222 = (100 × 2 boxes) + (130 × 2 boxes × 0.10) − 4

D.

Jun June purchases ses of tissu issuee boxes = 258 258 = (130 × 2 boxes) + (120 × 2 boxes × 0.10) − (130 × 2 boxes × 0.10) 0.10)


P a g e 4 6

Chapter 9 - Profit Planning 152. Foster Company makes power tools. The sales budget for drills for the first four months of the year is: Month Unit Sales January 20,000 February 15,000 March 22,000 April 25,000 Foster has taken a just-in-time approach to production and wants only 5% of the next month's sales needs in ending inventory. January 1 inventory of drills was zero. Each drill takes 15 minutes of direct labor at $18 per hour. The factory overhead formula is $27,000 + $1.20 per direct labor hour. A. B. C. D. E. F. G.

Budgeted production for January is ______ ___ ______ ______ ______ ______ ___ . Budgeted production for February is ______ ___ ___ ______ ___ ______ ______ ___ . Budgeted production for the entire first quarter of the year is ______ ___ ______ ______ ______ ______ ___ . Budgeted direct labor cost for January is $ ______ ___ ______ ______ ______ ______ ___ . Budgeted direct labor cost for February is $ ___ ______ ___ ______ ______ ______ ___ . Budgeted variable overhead for March is $ ______ ___ ___ ______ ___ ______ ______ ___ . Budgeted total overhead for March is $ ______ ___ ___ ______ ___ ______ ______ ___ .

ANSWER:

A.

Budg udgeted ted pro prod ducti ction for Jan January ary = 20 20,750 [20,750 = 20,000 + 750 − 0]

B.

Budg Budget eted ed prod produc ucti tion on for for Febr Februa uary ry = 15,3 15,350 50 [15,350 = 15,000 + 1,100 − 750]

C.

Budg Budget eted ed prod produc ucti tion on for for the the entir entiree fir first st quar quarte terr of of the the year year = 58, 58,25 250 0 [58, [58,25 250 0 = 20,75 0,750 0 + 15,3 15,35 50 + 22,15 ,150*] 0*] *(22,0 22,00 00 + 1,2 1,250 − 1,100)

D.

Budg Budget eted ed dire direct ct labo laborr cos costt for for Janu Januar ary y = $93, $93,37 375 5 [93,375 = 20,750 × 0.25* × $1 $18] *(15 / 60)

E.

Budg Budget eted ed dire direct ct labo laborr cost cost for for Febr Februa uary ry = $69, $69,07 075 5 [69,075 = 15,350 × .25 × $18]

F.

Budg Budget eted ed var variabl iablee ov overh erhead ead fo for Mar March ch = $6, $6,6 645 [6,645 = 22,150 × 0.25 × $1.20]

G.

Mar March budget dgeteed tot total al overhe erhead ad = $3 $33,645 ,645 [33,645 = $27,000 + 6,645]


P a g e 4 7

Chapter 9 - Profit Planning 153. Uma Company production has variable overhead costs of $8 per direct labor hour and fixed overhead costs of $56,000 per month. Budgeted production for the next three months is as follows: Month Production October 6,000 November November 5,50 5,500 0 December 8,000 Each unit requires three hours of direct labor. A. B. C. D. E.

Uma's total variable overhead for October is $ ______ ___ ______ ______ ______ ___ ___ . Uma's total overhead for October is $ ______ ___ ______ ______ ______ ______ ___ . Uma's total variable overhead for November is $ ______ ___ ___ ______ ___ ______ ______ ___ . Uma's total fixed overhead for December is $ ______ ___ ___ ______ ___ ______ ______ ___ . Uma's total budgeted overhead for the last three months of the year equals $ ______ ___ ______ ___ ______ ___ ______ ___ .

ANSWER:

Month October November November December

A. B. C. D. E.

Variable overhead $144,000 $132 $132,0 ,000 00 $192,000

Fixed overhead $56,000 $56, $56,00 000 0 $56,000

Total overhead $200,000 $188 $188,0 ,000 00 $248,000

Oct October to total tal va variab iable ov overhead = 3 × 6,000 × $8 = $144,000 Octo Octobe berr tot total al over overhe head ad = $14 $144, 4,00 000 0 + $56, $56,00 000 0 = $200 $200,0 ,000 00 November to total va variable ov overhead = 3 × 5,500 × $8 = $132,000 Dece Decem mber tota totall fix fixeed ov overh erhead ead = $56 $56,00 ,000 Tota Totall bud budge gete ted d ove overh rhea ead d for for the the last last thre threee mon month thss of of the the year year = $63 $636, 6,00 000 0 $636,000 = $200,000 + $188,000 + $248,000 OR [(6,000 + 5,500 + 8,000) × 3 hours × $8.00 × variable overhead rate per direct labor hour] + ($56,000 × 3 months) = $636,000

Above numbers calculated as follows: $188,000 = $132,000 + $56,000 $248,000 = 3 × 8,000 × $8 $8 + 56,000


November Total Budgeted Overhead December Total Budgeted Overhead

P a g e 4 8

Chapter 9 - Profit Planning 154. Kanban Company estimated sales of 40,000 units at $6 each. Budgeted cost of goods sold s old per unit includes $1.20 of direct materials, six minutes of direct labor time at $15 per hour, and unit overhead cost of $1.30. Kanban pays a sales commission of 10% of sales revenue. Fixed selling and administrative expenses are budgeted at $25,000. Prepare a statement of operating income. A. B. C.

Budgeted variable marketing expense is $ ______ ___ ______ ___ ______ ___ ______ ___ . Budgeted operating income is $ ___ ______ ___ ______ ______ ______ ___ . Recalculate budgeted operating income assuming fixed selling and administrative expenses double and the selling price per unit increases 10%.

ANSWER:

Sales ($6 × 40 40,000) Cost of goods sold {$1.20 + [(6 / 60) × $15.00] + $15.00] + $1.30} × 40,000 Gross profit Less: Sales commission ($240,000 × 0. 0.10) Less: Fixed selling and administrative expense Operating income

A. B. C.

$240,000 160,000 $ 80,000 (24,000) (25,000) $ 31,000

Budg Budget eted ed vari variab able le mark market etin ing g exp expen ense se is $24 $24,0 ,000 00.. Budgeted ted op opera erating ing in income is is $3 $31,000. Budg Budget eted ed oper operat atin ing g inco income me is $27, $27,60 600. 0. (see (see tabl tablee belo below) w)

Sales ($6.60 × 40 40,000) Cost of goods sold {$1.20 + [(6 / 60) × $15.00] + $1.30} × 40,000 Gross profit Less: Sales commission ($264,000 × 0. 0.10) Less: Fixed selling and administrative expense Operating income


$264,000 160,000 $104,000 (26,400) (50,000) $ 27,600

P a g e 4 9

Chapter 9 - Profit Planning 155. You have decided to throw a party next weekend for 19 friends. The friends are going to bring health food, so all you have to have available are the drinks. You estimate that, on average, each person will drink four bottles of soft drinks. Three of your friends will drink only natural soda without unneeded color − so Sulo Ginger Ale should work well for them. For the others and yourself, you decide to buy Sulo Cola. Before going online, you check the refrigerator − you already have six bottles of Sulo Ginger Ale and 14 of Sulo Cola. Since this is the end of the semester − you decide that you don't really want any of the soft drinks on hand after the party. Now, you are ordering on the Internet. A. B.

How How man many y bot bottl tles es of Sulo Sulo Ging Ginger er Ale Ale do do you you plan plan to buy? buy? How How man many y bot bottl tles es of Sulo Sulo Cola Cola do you you pla plan n to to buy buy??

ANSWER:

Ginger Ale To drink at the party: 3 friends × 4 bottles 17 friends × 4 bottles + Desired ending inventory Bottles needed − Beginning inventory Bottles to purchase


Cola

12 0 12 − 6 6

68 0 68 − 14 54

P a g e 5 0

Chapter 9 - Profit Planning 156. Quillin Company had the following budgeted information for October: 1. 2. 3. 4. 5. 6. 7. A. B. C. D.

Octo Octobe berr 1 cas cash h bal balan ance ce $3,5 $3,500 00 Expected Expected sales sales 2,500 2,500 units units at $25 $25 each each (half (half in cash, cash, remaind remainder er on credit credit due in November) November) Invent Inventory ory purcha purchases ses 3,00 3,000 0 units units at $14 $14 each each (all (all in in cash) cash) Rent $1,450 Payroll $1 $1,000 Util Utilit itie iess and and othe otherr cos costs ts $4, $4,50 500 0 Accounts receivable balance Oct. 1, $35,000 (includes $700 bad debts allowance; use this amount for both parts A and D). What What is the the budg budgete eted d col colle lecti ction on on acco accoun unts ts rece receiv ivab able le for for Oct Octob ober er?? What hat are are the the tot total al cash cash disb disbur urse seme ment ntss for for Octo Octobe ber? r? What hat is the the end endin ing g cash cash bala balanc ncee for for Octo Octobe ber? r? Assuming sales are collected 75% in the month of sale and 25% the following month, what is the ending cash balance for October?

ANSWER:

A. B. C.

$34,300 (see table below) $48,950 (see table below) $20,100 (see table below) Beginning cash balance Sales in cash (2,500 × $25 × 0. 0.50) Collections on account ($35,000 − $7 $700) Cash available Payments for purchases (3,000 × $1 $14) Rent Payroll Utilities, etc. Total cash disbursements Ending cash balance

D.

$ 3,500 31,250 34,300 $69,050 $42,000 1,450 1,000 4,500 48,950 $20,100

$35,725 (see table below) Beginning cash balance Sales in cash (2,500 × $25 × 0. 0.75) Collections on account ($35,000 − $7 $700) Cash available Payments for purchases (3,000 × $1 $14) Rent Payroll Utilities, etc. Total cash disbursements Ending cash balance


$ 3,500 46,875 34,300 $84,675 $42,000 1,450 1,000 4,500 48,950 $35,725

P a g e 5 1

Chapter 9 - Profit Planning 157. Fredder Company usually sells about 20% of its merchandise during a month for cash with the remaining sales on account. The company's accounts receivable payment history is as follows: 30% in the month of sale, 50% in the month following, and 15% in the second month following sale. Total budgeted sales for the second quarter are as follows: April $100,000 May 120,000 June 80,000 Assume all questions relate to the month of June. A. B. C. D. E.

What are the expected ted cash sal sales? What What are are the the exp expect ected ed receip receipts ts fro from m acco accoun unts ts rece receiva ivable ble for for sales sales made made in in Apr April? il? What What are the expec expected ted receip receipts ts from from accou accounts nts receiv receivabl ablee for for sale saless made made in May? May? What are are th the to total tal exp expec ecte ted d cas cash h rec recei eipt pts? s? From the above accounts receivable history information, receipts from accounts receivable do not equal 100%. Why not? Does this amount appear on the cash budget?

ANSWER:

A.

June cash sales = $80,000 × 0.2 = $16,000

B.

Receipts on accounts receivable for sales made in April = 0.80 × $100,000 × 0.15 = $12,000

C.

Receipts on accounts receivable for sales made in May = 0.80 × $120,000 × 0.50 = $48,000

D.

Total cash expected in June = $16,000 + $12,000 + $48,000 + (0.80 × $80,000 × 0.30) = $95,200

E.

30% + 50% + 15% = 95% The remaining 5% is uncollectible. It does not appear on the cash budget because there is no cash involved.


P a g e 5 2

Chapter 9 - Profit Planning 158. Rivers Company purchases merchandise on account. In general, Rivers pays 50% in the month of purchase and 50% in the following month. All payments in the month of purchase qualify for a 2% cash discount. First quarter budgeted budgeted purchases purchases are: are: January February March A. B. C.

$90,000 80,000 96,000

What What are are the the tota totall cas cash h dis disbu burs rsem emen ents ts exp expec ecte ted d in in Feb Febru ruar ary? y? What What are are the the tota totall cas cash h dis disbu burs rsem emen ents ts expe expect cted ed in Marc March? h? Now suppose suppose that there there is no cash discount for for purchases made in the month of purchase. Now what are are the total cash disbursements disbursements expected expected in February? February? In March?

ANSWER:

A. B.

$84,200 (see table below) $87,040 (see table below)

January purchases (0.50 × $90,000) February purchases: (0.50 × $80,000 × 0.98) (0.50 × $80,000) March purchases (0.50 × $96,000 × 0.98) Total cash disbursements C.

February $45,000

March

39,200

$84,200

$40,000 47,040 $87,040

Feb Februar ruary y cash cash disb disbur urse seme ment ntss = $85,0 85,000 00 March cash disbursements = $88,000

January purchases (0.50 × $90,000) February purchases: (0.50 × $80,000) (0.50 × $80,000) March purchases (0.50 × $96,000) Total cash disbursements


February $45,000

March

40,000 __ _ __ _ _ $85,000

$40,000 48,000 $88,000

P a g e 5 3

Chapter 9 - Profit Planning 159. Wexler Company expects sales of $40,000 in July, $50,000 in August, and $30,000 in September. Wexler's experience is that 40% of sales are cash, and the remainder is on account. Accounts receivable are paid: 70% in the month of sale, and 25% in the following month. A. B. C. D. E.

What What are are the the exp expect ected ed cash cash recei receipt ptss on accou accounts nts receiv receivabl ablee in August August for for July July sale sales? s? What What are are the the exp expect ected ed cash cash receip receipts ts on on accou account ntss rece receiva ivable ble in Aug August ust for August August sales? sales? What What are are the total total expect expected ed cash cash rece receipt iptss on on acc accoun ounts ts receiv receivabl ablee in in Aug August ust?? What hat are are the the tot total al expe expect cted ed cash cash rece receip ipts ts in Augu August st?? How How muc much h of of Jul July y sal sales es are are dee deeme med d to to be be unc uncol olle lect ctib ible le??

ANSWER:

A.

Expe Expect cted ed cas cash h rece receip ipts ts on on acco accoun unts ts rec receiv eivab able le in in Augu August st for for Jul July y sale saless = $6,0 $6,000 00 [(0.60 × $40,000 × 0.25) = $6,000]

B.

Expe Expect cted ed cash cash rece receip ipts ts on on acco accoun unts ts rec recei eiva vabl blee in Aug Augus ustt for for Augu August st sal sales es = $21 $21,0 ,000 00 [$21,000 = (0.60 × $50,000 × 0.70)]

C.

Tota Totall exp expec ecte ted d cas cash h rec receip eipts ts on on acc accou ount ntss rece receiv ivab able le in Augu August st = $27, $27,00 000 0 [$27,000 = (0.60 × $40,000 × 0.25) + (0.60 × $50,000 × 0.70)]

D.

Tota Totall exp expec ecte ted d cash cash rece receip ipts ts in Augu August st = $47 $47,0 ,000 00 [$47,000 = (0.60 × $40,000 × 0.25) + (0.60 × $50,000 × 0.70) + (0.4 × $50,000)]

E.

July sales of $40,000 × 0.60 = $24,000 on account $24,000 × 0.05 = $1,200 uncollectible


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Chapter 9 - Profit Planning 160. Shorter Company developed the following data for the month of June. 1. 2. 3. 4. 5. A. B. C. D.

June June 1 cas cash h bal balan ance ce $2,3 $2,300 00 Cash Cash sale saless in in Jun Junee $67 $67,0 ,000 00 Credit sales for June are $20,000; for May $10,000; and for April $16,000. 60% of credit sales are collected in the month of sale, 20% in the following month, and 10% in the second month following the sale. Purchases for May were $34,000 and for June are $40,000. Half of purchases are paid in the month of purchase and the remainder in the following month. June salaries are $28,400, $28,400, utilities are $1,090, $1,090, and depreciat depreciation ion on the building building is $1,000. $1,000. Anticipated cash receipts from accounts receivable in June equal $ ______ ___ ______ ___ ______ ___ ______ ___ . Anticipated total cash available in June is $ ______ ___ ______ ______ ______ ______ ___ . June cash payments for purchases are $ ______ ___ ______ ______ ______ ___ ___ . Anticipated cash balance on June 30 is $ ______ ___ ______ ______ ______ ___ ___ .

ANSWER:

A.

Anti Antici cipa pate ted d cash cash rece receip ipts ts fro from m acc accou ount ntss rece receiv ivab able le in in June June = $15, $15,60 600 0 [15,600 = ($20,000 × 0.60) + ($10,000 × 0.20) + ($16,000 × 0.10)]

B.

Anti Antici cipa pate ted d tot total al cash cash avai availa labl blee in in Jun Junee = $84 $84,9 ,900 00 [84,900 = $67,000 + $15,600 + $2,300]

C.

June June cash cash paym paymen ents ts for for purch urchas ases es = $37 $37,0 ,000 00 [37,000 = ($40,000 × 0.50) + ($34,000 × 0.50)]

D.

Anti Antici cipa pate ted d cash cash bala balanc ncee on June June 30 = $18, $18,41 410 0 [18,410 = $84,900 − $37,000 − 28,400 − 1,090]


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Chapter 9 - Profit Planning 161. Calino Company developed the following data for the month of August. 1. 2.

Augu August st 1 cash cash bala balanc ncee $12, $12,30 300. 0. Cash Cash sale saless in in Augu August st $80, $80,00 000. 0. Credit sales for August are $30,000; for July $40,000; and for June $40,000. 70% of credit 3. sales are collected in the month of sale, 15% in the following month, and 10% in the second month following the sale. Purchases for July were $50,000 and for August are $40,000. One-fourth of purchases are 4. paid in the the month month of purch purchase ase and the remaining remaining three-qua three-quarter rterss in the follo following wing month. month. August salaries are $31,400, utilities are $3,220, and depreciation on the building and 5. equipment is $10,000. A. B. C. D.

Anticipated cash receipts from accounts receivable in August are $ ______ ___ ______ ___ ______ ___ ______ ___ . Anticipated total cash available from all sources in August is $ ______ ___ ___ ______ ___ ______ ______ ___ . August cash payments for purchases made in July and August are $ ______ ___ ______ ___ ______ ___ ______ ___ . Anticipated cash balance on August 31 is $ ______ ___ ______ ______ ______ ___ ___ .

ANSWER:

A. B. C. D.

Augu August st cash cash rec recei eipt ptss fro from m acc accou ount ntss rec recei eiva vabl blee = $31 $31,0 ,000 00 Augu August st ant antic icip ipat ated ed tot total al cas cash h ava avail ilab able le fro from m all all sou sourc rces es = $123 $123,3 ,300 00 Augu August st cash cash payme ayment ntss for for purc purcha hase sess = $47, $47,50 500 0 Anti Antici cipa pate ted d cas cash h bal balan ance ce on Augu August st 31 = $41 $41,1 ,180 80

Accounts Receivable Payments to be received in August from sales in:

June ($40,000 × 0. 0.10) July ($40,000 × 0. 0.15) August ($30,000 × 0. 0.70) Total

$ 4,000 6,000 21,000 $31,000

Cash Budget for August:

Beginning balance Cash sales Payments from Accounts Receivable Cash available Payments on July purchases ($50,000 × 0. 0.75) Payments on August purchases ($40,000 × 0. 0.25) Salaries Utilities Total disbursements Cash balance, August 31


$ 12,300 80,000 31,000

111,000 $123,300

37,500 10,000 31,400 3,220 82,120 $ 41,180

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Chapter 9 - Profit Planning 162. It is May 28 and you have just gotten a summer job that will pay you (net of taxes) $800 per month. You start June 1 and will work until school starts − halfway through August. Your scholarship pays for tuition, room and board. But you must buy books, pay for transportation to and from school, and pay for clothing, any extra meals, entertainment, and so on. You have gathered the following data: One round trip airline ticket is $260, and you'd like to come home for Thanksgiving (your 1. parents parents will will drive drive you there there in August, August, and and you you will will try try to catch a ride ride home home with another another student in December). 2. Books Books are estimated estimated to cost about about $500 per semester semester for your anticipated anticipated major 3. Supp Suppli lies es sho shoul uld db bee anot anothe herr $15 $150 0 4. Clot Clothi hing ng migh mightt run run $100 $100 − you already have almost everything you think you'll need. There are 16 weeks in the semester, and you think you'll need $50 per week for allowance to 5. cover extra meals and entertainment Before school even starts, you need to cover any summer expenses, including going out with 6. friends. $30 a week sounds about right, since all your friends will be working and saving for college as well. There are 11 weeks of summer. Right now, you have $200 in your checking account. A. B.

Prepare a cash budget for the summer and the first semester of college. (Do the entire time period; do not break it down by week or by month.) Comment on the estimated ending balance. What actions can you take, if any, to increase it? it?

ANSWER:

A.

B.

Beginning balance checking account Salary from summer job (2.5 × $8 $800) Cash available Less disbursements: Airline ticket Bo Books Su Supplies Cl Clothing Weekly allowance at school (16 × $5 $50) Weekly allowance during the summer (11 × $3 $30) Total disbursements Estimated ending balance

$ 200 2,000 $2,200 260 500 150 100 800 330 $2,140 $ 60

A $60 ending balance for a six month time period seems too close for comfort. Responses will vary. However, it would be relatively easy to suggest cutting out the trip home at Thanksgiving − or attempt to find a ride home with another student instead. Similarly, the estimated allowances can be cut. The real problem is that these are estimates. So perhaps another source of cash, such as a student loan, should be located in advance.


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Chapter 9 - Profit Planning 163. Miller Corporation has the following sales budget for the first four months of the current year: Month Sales January $400,000 February $320,000 March $440,000 April $360,000 Historically, the following trend has been established regarding cash collection of sales: 65% in month of sale 25% in month following sale 8% in second month following sale 2% uncollectible The company allows a 2% cash discount for payments made by customers during the month of the sale. November and December sales were $400,000 and $240,000, respectively. All sales are on account. Required: Prepare a schedule of budgeted cash collections from sales for January, February, and March.

ANSWER:

November November December January February March Total cash collections

$400,000 × 8% $240,000 × 25%; 8% $400,000 × (65% × 98%); 25%; 8% $320,000 × (65% × 98%); 25% $440,000 × (65% × 98%)

January $ 32,000 60,000

February

254,800

100,000

$ 32,000

203,840

80,000

$323,040

280,280 $392,280

$346,800

March

$ 19,200

164. Allan Corporation has a sales budget for March of $440,000. About 10% are cash sales and the remainder is sold on account. The company expects that 60% of credit sales will be collected in the month of the sale, 25% in the next month and 10% in the following month. Materials purchased on account are expected to be $250,000. Allan pays 35% in the month of the purchase, 50% in the month following the purchase and the remaining 15% in the second month after the purchase. Salaries and wages of the workers are approximately $45,000 per month. The employees are paid weekly so on average 95% of their wages are paid in the month to which they relate and the remaining 5% is paid in the following month. Utilities average $4,300 per month. Rent on the building is $9,000 per month. Insurance is $3,000 per month and advertising costs are $1,000 per month. February sales were $320,000 and purchases of materials in February were $170,000; January sales were $200,000 and purchases of materials in January were $130,000. C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning The cash balance on March 1st is $5,400. Required: A. Prep Prepar aree a sch sched edul ulee of of cash cash rece receip ipts ts B. Prepare Prepare a schedu schedule le of of cash cash payme payments nts (Account (Accountss payabl payablee payme payments) nts) C. Prep Prepar aree a cash cash bud budget get ANSWER: A.

Cash receipts for March January collection (200,000 × 90% × 10%) February collection (320,000 × 90% × 25%) March cash sales (440,000 × 10%) March accounts receivable sales (440,000 × 90% × 60%) Total cash collection

$18,000 72,000 44,000 $237,600 $371,600

B. Cash disbursements for March January payment (130,000 ×15%) February payment (180,000 × 50%) March payment (250,000 × 35%) Total cash disbursements

C. Beginning cash balance Cash collections Cash available Less disbursements: Payments for: Raw materials Salaries Utilities Rent Insurance Advertising Total disbursements Ending cash balance

$19,500 85,000 87,500 $192,000

$5,400 371,600 377,000

192,000 45,000 4,300 9,000 3,000 1,000 $254,300 $122,700

165. Trish Morrow owns and operates Yummy Bakery which sells a wide variety of cupcakes. She has compiled the following data and information in order to put together a cash budget for September and October. Budgeted sales for September are 65,000 cupcakes and 98,000 in October. Each cupcake sells for $3.50. C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 9 - Profit Planning On average 60% are cash sales and 40% are sold on account. The company expects to collect 75% of credit sales in the month of the sale and 20% in the month after the sale. All necessary raw materials are purchased on account. Purchases are paid 85% in the month of the purchase purchase and and 15% in the the following following month. month. Purchases Purchases for Septemb September er are estimated estimated to be $200,00 $200,000 0 and $290,000 in October. Monthly expenses include: Wages $10,000 Rent $4,000 Utilities $3,500 Insurance $2,500 Advertising $2,290 Cash balance on September 1 st was $6,000. The company has a policy to maintain a minimum cash balance of $5,000. If necessary the company will borrow borrow to meet its short-t short-term erm needs. needs. All All borrow borrowing ing is is done done at the beginn beginning ing of the the month month and all payme payments nts on on principal principal and interest are made made at the the end of the next month. month. The annual annual interest interest rate rate is 7%. 7%. The The company company must borrow in multiples of $1,000. August sales were 43,000 cupcakes and raw materials purchased equal $230,000. Prepare a cash budget for September and October. ANSWER:

September collections: Total sales* Cash sales** Accounts receivable collections-September*** Accounts receivable collections-August**** Total cash collections

$227,500 $136,500 68,250 12,040 $216,790

* 65,000 × $3.50 ** $227,500 × 60% *** $227,500 × 40% × 75% **** 43,000 × $3.5 × 40% × 20%

October collections Total sales* Cash sales** Accounts receivable collections-October*** Accounts receivable collections-September**** Total cash collections

$343,000 $205,800 102,900 18,200 $326,900

* 98,000 × $3.50 ** $343,000 × 60% *** $343,000 × 40% × 75% **** $227,500 × 40% × 20%


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Chapter 9 - Profit Planning Yummy Baker Cash Budget Beginning cash balance Cash collections Total cash available Cash disbursements: Purchases (230,000 × 15%) + (200,000 × 85%); (200,000 × 15%) + (290,000 × 85%) Wa Wages Re R ent Utilities In I nsurance Advertising Total disbursements Minimum cash balance Total cash needs Excess (deficiency) Financing: Borrowings Repayments Interest Total financing Ending cash balance

September $ 6,000 216,790 $222,790

October $ 5,000 326,900 $331,900

$204,500 10,000 4,000 3,500 2,500 2,290 $226,790 5,000 $231,790 $ (9,000)

$276,500 10,000 4,000 3,500 2,500 2,290 $298,790 5,000 $303,790 $ 28,110

$ 9,000

$ 9,000 $ 5,000

$ (9,000) (105) ($9,105) $ 24,005

166. Dickson Company has the following projected account balances for September 30 of the current year: Accounts payable $20,000 Sales Accounts receivable 50,000 Capital stock Depreciation, factory 12,000 Re Retained earnings (beginning) Inventories (8/31) 90,000 Maintenance, factory Inventories (9/30) 90,000 Cash Materials used 100,000 Equipment, net Office salaries 40,000 Buildings, net Insurance, factory 2,000 Utilities, factory Factory wages 70,000 Selling expenses Bonds payable 80,000 Required: A. Prep Prepare are a bud budget geted ed inco income me statem statemen entt for for the mo mont nth h end ended ed Septem Septembe berr 30. 30. B. Prep Prepar aree a bud budge gete ted d bal balan ance ce shee sheett as as of of Sep Septe temb mber er 30. 30.

$400,000 200,000 64,000 14,000 28,000 120,000 200,000 8,000 30,000

ANSWER:

Dickson Company Budgeted Income Statement For the Month Ended September 30

A. Sales Cost of goods sold: C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

$400,000 P a g e 6 1

Chapter 9 - Profit Planning Beginning inventory Materials used Factory wages Depreciation Insurance Maintenance Utilities Ending inventory Gross margin

$ 90,000 100,000 70,000 12,000 2,000 14,000 8,000 (90,000)

Operating expenses: Selling expenses Office salaries Net income

B. Assets Cash Accounts receivable Inventories Equipment, net Buildings, net Total

$ 30,000 40,000

Dickson Company Budgeted Balance Sheet September 30 Liab. and Owners' Equity $ 28,000 Accounts payable 50,000 Bonds payable 90,000 Capital stock 120,000 Retained earnings 200,000 $488,000 Total

206,000 $194,000

70,000 $124,000

$ 20,000 80,000 200,000 188,000 $488,000

167. What are the advantages of budgeting? ANSWER: There are several advantages of budgeting: 1. 2. 3. 4.

It forc forces es mana manage gers rs to plan plan.. It provid provides es infor informat mation ion that that can can be used used to improv improve e decisio decision n making. making. It provi provides des a stand standard ard for perfor performan mance ce eval evaluat uation ion.. It impr improv oves es comm commun unic icati ation on and and coord coordin inat atio ion. n.

168. Which budget is the first one that must be completed in the master budgeting process and why? ANSWER: The sales budget is the first budget to be developed in the master budgeting process. The sales budget forms the basis for the rest of the budgets. A company must know estimated sales of each product in order to determine how much must be produced. The production budget, in turn, is used to develop the direct materials purchases, direct labor, and overhead budgets. These three budgets provide useful information in determining cost of goods sold. Clearly, the budgeted income statement requires the budgeted budgeted revenu revenuee from from the sales budget budget.. Without Without this this budget, budget, the others others cannot cannot be developed. developed.


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Chapter 9 - Profit Planning You decide 169. You are the senior accountant at Cannon Manufacturing and have been asked by the budget director to prepare the production production budget budget for for the upcoming upcoming quarte quarter. r. The The budget budget directo directorr stated stated that that they they chose chose you you to prepare prepare this this budget budget because because it is an importan importantt part part of the overall overall opera operating ting budget budget and and financ financial ial budge budget. t. Expla Explain in what what the the produc production tion budget budget calcula calculates tes and and how how the productio production n budget budget would would affect affect other other operating operating budgets budgets and and the the financia financiall budget. budget. ANSWER: The production budget tells how many units must be produced to meet sales needs and to satisfy ending inventory requirements. The total units to be produced each month or quarter is then used in determining the direct materials to be purchased and the number of direct labor hours needed during the period period to produce produce the the units. units. After After determinin determining g how many direct direct labor labor hours hours would would be necessar necessary y to produce produce the given amount amount of units, the overhea overhead d budget budget can can be prepare prepared. d. The The direct direct materials materials purchases purchases budget budget,, the direct direct labor labor budget budget and and the overhead overhead budget budget also calculat calculatee the total amoun amountt of cash needed to pay for the raw materials, direct labor employees, and overhead costs, which have a direct affect on the preparation of the cash budget.

170. Does a not-for-profit agency need to budget? Why or why not? ANSWER: All entities need to use the formal budgeting process. While the nonprofit agency is not trying to make a profit, profit, it does does need need to determine determine sources sources and uses uses of revenues. revenues. For For example, example, local United Ways develop develop budgets budgets each each year. year. First, First, they they listen listen to proposals proposals from from the the agencies agencies that that want want funding. funding. Worthy Worthy proposals proposals are chosen and a budget to obtain revenues and then distribute those revenues is developed. The budget forms the foundation for the fall fundraising efforts.

171. Briefly describe the attributes of an ideal budgetary system. What features of budgeting have been identified that encourage positive behavior? ANSWER: An ideal budgetary system is one that achieves complete goal congruence and at the same time creates a drive in managers to achieve the organization's goals in an ethical manner. Features that encourage the positive behavior that would move the firm closer to an ideal budgetary system include: Frequent feedback on performance Monetary and nonmonetary incentives Participative budgeting Realistic standards Controllability of costs Multiple measures of performance

172. Describe some problems with participative budgeting. ANSWER: Some potential problems are: 1.

Standards may be set too high. This can discourage managers/employees from even trying to meet the standards. Alternatively, standards can be set too low. This will not encourage workers to stretch to meet achievable (yet higher) standards.

2.

Managers may pad the budget. Managers know that the budget sets the standards against which their work will be measured. Not surprisingly, managers may prefer an easier standard, with budgetary slack built in.

3.

Pseudoparticipation may be more the rule than participation. Here, t op management sets the budget and does not seek or use input from lower-level managers. The so-called participation is simply the opportunity for lower-level managers to formally acknowledge the budget.


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Chapter 9 - Profit Planning Identify Ident ify each e ach item i tem as a s a compone c omponent nt of the produc p roduction tion budget or the th e direct dir ect materi m aterials als purcha p urchases ses budget b udget.. a. production budget

b. direct direct materials materials purchase purchasess budget budget 173. beginning inventory of materials ANSWER: b

174. sales in units ANSWER: a

175. units of raw materials needed for each unit of product ANSWER: b

176. ending inventory of product ANSWER: a Identify Ident ify each item as either ei ther part of the th e operati ope rating ng budget bud get or o r the th e financia fin anciall budget. bud get. a. Operating Budget

b. Financ Financial ial Budget Budget 177. production budget ANSWER: a

178. sales budget ANSWER: a

179. cash budget ANSWER: b

180. ending finished goods inventory budget ANSWER: a

181. budgeted balance sheet ANSWER: b

182. budgeted capital expenditures ANSWER: b


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Chapter 9 - Profit Planning Identify Ident ify each item as an a n advantag adv antagee or disadvant disa dvantage age of budget bu dgeting. ing. a. advantage advantage

b. disadvan disadvantage tage 183. Pseudoparticipation ANSWER: b

184. forces managers to plan ANSWER: a

185. improves communication and coordination ANSWER: a

186. leads to budgetary slack ANSWER: b

187. provides standard for performance evaluation ANSWER: a


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