Budgeting Test Bank Docx Chapter 9

Testbank

to accompany

Accounting: business reporting for decision making

7th edition

by

Birt et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2020

Chapter 9: Budgeting

Learning objectives

1. Understand the importance of planning and budgeting

Q1, Q2, Q3, Q4, Q51

2. Explain what a budget is and describe the key steps in the budgeting process

Q5, Q6, Q7, Q8, Q9, Q52, Q53

3. Explain the different types of budgets

Q10, Q11, Q12, Q13, Q14, Q54, Q55, Q56

4. Outline the components of a master budget and prepare a master budget

Q15, Q16, Q17, Q18, Q19, Q20, Q21, Q22, Q23, Q24, Q25, Q26, Q27, Q57, Q58, Q59

5. Prepare a schedule of receipts from accounts receivable and a cash budget

Q28, Q29, Q30, Q31, Q32, Q33, Q34, Q35, Q36, Q60, Q61

6. Explain the use of budgeting in planning and control

Q37, Q38, Q39, Q40, Q41, Q42, Q43, Q44, Q62, Q63

7. Discuss the issues associated with the behavioural aspects of budgeting

Q45, Q46, Q47, Q48, Q49, Q50, Q64, Q65

Multiple-choice questions

1. The decision to expand the business by opening up a new branch in a different city is part of:

a. strategic planning.

b. master budgeting.

c. strategic budgeting.

d. performance planning.

Learning objective 9.1 ~ Understand the importance of planning and budgeting

1. What does the strategic planning process relate to?

a. Large entities only

b. Shorter term planning (usually less than 1 year)

c. Longer term planning (often 3–5 years)

d. Shorter term planning (usually 1–3 months)

Learning objective 9.1 ~ Understand the importance of planning and budgeting

1. During the budget cycle, what can the budget be used for?

a. To monitor and investigate any differences between the budget and the entity’s actual results

b. To reward positive performance

c. To reconsider long-term strategies

d. All of the above options are uses for the budget

Learning objective 9. 1 ~ Understand the importance of planning and budgeting

1. What time frame does a budget process usually focus on?

a. One year

b. One month

c. One week

d. One day

Learning objective 9.1 ~ Explain what a budget is and describe the key steps in the budgeting process

1. Which of the following is a performance management measure?

a. Increasing sales by 10% p.a.

b. Decreasing manufacturing costs by 5%

c. Enhancing customer service

d. Purchasing a new item of equipment

Learning objective 9.2 ~ Explain what a budget is and describe the key steps in the budgeting process

1. Which of the following statements about a budget is correct?

a. Budget targets are always impossible to meet.

b. Budgets must be prepared by all types of entities.

c. It is an entity’s short-term plan expressed quantitatively.

d. It is an entity’s long-term plan expressed quantitatively.

Learning objective 9.2 ~ Explain what a budget is and describe the key steps in the budgeting process

1. Which of the following describes a way in which budgeting can assist in decision making?

a. Identifying expected cash shortages

b. Determining inventory levels

c. Setting production targets for managers

d. All of the options listed

Learning objective 9.2 ~ Explain what a budget is and describe the key steps in the budgeting process

1. Simons’s three wheels of planning shows the interrelationships between:

a. cash, sales and profit.

b. profit, cash and assets.

c. cash, profit and return on investment.

d. return on investment, cash and assets.

Learning objective 9.2 ~ Explain what a budget is and describe the key steps in the budgeting process

1. What is commonly the first step in the budgeting process?

a. Consideration of past performance

b. Preparation of the master budget and sub-budgets

c. Preparation of initial budget estimates

d. Assessment of expected trading and operating conditions

Learning objective 9.2 ~ Explain what a budget is and describe the key steps in the budgeting process

1. Which of the below statements regarding the sales budget is correct?

a. The sales budget is often referred to as the ‘cornerstone’ of the budget process.

b. The sales budget sets the expected level of activity for the budget period.

c. The sales budget provides an important input variable for other budgets.

d. All of the options are correct.

Learning objective 9.3 ~ Explain the different types of budgets

1. Which of these is not a commonly prepared budget?

a. Asset amortisation budget

b. Operating budget

c. Manufacturing overhead budget

d. Inventory budget

Learning objective 9.3 ~ Explain the different types of budgets

1. Applicable budgets for an accounting firm are likely to include:

a. budgeted statement of financial position.

b. expenses budget.

c. labour budget.

d. all of the options listed.

Learning objective 9.3 ~ Explain the different types of budgets

1. The government’s Department of Education and Training would be unlikely to prepare which type of budget?

a. Production budget

b. Expenses budget

c. Cash budget

d. Program budget

Learning objective 9.3 ~ Explain the different types of budgets

1. A budget that estimates the overheads and expenses associated with production activities is known as a(n):

a. departmental budget.

b. master budget.

c. manufacturing overhead budget.

d. operating budget.

Learning objective 9.3 ~ Explain the different types of budgets

1. What is the name for an interrelated set of budgets for a future period?

a. A master budget

b. A combined budget

c. A program budget

d. An assembly of budgets

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. What is the term used to describe the difference between budgeted amounts and an entity’s actual results?

a. Control tool

b. Variance

c. Excess

d. Budget error

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. Which type of budget is the schedule of receipts from accounts receivable (debtors) prepared to provide information for?

a. The sales budget

b. The production budget

c. The budgeted statement of financial position

d. The cash budget

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. For a retail entity, the key variable which is normally the starting point for the budget process and upon which many other items are based is:

a. labour.

b. sales.

c. production.

d. fixed expenses.

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. Which of the following would be included in the operating budgets for a trampoline park?

a. The sales or fees budget and the budgeted statement of profit or loss.

b. The sales or fees budget, the operating expenses budget and the capital expenditure budget.

c. The sales or fees budget and the cash budget.

d. The sales or fees budget, the labour budget, and the operating expenses budget.

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. The master budget is commonly classified into which two sections?

a. Sales and cash budgets

b. Operating and financial budgets

c. Sales and manufacturing budgets

d. Statement of profit or loss and statement of financial position budgets

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. Identify the components of the financial budgets.

a. Budgeted statement of profit or loss, budgeted statement of financial position, cash budget and capital expenditure budget

b. Budgeted statement of profit or loss, sales/fees budget and cash budget

c. Operating budget and production budget

d. Capital expenditure budget and manufacturing budget

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. A budget can be used as an effective control tool in monitoring an entity’s achievements of its plans if the structure of its master budget mirrors the entity’s:

a. statement of financial position.

b. chart of accounts.

c. statement of profit or loss.

d. statement of cash flows.

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. Production units multiplied by material cost per item plus target ending materials inventory less beginning materials inventory is the formula for which budget item?

a. Required production units

b. Production overhead

c. Sales

d. Cost of material purchases

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. The production budget for Top Furniture Ltd shows that 500 coffee tables are to be produced for the month of December. It takes 2 labour hours to produce each coffee table and labour is paid at $280 per 8-hour day. What is the budget cost of labour for the month of December?

a. $14 000

b. $28 000

c. $17 500

d. $35 000

Feedback: 280/8 = $35 per hour; labour cost = $35 x 2 = $70 to build one coffee table.

$70 x 500 = $35 000 to produce 500 coffee tables.

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. Fancy Feet Pty Ltd sells sandals. The desired ending inventory for July is budgeted at 400 pairs of sandals. If there are 300 pairs on hand at the beginning of July, and the expected sales volume for the month is expected to be 1800 units, how many pairs of sandals will Fancy Feet Pty Ltd need to purchase for the month?

a. 1500

b. 2500

c. 1900

d. 1700

Feedback: 1800 + 300 – 400 = 1900. A purchases budget is determined as expected unit sales plus desired ending inventory less beginning inventory.

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. Fresh Cuts Pty Ltd is a hair salon that needs to develop an operating budget. From the following options, select the budgets and the order in which they would be prepared for Fresh Cuts.

a. Sales budget, labour budget, operating expenses budget

b. Sales budget, production budget, labour budget

c. Sales budget, materials budget, operating expenses budget

d. Production budget, sales budget, operating expenses budget

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. Tango Ltd estimates their sales volume for the year is 30 000 units. The beginning materials inventory is $300 000 and the desired ending materials inventory is $240 000. If the materials cost per unit is $60, calculate the budgeted cost of materials for the year.

a. $1 860 000

b. $1 740 000

c. $1 800 000

d. $2 040 000

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. A cash budget:

a. helps to identify periods of cash shortages and/or cash surpluses.

b. documents the timing of all estimated cash receipts and cash payments.

c. assists with the planning of borrowings.

d. all of the options listed.

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. For a cash budget to enable close monitoring of the entity’s cash position it should be prepared on a:

a. yearly basis.

b. daily basis.

c. monthly basis.

d. quarterly basis.

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. Fair Deals Ltd had credit sales of $25 000 for March; $30 000 for April; and $18 000 for May. Credit sales are normally settled in the following pattern: 50% in the month of sale, 40% in the month following the sale, and 10% in the second month following the sale. Calculate Fair Deals Ltd’s estimated cash received from credit sales during the month of May.

a. $9000

b. $12 000

c. $23 500

d. $21 000

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. Thompson Ltd made these estimates for the six months ending 31 December.
   
   Estimates:
   

The cash balance at 1 July is $13 000. What is the estimated cash balance at 31 December?

a. A surplus of $13 500

b. A surplus of $26 500

c. A surplus of $11 000

d. A deficit of $15 000

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. Household Ltd settles their creditors’ accounts as follows: 25% in the month of purchase and 75% in the month following purchase. Their credit purchases for the month of August totalled $32 000; in September, credit purchases totalled $43 000. How much cash did Household Ltd pay to their creditors in the month of September?

a. $24 000

b. $34 750

c. $40 250

d. $43 000

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. Bluefoot Pty Ltd made the following estimates for the three months ending 31 March. This is Bluefoot Pty Ltd’s first period of operation and their starting cash balance is $5000. What is the estimated cash balance at 31 March?
   

Estimates:

a. Surplus of $252 000

b. Surplus of $272 000

c. Surplus of $255 000

d. Surplus of $265 000

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. Digital Stuff Pty Ltd is planning to purchase equipment costing $45 000. The planned delivery date is 11 April with settlement on that date. On 17 January, Digital Stuff Pty Ltd paid a deposit of $15 000. What is the amount that will appear in the cash budget for the quarter ending 31 March?

a. $0; no cash flows are recorded until settlement date

b. Outflow of $15 000

c. Outflow of $30 000

d. Outflow of $45 000

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. From the following data, calculate the estimated cash received from total sales for the month of June.

Total sales for April, $42 000; May, $54 000; June, $38 000.
Credit sales are normally settled in the pattern: 50% in the month of sale, 40% in the first month following the sale, and the balance in the second month following the sale.

a. $44 800

b. $25 800

c. $19 000

d. $40 600

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. The schedule of cash receipts from accounts receivable (debtors) provides information to include in the:

a. sales budget.

b. cash budget.

c. budgeted statement of profit or loss.

d. budgeted statement of financial position.

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. Preparing a cash budget is part of the process.

a. cash

b. control

c. planning

d. monitoring

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. An entity’s cash budget predicts a period of cash shortage throughout the final quarter of the financial year. What corrective action can the entity take to help restore the cash position to a cash surplus during this period?

a. Improve inflows of cash by offering incentives to customers for early payment.

b. Reduce cash outflows by decreasing the amount of inventory on hand.

c. Reduce cash outflows by delaying the acquisition of fixed assets during that period.

d. All of the above actions can help to restore the cash position of the entity.

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. At the end of February, Clarke Pty Ltd reviewed its performance for the month and noted the following:

How will the respective variances be reported?

a. $$7000 F, $1200 U, $1500 U

b. $7000 U, $1200 U, $1500 F

c. $7000 F, $1200 F, $1500 U

d. $7000 U, $1200 F, $1500 U

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. When does an unfavourable variance occur?

a. When budgeted sales are higher than actual sales

b. When actual expenses are less than budgeted expenses

c. When budgeted expenses are greater than actual expenses

d. When actual sales are higher than budgeted sales

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. Which of these is not a strategy to reduce cash outflow?

a. Make use of credit terms offered by suppliers

b. Minimise inventory on hand

c. Sell unnecessary non-current assets

d. Defer capital expenditure

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. A review of the financial performance for the month of July noted the following. What is the actual bank balance and variance at 31 July?

a. Bank balance $(3300); variance $1700 F

b. Bank balance $(3300); variance $1700 U

c. Bank balance $19 300; variance $1700 F

d. Bank balance $19 300; variance $1700 U

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. Which of the following budgeted expenses has a favourable variance?

a. Advertising $30 000; actual advertising $40 000

b. Telephone $4000; actual telephone $3700

c. Salary and wages $52 000; actual salary and wages $56 000

d. Interest $500; actual interest $500

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. Which of the following budgeted revenues has an unfavourable variance?

a. Rent $4000; actual rent revenue $4000

b. Dividends $7500; actual dividends revenue $8500

c. Interest $2000; actual interest revenue $1400

d. Cash sales $50 000; actual cash sales $70 000

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. Which of the following statements regarding the authoritarian style of budgeting is correct?

a. The budget is set by senior management.

b. Department managers have no influence over the budget targets.

c. Department managers are not consulted during the budget setting process.

d. All of the above statements are correct.

Learning objective 9.7 ~ Discuss the issues associated with the behavioural aspects of budgeting

1. Which of the following statements regarding the participative style of budgeting is not true?

a. Department managers do not have ownership of the targets and budgets.

b. The targets and budgets are prepared after negotiations between senior management and department managers.

c. Provides department managers with an opportunity to create some ‘room to move’.

d. Often results in targets that are easier to achieve.

Learning objective 9.7 ~ Discuss the issues associated with the behavioural aspects of budgeting

1. Which of the following factors will most likely have a negative impact on a manager’s motivation with regards to the budget?

a. The budget targets are challenging but attainable.

b. The manager’s input was highly regarded throughout the budget setting process.

c. The budget includes some budgetary slack.

d. The budget provides too little scope for managers to perform their duties.

Learning objective 9.7 ~ Discuss the issues associated with the behavioural aspects of budgeting

1. Which of the following is a potential consequence of the authoritarian style of budgeting?

a. Unattainable targets

b. Demotivation of employees

c. Unit managers taking very little ownership of the budget

d. All of the options listed

Learning objective 9.7 ~ Discuss the issues associated with the behavioural aspects of budgeting

1. Requiring managers to prepare the budgets from scratch or zero-base may help them to overcome the problem of:

a. motivation.

b. budget ownership.

c. embedded budget slack.

d. unattainable targets.

Learning objective 9.7 ~ Discuss the issues associated with the behavioural aspects of budgeting

1. Having a budget that directly links employee bonuses with sales targets may lead to:

a. a culture among sales staff where sales targets are to be achieved regardless of the consequences.

b. a change of focus of sales staff away from that of customer satisfaction.

c. unfavourable variances in budgeted expenses.

d. all of the options listed.

Learning objective 9.7 ~ Discuss the issues associated with the behavioural aspects of budgeting

Fill in the blanks

1. Budgets provide the financial frameworks for an entity’s _______________ plan.

a. strategic

Learning objective 9.1 ~ Understand the importance of planning and budgeting

1. ____________________ management involves setting business targets in other than just financial terms.

a. Performance

Learning objective 9.2 ~ Explain what a budget is and describe the key steps in the budgeting process

1. Throughout the budgeting process, participation may be sought from the managers who are in control of the entity’s ______________ centres.

a. responsibility

Learning objective 9.2 ~ Explain what a budget is and describe the key steps in the budgeting process

1. The budget that sets the expected level of activity for the budget period is the ______________ or ______________ budget.

a. sales, fees

Learning objective 9.3 ~ Explain the different types of budgets

1. The purchases budget sets the required level of inventory or direct materials for merchandising or _________________ entities.

a. manufacturing

Learning objective 9.3 ~ Explain the different types of budgets

1. A program budget is commonly used in the __________ and not-for-profit sector.

a. government

Learning objective 9.3 ~ Explain the different types of budgets

1. The difference between actual and budgeted results is known as a(n) ________________.

a. variance

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. To enable the budget to be used as a control tool to monitor financial performance the master budget should classify items in the same format as an entity’s __________ ___ ____________.

a. chart of accounts

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. The master budget is a set of __________ budgets for a future period.

a. interrelated

Learning objective 9.4 ~ Outline the components of a master budget and prepare a master budget

1. The cash budget shows the ____________ future cash receipts and cash payments.

a. expected

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. The cash budget assists in identifying periods of cash surpluses and cash _____________ throughout the budget period.

a. shortages

Learning objective 9.5 ~ Prepare a schedule of receipts from accounts receivable and a cash budget

1. If the actual cash receipts are $35 000 for the month and the budgeted cash receipts are $40 000, there is a(n) _____________ (favourable/unfavourable) variance of $_________.

a. unfavourable, 5000

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. The ______________ process monitors the performance of the entity in achieving budget targets.

a. control

Learning objective 9.6 ~ Explain the use of budgeting in planning and control

1. Preparing budget targets through a process of discussion and negotiation between senior managers and unit managers is the ______________ style of budgeting.

a. participative

Learning objective 9.7 ~ Discuss the issues associated with the behavioural aspects of budgeting

1. Under the ___________________ style of budgeting, unit managers have no influence over the targets and budgets that are set.

a. authoritarian

Learning objective 9.7 ~ Discuss the issues associated with the behavioural aspects of budgeting