Ch11 Using Budgets for Planning and Test Bank + Answers

Chapter 11

Using Budgets for Planning

and Coordination

Learning Objectives―Coverage by question type

LO1 – Explain the role of budgets and budgeting in organizations.

True / False Multiple Choice Exercises, Problems & Short Answer

1, 2 1-8 1-3

LO2 – Demonstrate the importance of each element of the budgeting process.

True / False Multiple Choice Exercises, Problems & Short Answer

3 9, 10 None

LO3 – Explain the different types of operating budgets and financial budgets and the relationships among them.

True / False Multiple Choice Exercises, Problems & Short Answer

4-7 11-47 4-7

LO4 – Describe the way organizations use and interpret budgets.

True / False Multiple Choice Exercises, Problems & Short Answer

8 48-52 8

LO5 – Develop and use what-if and sensitivity analyses—budgeting tools used by budget planners.

True / False Multiple Choice Exercises, Problems & Short Answer

9 53-60 9, 10

LO6 – Compute and interpret common variances used by managers.

True / False Multiple Choice Exercises, Problems & Short Answer

10-19 61-98 11-25

LO7 – Identify the role of budgets in service organizations and not-for-profit organizations.

True / False Multiple Choice Exercises, Problems & Short Answer

None 99, 100 26

LO8 – Understand the criticisms leveled against traditional budgeting and the beyond budgeting approach.

True / False Multiple Choice Exercises, Problems & Short Answer

20-33 101, 102 27

Chapter 11: Using Budgets for Planning and Coordination

True / False

LO1

Terms: Discretionary spending budgets

Difficulty: 1

1. Once authorized, discretionary spending budgets are committed or fixed and do not vary with levels of production or service.

Difficulty: 1

1. A budget is a qualitative expression of the cash inflows and outflows that show whether the current operating plan will meet the firm's organizational objectives.

Difficulty: 1

1. Budgets can play both planning and control roles for management.

Difficulty: 1

1. The usual starting point in budgeting is to make a forecast of production.

Difficulty: 1

1. The production plan should be based on the sales plan.

Difficulty: 1

1. If amounts in the sales forecast change, amounts in the production budgets will also change.

Difficulty: 1

1. The first step in developing a budget is for the accounting department to prepare the sales forecast.

Difficulty: 1

1. Budgets can be prepared for any time period, but are usually developed for one year.

Difficulty: 1

1. Sensitivity analysis is the process of selectively varying a plan's or a budget's key estimates for the purpose of identifying over what range a decision option is preferred.

Difficulty: 2

1. Variance analysis explains the difference between planned costs and actual costs by evaluating differences between standard prices and actual prices and budgeted quantities and actual quantities.

Difficulty: 1

1. It is most meaningful to compare cost targets in the master budget to actual cost results.

Difficulty: 1

1. A favorable variance indicates management's attention is not needed.

Difficulty: 1

1. Unfavorable variances arise when actual costs exceed estimated budget costs.

Difficulty: 1

1. If standards are lax, cost variances will tend to be unfavorable.

Difficulty: 2

1. The direct material quantity variance is computed by multiplying the difference between the actual quantity of material and the standard quantity by the standard price.

Difficulty: 2

1. The use of low-quality raw materials is likely to result in an unfavorable material quantity variance and a favorable material price variance.

Difficulty: 2

1. The labor efficiency variance is likely to be favorable if higher-skilled workers are put on a job.

Difficulty: 2

1. Planning variances are the focus of cost control.

Difficulty: 1

1. The role of budgeting in planning and control is more important in manufacturing than in a not-for-profit environment.

Difficulty: 1

1. Zero-based budgeting requires that proponents of discretionary expenditures justify these outlays for each budgeting period.

Difficulty: 2

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

Difficulty: 2

1. In the beyond budgeting approach, targets are developed based on stretch goals tied to peers, competitors, and key global benchmarks.

Difficulty: 1

1. Traditional budgeting takes a top-down approach.

Difficulty: 1

1. A budget should/can do all of the following except that it:

A) should be prepared by managers from different functional areas working independently of each other.

B) should be adjusted if new opportunities become available during the year.

C) can help management allocate limited resources.

D) can become the performance standard against which firms can compare the actual results.

Difficulty: 1

1. Budgeting provides all of the following except:

A) a means to communicate the organization's short-term goals to its members.

B) support for the management functions of planning and coordination.

C) a means to anticipate problems.

D) an ethical framework for decision making.

Difficulty: 2

1. Which of the following is not a role of budgeting in organizations?

A) performance evaluation.

B) historical financial statements.

C) allocation of resources.

D) motivation of employees.

Difficulty: 1

1. Budgeting does not require:

A) knowledge of the organization's activities.

B) specialized expertise in financial management and control.

C) knowledge about how activities affect costs.

D) the ability to see how the organization's different activities fit together.

Difficulty: 2

1. All of the following are true statements about the role of budgets and budgeting except that:

A) a budget is a quantitative summary of the expected allocations and financial consequences of the organization's short-term operating activities.

B) budgeting includes the process of estimating money inflows and outflows to determine a financial plan that will meet an organization's objectives.

C) the difference between actual results and the budget plan are called variances.

D) budgeting solves most business challenges because it coordinates activities and communicates the organization's short-term goals to its members.

Difficulty: 1

1. In regard to the amount of detail, a budget should:

A) show the detail for each product.

B) group products into pools of products.

C) strike a balance between detail and aggregated information.

D) not consider the cost of gathering the information.

Difficulty: 1

1. If initial budgets prove unacceptable, planners achieve the most benefit from:

A) repeating the budgeting cycle with a new set of decisions.

B) deciding not to budget this year.

C) accepting an unbalanced budget.

D) using last year's budget.

Difficulty: 1

1. Which of the following statements is not true?

Budgeting helps to coordinate organization activities.

Budgeting sets targets for future performance.

Budgeting is prepared in advance of the budget period.

Budgeting is done before strategy is set.

Difficulty: 1

1. When discussing the roles of budgets, a planning role in the budgeting process includes:

A) measuring outcomes against planned amounts.

B) developing the master budget.

C) assessing performance.

D) reporting actual amounts at the end of the budgeting period.

Difficulty: 2

1. When discussing the roles of budgets, a control role includes:

A) identifying organizational objectives and short-term goals.

B) developing long-term strategies and short-term plans.

C) measuring and assessing performance against budgeted amounts.

D) developing the master budget.

Difficulty: 1

1. Operating budgets and financial budgets:

A) combined form the master budget.

B) are prepared before the master budget.

C) are prepared after the master budget.

D) have nothing to do with the master budget.

Difficulty: 1

1. Operating budgets include all of the following except:

A) a sales plan.

B) a labor hiring and training plan.

C) an administrative and discretionary spending plan.

D) projected balance sheet.

Difficulty: 1

1. Operating budgets include the:

A) projected balance sheet.

B) projected income statement.

C) capital spending plan.

D) expected cash flow statement.

Difficulty: 1

1. Financial budgets are prepared:

A) to specify expectations for selling, purchasing, and production.

B) to evaluate the financial results of the proposed decisions.

C) so that financial statements can be prepared for shareholders.

D) to plan for production capacity.

Difficulty: 1

1. Financial budgets include the:

A) capital spending plan.

B) production plan.

C) labor hiring and training plan.

D) expected cash flow statement.

Difficulty: 1

1. ____________ include an expected cash flow statement, the projected balance sheet, and the projected income statement.

A) Annual reports

B) Financial budgets

C) Operating budgets

D) Capital budgets

Difficulty: 1

1. ____________ provide(s) the starting point for developing the operating budget.

A) The demand forecast

B) Projected income statement

C) The production plan

D) Expected cash flows

Difficulty: 1

1. A demand forecast is:

A) an estimate of sales demand at a specified selling price for each product.

B) developed primarily to prepare next year's marketing campaign.

C) an estimate of market demand based on the amount sold in the previous year.

D) a summary of product costs that influence pricing decisions.

Difficulty: 1

1. The budgeting process is most strongly influenced by the:

A) capital spending plan.

B) statement of expected cash flows.

C) demand forecasts.

D) production plan.

Difficulty: 1

1. In which order are the following developed?

A = Production plan B = Materials purchasing plan

C = Demand forecast D = Sales plan

A) first to last: A, B, C, D

B) first to last: C, D, A, B

C) first to last: D, C, B, A

D) first to last: C, A, D, B

Difficulty: 1

1. The ___________ provides the foundation for the materials purchasing plan.

A) inventory policy

B) sales plan

C) production plan

D) capital spending plan

Difficulty: 1

1. The sales plan identifies:

A) expected cash flows from the sales of each product.

B) actual sales from last year for each product.

C) the budgeted level of sales for each product.

D) the variance of sales from actual for each product.

Difficulty: 1

1. The ___________ summarizes planned revenues from each product.

A) capital spending plan

B) production plan

C) administrative and discretionary spending plan

D) sales plan

Difficulty: 1

1. Which of the following statements is true regarding capacity resources?

A) Raw materials and supplies are examples of intermediate-term resources.

B) Long-term capacity usually varies directly with production levels.

C) Flexible resources are usually purchased to acquire intermediate-term capacity.

D) Long-term capacity resources are expensive and referred to as "committed" resources.

Difficulty: 1

1. ____________ specifies when items such as acquisitions for buildings and special-purpose equipment must be made to meet activity level objectives.

A) The capital-spending plan

B) The production plan

C) The materials purchasing plan

D) The administrative and discretionary spending plan

Difficulty: 1

1. The sales plan and inventory plan is compared to available productive capacity levels and ____________ is determined.

A) an aggregate plan

B) a new sales plan

C) a materials purchasing plan

D) an administrative and discretionary spending plan

Difficulty: 2

1. Aggregate planning:

A) determines the projected financial statements.

B) compares the sales plan with the demand forecast.

C) assesses the feasibility of the proposed production plan.

D) provides a detailed production schedule for all product lines.

Difficulty: 2

1. Discretionary expenditures:

A) are usually planned for first.

B) are amounts paid for the use of flexible resources.

C) are not determined by the organization's level of production.

D) increase in amount during periods of greater activity.

Difficulty: 2

1. ____________ summarizes expenditures for advertising and research and development.

A) The labor hiring and training plan

B) The production plan

C) The administrative and discretionary spending plan

D) The aggregate plan

Difficulty: 2

1. All the following are true regarding the labor hiring and training plan except that it:

A) may include retraining plans to redeploy employees to other parts of the organization.

B) determines discretionary spending for research and development.

C) works backward from the date when personnel are needed.

D) can include plans for both expansion and contraction.

Difficulty: 2

1. Financial analysts use the expected cash flow statement to do all the following except:

A) plan for when excess cash is generated.

B) plan for short-term cash investments.

C) project cash shortages and plan a strategy to deal with the shortages.

D) project sales.

Difficulty: 1

1. The expected cash flow statement does not include:

A) cash inflows from the collection of receivables.

B) cash outflows paid toward committed resources.

C) all sales revenues.

D) interest paid and collected.

Difficulty: 1

1. The financing section of the expected cash flow statement includes:

A) cash flows from retail sales.

B) dividends paid.

C) amounts paid for advertising costs.

D) cash outflows for asset acquisitions.

Difficulty: 2

1. The production for July is projected to be:

A) 300 units.

B) 900 units.

C) 1,050 units.

D) 1,500 units.

Difficulty: 2

1. The number of dealer units that will be produced and sold in September is:

A) 900 units.

B) 1,050 units.

C) 1,500 units.

D) 600 units.

Difficulty: 2

1. Painting capacity appears to be:

A) short-term capacity.

B) intermediate-term capacity.

C) long-term capacity.

D) total demand.

Difficulty: 2

1. In November, production appears to be limited by:

A) short-term capacity.

B) intermediate-term capacity.

C) long-term capacity.

D) total demand.

Difficulty: 2

1. For October, budgeted cash collections are:

A) $20,000.

B) $60,000.

C) $80,000.

D) None of the above is correct.

Difficulty: 2

1. At the end of October, budgeted accounts receivable is:

A) $20,000.

B) $40,000.

C) $60,000.

D) None of the above is correct.

Difficulty: 2

1. For October, budgeted cost of goods sold is:

A) $20,000.

B) $30,000.

C) $40,000.

D) None of the above is correct.

Difficulty: 3

1. For October, budgeted net income is:

A) $20,000.

B) $30,000.

C) $40,000.

D) None of the above is correct.

Difficulty: 2

1. For October, budgeted cash payments for purchases are:

A) $14,000.

B) $60,000.

C) $70,000.

D) None of the above is correct.

Difficulty: 3

1. At the end of October, budgeted ending inventory is:

A) $20,000.

B) $28,000.

C) $40,000.

D) None of the above is correct.

Difficulty: 3

1. How much cash will be collected from customers in June?

A) $129,000

B) $141,000

C) $150,000

D) None of the above is correct.

Difficulty: 2

1. How much cash will be paid to suppliers in June?

A) $69,600

B) $56,000

C) $88,000

D) None of the above is correct.

Difficulty: 2

1. How much cash will be disbursed for labor and operating costs in June?

A) $63,000

B) $70,000

C) $88,400

D) $96,400

Difficulty: 3

1. What is the ending cash balance for June?

A) ($50,000)

B) $ 6,000

C) $ 5,400

D) $11,400

Difficulty: 1

1. In ____________ , as one budget period passes, planners delete that budget period from the master budget and add another one.

A) zero-based budgeting

B) periodic budgeting

C) incremental budgeting

D) continuous budgeting

Difficulty: 2

1. Although planners update or revise the budgets during the period, ___________ is typically performed once per year.

A) zero-based budgeting

B) periodic budgeting

C) incremental budgeting

D) continuous budgeting

Difficulty: 1

1. ____________ requires that each discretionary expenditure be justified.

A) Zero-based budgeting

B) Periodic budgeting

C) Incremental budgeting

D) Continuous budgeting

Difficulty: 1

1. ____________ bases a period's expenditure level for a discretionary item on the amount spent on that item during the previous period.

A) Zero-based budgeting

B) Periodic budgeting

C) Incremental budgeting

D) Continuous budgeting

Difficulty: 1

1. In zero-based budgeting:

A) the prior year's budgeted amounts or actual results are used to build the new operating budget.

B) the budget is prepared by the top managers.

C) managers must justify each item within the operating budget as if it were a new budget item.

D) the budget is updated every month.

Difficulty: 1

1. ____________ is the process of varying key estimates to identify those estimates that are the most critical to a decision.

A) A demand forecast

B) A sensitivity analysis

C) A pro forma income statement

D) The cash flow statement

Difficulty: 1

1. Assume only the specified parameters change in a sensitivity analysis. If the contribution margin increases by $10 per unit then operating profits will:

A) also increase by $10 per unit.

B) increase by less than $10 per unit.

C) decrease by $10 per unit.

D) be indeterminable.

Difficulty: 2

1. Assume that only the specified parameters change in a sensitivity analysis. The contribution margin ratio increases when:

A) total capacity-related (fixed) costs increase.

B) total capacity-related (fixed) costs decrease.

C) flexible (variable) costs per unit increase.

D) flexible (variable) costs per unit decrease.

Difficulty: 2

1. The break-even point in units decreases if the:

A) flexible (variable) cost per unit increases.

B) total capacity-related (fixed) costs decrease.

C) contribution margin per unit decreases.

D) selling price per unit decreases.

Difficulty: 2

1. The strategy most likely to reduce the break-even point would be to:

A) increase both the capacity-related (fixed) costs and the contribution margin per unit.

B) decrease both the capacity-related (fixed) costs and the contribution margin per unit.

C) decrease the capacity-related (fixed) costs and increase the contribution margin per unit.

D) increase the capacity-related (fixed) costs and decrease the contribution margin per unit.

Difficulty: 2

1. What is the current break-even point in terms of number of units for the next month?

A) 1,500 units

B) 2,250 units

C) 3,333 units

D) None of the above is correct.

Difficulty: 2

1. Suppose that P&Q Manufacturing's management believes that a $1,600 increase in the monthly advertising expense will result in a considerable increase in sales.

How much must sales increase in a month to justify this additional expenditure?

A) 200 units

B) 334 units

C) 500 units

D) None of the above is correct.

Difficulty: 2

1. Suppose that P&Q Manufacturing's management believes that a 10% reduction in the selling price will result in a 30% increase in sales.

If this proposed reduction in selling price is implemented, then:

A) profit will decrease by $12,800 in a month.

B) profit will increase by $12,800 in a month.

C) profit will decrease by $32,000 in a month.

D) profit will increase by $32,000 in a month.

Difficulty: 1

1. The primary reason for using cost variances is:

A) that they diagnose the cause of a problem and what should be done to correct it.

B) for superiors to communicate expectations to lower level employees.

C) to administer appropriate disciplinary action.

D) for financial control of operating activities.

Difficulty: 2

1. A favorable cost variance of significant magnitude:

A) is the result of good planning.

B) may lead to improved production methods if it is investigated.

C) indicates that management does not need to be concerned about lax standards.

D) does not need to be investigated.

Difficulty: 1

1. The variances that should be investigated by management include:

A) only unfavorable variances.

B) only favorable variances.

C) all variances, both favorable and unfavorable.

D) both favorable and unfavorable variances that are considered significant in amount for the company.

Difficulty: 1

1. A flexible budget contains:

A) cost targets for actual output.

B) cost targets for planned output.

C) the difference between planned and actual output.

D) actual costs for actual output.

Difficulty: 1

1. All the following are true of flexible budgets except that they:

A) use the same flexible (variable) cost per unit as the master budget.

B) result in higher total costs for greater levels of production.

C) allow comparison of actual results to targets based on the achieved level of production.

D) reflect the same level of production as the master budget.

Difficulty: 1

1. The variance that least affects cost control is the ____________ variance.

A) flexible budget

B) direct material price

C) planning

D) direct labor efficiency

Difficulty: 2

1. A flexible budget variance is $1,500 favorable for unit-related costs. This indicates that:

A) actual costs were $1,500 more than the master budget.

B) actual costs were $1,500 less than standard for the achieved level of activity.

C) the sum of the planning and efficiency variances totals $1,500.

D) actual costs were $1,500 less than for the planned level of activity.

Difficulty: 2

1. A favorable price variance for direct materials indicates that:

A) a lower price than expected was paid for materials.

B) a higher price than expected was paid for materials.

C) less material was used during production than planned for actual output.

D) more material was used during production than planned for actual output.

Difficulty: 2

1. A favorable efficiency variance for direct labor indicates that:

A) a lower wage rate than expected was paid for direct labor.

B) a higher wage rate than expected was paid for direct labor.

C) less direct labor hours were used during production than expected for actual output.

D) more direct labor hours were used during production than expected for actual output.

Difficulty: 2

1. A favorable wage rate variance for direct labor might indicate that:

A) employees were paid less than planned.

B) fewer skilled employees are available in the market.

C) less skilled and qualified employees are being hired.

D) an efficient labor force.

Difficulty: 2

1. An organization planned to use $44 of material per unit of activity but it actually used $42 of material per unit of activity, and it planned to make 1,200 units but it actually made 1,000 units.

The flexible budget amount for materials is:

A) $42,000.

B) $44,000.

C) $48,000.

D) $49,400.

Difficulty: 2

1. An organization planned to use $44 of material per unit of activity but it actually used $42 of material per unit of activity, and it planned to make 1,200 units but it actually made 1,000 units.

The flexible budget variance for materials is:

A) $ 2,000 favorable.

B) $14,000 unfavorable.

C) $16,400 unfavorable.

D) $ 2,400 favorable.

Difficulty: 2

1. An organization planned to use $44 of material per unit of activity but it actually used $42 of material per unit of activity, and it planned to make 1,200 units but it actually made 1,000 units.

The planning variance is:

A) $ 2,000.

B) $ 8,800.

C) $16,400.

D) $ 2,400.

Difficulty: 2

1. The best label for the formula (AQ – SQ) × SP is the:

A) materials quantity variance.

B) materials price variance.

C) total cost variance for materials.

D) labor wage rate variance.

Difficulty: 2

1. The best label for the formula (AP – SP) × AQ is the:

A) materials quantity variance.

B) materials price variance.

C) total cost variance for materials.

D) labor efficiency variance.

Difficulty: 2

1. The best label for the formula [(AP) × (AQ)] – [(SP) × (AQ)] is the:

A) materials quantity variance.

B) materials price variance.

C) total cost variance for materials.

D) labor efficiency variance.

Difficulty: 2

1. The best label for the formula [(AP) × (AQ)] – [(SP) × (SQ)] is the:

A) materials quantity variance.

B) materials price variance.

C) total cost variance for materials.

D) labor efficiency variance.

Difficulty: 2

1. August's direct material cost variance was:

A) $1,960 unfavorable.

B) $ 600 favorable.

C) $1,360 unfavorable.

D) None of the above is correct.

Difficulty: 2

1. August's direct material price variance was:

A) $1,960 unfavorable.

B) $ 600 favorable.

C) $1,360 favorable.

D) None of the above is correct.

Difficulty: 2

1. August's direct material quantity variance was:

A) $1,960 unfavorable.

B) $ 600 favorable.

C) $1,360 favorable.

D) None of the above is correct.

Difficulty: 3

1. August's direct material planning variance was:

A) $268,640 favorable.

B) $270,600 unfavorable.

C) $ 1,360 unfavorable.

D) indeterminable using the above information.

Difficulty: 2

1. August's direct labor rate variance was:

A) $125 unfavorable.

B) $125 favorable.

C) $142,375 favorable.

D) None of the above is correct.

Difficulty: 3

1. August's direct labor efficiency variance was:

A) $125 unfavorable.

B) $125 favorable.

C) $142,375 favorable.

D) None of the above is correct.

Difficulty: 2

1. May's direct material price variance was:

A) $2,800 favorable.

B) $2,200 favorable.

C) $5,000 unfavorable.

D) None of the above is correct.

Difficulty: 2

1. May's direct material quantity variance was:

A) $2,800 unfavorable.

B) $2,200 favorable.

C) $5,000 unfavorable.

D) None of the above is correct.

Difficulty: 2

1. May's direct labor cost variance was:

A) $750.00 unfavorable.

B) $262.50 favorable.

C) $487.50 unfavorable.

D) indeterminable using the above information.

Difficulty: 2

1. May's direct labor rate variance was:

A) $750.00 unfavorable.

B) $262.50 favorable.

C) $487.50 favorable.

D) indeterminable using the above information.

Difficulty: 2

1. May's direct labor efficiency variance was:

A) $750.00 unfavorable.

B) $262.50 favorable.

C) $487.50 favorable.

D) indeterminable using the above information.

Difficulty: 3

1. May's direct labor planning variance was:

A) $134,512.50 favorable.

B) $ 487.50 favorable.

C) $ 487.50 unfavorable.

D) indeterminable using the above information.

Difficulty: 2

1. The flexible budget will report $________ for the flexible (variable) costs.

A) $512,000

B) $600,000

C) $480,000

D) $640,000

Difficulty: 2

1. The flexible budget will report $________ for the capacity-related (fixed) costs.

A) $458,000

B) $450,000

C) $360,000

D) $572,500

Difficulty: 2

1. The flexible budget variance for flexible (variable) costs is:

A) $32,000 unfavorable.

B) $120,000 unfavorable.

C) $32,000 favorable.

D) $120,000 favorable.

Difficulty: 2

1. The primary reason for low operating profits in June was:

A) the flexible budget variance for flexible (variable) costs.

B) increased capacity-related (fixed) costs.

C) a poor management accounting system.

D) lower sales volume than planned.

Difficulty: 2

1. The most likely explanation of the above variances for Material A is that:

A) a lower price than expected was paid for Material A.

B) higher quality raw materials were used than were planned.

C) the company used a new supplier.

D) Material A used during October was $2,000 less than expected.

Difficulty: 2

1. The most likely explanation of the above direct labor variances is that:

A) the average wage rate paid to employees was less than expected.

B) employees did not work as efficiently as expected to accomplish the job.

C) the company may have assigned more experienced employees this month than originally planned.

D) management may have a problem with budget slack and may be using lax standards for both labor wage rates and expected efficiency.

Difficulty: 1

1. The planning variance is the difference between:

A) The static budget and the flexible budget

B) The static budget and the actual results

C) The flexible budget and the actual results

D) None of the above

Difficulty: 1

1. Which of the following is a component of the planning variance?

A) the direct material quantity variance

B) the variable overhead efficiency variance

C) the discretionary spending variance

D) the mix variance

Difficulty: 2

1. A sales quantity variance will change when:

A) An organization sells more units than it planned

B) The planned sales mix changes

C) The contribution margin of any product changes

D) All the above

Difficulty: 2

1. In the service sector, ____________ rather than machines usually represent(s) the capacity constraint, which underscores the importance of budgeting even in nonmanufacturing organizations.

A) people

B) knowledge

C) familiarity with processes

D) potential for sales

Difficulty: 2

1. _________ occur(s) when a superior simply tells subordinates what their budget will be.

A) Traditional budgeting

B) Stretch goals

C) Beyond budgeting approach

D) Budget slack

Difficulty: 2

1. _____________ mean(s) that the organization will attempt to reach much higher goals with the current budget.

A) Traditional budgeting

B) Stretch goals

C) The beyond budgeting approach

D) Budget slack

Difficulty: 2

1. ____________ occur(s) when managers ask subordinates to discuss their ideas about the budget, but no joint decision-making occurs.

A) Traditional budgeting

B) Stretch targets

C) The beyond budgeting approach

D) Budget slack

Difficulty: 2

1. What is budgeting? What is its role?

Difficulty: 2

1. Describe the benefits to an organization of preparing an operating budget.

Difficulty: 1

1. Are negative variances always unfavorable and positive variances always favorable? Explain.

Difficulty: 2

1. The following information pertains to Tam Corporation:

Cash is collected from customers in the following manner:

Month of sale (2% cash discount) 30%

Month following sale 50%

Two months following sale 15%

Amount uncollectible 5%

40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.

Required:

a. Prepare a summary of cash collections for the 4th quarter.

b. Prepare a summary of cash disbursements for the 4th quarter.

Difficulty: 2

1. The following information pertains to Monroe Corporation:

Cash is collected from customers in the following manner:

Month of sale 20%

Month following the sale 50%

Two months following sale 28%

Amount uncollectible 2%

• Thirty percent of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. A 2% discount is allowed on purchases paid for in the month of purchase.
• Labor costs equal 20% of sales; other operating costs of $5,000 per month (including $2,000) of depreciation. Both are paid in the month incurred.
• The cash balance on October 1 is $4,300. A minimum cash balance of $4,000 is required at the end of the month. Money is borrowed in multiples of $1,000.
• The company will issue $6,000 of common stock and pay $10,000 in dividends in October.
• There is no debt outstanding at October 1.

Required:

Prepare a projected cash flow statement in good form for the month ended October 31.

Difficulty: 2

1. Describe operating and financial budgets and give at least two examples of each that are discussed in the textbook.

Difficulty: 2

1. Discuss the importance of the sales forecast and items that influence its accuracy.

Difficulty: 2

1. Discuss the terms discretionary expenditures and committed expenditures and give an example of each.

Difficulty: 2

1. Jupiter, Inc. sells a single product. The company's 2020 income statement is given below.

Sales (4,000 units) $800,000

Less flexible (variable) expenses $200,000

Less capacity-related (fixed) expenses $300,000

In an attempt to improve performance, Pat, the manager is considering a number of alternative actions. Each situation is to be evaluated separately.

Required:

a. Calculate operating income and the break-even point in units and dollars for 2020

b. Pat believes that a $100,000 increase in equipment improvements will increase sales considerably. How much must sales increase to justify this capital expenditure?

c. Pat believes that flexible costs can be decreased by 10%., and therefore wants to reduce the selling price by 2% in anticipation of a 5% increase in sales. What are projected profits if these proposals are implemented?

Difficulty: 1

1. Explain when a manager would use what-if analysis.

Difficulty: 2

1. Beck Industries, Inc. developed standard costs for direct material and direct labor. In 2020 Beck estimated the following standard costs for one of their major products, the 50-gallon plastic container.

During August, Beck produced and sold 8,000 containers using 1,900 pounds of direct materials at an average cost per pound of $41 and 250 direct labor hours at an average wage of $18.25 per hour.

Required:

Determine the following variances for August:

a. Total direct material cost variance.

b. Direct material price variance.

c. Direct material quantity variance.

d. Total direct labor cost variance.

e. Direct labor rate variance.

f. Direct labor efficiency variance.

Difficulty: 2

1. As part of the budgeting process, Schaeffer Company developed the following master budget for September. Schaeffer is in the process of preparing the flexible budget and understanding the results.

Required:

a. Prepare the flexible budget in the area provided above.

b. Determine the flexible budget variance for flexible (variable) costs.

c. Determine the planning variance for flexible (variable) variance costs.

d. Should the manager be congratulated for keeping costs under control? Explain.

Difficulty: 2

1. Braun Manufacturing has prepared the following flexible budget for October and it is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Required:

a. Explain what each of the following variances indicates.

1. For Material A, the favorable price variance indicates that…

2. For Material A, the unfavorable quantity variance indicates that…

3. For direct labor, the unfavorable price variance indicates that…

4. For direct labor, the favorable efficiency variance indicates that…

b. Which two variances do you think should be investigated by management? Why?

Difficulty: 2

1. Explain what each of the following variances indicates, and discuss what conditions might have caused each variance.

Direct material price variance: $1,000 U

Direct material quantity variance: $1,500 F

Direct labor rate variance: $800 F

Direct labor efficiency variance: $300 U

Difficulty: 2

1. What is the primary role of the flexible budget?

Difficulty: 2

1. What is the planning variance for this period?

Difficulty: 2

1. Explain the meaning of the planning variance.

Difficulty: 2

1. What is the quantity variance for product X55?

Difficulty: 1

1. Explain the meaning of the quantity variance for product X55.

Difficulty: 2

1. What is the mix variance for product J33?

Difficulty: 2

1. What is the meaning of the mix variance?

Difficulty: 2

1. What is the market share variance?

Difficulty: 2

1. What is the meaning of the market share variance?

Difficulty: 2

1. What is the market size variance?

Difficulty: 2

1. What is the meaning of the market size variance?

Difficulty: 2

1. How is the role of budgeting similar for a manufacturing firm and a not-for-profit organization?

Difficulty: 2

1. Describe some of the drawbacks of using the operating budget as a control device.