ch10_tb

CHAPTER 10USING BUDGETS TO ACHIEVE ORGANIZATIONAL OBJECTIVES

TRUE/FALSE

1. Budgeting involves forecasting the demand for flexible resources, intermediate-term capacity resources, and long-term capacity resources.a. Trueb. False

2. Budgeting helps management anticipate and adjust for trouble spots in advance.a. Trueb. False

3. Budgets can play both planning and control roles for management.a. Trueb. False

4. The usual starting point in budgeting is to make a forecast of net income.a. Trueb. False

5. The sales plan should be based on the production plan.a. Trueb. False

6. If amounts in the sales forecast change, amounts in the production budgets will also change.a. Trueb. False

7. After a budget is agreed upon and finalized by the management team, the amounts should not be changed for any reason.a. Trueb. False

8. In periodic budgeting, organizations budget continuously.a. Trueb. False

9. Zero-based budgeting requires that proponents of discretionary expenditures justify these outlays for each budgeting period.a. Trueb. False

AKY 4E Test Bank Chapter 10 Schoenebeck

10. Sensitivity analysis is the process of selectively varying the key estimates of a plan or budget.a. Trueb. False

11. The essence of variance analysis is that it captures a departure from what was expected.a. Trueb. False

12. It is most meaningful to compare cost targets in the master budget to actual cost results.a. Trueb. False

13. A favorable variance indicates management’s attention is not needed.a. Trueb. False

14. An unfavorable variance may be due to poor planning rather than due to inefficiency.a. Trueb. False

15. If standards are lax, cost variances will tend to be favorable.a. Trueb. False

16. To compute the direct material price variance, the actual cost is compared to the amount budgeted at the beginning of the year for the material. a. Trueb. False

17. The use of high-quality raw materials is likely to result in a favorable usage variance and an unfavorable price variance.a. Trueb. False

18. The labor rate variance is likely to be favorable if higher-skilled workers are put on a job.a. Trueb. False

19. Planning variances are the focus of cost control.a. Trueb. False

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


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

22. Budgeting slack is most likely to occur when a firm uses the budget only as a planning device and not for control.a. Trueb. False

23. Authoritative budgeting occurs when a superior simply tells subordinates what their budget will be.a. Trueb. False


MULTIPLE CHOICE

24. 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 otherb. should be adjusted if new opportunities become available during the yearc. can help management allocate limited resourcesd. can become the performance standard against which firms can compare the actual

results

25. Budgeting provides all of the following EXCEPT:a. a means to communicate the organization's short-term goals to its membersb. support for the management functions of planning and coordinationc. a means to anticipate problemsd. an ethical framework for decision making

26. Budgeting always includes:a. controlb. planning of short-term activitiesc. evaluating performanced. preparing pro forma financial statements

27. Budgeting does NOT require: a. knowledge of the organization’s activitiesb. specialized expertise in financial management and controlc. knowledge about how activities affect costsd. the ability to see how the organization’s different activities fit together

28. 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 activitiesb. budgeting includes the process of estimating money inflows and outflows to

determine a financial plan that will meet objectivesc. the difference between actual results and the budget plan are called variancesd. budgeting solves most business challenges because it coordinates activities and

communicates the organization’s short-term goals to its members

29. In regard to the amount of detail, a budget should:a. show the detail for each productb. group products into pools of productsc. strike a balance between detail and aggregated informationd. not consider the cost of gathering the information


30. If initial budgets prove unacceptable, planners achieve the MOST benefit from:a. repeating the budgeting cycle with a new set of decisionsb. deciding not to budget this yearc. accepting an unbalanced budgetd. using last year’s budget

31. When discussing the roles of budgets, a planning role in the budgeting process includes: a. measuring outcomes against planned amountsb. developing the master budgetc. assessing performanced. reporting actual amounts at the end of the budgeting period

32. When discussing the roles of budgets, a control role includes:a. identifying organizational objectives and short-term goalsb. developing long-term strategies and short-term plansc. measuring and assessing performance against budgeted amountsd. developing the master budget

33. Operating budgets and financial budgets: a. combined form the master budgetb. are prepared before the master budgetc. are prepared after the master budgetd. have nothing to do with the master budget

34. Operating budgets include all of the following EXCEPT:a. a sales planb. a labor hiring and training planc. an administrative and discretionary spending pland. expected financial results

35. Operating budgets include the:a. projected balance sheetb. projected income statementc. capital spending pland. expected cash flow statement

36. Financial budgets are prepared:a. to specify expectations for selling, purchasing, and productionb. to evaluate the financial results of the proposed decisionsc. so that financial statements can be prepared for shareholdersd. to plan for production capacity

37. Financial budgets include the:a. capital spending planb. production planc. labor hiring and training pland. expected cash flow statement


38. __________ include an expected cash flow statement, the projected balance sheet, and the projected income statement.a. Annual reportsb. Financial budgetsc. Operating budgetsd. Capital budgets

39. __________ provide(s) the starting point and the framework for evaluating the budgeting process.a. The sales planb. Organizational goalsc. The production pland. Expected cash flows

40. A demand forecast is:a. an estimate of sales demand at a specified product priceb. developed primarily to prepare next year’s marketing campaignc. an estimate of market demand based on the amount sold in the previous yeard. a summary of product costs that influence pricing decisions

41. The budgeting process is MOST strongly influenced by the:a. capital spending planb. statement of expected cash flowsc. demand forecastsd. production plan

42. In which order are the following developed?A = Production plan B = Materials purchasing planC = Demand forecast D = Sales plan

a. first to last: A, B, C, Db. first to last: C, D, A, Bc. first to last: D, C, B, Ad. first to last: C, A, D, B

43. The __________ provides the foundation for the production plans.a. inventory policyb. sales planc. administrative and discretionary spending pland. capital spending plan

44. The sales plan identifies:a. expected cash flows from the sales of each productb. actual sales from last year for each productc. the budgeted level of salesd. the variance of sales from actual for each product


45. The __________ summarizes planned revenues from each product.a. capital spending planb. production planc. administrative and discretionary spending pland. sales plan

46. 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.

47. __________ specifies when items such as acquisitions for buildings and special-purpose equipment must be made to meet activity objectives.a. The capital-spending planb. The production planc. The materials purchasing pland. The administrative and discretionary spending plan

48. The sales plan is matched with inventory policy and capacity levels and __________ is determined.a. an aggregate planb. a new sales planc. a materials purchasing pland. an administrative and discretionary spending plan

49. Aggregate planning:a. determines the projected financial statementsb. compares the sales plan with the demand forecastc. assesses the feasibility of the proposed production pland. provides a detailed production schedule for all product lines

50. Discretionary expenditures:a. are usually planned for firstb. are amounts paid for the use of flexible resourcesc. are not determined by the organization’s level of productiond. increase in amount during periods of greater activity

51. __________ summarizes expenditures for advertising and research and development.a. The labor hiring and training planb. The production planc. The administrative and discretionary spending pland. The aggregate plan


52. All of 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 organizationb. determines discretionary spending for research and developmentc. works backward from the date when personnel are neededd. can include plans for both expansion and contraction

53. Financial analysts use the projected cash flow statement to do all of the following EXCEPT:a. plan for when excess cash is generatedb. plan for short-term cash investmentsc. project cash shortages and plan a strategy to deal with the shortagesd. project sales

54. The cash flow statement does NOT include:a. cash inflows from the collection of receivablesb. cash outflows paid toward committed resourcesc. all sales revenuesd. interest paid and collected

55. The financing section of the cash flow statement includes:a. cash flows from retail salesb. borrowing made and repaidc. amounts paid for advertising costsd. cash outflows for flexible resources

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 56 THROUGH 59.For the next six months, Brett Company projects the following information (in units).

Jan Feb Mar April May JuneRetail demand 200 200 300 300 400 400Dealer demand 400 500 600 700 800 900Shop capacity 1,000 1,000 1,000 1,000 1,000 1,000Painting capacity 700 700 700 1,200 1,200 1,200

Demand drives production for that month and cannot be carried over from one month to another. Retail customers are satisfied first.

56. The production for January is projected to be:a. 200 unitsb. 600 unitsc. 700 unitsd. 1,000 units

57. The number of dealer units that will be produced and sold in March is:a. 600 unitsb. 700 unitsc. 1,000 unitsd. 400 units


58. Painting capacity appears to be:a. short-term capacityb. intermediate-term capacityc. long-term capacityd. total demand

59. In May, production appears to be limited by:a. short-term capacityb. intermediate-term capacityc. long-term capacityd. total demand

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 60 THROUGH 65.The following information pertains to the January operating budget for Casey Corporation.

Budgeted sales for January $100,000 and February $200,000. Collections for sales are 60% in the month of sale and 40% the next month. Gross margin is 30% of sales. Administrative costs are $10,000 each month. Beginning accounts receivable $20,000. Beginning inventory $14,000. Beginning accounts payable $60,000. (All from inventory purchases.) Purchases are paid in full the following month. Desired ending inventory is 20% of next month’s cost of goods sold (COGS).

60. For January, budgeted cash collections are:a. $20,000b. $60,000c. $80,000d. None of the above is correct.

61. At the end of January, budgeted accounts receivable is:a. $20,000b. $40,000c. $60,000d. None of the above is correct.

62. For January, budgeted cost of goods sold is:a. $20,000b. $30,000c. $40,000d. None of the above is correct.

63. For January, budgeted net income is:a. $20,000b. $30,000c. $40,000d. None of the above is correct.


64. For January, budgeted cash payments for purchases are:a. $14,000b. $60,000c. $70,000d. None of the above is correct.

65. At the end of January, budgeted ending inventory is:a. $20,000b. $28,000c. $40,000d. None of the above is correct.

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 66 THROUGH 69.The following information pertains to Tiffany Company:

Month Sales PurchasesJanuary $30,000 $16,000February $40,000 $20,000March $50,000 $28,000

Cash is collected from customers in the following manner:Month of sale 30%Month following the sale 70%

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

Labor costs are 20% of sales. Other operating costs are $15,000 per month (including $4,000 of depreciation). Both of these are paid in the month incurred.

The cash balance on March 1 is $4,000. A minimum cash balance of $3,000 is required at the end of the month. Money can be borrowed in multiples of $1,000.

66. How much cash will be collected from customers in March?a. $43,000b. $47,000c. $50,000d. None of the above is correct.

67. How much cash will be paid to suppliers in March?a. $23,200b. $28,000c. $44,000d. None of the above is correct.


68. How much cash will be disbursed for labor and operating costs in March?a. $21,000b. $25,000c. $44,200d. $48,200

69. What is the ending cash balance for March?a. ($25,000)b. $3,000c. $3,200d. $3,800

70. In __________, as one budget period passes, planners delete that budget period from the master budget and add another one.a. zero-based budgetingb. periodic budgetingc. incremental budgetingd. continuous budgeting

71. Although planners update or revise the budgets during the period, __________ is typically performed once per year.a. zero-based budgetingb. periodic budgetingc. incremental budgetingd. continuous budgeting

72. __________ requires that each discretionary expenditure be justified.a. Zero-based budgetingb. Periodic budgetingc. Incremental budgetingd. Continuous budgeting

73. __________ bases a period's expenditure level for a discretionary item on the amount spent on that item during the previous period.a. Zero-based budgetingb. Periodic budgetingc. Incremental budgetingd. Continuous budgeting

74. In zero-based budgeting:a. the prior year’s budgeted amounts or actual results are used to build the new

operating budgetb. the budget is prepared by the top managersc. managers must justify each item within the operating budget as if it were a new

budget itemd. the budget is updated every month


75. __________ is the process of varying key estimates to identify those estimates that are the most critical to a decision.a. A demand forecastb. A sensitivity analysisc. A pro forma income statementd. The cash flow statement

76. Assume only the specified parameters change in a sensitivity analysis. If the contribution margin increases by $2 per unit then operating profits will:a. also increase by $2 per unitb. increase by less than $2 per unitc. decrease by $2 per unitd. be indeterminable

77. Assume that only the specified parameters change in a sensitivity analysis. The contribution margin ratio increases when:a. total capacity-related (fixed) costs increaseb. total capacity-related (fixed) costs decreasec. flexible (variable) costs per unit increased. flexible (variable) costs per unit decrease

78. The break-even point decreases if the:a. flexible (variable) cost per unit increasesb. total capacity-related (fixed) costs decreasec. contribution margin per unit decreasesd. selling price per unit decreases

79. (CPA adapted, November 1992) The strategy MOST LIKELY to reduce the break-even point would be to:a. increase both the capacity-related (fixed) costs and the contribution marginb. decrease both the capacity-related (fixed) costs and the contribution marginc. decrease the capacity-related (fixed) costs and increase the contribution margind. increase the capacity-related (fixed) costs and decrease the contribution margin

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 80 THROUGH 82.Cathy Manufacturing produces a single product that sells for $80. Variable (flexible) costs per unit equal $32. The company expects the total fixed (capacity-related) costs to be $72,000 for the next month at the projected sales level of 2,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.

80. What is the current break-even point in terms of number of units?a. 1,500 unitsb. 2,250 unitsc. 3,333 unitsd. None of the above is correct.


81. Suppose that Cathy Manufacturing’s management believes that a $16,000 increase in the monthly advertising expense will result in a considerable increase in sales. How much must sales increase to justify this additional expenditure?a. 200 unitsb. 334 unitsc. 500 unitsd. None of the above is correct.

82. Suppose that Cathy Manufacturing's management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented, then:a. profit will decrease by $8,000b. profit will increase by $8,000c. profit will decrease by $16,000d. profit will increase by $16,000

83. The PRIMARY reason for using cost variances is:a. that they diagnose the cause of a problem and what should be done to correct itb. for superiors to communicate expectations to lower level employeesc. to administer appropriate disciplinary actiond. for financial control of operating activities

84. A favorable cost variance of significant magnitude:a. is the result of good planningb. may lead to improved production methods if it is investigatedc. indicates that management does not need to be concerned about lax standardsd. does not need to be investigated

85. The variances that should be investigated by management include:a. only unfavorable variancesb. only favorable variancesc. all variances, both favorable and unfavorabled. both favorable and unfavorable variances that are considered significant in amount

for the company

86. A flexible budget contains:a. cost targets for actual outputb. cost targets for planned outputc. the difference between planned and actual outputd. actual costs for actual output

87. All of the following are true of flexible budgets EXCEPT that they:a. use the same flexible (variable) cost per unit as the master budgetb. result in higher total costs for greater levels of productionc. allow comparison of actual results to targets based on the achieved level of

productiond. reflect the same level of production as the master budget


88. The variance that LEAST affects cost control is the __________ variance.a. flexible budgetb. direct material pricec. planningd. direct labor efficiency

89. A flexible budget variance is $800 favorable for unit-related costs. This indicates that:a. costs were $800 more than the master budgetb. costs were $800 less than standard for the achieved level of activityc. the sum of the planning and efficiency variances totals $800d. costs were $800 less than for the planned level of activity

90. A favorable price variance for direct materials indicates that: a. a lower price than expected was paid for materialsb. a higher price than expected was paid for materialsc. less material was used during production than planned for actual outputd. more material was used during production than planned for actual output

91. A favorable efficiency variance for direct labor indicates that:a. a lower wage rate than expected was paid for direct laborb. a higher wage rate than expected was paid for direct laborc. less direct labor hours were used during production than expected for actual outputd. more direct labor hours were used during production than expected for actual output

92. A favorable wage rate variance for direct labor might indicate that:a. employees were paid more than plannedb. a corporate-wide wage adjustment was implementedc. less skilled and qualified employees are being hiredd. an efficient labor force

93. An organization planned to use $82 of material per unit of activity but it actually used $80 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 is:a. $80,000b. $82,000c. $96,000d. $98,400

94. An organization planned to use $82 of material per unit of activity but it actually used $80 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 is:a. $2,000 favorableb. $14,000 unfavorablec. $16,400 unfavorabled. $2,400 favorable


95. An organization planned to use $82 of material per unit of activity but it actually used $80 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. $2,000b. $14,000c. $16,400d. $2,400

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 96 THROUGH 99.These questions refer to flexible budget variance formulas with the following descriptions for the variables: A = Actual; P = Price; Q = Quantity; S = Standard.

96. The best label for the formula (AQ – SQ) x SP is the:a. quantity varianceb. price variancec. total cost varianced. wage rate variance

97. The best label for the formula (AP – SP) x AQ is the:a. quantity varianceb. price variancec. total cost varianced. efficiency variance

98. The best label for the formula [(AP) x (AQ)– (SP) x (AQ)] is the:a. quantity varianceb. price variancec. total cost varianced. efficiency variance

99. The best label for the formula [(AP) x (AQ)– (SP) x (SQ)] is the:a. quantity varianceb. price variancec. total cost varianced. efficiency variance


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 100 THROUGH 105.Triglobal Industries, Inc., (TII) developed the following standard costs for direct material and direct labor for one of their major products, the 10-gallon plastic container.

Standard quantity Standard priceDirect materials 0.10 pounds $30 per poundDirect labor 0.05 hours $15 per hour

During June, TII produced and sold 5,000 containers using 490 pounds of direct materials at an average cost per pound of $32 and 250 direct labor hours at an average wage of $15.25 per hour.

100. June’s direct material cost variance was:a. $980 unfavorableb. $300 favorablec. $680 unfavorabled. None of the above is correct.

101. June’s direct material price variance was:a. $980 unfavorableb. $300 favorablec. $680 favorabled. None of the above is correct.

102. June’s direct material quantity variance was:a. $980 unfavorableb. $300 favorablec. $680 favorabled. None of the above is correct.

103. June’s direct material planning variance was:a. $134,320 favorableb. $135,300 unfavorablec. $680 unfavorabled. indeterminable using the above information

104. June’s direct labor rate variance was:a. $62.50 unfavorableb. $62.50 favorablec. $71,187.50 favorabled. None of the above is correct.

105. June’s direct labor efficiency variance was:a. $62.50 unfavorableb. $62.50 favorablec. $71,187.50 favorabled. None of the above is correct.


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 106 THROUGH 111.Sanders Industries, Inc., developed the following standard costs for direct material and direct labor for one of their major products, the 30-gallon heavy-duty plastic container.


During July, Sanders produced and sold 10,000 containers using 2,200 pounds of direct materials at an average cost per pound of $24 and 1,050 direct labor hours at an average wage of $14.75 per hour.

106. July’s direct material price variance was:a. $2,800 favorableb. $2,200 favorablec. $5,000 unfavorabled. None of the above is correct.

107. July’s direct material quantity variance was:a. $2,800 unfavorableb. $2,200 favorablec. $5,000 unfavorabled. None of the above is correct.

108. July’s direct labor cost variance was:a. $750.00 unfavorableb. $262.50 favorablec. $487.50 unfavorabled. indeterminable using the above information

109. July’s direct labor rate variance was:a. $750.00 unfavorableb. $262.50 favorablec. $487.50 favorabled. indeterminable using the above information

110. July’s direct labor efficiency variance was:a. $750.00 unfavorableb. $262.50 favorablec. $487.50 favorabled. indeterminable using the above information

111. July’s direct labor planning variance was:a. $134,512.50 favorableb. $ 487.50 favorablec. $ 487.50 unfavorabled. indeterminable using the above information


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 112 THROUGH 115.The actual information pertains to the month of August. As part of the budgeting process, Dale’s Fencing Company developed the following master budget for August. Dale is in the process of preparing the flexible budget and understanding the results.

Master Flexible ActualBudget Budget Results

Sales volume (in units) # 25,000 # 20,000========

Sales revenues $1,250,000 $ $1,000,000Flexible (variable) costs 600,000 $ _________ 512,000

Contribution margin 650,000 $ 488,000

Capacity-related (fixed) costs 450,000 $ _________ 458,000Operating profit $ 200,000 $ $ 30,000

112. The flexible budget will report $__________ for the flexible (variable) costs.a. $512,000b. $600,000c. $480,000d. $640,000

113. The flexible budget will report $__________ for the capacity-related (fixed) costs.a. $458,000b. $450,000c. $360,000d. $572,500

114. The flexible (variable) cost variance is:a. $32,000 unfavorableb. $120,000 unfavorablec. $32,000 favorabled. $120,000 favorable

115. The PRIMARY reason for low operating profits was:a. the flexible (variable) cost varianceb. increased capacity-related (fixed) costsc. a poor management accounting systemd. lower sales volume than planned


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 116 THROUGH 117.Lynn’s Camera Shop has prepared the following flexible budget for September and it is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible ------------Variances-------------Budget Price/Rate Use/Efficiency

Material A $20,000 $1,000 F $3,000 UMaterial B 30,000 500 U 1,500 FDirect labor 40,000 500 U 2,500 F

116. The MOST LIKELY explanation of the above variances for Material A is that:a. a lower price than expected was paid for Material Ab. higher quality raw materials were used than were plannedd. the company used a new supplierd. Material A used during September was $2,000 less than expected

117. The MOST LIKELY explanation of the above direct labor variances is that:

a. the average wage rate paid to employees was less than expectedb. employees did not work as efficiently as expected to accomplish the jobc. the company may have assigned more experienced employees this month than

originally plannedd. management may have a problem with budget slack and may be using lax standards

for both labor wage rates and expected efficiency

118. 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. knowledgec. familiarity with processesd. potential for sales

119. _________ occur(s) when a superior simply tells subordinates what their budget will be.a. Authoritative budgetingb. Stretch targetsc. Consultative budgetingd. Budget slack

120. _________ mean(s) that the organization will attempt to reach much higher goals with the current budget.a. Authoritative budgetingb. Stretch targetsc. Consultative budgetingd. Budget slack


121. _________ occur(s) when managers ask subordinates to discuss their ideas about the budget, but no joint decision-making occurs.a. Authoritative budgetingb. Stretch targetsc. Consultative budgetingd. Budget slack

122. _________ involve(s) a joint decision-making process in which all parties agree about setting the budget targets.a. The pseudo-participation b. Budgeting gamesc. Budget slackd. The participation method

123. _________ occur(s) when subordinates ask for excess resources above and beyond what they need to accomplish budget objectives.a. Pseudo participation b. Effective budgetingc. Budget slackd. Participative budgeting

124. The BEST description of participative budgeting is that:a. lower-level managers and employees initially prepare the budgetb. managers and employees at many levels are involved with the budgeting processc. the budget is prepared by the top managersd. top management sets figures for all operating activities and these amounts are not

negotiable


EXERCISE/PROBLEMS

125. For the next six months, Barton Manufacturing projects the following information (in units).

July Aug Sept Oct Nov DecRetail demand 200 200 300 400 500 600Dealer demand 400 500 600 600 600 600Shop capacity 800 800 800 800 800 800Painting capacity 700 700 700 1,100 1,100 1,100

Demand drives production for that month and cannot be carried over from one month to another. Retail customers are satisfied first.

Required:a. Prepare a schedule that shows the number of retail and dealer units to be made and

sold each month.b. Review the above information and comment on your observations. What suggestions

do you have for Barton Manufacturing?

126. The following information pertains to Amigo Corporation:

Month Sales Purchases July $30,000 $10,000August 34,000 12,000September 38,000 14,000October 42,000 16,000November 48,000 18,000December 60,000 20,000

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.


127. The following information pertains to Maximillion Corporation:

Month Sales Purchases July $40,000 $20,000August 30,000 15,000September 20,000 10,000October 50,000 25,000November 60,000 30,000December 70,000 35,000

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 cash paid out at the time of purchase.

Maximillion Corporation incurs labor costs equal to 20% of sales, and other operating costs of $5,000 per month (including $2,000) of depreciation. Both of these 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 can be borrowed in multiples of $1,000.

Finally, Maximillion Corporation will issue $6,000 of common stock and pay out $10,000 in dividends in October.

Required:Prepare a projected cash flow statement in good form for the month of October.

128. Sunshine, Inc. sells a single product. The company's 2005 income statement is given below.

Sales (4,000 units) $800,000Less flexible (variable) expenses $200,000Less capacity-related (fixed) expenses $300,000

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

Required:a. Calculate operating income and the break-even point for 2005.b. Management believes that a $100,000 increase in equipment improvements will result

in a considerable increase in sales. How much must sales increase to justify this additional capital expenditure?

c. Assume management believes that flexible costs can be decreased by 10%. As a result management wants to reduce the selling price by 2% and expects this reduction will result in a 5% increase in sales. What are projected profits if these proposals are implemented?


129. Tatro Industries, Inc., (TII) developed standard costs for direct material and direct labor. In 2005, TII estimated the following standard costs for one of their major products, the 50-gallon plastic container.


During August, TII 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. Determine the following variances for August:

Required: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.

130. As part of the budgeting process, Dale’s Fencing Company developed the following master budget for September. Dale is in the process of preparing the flexible budget and understanding the results.

Master Flexible ActualBudget Budget Results

Sales volume (in units) # 30,000 # 25,000========

Sales revenues $3,600,000 $ $3,000,000Flexible (variable) costs 2,160,000 $ _________ 1,930,000

Contribution margin 1,440,000 $ 1,070,000

Capacity-related (fixed) costs 900,000 $ _________ 970,000Operating profit $ 540,000 $ $ 100,000

Required:a. Prepare the flexible budget in the area provided above.b. Determine the flexible (variable) cost variance.c. Determine the flexible (variable) planning variance.d. Should the manager be congratulated for keeping costs under control? Explain.


131. Bob’s Camera Shop 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.

Flexible ----------------Variances--------------- ActualBudget Price/Rate Quantity/Efficiency Results

Material A $30,000 $1,000F $3,000U $32,000Material B 40,000 500U 1,500F 39,000Direct labor 50,000 500U 2,500F 48,000

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?


CRITICAL THINKING/ESSAY

132. What is budgeting? What is its role?

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

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

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

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

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

138. What is the primary reason for conducting cost variance analysis?

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

Direct material price variance: $1,000 FDirect material quantity variance: $500 UDirect labor rate variance: $700 UDirect labor efficiency variance: $200 F

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

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

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

143. What is stretch budgeting? Why is it used?

144. What is budget slack? What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager?


CHAPTER 10 SOLUTIONSUSING BUDGETS TO ACHIEVE ORGANIZATIONAL OBJECTIVES

TRUE/FALSE

LO1 1. aLO1 2. aLO2 3. aLO3 4. bLO3 5. b

LO3 6. aLO3 7. bLO4 8. bLO4 9. aLO5 10. a

LO6 11. aLO6 12. bLO6 13. bLO6 14. aLO6 15. a

LO6 16. bLO6 17. aLO6 18. bLO6 19. bLO7 20. b

LO8 21. bLO8 22. bLO8 23. a


MULTIPLE CHOICE

LO1 24. aLO1 25. dLO1 26. bLO1 27. bLO1 28. d

LO1 29. cLO1 30. aLO2 31. bLO2 32. cLO3 33. a

LO3 34. dLO3 35. cLO3 36. bLO3 37. dLO3 38. b

LO3 39. bLO3 40. aLO3 41. cLO3 42. bLO3 43. b

LO3 44. cLO3 45. dLO3 46. dLO3 47. aLO3 48. a

LO3 49. cLO3 50. cLO3 51. cLO3 52. bLO3 53. d

LO3 54. cLO3 55. bLO3 56. bLO3 57. dLO3 58. b

LO3 59. cLO3 60. cLO3 61. bLO3 62. dLO3 63. a

LO3 64. bLO3 65. bLO3 66. aLO3 67. aLO3 68. a

LO3 69. dLO4 70. dLO4 71. bLO4 72. aLO4 73. c

LO4 74. cLO5 75. bLO5 76. aLO5 77. dLO5 78. b

LO5 79. cLO5 80. aLO5 81. bLO5 82. aLO6 83. d

LO6 84. bLO6 85. dLO6 86. aLO6 87. dLO6 88. c

LO6 89. bLO6 90. aLO6 91. cLO6 92. cLO6 93. b

LO6 94. aLO6 95. cLO6 96. aLO6 97. bLO6 98. b

LO6 99. cLO6 100. cLO6 101. aLO6 102. bLO6 103. d

LO6 104. aLO6 105. dLO6 106. bLO6 107. cLO6 108. c

LO6 109. bLO6 110. aLO6 111. dLO6 112. cLO6 113. b

LO6 114. aLO6 115. dLO6 116. aLO6 117. cLO7 118. a

LO8 119. aLO8 120. bLO8 121. cLO8 122. dLO8 123. c

LO8 124. b


MULTIPLE CHOICE

56. Retail demand 200 + Dealer demand 400 = 600 units57. Painting capacity 700 - Retail demand 300 = 400 units60. (January $100,000 x 60% = $60,000) + (Beginning accounts receivable $20,000) =

$80,00061. January $100,000 x 40% = $40,00062. $100,000 x (1- 30%) = $70,00063. Sales $100,000 – COGS $70,000 – Administrative costs $10,000 = $20,00064. Beginning accounts payable $60,00065. February sales $200,000 x (1 – 30%) = $140,000 COGS x 20% = $28,00066. (February sales $40,000 x 70% = $28,000) + (March sales $50,000 x 30% = $15,000) =

$43,00067. (February purchases $20,000 x 60% = $12,000) + (March purchases $28,000 x 40% =

$11,200) = $23,20068. (March sales $50,000 x 20% = $10,000) + (Cash operating costs $15,000 - $4,000 =

$11,000) = $21,00069. (Cash March 1 $4,000 + cash collected from customers +$43,000 (See No. 66) – cash paid

to suppliers $23,200 (See No. 67) – operating expenses paid $21,000 (See No. 68) = $2,800 + borrowed for minimum balance $1,000 = $3,800.

80. $72,000 / ($80 - $32) = 1,500 units81. $16,000 / ($80 - $32) = 334 units82. ($80 - $32) x (2,000 units) - $72,000 = $24,000

($72 - $32) x (2,200 units) - $72,000 = $16,000Will decrease operating profit by $8,000

93. 1,000 units x $82 = $82,00094. (1,000 units x $82) – (1,000 x $80) = $2,000 favorable variance 95. (1,200 units x $82) – (1,000 x $82) = $16,400 planning variance 100. Total direct material cost variance

= Actual direct material cost – Standard direct material cost= (490# x $32) – (5,000 x 0.10# x $30) = $15,680 - $15,000 = $680 U

101. (AP – SP) x AQ = ($32 - $30) x 490# = $980 U102. (AQ – SQ) x SP = [490# - (5,000 x 0.10#)] x $30 = $300 F 103. Planned quantity of containers was not disclosed.104. (AR – SR) x AH = ($15.25 - $15.00) x 250 = $62.50 U 105. (AH – SH) x SR = [250 - (5,000 x 0.05)] x $15 = Zero variance 106. (AP – SP) x AQ = ($24 - $25) x 2,200# = $2,200 F 107. (AQ – SQ) x SP = [2,200# - (10,000 x 0.20#)] x $25 = $5,000 U 108. Total direct labor cost variance = Actual direct labor cost – Standard direct labor cost

= (1,050 x $14.75) – (10,000 x 0.10 x $15) = $15,487.50 - $15,000.00 = $487.50 U 109. (AR – SR) x AH = ($14.75 - $15.00) x 1,050 = $262.50 F 110. (AH – SH) x SR = [1,050 - (10,000 x 0.10)] x $15 = 750 U 111. Planned quantity of containers was not disclosed.112. $600,000 / 25,000 units = $24 standard cost per unit x 20,000 actual units = $480,000113. $450,000 expected capacity-related (fixed) costs from the master budget 114. Actual cost – Flexible cost = $512,000 - $480,000 (See No. 112) = $32,000 U


EXERCISE/PROBLEM

LO3125. a. July Aug Sept Oct Nov Dec

Retail production 200 200 300 400 500 600Dealer production 400 500 400 400 300 200Total production 600 700 700 800 800 800

b. October through December shop capacity is a limiting factor and painting capacity is not being fully utilized.

Barton Manufacturing may want to consider renting additional space during the last three months of the year to take advantage of the increased demand and painting capacity at the end of the year.

LO3126. a. Cash collections total $125,200 = Oct $36,448 + Nov $40,812 + Dec $47,940.

October November December August $ 5,100September 19,000 5,700October 12,348 21,000 6,300November 14,112 24,000December 17,640

-------- --------- --------$36,448 $40,812 $47,940

b. Cash disbursements total $50,400 = Oct $14,800 + Nov $16,800 + Dec $18,800.

October November December September 8,400October 6,400 9,600November 7,200 10,800December 8,000

-------- --------- --------$14,800 $16,800 $18,800


LO3127. Cash collections from customers:

August (0.28 x $30,000) $8,400September (0.50 x $20,000) 10,000October (0.20 x $50,000) 10,000

$28,400

Cash outflows for operating:Suppliers ** $14,350Labor 10,000Operating costs 3,000

$27,350

Net cash flows from operations $1,050Add: opening cash 4,300Add: cash from stock issuance 6,000Less: cash paid as dividends (10,000)Add: cash borrowed 3,000

Ending cash $4,350

**$7,350 + $7,000 = Oct (0.30 x $25,000 x .98) + Sept (0.70 x $10,000).

LO5128. a. 2005 operating income equals $300,000 = $800,000 sales revenue - $200,000

variable costs - $300,000 fixed costs.

2005 breakeven point $400,000 in total sales dollars. $600,000 CM / $800,000 sales revenue = 0.75 CM ratio. $300,000 total fixed costs / 0.75 CM ratio = $400,000 in total sales to break even. OR $800,000 / 4,000 units = $200 selling price. $200,000 / 4,000 units = $50 flexible cost per unit. $300,000 / ($200 - $50) = 2,000 units to break even.

b. $100,000 / 75% CM ratio = $133,334 in increased sales to break even. OR $100,000 / ($200 - $50) = 667 additional units to breakeven.

c. ($200 - $50) (4,000 units) - $300,000 = $300,000 current production and pricing($196 - $45) (4,200 units) - $300,000 = $334,200 proposed production and pricingOperating profit is expected to increase by $34,200


LO6129. a. Total direct material cost variance.

= Actual direct material cost – Standard direct material cost= (1,900# x $41) – (8,000 x 0.25 x $40)= $77,900 - $80,000= $2,100 favorable

b. Direct material price variance.= (AP – SP) x AQ= ($41 - $40) x 1,900#= $1,900 unfavorable

c. Direct material quantity variance.= (AQ – SQ) x SP= [1,900# - (8,000 x 0.25)] x $40= $4,000 favorable

d. Total direct labor cost variance.= Actual direct labor cost – Standard direct labor cost= (250 x $18.25) – (8,000 x 0.03 x $18)= $4,562.50 - $4,320.00= $242.50 unfavorable

e. Direct labor rate variance.= (AR – SR) x AH= ($18.25 - $18.00) x 250= $62.50 unfavorable

f. Direct labor efficiency variance.= (AH – SH) x SR= [250 - (8,000 x 0.03)] x $18= $180.00 unfavorable


LO6130. a. Master Flexible Actual

Budget Budget ResultsSales volume (in units) # 30,000 # 25,000 # 25,000

Sales revenues $3,600,000 $3,000,000 $3,000,000Flexible (variable) costs 2,160,000 $1,800,000 1,930,000

Contribution margin 1,440,000 $1,200,000 1,070,000

Capacity-related (fixed) costs 900,000 $ 900,000 970,000Operating profit $ 540,000 $ 300,000 $ 100,000

b. Determine the flexible (variable) cost variance.= Actual cost – Flexible budget cost= $1,930,000 - $1,800,000= $130,000 unfavorable

c. Determine the flexible (variable) planning variance.= Flexible budget cost – Master budget cost= $1,800,000 – $2,160,000= $360,000 less than planned

d. As these results suggest, the manager should not be congratulated for keeping costs under control. Flexible (variable) costs were $130,000 over budget for actual output and capacity-related (fixed) costs were also $70,000 over budget. These variances from the flexible budget highlight the amounts that are different than planned. Since variances simply signal a deviation from what was planned, these differences need to be investigated before corrective actions can be taken.


LO6131. a. 1. For Material A, the favorable price variance indicates that direct material costs

were lower than planned because the purchase price per unit of raw material was lower than expected.

2. For Material A, the unfavorable quantity variance indicates that direct material costs were higher than planned because more Material A was used during production than was expected to be used for the actual output.

3. For direct labor, the unfavorable price variance indicates that direct labor costs were higher than expected because the average wage paid per hour was greater than planned.

4. For direct labor, the favorable efficiency variance indicates that direct labor costs were lower than planned because fewer direct labor hours were used during production than was expected to be used for the actual output.

b. It appears that both the $3,000 unfavorable Material A quantity variance and the $2,500 favorable direct labor variance should be investigated by management since these are greatest in magnitude. The unfavorable variance should be investigated so that the cause of the problem can be identified and corrected. The favorable variance should be investigated so that the favorable conditions may possibly be replicated to continue these cost savings.


CRITICAL THINKING/ESSAY

LO1132. What is budgeting? What is its role?

Solution: Budgeting is the process of preparing budgets, plans, schedules, and forecasts, and the process requires several important skills, including forecasting, a knowledge of how activities affect costs, and the ability to see how the organization's different activities fit together.

The role of budgets includes coordination, problem signaling, and problem-solving activities as organization control.

LO1133. Describe the benefits to an organization of preparing an operating budget.

Solution: A well-prepared operating budget should serve as a guide for a company to follow during the budgeted period. It is not “set in stone.” If new information or opportunities arise, the budget should be adjusted.

A well-prepared operating budget assists management with the allocation of scarce resources. It can help management see trouble spots in advance, and decide where to allocate its limited resources.

A well-prepared operating budget fosters communication and coordination among various segments of the company. The process of preparing a budget requires managers from different functional areas to work together and to communicate performance levels they both want and can attain.

A well-prepared operating budget can become the performance standard against which firms can compare the actual results.

LO3134. Describe operating and financial budgets and give at least two examples of each that are

discussed in the textbook.Solution: Operating budgets specify the expected outcomes of any selling, capital spending, manufacturing, purchasing, labor management, and administrative activities during the planning period. Operations personnel use these plans to guide and coordinate activities during the planning period.

Examples of operating budgets include the sales plan, capital spending plan, production plan, materials purchasing plan, labor hiring and training plan, and the administrative and discretionary spending plan.

Financial budgets are used to evaluate the financial consequences of a proposed decision.

Examples of financial budgets include the projected balance sheet, projected income statement, and projected cash flow statement.


LO3135. Discuss the importance of the sales forecast and items that influence its accuracy.

Solution: All other budgets are based on information from the sales forecast.

The sales forecast is a challenge to predict because its accuracy depends on the ability to forecast the state of the general economy, changes in the industry, actions of the competition, the ability of the sales staff, and developments in technology. Each of these items affects individual products or product lines and are quantified and aggregated to obtain the sales forecast.

LO4136. Discuss the terms discretionary expenditures and committed expenditures and give an

example of each.Solution: Discretionary expenditures provide the infrastructure required by the emerging production and sales plan. There is no direct relationship between the level of spending on these activities and actual production levels.

Examples of discretionary expenditures include amounts spent on employee training and research and development.

Committed expenditures are expensive. In addition, they are costs that are the same whether the facility is used or not, and the level of these costs is very difficult to change in the short term.

An example of a committed expenditure would be a payment on a long-term lease.

LO5137. Explain when a manager would use what-if analysis.

Solution: What-if analysis is helpful for evaluating alternative marketing, production, and selling strategies.

LO1138. What is the primary reason for conducting cost variance analysis?

Solution: Conducting cost variance analysis can help managers in several ways. If the managerial actions are identified that led to actual costs being lower than estimated costs, similar cost savings can be realized by repeating those actions in the production of other jobs. If factors resulting in actual costs being higher are identified, then managers may be able to take the necessary actions to eliminate or control those factors. If cost changes are likely to be permanent, however, the revised cost information can be used in bidding for jobs in the future.

LO6139. Explain what each of the following variances indicates, and discuss what conditions might

have caused each variance.Direct material price variance: $1,000 FDirect material use variance: $500 UDirect labor rate variance: $700 UDirect labor efficiency variance: $200 F


Solution:Direct material price variance: $1,000 F A favorable variance indicates that the materials used cost $1,000 less than expected. This could be the result of the purchasing agent negotiating a good price or the result of purchasing inferior materials.

Direct material quantity variance: $500 U An unfavorable variance indicates that more materials were used than expected. This could be caused by inferior materials, wastage, or a faulty standard.

Direct labor rate variance: $700 U An unfavorable variance indicates that the wage rate paid was higher than expected. This could be the result of using more experienced and, therefore, higher-paid employees, or an unanticipated increase in wages for the company.

Direct labor efficiency variance: $200 F A favorable variance indicates that the actual time on the job was less than expected. This could be the result of using more experienced and, therefore, more efficient employees, or a lax standard.

LO6140. What is the primary role of the flexible budget?

Solution: The primary role of the flexible budget is to provide a realistic standard against which to compare actual costs. The differences in costs between the master budget and flexible budget reflect the effect of differences between the planned and the actual achieved output quantity. The differences in costs between the flexible budget and actual costs reflect variances between actual and the allowable standard costs.

LO7141. How is the role of budgeting similar for a manufacturing firm and a not-for-profit

organization? Solution: As in manufacturing firms, budgeting helps nonmanufacturing organizations perform their planning function by coordinating and formalizing responsibilities and relationships and communicating the expected plans.

LO8142. Describe some of the drawbacks of using the operating budget as a control device.

Solution: When the operating budget is used as a control device, it can lead to behavior that is actually detrimental to the organization.

The major problem with the budget performance report is not the report itself, but rather the way it is used. In general, managers are rewarded for favorable variances, and disciplined for unfavorable variances. This encourages managers to set lax standards for both sales and costs so favorable variances result. It can also lead to “budget games.”

Another drawback is that, once the budget is established, if there is any variance between budget and actual, it is assumed to be because of actual. However, as we know, the budget will never be totally accurate due to the uncertainties of predicting the future.

If used properly, however, the operating budget can be a tremendous benefit to any company.


LO8143. What is stretch budgeting? Why is it used?

Solution: A stretch budget is one that exceeds a previous target by a significant amount and usually requires an enormous increase in effort to achieve.

Research has shown that the most motivating type of budget is one that is "tight," meaning targets are perceived as ambitious, but attainable.

LO8144. What is budget slack? What are the pros and cons of building slack into the budget from

the point of view of (a) an employee and (b) a senior manager?Solution: Budget slack occurs when subordinates (1) ask for excess resources above and beyond what they need to accomplish budget objectives and (2) distort information by claiming they are not as efficient or effective at what they do, thus lowering management's performance expectations of them.

Employee's point of view: There are two benefits from this point of view. First, the subordinate may be able to obtain excess resources to achieve desired goals. This may take a lot of pressure off the subordinate and reduce job anxiety. Second, the subordinate may be able to convince senior management to lower their work expectations of him or her. This may also lead to lower pressure on the subordinate to perform. Both of these types of slack-building are designed to reduce job stress for the subordinate. However, if incentives are graduated in such a way that achieving higher and higher goals provides the subordinate with more and more compensation in the form of bonuses, then the subordinate may lose income by selecting lower goals.

Senior management's point of view: When subordinates build in slack, they are either using unnecessary resources to achieve a goal that they should have been able to achieve with fewer resources, or they are understating their performance capabilities. Thus, the organization is either not running as efficiently as it can, or it is losing potential productivity from employees who are not working as hard as they can. In some cases, senior management may believe that subordinates build in slack to relieve job pressure. If burnout of employees has been happening in the organization, then perhaps senior management may be more forgiving and view some slack-building as necessary to keep their employees from quitting.


ch10_tb

Documents

true b

false multiple choice

zerobased budgeting

authoritative budgeting

periodic budgeting

role of budgeting

budgeting slack

budgeting period