Budgetary Planning Budgetary Planning: Answer Key

Budgetary Planning
Budgetary Planning Answer Key

True / False Questions

1. Control is forward looking while planning is backward looking.

FALSE
Control is backward looking while planning is forward looking.

AACSB: Reflective Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Describe (a) how and why organizations use budgets for planning and control and (b) potential behavioral
issues to consider when implementing a budget.
Topic: Planning and control cycle

2. The budget translates a company's objectives into financial terms.

TRUE
The budget's role in the organizing process is to translate the company's objectives into financial terms.

AACSB: Reflective Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Describe (a) how and why organizations use budgets for planning and control and (b) potential behavioral
issues to consider when implementing a budget.
Topic: Planning and control cycle

8-1
3. A short-term objective is a specific action managers use to reach their long term goals.

FALSE
A short-term objective is a specific goal that managers need to achieve in no more than a year to reach
their long-term goals.
8-2

4. The strategic plan is management's vision of what they desire the organization to achieve over the long
term.

TRUE
This is the definition of a strategic plan.
8-3
5. An advantage of budgeting is that it requires managers to evaluate why things did not progress
according to the plan.

FALSE
This is not a requirement of budgeting, although managers can use budgets in this way.
8-4

6. One advantage of participative budgeting is managers can build in budgetary slack.
FALSE
Budgetary slack is a drawback to participative budgeting, not an advantage.
8-5
7. Participative budgeting allows employees throughout the organization to have input into the budget-
setting process.
TRUE
This is the main purpose of participative budgeting.
8-6

8. Top-down budgeting is when the local managers impose a budget on the top management.
FALSE
Top-town budgeting is when top management sets the budget and imposes it on lower levels of the
organization.
8-7

9. Budgets that are tight but attainable are less likely to motivate people than budgets that are easy to
achieve.

FALSE
Budgets that are tight but attainable are more likely to motivate people than budgets that are either too
easy or too difficult to achieve.
8-8
10. Participative budgeting is more likely to motivate people to work toward the organization's goals than is
a top-down approach.

TRUE
This is one of the main advantages of participative budgeting.
8-9

11. Operating budgets focus on the financial resources needed to support operations.

FALSE
Operating budgets cover the organization's planned operating activities for a particular period; financial
budgets focus on the financial resources needed to support operations.
8-10

12. The production budget must be prepared before the sales budget can be prepared.

FALSE
The sales budget is the starting point for preparing the master budget.
8-11
13. Preparing the sales budget includes calculating the revenues to be earned from units sold in addition to
the number of units to be sold.

TRUE
Preparation of the sales budget requires multiplying the number of units expected to be sold by the
budgeted sales price.
8-12

14. If a company produces and sells goods to order, the sales budget and production budget are identical.

TRUE
A company that produces and sells goods to order would not carry a finished goods inventory, which is
the difference between a sales budget and a production budget.

15. Manufacturing firms prepare a separate raw materials purchases budget for each material used in
production.

TRUE
Each material should have its own budget.
16. The direct labor budget is based on budgeted sales levels.

FALSE
The direct labor budget is based on budgeted production levels.
17. Budgeted manufacturing overhead includes indirect manufacturing costs, but not selling or
administrative costs.

TRUE
Budgeted manufacturing overhead includes all indirect manufacturing costs such as rent, depreciation
on equipment, and utilities.

18. Budgeted cost of goods sold reflects all the costs required to manufacture and sell the product.

FALSE
Budgeted cost of goods sold reflects all the costs required to manufacture the product, but not sell it.

19. The selling and administrative expense budget is related to the production budget.
FALSE
The selling and administrative expense budget includes all the costs related to selling the product and
managing the business, not the costs of producing the product.
20. Budgeted cash collections are based on the sales budget.
TRUE
Budgeted cash collections translates the sales budget into when it is collected in cash.

Multiple Choice Questions

8-13
21. Which of the following is the forward-looking phase of the planning and control cycle?

A. Planning
B. Directing/Leading
C. Organizing
D. Control
Planning is the forward-looking phase of the cycle; it involves setting long-term objectives and defining
short-term tactics that will help achieve them.
22. Creating a budget is an important part of which phase of the planning and control process?

A. Planning
B. Organizing
C. Directing/Leading
D. Control
A budget is a detailed plan that translates the company's objectives into financial terms. This aids in the
organizing process, in which managers arrange for the necessary resources needed to achieve the plan.

23. A detailed plan that translates the company's objectives into financial terms, identifying the resources
and expenditures that will be required over the planning horizon is a

A. Strategic plan

B. Budget
C. Tactic
D. Long-term objective
This is the definition of a budget.
24. Which of the following is the backward-looking phase of the planning and control cycle?

A. Planning
B. Directing/Leading
C. Organizing
D. Control
This is the phase in which managers compare actual to budgeted results to determine whether the
objectives set during the planning stage were met, and take corrective action where necessary.
8-14
25. ____________ are the specific actions managers use to achieve their objectives.

A. Strategic plans

B. Long-term objectives
C. Short-term objectives
D. Tactics
This is the definition of tactics.
8-15

26. _____________ are the specific goals that managers want to achieve over a 5 to 10 year horizon.

A. Strategic plans

B. Long-term objectives
C. Short-term objectives
D. Tactics
This is the definition of long-term objectives.
8-16

27. A _____________ is the vision of what management wants the organization to achieve over the long
term.
Strategic plan
Long-term objective
Short-term objective
Tactic
This is the definition of a strategic plan.
8-17
28. Which of the following is not a benefit of budgeting?

A. It forces managers to look to the future
B. It plays an important role in communication within the organization
C. It serves an important role in motivating and rewarding employees
D. It builds organizational slack
Organizational slack is not a positive result of budgeting.
8-18

29. A top-down approach to budgeting is one that is
participative.
motivational.
imposed.
tight.
A top-down approach is one in which top management sets the budget and imposes it on lower levels of
the organization.
8-19

30. Participative budgeting is an approach to budgeting that

A. is top-down in nature.
B. allows top management to set the budget.
C. discourages budget slack.
D. is more likely to motivate people to work towards the organization's goals than a top-down
approach.
One of the major advantages of participative budgeting is that it is motivational.
8-20

31. Which of the following is not a way to reduce the dysfunctional behaviors associated with budgeting?
Create budget slack.

Use different budgets for planning and for performance evaluation.
Use a continuous or rolling budget approach.
Use a zero-based budgeting approach.
Creating budget slack is a dysfunctional behavior associated with budgeting.
8-21

32. Which of the following statements about employee motivation is true?

A. A budget that is too easy to achieve is more likely to motivate than a budget that is too difficult or
that is tight but attainable.
B. A budget that is too difficult to achieve is more likely to motivate than a budget that is too easy or
that is tight but attainable.
C. A budget that is tight but attainable is more likely to motivate than a budget that is too easy or too
difficult to achieve.
D. Budgets are difficult to use for motivation.
Research suggests that budgets that are tight but attainable are more likely to motivate people than
budgets that are either too easy or too difficult to achieve.
8-22

33. Which of the following is not a component of the master budget?
Operating budget
Budgeted income statement
Budgeted balance sheet
Statement of return on investment
The components of the operating budget, when combined, form the budgeted income statement.
Together with the financial budgets, which combine to form the budgeted balance sheet, these comprise
the master budget.
8-23

34. Which of the following is not included in the operating budget?

A. Budgeted balance sheet

B. Sales budget
C. Selling and administrative budget
D. Raw materials purchases budget
The budgeted balance sheet is a financial budget, not an operating budget.
8-24

35. The starting point for preparing the master budget is the
inventory policy.
sales budget.
production budget.
budgeted balance sheet.
The sales budget, an estimate of the number of units to be sold and total sales revenue, is the basis for
all the other components of the operating budget.
8-25

36. Which of the following budgets shows how many units will be produced each period?

A. Direct materials budget

B. Direct labor budget
C. Sales budget
D. Production budget
This is the purpose of the production budget.
8-26

37. A primary financial budget is the
Production budget.
Cash budget.
Inventory budget.
Selling and administrative budget.
The cash budget is a component of the financial budgets. All others listed are operating budgets.
8-27

38. Which of the following sequences is correct?

A. Sales budget - production budget - direct materials budget - budgeted income statement
B. Budgeted income statement - direct materials budget - production budget - sales budget
C. Cash receipts budget - sales budget - production budget - budgeted income statement
D. Inventory budget - production budget - sales budget - selling and administrative budget
The sales budget is needed to prepare the production budget, which is needed to prepare the direct
materials budget, which is needed to prepare the budgeted income statement.
8-28

39. Which of the following is not a source that can be used in preparing the sales budget?
Prior sales.
The production budget.
Industry trends.
Marketing activities.
The sales department usually bases sales estimates on information such as prior sales, industry trends,
and marketing activities. The production budget is based on the sales budget.
8-29

40. Parker Corp expects to sell 4,000 units in October, and expects sales to increase 20% each month
thereafter. Sales price is expected to stay constant at $8 per unit. What are budgeted revenues for the
fourth quarter?

A. $32,000
B. $96,000
C. $115,200
D. $116,480
[(4,000) + (4,000 × 1.2) + (4,000 × 1.2 × 1.2)] × $8.00 = $116,480.
8-30

41. Budgeted production is calculated by
adding budgeted unit sales to budgeted beginning finished goods inventory, and subtracting
budgeted ending finished goods inventory.
adding budgeted unit sales to budgeted beginning work in process inventory, and subtracting
budgeted ending work in process inventory.
adding budgeted unit sales to budgeted ending finished goods inventory, and subtracting budgeted
beginning finished goods inventory.
adding budgeted unit sales to budgeted ending work in process inventory, and subtracting budgeted
beginning work in process inventory.
Budgeted production units = Budgeted unit sales + Budgeted ending finished goods inventory -
Budgeted beginning finished goods inventory.
8-31

42. If a company is planning to build inventory,

A. production should exceed sales.

B. sales should exceed production.
C. production should equal sales.
D. production should equal inventory.
To build inventory, production must be greater than sales.
8-32

43. Lea Company produces hand tools. Budgeted sales for March are 10,000 units. Beginning finished
goods inventory in March is budgeted to be 1,300 units, and ending finished goods inventory is
budgeted to be 1,400 units. How many units will be produced in March?
9,900
10,000
10,100
12,700
10,000 + 1,400 - 1,300 = 10,100.
8-33

44. Meadow Company produces hand tools. A sales budget for the next four months is as follows: March
10,000 units, April 13,000, May 16,000 and June 21,000. Meadow Company's ending finished goods
inventory policy is 10% of the following month's sales. What is budgeted ending finished goods
inventory for May?

A. 1,000
B. 1,300
C. 1,600
D. 2,100
(10% × 21,000) - 2,100.
8-34

inventory policy is 10% of the following month's sales. March 1 inventory is projected to be 1,400 units.
How many units will be produced in March?
10,000
9,900
13,000
10,100
10,000 + 10% × 13,000 - 1,400 = 9,900.
8-35

inventory policy is 10% of the following month's sales. March 1 inventory is projected to be 1,400 units.
How many units will be produced in April?

A. 13,300
B. 15,900
C. 12,700
D. 13,000
13,000 + (10% × 16,000) - (10% × 13,000) = 13,300.
8-36

47. Marlow Company produces hand tools. A production budget for the next four months is as follows:
March 10,300 units, April 13,300, May 16,500, and June 21,800. Marlow Company's ending finished
goods inventory policy is 10% of the following month's sales. Meadow plans to sell 16,000 units in
May. How many units will be sold in April?
12,380
13,000
13,570
13,620
April sales + (16,000 × 10%) - (April sales × 10%) = 13,300. So April sales × 90% = 11,700, which
means April sales is 13,000.
8-37

48. Marlow Company produces hand tools. A production budget for the next four months is as follows:
March 10,300 units, April 13,300, May 16,500, and June 21,800. Marlow Company's ending finished
goods inventory policy is 10% of the following month's sales. Marlow plans to sell 16,000 units in May.
What is budgeted ending inventory for March?

A. 1,030
B. 1,300
C. 1,330
D. 1,650
April sales + (16,000 × 10%) - (April sales × 10%) = 13,300. So April sales × 90% = 11,700, which
means April sales is 13,000. March ending inventory is 10% × 13,000 = 1,300, which is the beginning
inventory for April.
8-38

49. The formula for budgeted raw materials purchases is
Budgeted production units + Ending raw materials inventory - Beginning raw materials inventory.
Budgeted production units + Beginning raw materials inventory - Ending raw materials inventory.
Materials needed for production + Ending raw materials inventory - Beginning raw materials
inventory.
Materials needed for production + Beginning raw materials inventory - Ending raw materials
inventory.
This is the formula for the raw materials purchases budget.
8-39

50. When calculating raw materials purchases, the starting point should be

A. actual materials purchases from the previous year.

B. budgeted sales.
C. budgeted production.
D. budgeted cost of raw materials.
Raw materials to be purchased will be used in manufacturing the units to be produced.
8-40

51. Jeremy Inc. produces leather handbags. The production budget for the next four months is: July 5,000
units, August 7,000, September 7,500, October 8,000. Each handbag requires 0.5 square meters of
leather. Jeremy Inc.'s leather inventory policy is 30% of next month's production needs. If the leather
policy is met, what will the July 1 inventory be?
750 square meters

1,050 square meters
1,825 square meters
300 square meters
30% × (5,000 × 0.5) = 750.
8-41

52. Johnson Inc. produces leather handbags. Johnson Inc. estimates it will use 3,500 square meters of
leather in production in August, and 3,750 square meters of leather in production in September. Johnson
Inc.'s leather inventory policy is 30% of next month's production needs. What will leather purchases be
in August?

A. 3,425 square meters

B. 3,500 square meters
C. 3,575 square meters
D. 4,625 square meters
3,500 + (0.30 × 3,750) - (0.30 × 3,500) = 3,575.
8-42

53. Jackson Inc. produces leather handbags. The production budget for the next four months is: July 5,000
leather. Jackson Inc.'s leather inventory policy is 30% of next month's production needs. On July 1
leather inventory was expected to be 1,000 square meters. What will leather purchases be in August?
7,150 square meters

3,575 square meters
7,075 square meters
3,425 square meters
(7,000 × 0.5) + (7,500 × 0.5 × 30%) - (7,000 × 0.5 × 30%) = 3,575.
8-43

leather inventory was expected to be 1,000 square meters. What will leather purchases be in July?


(5,000 × 0.5) + (7,000 × 0.5 × 30%) - 1,000 = 2,550.
8-44

leather inventory was expected to be 1,000 square meters. Leather is expected to cost $5.00 per square
meter in June, but go up to $6.00 per square meter in July. What is the expected cost of leather
purchases in July?
$13,800
$15,300
$16,200
$16,300
(5,000 × 0.5) + (7,000 × 0.5 × 30%) - 1,000 = 2,550 square meters to be purchased. 2,550 × $6.00 =
$15,300.
8-45

56. Jared Inc. produces leather handbags. The sales budget for the next four months is: July 5,000 units,
August 7,000, September 7,500, October 8,000. Each handbag requires 0.5 square meters of leather.
Jared Inc.'s finished goods inventory policy is 10% of next month's sales needs. Jared Inc.'s leather
inventory policy is 30% of next month's production needs. What will leather purchases be in August?


Production in August is 7,000 + (7,500 × 10%) - (7,000 × 10%) = 7,050. Production in September is
7,500 + (8,000 × 10%) - (7,500 × 10%) = 7,550. Leather purchases in August are (7,050 × 0.50) +
(7,550 × 0.50 × 30%) - (7,050 × 0.50 × 30%) = 3,600 square meters.
8-46

57. Budgeted direct labor hours are calculated as
Budgeted production units × Direct labor requirements per unit + Ending inventory - Beginning
inventory.
Budgeted production units × Direct labor requirements per unit + Beginning inventory - Ending
inventory.
Budgeted production units × Direct labor requirements per unit.
Budgeted sales units × Direct labor requirements per unit.
This is the formula for budgeted direct labor hours.
8-47

58. When calculating the direct labor budget, the starting point should be

A. actual direct labor hours from the previous year.

B. budgeted sales.
C. budgeted production.
D. budgeted cost of direct labor.
Direct labor will be used in manufacturing the units to be produced.
8-48

59. Jillian Inc. produces leather handbags. The production budget for the next four months is: July 5,000
units, August 7,000, September 7,500, October 8,000. Each handbag requires 1.3 hours of unskilled
labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How many unskilled labor
hours will be budgeted for August?
7,000
9,100
15,400
24,500
7,000 × 1.3 = 9,100 hours.
8-49

labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How many total labor hours
will be budgeted for September?

A. 7,500
B. 9,750
C. 16,500
D. 26,250
(7,500 × 1.3) + (7,500 × 2.2) = 26,250.
8-50

labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How much will be paid to
skilled labor during the three months July through September?
$742,500
$643,500
$4,387,500
$292,500
(5,000 × 2.2 × $15) + (7,000 × 2.2 × $15) + (7,500 × 2.2 × $15) = $643,500.
8-51

labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). What will be the total labor
cost for the month of August?

A. $303,800
B. $231,000
C. $121,500
D. $161,000
(7,000 × 1.3 × $8) + (7,000 × 2.2 × $15) = $303,800.
8-52

63. Jaybird Inc. produces leather handbags. The sales budget for the next four months is: July 5,000 units,
August 7,000, September 7,500, October 8,000. Jaybird Inc.'s ending finished goods inventory policy is
10% of the following month's sales. Each handbag requires 1.3 hours of unskilled labor (paid $8 per
hour) and 2.2 hours of skilled labor (paid $15 per hour). What will be the total labor cost for the month
of August?
$24,675
$225,680
$303,800
$305,970
Production = (7,000 + 10% × 7,500) - (10% × 7,000) = 7,050. Cost = (7,050 × 1.3 × $8) + (7,050 × 2.2
× $15) = $305,970.
8-53

64. Jaybird Inc. produces leather handbags. The sales budget for the next four months is: July 5,000 units,
August 7,000, September 7,500, October 8,000. Jaybird Inc.'s ending finished goods inventory policy is
10% of the following month's sales. Each handbag requires 1.3 hours of unskilled labor (paid $8 per
hour) and 2.2 hours of skilled labor (paid $15 per hour). How much is total labor cost during the three
months July through September?

A. $69,300
B. $327,670
C. $846,300
D. $859,320
Production = (5,000 + 7,000 + 7,500) + (10% × 8,000) - (10% × 5,000) = 19,800. Labor cost = (19,800
× 1.3 × $8) + (19,800 × 2.2 × $15) = $859,320.
8-54

65. Skylark has forecast production for the next three months as follows: July 4,900 units, August 6,600
units, September 7,500 units. Monthly manufacturing overhead is budgeted to be $17,000 plus $6 per
unit produced. What is budgeted manufacturing overhead for July?
$29,400
$47,000
$46,400
$17,000
Budgeted manufacturing overhead is (4,900 × $6) + $17,000 = $46,400.
8-55

66. Skylark has forecast production for the next three months as follows: July 4,900 units, August 6,600
units, September 7,500 units. Monthly manufacturing overhead is budgeted to be $17,000 plus $6 per
unit produced. What is budgeted manufacturing overhead for August?

A. $56,600
B. $17,000
C. $39,600
D. $62,000
Budgeted manufacturing overhead = (6,600 × $6) + $17,000 = $56,600.
8-56

67. Larken has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Larken's policy is to have an ending inventory of 40% of the next month's sales
needs on hand. July 1 inventory is projected to be 1,500 units. Monthly manufacturing overhead is
budgeted to be $17,000 plus $6 per unit produced. What is budgeted manufacturing overhead for July?
$29,400
$41,000
$46,400
$17,000
Production for July is 4,000 + (40% × 6,000) - 1,500 = 4,900. Budgeted manufacturing overhead is
(4,900 × $6) + $17,000 = $46,400.
8-57

68. Larken has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Larken's policy is to have an ending inventory of 40% of the next month's sales
needs on hand. July 1 inventory is projected to be 1,500 units. Monthly manufacturing overhead is
budgeted to be $17,000 plus $6 per unit produced. What is budgeted manufacturing overhead for
August?

A. $56,600
B. $17,000
C. $53,000
D. $38,600
Production = 6,000 + (40% × 7,500) - (40% × 6,000) = 6,600. Budgeted manufacturing overhead =
(6,600 × $6) + $17,000 = $56,600.
8-58

69. Skybird has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Skybird's policy is to have an ending inventory of 40% of the next month's sales
needs on hand. July 1 inventory is projected to be 1,500 units. Monthly costs are budgeted as follows:
What is budgeted manufacturing overhead cost for July?
$32,000
$41,000
$46,400
$17,000
Production for July is 4,000 + (40% × 6,000) - 1,500 = 4,900. Budgeted manufacturing overhead is
(4,900 × $6) + $17,000 = $46,400.
8-59

70. Pacific has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Pacific's policy is to have an ending inventory of 40% of the next month's sales
needs on hand. July 1 inventory is projected to be 1,500 units. Monthly costs are budgeted as follows:

What is budgeted manufacturing overhead cost for August?

A. $50,000
B. $47,000
C. $33,000
D. $32,000
Production = 6,000 + (40% × 7,500) - (40% × 6,000) = 6,600. Budgeted manufacturing overhead =
(6,600 × $5) + $17,000 = $50,000.
8-60

71. Budgeted cost of goods sold should include which of the following?
Raw materials and direct labor.

Raw materials, direct labor, and manufacturing overhead.
Raw materials, direct labor, manufacturing overhead, and selling expenses.
Raw materials, direct labor, manufacturing overhead, selling expenses, and administrative expenses.
Budgeted cost of goods sold should reflect all costs required to manufacture the product including raw
materials, direct labor, and manufacturing overhead.
8-61

72. Harney, Inc. has prepared the following budgets for March. In March, budgeted production equals
budgeted sales, and raw materials inventory will stay constant.

What is budgeted cost of goods sold for March?

A. $14,560
B. $24,960
C. $27,560
D. $37,960
$5,200 + $9,360 + $13,000.
8-62

73. Atlantic, Inc. has prepared the following budgets for March. In March, budgeted production equals
budgeted sales of 1,000 units, and raw materials inventory will stay constant.
$16,800
$24,300
$31,800
$43,800
[($6.00 + $10.80 + $7.50) × 1,000] + $7,500 = $31,800.
8-63

74. Crystal, Inc. has prepared the following budgets for March. In March, budgeted production is 1,000
units, budgeted sales is 1,200 units, and raw materials inventory will stay constant.


A. $20,367
B. $21,200
C. $25,440
D. $35,040
($4.00 + $7.20 + $10.00) × 1,200 = $25,440.
8-64

75. Crystal, Inc. has prepared the following budgets for March. In March, budgeted production is 1,000
units, budgeted sales is 1,200 units, and raw materials inventory unit costs will stay constant.
$30,551
$31,800
$36,660
$38,160
[($6.00 + $10.80 + $7.50) × 1,200] + [($7,500/1,000) × 1,200] = $38,160.
8-65

76. Lemon, Inc. has prepared the following budgets for March. In March, budgeted production is 1,000
units, budgeted sales is 1,200 units, and raw materials inventory and unit costs will stay constant.


A. $40,734
B. $42,400
C. $48,880
D. $50,880
($8,000 + $14,400 + $20,000)/1,000 = $42.40 per unit. $42.40 × 1,200 = $50,880.
8-66

77. Which of the following would not be an example of a cost to include in a selling and administrative
expense budget?
Legal expenses
Accounting services
Fixed manufacturing overhead
Franchise fees
The selling and administrative expense budget should include all the costs related to selling the product
and managing the business, but not manufacturing costs.
8-67

78. Walnut has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Walnut's policy is to have an ending inventory of 40% of the next month's sales
needs on hand. July 1 inventory is projected to be 1,500 units. Selling and administrative costs are
budgeted to be $15,000 per month plus $5 per unit sold. What are budgeted selling and administrative
expenses for July?

A. $24,500
B. $39,500
C. $35,000
D. $30,500
(4,000 × $5) + $15,000 = $35,000.
8-68

79. Walnut has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Walnut's policy is to have an ending inventory of 40% of the next month's sales
needs on hand. July 1 inventory is projected to be 1,500 units. Selling and administrative costs are
budgeted to be $15,000 per month plus $5 per unit sold. What are budgeted selling and administrative
expenses for September?
$30,000
$67,500
$32,500
$52,500
(7,500 × $5) + $15,000 = $52,500.
8-69

80. The budgeted income statement is a combination of

A. All the operating budgets.

B. All the operating budgets plus the budgeted balance sheet.
C. The direct materials budget, the direct labor budget, and the manufacturing overhead budget.
D. The production budget, the cost of goods sold budget, and the selling and administrative expense
budget.
The budgeted income statement combines all operating budgets.
8-70

81. The purpose of the cash budget is to
be used as a basis for the operating budgets.

provide external users with an estimate of future cash flows.
help managers plan ahead to make certain they will have enough cash on hand to meet their
operating needs.
summarize the cash flowing into and out of the business during the past period.
The cash budget helps managers plan ahead to make certain they will have enough cash on hand to meet
their operating needs.
8-71

82. The basic form of the cash budget is:

A. Budgeted cash collections - Budgeted cash payments +/- Cash borrowed or repaid = Ending cash
balance
B. Beginning cash balance + Budgeted cash collections - Budgeted cash payments +/- Cash borrowed
or repaid = Ending cash balance
C. Beginning cash balance - Budgeted cash collections + Budgeted cash payments +/- Cash borrowed
or repaid = Ending cash balance
D. Beginning cash balance + Budgeted cash collections - Budgeted cash payments = Cash borrowed or
repaid
This is the formula for the cash budget.
8-72

83. Which of the following is not a component of the cash budget?
Budgeted cash collections

Budgeted cash payments
Depreciation expense
Cash borrowed or repaid
Depreciation expense is a non-cash expense.
8-73

84. Which component of the cash budget is shown as a line item on the budgeted balance sheet?

A. Budgeted cash collections

B. Budgeted cash payments
C. Cash repaid
D. Ending cash balance
The ending cash balance is an asset that would be shown on the budgeted balance sheet.
8-74

85. Grover has forecast sales to be $125,000 in February, $135,000 in March, $150,000 in April, and
$140,000 in May. The average cost of goods sold is 70% of sales. All sales are on made on credit and
sales are collected 60% in the month of sale, and 40% the month following. What are budgeted cash
receipts in March?
$131,000
$135,000
$94,500
$91,700
($135,000 × 60%) + ($125,000 × 40%) = $131,000.
8-75

86. Grover has forecast sales to be $125,000 in February, $135,000 in March, $150,000 in April, and
$140,000 in May. The average cost of goods sold is 70% of sales. All sales are made on credit and sales
are collected 60% in the month of sale, and 40% the month following. What are budgeted cash receipts
in April?

A. $105,000
B. $141,000
C. $150,000
D. $144,000
($150,000 × 60%) + ($135,000 × 40%) = $144,000.
8-76

87. Dayton has forecast sales to be $205,000 in February, $270,000 in March, $290,000 in April, and
are collected 50% in the month of sale, 30% the month following and the remainder two months after
the sale. What are budgeted cash receipts in May?
$267,000
$296,000
$161,250
$241,500
($310,000 × 50%) + ($290,000 × 30%) + ($270,000 × 20%) = $296,000.
8-77

88. Blue has forecast sales to be $410,000 in February, $540,000 in March, $580,000 in April, and
the sale. What are budgeted cash receipts in May?

A. $592,000
B. $620,000
C. $310,000
D. $483,334
($620,000 × 50%) + ($580,000 × 30%) + ($540,000 × 20%) = $592,000.
8-78

89. Dane Inc. has forecast purchases on account to be $465,000 in March, $555,000 in April, $630,000 in
May, and $735,000 in June. Seventy percent of purchases are paid for in the month of purchase, the
remaining 30% are paid in the following month. What are budgeted cash payments for April?
$528,000
$577,500
$388,500
$189,000
($555,000 × 70%) + ($465,000 × 30%) = $528,000.
8-79

90. Ivory Inc. has forecast purchases on account to be $310,000 in March, $370,000 in April, $420,000 in
May, and $490,000 in June. Seventy percent of purchases are paid for in the month of purchase, the
remaining 30% are paid in the following month. What are budgeted cash payments for June?

A. $441,000
B. $469,000
C. $343,000
D. $294,000
($490,000 × 70%) + ($420,000 × 30%) = $469,000.
8-80

91. Cedar Co. has forecast purchases to be $330,000 in June, $375,000 in July, $310,000 in August, and
$270,000 in September. Purchases average 30% paid in cash, 70% are on credit. Credit purchases are
paid 60% in the month of purchase, 30% during the month following, and 10% the second month
following the purchase. Cash disbursements in September would be
$113,400.
$204,750.
$261,450.
$285,750.
($270,000 × 30%) + ($270,000 × 70% × 60%) + ($310,000 × 70% × 30%) + ($375,000 × 70% × 10%)
= $285,750.
8-81

92. Arbor Co. has forecast sales to be $400,000 in May, $475,000 in June, $575,000 in July and $700,000 in
August. Forty percent of sales are cash, the remainder is on credit. Credit sales are collected 60% in the
month of sale, the remaining the following month. What are budgeted cash collections for July?

A. $230,000
B. $334,000
C. $459,000
D. $551,000
($575,000 × 40%) + ($575,000 × 60% × 60%) + ($475,000 × 60% × 40%) = $551,000.
8-82

93. Ebony Co. has forecast sales to be $300,000 in May, $375,000 in June, $475,000 in July and $600,000
in August. Forty percent of sales are cash, the remainder is on account. Credit sales are partially
collected in the month of sale, with all collections completed by the end of the month following the sale.
The August 31 accounts receivable is budgeted to be $108,000. What are budgeted cash collections for
July?

A. $389,500
B. $267,000
C. $457,000
D. $415,000
For August, $600,000 × 60% = $360,000 of sales are on account. $108,000/$360,000 = 30% of credit
sales are still not collected at the end of August, so 70% are collected in the month of sale. For July,
then, collections will be $475,000 × 40% = $190,000 in cash, plus ($475,000 × 60% × 70%) +
($375,000 × 60% × 30%) = $267,000 in credit collections, for a total of $457,000.
8-83

94. Which of the following budgets do not provide information needed for the budgeted balance sheet?

A. Materials purchases budget

B. Production budget
C. Selling and administrative expense budget
D. Cash budget
The selling and administrative expense budget includes only expenses, which would not affect the
balance sheet.
8-84

95. Orchard has forecast sales to be $250,000 in February, $270,000 in March, $300,000 in April, and
are collected 60% in the month of sale, and 40% the month following. What is the budgeted Accounts
Receivable balance on May 31?

A. $196,000
B. $117,600
C. $112,000
D. $168,000
$280,000 × 40% = $112,000.
8-85

96. Boxwood Inc. has forecast purchases on account to be $620,000 in March, $740,000 in April, $840,000
in May, and $980,000 in June. Seventy percent of purchases are paid for in the month of purchase, the
remaining 30% are paid in the following month. What is the budgeted Accounts Payable balance for
June 30?

A. $588,000
B. $686,000
C. $294,000
D. $252,000
$980,000 × 30% = $294,000.
8-86

97. Audrey has forecast sales to be $205,000 in February, $270,000 in March, $290,000 in April, and
the sale. What is the budgeted Accounts Receivable balance on May 31?

A. $155,000
B. $213,000
C. $127,800
D. $186,000
$310,000 × 50% + $290,000 × 20% = $213,000.
8-87

98. Which of the following budgets would not exist for a merchandising firm?

A. Sales budget
B. Purchases budget
C. Production budget
D. Selling and administrative expense budget
A merchandising firm does not produce the goods it sells, so it would not need a production budget.

99. Clare purchases a single product for $15 and sells it for $30. Forecasted sales for the next three months
are July 4,000 units, August 6,000 units, September 7,500 units. Clare's policy is to have an ending
inventory of 40% of the next month's sales needs on hand. July 1 inventory is projected to be 1,500
units. What are budgeted purchases in units for August?

A. 6,600 units
B. 10,400 units
C. 5,400 units
D. 600 units
(6,000 × 60%) + (7,500 × 40%) = 6,600 units.

100. Parsley Inc, a merchandising firm, has forecasted sales to be $125,000 in February, $135,000 in March,
$150,000 in April, and $140,000 in May. The average cost of goods sold is 60% of sales. The
merchandise inventory policy is to carry 50% of next month's sales needs. If actual February 1
inventory is $40,000, what will the cost of March purchases be?

A. $58,500
B. $142,500
C. $81,000
D. $85,500
($135,000 × 60%) + ($150,000 × 60% × 50%) - ($135,000 × 60% × 50%) = $85,500.
8-88
101. Mango Place has forecast its sales for the coming months as follows:

The standard unit sells for $200, the deluxe unit sells for $350.
Required: Prepare a sales budget for each of the three months April through June as well as the total for
the quarter. Present the budget for each product as well as total sales.

Feedback: Preparation of the sales budget requires multiplying the number of units expected to be sold
each period by the budgeted sales price.
8-89

102. Edna Inc. has forecast its sales for the coming months as follows:

The standard model sells for $28, the economy model sells for $21, and the deluxe model sells for $49.
Required: Prepare a sales budget for each of the three months July through September as well as the
total for the quarter. Present the budget for each product as well as total sales.

Feedback: Preparation of the sales budget requires multiplying the number of units expected to be sold
each period by the budgeted sales price.
8-90

103. Willow Products expects the following sales of its single product:

Willow Products desires an ending finished goods inventory to be equal to 30% of the next month's
sales needs. Actual March 1 inventory is projected to be 1,300 units.
Required: Prepare a production budget for Willow Products for as many months as is possible.

Feedback: Budgeted production units = Budgeted unit sales + Budgeted ending finished goods
inventory - Budgeted beginning finished goods inventory
8-91

104. Heather Products expects the following sales of its single product:

Heather desires an ending finished goods inventory to be equal to 20% of the next month's sales needs.
Actual May 1 inventory will be 3,300 units.
Required: Prepare a production budget for Heather for as many months as is possible.

inventory - Budgeted beginning finished goods inventory.
8-92
105. Wheat Inc. has forecast its sales for the coming months as follows:

Wheat maintains finished goods inventory equal to 20% of the next month's sales requirements. April 1
inventories were 14 standard units and 10 deluxe.
Required: Prepare a production schedule for April through June.

8-93
106. Cherry Inc. has forecast its sales for the coming months as follows:

Cherry maintains finished goods inventory equal to 40% of the next month's sales requirements. April 1
inventories were 74 standard units and 72 deluxe.
Required: Prepare a production schedule for April through June.

8-94
8-95
107. Gertrude Products expects the following sales of its single product:

Gertrude desires an ending finished goods inventory to be equal to 10% of the next month's sales needs.
July 1 inventory is projected to be 800 units. Each unit requires 5 pounds of Chemical A and 14 pounds
of Chemical B. July 1 materials inventory includes 8,600 pounds of Chemical A and 76,000 pounds of
Chemical B. Gertrude desires to maintain a Chemical A inventory equal to 20% of next month's
production needs and a Chemical B inventory equal to 100% of next month's production needs.
a. Prepare a production budget for Gertrude for as many months as is possible.

b. Prepare a raw materials purchases budget for both Chemical A and Chemical B for the months of July
through September.

inventory - Budgeted beginning finished goods inventory. Budgeted raw materials purchases =
8-96
Materials needed for budgeted production needs + Budgeted ending raw materials inventory - Budgeted
beginning raw materials inventory.
8-97

8-98
108. Crest Products expects the following sales of its single product:

Crest desires an ending finished goods inventory to be equal to 30% of the next month's sales needs.
August 1 inventory is projected to be 7,800 units. Each finished unit requires 2 units of component X
and 11 units of component Z. August 1 materials inventory includes 5,000 units of component X and
184,000 units of component Z. Crest desires to maintain a component X inventory equal to 10% of next
month's production needs and a component Z inventory equal to 70% of next month's production needs.
a. Prepare a production budget for Crest for as many months as is possible.

b. Prepare a raw materials purchases budget for both Component X and Component Z for the months of
August through October.

inventory - Budgeted beginning finished goods inventory. Budgeted raw materials purchases =
Materials needed for budgeted production needs + Budgeted ending raw materials inventory - Budgeted
beginning raw materials inventory.
8-99

109. Honeysuckle Inc. produces canvas bags. The production budget for the next four months is: July 5,000
units, August 7,000, September 7,500, October 8,000. Each bag requires 2.6 hours of unskilled labor
(paid $8 per hour) and 4.4 hours of skilled labor (paid $15 per hour).
Required: Prepare a labor budget for the three months July through September. Provide the labor
requirements according to skill level in hours and in labor cost as well as in total. Provide the budget
monthly as well as a total for the quarter.

Feedback: Budgeted direct labor cost = Budgeted production × Direct labor requirements per unit ×
Direct labor cost per hour.
8-100

110. Maple Inc. produces wooden boxes. The production budget for the next four months is: July 15,000
units, August 17,000, September 17,500. Each box requires three skill levels: 1.0 hours of unskilled
labor (paid $8 per hour), 1.5 hours of semi-skilled labor (paid $10) and 2.0 hours of skilled labor (paid
$15 per hour).
Required: Prepare a labor budget for the three months July - September. Provide the labor requirements
according to skill level in hours and in labor cost as well as in total. Provide the budget monthly as well
as a total for the quarter.

Feedback: Budgeted direct labor cost = Budgeted production × Direct labor requirements per unit ×
Direct labor cost per hour.
8-101

111. Sugar has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units, and October 8,000 units. Sugar's policy is to have an ending inventory of 40% of
the next month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Manufacturing
overhead is budgeted to be $17,000 plus $5 per unit produced.
a. Prepare a production budget for Sugar for as many months as is possible.

b. Prepare a manufacturing overhead budget for the three months July - September. Be sure to include a
total for the quarter as well.

inventory - Budgeted beginning finished goods inventory. Budgeted manufacturing overhead =
Budgeted production × Variable overhead rate + Budgeted fixed manufacturing overhead.
8-102

112. Butler has forecast sales for the next three months as follows: July 14,000 units, August 16,000 units,
September 17,500 units, October 18,000 units. Butler's policy is to have an ending inventory of 20% of
the next month's sales needs on hand. July 1 inventory is projected to be 2,500 units. Manufacturing
overhead is budgeted to be $18,000 (depreciation $2,000, supervision $7,000, factory lease $1,500,
maintenance $4,000, training $3,500) plus $5 per unit produced ($3 indirect materials, $2 utilities).
a. Prepare a production budget for Butler for as many months as is possible.

b. Prepare a manufacturing overhead budget for the three months July through September. Be sure to
include a total for the quarter as well.

inventory - Budgeted beginning finished goods inventory. Budgeted manufacturing overhead =
Budgeted production × Variable overhead cost per unit + Budgeted fixed manufacturing overhead.
8-103

113. Bear Corp. sells its product for $120. Forecast sales are 1,200 units in October, 1,500 in November, and
1,600 in December. Variable costs are based on sales, and consist of commissions (7% of sales),
advertising (3%) and shipping (5%). Fixed costs per month are $4,000 sales salaries, $3,300 office
salaries, $2,000 depreciation, $1,800 office rent, $750 insurance and $900 utilities.
Required: Prepare Bear Corp's selling and administrative expense budget for the period October through
December. Present monthly totals as well as a 3-month total.

Feedback: Budgeted variable selling and administrative expenses are calculated by multiplying
budgeted sales by the appropriate rate. Budgeted total selling and administrative expenses are calculated
by adding budgeted variable to budgeted fixed selling and administrative expenses.
8-104

114. Rapid Corp. sells its product for $200. Forecast sales are 1,500 units in January, 1,800 in February, and
1,600 in March. Variable costs are based on sales, and consist of commissions (6% of sales),
cooperative advertising (2%) and shipping (6%). Monthly fixed costs are $7,000 sales salaries, $6,500
office salaries, $2,500 depreciation, $1,800 office rent, $900 insurance and $1,200 utilities.
a. Prepare Rapid's selling and administrative expense budget for the period January through March.
Present monthly totals as well as a 3-month total.

Feedback: Budgeted variable selling and administrative expenses are calculated by multiplying
budgeted sales by the appropriate rate. Budgeted total selling and administrative expenses are calculated
by adding budgeted variable to budgeted fixed selling and administrative expenses.
8-105

115. Meredith Company has budgeted sales for the upcoming months as follows:

Forty percent of the sales are credit sales, the remainder are cash sales. Credit sales are collected 50% in
the month of sale, 40% in the month following the sale, and 8% in the second month following the sale.
a. Compute Meredith Company's cash receipts for June.

b. Compute Meredith Company's cash receipts for July.
c. Compute Meredith Company's cash receipts for August.

a. $384,640 = ($392,000 × .60) + ($392,000 × .40 × .50) + ($372,000 × .40 × .40) + ($360,000 × .40 × .
08)
b. $404,224 = ($412,000 × .60) + ($412,000 × .40 × .50) + ($392,000 × .40 × .40) + ($372,000 × .40 × .
08)
c. $398,464 = ($400,000 × .60) + ($400,000 × .40 × .50) + ($412,000 × .40 × .40) + ($392,000 × .40 × .
08)
Feedback: Cash collections for a month are calculated by multiplying sales revenue for that month by
the percentage collected in cash, and also by the percentage of credit sales collected in the month of
sale, and adding in the amount to be collected in cash from sales made in prior months.
8-106

116. Spencer Company has budgeted sales for the upcoming months as follows:

Seventy percent of the sales are credit sales, the remainder are cash sales. Credit sales are collected 40%
in the month of sale, 50% in the month following the sale, and 10% in the second month following the
sale.
a. Compute Spencer's cash receipts for April.

b. Compute Spencer's cash receipts for May.
c. Compute the accounts receivable balance for May 31.

a. $631,350 = ($645,000 × .30) + ($645,000 × .70 × .40) + ($615,000 × .70 × .50) + ($600,000 × .70 × .
10)
b. $657,400 = ($670,000 × .30) + ($670,000 × .70 × .40) + ($645,000 × .70 × .50) + ($615,000 × .70 × .
10)
c. $326,550 = May ($670,000 × .70 × .60) + April ($645,000 × .70 × .10)
sale, and adding in the amount to be collected in cash from sales made in prior months. The accounts
receivable balance in a month is calculated as the sales revenue earned to date that has not yet been
collected in cash.
8-107
117. Blair is a retailer of assorted baby products. The sales forecast for the coming months is:

All sales are credit sales. The cash collection pattern is 20% in the month of sale, 70% in the month
following the sale, and the remainder in the second month following the sale. Accounts receivable on
June 1 were $177,500.
a. Prepare a cash receipts schedule for the period June through August (by month).
b. What will the Accounts Receivable balance be on August 31?

b. $208,000 = July ($240,000) × 10% + August ($230,000 × 80%) = $24,000 + $184,000
collected in cash.
8-108

118. Portia is a retailer of scrapbooking products. The sales forecast for the coming months is:

Portia's sales are all credit. The collection pattern is 60% in the month of sale, 35% the following month
and the remainder in the second month following the sale. Accounts receivable on April 1 were
$122,500.
a. Prepare a cash receipts schedule for the period June through August (by month).
b. What will the Accounts Receivable balance be on August 31?

b. $157,500 = July ($350,000 × 5%) + August ($350,000 × 40%) = $17,500 + $140,000
collected in cash.
8-109
119. Young is a retailer of assorted baby products. The sales forecast for the coming months is:

Young's cost of sales averages 60% of revenues. The inventory policy is to carry 30% of next month's
sales needs. April 1 inventory will be as expected under the policy. Young pays for purchases 80% in
the month of purchase and 20% the following month. Accounts payable on April 1 is $22,400.
a. Prepare a purchases budget for as many months as is possible.

b. Prepare a cash payments budget for April through June.

Feedback: Budgeted merchandise purchases = Budgeted sales + Budgeted ending finished goods
inventory - Budgeted beginning finished goods inventory. Budgeted cash payments are calculated by
multiplying purchases for the month by the percentage paid in cash, and adding in the amounts to be
paid in the current month from purchases made in prior months.
8-110
120. Carmen is a retailer of scrapbooking products. The sales forecast for the coming months is:

Carmen's sales are 70% cash and 30% store credit. The credit sales are collected 60% in the month of
sale, the remainder the following month. Accounts receivable on April 1 are $32,000.
Carmen's cost of sales averages 65% of revenues. The inventory policy is to carry 40% of next month's
sales needs. April 1 inventory will be as expected under the policy. Carmen pays for purchases 30% in
the month of purchase and 70% the following month. Accounts payable on April 1 is $125,000.
a. Prepare a purchases budget for as many months as is possible.
b. Prepare a cash payments budget for April through June.
c. Prepare a cash receipts budget for April through June.

Feedback: Budgeted merchandise purchases = Budgeted sales + Budgeted ending finished goods
inventory - Budgeted beginning finished goods inventory. Budgeted cash payments are calculated by
multiplying purchases for the month by the percentage paid in cash, and adding in the amounts to be
paid in the current month from purchases made in prior months. Cash collections for a month are
calculated by multiplying sales revenue for that month by the percentage collected in cash, and also by
the percentage of credit sales collected in the month of sale, and adding in the amount to be collected in
cash from sales made in prior months.
8-111

8-112

Budgetary Planning Budgetary Planning: Answer Key

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Budgetary Planning

Budgetary Planning Answer Key

Control is backward looking while planning is forward looking.

This is the definition of a strategic plan.

This is one of the main advantages of participative budgeting.

Each material should have its own budget.

16. The direct labor budget is based on budgeted sales levels.

The direct labor budget is based on budgeted production levels.

A. Strategic plan

This is the definition of a budget.

A. Strategic plans

This is the definition of tactics.

A. Strategic plans

This is the definition of long-term objectives.

This is the definition of a strategic plan.

Organizational slack is not a positive result of budgeting.

One of the major advantages of participative budgeting is that it is motivational.

Create budget slack.

Creating budget slack is a dysfunctional behavior associated with budgeting.

A. Budgeted balance sheet

The budgeted balance sheet is a financial budget, not an operating budget.

A. Direct materials budget

This is the purpose of the production budget.

[(4,000) + (4,000 × 1.2) + (4,000 × 1.2 × 1.2)] × $8.00 = $116,480.

A. production should exceed sales.

To build inventory, production must be greater than sales.

10,000 + 1,400 - 1,300 = 10,100.

(10% × 21,000) - 2,100.

10,000 + 10% × 13,000 - 1,400 = 9,900.

13,000 + (10% × 16,000) - (10% × 13,000) = 13,300.

This is the formula for the raw materials purchases budget.

A. actual materials purchases from the previous year.

Raw materials to be purchased will be used in manufacturing the units to be produced.

750 square meters

30% × (5,000 × 0.5) = 750.

A. 3,425 square meters

3,500 + (0.30 × 3,750) - (0.30 × 3,500) = 3,575.

7,150 square meters

(7,000 × 0.5) + (7,500 × 0.5 × 30%) - (7,000 × 0.5 × 30%) = 3,575.

A. 2,300 square meters

(5,000 × 0.5) + (7,000 × 0.5 × 30%) - 1,000 = 2,550.

A. 3,425 square meters

This is the formula for budgeted direct labor hours.

A. actual direct labor hours from the previous year.

Direct labor will be used in manufacturing the units to be produced.

7,000 × 1.3 = 9,100 hours.

(7,500 × 1.3) + (7,500 × 2.2) = 26,250.

(7,000 × 1.3 × $8) + (7,000 × 2.2 × $15) = $303,800.

Budgeted manufacturing overhead is (4,900 × $6) + $17,000 = $46,400.

Budgeted manufacturing overhead = (6,600 × $6) + $17,000 = $56,600.

What is budgeted manufacturing overhead cost for July?

What is budgeted manufacturing overhead cost for August?

Raw materials and direct labor.

What is budgeted cost of goods sold for March?

$5,200 + $9,360 + $13,000.

What is budgeted cost of goods sold for March?

[($6.00 + $10.80 + $7.50) × 1,000] + $7,500 = $31,800.

What is budgeted cost of goods sold for March?

($4.00 + $7.20 + $10.00) × 1,200 = $25,440.

What is budgeted cost of goods sold for March?

[($6.00 + $10.80 + $7.50) × 1,200] + [($7,500/1,000) × 1,200] = $38,160.

What is budgeted cost of goods sold for March?