True/False: Chapter 6: Master Budget and Responsibility Accounting
True/False: Chapter 6: Master Budget and Responsibility Accounting
TRUE/FALSE
1. Few businesses plan to fail, but many of those that flop have failed to plan.
2. The master budget reflects the impact of operating decisions, but not financing
decisions.
4. Budgeting includes only the financial aspects of the plan and not any nonfinancial
aspects such as the number of physical units manufactured.
5. Budgeting helps management anticipate and adjust for trouble spots in advance.
6. Budgets can play both planning and control roles for management.
7. To create greater commitment to the budget, top-management should create the budget
and then share it with lower-level managers.
8. After a budget is agreed upon and finalized by the management team, the amounts
should not be changed for any reason.
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9. Even in the face of changing conditions, attaining the original budget is critical.
10. A four-quarter rolling budget encourages management to be thinking about the next 12
months.
11. Research has shown that challenging budgets (rather than budgets that can be easily
attained) are energizing and improve performance.
12. It is best to compare this year’s performance with last year’s actual performance rather
than this year’s budget.
13. Budgets have the potential to compel strategic planning and the implementation of
plans.
14. When administered wisely, budgets promote communication and coordination among
the various subunits of the organization.
15. Preparation of the budgeted income statement is the final step in preparing the
operating budget.
16. The sales forecast should primarily be based on statistical analysis with secondary input
from sales managers and sales representatives.
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17. The usual starting point in budgeting is to forecast net income.
19. The operating budget is that part of the master budget that includes the capital
expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement
of cash flows.
20. If budgeted amounts change, the kaizen approach can be used to examine changes in
the budgeted results.
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25. Kaizen budgeting does not make sense for profit centers.
26. Kaizen budgeting encourages small incremental changes, rather than major
improvements.
28. Activity-based costing analysis takes a long-run perspective and treats all activity costs
as variable costs.
29. Activity-based budgeting (ABB) focuses on the budgeting cost of activities necessary
to produce and sell products and services.
32. In a profit center, a manager is responsible for investments, revenues, and costs.
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34. Variances between actual and budgeted amounts inform management about
performance relative to the budget.
37. The fundamental purpose of responsibility accounting is to fix blame when budgets are
not achieved.
39. Budgetary slack provides management with a hedge against unexpected adverse
circumstances.
40. Most costs can be easily controlled because they are under the sole influence of one
manager.
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42. When the operating budget is used as a control device, managers are more likely to be
motivated to budget higher sales than actually anticipated.
43. Budgeting slack is most likely to occur when a firm uses the budget only as a planning
device and not for control.
44. If a cost is considered controllable, it indicates that all aspects of the cost are under the
control of the manager of the responsibility center to which that cost is assigned.
46. The self-liquidating cycle is the movement from cash to inventories to receivables and
back to cash.
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MULTIPLE CHOICE
52. If initial budgets prove unacceptable, planners achieve the MOST benefit from
a. planning again in light of feedback and current conditions.
b. deciding not to budget this year.
c. accepting an unbalanced budget.
d. using last year’s budget.
Answer: a Difficulty: 2 Objective: 1
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53. Operating budgets and financial budgets
a. combined form the master budget.
b. are prepared before the master budget.
c. are prepared after the master budget.
d. have nothing to do with the master budget.
54. A good budgeting system forces managers to examine the business as they plan, so they
can
a. detect inaccurate historical records.
b. set specific expectations against which actual results can be compared.
c. complete the budgeting task on time.
d. get promoted for doing a good job.
56. A limitation of comparing a company’s performance against actual results of last year
is that
a. it includes adjustments for future conditions.
b. feedback is no longer a possibility.
c. past results can contain inefficiencies of the past year.
d. the budgeting time period is set at one year.
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58. A company’s actual performance should be compared against budgeted amounts for the
same accounting period so that
a. adjustments for future conditions can be included.
b. limited feedback is possible.
c. inefficiencies of the past year can be included.
d. a rolling budget can be implemented.
Answer: a Difficulty: 2 Objective: 2
61. To gain the benefits of budgeting __________ must understand and support the budget.
a. management at all levels
b. customers
c. suppliers
d. all of the above
Answer: a Difficulty: 3 Objective: 2
63. Line managers who feel that top management does not believe in the budget are MOST
likely to
a. pick up the slack and participate in the budgeting process.
b. be motivated by the budget.
c. spend little time on the budgeting process.
d. convert the budget to a shorter more reasonable time period.
Answer: c Difficulty: 2 Objective: 2
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64. The time coverage of a budget should be
a. one year.
b. guided by the purpose of the budget.
c. cover design through manufacture and sale of the product.
d. shorter rather than longer.
69. The operating budget process generally concludes with the preparation of the
a. production budget.
b. distribution budget.
c. research and development budget.
d. budgeted income statement.
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70. Financial budgets include the
a. capital expenditures budget.
b. production budget.
c. marketing costs budget.
d. administrative costs budget.
Answer: a Difficulty: 1 Objective: 3
71. __________ includes a budgeted statement of cash flows and a budgeted balance sheet.
a. An annual report
b. The financial budget
c. The operating budget
d. The capital expenditures budget
Answer: b Difficulty: 1 Objective: 3
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76. The sales forecast should be PRIMARILY based on
a. statistical analysis.
b. input from sales managers and sales representatives.
c. production capacity.
d. input from the board of directors.
80. The number of units in the sales budget and the production budget may differ because
of a change in
a. finished goods inventory levels.
b. overhead charges.
c. direct material inventory levels.
d. sales returns and allowances.
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82. Budgeted production depends on
a. the direct materials usage budget and direct material purchases budget.
b. the direct manufacturing labor budget.
c. budgeted sales and expected changes in inventory levels.
d. the manufacturing overhead costs budget.
Answer: c Difficulty: 2 Objective: 3
85. Individual budgeted amounts included in the manufacturing overhead costs budget are
based on input from
a. operating personnel.
b. costs incurred in prior years.
c. cost changes expected in the future.
d. all of the above.
Answer: d Difficulty: 3 Objective: 3
86. The manufacturing overhead costs budget includes budgeted amounts for
a. direct materials.
b. direct manufacturing labor.
c. indirect manufacturing labor.
d. all of the above.
Answer: c Difficulty: 3 Objective: 3
87. Budgeted manufacturing overhead costs include all types of factory expenses EXCEPT
a. fixed items such as depreciation of manufacturing machinery.
b. variable items such as plant supplies.
c. indirect labor such as the salary of the plant supervisor.
d. direct labor and direct materials.
Answer: d Difficulty: 2 Objective: 3
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88. Schultz Company expects to manufacture and sell 30,000 baskets in 20x4 for $6 each.
There are 3,000 baskets in beginning finished goods inventory with target ending
inventory of 4,000 baskets. The company keeps no work-in-process inventory. What
amount of sales revenue will be reported on the 20x4 budgeted income statement?
a. $174,000
b. $180,000
c. $186,000
d. $204,000
Answer: b Difficulty: 3 Objective: 3
30,000 x $6 = $180,000
89. DeArmond Corporation has budgeted sales of 18,000 units, target ending finished
goods inventory of 3,000 units, and beginning finished goods inventory of 900 units.
How many units should be produced next year?
a. 21,900 units
b. 20,100 units
c. 15,900 units
d. 18,000 units
90. For next year, Galliart, Inc., has budgeted sales of 60,000 units, target ending finished
goods inventory of 3,000 units, and beginning finished goods inventory of 1,800 units.
All other inventories are zero. How many units should be produced next year?
a. 58,800 units
b. 60,000 units
c. 61,200 units
d. 64,800 units
91. Wilgers Company has budgeted sales volume of 30,000 units and budgeted production
of 27,000 units. 5,000 units are in beginning finished goods inventory. How many
units are targeted for ending finished goods inventory?
a. 5,000 units
b. 8,000 units
c. 3,000 units
d. 2,000 units
Answer: d Difficulty: 2 Objective: 3
5,000 + 27,000 - 30,000 = 2,000
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 92 THROUGH 95.
Marguerite, Inc., expects to manufacture and sell 20,000 pool cues for $12.00 each. Direct
materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is
$0.80 per pool cue. The following inventory levels apply to 20x4:
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 96 THROUGH 99.
Daniel, Inc. expects to manufacture and sell 6,000 ceramic vases for $20 each. Direct
materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3
per vase. The following inventory levels apply to 20x4:
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 100 THROUGH 102.
The following information pertains to the January operating budget for Casey Corporation, a
retailer:
Budgeted sales are $200,000 for January
Collections of sales are 50% in the month of sale and 50% the next month
Cost of goods sold averages 70% of sales
Merchandise purchases total $150,000 in January
Marketing costs are $3,000 each month
Distribution costs are $5,000 each month
Administrative costs are $10,000 each month
100. For January, budgeted gross margin is
a. $100,000.
b. $140,000.
c. $60,000.
d. $50,000.
101. For January, the amount budgeted for the nonmanufacturing costs budget is
a. $78,000.
b. $10,000.
c. $168,000.
d. $18,000.
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 103 THROUGH 106.
Konrade, Inc., expects to manufacture and sell 30,000 athletic uniforms for $80 each in 20x4.
Direct materials costs are $20, direct manufacturing labor is $8, and manufacturing overhead
is $6 for each uniform. The following inventory levels apply to 20x4:
Beginning inventory Ending inventory
Direct materials 12,000 units 9,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 6,000 units 5,000 units
103. How many uniforms need to be produced in 20x4?
a. 26,000 uniforms
b. 34,000 uniforms
c. 30,000 uniforms
d. 29,000 uniforms
Answer: d Difficulty: 2 Objective: 3
30,000 + 5,000 - 6,000 = 29,000 uniforms
104. What is the amount budgeted for direct material purchases in 20x4?
a. $520,000
b. $600,000
c. $580,000
d. $760,000
Answer: a Difficulty: 3 Objective: 3
29,000 units + 9,000 - 12,000 = Purchases 26,000 x $20 = $520,000
105. What is the amount budgeted for cost of goods manufactured in 20x4?
a. $1,020,000
b. $986,000
c. $1,156,000
d. $1,190,000
Answer: b Difficulty: 3 Objective: 3
29,000 x ($20 + $8 + $6) = $986,000
106. What is the amount budgeted for cost of goods sold in 20x4?
a. $1,156,000
b. $986,000
c. $1,020,000
d. $2,400,000
Answer: c Difficulty: 3 Objective: 3
30,000 x ($20 + $8 + $6) = $1,020,000
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 107 AND 108.
Furniture, Inc., estimates the following number of mattress sales for the first four months of
20x4:
Month Sales
January 5,000
February 7,000
March 6,500
April 8,000
Finished goods inventory at the end of December is 1,500 units. Target ending finished
goods inventory is 30% of next month's sales.
107. How many mattresses need to be produced in January 20x4?
a. 4,400 mattresses
b. 5,600 mattresses
c. 6,500 mattresses
d. 7,100 mattresses
Answer: b Difficulty: 2 Objective: 3
5,000 + (7,000 x 0.30) - $1,500 = 5,600 mattresses
108. How many mattresses need to be produced in the first quarter (January, February,
March) of 20x4?
a. 18,500 mattresses
b. 19,400 mattresses
c. 20,900 mattresses
d. 22,400 mattresses
Answer: b Difficulty: 2 Objective: 3
5,000 + 7,000 + 6,500 + (8,000 x 0.30) - 1,500 = 19,400 mattresses
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 109 AND 110.
Wallace Company provides the following data for next year:
Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 144,000
The gross profit rate is 40% of sales. Inventory at the end of December is $21,600 and target
ending inventory levels are 30% of next month's sales, stated at cost.
109. Purchases budgeted for January total
a. $130,800.
b. $72,000.
c. $69,840.
d. $74,160.
Answer: c Difficulty: 3 Objective: 3
($120,000 x 0.6) + ($108,000 x 0.6 x 0.3) - $21,600 = $69,840
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110. Purchases budgeted for February total
a. $69,120.
b. $60,480.
c. $115,200.
d. $64,800.
112. __________ utilizes a “what-if” technique that examines how results will change if the
originally predicted data changes.
a. A sales forecast
b. A sensitivity analysis
c. A pro forma financial statement
d. The statement of cash flows
Answer: b Difficulty: 1 Objective: 4
113. When performing a sensitivity analysis, if the selling price per unit is increased, then
the
a. per unit fixed administrative costs will increase.
b. per unit direct materials purchase price will increase.
c. total volume of sales will increase.
d. total costs for sales commissions and other nonmanufacturing variable costs will
increase.
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 114 THROUGH 116.
Ossmann Enterprises reports year-end information from 20x4 as follows:
Sales (80,000 units) $480,000
Cost of goods sold 320,000
Gross margin 160,000
Operating expenses 130,000
Operating income $ 30,000
Ossmann is developing the 20x5 budget. In 20x5 the company would like to increase selling
prices by 8%, and as a result expects a decrease in sales volume of 10%. All other operating
expenses are expected to remain constant. Assume that COGS is a variable cost and that
operating expenses are a fixed cost.
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 117 THROUGH 119.
Katie Enterprises reports the year-end information from 20x4 as follows:
Sales (70,000 units) $560,000
Cost of goods sold 210,000
Gross margin 350,000
Operating expenses 200,000
Operating income $ 150,000
Katie is developing the 20x5 budget. In 20x5 the company would like to increase selling
prices by 4%, and as a result expects a decrease in sales volume of 10%. All other operating
expenses are expected to remain constant. Assume that COGS is a variable cost and that
operating expenses are a fixed cost.
117. What is budgeted sales for 20x5?
a. $582,400
b. $524,160
c. $504,000
d. $560,000
Answer: b Difficulty: 3 Objective: 4
$560,000 x 1.04 x 0.90 = $524,160
118. What is budgeted cost of goods sold for 20x5?
a. $189,000
b. $196,560
c. $218,400
d. $210,000
Answer: a Difficulty: 3 Objective: 4
$210,000 x 0.90 = $189,000
119. Should Katie increase the selling price in 20x5?
a. Yes, because sales revenue is increased for 20x5.
b. Yes, because operating income is increased for 20x5.
c. No, because sales volume decreases for 20x5.
d. No, because gross margin decreases for 20x5.
Answer: d Difficulty: 3 Objective: 4
$524,160 - $189,000 = $335,160 gross margin - $200,000 = $135,160 operating
income. No, because there would be a decrease in gross margin and operating income
compared to 20x4.
120. The Japanese use the term kaizen when referring to
a. scarce resources.
b. pro forma financial statements.
c. continuous improvement.
d. the sales forecast.
Answer: c Difficulty: 1 Objective: 5
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121. Kaizen refers to incorporating cost reductions
a. in each successive budgeting period.
b. in each successive sales forecast.
c. in all customer service centers.
d. in all of the above.
Answer: a Difficulty: 2 Objective: 5
122. All of the following are encouraged with kaizen budgeting EXCEPT
a. better interactions with suppliers.
b. large discontinuous improvements.
c. cost reductions during manufacturing.
d. systematic monthly cost reductions.
Chapter 6 Page 23
125. The use of activity-based budgeting is growing because of
a. the increased use of activity-based costing.
b. the increased use of kaizen costing.
c. increases in work-in-process inventory.
d. increases in direct materials inventory.
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131. Activity-based budgeting includes all the following steps EXCEPT
a. determining demands for activities from sales and production targets.
b. computing the cost of performing activities.
c. determining a separate cost-driver rate for each department.
d. describing the budget as costs of activities rather than costs of functions.
134. The regional sales office manager of a national firm is MOST likely responsible for
a. a revenue center.
b. an investment center.
c. a cost center.
d. a profit center.
135. A regional manager of a restaurant chain in charge of finding additional locations for
expansion is MOST likely responsible for
a. a revenue center.
b. an investment center.
c. a cost center.
d. a profit center.
136. The manager of a hobby store that is part of a chain of stores is MOST likely
responsible for
a. a revenue center.
b. an investment center.
c. a cost center.
d. a profit center.
138. A manager of a profit center is responsible for all of the following EXCEPT
a. sales revenue.
b. the cost of merchandise purchased for resale.
c. expanding into new geographic areas.
d. selling and marketing costs.
139. A controllable cost is any cost that can be _________ by a responsibility center
manager for a period of time.
a. controlled
b. influenced
c. segregated
d. excluded
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143. Building in budgetary slack includes
a. overestimating budgeted revenues.
b. underestimating budgeted costs.
c. making budgeted targets more easily achievable.
d. all of the above.
145. Financial analysts use the projected cash flow statement to do all of the following
EXCEPT
a. plan for when excess cash is generated.
b. plan for short-term cash investments.
c. project cash shortages and plan a strategy to deal with the shortages.
d. project depreciation expense.
147. The cash budget is a schedule of expected cash receipts and disbursements that
a. requires an aging of accounts receivable and accounts payable.
b. is a self-liquidating cycle.
c. is prepared immediately after the sales forecast.
d. predicts the effect on the cash position at given levels of operations.
Chapter 6 Page 27
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 148 THROUGH 151.
The following information pertains to Tiffany Company:
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151. What is the ending cash balance for March?
a. ($25,000)
b. $3,000
c. $3,200
d. $3,800
Answer: d Difficulty: 2 Objective: A
$4,000 + $43,000 - $44,200 + $1,000 = $3,800
Chapter 6 Page 29
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 155 THROUGH 157.
Bear Company has the following information:
Chapter 6 Page 30
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 158 THROUGH 163.
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).
158. For January, budgeted cash collections are
a. $20,000.
b. $60,000.
c. $80,000.
d. none of the above.
Chapter 6 Page 31
162. For January, budgeted cash payments for purchases are
a. $14,000.
b. $70,000.
c. $60,000
d. none of the above.
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EXERCISES AND PROBLEMS
164. Spirit Company sells three products with the following seasonal sales pattern:
Products
Quarter A B C
1 40% 30% 10%
2 30% 20% 40%
3 20% 20% 40%
4 10% 30% 10%
The annual sales budget shows forecasts for the different products and their expected
selling price per unit as follows:
Product Units Selling Price
A 50,000 $4
B 125,000 10
C 62,500 6
Required:
Prepare a sales budget, in units and dollars, by quarters for the company for the coming
year.
Product B:
Sales (units) 37,500 25,000 25,000 37,500 125,000
Price x $10 x $10 x $10 x $10 x $10
Sales ($) $375,000 $250,000 $250,000 $375,000
$1,250,000
Product C:
Sales (units) 6,250 25,000 25,000 6,250 62,500
Price x $6 x $6 x $6 x $6 x $6
Sales ($) $37,500 $150,000 $150,000 $37,500 $375,000
Difficulty: 2 Objective: 3
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165. Lubriderm Corporation has the following budgeted sales for the next six-month period:
Month Unit Sales
June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000
There were 30,000 units of finished goods in inventory at the beginning of June. Plans
are to have an inventory of finished products that equal 20% of the unit sales for the
next month.
Five pounds of materials are required for each unit produced. Each pound of material
costs $8. Inventory levels for materials are equal to 30% of the needs for the next
month. Materials inventory on June 1 was 15,000 pounds.
Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give
total purchases in both pounds and dollars for each month.
Answer:
a. July August September
Budgeted sales 120,000 210,000 150,000
Add: Required ending inventory 42,000 30,000 36,000
Total inventory requirements 162,000 240,000 186,000
Less: Beginning inventory 24,000 42,000 30,000
Budgeted production 138,000 198,000 156,000
b. July August September
Production in units 138,000 198,000 156,000
Targeted ending inventory in lbs. *
297,000 234,000 **
252,000
Production needs in lbs. ***
690,000 990,000 780,000
Total requirements in lbs. 987,000 1,224,000 1,032,000
Less: Beginning inventory in lbs. ****
207,000 297,000 234,000
Purchases needed in lbs. 780,000 927,000 798,000
Cost ($8 per lb.) x $8 x $8 x $8
Total material purchases $6,240,000 $7,416,000 $6,384,000
*
0.3 times next month's needs
**
(180,000 + 24,000 - 36,000) times 5 lbs. x 0.3
***
5 lbs. times units to be produced
****
(690,000 x .3) = 207,000 lbs.
Difficulty: 3 Objective: 3
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166. Gerdie Company has the following information:
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next
month's cost of sales.
Required:
Prepare a purchases budget for April through June.
Difficulty: 2 Objective: 3
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167. Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000
units of various sizes. Historically, the average frame requires four feet of framing, one
square foot of glass, and two square feet of backing. Beginning inventory includes
1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current
prices are $0.30 per foot of framing, $6.00 per square foot of glass, and $2.25 per
square foot of backing. Ending inventory should be 150% of beginning inventory.
Purchases are paid for in the month acquired.
Required:
Answer:
a. Framing Glass Backing
Desired ending inventory* 2,250 750 750
Production needs (10,000 units)** 40,000 10,000 20,000
Total $119,287.50
**10,000 x 4 = 40,000
10,000 x 1 = 10,000
10,000 x 2 = 20,000
Difficulty: 2 Objective: 3
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168. Michelle Enterprises reports the year-end information from 20x2 as follows:
Michelle is developing the 20x3 budget. In 20x3 the company would like to increase
selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost
of goods sold as a percentage of sales is expected to increase to 62%. Other than
depreciation, all operating costs are variable.
Required:
Answer:
Michelle Enterprises
Budgeted Income Statement
For the Year 20x3
Difficulty: 2 Objective: 4
Chapter 6 Page 37
169. Brad Corporation is using the kaizen approach to budgeting for 20x5. The budgeted
income statement for January 20x5 is as follows:
Sales (240,000 units) $720,000
Less: Cost of goods sold 480,000
Gross margin 240,000
Operating expenses (includes $64,000 of fixed costs) 192,000
Net income $ 48,000
Under the kaizen approach, cost of goods sold and variable operating expenses are
budgeted to decline by 1% per month.
Required:
Answer:
Sales $720,000
Less: Cost of goods sold ($480,000 x 0.99 x 0.99) 470,448
Gross margin 249,552
Operating expenses [($128,000 x 0.99 x 0.99) + $64,000] 189,453
Net income $ 60,099
Difficulty: 2 Objective: 5
Chapter 6 Page 38
170. Allscott Company is developing its budgets for 20x5 and, for the first time, will use the
kaizen approach. The initial 20x5 income statement, based on static data from 20x4, is
as follows:
Selling prices for 20x5 are expected to increase by 8%, and sales volume in units will
decrease by 10%. The cost of goods sold as estimated by the kaizen approach will
decline by 10% per unit. Other than depreciation, all other operating costs are expected
to decline by 5%.
Required:
Answer:
Difficulty: 2 Objectives: 4, 5
Chapter 6 Page 39
171. Russell Company has the following projected account balances for June 30, 20x3:
Accounts payable $40,000 Sales $800,000
Accounts receivable 100,000 Capital stock 400,000
Depreciation, factory 24,000 Retained earnings ?
Inventories (5/31 & 6/30) 180,000 Cash 56,000
Direct materials used 200,000 Equipment, net 240,000
Office salaries 80,000 Buildings, net 400,000
Insurance, factory 4,000 Utilities, factory 16,000
Plant wages 140,000 Selling expenses 60,000
Bonds payable 160,000 Maintenance, factory 28,000
Required:
a. Prepare a budgeted income statement for June 20x3.
b. Prepare a budgeted balance sheet as of June 30, 20x3.
Answer: Russell Company
a. Income Statement
For the Month of June 20x3
Sales $800,000
Cost of goods sold:
Materials used $200,000
Wages 140,000
Depreciation 24,000
Insurance 4,000
Maintenance 28,000
Utilities 16,000 412,000
Gross profit $388,000
Operating expenses:
Selling expenses $60,000
Office salaries 80,000 140,000
Net income $248,000
b. Russell Company
Balance Sheet
June 30, 20x3
Assets: Liabilities and Owners’ Equity:
Cash $ 56,000 Accounts payable $ 40,000
Accounts receivable 100,000 Bonds payable 160,000
Inventories 180,000 Capital stock 400,000
Equipment, net 240,000 Retained earnings* 376,000
Buildings, net 400,000
Total $976,000 Total $976,000
*$976,000 – ($40,000 + $160,000 + $400,000) = $376,000
Difficulty: 2 Objectives: 3, A
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172. Duffy Corporation has prepared the following sales budget:
Collections are 40% in the month of sale, 45% in the month following the sale, and
10% two months following the sale. The remaining 5% is expected to be uncollectible.
Required:
Answer:
Difficulty: 2 Objective: A
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173. The following information pertains to Amigo Corporation:
Required:
Answer:
Difficulty: 2 Objective: A
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CRITICAL THINKING
Answer:
A well-prepared operating budget can become the performance standard against which
firms can compare the actual results.
Difficulty: 2 Objective: 1
175. Bob and Dale have just purchased a small honey manufacturing company that was
having financial difficulties. After a brief operating period, they decided that the
company's main problem was lack of any financial planning. The company made a
good product and market potential was great.
Required:
Explain why a company needs a good budgeting plan. Specifically address the need for
a master budget.
Answer:
Difficulty: 2 Objective: 1
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176. Describe operating and financial budgets and give at least two examples of each
discussed in the textbook.
Answer:
Operating budgets specify the expected outcomes of any selling, manufacturing,
purchasing, labor management, R&D, marketing, distribution, customer service, 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 revenues budget, production budget, direct
materials costs budget, direct manufacturing labor costs budget, manufacturing
overhead budget, and budgets for R&D, marketing, distribution, customer service, and
administrative activities.
Financial budgets are used to evaluate the financial consequences of a proposed
decision.
Examples of financial budgets include the capital expenditures budget, cash budget,
budgeted balance sheet, and the budgeted statement of cash flows.
Difficulty: 2 Objective: 3
177. Discuss the importance of the sales forecast and items that influence its accuracy.
Answer:
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, and developments in technology. Each of these items affects individual
products or product lines and are quantified and aggregated to obtain the sales forecast.
Difficulty: 2 Objective: 3
178. Distinguish between controllable and uncontrollable aspects of revenue and costs. Can
a manager totally control all revenue and costs? Why or why not?
Answer:
Difficulty: 2 Objective: 7
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179. Describe some of the drawbacks of using the operating budget as a control device.
Answer:
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.
Difficulty: 2 Objective: 8
180. 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?
Answer:
Budget slack occurs when subordinates (a) ask for excess resources above and beyond what
they need to accomplish budget objectives and (b) 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 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.
Difficulty: 2 Objective: 8
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