Multiple Choice: Chapter Twenty-One
1. With the top-down budgeting approach the budget:
a. Process begins with the issuance of general budget guidelines by top management or a budget committee.
b. Developmental process centers on lower-level employee participation.
c. Is imposed on lower-level personnel who do not become involved in the budget construction process in a significant way.
d. Is not characterized by sound budget preparation practices.
Answerc. The budget is imposed on lower-level personnel who rarely become involved in the budget construction process. One advantage of the top-down approach is that it offers the advantage of sound budget preparation in that it reflects the overall goals of an organization and is prepared by those who have the best company-wide view of operations. Bottom-up budget development is characterized by lower-level employee participation and begins with the issuance of general budget guidelines by top management or a budget committee.
2. There are a number of benefits associated with budgeting. Which of the following is not frequently cited as a benefit of the budget process?
a. Budgets can help identify production bottlenecks.
b. Budgets are useful tools in performance evaluation.
c. Budgets help provide an early warning for periods during which cash may be in short supply.
d. Budgets eliminate the opportunity for slack or padding within an organization.
3. Which of the following statements is incorrect?
a. The cash budget is an element of a master budget.
b. The direct labor budget is specifically dependent on the production budget.
c. The budgeting process would normally begin with preparation of a sales budget.
d. A continuous budget is feasible only for sales projections.
4. Another name for "pro-forma financial statements" would be:
a. Corrected financial statements.
b. Historical-cost financial statements.
c. Projected financial statements.
d. Computer-generated financial statements.
Answerc. Pro forma means "as if" or projected financial statements. Historical-cost financial statements pertain to past transactions and events. Pro forma is not the same as corrected. Pro forma financial statements can be manually or computer prepared.
5. Roland Corporation budgeted April sales at 2,500 units. The beginning finished goods inventory consisted of 2,000 units, however, Roland desired to have 2,500 finished units on hand by the end of April. Direct materials inventory consisted of 800 beginning units and Roland desired an ending balance of 1,400 units. Each finished unit required 2 units of direct material and 1 hour of direct labor. Direct materials cost $3.00 per unit, direct labor cost $11.00 per hour, and factory overhead is applied at $7.00 per direct labor hour. Roland has no work in process at the beginning or end of the month. How much is the anticipated cost of goods manufactured for April?
Answerc. $72,000. Total production is 3,000 units; 2,500 sold + 500 increase in finished goods inventory (2,500 - 2,000). The 3,000 units produced require 6,000 units (3,000 X 2) of raw materials. These raw materials cost $3.00 per unit or $18,000 (6,000 units X $3.00 each). Direct labor costs amount to $33,000 (3,000 units X $11.00 per unit). Factory overhead equals $21,000 (3,000 hours X $7.00). Total cost, therefore, is $72,000 ($18,000 + $33,000 + $21,000).
6. Bright Company manufactures mirrors which require 8 square feet of glass per mirror. Bright anticipates production of 500 units in January, 700 units in February, and 1,700 units in March. Bright maintains glass on hand equal to 40% of the following month's anticipated production requirements. The glass costs $3 per square foot. At the beginning of January, only 500 square feet of glass is on hand. How many square feet of glass should Bright plan to buy in February?
a. 2,200 square feet
b. 5,440 square feet
c. 8,800 square feet
d. 11,040 square feet
Answerc. 8,800. The February beginning inventory in square feet should equal 2,240. This is based on 40% of February's anticipated production; February's anticipated production of 700 units requires 5,600 square feet of glass (700 units X 8 feet per unit). February's ending inventory should equal 5,440 square feet of glass. This is 40% of March's anticipated needs (1,700 units X 8 feet per unit X 40%). The necessary units available during February should equal 11,040 square feet, or the ending inventory desired of 5,440 + the 5,600 square feet required for February production. Of the 11,040 square feet which need to be made available during February, 2,240 square feet are in beginning inventory, leaving a need to purchase 8,800 additional feet in February.
7. Hanson anticipates unit sales during the first three months of the upcoming year at 5,000 for January, 4,000 for February, and 8,000 for March. If Hanson wishes to maintain its finished goods inventory at 80% of the following month's sales, and the January 1 finished goods inventory consisted of 1,000 units, how many units must Hanson produce in January?
Answerc. 7,200. The beginning inventory of 1,000 units + production of 7,200 units makes 8,200 units available. Subtracting the 5,000 units sold would leave 3,200 units in ending finished goods inventory. This is equal to 80% of February's anticipated needs (4,000 X 80% = 3,200).
8. O'Connor Corporation had December sales of $30,000. Anticipated sales during January are $40,000, and February sales are projected at $37,500. 40% of sales are cash sales, the remainder are on account. Sales on account are expected to be collected 50% in the month of sale, 45% in the month following the month of sale, and 5% ultimately prove uncollectible. How much are anticipated cash collections during the month of February?
Answerd. $37,050. January sales collected in February are $10,800 ($40,000 X 60% X 45%). February cash sales are $15,000 ($37,500 X 40%). February credit sales collected in February are $11,250 ($37,500 X 60% X 50%). Total cash collections are $37,050 ($10,800 + $15,000 + $11,250).
9. Scanlon Corporation has estimated its activity for April as follows:
|Gross profit (based on sales)||
|Increase in accounts receivable during month||
|Increase in finished goods inventory during month||
|Total selling and administrative costs||
|Depreciation included in selling and administrative costs||
Scanlon has no raw material or work in process inventory at the beginning or end of April. On the basis of the above, what are estimated cash disbursements for April?
Expenditure for cost of goods sold ($800,000 X 60%) = $480,000
Additional expenditure to increase inventory = $30,000
Cash selling and administrative costs ($80,000 - $25,000) = $55,000
$480,000 + $30,000 + $55,000 = $565,000
10. Blinder Corporation projected the following:
|Fixed manufacturing costs||
Blinder projects variable manufacturing costs of 40% of sales. Assuming no change in inventory, what will be the projected cost of goods sold?