Master Budget
Easy Practice Test
Easy Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. Which order gives the normal order used to prepare a master operating budget?
a. sales, balance sheet, materials purchases, cash budget
b. production, materials purchases, selling, sales
c. production, balance sheet, income statement, cash budget
d. sales, production, cash disbursements, cash budget
Answer
D. The master budget always begins with the sales forecast. Using the sales forecast a production unit forecast is done. Once production units are forecasted, the cost of these units can be budgeted. Period costs are budgeted after product costs. Cash flows from customers and payment for inventory are forecasted and then the income statement and balance sheet are budgeted.
2. To determine the quantity of units that should be produced, the company
a. starts with raw materials on hand, adds purchases, and produces just enough to leave enough material on hand for next period
b. starts with units to be sold, deducts the finished goods already on hand, and adds the ending finished goods required for next period
c. starts with sales and adds the finished good units required for next period
d. starts with units produced last period and adds next periods requirements
Answer
B. Budgeted units to be produced for the period is equal to units sold plus ending inventory of finished goods less beginning inventory of finished goods. Beginning inventory does not have to be made this period and ending inventory is the extra that has to be produced to have some left at the end of the period.
3. Which of the following statements is what happens when a budget is prepared?
a. sales in units are added to units to be produced
b. sales in units are added to beginning finished goods
c. sales in units are added to ending finished goods
d. ending finished goods is based on the next months production
Answer
C. When preparing a production budget, sales in units are added to ending finished goods and then you subtract beginning finished goods. Ending finished goods is typically based on next months sales, not production. (d.)
| Ending | Beginning | |
| Raw materials | 15,000 | 22,000 |
| Finished goods | 8,000 | 12,000 |
The units required to be produced this year is
b. 46,000
c. 54,000
d. 57,000
Answer
B. Units to be produced = sales + ending FG inventory – beginning FG inventory
50,000 +8,000 – 12,000 = 46,000
5. A company has a manufacturing overhead rate of $5 per direct labor hour. Total fixed annual budgeted manufacturing overhead is $240,000. Annual depreciation expense included in manufacturing overhead is $22,000. Total budgeted disbursements for manufacturing overhead for the month when 20,000 direct labor hours are required is
a. $100,000
b. $118,167
c. $218,000
d. $119,667
Answer
B. Total manufacturing overhead is calculated by total FC + VC per activity x activity
VC = $5 x 20,000 = $100,000
Total budgeted M O/H = $118,167
6. A bank officer requests the company’s cash budget in order to determine if
a. the company will be profitable
b. the company will collect all of its accounts receivable
c. the company will be able to repay the line of credit
d. the company paid a cash dividend in the past
Answer
C. The bank is providing the company with short term loans to cover cash flow shortages for a period of time. The cash budget projects the cash balance at the end of the period and is used to determine if there may be excess cash to repay the loans. Positive income does not mean that cash flow is positive (a). Accounts receivable collections are part of the cash budget but the cash budget is not a procedure for collecting receivables. The loan officer is concerned about future cash flows not past cash flows.
7. A sales budget is not required for
a. the production budget
b. the manufacturing overhead budget
c. the direct labor budget
d. none of the above
Answer
D. The sales budget is required in order to prepare all the budgets listed above. Units to be sold is the first step in the production budget (a.). From the production budget, product costs are budgeted (b. & c.)
8. Of the budgets listed below, which budget is prepared last?
a. cash budget
b. income statement
c. balance sheet
d. capital expenditures
Answer
A. The cash budget is prepared after budgeting all other product costs, expense budgets and capital expenditure budgets. The income statement must be prepared before the balance sheet in order to determine projected retained earnings and estimated tax information. The projected balance sheet is prepared last.
9. A cash budget is not prepared until after the company has
a. prepared the projected financial statements
b. prepared the production budget
c. knows it can obtain short term financing at a bank
d. prepared the projected balance sheet
Answer
B. The budgeting process always begins with the sales forecast. Using the sales forecast a production unit forecast is done. Once production units are forecasted, the cost of these units can be budgeted. Period costs are budgeted after product costs. The cash budget is a summary of all the other budgets and is prepared just before the projected financial statements. The projected balance sheet is prepared using some items that become part of the cash budget.
10. The cash collections budget is
a. only prepared after the materials requirements budget
b. prepared after the sales budget
c. prepared after the cash budget
d. none of the above
Answer
B. The sales budget and an estimate of when accounts receivable will be collected are the only requirements to be able to do a cash collections budget. It can be prepared any time after the sales budget and before the cash budget because it becomes part of the cash budget.
11. A company sells a single product for $9 per unit and has expected unit sales for the first six months of the year of 10,000; 8,000; 12,000; 7,000; 11,000; and 10,000. Management has determined that finished goods inventories should be 40% of the next months sales. At the end of last year, 5,500 units of finished goods were on hand,
Each unit uses 3 yards of wire at a cost of $1.10 per yard. At the end of last year, 18,000 yards of wire was on hand. The company desires to keep raw materials inventory at 50% of next months requirements for production. Suppliers are paid 15% in the current month and 85% in the month following purchase. Accounts Receivable are collected 20% in the current month and 80% in the next month. Accounts Payable on December 31st was $40,250. Accounts receivable at the end of the year was $84,000.
For the first 3 months of the year, prepare the following
b Production budget
c. Material purchases budget – units and dollars
d. Cash disbursements budget
e. Cash receipts budget
Answer
A. Sales Budget
| January | February | March | |
| Sales in units | 10,000 | 8,000 | 12,000 |
| x Price per unit | $9 | $9 | $9 |
| = Total sales dollars | $90,000 | $72,000 | $108,000 |
B. Production Budget
| January | February | March | |
| Budgeted Sales in Units | 10,000 | 8,000 | 12,000 |
| + Desired Ending Inventory in Units | 3,200 | 4,800 | 2,800 * |
| – Beginning Inventory in Units | (5,500) | (3,200) | (4,800) |
| = Required Production in Units | 7,700 | 9,600 | 10,000 |
* April sales of 7,000 x 40% = 2,800 ending inventory for March
Beginning inventory is last month’s ending inventory
C. Purchases Budget
| January | February | March | |
| Required Production in Units | 7,700 | 9,600 | 10,000 |
| X Quantity Required Per Unit (yards) | 3 | 3 | 3 |
| = Units of Raw Mat. for Production | 23,100 | 28,800 | 30,000 |
| + Desired Ending Inventory of Raw Mat | 14,400 | 15,000 | 12,900 ** |
| – Beginning Inventory of Raw Materials | (18,000) | (14,400) | (15,000) |
| = Raw Materials to be Purchased – units | 19,500 | 29,400 | 27,900 |
| X cost per yard | $1.10 | $1.10 | $1.10 |
| = Raw materials dollars – purchased $21,450 | $21,450 | $ 32,340 | $30,690 |
** April: Sales 7,000
+ Ending FG 4,400 40% x 11,000 May sales
– Beginning FG (2,800) from March ending FG
= To produce 8,600
X 3 for each ____3____
Required for production 25,800 x 50% = 12,900 Ending inventory
D. Cash Disbursements Budget:
Amounts Paid In:
| Dollars owed | January | February | March | |
| December A/P: | 40,250 | all | ||
| January purchases | 21,450 | 15% | 85% | |
| February purchases | 32,340 | 15% | 85% | |
| March purchases | 30,690 | 15% |
Amounts Paid In:
| Dollars owed | January | February | March | |
| December A/P: | 40,250 | 40,250 | ||
| January purchases | 21,450 | 3,217.50 | 18,232.50 | |
| February purchases | 32,340 | 4,851 | 27,489 | |
| March purchases | 30,690 | 4,603.50 | ||
| Total Disbursements: | $43,467.50 | $23,083.50 | $32,092.50 |
E. Cash Receipts Budget:
Amounts Paid In:
| Dollars owed | January | February | March | |
| December A/R: | 84,000 | all | ||
| January sales | 90,000 | 20% | 80% | |
| February sales | 72,000 | 20% | 80% | |
| March sales | 108,000 | 20% |
Amounts Paid In:
| Dollars owed | January | February | March | |
| December A/R: | 84,000 | 84,000 | ||
| January sales | 90,000 | 18,000 | 72,000 | |
| February sales | 72,000 | 14,400 | 57,600 | |
| March sales | 108,000 | 21,600 | ||
| Total Cash Collections: | $102,000 | $86,400 | $79,200 |
12. Individual budgets have been prepared and provide the following information for the next two months respectively: Cash disbursements for inventory are expected to be $128,000 and $164,000; selling and administrative expenses each month are expected to be $89,000 which includes $7000 of depreciation expense; cash collections are expected to be $228,000 and $299,000; Equipment purchases of $11,000 are expected to be paid in the second month; Disbursements for other product costs (labor and overhead) are expected to be $76,000 and $81,000. The company declared a dividend of $10,000 in the first month which will be paid the third month of the year. The company has a line of credit available with the bank and may borrow in $1,000 increments at an annual interest rate of 12%. Interest is computed at the end of the current month on the outstanding balance including this month’s borrowings. Interest is paid the following month. The company desires a minimum cash balance of $25,000. The cash balance at the beginning of the first month was $25,890. The company owed $23,000 on the line of credit at the beginning of the first month.
Answer
| Month 1 | Month 2 | |
| Cash Balance, Beginning | $25,890 | $25,660 |
| + Receipts for the Period (Cash Collections) | $228,000 | $299,000 |
| = Total Cash Available | $253,890 | $324,660 |
| – Disbursements for Material (Cash Disb.) | $128,000 | $164,000 |
| – Disbursements for Labor and O/H | $76,000 | $81,000 |
| – Disbursements for Selling and Administrative | $82,000 | $82,000 |
| = Cash Available | ($32,110) | ($2,340) |
| – Expenditures for Property/Plant/Equipment | 0 | ($11,000) |
| – Dividends Paid to Shareholders | 0 | 0 |
| = Excess(Deficiency) of cash | ($32,110) | ($13,340) |
| + Borrowings | $58,000 | $40,000 |
| – Repayment of Borrowings | 0 | 0 |
| – Interest Expense Paid | ($230) | ($810) |
| = Cash Balance, Ending | $25,660 | $25,850 |
Month 1 interest – Interest expense last month, paid this month
23,000 x 12% x 1/12 = $230
Month 2 interest -Owed last month $23,000 + 58,000 = $81,000 x12% x 1/12 = $810
Budgeted Sales
January $50,000
February $60,000
March $40,000
April $45,000
Raw Materials, 12/31 $ 5,000
Finished Goods, 12/31 $35,000
Accounts Payable, 12/31 $12,000
Accounts payable are paid 22% in the current month and 78% in the following month.
Prepare the following for January and February:
A. A production budget
B. A materials budget in units and dollars
C. A cash disbursements budget for raw materials
Answer
You have to determine sales in units to use for the production budget:
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January
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February
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March
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| Sales $ |
$50,000
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$60,000
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$40,000
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| / Cost per unit |
$20
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$20
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$20
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| Sales in units |
2,500
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3,000
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2,000
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A. Production Budget
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January
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February
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March
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| Budgeted Sales in Units |
2,500
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3,000
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2,000
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| + Desired Ending Inventory in Units |
1,800
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1,200
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1,350
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| – Beginning Inventory in Units |
(1,750)
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(1,800)
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(1,200)
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| = Required Production in Units |
2,550
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2,400
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2,150
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January beginning inventory is December ending $35,000 / $20 = 1,750 units
April sales of $45,000 / $20 = 2,250 units x 60% = 1,350 is March ending inventory
Beginning inventory is last months ending
March is done because it must be used to determine February ending RM inventory
B. Materials Budget
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January
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February
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March
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| Required Production in Units |
2,550
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2,400
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2,150
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| X Quantity Required Per Unit (pounds) |
4
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4
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4
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| = Units of Raw Mat. for Production |
10,200
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9,600
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8,600
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| + Desired Ending Inventory of Raw Mat. |
4,800
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4,300
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| – Beginning Inventory of Raw aterials |
(4,000)
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(4,800)
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| = Raw Materials to be Purchased – units |
11,000
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9,100
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| X cost per yard |
$1.25
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$1.25
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| = Raw materials dollars – purchased |
$13,750
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$11,375
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January beginning is December ending: $5,000 / $1.25 per pound = 4,000 pounds
C. Cash Disbursements Budget:
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Amounts Paid In:
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Dollars owed
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January
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February
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March
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| December A/P: |
$12,000
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all
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| January purchases |
$13,750
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22%
|
78%
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| February purchases |
$11,375
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22%
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78%
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Amounts Paid In:
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Dollars owed
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January
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February
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| December A/P:: |
$12,000
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$12,000
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| January purchases |
$13,750
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$3,025
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$10,725
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| February purchases |
$11,375
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$2,502.50
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| Total Disbursements: |
$15,025
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$13,227.50
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