Master Budget
Medium to Hard Practice Test
Medium to Hard Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. To determine the cost of raw materials that must be purchased this period, a company must take
a. the quantity of raw materials on hand and add the change in raw materials inventory and multiply by the cost per unit of raw materials
b. the quantity of raw materials on hand and add beginning raw materials inventory and multiply by the cost per unit of raw materials
c. the quantity required for production and the change in finished goods inventory times the cost per each
d. units to be produced times the quantity required for each, consider the change in raw materials inventory and then multiply by the cost of each raw material
Answer
D. The formula: Units to be produced x quantity required for each unit = material quantity required. Quantity required less what is already on hand (beginning raw materials) plus what is desired to be left at the end of the period (ending inventory) equals quantity to be purchased. Quantity to be purchased is then multiplied by the cost per unit to get budgeted total materials cost for the period. The change in inventory is the same thing as ending less beginning inventory. Finished goods and raw materials are never mixed in the budget process.
2. Which of the following statements is correct relating to the preparation of the manufacturing overhead budget?
a. budgeted costs should be directly proportionate to the increase in sales over last year. If sales are increasing 20%, the manufacturing overhead
budget will be increased 20% over last year
b. cost behavior for costs must be determined
c. it is prepared prior to the sales budget
d. all manufacturing overhead costs are considered to be disbursements in the period incurred
Answer
B. Manufacturing overhead consists of both fixed and variable costs. You must determine a variable cost per unit and a fixed cost in total. The sales budget is the first budget that must be completed. (c.) Depreciation is not paid, therefore all costs are not cash disbursements. (d) (a.) describes what occurs when a company only has variable manufacturing costs which is very very rare.
3. A company has cash sales of $20,000 each month and has credit sales as follows:
| January February March April $69,000 $47,000 $73,000 $52,000 |
Normally, 15% of credit sales are collected in the month of the sale, 55% are collected the month following the sale, and 38% is collected the second month following the sale. Cash receipts from customers during April is expected to be:
a. $85,810
b. $47,950
c. $65,810
d. $66,960
Answer
A. During April, the company will collect
15% of April sales $52,000 = $ 7,800
55% of March sales $73,000 = $40,150
38% of February sales $47,000 = $17,860
Total collected in April $65,810
+ Cash Sales $20,000
Total Cash Collected $85,810
4. The sales price per unit is necessary to prepare the
a. manufacturing overhead budget
b. cash collections budget
c. sales budget
d. both b. & c.
Answer
D. The sales price per unit is used to determine the sale budget – sales in units x price per unit. The sales budge is then used along with when funds are typically collected from customer to determine the cash collections budget.
5. A company sells a unit of product for $20 and the total cost of production is $12 per unit. Sales, all cash, for March are expected to be $1,000,000, total cash disbursements for March are budgeted at $1,050,000. The company can borrow at a rate of 12% per year in increments of $5,000 at the beginning of each month. All borrowings occur at the beginning of the month and interest is paid for the month at the end of the same month. The company desires a minimum cash balance of $20,000 and the cash balance on March 1 was $24,000. At the end of the prior month, the company owed $35,000. The expected amount to be borrowed on March 1st is
a. $25,000
b. $50,000
c. $75,000
d. $20,000
Answer
B. Beginning cash balance $ 24,000
Collections from customers $1,000,000
Cash Disbursements ($1,050,000)
Cash balance before borrowing ($ 26,000)
Borrowings $ 50,000
Interest Paid end of month $ (850)
Cash balance end of month $ 23,150
Interest $35,000 +$50,000 x 12% x 1/12 = $850
6. A company makes and sells one product for $18 each. Each unit made requires .75 labor direct labor hours. Direct labor is paid $10 per hour. The direct labor budget is $38,100 for this month. The budgeted units to be produced is
a. 2,857
b. 3,810
c. 5,080
d. not enough information to determine
Answer
C. Put in what you know into the formula:
Units to produce 5,080 ? solved
X required for one unit .75
= direct labor hours required 3,810 ? solved
X rate per direct labor hour $10
= direct labor dollars $38,100
Solve working up from the bottom
7. Depreciation on production equipment would be used in preparing which of the following budgets?
a. manufacturing overhead budget
b. cash budget
c. sales budget
d. production budget
Answer
A. Depreciation expense must be considered in the manufacturing overhead budget. Depreciation is not paid and must be subtracted to determine cash paid for the period. Production units only is used in the manufacturing overhead budget. The cash budget shows only cash inflows and cash outflows and depreciation is not a cash flow.
8. Which of the following won’t be affected just because sales in units are lower at the end of this month than expected?
a. cash receipts for next month
b. finished goods inventory at the end of this month
c. the level of production next month
d. the level of production this month
Answer
D. The company will determine the level of production this month based on projected sales for next month and future months, not actual sales. Cash receipts will be less if sales are less (a.), inventory will be higher if sales are less (b), and the company will most likely produce less next month if inventory levels are higher than planned. (c.)
9. When a company produces the same quantity each month and sales randomly fluctuate each month it
a. will always have more funds tied up in inventory than necessary
b. will have volatile inventory balances
c. will have a stable cash balance
d. will have a volatile purchases budget
Answer
B. Inventory will go up when sales are lower and will go down when sales are higher when production is constant. Sometimes inventory will be too low and other times it will be too high. Lower levels of inventory will not tie up as much cash. (a.) The cash balance will fluctuate as funds are tied up and released from inventory. (c.) Purchases will be constant if production is constant. (d.)
10. Which of the following will be impacted less if actual production for the month is higher than budgeted production for the month?
a. materials disbursements for next month
b. inventory levels at the end of the month
c. direct labor costs for the month
d. sales for the month
Answer
D. The quantity of units produced will impact the amount of materials that are purchased and direct labor used in production and how much inventory is left at the end of the period. If you produce more than expected you will have more units left than expected given sales are as expected. Sales are not typically impacted when production is higher than budgeted, given there are enough units to fill orders from customers.
11. A company makes a product using wire and nylon material. Each product requires 1.5 feet of wire and 2.3 yards of nylon material. Ending finished goods is budgeted at 60% of next months sales. Ending raw materials quantity is budgeted at 120% of next months production in units. Wire costs $4 per foot and nylon costs $6.50 per yard.
Purchases are paid 20% in the month following the purchase and 80% in the second month following the purchase. Accounts Payable at the end of February is $279,000. The product is sold for $16. Budgeted sales are:
|
Units
|
||
| January |
10,000
|
|
| February |
15,000
|
|
| March |
18,000
|
|
| April |
14,000
|
|
| May |
11,000
|
|
| June |
12,000
|
Prepare the following budgets for the months of March and April:
A. Production budget
B. Materials requirement budget for both wire and nylon
C. Materials purchases budget for both wire and nylon
Answer
A. Production Budget
|
February
|
March
|
April
|
May
|
|
|
|
|
|
|
|
| Budgeted Sales in Units |
15,000
|
18,000
|
14,000
|
11,000
|
| + Desired Ending Inventory in Units |
10,800
|
8,400
|
6,600
|
7,200
|
| – Beginning Inventory in Units |
(9,000)
|
(10,800)
|
(8,400)
|
(6,600)
|
| = Required Production in Units |
16,800
|
15,600
|
12,200
|
11,600
|
February beginning units is January ending which is equal to Feb sales x 60%
May ending inventory is June sales of 12,000 x 60% = 7,200
B. Materials Budget Wire
|
February
|
March
|
April
|
|
|
|
|
|
|
| Required Production in Units |
16,800
|
15,600
|
12,200
|
| X Quantity Required Per Unit (yards) |
1.5
|
1.5
|
1.5
|
| = Units of Raw Mat. for Production |
25,200
|
23,400
|
18,300
|
| + Desired Ending Inventory of Raw Mat. |
18,720
|
14,640
|
13,920
|
| – Beginning Inventory of Raw Materials |
|
(18,720)
|
(14,640)
|
| = Raw Materials to be Purchased – units |
19,320
|
17,580
|
|
| X cost per yard |
|
$4.00
|
$4.00
|
| = Raw materials dollars – purchased |
|
$77,280
|
$70,320
|
Raw materials ending inventory is 120% of next months production in units, not raw materials required for production. Read the problem carefully.
April ending inventory is May units to produce of 11,600 x 1.2 = $13,920
B. Materials Budget
Nylon
|
February
|
March
|
April
|
|
|
|
|
|
|
| Required Production in Units |
16,800
|
15,600
|
12,200
|
| X Quantity Required Per Unit (yards) |
2.3
|
2.3
|
2.3
|
| = Units of Raw Mat. for Production |
38,640
|
35,880
|
28,060
|
| + Desired Ending Inventory of Raw Mat. |
18,720
|
14,640
|
13,920
|
| – Beginning Inventory of Raw Materials |
|
(18,720)
|
(14,640)
|
| = Raw Materials to be Purchased – units |
31,800
|
27,340
|
|
| X cost per yard |
|
$6.50
|
$6.50
|
| = Raw materials dollars – purchased |
|
$206,700
|
$177,170
|
C. Materials Purchase Budget:
March April Wire $ 77,280 $70,320 Nylon $206,700 $177,710 Total Purchased $283,980 248,030 Amounts Paid In: Dollars owed March April
February A/P: 279,000 279,000 March purchases 283,980 56,796 227,184 April purchases 248,030 49,606 Total Disbursements: $335,796 $276,790
12. A company has budgeted sales and production for a 3 month period as follows:
|
July
|
August
|
September
|
|
| Units Sold |
10,000
|
20,000
|
15,000
|
| Units to produce |
22,000
|
18,000
|
14,000
|
| Additional information that is available: |
|
|
| Sales price per unit |
$10
|
|
| Direct material cost per unit |
$3.00
|
|
| Direct labor cost per unit |
$1.50
|
|
| Paid manufacturing overhead cost per unit |
$ 2.00
|
|
|
|
||
| Cash on hand on August 1 |
$51,750
|
|
The quantity of inventory does not change from month to month.
Inventory purchases are paid 20% current month, 80% following month
Accounts receivable is collected 10% current month, 90% following month
Disbursements for selling and administrative is $45,000, which includes $3,000 for depreciation on furniture.
The company borrows monthly at a rate of 12% annually in order to keep the cash balance at a minimum of $50,000. Borrowings are in increments of $1,000 and are made at the beginning of the month. Interest is paid at the end of the month. The company owed $62,000 on July 31st.
Prepare a cash budget for the month of August.
Answer
|
August
|
|
|
|
|
|
|
|
| Cash Balance, Beginning |
$51,750
|
| + Receipts for the Period (Cash Collections) |
$110,000
|
| = Total Cash Available |
$161,750
|
|
|
|
| – Disbursements for Material (Cash Disb.) |
$63,600
|
| – Disbursements for Labor and O/H |
$63,000
|
| – Disbursements for Selling and Administrative |
$42,000
|
| = Cash Available |
($6,850)
|
|
|
|
| + Borrowings |
$59,000
|
| – Repayment of Borrowings |
0
|
| – Interest Expense Paid |
($1,210)
|
| = Cash Balance, Ending |
$50,940
|
Receipts: July sales 10,000 units x $10= $100,000 x 90% = $90,000
August sales 20,000 units x $10 = $200,000 x 10% = $20,000
Total cash collections in August $110,000
When the quantity in inventory does not change purchased units are equal to units
produced.
Materials disbursements:
July production 22,000 units x $3= $66,000 x 80% = $52,800
August production 18,000 units x $3 = $54,000 x 20% = $10,800
Total cash disbursements in August $63,600
Labor & O/H: August production 18,000 x $3.50 per unit = 63,000
Interest Expense $62,000 + $59,000 = $121,000 owed x 12% x 1/12 = $1,210
13. A company is preparing budgets and has progressed far enough to gather the following information:
|
Jan
|
Feb
|
Mar
|
April
|
May
|
|
|
|
|
|
|
|
|
| Sales $ |
$42,000
|
$59,000
|
$62,000
|
$39,000
|
$36,000
|
|
|
|
|
|
|
|
| Material Purchase $ |
$41,000
|
$47,000
|
$37,000
|
$32,000
|
$49,000
|
The company expects to collect accounts receivable as follows: 5% in the current
month, 35% in the month following the sale, and 55% in the second month after sale
The company expects to pay for inventory as follows: 25% in the current month and
70% in the month after purchase, and 5% in the second month following purchase
A. Prepare the cash disbursements schedule for March and April
B. Prepare the cash receipts schedule for March and April
Answer
A. Cash Disbursements:
|
Amounts Paid In:
|
|||
|
Dollars owed
|
March
|
April
|
|
|
|
|
|
|
| January purchases |
$41,000
|
5%
|
|
| February purchases |
$47,000
|
70%
|
5%
|
| March purchases |
$37,000
|
25%
|
70%
|
| April purchases |
$32,000
|
|
25%
|
Now that you know what percent is coming in, take the amount on the left in the row
times the % on the same row to get the dollars that will be collected during that month.
|
|
Amounts Paid In:
|
||
|
Dollars
owed |
January
|
February
|
|
|
|
|
|
|
| January purchases |
$41,000
|
2,050
|
|
| February purchases |
$47,000
|
32,900
|
2,350
|
| March purchases |
$37,000
|
9,250
|
25,900
|
| April purchases |
$32,000
|
______
|
8,000
|
| Total |
$44,200
|
$36,250
|
|
B. Cash Receipts Schedule:
Set up the schedule as follows:
|
Amounts Paid In:
|
|||
|
Dollars owed
|
March
|
April
|
|
|
|
|
|
|
| January sales |
$42,000
|
55%
|
|
| February sales |
$59,000
|
35%
|
55%
|
| March sales |
$62,000
|
5%
|
35%
|
| April sales |
$39,000
|
|
5%
|
Now that you know what percent is coming in, take the amount on the left in the row times the % on the same row to get the dollars that will be collected during that month.
|
|
Amounts Paid In:
|
||
|
Dollars owed
|
March
|
April
|
|
|
|
|
|
|
| January sales |
$42,000
|
$23,100
|
|
| February sales |
$59,000
|
$20,650
|
$32,450
|
| March sales |
$62,000
|
$3,100
|
$21,700
|
| April sales |
$39,000
|
______
|
$1,950 |
|
Total: |
$46,850
|
$56,100
|
|