Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. The starting point for preparing a budget is
a. the production forecast
b. department expense forecast
c. the sales forecast in units
d. the sales forecast in dollars
C. The budget always begins with estimated sales in units which is then converted to sales dollars. The production forecast is done using the sales budget. Department expenses are one of the last expenses budgeted.
2. A self imposed budget is prepared by
a. executive management only
b. board of directors
c. various members of management
d. only the accountant
C. A self imposed budget is prepared by members of management throughout the company. Each management member budgets their area of responsibility using guidelines given by executive management. Board members are not typically involved in the budgeting process. The accountant assimilates information for the budget provided by members of management.
3. Budgets are used for
c. evaluating results
d. all of the above
D. Budgets are used for planning, control, and evaluating whether or not department and company goals are achieved.
4. Required production in units is equal to
a. units expected to be sold
b. units sold + beginning finished goods – ending finished goods
c. units sold + ending finished goods – beginning finished goods
d. units sold + or – the change in raw materials
C. 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.
5. Which shows the normal order of how a comprehensive budget is prepared?
a. sales , manufacturing overhead, production
b. materials purchases, direct labor, sales
c. sales, materials purchases, selling and administrative
d. income statement, materials purchases, direct labor
C. The comprehensive master budget always begins with the sales forecast. Using the sales forecast a production unit forecast is done. Once production units are forecasted, the materials 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 financial statements are budgeted.
6. Zero based budgeting
a. begins with last years budget and makes adjustments
b. begins at nothing and adds only justified expenditures
c. is used when the company needs to increase sales performance
d. assumes all departments will keep last year’s budget.
B. Zero based budgeting includes only necessary, justified expenditures in the budget. What was in the prior year budget is not relevant. Increasing sales is an entirely different issue than budgeting total company costs for a planned level of sales.
7. The quantity of raw materials purchased is determined by
a. taking the quantity of raw materials necessary times cost per unit
b. taking prior period inventory and subtracting ending raw materials
c. taking material required for production, adding ending requirements and subtracting beginning raw materials on hand.
d. taking prior period inventory, adding ending finished good requirements and subtract beginning finished goods on hand.
C. 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. Dollars purchased is computed in (a.) Finished goods and raw materials are never mixed in the budget process.
8. Budgeted direct labor costs are determined by
a. taking the cost per unit times the number of units sold
b. first determining how many hours it will take to make required units of production and then multiplying times the rate per hour
c. multiplying units expected to be sold by direct labor cost per hour
d. multiplying units to be produced by total cost per unit
B. Use the formula: Units to be produced x labor hours required for one unit = total hours required for production x cost per hour = total direct labor costs for the period. Units sold will be different than units produced due to inventory requirements (a.) (d.) is the total cost, not just direct labor costs.
9. Which of the following statements is not true about a budget?
a. Budgets are financial plans for the future
b. Budgets are operating plans for the future
c. Budgets are part of an overall strategic plan
d. Budgets are not based on specific objectives of the company
D. Budgets are based on specific objectives of the company and are also all other things listed.
10. A budget that adds a month when a month passes is a
a. moving budget
b. continuous budget
c. flexible budget
d. incremental budget
B. A continuous budget is a 12 month rolling budget. When one month passes, another month is added. Moving and incremental budget are not terms that are used. A flexible budget is for the same time period and different volume levels.
11. Which of the following budgets is completed just before the material requirements budget is prepared?
a. direct labor budget
b. sales budget
c. manufacturing overhead budget
d. production budget
D. The sales budget is prepared first, followed by the production budget, followed by the materials required to produce those units budget. Direct labor and manufacturing overhead typically follow materials.
12. Which of the following is not true for the master budget?
a. it presents the overall operating and financial plans for a period
b. it includes projected financial statements
c. it begins with forecasted production
d. it includes all product costs
C. The master budget begins with a sales budget. All other statements are true relative to a master (operating) budget.
13. A cash budget will never include which of the following
a. interest expense
b. depreciation expense
c. long-term asset purchases
d. cash collections from customers
B. Depreciation expense is not an expense that is paid. Only cash inflows and outflows are shown on the cash budget. All others are cash inflows or outflows.
14. The production budget gives information relative to
c. both a. and b.
d. direct labor hours
A. The purpose of the production budget is to forecast the number of units that should be produced in the period to meet sales and inventory goals. This information is used to determine other costs, however, this budget is in units.
15. The accuracy of the current year cash budget will be most impacted by
a. the level of inventories
b. the interest rate on borrowings
c. planned capital expenditures
d. custom credit worthiness
A. The highest cost of a manufacturing company is typically the cost of making the products. As inventories fluctuate, the costs that go into the inventory will fluctuate also. High inventory levels consume cash while it sits on the shelf. Interest rates and capital expenditures are items that are easy to budget within a small degree of error. Bad debt expense is not a cash flow. Sales are not as easy to budget and sales will impact inventory levels.