Managerial accounting, 5th by jiambalvo test bank ch10

CHAPTER 10 Budgetary Planning and Control Summary of Questions by Objectives and Bloom’s Taxonomy Item SO BT Item SO True-False Statements 1 K 2 C K D\C 10 K 11 K 12 Multiple Choice Questions 31 K 58 32 K 59 33 C 60 34 K 61 35 C 62 36 1,4 C 63 37 K 64 38 K 65 39 K 66 40 K 67 41 K 68 42 K 69 43 K 70 44 K 71 45 K 72 46 K 73 47 K 74 48 K 75 49 K 76 50 K 77 51 K 78 52 K 79 53 K 80 54 K 81 55 K 82 56 K 83 57 C 84 Matching 163 1-4 K Exercises 164 AP 168 165 AP 169 166 AP 170 167 AP 171 BT Item SO BT Item SO BT K C K C K K 13 14 15 16 17 18 2 2 2 C C C K K C 19 20 21 22 23 24 2 3 2, 3 K K K K K K C K C C C C K AN K K C C C C C AP AP AP AP AP AP AP AP AP AP AP AP 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 2 2 3 3 3 3 4 4 2 2 2 2 2 AP AP AP AP K C C K AN AN AN AN C K C K C AP AP AP AP AP AP AP AP AP AP 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 2 2 2 2 2 2 2 2 2 2 2 2 2 AP AP AP AP 172 173 174 175 2 2 AP AP AP AP 176 177 178 179 2 Item SO BT 25 26 27 28 29 30 4 4 C C K K K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 2 2 2 2 3 3 3 3 3 3 3 AP AP AP AP AP AP AP AP AP C AP AP AP AP AP AP AN AP AN AP AN AN C C AP AP AP AP 180 181 182 3 AP AP AP 10-2 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition Challenge Exercises 183 AP 185 184 AP 186 Short-Answer Essays 189 C 191 190 C 192 2 AP AP 187 188 2 AP AP K K 193 194 C C 195 196 4 C EV Chapter 10 Budgetary Planning and Control 10-3 True-False A budget is a formal document that quantifies a company’s plans for achieving its goals Budgets are useful in the control process because they provide a basis for evaluating performance A bottom-up approach to budgeting involves substantial input from lower-level managers Most managers believe that budgeting is more successful when a bottom-up approach rather than a top-down approach is used Generally, budgets that span longer time periods provide less detail than those spanning shorter time periods A zero-based budgeting is easier to prepare because it is based on prior period’s activity levels Only manufacturing firms need to prepare a production budget Changes in economic conditions can be one of the causes for significant deviations from the planned performance The first step in the budget process is preparing the sales forecast 10 If the number of units produced equals the number of units sold, the number of units in ending inventory will equal the number of units in beginning inventory on the production budget 11 The sales budget is constructed after the production budget is finalized based on a company’s capacity 12 All of the dollar amounts in the cash receipts budget represent revenues earned in the current period 13 The costs of acquisitions in the material purchases budget appear on the budgeted income statement as part of cost of goods sold 14 The amount and timing of cash flows is the focus of the cash receipts and disbursements budget 15 A company will often have cash flow problems ahead of a period of increasing sales 16 A company that utilizes just-in-time inventory eliminates the need for budgeting 17 The budgeted balance sheet is also called a pro-forma balance sheet 18 One way a company can perform “what if” budget analysis is by preparing a flexible budget 19 The selling and administrative expense budget is based on the numbers in the production budget 20 Differences between budgeted and actual amounts are referred to as flexible budgets 21 A static budget is prepared for a single anticipated level of production 10-4 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 22 If the actual activity level differs from the budgeted activity level on the flexible budget, it is unfair to evaluate cost performance against that budget 23 A master budget is a set of budget relationships that can be adjusted to various activity levels 24 In a management by exception approach, only large, unfavorable variances are investigated 25 Managers may be tempted to pad the budget to meet performance targets 26 Generally, it is best to evaluate managers against a static budget since the volume used on a static budget is used to generate expected results for the period 27 Waiting until January to ship an order and recognizing its revenue that was ready on December 29 is an example of income shifting 28 When a static budget is used for planning and control, managers may be tempted to build slack into their budgets 29 There is an inherent conflict when budgets are used for both planning and control 30 Budgeting often involves both monetary and nonmonetary measures of performance Answers T T T T T F 10 11 12 T T T T F F 13 14 15 16 17 18 F T F F T T 19 20 21 22 23 24 F F T T F F 25 26 27 28 29 30 T F T T T T Chapter 10 Budgetary Planning and Control 10-5 MULTIPLE CHOICE 31 Which of the following is correct concerning a budget? A It is a formal document that quantifies a company’s plans for achieving its goals B It is prepared by the budget committee C It identifies the causes of significant deviations from expected performance D All of the answer choices are correct 32 The formal documents that quantify a company’s plans for achieving its goals are called A variance reports B budgets C cost sheets D production reports 33 A budget is useful in the planning process because it A determines who is to blame for poor operations B forces managers to think about goals and objectives and means of achieving them C identifies budget padding D creates budget slack 34 Which statement is not true concerning the development of a budget? A It is a means of planning for management B It often involves communication with and input from department managers C It enhances communication and coordination among managers D It is created by the budget committee 35 Which of the following is not a reason that actual results may deviate from planned performance? A A bottom-up approach to budgeting was used B Managers have done a particularly good or particularly poor job of managing operations C Conditions have changed since the budget was developed D The budget was poorly conceived and constructed 36 The person evaluating a manager should consider A any deviation from budgeted amounts as an item that should be investigated B all favorable variances as indications of good performance C that managers will focus their attention on those measures that they know will be part of their evaluation D that all unfavorable variances indicate poor performance 37 Who is responsible for the approval of the master budget? A The budget committee B The company’s cost accountant C The company’s auditors D The company’s board of directors 38 The budget committee consists of A senior managers, including the CEO and CFO B representatives from the stockholders and suppliers C a company’s stockholders D all employees interested in providing input to the budgeting process 10-6 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 39 In a top-down approach to budgeting, what occurs? A The upper-level managers impose a budget without soliciting input from department managers B Lower-level managers are the primary source of information used in setting the budget C The production budget is developed before the sales budget D Each budget amount projected by upper-level managers is approved or disapproved by lower-level managers 40 In a bottom-up approach to budgeting, the primary source of information used in setting the budget is A based on forecasted economic conditions B based on industry forecasts C provided by the controller D provided by lower-level managers 41 Which of the following statements regarding approaches to budgeting is(are) true? I Most managers believe that successful budgeting requires a bottom-up approach II A top-down approach involves substantial input from lower-level managers A Only I B Only II C Both I and II D Neither I nor II 42 Less detailed budgets are associated with A production costs B governmental agencies C longer time periods D zero-based budgeting 43 A method of budget preparation that requires all budgeted amounts to be justified, even if the amounts were supported in prior periods, is called A variance budgeting B flexible budgeting C justified budgeting D zero-based budgeting 44 Which of the following is a characteristic of zero-based budgeting? A It uses the same level of activity as the prior budget period B It is relatively inexpensive to implement C It is used mostly by manufacturing companies D It results in a fresh consideration of the validity of budget amounts 45 Which of the following is the comprehensive planning document that incorporates a number of individual budgets? A Static budget B Master budget C Flexible budget D Collective budget Chapter 10 Budgetary Planning and Control 10-7 46 Which of the following is not typically a part of the master budget? A Direct material purchases budget B Performance report budget C Projected cash receipts and disbursements D Budgeted balance sheet 47 The master budget incorporates individual budgets including those for A direct materials, direct labor, and selling and administrative expenses B multiple levels of sales volume C past and future accounting periods D each employee in the company 48 Which of the following is the correct order for the preparation of the listed budgets? A Budgeted income statement, sales budget, cash budget B Cash budget, capital acquisitions budget, direct labor budget C Sales budget, production budget, direct material purchases budget D Direct labor budget, sales budget, budgeted income statement 49 Which of the following budgets is prepared last? A Sales budget B Capital acquisitions budget C Budgeted income statement D Budgeted balance sheet 50 Which of the following budgets is prepared first? A Cash budget B Sales budget C Production budget D Budgeted balance sheet 51 Which of the following contains at least one item that is not a common method companies use to estimate sales? A Economic models, and estimates from a company’s own sales force B Trends in a company’s own sales data, and estimates from a company’s own sales force C Estimates from a company’s own sales force, and expected production levels D Economic models, and trends in a company’s own sales data 52 Which of the following is not a method that can reasonably be used to forecast sales? A Trends in the company’s sales data B Production capacity C Estimates from the company’s salespersons D Mathematical models adjusted by an experienced manager using professional judgment 53 Which of the following assumptions is made while preparing a sales budget? A The number of units to be sold and selling price per unit B The cash to be received from units sold C The contribution margin per unit and the number of units to be sold D The number of units the manufacturing facility is able to produce 10-8 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 54 Why is setting the sales budget very important? A The rest of the master budget is driven by the sales budget B It is based on the production targets set by the production department C It establishes the actual profits that will be earned by a company D None of the answer choices are correct 55 Which of the following is not used in deciding how many units to produce in a period? A The desired number of units in ending finished goods inventory B The expected sales in units C The number of units in beginning finished goods inventory D The number of units of raw material needed for production 56 Concerning relationship between beginning finished goods inventory, ending finished goods inventory, production, and sales, which of the following is true? A Production = Beginning Inventory + Sales – Ending Inventory B Production = Sales + Ending Inventory – Beginning Inventory C Production = Beginning Inventory + Ending Inventory – Sales D Production = Beginning Inventory – Ending Inventory + Sales 57 Ace Ladders has fewer units in beginning finished goods inventory than in ending finished goods inventory The number of units sold is A less than the number of units produced B greater than the number of units produced C less than the number of units in beginning finished goods inventory D greater than the number of units in ending finished goods inventory 58 While preparing the production budget, the desired ending finished goods inventory for the first period is A the same as the beginning inventory for the second period B often expressed as a percentage of the first period’s sales C generally more than the beginning finished goods inventory for the first period D always zero 59 Which of the following items affect the amount of direct material that must be purchased during a period? I The amount of raw material in beginning inventory II The amount of raw material in ending inventory A Only I B Only II C Both I and II D Neither I nor II 60 A significant difference between the direct material purchases budget and the direct labor budget is that the direct material purchases budget A is based on units sold, while the direct labor budget is based on units produced B considers beginning and ending inventory amounts, which are not part of the direct labor budget C is constructed for each quarter, while the direct labor budget is constructed for each pay period D is constructed from the top down, while the direct labor budget uses a bottom-up approach Chapter 10 Budgetary Planning and Control 10-9 61 Which of the following is likely to increase the amount budgeted for depreciation in the manufacturing overhead budget? A Sale of production equipment at a loss B Increased variable costs related to estimated increases in sales C Planned acquisitions of new equipment D A decrease in the number of units to be produced 62 Which of the following is a reason the amount of cash paid out for manufacturing overhead each period does not equal the total overhead incurred? A Depreciation is an overhead expense that does not require the use of cash B Overhead expenses are only estimates, and they not require cash C Cash is only paid out for variable manufacturing overhead expenses D The amount of cash paid out is adjusted for the number of units sold 63 A significant difference between the direct material purchases budget and the production budget is that the production budget considers A units to be produced, while the direct material purchases budget is based on units to be sold B beginning and ending finished goods inventory amounts, which are not part of a direct material purchases budget C finished goods inventory levels, while the material purchases budget considers raw material inventory levels D the capacity of the factory, while the direct material purchases budget does not 64 Which of the following is not required to calculate cost of goods sold in the budgeted income statement? A Number of units to be sold B Direct material costs to be used and direct labor costs to be incurred C Manufacturing overhead costs incurred D Direct material purchases expected during the period 65 If budgeted net income is projected to be less than the company’s goal, the company should try to A increase revenues and decrease expenses B incur more fixed costs and less variable costs C increase the collection of cash receipts D finance operations with a loan 66 Which of the following statements is true concerning the capital acquisitions budget? A It consists of a plan to acquire long-lived assets B It is constructed directly from the values in the sales budget C It is the same as the capital budgeting process D It is dependent upon plant capacity 67 Which of the following does not appear on the cash budget? A Beginning cash balance B Purchase of long-lived assets C Cost of goods sold D Collection of credit sales 10-10 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 68 Which of the following transactions will affect the cash budget for a particular month in which each transaction occurs? A Sale of a product when payment will be received in 60 days B Payment for direct labor C Amortization of prepaid insurance D Depreciation of a piece of equipment that was purchased last year 69 A cash budget fails to alert the management for: A low projected cash balance B low profit levels C availability of excess cash for investment purposes D availability of sufficient cash for loan repayments 70 Which of the following is least likely to produce a need for temporary financing to bridge a cash shortfall? A Building up inventory in anticipation of increased sales in the months ahead B Allowing customers to purchase on credit C Paying insurance policies in advance of the period insured D Purchasing materials on a just-in-time inventory basis 71 Winslow Inc determined it had sold products during the month but not collected all of the amounts owed Where will this amount owed be reflected in the master budget for the month? A On the budgeted balance sheet in the assets section B On the budgeted income statement C As part of the cash receipts section of the cash budget D As a reduction of inventory to be produced in the production budget 72 When using a computer program to budgeting, which one of the following is not true? A A company can easily run “what if” analysis if the spreadsheet is well designed B Cash flow problems generally erupt since cash is difficult to track and predict C Worksheets should be formula driven so that a change in sales will update all schedules D A change in the sales budget should carry throughout all the individual budgets 73 SalaRita’s sales are 32% cash and 68% credit Of the credit sales, 40% of credit sales are collected in the month of sale, 45% in the month following the sale, and 15% is collected two months after Budgeted sales data is as follows: June July August $200,000 120,000 150,000 How much is total ‘Accounts Receivable’ at the end of August? A $61,200 B $73,440 C $99,600 D $108,000 10-46 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 167 Martinez Corporation's sales of gizmos are 25% for cash and 75% on credit Past collection history indicates that credit sales are collected as follows: Month of Sale 30% Month After Sale 50% Second Month After Sale 15% Uncollectible 5% In January, sales were $80,000 and February sales were $70,000 Projected sales for March are 3,000 gizmos at $13 each Projected sales for April are 4,000 gizmos at $14 each Calculate the budgeted cash collections for April Answer Sales during March: 3,000 × $13 = $39,000 Sales during April: 4,000 × $14 = $56,000 Collections from April Sales: Cash sales (25% × $56,000) Credit sales (75% × $56,000 × 30%) Collections from March Sales: Credit sales (75% × $39,000 × 50%) Collections from February Sales: Credit sales (75% × $70,000 × 15%) Cash collections during April 168 $14,000 12,600 14,625 7,875 $49,100 All of Gaylord Boutique’s sales are on account In the past, 15% of the amounts charged have been paid in the same month as the sale, 60% were paid in the following month, and the rest were paid in the second month following the sale Sales for selected months are given below: November 2014 $580,000 December 2014 600,000 January 2015 550,000 February 2015 650,000 March 2015 750,000 April 2015 725,000 May 2015 700,000 Prepare the cash receipts budget for the first three months of 2015 Answer November sales December sales January sales February sales March sales Total receipts January $145,000 360,000 82,500 $587,500 February $150,000 330,000 97,500 $577,500 March $137,500 390,000 112,500 $640,000 Chapter 10 Budgetary Planning and Control 169 10-47 Billy Bob Tacos pays for 40% of its inventory purchases in the month of the purchase and the remainder in the following month The company’s inventory purchases totaled $850,000 in October, $980,000 in November, and $720,000 in December The company also paid for new equipment with a total cost of $520,000 in November and made an income tax payment of $130,000 in December Salaries and wages were paid as follows: $310,000 in October, $300,000 in November and $295,000 in December Determine the company’s cash disbursements for November and December Answer October purchases November purchases December purchases Equipment Income tax payment Salaries and wages Total cash disbursements 170 November $ 510,000 392,000 December $ 588,000 288,000 520,000 300,000 $1,722,000 130,000 295,000 $1,301,000 At January 1, 2014, Wallace, Inc has beginning inventory of 4,000 widgets Wallace estimates it will sell 35,000 units during the first quarter of 2014 with a 10% increase in unit sales each quarter Wallace’s policy is to maintain an ending inventory equal to 25% of the next quarter’s sales Each widget costs $1 to purchase and is sold for $1.50 How much is budgeted sales revenue for the third quarter of 2014? Answer 1st quarter units = 35,000 2nd quarter units = 35,000 × 110% = 38,500 3rd quarter units = 35,000 × 110% × 110% = 42,350 Sales revenue for 3rd quarter = 42,350 × $1.50 = $63,525 171 Clips, Inc budgets on an annual basis for its fiscal year The following beginning and ending inventory levels are planned for the fiscal year ending June 30, 2014: Oximate Widgets July 1, 2013 40,000 pounds 80,000 units June 30, 2014 36,000 pounds 50,000 units Three pounds of oximate are needed to produce each widget If Clips plans to sell 480,000 widgets during the year ending June 30, 2014, how many widgets will it need to produce during the year? Answer Expected sales Add desired ending inventory Less beginning inventory on hand Units to be produced 480,000 50,000 (80,000) 450,000 10-48 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 172 East Lansing Mall expects to make purchases in the first quarter of 2015 as follows: January February March $ 80,000 122,000 74,000 Purchases in December of 2014 are expected to be $93,000 The company expects that 35% of a month’s purchases will be paid in the month of purchase and the balance will be paid in the following month Calculate budgeted cash disbursements related to purchases for February of 2015 Answer Payment of January purchases ($80,000 × 65%) Payment of February purchases ($122,000 × 35%) Budgeted cash receipts 173 $52,000 42,700 $94,700 ProSlade expects credit sales in the next quarter as follows: April May June $ 90,000 110,000 113,000 Prior experience has shown that 30% of a month’s sales are collected in the month of sale, 40% in the month following sale, and 28% in the second month following sale February and March sales were $90,000 and $100,000, respectively Uncollectible accounts are written off under the allowance method at 80 days after the end of the month in which the sale was made a b Answer a b Calculate budgeted cash receipts for May How much is Accounts Receivable on ProSlade’s May 31 balance sheet? Cash receipts for May purchases ($110,000 × 30%) Cash receipt for April purchases ($90,000 × 40%) Cash receipts for March purchases ($100,000 × 28%) Budgeted cash receipts for May $33,000 36,000 28,000 $97,000 ($110,000 × 70%) + ($90,000 × 30%) + ($100,000 × 2%) = $106,000 Chapter 10 Budgetary Planning and Control 174 10-49 In the fourth quarter of 2014, Winston Wheels had the following net income: Sales Less cost of sales Gross margin Selling and administration costs Income before taxes Income taxes Net income $400,000 150,000 250,000 110,000 140,000 42,000 $ 98,000 Purchases in the fourth quarter of 2014 amounted to $170,000 Estimated data for 2015 follow: Sales Cost of sales Purchases Selling and admin • • • • • • First Quarter $300,000 170,000 200,000 110,000 Second Quarter $350,000 200,000 230,000 110,000 Third Quarter $400,000 230,000 250,000 110,000 Fourth Quarter $450,000 150,000 280,000 110,000 Taxes are 30% of pretax income and are paid in the month of accrual All sales are on credit and 30% are collected in the quarter of sale and 70% are collected in the next quarter 40% of purchases are paid in the quarter of purchase and 60% in the next quarter Selling and administrative expenses are paid in the quarter incurred There is $11,000 of depreciation included in selling and administrative expense A capital expenditure for $40,000 is planned for the fourth quarter of 2015 Calculate total cash receipts for the second quarter of 2015 Answer Collection of sales: Collection of second quarter sales (30% × $350,000) $ 105,000 Collection of first quarter sales (70% × $300,000) 210,000 Total cash receipts $315,000 10-50 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 175 In the fourth quarter of 2014, Winston Wheels had the following net income: Sales Less cost of sales Gross margin Selling and administration costs Income before taxes Income taxes Net income $400,000 150,000 250,000 110,000 140,000 42,000 $ 98,000 Purchases in the fourth quarter of 2014 amounted to $170,000 Estimated data for 2015 follow: Sales Cost of sales Purchases Selling and admin • • • • • • First Quarter $300,000 170,000 200,000 110,000 Second Quarter $350,000 200,000 230,000 110,000 Third Quarter $400,000 230,000 250,000 110,000 Fourth Quarter $450,000 150,000 280,000 110,000 Taxes are 30% of pretax income and are paid in the month of accrual All sales are on credit and 30% are collected in the quarter of sale and 70% are collected in the next quarter 40% of purchases are paid in the quarter of purchase and 60% in the next quarter Selling and administrative expenses are paid in the quarter incurred There is $11,000 of depreciation included in selling and administrative expense A capital expenditure for $40,000 is planned for the fourth quarter of 2015 Prepare a cash disbursements budget for the second quarter of 2015 Answer Winston Wheels Cash Disbursements Budget, Second Quarter 2015 Payment for purchases: Payment of second quarter purchases (40% × $230,000) $ 92,000 Payment of first quarter purchases (60% × $200,000) 120,000 Payment for selling and administrative expenses 99,000 Payment of taxes ($350,000 – $200,000 – $110,000) × 30% 12,000 Total cash disbursements $323,000 Chapter 10 Budgetary Planning and Control 176 10-51 Green & Clean produces and sells organic concentrated detergent Information about the budget for 2014 is as follows: The company expects to sell 50,000 bottles of detergent in the first quarter, 70,000 in the second quarter, 95,000 in the third quarter, and 46,000 in the fourth quarter A bottle of detergent requires ounces of Chemical A and 12 ounces of Chemical B The desired ending inventory of finished goods is equal to 15% of next quarter’s sales, whereas the desired ending inventory for material is 10% of next quarter’s production requirements There are 7,500 bottles of detergent, 25,000 ounces of Chemical A, and 60,000 ounces of Chemical B on hand at the beginning of the first quarter At the end of the fourth quarter, the company must have 10,000 bottles of detergent, 24,000 ounces of Chemical A, and 90,000 ounces of Chemical B to meet its needs in the first quarter of 2015 The cost of Chemical A is $0.12 per ounce, the cost of Chemical B is $0.08 per ounce, and the selling price of the detergent is $11.50 per bottle The cost of direct labor is $0.80 per bottle, and the cost of variable overhead is $1.20 per bottle Fixed manufacturing overhead is $50,000 per quarter Variable selling and administrative expense is 5% of sales, and fixed selling and administrative expenses are $60,000 per quarter Prepare a production budget for each quarter of 2014 Answer Unit sales Desired ending inventory Total needed Beginning inventory Units to be produced 177 First Quarter 50,000 10,500 60,500 7,500 53,000 Second Quarter 70,000 14,250 84,250 10,500 73,750 Third Quarter 95,000 6,900 101,900 14,250 87,650 Fourth Quarter 46,000 10,000 56,000 6,900 49,100 Pappas Products manufactures a single product Expected manufacturing costs are as follows: Variable unit costs Direct materials $2.10 per unit Direct labor $1.50 per unit Manufacturing overhead $0.50 per unit Fixed costs per month Depreciation $4,000 per month Supervisory salaries $3,500 per month Other fixed costs $2,400 per month How much are budgeted manufacturing costs for a production levels of 8,000 units? Answer [($2.10 + $1.50 + $0.50) × 8,000] + ($4,000 + $3,500 + $2,400) = $42,700 10-52 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 178 Green & Clean produces and sells organic concentrated detergent Information about the budget for 2014 is as follows: The company expects to sell 50,000 bottles of detergent in the first quarter, 70,000 in the second quarter, 95,000 in the third quarter, and 46,000 in the fourth quarter A bottle of detergent requires ounces of Chemical A and 12 ounces of Chemical B The desired ending inventory of finished goods is equal to 15% of next quarter’s sales, whereas the desired ending inventory for material is 10% of next quarter’s production requirements There are 7,500 bottles of detergent, 25,000 ounces of Chemical A, and 60,000 ounces of Chemical B on hand at the beginning of the first quarter At the end of the fourth quarter, the company must have 10,000 bottles of detergent, 24,000 ounces of Chemical A, and 90,000 ounces of Chemical B to meet its needs in the first quarter of 2014 The cost of Chemical A is $0.12 per ounce, the cost of Chemical B is $0.08 per ounce, and the selling price of the detergent is $11.50 per bottle The cost of direct labor is $0.80 per bottle, and the cost of variable overhead is $1.20 per bottle Fixed manufacturing overhead is $50,000 per quarter Variable selling and administrative expense is 5% of sales, and fixed selling and administrative expenses are $60,000 per quarter Prepare a material purchases budget for Chemical A for the third quarter of 2014 Assume the production for the fourth quarter is 49,100 units Answer Units to be produced Ounces of chemical A per unit Ounces of chemical A required for production Plus desired ending inventory of chemical A Total needed Less beginning inventory of chemical A Ounces to be purchased Cost per ounce Cost of purchases of chemical A *95,000 + (15% × 46,000) – (15% × 95,000) = 87,650 87,650* 438,250 24,550 462,800 43,825 418,975 $ 0.12 $ 50,277 Chapter 10 Budgetary Planning and Control 179 10-53 Green & Clean produces and sells organic concentrated detergent Information about the budget for 2014 is as follows: The company expects to sell 50,000 bottles of detergent in the first quarter, 70,000 in the second quarter, 95,000 in the third quarter, and 46,000 in the fourth quarter A bottle of detergent requires ounces of Chemical A and 12 ounces of Chemical B The desired ending inventory of finished goods is equal to 15% of next quarter’s sales, whereas the desired ending inventory for material is 10% of next quarter’s production requirements There are 7,500 bottles of detergent, 25,000 ounces of Chemical A, and 60,000 ounces of Chemical B on hand at the beginning of the first quarter At the end of the fourth quarter, the company must have 10,000 bottles of detergent, 24,000 ounces of Chemical A, and 90,000 ounces of Chemical B to meet its needs in the first quarter of 2014 The cost of Chemical A is $0.12 per ounce, the cost of Chemical B is $0.08 per ounce, and the selling price of the detergent is $11.50 per bottle The cost of direct labor is $0.80 per bottle, and the cost of variable overhead is $1.20 per bottle Fixed manufacturing overhead is $50,000 per quarter Variable selling and administrative expense is 5% of sales, and fixed selling and administrative expenses are $60,000 per quarter Prepare a direct labor budget for the first and second quarters of 2014 Answer Units to be produced* Labor cost per bottle Budgeted direct labor cost First Quarter 53,000 $ 0.80 $42,400 Second Quarter 73,750 $ 0.80 $59,000 First quarter = 50,000 + (0.15 × 70,000) – 7,500 = 53,000 Second quarter = 70,000 + (0.15 × 95,000) – (0.15 × 70,000) = 73,750 10-54 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 180 Green & Clean produces and sells organic concentrated detergent Information about the budget for 2014 is as follows: The company expects to sell 50,000 bottles of detergent in the first quarter, 70,000 in the second quarter, 95,000 in the third quarter, and 46,000 in the fourth quarter A bottle of detergent requires ounces of Chemical A and 12 ounces of Chemical B The desired ending inventory of finished goods is equal to 15% of next quarter’s sales, whereas the desired ending inventory for material is 10% of next quarter’s production requirements There are 7,500 bottles of detergent, 25,000 ounces of Chemical A, and 60,000 ounces of Chemical B on hand at the beginning of the first quarter At the end of the fourth quarter, the company must have 10,000 bottles of detergent, 24,000 ounces of Chemical A, and 90,000 ounces of Chemical B to meet its needs in the first quarter of 2014 The cost of Chemical A is $0.12 per ounce, the cost of Chemical B is $0.08 per ounce, and the selling price of the detergent is $11.50 per bottle The cost of direct labor is $0.80 per bottle, and the cost of variable overhead is $1.20 per bottle Fixed manufacturing overhead is $50,000 per quarter Variable selling and administrative expense is 5% of sales, and fixed selling and administrative expenses are $60,000 per quarter Prepare a budgeted income statement using the variable costing format for the third quarter of 2014 (Ignore income taxes) Answer Sales ($11.50 × 95,000) Less variable costs: Cost of goods sold ($3.56 × 95,000) Selling and administrative costs (5% × $1,092,500) Contribution margin Less fixed costs: Production costs Selling and administrative costs Income before taxes Variable cost of sales per bottle: Chemical A Chemical B Direct labor Variable overhead Total $1,092,500 $338,200 54,625 50,000 60,000 $0.60 0.96 0.80 1.20 $3.56 392,825 699,675 110,000 $589,675 Chapter 10 Budgetary Planning and Control 181 10-55 Expected manufacturing costs for Beaver Street Manufacturing are as follows: Variable Costs per Unit Direct material $7.00 Direct labor 3.50 Variable overhead 1.80 Fixed Costs per Month Supervisory salaries $17,000 Factory depreciation 4,500 Other factory costs 3,100 Determine the budgeted manufacturing costs for a production level of 14,000 units Answer Variable costs per unit = $7.00 + $3.50 + $1.80 = $12.30 per unit Fixed costs per month = $17,000 + $4,500 + $3,100 = $24,600 Manufacturing costs for 14,000 units = ($12.30 × 14,000) + $24,600 = $196,800 182 Expected manufacturing costs for Beaver Street Manufacturing for June are as follows: Variable Costs per Unit Direct material $7.00 Direct labor 3.50 Variable overhead 1.80 Fixed Costs per Month Supervisory salaries $17,000 Factory depreciation 4,500 Other factory costs 3,100 During June, the company produced 13,000 units and incurred the following costs: Total Variable Costs Direct material $112,500 Direct labor 36,000 Variable overhead 23,000 Total Fixed Costs For The Month Supervisory salaries $16,100 Factory depreciation 4,700 Other factory costs 3,200 Prepare a performance report for Beaver Street Manufacturing for June Answer Number of units Variable costs: Direct material Direct labor Variable overhead Total variable costs Fixed costs: Supervisory salaries Depreciation Other fixed costs Total fixed costs Total overhead Flexible Budget 13,000 Actual 13,000 Variance $ 91,000 45,500 23,400 159,900 $112,500 36,000 23,000 171,500 ($21,500) U 9,500 F 400 F ($11,600) U 17,000 4,500 3,100 24,600 $184,500 16,100 4,700 3,200 24,000 $195,500 900 F (200) U (100) U 600 F ($11,000) U 10-56 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition CHALLENGE EXERCISES 183 Werth’s Widgets pays for 30% of its inventory purchases in the month of the purchase and the remainder in the following month The company’s inventory purchases totaled $65,000 in October, $87,000 in November, and $52,000 in December During November, Werth acquired new equipment costing $100,000 by signing a note for $80,000 and paid the balance in cash Werth made one payment for $5,000 toward the note during December that included $600 of interest Income taxes totaling $30,000 were paid in December General and admin expenses totaled $30,000 during October, $35,000 during November, and $40,000 during December, of which $5,000 per month is for depreciation Werth pays 80% of the general and administrative costs during the month incurred and the balance the following month Cash at the beginning of November was $40,000 Prepare a cash disbursements budget for November for Werth’s Widgets Omit the budget heading Answer Inventory purchases – November (30% × $87,000) Inventory purchases – October (70% × $65,000) Total inventory purchases Cash down payment on equipment Cash paid for general and admin – November [($35,000 –$5,000) × 80%] Cash paid for general and admin – October [($30,000 – $5,000) × 20%] Budgeted cash disbursements 184 $ 26,100 45,500 71,600 20,000 24,000 5,000 $120,600 Gessel Co.’s projected sales are as follows: August $160,000 September $180,000 October $220,000 November $200,000 Gessel estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale Two percent of all sales are estimated to be bad debts Gessel purchases inventories on account totaling $130,000 during August, $140,000 during September, and $100,000 during October Gessel pays 25% of purchases in the month purchased and 75% in the following month a b Answer a b How much is Gessel Co.’s budgeted cash receipts for October? How much is the net increase or decrease in cash for Gessel for October? Collections from October sales: $220,000 × 30% Collections from September sales: $180,000 × 50% Collections from August sales: $160,000 × 18% Total budgeted cash receipts for October $ 66,000 90,000 28,800 $184,800 Collections during October (from part a) Disbursements from October purchases: $100,000 × 25% Disbursements from September purchases: $140,000 × 75% Total disbursements during October Net increase in cash during October $184,800 (25,000) (105,000) (130,000) $ 54,800 Chapter 10 Budgetary Planning and Control 185 10-57 Tree Haven makes and sells silk palm trees Each tree uses 0.80 yards of silk fabric Budgeted production of trees in units for the next five months is as follows: Budgeted production Budgeted sales April 24,160 24,500 May 23,490 22,800 June 26,570 26,250 July 26,880 27,850 August 22,900 23,000 The company wants to maintain monthly ending inventories of fabric equal to 15% of the following month's budgeted production needs, and monthly inventories of trees equal to 20% of the number needed for next month’s sales The cost of silk is $2.00 per yard Direct labor cost is $14.00 per hour and it takes 66 minutes to complete each tree Factory overhead is applied at the rate of $1.25 per direct labor dollar a Prepare a direct materials purchases budget for June b Calculate the amount of Raw Materials and Finished Goods Inventory on Tree Haven’s June 30 balance sheet Answer a b Units to be produced Yards of silk per tree Yards of silk need for production Ending raw materials inventory (15% × 26,880 × 0.80) Beginning raw material inventory (15% × 26,570 × 0.80) Yards of silk need to purchase Cost of silk per yard Budgeted cost of materials purchases 26,570 0.80 21,256 3,226 (3,188) 21,294 $ 2.00 $42,588 Ending raw materials inventory: 15% × 26,880 × 0.80 × $2 = $6,452 Cost per unit of the bins produced: Direct materials per unit (0.80 × $2) Direct labor (66/60) × $14 Factory overhead ($15.40 × $1.25) Total cost per unit $ 1.60 15.40 19.25 $36.25 Finished goods units at June 30 = 20% × 27,850 = 5,570 Ending finished goods inventory: $36.25 × 5,570 = $201,913 10-58 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 186 Trescot, Inc provided the following information: June Projected sales $120,000 Projected merchandise purchases $76,000 • • • • • July $110,000 $65,000 August $130,000 $70,000 September $100,000 $58,000 Trescot estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 23% in the second month following the sale Two percent of all sales are estimated to be bad debts The cash balance on June is $6,000 Trescot pays 30% of merchandise purchases in the month purchased and 70% in the following month General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000 of this amount Trescot pays operating expenses in the month incurred Trescot make loan payments of $3,000 per month of which $400 is interest and the remainder is principal Calculate Trescot’s budgeted cash disbursements for August Answer Cash paid for merchandise purchases: August purchases ($70,000 × 30%) $21,000 July purchases ($65,000 × 70%) 45,500 Cash paid for operating expenses ($20,000 – $2,000) 18,000 Cash paid for loan ($3,000 – $400) 2,600 Cash paid for interest 400 Budgeted cash disbursements for August $87,500 187 Livanos, Inc reports all its sales on credit, and pays operating costs in the month incurred Amounts for 2014 are: March April May June July Budgeted sales $300,000 $290,000 $320,000 $280,000 $210,000 Budgeted purchases $144,000 $120,000 $128,000 $132,000 $90,000 • Amounts due from customers are collected 70% in the month of sale and 30% in the following month • Cost of goods sold is 60% of sales • Livanos purchases and pays for merchandise 40% in the month of acquisition and 60% in the following month • Operating expenses are: Salaries, $50,000; Depreciation, $12,000; Rent, $15,000; and Utilities, $14,000 • Accounts payable is used only for inventory acquisitions a b c How much cash will Livanos receive during May from customers? How much is the May 30, 2014 budgeted Accounts Receivable? How much is the budgeted balance for Accounts Payable at May 30, 2014? a b c (70% × $320,000) + ($290,000 × 30%) = $311,000 30%× $320,000 = $96,000 60% × $128,000 = $76,800 Answer Chapter 10 Budgetary Planning and Control 188 10-59 Contron, Inc projected the following for 2014: Credit sales Collections from customers Cost of goods sold Loan repayments: $1,000 is interest, $15,000 is principal Current period cash operating expenses Depreciation expense Loss on disposal of plant asset Merchandise purchases (90% to be paid in cash) Accrued wages closing balance Beginning cash balance $240,000 246,000 92,000 16,000 80,000 20,000 5,000 95,000 12,000 36,000 How much is cash to be reported on Con’s budgeted balance sheet at the end of 2014? Answer Beginning cash balance Collections from customers Loan repayments Operating expenses Merchandise purchases (90% x $95,000) Cash at end of 2014 $ 36,000 246,000 (16,000) (80,000) (85,500) $100,500 SHORT-ANSWER ESSAYS 189 What is the difference between the bottom-up and top-down approach to budgeting? Answer In a bottom-up approach to budgeting, lower-level managers are the primary source of information in setting the budget In the top-down approach, budgets are developed at higher organizational levels without substantial input from lower-level managers 190 Describe at least three sources of input for the sales budget Answer Input for the sales budget may come from economists, trade journals and magazines, or the company’s own sales personnel, as well as last year’s sales level 191 What are the main purposes of preparing a cash receipts and disbursements budget? Answer By preparing a cash receipts and disbursements budget, a company can anticipate cash shortages and arrange to borrow funds A company may also find investment opportunities for anticipated cash surpluses 10-60 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 192 What is meant by “management by exception?” Answer Management by exception is an approach to investigating variances that suggests that managers only investigate those variances that are a significant percentage of the budgeted or actual amount or exceed a significant dollar amount 193 List and briefly explain three reasons that a company may have significant deviations from budgeted performance Answer Deviations from budgeted performance may result from: a poorly conceived plan or budget conditions that have changed since the plan was developed managers who have done a particularly good or particularly poor job of managing operations 194 What is the difference between a static budget and a flexible budget? Answer A static budget is prepared for a single level of anticipated production A flexible budget is a set of budget relationships that can be adjusted for different levels of activity 195 “Managers may perceive a conflict between the planning and control uses of budgets.” Explain what this statement means and what a company can to minimize this conflict Answer If managers are asked to provide input into the budget, they may build slack into the amounts that they budget so that it will be fairly easy for them to achieve the budgeted amounts and they will be evaluated favorably However, these budgeted amounts may not be in the best interest of the firm Firms can discourage this behavior by assuring managers that they will be evaluated fairly and fostering open communication among all levels of employees 196 Explain what budget padding and income shifting are and why managers are tempted to them Answer Budget padding is projecting low sales and high expenses so that targets are easy to achieve Income shifting is shifting revenues or expenses into periods where they are needed to reach budget goals Managers engage in these activities in order to hit budget targets ... to produce 10-8 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 54 Why is setting the sales budget very important? A The rest of the master budget is driven by the sales budget... will Washam Company need to borrow by the end of June? A $43,000 B $34,000 C $9,000 D $59,000 10-12 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 78 Alpha Caps Company has... employees interested in providing input to the budgeting process 10-6 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 39 In a top-down approach to budgeting, what occurs? A The