Management Advisory Services

Module 6 - Budgeting
BASIC CONCEPTS
1. A formal written statement of management’s plans for the future, packaged in financial terms, is a:
A. Responsibility report. C. Cost of production report.
B. Performance report. D. Budget.

2. Budgets are related to which of the following management functions?

A. Planning C. Control
B. Performance evaluation D. all of these

3. Budgeting supports the planning process by encouraging all of the following activities except:
A. Requiring all organizational units to establish their goals for the coming period.
B. Increasing the motivation of managers and employees by providing agreed-upon expectations.
C. Improving overall decision making by considering all viewpoints, options, and cost control
programs.
D. Directing and coordinating operations during the period.

4. Which of the following advantages does a budget mostly provide?

A. Coordination is increased.
B. Planning is emphasized.
C. Communication is continuous.
D. Comparison of actual versus budgeted data.

5. Which of the following is NOT an advantage of budgeting?

A. It forces managers to plan.
B. It provides resource information that can be used to improve decision making.
C. It aids in the use of resources and employees by setting a benchmark that can be used for the
subsequent evaluation of performance.
D. It provides organizational independence.

6. Which of the following is least likely a reason why a company prepares its budget?
A. To provide a basis for comparison of actual performance
B. To communicate the company’s plans throughout the entire business organization
C. To control income and expenditure in a particular period.
D. To make sure the company expands its operations.

7. The budgets that are based on a very high levels of performance, like expected costs using ideal
standards,
A. assist in planning the operations of the company
B. stimulate people to perform better than they ordinarily would
C. are helpful in evaluating the performance of managers
D. can lead to low levels of performance

8. Which of the following statements is incorrect?

A. An imposed budget is the same as a participative budget.
B. Preparation of the budget would be the responsibility of each responsibility unit.
C. Top management’s support is necessary to promote budget participation.
D. The top management should review and approve each responsibility unit’s budget.

9. The primary role of the budget director and the budgeting department is to
A. Settle disputes among operating executives during the development of the annual operating plan.
B. Develop the annual profit plan by selecting the alternatives to be adopted form the suggestions
submitted by the various operating segments.
C. Compile the budget and manage the budget process.
D. Justify the budget to the corporate planning committee of the board of directors.

10. The primary variable affecting active participation and commitment to the budget and the control
system is
A. Management efforts to achieve the budget rather than optimize results.
B. The rigid adherence to the budget without recognizing changing conditions.
C. Top management involvement in support of the budget.
D. The opportunity budgeting gives to risk-taker managers for department growth.

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TYPES OF BUDGETS
11. The method of budgeting which adds one month’s budget to the end of the plan when the current
month’s budget is dropped from the plan refers to
A. Long-term budget C. Incremental budget
B. Operations budget D. Continuous budget

12. A continuous budget

A. is a budget that is revised monthly or quarterly.
B. is a medium term plan that consists of more than 2 years’ projections.
C. is appropriate only for use of a not-for-profit entity.
D. works best for an entity that can reliably forecast events a year or more into the future.

13. “Incremental budgeting” refers to

A. line-by-line approval of expenditures
B. setting budget allowances based on prior year expenditures
C. requiring top management approval of increases in budgets
D. using incremental revenues and costs in budgeting

14. A budget plan for annual fixed costs that arises from top management decisions directly reflecting
corporate policy.
A. Flexible budget. C. Discretionary budget.
B. Static budget. D. Program budget.

15. The term “decision package” relates to

A. comprehensive budgeting C. program budgeting
B. zero-based budgeting D. line budgeting

16. The budget approach that is more relevant when the continuance of an activity or operation must be
justified on the basis of its need or usefulness to the organization.
A. the incremental approach C. the baseline approach
B. the zero-based approach D. both a and b are true

17. The process of developing budget estimates by requiring all levels of management to estimate sales,
production, and other operating data as though operations were being initiated for the first time is
referred to as:
A. Forecasting. C. Continuous budgeting.
B. Zero-based budgeting. D. Program budgeting.

18. Which of the following is a contemporary approach to budgeting?

A. incremental approach C. baseline approach
B. zero-based approach D. both a and b are true

19. A systematized approach known as zero-based budgeting:

A. Classifies the budget by the prior year’s activity and estimates the benefits arising from each activity.
B. Commence with either the current level of spending or projected whichever is lower.
C. Presents planned activities for a period of time but does not present a firm commitment.
D. Divides the activities of individual responsibility centers into a series of packages that are prioritized.

20. Budgeting expenditures by purpose is called

A. program budgeting C. zero-based budgeting
B. line budgeting D. flexible budgeting

21. A static budget is not appropriate in evaluating a manager's effectiveness if a company has
A. substantial fixed costs.
B. substantial variable costs.
C. planned activity levels that match actual activity levels.
D. no variable costs.

22. Flexible budgeting is a reporting system wherein the

A. Budget standards may be adjusted at management’s discretion.
B. Planned level of activity is adjusted to the actual level of activity before the performance report is
prepared.
C. Reporting dates vary according to the managerial levels of the users.
D. Packages of activities vary from period to period.

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23. A flexible budget is
A. one that can be changed whenever a manager so desires
B. adjusted to reflect expected costs at the actual level of activity
C. one that uses the formula total costs = cost per unit x units produced
D. the same as a continuous budget

24. The basic difference between a master budget and a flexible budget is that a
A. Flexible budget considers only variable costs but a master budget considers all costs.
B. Flexible budget allows management latitude in meeting goals whereas a master budget is based on
a fixed standard.
C. Master budget is for an entire production facility but a flexible budget is applicable to single
department only.
D. Master budget is based on one specific level of production and a flexible budget can be prepared for
any production level within a relevant range

25. A system that classifies budget requests by activity and estimates the benefits arising from each
activity:
A. Incremental budgeting system. C. Program planning and budgeting system.
B. Static budgeting system. D. Participative system.

26. A budget that identifies revenues and costs with an individual controlling their incurrence is
A. Master budget C. Product budget
B. Responsibility budget D. None of the above

27. Budget slack is a condition in which

A. Demand is low at various times of the year
B. Excess machine capacity exists in some areas of the plant
C. There is an intentional overestimate of expenses or an underestimate of revenues
D. Managers grant favored employees extra time-off

28. The difference between an individual's submitted budget projection and his or her best estimate of the
item being projected is an example of
A. padding the budget
B. adhering to zero-based budgeting assumptions
C. creating budgetary slack
D. being incongruent with participative budgeting

29. The procedure for setting profit objectives in which the determination of profit objectives is
subordinated to the planning, and the objectives emerge as the product of the planning itself is the
A. a priori method C. practical method
B. theoretical method D. a posteriori method

40. The procedure for setting profit objectives in which management specifies a given rate of return that
it seeks to realize in the long run by means of planning toward that end is the
A. a priori method C. pragmatic method
B. theoretical method D. ad hoc method

30. Budgeting process in which information flows top down and bottom up is referred to as:
A. Continuous budgeting. C. Perpetual budgeting
B. Participative budgeting D. Joint budgeting

31. Which of the following is not a potential problem with participative budgeting?
A. setting standards that are either too high or too low
B. padding the budget
C. build slack into the budget
D. all of the above are potential problems

32. The ideal financial planning process would be

A. top-down planning. C.a combination of top-down and bottom-up planning.
B. bottom-up planning. D.None of the above

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33. Operating budgets are
A. a forecast of expected operating expenses.
B. a forecast of operating expenses and related revenues.
C. a forecast of units of production.
D. concerned with the income-generating activities of a firm.

34. Using the concept of ‘expected value” in sales forecasting means that the sales forecast to be used is
A. developed using the indicator method
B. the sum of the sales expected by individual managers
C. based on expected selling prices of the products
D. based on probabilities

35. An overly optimistic sales budget may result in

A. increases in selling prices late in the year.
B. insufficient inventories.
C. increased sales during the year.
D. excessive inventories.

36. In preparing a cash budget, which of the following is normally the starting point for projecting cash
requirements?
A. Fixed assets. C. Accounts receivable.
B. Sales. D. Inventories.

Purchases budget
37. TOP Company desires an ending inventory of P140,000. It expects sales of P800,000 and has a beginning
inventory of P130,000. Cost of sales is 65% of sales. Budgeted purchases are
A. P 530,000 C. P 810,000
B. P 790,000 D. P1,070,000

38. Caloocan Co. has projected sales to be P600,000 in January, P750,000 in February, and P800,000 in
March. Caloocan wants to have 50% of next month’s sales needs on hand at the end of a month. If Calypso
has an average gross profit of 40%, what are the February 28 purchases?
A. P465,000 C. P775,000
B. P310,000 D. P428,000

39. Banawe Company budgeted purchases of P100,000. Cost of sales was P120,000 and the desired ending
inventory was P42,000. The beginning inventory was
A. P20,000 C. P42,000
B. P32,000 D. P62,000

Production budget
40. Malabon Company’s sales budget shows the following expected sales for the following year:
Quarter Units
First 120,000
Second 160,000
Third 90,000
Fourth 110,000
Total 480,000
The inventory at December 31 of the prior year was budgeted at 36,000 units. The quantity of finished
goods inventory at the end of each quarter is to equal 30% of the next quarter’s budgeted sales of units.
How much should the production budget show for units to be produced during the first quarter?
A. 48,000 C. 132,000
B. 96,000 D. 144,000

41. Laoag Company plans to sell 400,000 units of finished product in July an anticipates a growth rate in
sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of
the next month’s estimated sales.
There are 300,000 finished units in the inventory on June 30. Each unit of finished product requires
four pounds of direct materials at a cost of P2.50 per pound. There are 800,000 pounds of direct
materials in the inventory on June 30.
How many units should be produced for the three-month period ending September 30?
A. 1,260,000 C. 1,331,440
B. 1,328,000 D. 1,424,050

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Raw materials usage budget
42. Marinduque Company sells a single product. Budgeted sales for the year are anticipated to be 640,000
units. The estimated beginning and ending finished goods inventory are 108,000 and 90,000,
respectively. A production of one unit requires the following materials:
Material A 0.50 lb. @ P0.60
Material B 1.00 lb. @ P1.70
Material C 1.20 lb. @ P1.00
What are the respective peso amounts of each material to be used in production during the year?
Material A Material B Material C
A. P181,200 P1,026,800 P724,800
B. P181,200 P1,026,800 P746,400
C. P186,600 P1,057,400 P746,400
D. P186,600 P1,057,400 P724,800

Raw materials purchases budget

43. If there were 30,000 pounds of raw material on hand on January 1, 60,000 pounds are desired for
inventory at December 31, and 180,000 pounds are required for annual production, how many pounds
of raw material should be purchased during the year?
A. 150,000 pounds C. 120,000 pounds
B. 240,000 pounds D. 210,000 pounds

44. San Juan Company manufactures a single product. It keeps its inventory of finished goods at 75% the
coming month’s budgeted sales. It also keeps its inventory of raw materials at 50% of the coming month’s
budgeted production. Each unit of product requires two pounds of materials. The production budget is,
in units: May, 1,000; June, 1,200; July, 1,300; august, 1,600. Raw material purchases in July would be
A. 1,525 pounds C. 2,550 pounds
B. 2,900 pounds D. 3,050 pounds

Cash receipts budget

Sales
45. Gen. Santos Company began its operations on January 1 of the current year. Budgeted sales for the
first quarter are P240,000, P300,000, and P420,000, respectively, for January, February and March.
Gen. Santos Company expects 20% of its sales cash and the remainder on account. Of the sales on
account, 70% are expected to be collected in the month of sale, 25% in the month following the sale,
and the remainder in the following month.
How much should Generous receive from sales in March?
A. P304,800 C. P388,800
B. 294,000 D. P295,200

Cash collections
46. Cavite Company has P299,000 in accounts receivable on January 1, 2006. Budgeted sales for January
are P860,000. Cavite expects to sell 20% of its merchandise for cash. Of the remaining sales, 75% are
expected to be collected in the month of sale and the remainder the following month.
The January cash collections from sales are:
A. P815,000 C. P471,000
B. P691,000 D. P987,000

47. The Angono Company has the following historical pattern on its credit sales.
70 percent collected in month of sale
15 percent collected in the first month after sale
10 percent collected in the second month after sale
4 percent collected in the third month after sale
2 percent uncollectible
The sales on open account have been budgeted for the last six months of 2015 are shown below:
July P 60,000
August 70,000
September 80,000
October 90,000
November 100,000
December 85,000
The estimated total cash collections during the fourth calendar quarter from sales made on open
account during the fourth calendar quarter would be
A. P172,500 C. P265,400
B. P230,000 D. P251,400
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Cash disbursements
48. Candon Company, a merchandising firm, is preparing its master budget and has gathered the following
data to help budget cash disbursements:
Budgeted data:
Cost of goods sold P1,680,000
Desired decrease in inventories 70,000
Desired decrease in Accounts Payable 150,000
All of the accounts payables are for inventory purchases and all inventory items are purchased on
account. What are the estimated cash disbursements for inventories for the budget period?
A. P1,460,000 C. P1,900,000
B. P1,600,000 D. P1,760,000

49. Antipolo Company started its commercial operations on September 30 of the current year. Projected
manufacturing costs for the first three months of operations are P1,568,000, P1,952,000, and
P2,176,000, respectively. Depreciation, insurance, and property taxes represent P288,000 of the
estimated manufacturing costs. Insurance was paid on September 30, and property taxes will be paid
in July next year. Seventy-five percent of the remainder of the manufacturing costs are expected to be
paid in the month in which they are incurred, with the balance to be paid in the following month. The
cash payments for manufacturing costs in the month of November are:
A. P1,568,000 C. P1,664,000
B. P1,952,000 D. P1,856,000

Cash budget
50. Abra Company expects its June sales to be P300,000, which is 25% higher than its May sales. Purchases
were P200,000 in May and are expected to be P240,000 in June. All sales are on credit and are collected
as follows: 80% in the month of the sale and 20% in the following month. All payments in the month
of sales are given 2% discount. Sixty percent of purchases are paid in the month of purchase to take
advantage of purchase term of 1/10, n/40. The remaining amount is paid in the following month. The
beginning cash balance on June 1 is P20,000. The ending cash balance on June 30 would be:
A. P64,160 C. P80,640
B. P73,000 D. P85,440

51. ABC Company has a cash balance of P9,000 on April 1. The company must maintain a minimum cash
balance of P6,000. During April expected cash receipts are P45,000. Expected cash disbursements
during the month total P52,000. During April the company will need to borrow:
A. P2,000
B. P4,000
C. P6,000
D. P8,000
52. Thiel Inc. is working on its cash budget for October. The budgeted beginning cash balance is P35,000.
Budgeted cash receipts total P166,000 and budgeted cash disbursements total P162,000. The desired
ending cash balance is P50,000. The excess (deficiency) of cash available over disbursements for
October will be:
A. P31,000
B. P39,000
C. P4,000
D. P201,000

Davao's Plant Store, a retailer, started operations on January 1. On that date, the only assets were
P16,000 in cash and P3,500 in merchandise inventory. For purposes of budget preparation, assume
that the company's cost of goods sold is 60% of sales. Expected sales for the first four months appear
below.
Expected sales
January P10,000
February 24,000
March 16,000
April 25,000
The company desires that the merchandise inventory on hand at the end of each month be equal to
50% of the next month's merchandise sales (stated at cost). All purchases of merchandise inventory
must be paid in the month of purchase. Sixty percent of all sales should be for cash; the balance will be
on credit. Seventy-five percent of the credit sales should be collected in the month following the month
of sale, with the balance collected in the following month. Variable selling and administrative expenses
should be 10% of sales and fixed expenses (all depreciation) should be P3,000 per month. Cash
payments for the variable selling and administrative expenses are made during the month the expenses
are incurred.

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53. In a budgeted income statement for the month of February, net income would be:
A. P9,000
B. P1,800
C. P0
D. P4,200

54. In a budgeted balance sheet, the Merchandise Inventory on February 28:

A. P4,800
B. P7,500
C. P9,600
D. P3,200

55. The Accounts Receivable balance that would appear in the March 31 budgeted balance sheet would be:
A. P15,000
B. P16,000
C. P8,800
D. P12,400

56. In a cash budget for March, the total cash receipts would be:
A. P17,800
B. P8,200
C. P20,200
D. P16,000

57. In a cash budget for March, the total cash disbursements would be:
A. P11,200
B. P13,900
C. P22,300
D. P16,900

Flexible Budget
58. Marikina Family Inn is a bed and breakfast establishment in a converted 100-year-old mansion. The
Inn's guests appreciate its gourmet breakfasts and individually decorated rooms. The Inn's overhead
budget for the most recent month appears below:
Activity level 65 guests
Variable overhead costs
Supplies P156
Laundry 364
Fixed overhead costs
Utilities 250
Salaries and wages 4,480
Depreciation 1,330
Total overhead costs 6,580

The Inn's variable overhead costs are driven by the number of guests. What would be the total
budgeted overhead cost for a month if the activity level is 70 guests?
A. P42,460.00
B. P6,620.00
C. P7,086.15
D. P6,580.00

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59. Bacolod Manufacturing Corporation has prepared the following overhead budget for next month.
Activity level 7,800 machine-hours
Variable overhead costs
Supplies P34,320
Indirect labor 50,700
Fixed overhead costs
Supervision 10,200
Utilities 5,600
Depreciation 8,800
Total overhead costs 109,620
The company's variable overhead costs are driven by machine-hours. What would be the total
budgeted overhead cost for next month if the activity level is 7,900 machine-hours rather than 7,800
machine-hours?
A. P110,710.00
B. P109,620.00
C. P110,868.00
D. P111,025.38

60. Sarangani's cost formula for its vehicle operating cost is P1,240 per month plus P348 per snow-day.
For the month of December, the company planned for activity of 12 snow-days, but the actual level of
activity was 14 snow-days. The actual vehicle operating cost for the month was P6,330. The vehicle
operating cost in the planning budget for December would be closest to:
A. P5,426
B. P6,112
C. P5,416
D. P6,330

61. Bicol's cost formula for its vehicle operating cost is P1,840 per month plus P377 per snow-day. For the
month of November, the company planned for activity of 14 snow-days, but the actual level of activity
was 19 snow-days. The actual vehicle operating cost for the month was P9,280. The vehicle operating
cost in the flexible budget for November would be closest to:
A. P9,003
B. P7,118
C. P9,280
D. P9,660

Pollica Corporation's cost formula for its selling and administrative expense is P11,400 per month plus
P94 per unit. For the month of March, the company planned for activity of 5,700 units, but the
actual level of activity was 5,660 units. The actual selling and administrative expense for the month
was P522,860.

62. The selling and administrative expense in the planning budget for March would be closest to:
A. P522,860
B. P547,200
C. P543,440
D. P526,555

63. The selling and administrative expense in the flexible budget for March would be closest to:
A. P547,200
B. P522,860
C. P543,360
D. P543,440

64. The activity variance for selling and administrative expense in March would be closest to:
A. P24,340 Favorable
B. P24,340 Unfavorable
C. P3,760 Unfavorable
D. P3,760 Favorable

65. The spending variance for selling and administrative expense in March would be closest to:
A. P20,580 Favorable
B. P24,340 Unfavorable
C. P24,340 Favorable
D. P20,580 Unfavorable

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