Operational Budgeting

True/False

2. The typical starting point of a master budget would be to prepare a budgeted balance sheet.
Answer: False

4. A company that is profitable may not have sufficient cash on hand to meet their immediate needs.
Answer: True

5. In a master budget the sales forecast would be dependent upon the budgeted production figures.
Answer: False

11. A company's operating cycle is the time between purchases of direct materials and conversion of
these materials back into cash.
Answer: True

12. The operating cycle is the average time required to manufacture products for sale.
Answer: False

13. Because a budget is merely a forecast of future events, its benefits are extremely narrow and limited.
Answer: False

16. A master budget is a comprehensive financial plan setting forth the financial and operational goals of
a business.
Answer: True

17. A master budget actually includes a number of related budgets.

Answer: True

18. In preparing a master budget, budgeted levels for production, manufacturing costs, and operating
expenses normally are determined after preparing the sales forecast.
Answer: True

20. A cash budget determines the maximum limit amount of money that can be spent during the period.
Answer: False

21. The preparation of a budgeted balance sheet requires consideration of the budgeted capital
expenditures and budgeted net income.
Answer: True

22. A debt service budget summarizes cash payments required for interest, and includes those required to
pay down principal.
Answer: True

23. If a budget is to provide a basis for evaluating departmental performance, departmental managers
should not know what their budget targets are until after the budget period has ended.
Answer: False

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Multiple Choices:

25. A budget that adds a new month when the current month ends is called a:
A) Capital budget.
B) Master budget.
C) Rolling budget.
D) There is no such budget.
Answer: C

26. The benefits of budgeting include all of the following except:

A) Enabling the company to produce more for less cost.
B) Assigning responsibility for situations that require corrective action.
C) Coordinating activities between departments within the organization.
D) Creating standards for evaluating performance.
Answer: A

27. A master budget usually includes all of the following except:

A) A sales forecast.
B) A cash budget.
C) A projected tax return.
D) Projected financial statements.
Answer: C

28. A master budget can be used as a(n):

A) Aid to planning.
B) Evaluation tool.
C) Means to coordinate activities.
D) All of the above.
Answer: D

29. As the volume of output increases:

A) Variable costs per unit will increase.
B) Variable costs per unit will decrease.
C) Variable costs per unit will not change.
D) Variable costs in total will decrease.
Answer: C

30. As the volume of output decreases:

A) Fixed costs per unit will increase.
B) Fixed costs per unit will decrease.
C) Fixed costs per unit will not change.
D) Fixed costs in total will decrease.
Answer: A

33. Costs that rise and fall proportionately with the volume of output are often referred to as:
A) Variable costs.
B) Flexible costs.
C) Idle capacity costs.
D) Uncontrollable costs.
Answer: A

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37. Which of the following is not considered an operating budget?
A) Manufacturing cost budget.
B) Production schedule.
C) Capital expenditures budget.
D) Sales forecast.
Answer: C

38. Which element of a master budget would normally be prepared first?

A) A production budget.
B) A cash budget.
C) A budget of operating expenses.
D) A sales forecast.
Answer: D

39. Which of the following is a major component of a master budget?

A) A production throughput schedule.
B) A machinery maintenance schedule.
C) A manufacturing cost budget.
D) An employee training budget.
Answer: C

40. Which of the following is considered an operating budget estimate?

A) The prepayments budget.
B) The debt service budget.
C) The manufacturing cost budget.
D) The capital expenditures budget.
Answer: C

41. The sales forecast directly affects many elements of the master budget. Which of the following
would be least affected by short-term fluctuations in the sales forecasts?
A) The production schedule.
B) The budgeted income statement.
C) The capital expenditures budget.
D) The operating expense budget.
Answer: C

42. The production schedule in units:

A) Cannot be prepared until the budgeted income statement is completed.
B) Is dependent upon the sales forecast for the period.
C) Is based upon the manufacturing cost budget, that is, upon the level of funds available for
manufacturing costs.
D) Is the starting point in the preparation of the master budget.
Answer: B

45. Which element of a master budget would normally be prepared last?

A) A cash budget.
B) A budgeted balance sheet.
C) A budgeted income statement.
D) A production budget.
Answer: B

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46. A cash budget is affected directly by each of the following except:
A) A capital expenditures budget.
B) A sales forecast.
C) A manufacturing cost budget.
D) A budgeted income statement.
Answer: D

47. In a cash budget, the budgeted level of cash receipts depends on all of the following except:
A) The sales forecast.
B) The credit terms offered to customers.
C) The credit terms offered by suppliers.
D) Experience in collecting receivables.
Answer: C

Use the following for questions 55-56

The following information is from the manufacturing budget and budgeted financial statements of Taylor
Corp.:

55. Refer to the information above. For the year, budgeted purchases of direct materials amounted to:
A) $342,000.
B) $326,000.
C) $358,000.
D) $368,000.
Answer: C
Response:
84,000 + x _0342,000 = 100,000
X = 358,000

56. Refer to the information above. For the year, budgeted cash payments to suppliers amounted to:
A) $342,000.
B) $348,000.
C) $332,000.
D) $352,000.
Answer: B
Feedback:
52,000 + 358,000 – x = 62,000
X = 348,000

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57. Shoreline Corporation has budgeted a total of $361,800 in costs and expenses for the upcoming
quarter. Of this amount, $45,000 represents depreciation expense and $7,300 represents the expiration of
prepayments. Shoreline 's current payables balance is $265,000 at the beginning of the quarter. Budgeted
payments on current payables for the quarter amount to $370,000. The company's estimated current
payables balance at the end of the quarter is:
A) $179,500.
B) $204,500.
C) $203,500.
D) $310,000.
Answer: B
Feedback:
265,000 + (361,800 – 45,000 – 7,300) - 370,000 = 204,500

Use the following to answer 59-60

On March 1, Grant Corporation plans to borrow $450,000 from the Ireland State Bank by signing a 12%,
15-year note payable. The note calls for 180 monthly payments of $5,000, which includes both interest
and principal components.

59. Refer to the information above. Grant 's budgeted interest expense for March is:
A) $500.
B) $4,000.
C) $4,500.
D) $5,000.
Answer: C
Feedback:
450,000 x .01 = 4,500

60. Refer to the information above. Of Grant 's budgeted debt service cost of $5,000 in March, the
amount applied to the principal of the note totals:
A) $500.
B) $4,000.
C) $4,500.
D) $5,000.
Answer: A
Feedback:
5,000 – 4,500 = 500

Use the following to answer 61-62

Morrow Corporation makes all sales on account. The June 30th balance sheet balance in its accounts
receivable is $400,000, of which $240,000 pertain to sales that were made during June. Budgeted sales
for July are $1,250,000. Morrow collects 70% of sales in the month of sale; 20% in the following month;
and the final 10% in the second month after the sale.

61. Refer to the information above. What are Morrow 's budgeted collections for July?
A) $800,000.
B) $939,000.
C) $1,083,000.
D) $915,000.
Answer: B
Feedback:
.7(1,250,000) + .2(240,000) + .1(160,000) = 939,000

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62. Refer to the information above. What is the budgeted balance of Morrow 's accounts receivable as of
July 31?
A) $375,000.
B) $399,000.
C) $415,000.
D) $396,000.
Answer: B
Feedback:
.3(1,250,000) + .1(240,000) = 399,000

Use the following to answer 63-65

On October 1 of the current year, Jackson Corporation prepared a cash budget for October, November,
and December. All of Jackson‘s sales are made on account. The following information was used in
preparing estimated cash collections:

Approximately 60% of all sales are collected in the month of the sale, 30% is collected in the following
month, and 10% is collected in the month thereafter.

63. Refer to the information above. Budgeted collections from customers in October total:
A) $52,000.
B) $39,000.
C) $41,000.
D) $63,000.
Answer: C
Feedback:
.6(30,000) + .3(60,000) + .1(50,000) = 41,000

64. Refer to the information above. Budgeted collections from customers in November total:
A) $42,000.
B) $63,000.
C) $69,000.
D) $58,000.
Answer: B
Feedback:
.6(80,000) + .3(30,000) + .1(60,000) = 63,000

65. Refer to the information above. Budgeted collections from customers in December total:
A) $65,000.
B) $70,000.
C) $74,000.
D) $69,000.
Answer: D
Feedback:
.6(70,000) + .3(80,000) + .1(30,000) = 69,000

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74. Budgeted material purchases and payments to suppliers
On January 1 of the current period, Matson Corporation has direct materials on hand of $80,000. Of this
amount, Matson owes suppliers $49,000 on account. The company has prepared the following budget
estimates for January:

(a) Purchases of direct materials budgeted in January amount to: $_______________

(b) Cash payments to suppliers budgeted in January amount to: $_______________
Computations

Answer:
(a) $315,000 (b) $304,000

Computations:

75. Production and purchases budgets

Stewart Furniture, Inc. manufactures a variety of desks, chairs, tables, and shelf units which are sold to
public school systems throughout the Midwest. The controller of the company's School Desk Division is
currently preparing a budget for the second quarter of 2008. The following sales forecast has been
developed by the division's sales manager:

The inventory of finished desk and chair sets at the end of each month must be equal to 30% of the
budgeted sales for the next month. On April 1, there will be 2,500 units of desk and chair sets on hand.
Work-in-process inventories are negligible and can be safely ignored.

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Each desk and chair set requires 10 board feet of pine planks. Pine planks cost $0.70 per board foot, and
the division ends each month with enough pine to cover 20% of the next month's production
requirements. This requirement will be met on April 1 of 2008.
Required. Prepare a production budget and a materials purchases budget for April, May, and June and in
total for the three-month period.

Answer:

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77. Cash receipts budget
The director of budgeting for Ward Products is beginning the process of preparing a cash budget for each
month of the coming year. The sales forecast for the month of January is as follows:

In the past, the accounts receivable originating from credit sales have been collected in the following
pattern:

Credit sales in the last two months of the current year, some of which remain uncollected at year-end,
were as follows:

Compute the amount of cash expected to be collected from customers in January of the coming year.
$_______________
Computations
Cash expected to be collected in January:
From November credit sales $________
Answer:
$728,500
Computations

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78. Preparation of cash budget
Use the following information to prepare a cash budget for Dalton Corporation for the month of June
2008.
In May, 30-day credit sales were $150,000; 80% of this amount is estimated to be collectible in June.
June sales are estimated to be $450,000; cash sales are usually 25% of total sales. Only 10% of credit
sales are collected in the month in which the sale is made.
Total fixed expenses are $50,000 per month, including $24,000 depreciation. Variable expenses are 55%
of sales. All expenses requiring payment are paid in cash when incurred.
A $50,000 note payable must be paid on June 30.
As of May 31, the cash balance is $84,000.

Answer:

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