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CHAPTER 6: OPERATIONAL AND FINANCIAL BUDGETING True-False F 1. A just-in-time manufacturer does NOT need a sales budget. T 2.

A flexible budget allowance is NOT especially useful for budgeting discret ionary costs. F 3. The purchases budget is prepared before the sales budget because the compa ny cannot estimate what it will sell until it has some idea of what will be on h and. F 4. The longer the time period covered by a budget, the more useful the budget will be for controlling operations. F 5. A purchases budget is normally prepared after the company has forecast how much cash it will have available to pay for purchases. F 6. Imposed budgets are exceptionally ambitious goals not likely to be achieve d without making fundamental changes in the way a job is done. F 7. A JIT manufacturer that maintains no inventory doesn't need a cash disburs ements budget. F 8. The budget for a retailer is likely to be more complex than that for a man ufacturer because a retailer has a wider variety of customers. F 9. The increasing public demand for accountability from governmental and othe r not-for-profit organizations has resulted in an increased use of incremental b udgeting. T 10. Line-by-line budget authorization is common in governmental units. Multiple Choice A 1. The starting point in preparing a comprehensive budget is a. the sales forecast. b. the cash budget. c. the budgeted income statement. d. the flexible expense budget. D 2. Budgets are related to which of the following management functions? a. Planning. b. Control. c. Performance evaluation. d. All of the above. D 3. Which of the following should be used to forecast sales? a. Regression analysis. b. The scatter diagram. c. The judgment of the most experienced managers. d. Whatever method produces the most accurate forecast. A 4. A critical factor for using indicator methods to forecast sales is a. the availability of a forecasted value for the indicator. b. an upward trend in the value of the indicator. c. governmental collection of data for computing and reporting the value o f the indicator.

d. the availability of an indicator that covers the entire country. D 5. Which of the following equations can be used to budget purchases? (BI = b eginning inventory, EI = ending inventory desired, CGS = budgeted cost of goods sold) a. Budgeted purchases = CGS + BI - EI b. Budgeted purchases = CGS + BI c. Budgeted purchases = CGS + EI + BI d. Budgeted purchases = CGS + EI - BI B 6. 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 cost = cost per unit x units produced. d. the same as a continuous budget. B 7. The use of flexible (as opposed to static) budget allowances is LEAST impo rtant for which of the following? a. Costs of the production department. b. Costs of the general accounting department. c. Costs of the product shipping department. d. Costs of the material receiving department. D 8. Budgets set at very high levels of performance (i.e., very low costs) 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. C 9. Inventory policy is most critical in the budgeting of a. sales. b. cost of goods sold. c. purchases. d. expenses. A 10. Budgeting expenditures by purpose is called a. program budgeting. b. zero-based budgeting. c. line budgeting. d. flexible budgeting. C 11. Which of the following is a difference between a static budget and a flexi ble budget? a. A flexible budget includes only variable costs, a static budget include s only fixed costs. b. A flexible budget includes all costs, a static budget includes only fix ed costs. c. A flexible budget gives different allowances for different levels of ac tivity; a static budget does not. d. None of the above. A 12. A static budget is most appropriate for a department a. with only fixed costs. b. with only variable costs. c. with mostly mixed costs. d. with any of the above characteristics. D 13. Which of the following is NOT an advantage of budgeting? a. It requires managers to state their objectives. b. It facilitates control by permitting comparisons of budgeted and actual

results. c. It facilitates performance evaluation by permitting comparisons of budg eted and actual results. d. It provides a check-up device that allows managers to keep close tabs o n their subordinates. B 14. An a. b. c. d. imposed budget is the same as a static budget. can lead to poor performance. is best for planning purposes. eliminates the need for a sales forecast.

B 15. Prohibiting managers from overspending budget allowances a. improves company performance. b. can harm company performance. c. eliminates the need for comparisons of budgeted and actual amounts. d. usually reduces the need to prepare a cash budget. B 16. Which of the following will occur if X Co.'s actual sales in May are lower than its budgeted sales for that month? a. X won't have enough cash to cover bills requiring payment in May. b. X's actual inventory at the end of May will be higher than budgeted. c. X's actual purchases in June will be higher than budgeted. d. All of the above. C 17. JIT manufacturers are more likely than conventional manufacturers to a. use static budget allowances for manufacturing costs. b. prepare production budgets without a sales forecast. c. budget unit production equal to budgeted unit sales. d. experience budget variances. A 18. If cash receipts from customers are greater than sales, which of the follo wing is most likely to be true? a. The balance of accounts receivable will decrease. b. The company's outstanding debt will decrease. c. The company's cash balance will increase. d. The company will show a profit. C 19. A cash budget is NOT prepared until a company has a. obtained a commitment from its bank that cash will be available as need ed. b. prepared the pro forma balance sheet. c. prepared its purchases budget. d. determined that enough cash is available to meet dividend payments. A 20. Which of the following is LEAST likely to be affected if unit sales for th is month are lower than budgeted? a. Production for this month. b. Production for next month. c. Cash receipts for next month. d. Inventory at the end of this month. B 21. "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. B 22. The principal DISADVANTAGE of line budgeting is a. it can only be used by not-for-profit entities. b. it limits the flexibility of managers to accomplish the entity's object

ives. c. it works only in conjunction with zero-based budgeting. d. none of the above. A 23. The cash receipts budget a. requires a sales forecast. b. requires a purchases or production budget. c. is prepared after the cash disbursements budget. d. has none of the above characteristics. C 24. The type of company most likely to run short of cash during the year is on e with a. little seasonality. b. high contribution margin percentage. c. high seasonality and rapid sales growth. d. relatively low fixed costs. D 25. If a. b. c. d. a company is earning a profit, its cash balance is increasing. its monthly cash disbursements will be stable. its inventory is increasing. it might have to borrow money.

A 26. One difference between budgeting in for-profit and not-for-profit entities is that not-for-profit entities usually a. budget expenses before revenues. b. don't need a cash budget. c. are less likely to use incremental budgeting. d. use computer software-packages to facilitate the budgeting process. D 27. To a. b. c. d. prepare its cash disbursements budget, a company uses information from its balance sheet at the end of the prior period. its purchases budget. its capital budget. all of the above sources.

B 28. Just-in-time manufacturers are more likely than conventional manufacturers to a. prepare production budgets without a sales forecast. b. budget materials purchases equal to the current month's needs for produ ction. c. budget unit production for the month at greater than budgeted unit sale s for the month. d. experience cash shortages. .