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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

8. The behavioral approach to budgeting has as its goal the complete elimination of inefficiency.
Answer: False

9. A budget prepared using the total quality management approach is always achievable by departments
within a company.
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

15. If the behavioral approach is employed to determine the levels at which budgeted amounts are set,
then reasonable and achievable levels should be used.
Answer: True

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

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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

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

31. Which of the following is not a benefit of a careful and thorough budgeting process?
A) Budgeting increases management's awareness of the company's external economic environment.
B) Budgeted net income assures the company of operating profitably.
C) The budget may provide advance warning of pending problems.
D) Budgets provide a yardstick for evaluating future performance.
Answer: B

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35. When budgeted amounts are set at reasonable and achievable levels:
A) They reflect a "total quality management" philosophy of management.
B) A highly efficient department should fall slightly short of budget standards.
C) Meeting the budgeted amounts ensures a maximum level of profitability.
D) Failure to stay within the budget is viewed as an unacceptable level of performance.
Answer: D

36. A segment of a master budget relating to that portion of a business under the control of a particular
manager is termed a:
A) Performance report.
B) Production report.
C) Responsibility budget.
D) Cash budget.
Answer: C

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

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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

43. Preparation of a budgeted income statement does not require:
A) Estimates of cost of goods sold.
B) Estimates of the timing of cash receipts and payments.
C) Preparation of a sales forecast.
D) Anticipation of operating expenses.
Answer: B

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44. Which of the following is considered a financial budget estimate?
A) The manufacturing cost budget.
B) The cost of goods sold budget.
C) The operating expense budget.
D) The prepayments budget.
Answer: D

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

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.

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C) $332,000.
D) $352,000.
Answer: B
Feedback:
52,000 + 358,000 – x = 62,000
X = 348,000

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

58. Dolphin has budgeted sales for the upcoming quarter as follows:

The desired ending finished goods inventory for each month is one-half of next month's budgeted sales.
Three pounds of direct material are required for each unit produced. If direct material costs $4 per pound,
and must be paid for in the month of purchase, the budgeted direct materials purchases (in dollars) for
April are:
A) $19,980.
B) $20,700.
C) $19,800.
D) $18,000.
Answer: C
Feedback:
.5(1,500) + .5(1,800) = 1,650 x 3 = 4,950 x 4 = 19,800

Reference: 23_02
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:

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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

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:

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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

66. Capricorn, Inc. uses a flexible budget. Capricorn produced 16,000 units in May incurring direct
materials cost of $20,480. Its master budget for the year projected direct materials cost of $362,500, at a
production volume of 290,000 units. A flexible budget for May should reflect direct materials cost of:
A) $20,480.
B) $20,000.
C) $21,000.
D) $19,750.
Answer: B
Feedback:
362,500/290,000 = 1.25 x 16,000 = 20,000

Reference: 23_06
Use the following to answer 70-72

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Essay
73. Steps in the budgeting process
Listed below are eight operating budget estimates. In the space provided, list which of these estimates is
typically made first, second, third, etc.
(a) ____Operating expense budget
(b) ____Budgeted income statement
(c) ____Ending finished goods forecast
(d) ____Production schedule (in units)
(e) ____Manufacturing cost estimates
(f) ____Cost of goods sold budget
(g) ____Sales forecast
(h) ____Manufacturing cost budget
Answer: (a) 7 (or 6) (b) 8 (c) 5 (d) 2 (e) 3 (f) 6 (or 7) (g) 1 (h) 4

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

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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.
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.

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Answer:

76. Budgeted debt service costs
On April 1, Crawford Corporation borrowed $400,000 from its bank by signing a 9%, 5-year note
payable. The note calls for 60 monthly payments of $6,150, which includes both interest and principal
components.
(a) Interest expense budgeted for April amounts to: $_______________
(b) The carrying value of the note to be reported in the company's budgeted balance sheet as of April 30
is: $_______________
(c) Interest expense budgeted for May amounts to (round to nearest whole dollar): $_______________
(d) The carrying value of the note to be reported in the company's budgeted balance sheet as of May 31 is
(round to nearest whole dollar): $_______________
Computations

Answer:
(a) $3,000 (b) $396,850 (c) $2,976.38 (d) $393,676.38

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Computations

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:

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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

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.

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Answer:

79. Flexible budget-variances
The cost accountant for Fleming, Inc., prepared the following monthly performance report relating to the
Finishing Department:

(a) Compute the amounts that should be included for each of the following in a flexible budget prepared
for a 6,500-unit level of production:
(1) Direct materials: $_______________
(2) Direct labor: $_______________
(3) Fixed manufacturing overhead: $_______________
(b) Assume that a revised performance report is prepared for the 6,500-unit level of production using a
flexible budget approach. Compute the cost variances for each of the following. Indicate whether each
variance is favorable (F) or unfavorable (U).
(1) Direct materials: $_______________
(2) Direct labor: $_______________
(3) Fixed manufacturing overhead: $_______________

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Answer:

80. Elements of the master budget
Describe briefly the purpose of a master budget and discuss its elements.
Answer:
A master budget is a group of related budgets and forecasts which, together, summarize and coordinate all
planned activities of a business. The master budget usually consists of a sales forecast, a production
schedule, a manufacturing costs budget, an operating expense budget, a capital expenditures budget, and
projected financial statements. The number and type of individual budgets and schedules which make up
the master budget depend upon the size and the characteristics of the business.

83. Bisset Company expected sales to be 50,000 units in February, 45,000 in March and 55,000 units in
April. Each unit sells for $16.00 each. The following costs pertain to each unit:

Bisset is considering an advertising campaign which will cost $10,000 per month from January to March
and is expected to increase sales by 8% a month. At the same time Bisset will reduce sales prices to
$15.00 per unit while keeping costs steady.

Required:
(A.) What will operating income be in each of the three months before the advertising campaign?
(B.) If Bisset goes ahead with the advertising campaign, how much would operating income increase or
decrease each month? Would you advise them to go ahead with the campaign?

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Answer:

Total operating income for the three months decreases at all sales levels. There is no financial advantage
to have the advertising campaign.

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NAME #

10-MINUTE QUIZ A SECTION

Indicate the best answer for each question in the space provided.
1 Which of the following is not normally a characteristic of a profit rich, cash poor company?
a Low inventory turnover.
b High accounts receivable turnover.
c High operating income, but low cash flow from operations.
d A long operating cycle.

2 Which of the following is not considered a benefit from budgeting?
a Limited managerial perspectives.
b Advance warning of problems.
c Better coordination among activities.
d A measure of performance evaluation.

3 Which of the following is a characteristic of the behavioral approach to setting budget
targets?
a Complete elimination of inefficiency.
b Complete elimination of non-value-adding activities.
c Constant need for improvement.
d Achievable performance expectations.

4 Which of the following is not normally considered an element of a master budget?
a The production schedule.
b The employee turnover budget.
c The operating expense budget.
d The cash budget.

5 Which budget typically serves as a starting point in developing a master budget?
a The sales budget.
b The cost of goods sold budget.
c The employee turnover budget.
d The manufacturing cost budget.

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NAME #

10-MINUTE QUIZ B SECTION
Use the following data for questions 1 through 3.
The following budget for the 80,000-unit product level was prepared for the Production
Department for September:

Budgeted
(80,000 Units)
Variable costs:
Direct materials cost.......................................................................... $ 42,000
Direct labor....................................................................................... 50,000
Variable overhead............................................................................. 34,000
Fixed costs:
Manufacturing overhead................................................................... 66,000
Total manufacturing costs.................................................................... $192,000
During September, the Production Department actually produced 90,000 units at a total
manufacturing cost of $202,000.

1 Refer to the above data. Which of the following is not an accurate amount to be included
in a flexible budget prepared for the 90,000-unit level of production?
a Total overhead cost, $104,250.
b Total manufacturing costs, $208,750.
c Direct materials, $47,250.
d Direct labor, $56,250.
2 Refer to the above data. A performance report prepared for September operations under a
flexible budget approach would show:
a Actual costs under budget by $5,750.
b Total costs per flexible budget of $205,000.
c Actual costs under budget by $8,000.
d Actual costs over budget by $10,000.
3 Refer to the above data. The cost-volume relationship used to prepare the flexible budget
for this department includes:
a Manufacturing overhead cost of $1.00 per unit.
b Fixed cost of $0.83 per unit.
c Total cost of $2.40 per unit.
d Variable costs of $1.58 per unit.

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4 The Company’s actual manufacturing costs for the month of May totaled $72,000, while
the budgeted manufacturing costs were $80,000. Comparison of the budgeted costs with
actual amounts:
a Is not significant unless the budgeted and actual figures are based upon the same level
of production.
b Demonstrates that the Manufacturing Department operated very efficiently during May.
c Indicates that production cost per unit was 10% below budgeted cost per unit.
d Indicates that the Company produced only 90% of the number of units budgeted for
production in May.
5 A flexible budget is used to evaluate:
a Costs that should have been incurred for a level of output achieved.
b Costs that should have been incurred for a level of output considered to be normal.
c How variable unit costs change as output changes.
d How flexible management was at adapting to changes in business conditions.

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NAME #

10-MINUTE QUIZ C SECTION

The cost accountant for Dunbar’s Co. prepared the following monthly performance report relating to
the Production Department.

Budgeted Actual
Production Production
(10,000 Units) (11,000 Units)

Direct materials used.......................................................... $210,000 $230,000
Direct labor ..................................................................... 70,000 81,000
Variable manufacturing overhead....................................... 30,000 35,000
Fixed manufacturing overhead........................................... 130,000 134,000

1 Refer to the above data. Compute the amounts that should be included for each of the following in a
flexible budget prepared at an 11,000-unit level of production:

a Direct materials: $____________

b Direct labor: $____________

c Fixed manufacturing overhead: $____________

2 Refer to the above data. Assume that a revised performance report is prepared for the 11,000-unit level
of production using a flexible budget approach. Compute the cost variances for each of the following.
Indicate whether each variance is favorable (F) or unfavorable (U).

a Direct materials variance from flexible budget: $____________

b Direct labor variance from flexible budget: $____________

c Total manufacturing overhead variance from flexible budget: $____________

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NAME #

10-MINUTE QUIZ D SECTION

1 Hayden Corporation budgeted its cost of finished goods manufactured at $500,000 for May. Its May
31 finished goods inventory budgeted to be twice the level of its May 1 finished goods inventory. The
cost of goods sold budget for May has been set at $450,000.

Hayden’s finished goods inventory at May 31 is budgeted at: $____________

2 Suffolk Corporation expects to incur $360,000 in expenses during June (excluding interest and taxes).
Of this amount, depreciation is budgeted at $70,000, and expired prepayments are budgeted at
$35,000. Suffolk’s current payables total $60,000 at June 1 and are budgeted to increase to $70,000 by
June 30.

Payments on current payables budgeted for June total: $____________

3 Weaver Corporation pays its debt service costs in full each month. April debt service costs are
budgeted at $9,000. However, of this amount, only $1,000 represents a reduction principal. The
company expects to issue no new debt during the month.

What cash disbursement amount will be shown on Weaver’s debt service budget? $____________

4 Bergen Corporation’s accounts receivable remain outstanding approximately 42 days, whereas its
inventory remains in stock approximately 12 days before it is sold. It takes suppliers approximately 7
days to deliver inventory to Bergen once an order is received.

Jasper’s operating cycle is: __________ days

5 As budgeted output per the flexible budget increases, per-unit fixed costs (increase/decrease):
___________

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SELF-TEST QUESTIONS FROM TEXTBOOK

Choose the best answer for each of the following questions and insert the identifying letter in the
space provided.

1 Which of the following statements correctly describe relationships within the master
budget? (More than one answer may be correct.)
a The manufacturing budget is based in large part upon the sales forecast.
b In many elements of the master budget, the amounts budgeted for the upcoming
quarter are reviewed and subdivided into monthly budget figures.
c The manufacturing cost budget affects the budgeted income statement, the cash
budget, and the budgeted balance sheet.
d The capital expenditures budget has a greater effect upon the budgeted income
statement than it does upon the budgeted balance sheet.

2 During the first quarter of its operations, Morris Mfg. Co. expects to sell 50,000 units and
create an ending inventory of 20,000 units. Variable manufacturing costs are budgeted at
$10 per unit, and fixed manufacturing costs at $100,000 per quarter. The company’s
treasurer expects that 80% of the variable manufacturing costs will require cash payment
during the quarter and that 20% will be financed through accounts payable and accrued
liabilities. Only 50% of the fixed manufacturing costs are expected to require cash
payments during the quarter.
In the cash budget, payments for manufacturing costs during the quarter will total:
a $800,000.
b $610,000.
c $600,000.
d $450,000.

3 Rodgers Mfg. Co. prepares a flexible budget. The original budget forecasted sales of
100,000 units @ $20, and operating expenses of $300,000 fixed plus $2 per unit.
Production also was budgeted at 100,000 units. Actual sales and production for the period
totaled 110,000 units. When the budget is adjusted to reflect these new activity levels,
which of the following budgeted amounts will increase, but by less than 10%?
a Sales revenue.
b Variable manufacturing costs.
c Fixed manufacturing costs.
d Total operating expenses.

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4 Lamberton Manufacturing Company has just completed its master budget. The budget
indicates that the company’s operating cycle needs to be shortened. Thus, the company
will likely attempt:
a Decreasing its inventory turnover.
b Decreasing its accounts receivable turnover.
c Tighten credit policies.
d None of the above selections is correct.

5 Which of the following is not an element of the master budget?
a The capital expenditures budget.
b The production schedule.
c The operating expense budget.
d All of the above are elements of the master budget.

6 Which of the following is not a potential benefit of using budgets?
a Enhanced coordination of firm activities.
b More motivated managers.
c More accurate external financial statements.
d Improved interdepartmental communication.

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SOLUTIONS TO - 10-MINUTE QUIZZES

QUIZ A QUIZ B
1 B 1 B
2 A 2 A
3 D 3 D
4 B 4 A
5 A 5 A
Learning Objective: 1 – 4 Learning Objective: 6

QUIZ C
1
a ($210,000/10,000 units) x 11,000 units = $231,000
b ($70,000/10,000 units) x 11,000 units = $77,000
c $130,000 (Fixed costs remain unchanged throughout a relevant range of production)

2
a $231,000 flexible budget - $230,000 actual cost = $1,000 F
b $77,000 flexible budget - $81,000 actual cost = $4,000 U
c $6,000 U
Total overhead per flexible budget:
Fixed.................................................................................... $130,000
Variable ($30,000/10,000) x 11,000..................................... 33,000 $163,000
Actual overhead ($134,000 + $35,000)...................................... (169,000)
Cost variance-total manufacturing overhead............................... $6,000 U
Learning Objective: 5, 6

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QUIZ D
1
Let X = Finished Goods Inventory, May 1
X + $500,000 - 2X = $450,000
X = $50,000
2X = Finished Goods Inventory, May 31 =$100,000

2
($360,000 - $70,000 -$35,000) + $60,000 -$70,000 = $245,000

3
$9,000

4
42 days + 12 days = 54 days

5
Decrease
Learning Objective: 5, 6

SOLUTIONS TO SELF-TEST QUESTIONS FROM TEXTBOOK
1 a, b, c 2 b (70,000 units x $10 per unit x 80%) + ($100,000 x 50%) = $610,000 3 d 4 c 5 d
6 c

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