PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS, ACCOUNTANCY AND PUBLIC ADMINISTRATION

MASTER BUDGET
THEORIES:
1. The concept of “management by exception” refers to management’s consideration of
A. only those items that vary materially from expectations.
B. only rare events.
C. samples selected at random.
D. only significant unfavorable deviations.

2. 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.

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

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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.
9. A variant of fiscal-year budgeting whereby a twelve-month projections into the future is maintained at
all times:
A. Forecasting. C. Continuous budgeting.
B. Zero-based budgeting. D. Calendar budgeting.

10. 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

11. 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.

12. “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

13. 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.

14. The term “decision package” relates to

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

15. 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
16. 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
17. Zero-base budgeting requires managers to
A. Justify expenditures that are increases over the prior period’s budgeted amount.
B. Justify all expenditures, not just increases over last year’s amount.
C. Maintain a full-year budget intact at all times.
D. Maintain a budget with zero increases over the prior period.

18. Zero-based budgeting:

A. involves the review of changes made to an organization’s original budget.
B. does not provide a summary of annual projections.
C. involves the review of each cost component from a cost/benefit perspective.
D. emphasizes the relationship of effort to projected annual revenues.

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. Which of the following statements about Zero-based budgeting is incorrect?

A. All activities in the company are organized into break-up units called packages.
B. All costs have to be justified every budgeting period.
C. The process is not time consuming since justification of costs can be done as a routine matter.
D. Zero-based budgeting includes variable costs only
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.

23. A budget that presents the plan for a range of activity so that the plan can be adjusted for changes in
activity levels is referred to as:
A. Zero-based budgeting.
B. Continuous budgeting.
C. Flexible budgeting.
D. Program planning and budgeting system.

24. 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

25. A series of budgets for varying levels of activity is a:

A. Variable cost budget. C. Master budget.
B. Flexible budget. D. Zero-based budget.
26. The increased use of automation and less use of the work force in companies has caused a trend
towards an increase in
A. both variable and fixed costs.
B. fixed costs and a decrease in variable costs.
C. variable costs and a decrease in fixed costs.
D. variable costs and no change in fixed costs.

27. 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.

28. Recognition of the many uncertainties in budgeting is exemplified by companies normally

A. forecasting sales
B. establishing minimum required cash balances
C. forecasting only fixed costs
D. omitting expected dividend payments from budgeted disbursements

29. Which of the following statements is True?

A. Under zero-based budgeting, a manager is required to start at zero budget levels each period, as if
the programs involved were being initiated for the first time.
B. The primary purpose of the cash budget is to show the expected cash balance at the end of the
budget period.
C. Budget data are generally prepared by top management and distributed downward in an
organization.
D. The budget committee is responsible for preparing detailed budget figures in an organization.

30. Which of the following is a valid statement?

A. Responsibility budget identifies revenue and costs with the individual responsible for their incurrence.
B. The best way to establish budget figures is to use last year’s actual cost and activity data as this
year’s budget estimates.
C. A sales budget and a sales forecast are the same thing.
D. The primary purpose of the cash budget is to show the expected cash balance at the end of the
budget period.
PROBLEMS:
1. Calypso Co. has projected sales to be P600,000 in January, P750,000 in February, and P800,000 in
March. Calypso 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

2. The payment schedule of purchases made on account is: 60% in the time period of purchase, 30% in
the following time period, and 10% in the subsequent time period. Total credit purchases were P200,000
in May, and P100,000 in June. Total payments on credit purchases were P140,000 in June. What were
the credit purchases in the month of April?
A. P200,000 C. P145,000
B. P100,000 D. P215,000

3. Montalban 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

4. Lorie 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

5. If the required direct materials purchases are 8,000 pounds and the direct materials required for
production is three times the direct materials purchases, and the beginning direct materials are three
and a half times the direct materials purchases, what are the desired ending direct material in pounds?
A. 20,000 C. 12,000
B. 4,000 D. 32,000
6. 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

7. Silver Bowl 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

8. Each unit of finished product uses 6 kilograms of raw materials. The production and inventory budgets
for May 2007 are as follows:
Beginning Inventory:
Finished goods 15,000 units
Raw materials 21,000 kg.
Budgeted unit sales 18,000 units
Planned ending inventory
Finished goods 11,400 units
Raw materials 24,400 kg.
During the production process, it is usually found that 10% of production units are scrapped as defective
and this loss occurs after the raw materials have been placed in process.
How many kilograms of raw materials should be purchased in June?
A. 89,800 C. 96,000
B. 98,440 D. 99,400

9. Violet Company manufactures a single product. It keeps its inventory of finished goods at twice the
coming month’s budgeted sales, inventory of raw materials at 150% of the coming month’s budgeted
production requirements. Each unit of product requires two pounds of materials. The production budgets
in units consist of the following:
May 1,000
June 1,200

July 1,300
August 1,600
Raw material purchases in June would be
A. 2,600 pounds C. 2,400 pounds
B. 1,800 pounds D. 2,700 pounds

10.Each unit of finished product uses 6 kilograms of raw materials. The production and inventory budgets
for May 2007 are as follows: Diliman Corporation includes the following quarterly budget for production:
 Quarter Production
First 60,000 units
Second 45,000 units
Third 40,000 units
Fourth 65,000 units
Each unit of product requires 2.5 kilograms of direct materials. The company begins each quarter with
inventory of direct materials equal to 25 percent of the total quarter’s material requirements.
What is the budgeted purchases of materials for the second quarter?
A. 113,750 C. 46,250
B. 109,375 D. 112,500

11.Generous 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.
Generous 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

12. The Le Amore Company had the following budgeted sales for the first half of the current year:
Cash Sales Credit Sales
January P70,000 P340,000
February 50,000 190,000
March 40,000 135,000
April 35,000 120,000
May 45,000 160,000
June 40,000 140,000

The company is in the process of preparing a cash budget and must determine the expected cash
collections by month. To this end, the following information has been assembled:

Collections on sales: 60% in month of sale

30% in month following sale
10% in second month following sale
The accounts receivable balance on January 1 of the current year was P70,000, of which P50,000
represents uncollected December sales and P20,000 represents uncollected November sales.
The total cash collected by Le Amore Company during the month of January would be:
A. P410,000 C. P344,000
B. P254,000 D. P331,500
13.Ironman Company is preparing its cash budget for the month ending November 30. The following
information pertains to Ironman’s past collection experience from its credit sales:
Current month’s sales 12%
Prior month’s sales 75%
 Sales two months prior to current month 6%
Sales three months prior to current month 4%
Cash discounts (2/30, net/90) 2%
Doubtful accounts 1%
Credit sales:
November – estimated P2,000,000
October 1,800,000
September 1,600,000
August 1,900,000
How much is the estimated credit to Accounts Receivable as a result of collections expected during
November?
A. P1,730,200 C. P1,762,000
B. P1,757,200 D. P1,802,000

14.Albatross 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

Question Nos. 15 through 18 are based on the following information:

Apollo Merchandiser asks your services to develop cash and other budget information for the first quarter
of 2007. In December 31, the store had the following balance:
Cash P 55,000
Accounts receivable 4,370,000
Inventories 3,094,000
Accounts payable 1,330,550

The following information are relevant to 2007 operations:

Sales:
a. Each month’s sales are billed on the last day of the month.
b. Customers are allowed a 3 percent discount if payment is made within 10 days after the billing
date. Receivables are booked gross.
c. Sixty percent of the billings are collected within the discount period, twenty-five percent are
collected by the end of the month, nine percent are collected by the end of the second month, and
six percent are considered entirely uncollectible.

Purchases:
1. Fifty four percent of all purchases and selling, general, and administrative expenses are paid in
the month purchased and the remainder in the following month.
 2. Each month’s units of ending inventory is equal to one hundred thirty percent of the next month’s
units of sales.
3. The cost of each unit of inventory is P200.
4. Selling, general, and administrative expenses, of which P20,000 is depreciation, are equal to
fifteen percent of the current month’s sales.

Actual and projected sales are as follows:

UNITS PESOS
November 11,800 P3,540,000
December 12,100 3,630,000
January 11,900 3,570,000
February 11,400 3,420,000
March 12,000 3,600,000
April 12,200 3,660,000

15.The respective amounts of budgeted purchases for the months of January and February are:
A. P2,418,000 and P2,360,000 C. P2,250,000 and P2,436,000
B. P2,380,000 and P2,280,000 D. P3,570,000 and P3,420,000

16.The budgeted cash disbursements for the month of February are:

A. P2,929,000 C. P2,949,000
B. P2,873,790 D. P2,853,790

17.The amount of cash collected from sales during the month of January is:
A. P3,338,760 C. P3,404,100
B. P3,551,160 D. P3,556,560

18.The number of units to be purchased during the month of March is:

A. 15,860 C. 12,000
B. 12,260 D. 15,600

Question Nos. 19 through 20 are based on the following information:

Rajah Enterprises is a growing retailer of home care products. During the first four months of the following
year, it forecasts the following sales and purchases:

Sales Purchases
January P7,200,000 P4,200,000
February 6,600,000 4,800,000
March 6,000,000 3,600,000
April 7,800,000 5,400,000
 Rajah collects 70% of sales is collection during the month of sale, 20% the following month and 9% in
the second month. 1% of sales are deemed uncollectible.

In order to fully avail of the 2% discount, Rajah pays all the purchases by the tenth of the month following
the month of purchase.Sales for the month of May are expected to be P6,600,000 and the amount of
purchases are P6,000,000. Operating expenses to be paid during the month of May will be P1,440,000
and the cash balance by May 1 is P2,200,000.

The Atlanta Corporation has forecast the following sales for the first seven months of the year:

January P120,000 May P120,000

February 160,000 June 200,000
March 180,000 July 220,000
April 240,000

Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of the total
material costs, 40 percent are paid in the month of purchase and 60 percent in the following month. Labor
costs will run P60,000 per month, and fixed overhead is P30,000 per month. Interest payments on the debt
will be P45,000 for both March and June. Finally, Atlanta’s sales force will receive a 3 percent commission
on total sales for the first six months of the year, to be paid on June 30.

19. How much will be paid in the month of January for the purchase of materials?
A. P 27,200 C. P137,856
B. P117,200 D. P 33,600

20. How much does Atlanta plan to disburse in the month of June?
A. P 41,600 C. P207,200
B. P100,000 D. P117,200

Question Nos. 21 through 23 are based on the following information:

Super Sales’ actual sales and purchases for April and May are shown here along with forecasted sales and
purchases for June through September.

Sales Purchases
April (Actual) P390,000 P200,000
May (Actual) 420,000 220,000
June (forecast) 390,000 210,000
July (forecast) 350,000 240,000
August (forecast) 420,000 320,000
September (forecast) 410,000 230,000

The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sales, 30
percent are collected in the month after the sale and 70 percent are collected two months after. Super Sales
 pays for 45 percent of its purchases in the month after purchase and 55 percent two months after.

Labor expense equals 15 percent of the current month's sales. General overhead expense equals P10,000
per month. Interest payments of P35,000 are due in June and September. A cash dividend of P25,000 is
scheduled to be paid in June. Tax payments of P30,000 are due in June and September. There is a
scheduled purchase for cash of an equipment, P290,000 in September.

Super Sales’ ending cash balance in May is P25,000. The minimum desired cash balance is P20,000. The
maximum desired cash balance is P50,000. Excess cash (above P50,000) is used to buy marketable
securities. Marketable securities are sold before borrowing funds in case of a cash shortfall (less than
P20,000).

21. During the month of June, Super Sales expects to receive cash from sales amounting to:
A. P606,000 C. P398,100
B. P408,900 D. P359,100

22. The cumulative amount of marketable securities purchased as of July 31 amounts to:
A. P126,000 C. P143,300
B. 132,500 D. P 0

23. The amount of loan to be obtained to maintain a balance of P50,000 cash as of September 30 will be:
A. P109.4 C. P 9.4
B. P 59.4 D. P 0.0

Question Nos. 24 through 30 are based on the following information:

The Ingo Corporation makes standard-size 2-inch fasteners, which it sells for P155 per thousand. Irine Tee,
the major stockholder, manages the inventory and finances of the company. She estimates sales for the
following months to be:

January P263,500 (1,700,000 fasteners)

February P186,000 (1,200,000 fasteners)
March P217,000 (1,400,000 fasteners)
April P310,000 (2,000,000 fasteners)
May P387,500 (2,500,000 fasteners)

Last year Ingo Corporation's sales were P175,000 in November and P232,500 in December (1,500,000
fasteners).

Ms. Tee is preparing for a meeting with Peninsula Banking Corporation to arrange the financing for the first
quarter. Based on her sales forecast and the following information she has provided, you have to prepare
a monthly cash budget, a monthly and quarterly pro forma income statement, a pro forma quarterly balance
sheet, and all necessary supporting schedules for the first quarter.
 Past history shows that Ingo Corporation collects 50 percent of its accounts receivable in the normal 30-
day credit period (the month after the sale) and the other 50 percent in 60 days (two months after the sale).
It pays for its materials 30 days after receipt. In general, Ms. Tee likes to keep a two-month supply of
inventory in anticipation of sales. Inventory at the beginning of December was 2,600,000 units. (This was
not equal to her desired two-month supply.)
The major cost of production is the purchase of raw materials in the form of steel rods, which are cut,
threaded, and finished. Last year raw material costs were P52 per 1,000 fasteners, but Ms. Tee has just
been notified that material costs have risen, effective January 1, to P60 per 1,000 fasteners. The Ingo
Corporation uses FIFO inventory accounting. Labor costs are relatively constant at P20 per thousand
fasteners, since workers are paid on a piecework basis. Overhead is allocated at P10 per thousand units,
and selling and administrative expense is 20 percent of sales. Labor expense and overhead are direct cash
outflows paid in the month incurred, while interest and taxes are paid quarterly.

The corporation usually maintains a minimum cash balance of P25,000, and it puts its excess cash into
marketable securities. The average tax rate is 40 percent, and the company usually pays out 50 percent of
net income in dividends to stockholders. Marketable securities are sold before funds are borrowed when a
cash shortage is faced. Ignore the interest on any short-term borrowings. Interest on the long-term debt is
paid in March, as are taxes and dividends.

As of year-end, the Ingo Corporation balance sheet was as follows:

Ingo Corporation
Balance Sheet
December 31, 2006

ASSETS
Current assets:
Cash P 30,000
Accounts receivable 320,000
Inventory 237,800
Total current assets 587,800
Plant and equipment, net of accumulated depreciation of P200,000 800,000
Total Assets P1,387,800

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable P 93,600
Long-term debt, 8% 400,000
Common stock 504,200
Retained earnings 390,000
Total Liabilities and Stockholders’ Equity P1,387,800

24. The budgeted production respective to each month of the first quarter of the coming year are:
A. 1,400,000; 2,000,000; 2,500,000 C. 2,500,000; 2,000,000; 1,400,000
B. 1,400,000; 2,500,000; 2,000,000 D. 2,000,000; 1,400,000; 2,500,000
25. The amount of accounts payable paid in March for the purchase of materials is:
A. P150,000 C. P104,000
B. P120,000 D. P130,000

26. The expected cash collections on accounts receivable in the month of February are:
A. P224,750 C. P 93,000
B. P248,000 D. P186,000

27. The amount of accounts receivable outstanding as of March 31, 2007 is:
A. P217,000 C. P310,000
B. P224,750 D. P108,500

28. The cost of goods sold for the first quarter of the coming year amounts to:
A. P363,800 C. P426,400
B. P453,600 D. P373,400

29. The total cash and marketable securities as of January 31 will be:
A. P45,450 C. P91,800
B. P25,000 D. P54,450

30. The expected net income during the first quarter of the coming year is:
A. P 91,080 C. P 96,840
B. P161,400 D. P151,800

-end-