5 Operational Budgeting

Operational Budgeting
True/False
1. The typical starting point of a master budget would be to prepare a budgeted balance sheet.
2. A company that is profitable may not have sufficient cash on hand to meet their immediate needs.
3. In a master budget the sales forecast would be dependent upon the budgeted production figures.
4. The behavioral approach to budgeting has as its goal the complete elimination of inefficiency.
5. A budget prepared using the total quality management approach is always achievable by departments
within a company.
6. A company's operating cycle is the time between purchases of direct materials and conversion of
these materials back into cash.
7. The operating cycle is the average time required to manufacture products for sale.
8. Because a budget is merely a forecast of future events, its benefits are extremely narrow and limited.
9. If the behavioral approach is employed to determine the levels at which budgeted amounts are set,
then reasonable and achievable levels should be used.
10. A master budget is a comprehensive financial plan setting forth the financial and operational goals of
a business.
11. A master budget actually includes a number of related budgets.
12. In preparing a master budget, budgeted levels for production, manufacturing costs, and operating
expenses normally are determined after preparing the sales forecast.
13. A cash budget determines the maximum limit amount of money that can be spent during the period.
14. The preparation of a budgeted balance sheet requires consideration of the budgeted capital
expenditures and budgeted net income.
15. A debt service budget summarizes cash payments required for interest, and includes those required to
pay down principal.
16. 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.
Multiple Choices:
1. 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.
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2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. Which of the following is not considered an operating budget?

A) Manufacturing cost budget.
B) Production schedule.
C) Capital expenditures budget.
D) Sales forecast.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
The following information is from the manufacturing budget and budgeted financial statements of Taylor
Corp.:
19. 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.
20. 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.
21. 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.
22. 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.
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.
23. Refer to the information above. Grant 's budgeted interest expense for March is:
A) $500.
B) $4,000.
C) $4,500.
D) $5,000.
24. 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.
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.
25. 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.
26. 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.
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.
27. Refer to the information above. Budgeted collections from customers in October total:
A) $52,000.
B) $39,000.
C) $41,000.
D) $63,000.
28. Refer to the information above. Budgeted collections from customers in November total:
A) $42,000.
B) $63,000.
C) $69,000.
D) $58,000.
29. Refer to the information above. Budgeted collections from customers in December total:
A) $65,000.
B) $70,000.
C) $74,000.
D) $69,000.
30. 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.
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Operational Budgeting

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

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

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

6. When budgeted amounts are set at reasonable and achievable levels:

8. Which of the following is not considered an operating budget?

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

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

13. The production schedule in units:

14. Preparation of a budgeted income statement does not require:

15. Which of the following is considered a financial budget estimate?

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

17. A cash budget is affected directly by each of the following except:

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