CHAPTER 6: FINANCIAL PLANNING AND BUDGETS Practice Exercises 1. acelag is ‘A. Used to compare actual costs with standard costs B. Used to determine the cost of manufactured products C. A detailed plan that translates objectives or goals into financial terms D. Ameans of product costing that emphasizes activities as basic cost objects 2. The major objectives of any budget system are to A. Define responsibility centers, provide a framework for performance evaluation, and promote communication and coordination among organization segments. B. Define responsibility centers, facilitate the fixing of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates. C. Foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among organization segments. D. Foster the planning of operations, facilitate the fixing of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates. 3. Which of the following is false regarding budgeting? A. The essential features of the budgeting process are planning and control B. Availability of idle cash for investment is shown in the capital expenditures budget C. Comparing actual results with budgeted results will help mangers evaluate the performance of individuals D. Budgeting requires managers from different functional areas to communicate and coordinate their activities 4. TANG? Ok Rise cei eens 'egarting budgets ie faige? Budgets are used only as a planning function. Budgets may be developed for cash flows or labor usage. A budget is a plan that contains a quantitative statement of expected results, Budgets present organizational plans in a formal, logical, and integrated manner, 9 OPP ~219 ~, CHAPTER 6: FINANCIAL PLANNING AND BUDGETS 5. Which of the following is not part of the operating budget? A. Sales budget C. Manufacturing overhead - budget B. Capital budget D. Selling and administrative expense budget 6. Budgeting A. Is primarily a bookkeeping task. B. Primarily focuses on past performance. C. Involves the input from a broad range of managers. D. Should be built from the bottom of the hierarchy to the top. 7. Budgeting involves thi ni rn " whi as Shien e concept “management by exception” which takes A. Only rare events that would occur B. Only significant unfavorable deviations C. The samples selected at random or arbitrarily from a population D. Those items that vary materially from expectations, favorable or unfavorable 8. The following are reasons why a company would prepare a budget, except To make sure the company expands its operations To provide a basis for comparison of actual performance To control income and expenditure in a particular period To communicate the company’s plans throughout the entire business organization 9Op> 9. The following are distinguishable attributes of a budget, except A. Itis a motivating device. B. It is a guideline for operations. C. Itis a guarantee of actual results. D. It is an organization's operational plan. rations for slightly different . ization plans and budgets its opel Sn s t a significant reason for yreasons. Which one of the following is not planning? : ‘A. Ensuring profitable operations. viding a basis for controlling operations. ele ee foward the objectives of the organization. B. Cc. Checkin progress t D. Forcing Be agers to consider expected future trends and conditions.CHAPTER 6: FINANCIAL PLANNING AND BUDGETS 11. Which of the following is a use of budgets for control? A. Communication is improved. B, Plans can be made for the future. C. Budgets set a standard against which results can be compared, D. If conditions change between the formation of the budget and the current time, budgets can be quickly adapted, 12. Which of the following budgets can be used for control? A. Cash budget C. Budgeted income statement B, Production budget D. All of the choices ‘in 13. Budgeting A. Forces managers to look ahead and address potential problems B. Motivates employees to work hard to meet the company’s objectives C. Fosters the planning of operations, provide a framework for performance evaluation and promote communication and coordination among organization segments D. All of the above 14. One of the primary advantages of budgeting is that it A. Bases the profit plan on estimates. B. Is continually adapted to fit changing circumstances. C. Does not take the place of management and administration. D. Require departmental managers to make plans in conjunction with the plans of other interdependent departments. 15. Which one of the following is usually not cited as being an advantage of a formal budgetary process? A. Provides a formal benchmark to be used for feedback and performance evaluation. B. Ensures improved cost control within the organization and prevents inefficiencies. C. Serves as a coordination and communication device between management and subordinates. D. Forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary process. 16. All of the following are advantages of the use of budgets in a management control system except that budgets A. Provide performance criteria. B. Limit unauthorized expenditures. C. Force management planning. D. Promote communication and coordination within the organization. ~ 221+|G AND BUDGETS CHAPTER 6: FINANCIAL PLANNIN 17. 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 provides a check-up device that allows managers to keep close tabs on their subordinates. D. It facilitates performance evaluation by permitting comparisons of budgeted and actual results. Role of Top Management 18. In the process of budgeting, the role of the top management should A. Be limited to the approval process B. 2 ele including using the budget process to communicate cs Be limited because they do not have sufficient information of daily operations D. None of the above 19. Which one of the following best describes the role of top management in the budgeting process? Top management ‘A. Should be involved only in the approval process. B. Needs to be involved, including using the budget process to communicate goals. C. Lacks the detailed knowledge of the daily operations and should limit their involvement. D. Needs to separate the budgeting process and the business planning process into two separate processes. t director and the budgeting department is ge the budget process. mittee of the board of 20. The primary role of the budget ‘A. Compile the budget and mana B. Justify the budget to the executive com! directors. C. Settle disputes al development of the annual 0} D. Develop the annual profit plan 1 » be adopted from the suggestions submit operating segments. following is most important to mong operating executives during the perating plan. by selecting the alternatives to itted by the various 21. Which one of the a successful budgeting effort? A. Experienced analysts c. Top management support B. Integrated budget D. Reliable forecasts and i trend analyses softwareCHAPTER 6: FINANCIAL PLANNING AND BUDGETS 22, The budgeting process should be one that motivates managers and employees to work toward organizational goals. Which one of the following is least likely to motivate managers? A, Use of management by exception. B. Having top management set budget levels. C. Setting budget targets at attainable levels, D. Participation in the budgetary process. ing Pre 23, A budget manual, which enhances the operation of a budget system, is most likely to include A. Achart of accounts B. Distribution instructions for budget schedules C, Employee hiring policies D. Documentation of the accounting system software 24. When developing a budget, an external factor to consider in the planning process is New product development B. The merger of two competitors C. The implementation of a new bonus program. D. Achange to a decentralized management system ie 25. A planning calendar, for budgeting purposes is the A. Calendar year covered by the budget B. Schedule of dates at which goals are to be met C. Schedule of activities for the development and adoption of the budget D. Schedule of dates when new products should be launched in the market 26. Which one of the following statements concerning approaches for the budget development process is correct? A. The top-down approach to budgeting will ensure adherence to strategic organizational goals. B. With the information technology available, the role of budgets as an organizational communication device has declined. C. To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed even if the sales forecast upon which they are based proves to be wrong in the middle of the fiscal year. D. Since department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the operating budget.CHAPTER 6: FINANCIAL PLANNING AND BUDGETS 27. Which one of the following is not a characteristic of a successful budget "A. Gaining top management's support. B. Using market feedback to assist in setting expectations. Cc. Setting specific expectations to compare to actual results. D. Implementing the budget as the only benchmark for 28. vay of the following are advantages of the budgeting process except that Allocates resources on an as-needed basis. ew oe among organizational units. anagement to assess the future obj ee, ure objective of the Establishes benchmarks to identify unsat i tisfact mq ory organizational ° 99> Ineffective Budgets 29. An ineffective budget control system is characterized by Lack of timely feedback in the use of the budget. Use of budgets as a planning but not a control tool. Use of budgets for harassment of individuals rather than motivation. All of the answers are correct. 9 NEP 30. An improperly executed budget process might have the effect(s) of A. Inflated budget requests B. Meeting short-term but not long-term goals C. Disregard of overall company goals D. All of the choices 31. The finance department of 4 large company has prepared a master budget with very limited expense budgets for each department. The department managers are worried about being held accountable for these assigned targets, but senior management wants to keep spending ‘ reduced to allow for contingencies ‘and strategic adjustments to the company-wide master budget. Based on this information, this budget process is A. Nota successful budgeting process because it has not been widely accepted by the employees. B. Nota successful budgeting process because management has left too much room for strategic unknowns. 1 Cc. A successful budgeting process because it will encourage the ! associates to work their hardest to meet the goals. D. Assuccessful budgeting process because it will be a very useful tool to hold people accountable for overspending. itCHAPTER 6: FINANCIAL PLANNING AND BUDGETS 32. When budgets are used to evaluate performance spending, the process will often result in Capattiante in eee Rs ‘extra’ to ensure the budgets will be met. This ‘extra’ is = ws A. Budgetary slack C. Strategic Planning B. Management by objectives D. Continuous budgeting 33, There is budgetary slack when A. Costs are estimated too high, but sales are estimated too low B. Costs are estimated too low and sales are estimated too low C. Costs are estimated too high and sales are estimated too high D. Costs are estimated too low, but sales are estimated too high 34. Which of the following statements best describes budgetary slack? A. The margin of error assigned to each cost center to encourage the manager to budget accurately and consistently. B. The total amount that actual expenses are below budgeted expenses and actual revenues exceed budgeted revenues. C. The practice of understating budgeted revenues or overestimating budgeted costs to make budgeted targets more achievable. D. The practice of management assigning relaxed budgetary goals after the company achieves the first several months of the annual budget. 35. Which of the following is correct regarding budgetary slack? A. It eliminates the likelihood that a manager will receive the personal rewards that follow from meeting the expectations of superiors B. It is the process of making the budget look good by either overstating expected sales or understating budgeted expenses C. The use of which allows the use of budget to control subordinate performance D. From the perspective of corporate management, the use of budgetary slack increases the likelihood of inefficient resource allocation ~225~ee " q ————— FINANCIAL PLANNING AND BUDGETS CHAPTER 6: 36. In an organization that plans by using comprehensive budgeting, the } master is ‘A. The current budget updated for operations for part of the current year. B. A budget for a non-profit entity after it as approved by the : appropriate authoritative body. ’ C. The booklet containing budget guidelines, policies, and forms to use in the budgeting process. D. A compilation of all the separate operational and financial budget schedules of the organization. . 37. The master budget A. Reflects controllable costs only B. Shows forecasted and actual results C. Contains the operating budget D. Can be used to determine manufacturing cost variances : : 38. Which one of the following may be considered an independent item in the preparation of the master budget? ‘A. Ending inventory budget C. Capital investment budget i B. Pro forma income D. Pro forma statement of ; statement financial position 39. The preparation of a comprehensive master budget culminates with the preparation of the A. Production budget C. Capital investment budget B. Strategic budget D. Cash management and working capital budget 40. ABC Company uses a comprehensive planning and budgeting system. The apes order for ABC to prepare certain budget schedules would be CGS, balance sheet, income statement and statement of cash flows. B. Income statement, balance sheet, statement of cash flows, and ‘ CGS 3 r C. Statement of cash flows, CGS, income statement, and balance sheet D. CGS, income statement, balance sheet, and statement of cash flows Sales Budget A 5 ith 41. A comprehensive budget operational budget starts wit! : A. Sales forecast C. Budgeted income statement B. Production budget D. Raw materials purchase budget 42. The foundation of a profit plan is the ~ 226~CE CHAPTER 6: FINANCIAL PLANNING AND. BUDGETS A. Sales forecast C. Capital budget B. Production plan D. Cost and expense budget. ee 43. Which of the following is the usual starting point in di it forecast? on A. The production budget C. Last year’s level of sal B. The cash receipts budget D. Competitor a information 44. Using the concept of ‘expected value’ in sales forecasting means that the sales forecast to be used as A. Based on probabilities. B. Based on expected selling prices of the products, C. Developed using the indicator method. D. The sum of the sales expected by the individual, 45. Which one of the following items should be done first when developing a comprehensive budget for a manufacturing company? A. Development of a sales budget B. Development of a capital budget C. Determination of the advertising budget D. Preparation of a pro forma income statement 46. An overly optimistic sales budget would most likely result in A. Excessive inventories C. _ Insufficient inventories B. Increased sales during the D. Increases in selling prices year late in the year Purchasing Budget 47. Bucks Company desires an ending inventory of Php62,000 and a * beginning inventory of Php55,000. Gross profit is estimated to be 25% of sales. The expected sales amounted to Php320,000. Budgeted purchases would amount to A. Php230,000 C. Php247,000 B. Php240,000 D. Php370,000 48. ABC Company is a maker of men’s jeans. The company would like to maintain 32,000 yards of fabric in ending inventory. The beginning fabric inventory is expected to contain 40,000 yards. The expected yards of fabric needed for sales is 144,000. Compute the yards of fabric that ABC needs to purchase, A. 136,000 yards C. 152,000 yards B. 144,000 yards D. 216,000 yards ~227~CHAPTER, 6; FINANCIAL PLANNING AND BUDGETS 49, The budget that would provide necessary input data for the raw materials budget, direct labor budget and manufacturing overhead is ‘A. Sales forecast C. Cash recei ; ipts budget B. Production budget D. Cash disbursement budget 50. Which one of the following best descri i » A, It summarizes Boe ee cock. Brocuction pusaet? B, It includes required direct labor hours. = it includes required material purchases. D. Itis calculated from the desired ending inventory and the sales forecast. 51. In going from the sales budget to the production budget t, ad} the sales budget need to be made for pee A. Cash receipts C. Factory overhead costs B. Selling expenses D. Finished goods inventories 52. The production budget process usually begins with the A. Sales budget C. Direct materials budget B. Direct labor budget D. Manufacturing overhead budget ble sales and production for several years. Next year, sales are expected to increase by at least 50%. If the company maintains its policy for desired ending inventories of finished product and direct materials purchases, what will be the likely effect on the desired ending inventory of finished product? C. It will decrease A. It will increase B. It will stay the same D. It will be twice the size of desired ending inventory 53. A company has had stal 54. ABC Company's sales budget shows quarterly sales for ti quarter equal to 2( the second quarter of the next year would be c A. 10,440 units Cc. 12,180 units B. 11,600 units D. 12,760 units ~ 228 ~ he next year as follows: : > Quarter Units Quarter —_Units 1 14,500 3 17,400 Zi 11,600 4 20,300 Com| licy is to have a finished goods inventory at the end of each pe Ee 10% of the net quarter's sales. Budgeted production for .CHAPTER 6: FINANCIAL PLANNING AND BUDGETS 55. A company provided the following information on sales for the coming year: Qi Q2 Q3 Q4] Units 40,000 | 40,000 | 30,000 | 80,000 Average selling price Php5 | PhpS | Php | _Php6 ‘Assuming that the beginning inventory is 3,000 units, and that the company policy is to have 25% of the next quarter's sales in ending inventory, which quarter will have the lowest production? Am Of B. Q2 C aa D. Q4 ; Raw Materials Purchase Budget 56. Direct materials needed for production is calculated by A. Adding units to be produced to direct materials per unit. B. Dividing units to be produced by direct materials per unit. C. Multiplying units to be produced by direct materials per unit. D. Subtracting units to be produced from direct materials per unit. 57. Straw Company manufactures a single product. It has a policy of keeping finished goods inventory amounting to 150% the coming month's budgeted sales. Raw materials, on the other hand, are kept at twice the coming month's budgeted production requirements. Each unit of product requires 4 kilos of raw materials. The production budgets (in units) consist of the following: January 5,000 units February 5,500 units March 4,700 units April 4,500 units Purchases of raw materials in March would be A. 15,600 kilos C. 18,000 kilos B. 17,200 kilos D. 24,000 kilos Items 58 and 59 are based on the following information: DELL Company has budgeted sales of 60,000 units in July; 80,000 units in August; and 120,000 in September. The Company has 6,000 units of finished goods and 49,600 pieces of raw materials on hand on July 1. Each unit of product requires 4 pieces of materials. The desired inventory of finished goods is 10% of the next month’s sales. The desired inventory of materials is 20% of the next month’s production needs. Each raw material can be purchased for Php0.50 per material. 58. How many pieces of raw materials are purchased in July? A. 248,000 pieces C. 345,600 pieces B. 265,600 pieces D. 355,200 pieces 59. How much would be the purchases in July? A. Php132,800 C. Php172,800 B, Php177,600 D. None ~229~——_ CHAPTER 6: FINANCIAL PLANNING AND BUDGETS ea The budget schedule that would provide the i Bor budget would be the e necessary input data for the A. Production budget Cc. Sal . les forecast B. as, eo, purchase’ D. Schedule of cash receipts lg and disbursements 61. Each unit of Product X requires two direct | , labor hours. E costs are treated as direct labor costs. Data on direct mere en Number of direct employees 25 Weekly productive hours per employee ab Estimated weekly wages per employee Php12,250 Employee benefits (related to weekly wages) 20% The standard direct labor cost per unit of Product X is A. Php840.00 Cc. Php1,323.00 B. Php945.00 D. Php1,653.75 Overhead Budget 62. A company that manufactures furniture is establishing its budget for the upcoming year. All of the following items would appear in the overhead budget except for the ‘. A. Fringe benefits paid to the production supervisor. B. Cost of glue used to secure the attachment of the legs to the tables. C. Overtime paid to the workers who perform production scheduling. D. Freight charges paid for the delivery of raw materials to the company. 63. The information contained in a cost of goods manufactured budget most directly relates to the A. Materials use in-process. : B. Materials used, direct labor, goods inventories budgets. Cc. Materials used, direct labor, : : i rocess inventories budgets. 7 ; j D. eateries used, direct labor, overhead applied, and work-in- process inventories, and finished goods inventories budgets. .d, direct labor, overhead applied, and ending work- overhead applied, and finished overhead applied, and work-in- ~230~CHAPTER 6: FINANCIAL PLANNING AND BUDGETS 64. Which one of the following state i administrative budgets is most Caer ents regarding seling and A. Selling and administrative budgets are fixed in nature. 8. Selling and administrative budgets are usually optional C. Selling and administrative budgets need to be detailed in ord that the key assumptions can be better understood. . D. Selling and administrative budgets are difficult to all month and are best presented as one number for t year. locate by he entire 65. ABC Company pays out sales commissions to its sales team in the month the company receives cash for payment. These commissions equal 8% of total (monthly) cash inflows as a result of sales. ABC has budgeted sales of Php375,000 for August, PhpS00,000 for September, and Php250,000 for October. Approximately 80% of all sales are on credit, and the remaining balance is cash sales. Experience indicates that 60% of the budgeted credit sales will be collected in the month following the sale, 30% the month after that, and 10% of the sales will be uncollectible. Based on this information, what should be the total amount of sales commissions paid out by ABC in the month of October? A. Php21,250 C. Php27,500 B. Php26,400 D. Php30,400 Financial Budget; Cash jet 66. The financial budget process includes A. The cash budget C. The capital budget B. The budgeted statement D. All of the choices of cash flows 67. Which of the following is normally included in the financial budget of a firm? A. Direct materials budget C. Sales budget B. Budgeted balance sheet D. Selling expense budget 68. Bank loan officers would find which of the following budgets to be one of the most important in determining whether to give a company a loan? A. Sales budget C. Production budget B. Cash budget D. Budgeted balance sheet 69. The last budget schedule prepared before the financial statements is the A. Cash budget C. Manufacturing overhead budget B, Cost of goods sold budget D. Selling and administrative expenses budget ~21~J 4 CHAPTER, FINANCIAL PLANNING AND BUDGETS 70. Acash budget should help to ensure ‘A. That cash dividends can be paid every quarter. B. eet Pret an excess amount of idle cash. S enough cash is always on hand i i SI accel to satisfy maximum cash D. That enough cash is available to pay salaries and wages, even if it means borrowing money. 71. Accompany anticipates selling Php200,000 of goo will probably be uncollectible. Which of the Bae ee ae eter A. Php215,000 is added to the cash budget. : B. Php15,000 is subtracted from the cash budget. C. Php15,000 does not appear on the cash budget. ©. Php185,000 appears as a disbursement on the cash budget. i : 72. As part of the master budget process, a merchandising company begins ° to prepare the cash budget for the same period. Which of the following i el will be most useful to management in preparing a A. Credit policies, projected expenses, and inventory procurement | policies. | B. Sales credit policies, purchasing terms, and planned capital acquisition. C. Projected revenues, projected expenses, and intended financing . activities. D. Planned direct material purchases, planned direct labor, and } purchasing terms. calendar year and prepares a cash budget for each 73. ABC Company uses a hich one of the following items should be considered ; month of the year. WI i when developing July’s cash budget? ; A. Recognition that 0.5% of the July sales on account will be | uncollectible. B. Quarterly cas! dividends scheduled to be declared on July 15 and to shareholders of record as of July 25. tax and Social Security contributions withheld checks to be remitted to the Bureau of paid on August 6 : C. National income from employees’ June pay ‘al Revenue in July. Tie the last calendar year scheduled to be D. Property taxes levied in n paid quarterly in the coming year during the last month of each calendar quarter. ~ 232~ Sone ReCHAPTER 6: FINANCIAL PLANNING AND. BUDGETS Collections and Disbursements 74. Which of the following would be found in the cash receipts budget? A. Loan proceeds C. Extinguishing a loan B. Depreciation of factory D. Amount of factory supplies equipment ‘on hand 75. Which one of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for calendar Year 1? A. The amount of uncollectible customer accounts for Year 1. B. A purchase order issued in December Year 1 for items to be delivered in February Year 2. C. Dividends declared in November Year 1 to be paid in January Year 2 to shareholders of record as of December Year 1. D. The borrowing of funds from a bank on a note payable taken out in June Year 1 with an agreement to pay the principal and interest in June Year 2. 76. ABC Company budgeted sales of Php220,000 for June, Php200,000 for July, Php280,000 for August, Php264,000 for September, Php244,000 for October, and Php300,000 for November. Approximately 75% of sales are on credit; the remainder are cash sales. Collection experience indicates that 60% of the budgeted credit sales will be collected the month after the sale, 36% the second month, and 4% will be uncollectible. Which month has the highest budgeted cash receipts? A, August C. October B. September D. November Items 77 and 78 are based on the following information: The ee Company has the following historical pattern on its credit sales: 60% collected in the month of sale 20% is collected in the first month after sale 12% is collected in the second month after sale 5% is collected in the third month after sale 3% uncollectible The sales on open account have been budgeted for last six months of 2018 are show below: July Php84,000 October Php125,000 ‘August 90,000 November 140,000 ‘September 110,000 December 120,000 77. The estimated total cash collection during the fourth calendar quarter would be A. Php120,500 C, Php299,000 B. Php247,200 D. Php359,200 78. The estimated total cash collections during the fourth calendar quarter from sales made during the fourth calendar quarter would be ~ 233~P CHAPTER 6: FINANCIAL PLANNING AND BUDGETS ‘A. Phpi20,500 C. Php299,000 B. , Php247,200 D. Php359,200 79. ABC Company’s master budget was Prepared based on the followin Pisses les Decrease in inventories a Fas rt Decrease in accounts payable 225, oa Gross margin rate 30% fo ABC's estimated cash disbursements for inventories are A. Php2,070,000 C. Php3,150,000 B. Php2,250,000 D. Php3,870,000 Comprehensive Problems; Operating Budget Items 80 to 84 are based on the following information: MJY Company produces and sells only one product. The selling price is expected to be the prevailing price of Php14 per unit. The company expects to sell 270,000 units of product during the period. The desired finished goods inventory at the end of the period is 180,000 units while the expected beginning inventory is 150,000 units. Each unit of product requires 3.60 kilograms of raw materials. Only one kind of raw material is used, and it is expected to cost Php0.50 per kilogram. The desired ending inventory of raw materials is 28,800 kilograms; the expected beginning inventory is 22,800 kilograms. Direct labor is Php5.00 per hour. Each product requires 1 hour completing. Factory overhead is applied to production on the basis of direct labor hours. Variable factory overhead cost at the planned level of operations is budgeted at Php135,000; fixed budgeted overhead is budgeted at Php450,000. \d administrative expenses amounted to Php3.50 per i selling ant : e eer, elling and administrative expenses is unit of product sold while fixed sé + budgeted at Php200,000. 80. The budgeted production is A. 125,000 units B. 240,000 units C. 270,000 units D. 300,000 units i hases for the period is 81. The budgeted material purc! eras 000 000 5 ps7 000 D. Php1,086,000 ~ 234~CHAPTER 6: FINANCIAL PLANNING AND BUDGETS 82. The budgeted direct labor cost is A. 300,000 ¢. 1,200,000 B. 900,000 D. 1,500,000 83. The budgeted cost of goods sold on an absorption Costing basis is A. Php2,362,500 C. Php3,820,500 B. Php2,421,000 D. Php3,879,000 84. The budgeted income before tax is A. Php214,000 C. (Php1,186,500) B. Php272,500 D. (Php1,244,000) Items 85 to 90 are based on the following information: Presented below is the balance sheet of ABC Company as of December 31, 2017: Assets Liabilities & Equity Cash Php30,400 _—IT payable Php4,800 AR 48,000 Inventory 17,600 Ordinary Shares 256,000 PPE 232,000__Retained Earnings 67,200 Total Assets Php328,000 ‘Total L&E Php328,000 The manager instructs you to update the balances based on the budget below: Q rq 3Q FQ] Sales Php112,000 | Phpi28,000 | Php144,000 | Php140,800 Production Costs 76,800 80,000 89,600 80,000 Operating expenses 25,600 27,200 28,800 30,400 «Annual depreciation (included in the amounts above): © Production costs: Php70,400 o Operating expenses: Php19,200 « — Inventory balances are expected to be: March 31: Php56,000 June 30: 52,000 September 30: Php60,000 December 31: 48,000 ¢ All production costs and operating expenses, except depreciation, are to be paid during the quarter incurred. * Sales are made either through cash or credit. The Company expects quarterly sales to be made 20% in cash and 80% in credit. As to the credit sales, the same are collected 50% in the quarter of sales and 48% in the quarter after the sale. The rest are budgeted to be uncollectible and recognized as bad debts in the quarter incurred. There is no allowance for bad debts as of December 31, 2017. * Dividends are paid at the end of June and December. The number of dividends is based on 10% of the cash balance available at the end of the 1% quarter for June dividends and the 3° quarter for December dividends. ~235~——— ya CHAPTER 6: FINANCIAL PLANNING AND BUDGETS + Income tax is equal in the Paice.” of the quarter's income tax and is paid The December 31, 2018 budgeted balance sheet would show 85. Budgeted cash of A. e ey 10,992.00 C. Php142,280.00 . Np 139,776.00 D. Php153,379.20 86, Budgeted accounts receivable (net) of A. Php54,067.20 1,067. c Ph B. Php55,296.00 D. phe? 44.00 87. Budgeted Inventory of A. Php48,000 C. Phpst ; : 6,0 B. Php52,000 D. Bh 60,000 88. Budgeted Property, Plant and Equipment of A. Php142,400 C. Php187,200 B. Php164,800 D. Php209,600 89. Budgeted income tax payable of A. Php4,425.60 C. Php9,388.80 B. Php4,844.16 D, Php13,862.40 90. Budgeted retained earnings of A. Php99,545.60 C. Php125,903.04 B. Php103,792.00 D. Php125,669.20 Comprehensive Problems; Financial Budget nthe following infc : NI Company is preparing its cash budget for the last two months of the fourth quarter of the calendar year 2016. Following are some pertinent budget data gathered by the company’s budget committee: October November — December * Sales Php280,000 Php300,000 Php360,000 Accounts payable for merchandise 100,000 140,000 144,000 purchases Salaries 100,000 150,000 180,000 Other expenses 110,000 130,000 58,500 ‘Additional information from the budgets is presented below: « Collection pattern: 60% of each month's sales is collected in the month of sale; the balance is collected in the following month «Payment of accounts payable: 80% of the current month's accounts payable budget is paid during the month of purchase and the balance is paid in the following month ~ 236 ~CHAPTER 6: FINANCIAL PLANNING AND BUDGETS * The budgeted other expenses include dey amount of Php22,000 per month Biperias rection co F outlays are paid for in the month of incurrence, : * The company intends to maintain a cash balance Php100,000, © In case of deficits, the company may borrow from its bank in multiples of Php10,000 which would bear an interest rate of 12% per year. Principal repayments are to be made in any month in which there is a surplus of cash. Interest is paid monthly, o There is no outstanding balance of loans from banks as of November 1, o Tf there is no outstanding balance on the loan, the company will invest any cash in excess of its desired end-of-month cash balance in government securities. No investments were outstanding as of November 1. 91. Determine the amount borrowed for the month of November A. Phpo C, Php90,000 B. Php80,000 D. Php100,00 92. For the month of December, determine the ending cash balance A, Php77,300 C. Php102,000 B, Php10,000 D. Php107,300 93. A budgeting process where information flows top down and bottom up is referred to as: A. Joint budgeting C. Continuous budgeting B. Perpetual budgeting D. Participative budgeting 94. Which one of the following is not an advantage of a participatory budgeting process? A. Goal congruence C. Coordination between departments B. Control of uncertainties D. Communication between departments ~BiwJE-PROFIT (CVP) ANALYSIS a CHAPTER 6: FINANCIAL PLANNING AND BUDGETS 95. The ce are the benefits of participative budgeting, except? c It involves those most directh It is more like! Pees ly to motivate orgaizatons Pau people to work toward an it improves accountability _ be ecause managers are held pee for reaching goals, such that they cannot shift their ponsibility by blaming the unrealistic goals demanded by the budget Top management need not be concerned with the overall profitability of the current operations because lower-level managers set the final target for the budget 96. Participative budgeting A B. ice D. Ts the same as an imposed budget Would be the responsibility of each responsibility unit Does not require the support of top management to promote budget participation Does not require the review and approval of top management 97. An advantage of participative budgeting is that it A B. cS D. 98. Which Minimizes the cost of developing budgets. Encourages acceptance of the budget by employees. Reduces the effect on the budgetary process of employee biases. Yields information known to management but not to employees. ‘one of the following is not considered to be a benefit of participative budgeting? A B. iG The budget estimates are prepared by those in direct contact with various activities. Managers are more motivated to reach the budget objectives since they participated in setting them. ; Individuals at all organizational levels are recognized as being part of the team; this results in greater support of the organization. ‘ When managers set the final targets for the budget, senior management need not be concerned with the overall profitability of current operations. ~ 238 ~INANCIAL PLANNING AND BUDGETS Zero-Based Budgeting 99. One of the techniques or processes in budgeting is zero-based which is A. Developing budgeted costs from clear-cut relationships between inputs and outputs. B. Budgeting from the ground up as though the budget Process were being initiated for the first time. C. Using the prior year’s budget as a base year and adjusting it based on the experiences of the prior year and the expectations for the coming year. D. Budgeting for cash inflows and outflows to time investments and borrowings in a way to maintain a bank account with a minimum balance. budgeting, Measured 100.The major appeal of zero-based budgeting is that it ‘A. Solves the problem of measuring program effectiveness. B. Reduces significantly the time required to review a budget. C. Deals with some of the problems of the incremental approach to budgeting. D. Relates performance to resource inputs by an integrated planning and resource-allocation process. 101.Which of the following pertains to zero-based budgeting? ‘A. A variant of fiscal-year budgeting whereby a twelve-month projection in the future is maintained B. Involves the review of each cost component from a cost/benefit perspective C. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity levels D. A budgeting approach which top management sets the budget and imposes it on lower levels of the organization 102.The major feature of zero-based budgeting is that it ‘A. Takes the previous year’s budgets and adjusts them for inflation. B. Focuses on planned capital outlays for property, plant, and equipment. C. Questions each activity and determines whether it should be maintained as it is, reduced, or eliminated. D. Assumes all activities are legitimate and worthy of receiving budget increases to cover any increased costs. 103.A company that uses zero-based budgeting has A. An expense budget of zero. B, An assumed sales level of zero. C. Azero variance between budgeted and actual performance. D. Zero as the starting point of budgeting the coming year’s expenses. 104.Zero-based budgeting forces managers to ~239~ ——— ULLa Ss ‘ 6: FINANCIAL PLANNING AND BUDGETS A B. Cc: Dd. Prepare a budget based on historical | costs. Jocarate @ budget by objective rather than function Justify Spenares at the beginning of every budget period. — Product's revenues and expenses over its expected 105.An advantage of increme: ntal budgeting wher : based budgeting is that incremental budgeting res th 70° 9 NPP, 106.A contin one» Encourages adopting new Projects quickly. Accepts the existing base as being satisfactory. Eliminates functions and duties thi ane: lat have outlived their Eliminates the need to review all functions periodically to obtain optimum use of resources. uous profit plan Is an annual plan that is part of a 10-year plan. Is a plan that is revised monthly or quarterly. Is a plan devised by a full-time planning staff. Works best for a company that can reliably forecast events a year or more into the future. 107.A continuous (rolling) budget . 9 9 @ > Is a plan that is revised monthly or quarterly, dropping one period and adding another. Presents the plan for a range of activity so the plan can be adjusted for changes in activity. Presents the plan for only one level of activity and does not adjust to changes in the level of activity. Is one of the budgets that is part of a long-range strategic plan, unchanged unless the strategy of the company changes. Static Budgeting 108.The use of the master budget throughout the year as a constant i? A B. with actual results signifies that the master budget is also a Static budget C. Flexible budget Capital budget D. Zero-based budgetrunereo % COST-VOLUME-PROFIT (CvP) ANALYSIS CHAPTER 6: FINANCIAL PLANNING AND BUDGETS, 109.A static A B. ca D. budget Presents a statement of expectations for a period Present a firm commitment. me Gots not Presents the plan for only one level of activity adjust to changes in the level of activity. on Presents the plan for a range of activity so that the plan can be adjusted for changes in activity. Drops the current Month or quarter and adds a future month or a future quarter as the current month or quarter is completed. 110.A major disadvantage of static budget is that A. B. Cc D, Tt is made for only one level of activity. Tt is more difficult to develop than a flexible budget. Variances tend to be smaller than when flexible budgeting is used. Variances are more difficult to compute than when flexible budgeting is used. Flexible Budgeting 111A flexible budget is . The same as a continuous budget. One that can be changed whenever a manager so desires. Adjusted to reflect expected costs at the actual level of 9 o> activity. One that uses the formula “total cost = cost per unit * units produced” 112.Which one of the following statements regarding the difference between a flexible budget and a static budget is true? A i. A flexible budget includes only variable costs, whereas a static budget includes only fixed costs. A flexible budget is established by operating management, while a static budget is determined by top management. A flexible budget primarily is prepared for planning purposes, while a static budget is prepared for performance evaluation. D. A flexible budget provides cost allowances for different levels of activity whereas a static budget provides costs for one level of activity. ‘ eeCHAPTER 6: FINANCIAL PLANNING AND BUDGETS 113.When compared to static bud: il A. Provide a better ae pele gets rstandi is tthe period being evalus ae Of the capacity variances during B. Offer managers a more listi is actual fixed cost items sie. peepatieon of budget. and Beer ler their control. ta es aise to use fewer fixed cost items and more e fat are under their control. Offer istic ores fuanscers @ more realistic comparison of budget and avenue and cost items under their control. eee ae oh see ae budget compared to a statistic budget is A. Fixed Cost variances are more clearly presented. aerials in planned production are clearly presented. ee easily be changed to adjust to changing Budget costs for a given output level can be compared with actual costs for the same level of output. B. i, D. 115.Which of the following pertains to flexible budgeting? A. A budget that presents the plan for a range of activity B. A budget that sets allowances based on prior year expenditures C. A budget that is established at the beginning of the period and not adjusted for different levels of actual sales activity D. The process of developing budget estimates by requiring all levels of management to estimate sales, production, and other operating data as though operations were being initiated for the first time 116.Which one of the following budgeting methodologies would be most appropriate for a firm facing a significant level of uncertainty in unit sales volumes for next year? A. _ Static budgeting C. Life-cycle budgeting B. Flexible budgeting D. Top-down budgeting 117.When preparing 2 performance report for a cost center using flexible * budgeting techniques, the planned cost column should be based ‘on the ‘A. Actual amount for the same period in the preceding year. B. Budget adjusted to the actual level of activity for the period being reported ‘ : cy Breet rica to the planned level of activity for the period reported. D. pudgeted amount in the original budget prepared before the beginning of the year. Li ~ 242~CHAPTER 6: FINANCIAL PLANNING AND BUDGETS 118.The difference between the actual amounts and the flexi amounts for the actual output achieved is the tbe budget A. Sales volume variance C. Production variance B. Flexible budget variance D. Standard cost variance Volume Ani 119.ABC, Inc. has prepared budgets for the next 5 months: May, June, July, August, and September. As soon as May results are reported, ABC will add October to their budget plans. What type of budget system is ABC using? ‘A. Project budgeting C. Continuous budgeting B. Flexible budgeting D. Activity-based budgeting 120.ABC has found that its annual budgets are quickly outdated once actual data is recorded. Sometimes actual preparations have already begun for the period being budgeted by the time the annual budget is finished, which leaves no time to react to changing factors. ABC wants the budget to be as up to date as possible, and management is willing to revise budgets as needed. Which budgeting solution would be most appropriate for ABC? A. Flexible budgeting C. Continuous budgeting B. Zero-based budgeting D. Activity-based budgeting 121.A company is focused on continuous improvement and wants to ensure that its budgeting process supports this goal. The company has already eliminated much of the waste from activities during previous budget periods and now wants to concentrate on value-added activities and improving relationships with suppliers and customers. Which of the following is the least beneficial budget solution for this company? A. Flexible budgeting C. Continuous budgeting B. Zero-based budgeting D. Activity-based budgeting 122.ABC Company has certain peak seasons; namely the Christmas season, the summer season, and the last 2 weeks of February. During these periods of increased output, the firm leases additional production equipment and hires additional temporary employees. Which of the following budget techniques would best fit this firm’s needs? A. Flexible budgeting C. Continuous budgeting B. Zero-based budgeting D. Activity-based budgeting ~ 243 ~ :124.After performing a thorough study of ABC Company's operations, an independent consultant determined that the firm's labor standards were probably too tight. Which one of the following facts would be inconsistent with the consultant's conclusion? A. ABC's budgeting process was well-defined and based on a bottom-up philosophy. B. Management noted that minimal incentive bonuses have been paid in recent periods. C. Areview of performance reports revealed the presence of many unfavorable efficiency variances. é D. Production supervisors found several significant fluctuations in manufacturing volume, with short-term increases on output being followed by rapid, sustained declines. ‘(AL PLANNING AND BUDGETS lanagement tea: plan to allow more time and Bate For the next budget year, idle i a i will be undertaken, The Soe Feview of all activities and functions budget as the starting point for ller has elected to use this year’s master management's goals, did the ae year’s budget process. Considering of bu ségeting methodologies? ler make the most appropriate choice No, he should sel Hi lect zero-| 4 unless they are eRnEINe ‘based budgeting to allow no costs B. No, he should sel ar a lect activity- historical patterns. ae coe ca) Cociess On Uc C. No, he i i Be eee implement a continuous budget to provide current D. Yes, he should take the current budget and make incremental changes to reduce waste. -END- ~ 2M4~CHAPTER 6: FINANCIAL PLANNING AND BUDGETS ANSWER KEY a 26 | D 51[D 76D ig 27[ 0 52 LA 7 io 8 B 28 [A 53] A 78 Lc iTS A 29 | D 54] D 79 1D torte] B 30 | D 55 |B 80 | D 1051-5 Cc 31] A 56 | C [sic 106 -B D 32] A 57 |B 82 | D 107A A 33 [A 58/8 8A 108 TA G 34] Cc 59 A | 84] B 1091 B | A 35 | D 60 | A |meSemG 110/ a | GC 36 | D 61 | A | 86 | A 1u[c¢ D BZ 62/D 87 | A 1121 D D SeamG: 63 | C | 88 | A 113 | D D 39 | D Saal 89 | B 114 | D B 40 | D 65 | D Eu Le 115 | A B 41 A 66 | D 91 | D 116/ B Cc 42 | A 67 | B 92 | D 117| B B Ge} LL © 68 | B Sma) 118 | B B 44] A 69 | A 94 | B 119| C A 4S] A 70| 8B 95m MID} 120 | C Cc 46 | A Pies 96 | B 121| A B EZ 72 | B S7m/mB) 122| A B 48 | A 73 | C LES JLo) 123 | A B 49 | B 74, A Oo) | Bi 124| A c 50 | D 75 | D 100 | C Ans. | Comment Option A pertains to standard costing. Option B is incorrect since we do not determine the cost of c_ | Manufactured products. In budgeting, we only use manufacturing cost as basis for total production costs. Option C is incorrect since budgeting is not a product costing method. ¢€ Budgeting only covers operational and financial budgets. Idle cash for investment purposes may be seen in the financial budget when we prepare a cash budget. 8 ty Option C is not in contrast with Option A in Item Bipeted results are different from standard costs. oe are different from standards. In budgeting, te ie __| function of measuring performance while in 245.0‘R 6: FINANCIAL PLANNING AND BUDGETS there is an imposition of responsi ; [ r i f responsibility for the resulting | As mention in Option A in Item ¢ in Option A in el i Ttem 3, budgeting is used for he operating budget mainly in ns y, ting budget mainly focuses on operations. Clearl capital budget pertain: it outside routine ae ane een | Budgeting is also used as sales and purchases). - a ee = @s communication tool. It GC x activities between the mi subordinate. Thus, to establish epee ae hoe ne an effective and useful sdget, we need the input from a broad range of mana | Again, we are introduced with the concept of mana on | 7 D by exception (also brought up in Chapter 4 Standard | Costing). In budgeting, we only consider those items that vary materially from expectations. ade ne Cie assurance that the company can perations. Budgeting is not made for this purpose. ‘As mentioned, budgeting cannot be a guarantee of actual i] ic results. It serves as a mere expectation of actual results +. (i.e., expected results). The preparation of budgets neither guarantees actual 10 A results nor ensure profitable operations. It is only a plan that contains a quantitative statement of expected aI. results. We go back to a basic function of management: control. Here, the budgets are used so set a standard against which results can be compared. aa Cc Option A pertains to budgeting as a communication tool; Option B pertains to planning, @ separate function; and Option D goes beyond the control function. 12 D 13. D : rE Budgeting is also used as a ‘communication tool. It would 14 D require managers to make plans in conjunction with the plans of other interdependent departments. we Budgeting does not improve cost control. Again, this is only a5 B | a plan that contains 4 quantitative statement of expected results. lA pudget contains the costs that are expected to be incurred. jowever, cannot limit unauthorized 6 B_ | expenditures. There is no assurance that unauthorized : expenditures can happen. Unauthorized expenditures may still occu! even though the com ny has a concrete budget. Budgeting faci itates evaluation of performance and rovision of incentives since it compares actual results wi i” Bally ults_which will help managers evaluate the _—CHAPTER INANCIAL PLANNING AND BUDGETS Performance of individuals, departments, NS, OF entire companies, Budgeting could also be used to provide incentives for people to Perform well. It is not used to Provide a check-up device so Managers would keep close tabs on their subordinates. The role of top management is very important to make a successful budget. Management should be involved. Although Option C may seem correct since top management do not have sufficient information of daily operations, this does not mean that top management should limit its | Participation. To make a budget, top management should be there to supervise. The role of top management is very important to make a successful budget. Management should be involved. To make a budget, top management should be there to supervise. The role of top management is very important to make a successful budget. Management should be involved. To make a budget, top management should be there to supervise. By having top managemert set budget levels, the subordinates are given no opportunity to voice their opinions and/or concerns. This is a top-down approach which is usually frowned upon as compared to the bottom- up approach. Department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the. operating budget. Options A, C, and D would also affect the budget, but the item is looking for external factors. A merger of two competitors would affect the budget (e.g., sales forecast). The common error in this item is choosing Option A. When ABC Company makes a budget for 2019, the planning calendar is not from January 1, 2019 to December 31, 2019. The planning calendar is actually the schedule of activities for the development and adoption of the budget (e.9., September 1, interview sales department; or December 10, Obtain top management approval). >|9|0|>|o\0 ~ 247 ~FINANCIAL PLANNING AND BUDGETS A budgetary slack is created when employees estimate Costs too high and estimate sales too low. : A budgetary slack is created when employees estimate costs too high and estimate sales too low. A budgetary slack is created when employees estimate costs too high and estimate sales too low. ‘One of the main reasons why budgetary slacks are frowned | upon is that there would be the likelihood of inefficient resource allocation. In Chapter 12: Relevant Costing, one of the subtopics is resource allocation in case there are | insufficient resources. Remember that the product to which the resources are allocated first is not the one with the highest contribution margin per unit but the one with the highest contribution margin per constrained resource. So, if an employee adds a budgetary slack, e.g., underestimating sales forecasts of A and B, then the allocation of resources would be altered as well. The master budget is a comprehensive set of budgets that covers all phases of an organization’s planned activities for a specified period. Within the master budget are individual budgets which can be classified as either operating budgets or financial budgets. The master budget is a comprehensive set of budgets that covers all phases of an organization's planned activities for a specified period. Within the master budget are individual budgets which can be classified as either operating budgets or financial budgets. 39 D | we need information from the sales budget; to get cash D knowing how many units must The master budget is a comprehensive set ‘of budgets that covers all phases of an organization's planned activities for a specified period. Within the master budget are individual budgets which can be classified as either oper budgets or financial budgets. Capital investment budget is separate from the master budget since the latter covers only the phases of an organization's operations. , The preparation of the cash management and working capital budget needs all the information from the other budgets in the master budget. E.g., To get cash receipts, disbursements, we need information from the purchasing budget, labor budget, overhead budget, etc. : If you follow the sequence in our material, oe a of wid sales budget to know how many units will be sold, thus rk aE be produced (if chased (if merchandising firm). wufacturing firm) or ee anit of the production or From there, we determine the cost ~ 248.»