Answer Key Chapter 10b

The budgetary process

10b.1 What does a master budget comprise?

 The budgeted statement of profit or loss
 The budgeted cash flow, budgeted statement of profit or loss and budgeted statement of
financial position
 The budgeted cash flow
 The entire set of budgets prepared
10b.2 If a company has no production resource limitations, in which order would the following budgets
be prepared?
(i) Material usage budget (iv) Finished goods inventory budget
(ii) Sales budget (v) Production budget
(iii) Material purchase budget (vi) Material inventory budget

 (v), (iv), (i), (vi), (iii), (ii)

 (ii), (iv), (v), (i), (vi), (iii)
 (ii), (iv), (v), (i), (iii), (vi)
 (ii), (v), (iv), (i), (vi), (iii)
10b.3 In a situation where there are no production resource limitations, which of the following items
of information must be available for the production budget to be completed?
(i) Sales volume from the sales budget
(ii) Material purchases from the purchases budget
(iii) Budgeted change in finished goods inventory
(iv) Standard direct labour cost per unit
 (i), (ii) and (iii)
 (i), (iii) and (iv)
 (i) and (iii)
 All of them
10b.4 When preparing a production budget, what does the quantity to be produced equal?
 Sales quantity + opening inventory of finished goods + closing inventory of finished goods
 Sales quantity – opening inventory of finished goods + closing inventory of finished goods
 Sales quantity – opening inventory of finished goods – closing inventory of finished goods
 Sales quantity + opening inventory of finished goods – closing inventory of finished goods
10b.5 The quantity of material in the material purchases budget is greater than the inferred from
quantity of material in the material usage budget. Which of the following statements can be this
situation?
 Wastage of material occurs in the production process
 Finished goods inventories are budgeted to increase
 Raw materials inventories are budgeted to increase
 Raw materials inventories are budgeted to decrease
10b.6 A company plans to sell 24,000 units of product R next year. Opening inventory of R is expected
to be 2,000 units and PQ Co plans to increase inventory by 25 percent by the end of the year. How
many units of product R should be produced next year?
 23,500 units
 24,000 units
 24,500 units
 30,000 units
Answer Key 10b.6 How many units of product R should be produced next year?
- Opening inventory = 2,000 units
- Closing inventory = 2,000 units + (2,000 units * 25%) = 2,500 units
- Sale projection = 24,000 units
=> Production Requirement = Sale projection + Closing inventory – Beginning inventory
= 24,000 units + 2,500 units – 2,000 units = 24,500 units
10b.7 Each unit of product Alpha requires 3 kg of raw material. Next month's production budget for
product Alpha is as follows.
Opening inventories:
Raw materials 15,000 kg
Finished units of Alpha 2,000 units
Budgeted sales of Alpha 60,000 units
Planned closing inventories:
Raw materials 7,000 kg
Finished units of Alpha 3,000 units
How many kilograms of raw materials should be purchased next month?
 172,000
 175,000
 183,000
 191,000
Answer Key 10b.7 How many kilograms of raw materials should be purchased next month?
=> Required production of Alpha
 = Budgeted sales of Alpha + Closing of Alpha – Beginning of Alpha
= 60,000 units + 3,000 units – 2,000 units = 61,000 units
=> Raw material usage budgeted in production = 61,000 units * 3 kgs/unit = 183,000 kgs
=> Raw material purchase budgeted
= Raw material usage budgeted + Closing raw material – Opening raw material
= 183,000 kgs + 7,000 kgs – 15,000 kgs = 175,000 kgs
10b.8 Budgeted sales of X for December are 18,000 units. At the end of the production process for X,
10% of production units are scrapped as defective. Opening inventories of X for December are
budgeted to be 15,000 units and closing inventories will be 11,400 units. All inventories of finished
goods must have successfully passed the quality control check. What is the production budget for X
for December?
 12,960 units
 14,400 units
 15,840 units
 16,000 units
Answer Key 10b.8 What is the production budget for X for December?
=> Production budget = Sale projection + Closing inventory – Beginning inventory
= 18,000 units + 11,400 units – 15,000 units
= 14,400 units (90% of total production)
=> Total production budgeted (100%) = 14,400 units x (100% / 90%) = 16,000 units
10b.9 A company manufactures a single product, M. Budgeted production output of product M during
August is 200 units. Each unit of product M requires 6 labour hours for completion and PR Co
anticipates 20 percent idle time. Labour is paid at a rate of $7 per hour. What is the direct labour cost
budget for August?
 $6,720
 $8,400
 $10,080
 $10,500
Answer Key 10b.9 What is the direct labour cost budget for August?
=> Total hours required in production
= 200 units x 6 hours /unit = 1,200 hours (80% of total hours)
=> Total hours required in production (100%)
= 1,200 hours * (100% / 80%) = 1,500 hours
=> Direct labor cost budget = 1,500 hours * $7/hr = $10,500
10b.10 Each unit of product Echo takes five direct labour hours to make. Quality standards are high,
and 8% of units are rejected after completion as sub-standard. Next month's budgets are as follows.
 Opening inventories of finished goods 3,000 units
Planned closing inventories of finished goods 7,600 units
Budgeted sales of Echo 36,800 units
All inventories of finished goods must have successfully passed the quality control check. What is
the direct labour hours budget for the month?
 190,440 hours
 207,000 hours
 223,560 hours
 225,000 hours
10b.10 What is the direct labour hours budget for the month?
=> Budgeted production
= Budgeted sale + Planned closing inventories FG – Opening Inventory of FG
. Budgeted sale = 36,800 units
. Opening Inventory of FG = 3,000 units
. Planned closing inventory of FG = 7,600 units
=> Budgeted production = 36,800 units + 7,600 units – 3,000 units
= 41,400 units (92% of total budgeted production)
=> Total Budgeted production (in 100%) = 41,400 units x (100% / 92%) = 45,000 units
=> Total budgeted direct labour = 45,000 units * 5 hours/unit = 225,000 hours

10b.11 Budgeted production in a factory for next period is 4,800 units. Each unit requires five labour
hours to make. Labour is paid $10 per hour. Idle time represents 20% of the total labour time. What
is the budgeted total labour cost for the next period?
 $192,000
 $240,000
 $288,000
 $300,000

10b.11 What is the budgeted total labour cost for the next period?
=> Budgeted direct labour hours = Budgeted production units * Number of hours per unit
= 4,800 units * 5 hours/unit = 24,000 hours (80% of total budgeted DL)
=> Total budgeted DL (in 100%) = 24,000 hours * (100% / 80%) = 30,000 hours
=> Budgeted total labour cost = 30,000 hours * $10/hours = $300,000

10b.12 Which of the following statements are true?

(i) A flexed budget allows businesses to evaluate a manager's performance more fairly
 (ii) A fixed budget is useful for defining the broad objectives of the organisation
(iii) Relying on fixed budgets alone would usually give rise to massive variances
 (i) and (iii) only
 (i) and (ii) only
 (ii) and (iii) only
 (i), (ii) and (iii)
10b.13 The following details have been extracted from the receivables collection records of C Co.
Invoices paid in the month after sale 60%
Invoices paid in the second month after sale 25%
Invoices paid in the third month after sale 12%
Bad debts 3%
Invoices are issued on the last day of each month. Customers paying in the month after sale are
entitled to deduct a 2% settlement discount. Credit sales values for June to September are
budgeted as follows.
June July August September
$35,000 $40,000 $60,000 $45,000
What is the amount budgeted to be received from credit sales in September?
 $46,260
 $49,480
 $50,200
 $50,530

10b.13 What is the amount budgeted to be received from credit sales in September?
June July August Sept. Octob. Novem. Decem.
Sales forecasting ..................................................... 35,000 40,000 60,000 45,000 - - -
Cash receipt:
. In the month after sale
[60%*(100% - 2%) = 58.8% or 0.588]............. - 20,580 23,520 35,280 26,460 - -
. In the 2 nd
month after sale (25% or 0.25) ........ - - 8,750 10,000 15,000 11,250 -
. In the 3 month after sale (12% or 0.12) .........
rd
- - - 4,200 4,800 7,200 5,400
. Bad debt (3%).................................................. 1,050 1,200 1,800 1,350 - - -
Total cash receipt ................................................ 0 20,580 32,270 49,480 46,260 18,450 5,400

10b.14 BDL plc is currently preparing its cash budget for the year to 31 March 20X8. An extract from
its sales budget for the same year shows the following sales values.
March $60,000
April $70,000
 May $55,000
June $65,000
40% of its sales are expected to be for cash. Of its credit sales, 70% are expected to pay in the month
after sale and take a 2% discount; 27% are expected to pay in the second month after the sale, and
the remaining 3% are expected to be bad debts. What is the value of sales receipts to be shown in
the cash budget for May 20X7?
 $60,532
 $61,120
 $66,532
 $86,620

10b.14 What is the value of sales receipts to be shown in the cash budget for May 20X7?
March April May June July August
Sale forecasting ............................................. 60,000 70,000 55,000 65,000 - -

Sale by cash (40% or 0.40) .......................... 24,000 28,000 22,000 26,000 - -

Sale on credit (60% or 0.60)......................... 36,000 42,000 33,000 39,000 - -
Cash receipt of sale credit 60%:
. In the month after sale
[70%*(100%-2%) = 68.6% or 0.686]...... - 24,696 28,812 22,638 26,754 -
. In the 2 nd
month after sale (27%or0.27) . - - 9,720 11,340 8,910 10,530
. Bad debt (3% or 0.03) ............................ 1,080 1,260 990 1,170 - -
Total cash receipt ....................................... 24,000 52,696 60,532 59,978 35,664 10,530

The following information relates to questions 10b.15 and 10b.16.

Each unit of product Zeta requires 3 kg of raw material and 4 direct labour hours. Material costs $2
per kg and the direct labour rate is $7 per hour. The production budget for Zeta for April to June is
as follows.
April May June
Production units 7,800 8,400 8,200
10b.15 Raw material opening inventories are budgeted as follows.
April May June
3,800 kg 4,200 kg 4,100 kg
The closing inventory budgeted for June is 3,900 kg. Material purchases are paid for in the month
following purchase. What is the figure to be included in the cash budget for June in respect of
payments for purchases?
 $25,100
 $48,800
  $50,200
 $50,600

10b.15 What is the figure to be included in the cash budget for June in respect of payments for
purchases?
Budgeted purchase of Material
= Budgeted production Material + Closing of Material – Opening Material
April May June
Production units 7,800 8,400 8,200
x 3 kg of material per unit x 3 x 3 x 3
Total material used of production 23,400 25,200 24,600
Add: Closing material 4,200 4,100 3,900
Less: Opening material (3,800) (4,200) (4,100)
Total material purchased 23,800 25,100 24,400
x $2 per Kg of material x $2 x $2 x $2
Total cost of material $47,600 $50,200 $48,800
Payment in following month $47,600 $50,200 $48,800
10b.16 Wages are paid 75% in the month of production and 25% in the following month. What is
the figure to be included in the cash budget for May in respect of wages?
 $222,600
 $231,000
 $233,800
 $235,200
10b.16 What is the figure to be included in the cash budget for May in respect of wages?
April May June
Production units 7,800 8,400 8,200
x 4 hours of DL per unit x 4 x 4 x 4
Total labour used of production 31,200 33,600 32,800
x $7 per DL hour x $7 x $7 x $7
Total cost of DL $218,400 $235,200 $229,600
Cash payment:
. In the month (75%) $163,800 $176,400 $172,200
. In the next month (25%) - $54,600 $58,800
Total cash payment $231,000

=> Cash payment of DL for May = 75% of May + 25% of April

 = ($235,200 * 75%) + ($218,400 * 25%)
= $176,400 + $54,600 = $231,000
10b.17 An extract from a company's sales budget is as follows:
October $224,000
November $390,000
December $402,000
Ten percent of sales are paid for immediately in cash. Of the credit customers, 30 percent pay in the
month following the sale and are entitled to a one percent discount. The remaining customers pay
two months after the sale is made. What is the value of sales receipts shown in the company's cash
budget for December?
 $285,567
 $286,620
 $290,430
 $312,830
10b.17 What is the value of sales receipts shown in the company's cash budget for December?
October November December
Budgeted sale ...................................... $224,000 $390,000 $402,000
Sale by cash (10%) ............................. $22,400 $39,000 $40,200
Sale on credit (90%) ........................... $201,600 $351,000 $361,800
Collect on credit sale (90%):
. In the month following sale
[30%*(100% - 1%)=29.7% or 0.297] - $59,875 104,247
nd
. In 2 month of sale (70%) ............ - - 141,120
Total cash receipt ................................. $285,567
10b.18 Extracts from a company's budget are as follows:
August September
Production units 12,600 units 5,500 units
Fixed production overhead cost incurred $9,440 $7,000
The standard variable production overhead cost per unit is $5. Variable production overhead is paid
70 percent in the month incurred and 30 percent in the following month. Fixed production overhead
cost is paid in the month following that in which it is incurred and includes depreciation of $2,280 per
month. What is the payment for total production overhead cost shown in the cash budget for
September?
 $32,220
 $42,870
 $45,310
  $47,590
10b.18 What is the payment for total production overhead cost shown in the cash budget for
September?
August September October
Production units ..................................................... 12,600 u 5,500 u -
1. Variable production overhead cost ($5/unit).... $ 5 $ 5 -
Total variable production overhead cost ........... $63,000 $27,500 -
Cash payment for variable production overhead:
. 70% in the month incurred ............................. $44,100 $19,250 -
. 30% in the following month ......................... - $18,900 $8,250
2. Fixed production overhead cost ......................... $9,440 $7,000 -
Cash payment for fixed production overhead:
. 100% in the following month ........................... - $ 9,440 $7,000
. Exclude the depreciation (non-cash) expense (2,280)
Total cash payment ................................................ $45,310
10b.19 The following extract is taken from the production cost budget of S Co.
Production 2,000 units 3,000 units
Production cost $11,100 $12,900
What is the budget cost allowance for an activity level of 4,000 units?
 $7,200
 $7,500
 $13,460
 $14,700
10b.19 What is the budget cost allowance for an activity level of 4,000 units? (High-Low Method)
Change in Total Costs $12,900 − $11,100
=> Variable cost per unit = = = $1.80 /unit
Change in Total Units 3,000 units − 2,000 units
=> Total Fixed Cost = Total Cost – Total Variable Cost
= $12,900 – (3,000 units*$1.80/unit) = $7,500 (High level)
Or = $11,100 – (2,000 units*$1.80/unit) = $7,500 (Low level)
=> Total budget cost allowance for an activity level of 4,000 units
= Total Fixed Cost + Total Variable Cost
= $7,500 + (4,000 units * $1.80/unit) = $14,700
10b.20 The following details have been extracted from the payables' records of X Co:
Invoices paid in the month of purchase 25%
Invoices paid in the first month after purchase 70%
Invoices paid in the second month after purchase 5%
Purchases for July to September are budgeted as follows:
July $250,000
August $300,000
September $280,000
For suppliers paid in the month of purchase, a settlement discount of 5% is received. What is the
amount budgeted to be paid to suppliers in September?
 $278,500
 $280,000
 $289,000
 $292,500
10b.20 What is the amount budgeted to be paid to suppliers in September?
July August Septe. Octob. Novem.
Purchase forecasting......................... $250,000 $300,000 $280,000 - -
Cash payment:
. In month of purchase
[25%*(100%–5%)=23.75%] ....... $ 59,375 $ 71,250 $ 66,500 - -
. In month after purchase (70%) ... - 175,000 210,000 196,000 -
. In 2-month after purchase (5%) .. - - 12,500 15,000 14,000
Total cash payment....................... $289,000
10b.21 Which of the following control actions could be taken to help eliminate an adverse direct labour
efficiency variance?
(i) Employ more highly skilled labour
(ii) Ensure stricter supervision of labour workers
(iii) Ask employees to work paid overtime
 (i) and (iii) only
 (i) and (ii) only
 (i), (ii) and (iii)
 (ii) and (iii) only
10b.22 X department is a division of W Plc. X department usually has a quarterly wages cost of
$4,500,000. Quarterly material costs are usually around $2,000,000. W Plc made a central decision
to award all employees a wages increase of 2%. Which of the following variances for the latest quarter
are worth investigating?
(i) Direct material price variance $400 (A)
(ii) Labour rate variance $90,000 (A)
(iii) Sales volume variance $4,000,000 (F)
 (i) and (iii) only
  (i) and (ii) only
 (i), (ii) and (iii)
 (iii) only
10b.23 Which of the following BEST describes the purpose of a flexible budget?
 To ensure managers are motivated
 To facilitate control by establishing a budget relevant to actual activity levels
 To facilitate control by preventing discretionary expenditure
 To enable accurate reforecasting when actual costs are known
10b.24 The following statements relate to fixed budgets and flexible budgets.
(i) If production levels far exceed those anticipated, relying on a fixed budget is likely to
result in massive variances
(ii) Flexible budgets assist management control by providing dynamic, comparable
information
(iii) Flexible budgets are always superior to fixed budgets
Which statements are true?
 (i) only
 (i) and (ii) only
 (ii) and (iii) only
 (i), (ii) and (iii)
10b.25 A Local Authority is preparing a cash budget for its refuse disposal department. Which of the
following items would NOT be included in the cash budget?
 Capital cost of a new collection vehicle
 Depreciation of the refuse incinerator
 Operatives' wages
 Fuel for the collection vehicles
10b.26 Which of the following is NOT a functional budget?
 Production budget
 Distribution cost budget
 Selling cost budget
 Cash budget