Chapter 09 - Profit Planning and Activity-Based Budgeting

Chapter 09
Profit Planning and Activity-Based Budgeting
 

True / False Questions

 

1. The comprehensive set of budgets that serves as a company's overall financial plan is
commonly known as the financial budget. 
True    False

2. A company's sales forecast would likely not consider general economic and industry
trends. 
True    False

3. Sainte Claire Corporation has a highly automated production facility. Production volume
and management judgment are the two factors that would likely have the most direct
influence on the company's manufacturing overhead budget. 
True    False

4. The budgeting technique that focuses on different phases of a product such as planning and
concept design, testing, manufacturing, and distribution and customer service is known as
comprehensive budgeting. 
True    False

5. That employees make little effort to achieve budgetary goals is an outcome sometimes
associated with participative budgeting. 
True    False

 
 

Multiple Choice Questions

 

9-1
Chapter 09 - Profit Planning and Activity-Based Budgeting

6. Generally speaking, budgets are not used to: 

A. identify a company's most profitable products.
B. evaluate performance.
C. create a plan of action.
D. assist in the control of profit and operations.
E. facilitate communication and coordinate activities.

7. Which of the following choices correctly denotes managerial functions that are commonly
associated with budgeting?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

8. A formal budget program will almost always result in: 

A. higher sales.
B. more cash inflows than cash outflows.
C. decreased expenses.
D. improved profits.
E. a detailed plan against which actual results can be compared.

9. A budget serves as a benchmark against which: 

A. actual results can be compared.
B. allocated results can be compared.
C. actual results become inconsequential.
D. allocated results become inconsequential.
E. cash balances can be compared to expense totals.

9-2
Chapter 09 - Profit Planning and Activity-Based Budgeting

10. The comprehensive set of budgets that serves as a company's overall financial plan is
commonly known as: 
A. an integrated budget.
B. a pro-forma budget.
C. a master budget.
D. a financial budget.
E. a rolling budget.

11. A company's plan for the acquisition of long-lived assets, such as buildings and
equipment, is commonly called a: 
A. pro-forma budget.
B. master budget.
C. financial budget.
D. profit plan.
E. capital budget.

12. A company's plan for the issuance of stock or incurrence of debt is commonly called a: 
A. pro-forma budget.
B. master budget.
C. financial budget.
D. profit plan.
E. capital budget.

13. A company's expected receipts from sales and planned disbursements to pay bills is
commonly called a: 
A. pro-forma budget.
B. master budget.
C. financial budget.
D. profit plan.
E. cash budget.

9-3
Chapter 09 - Profit Planning and Activity-Based Budgeting

14. Wilmar Corporation is budgeting its equipment needs on an on-going basis, with a new
quarter being added to the budget as the current quarter is completed. This type of budget is
most commonly known as a: 
A. capital budget.
B. rolling budget.
C. revised budget.
D. pro-forma budget.
E. financial budget.

15. An organization's budgets will often be prepared to cover: 

A. one month.
B. one quarter.
C. one year.
D. periods longer than one year.
E. All of these.

16. A manufacturing firm would begin preparation of its master budget by constructing a: 
A. sales budget.
B. production budget.
C. cash budget.
D. capital budget.
E. set of pro-forma financial statements.

17. Which of the following budgets is based on many other master-budget components? 

A. Direct labor budget.
B. Overhead budget.
C. Sales budget.
D. Cash budget.
E. Selling and administrative expense budget.

9-4
Chapter 09 - Profit Planning and Activity-Based Budgeting

18. The budgeted income statement, budgeted balance sheet, and budgeted statement of cash
flows comprise: 
A. the final portion of the master budget.
B. the depiction of an organization's overall actual financial results.
C. the first step of the master budget.
D. the portion of the master budget prepared after the sales forecast and before the remainder
of the operational budgets.
E. the second step of the master budget.

19. Which of the following budgets is prepared at the end of the budget-construction cycle? 
A. Sales budget.
B. Production budget.
C. Budgeted financial statements.
D. Cash budget.
E. Overhead budget.

20. Which of the following would depict the logical order for preparing (1) a production
budget, (2) a cash budget, (3) a sales budget, and (4) a direct-labor budget? 
A. 1-3-4-2.
B. 2-3-1-4.
C. 2-1-3-4.
D. 3-1-4-2.
E. 3-1-2-4.

9-5
Chapter 09 - Profit Planning and Activity-Based Budgeting

21. The master budget contains the following components, among others: (1) direct-material
budget, (2) budgeted balance sheet, (3) production budget, and (4) cash budget. Which of
these components would be prepared first and which would be prepared last?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

22. A company's sales forecast would likely consider all of the following factors except: 
A. political and legal events.
B. advertising and pricing policies.
C. general economic and industry trends.
D. top management's attitude toward decentralized operating structures.
E. competition.

9-6
Chapter 09 - Profit Planning and Activity-Based Budgeting

23. Which of the following would be considered when preparing a company's sales forecast?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

24. A company's sales forecast would likely consider all of the following factors except: 
A. past sales levels and trends.
B. the company's intended pricing policy.
C. the company's product costing policy.
D. market research studies.
E. planned advertising and promotions.

25. Which of the following statements best describes the relationship between the sales-
forecasting process and the master-budgeting process? 
A. The sales forecast is typically completed after completion of the master budget.
B. The sales forecast is typically completed approximately halfway through the master-budget
process.
C. The sales forecast is typically completed before the master budget and has no impact on the
master budget.
D. The sales forecast is typically completed before the master budget and has little impact on
the master budget.
E. The sales forecast is typically completed before the master budget and has significant
impact on the master budget.

9-7
Chapter 09 - Profit Planning and Activity-Based Budgeting

26. Which of the following organizations is not likely to use budgets? 

A. Manufacturing firms.
B. Merchandising firms.
C. Firms in service industries.
D. Nonprofit organizations.
E. None of these, because all are likely to use budgets.

27. Nonprofit organizations begin their budgeting process with: 

A. a sales budget.
B. anticipated funding.
C. proforma financial statements.
D. services to be provided.
E. a cash budget.

28. Activity-based budgeting: 
A. begins with a forecast of products and services to be produced, and customers served.
B. ends with a forecast of products and services to be produced, and customers served.
C. parallels the flow of analysis that is associated with activity-based costing.
D. reverses the flow of analysis that is associated with activity-based costing.
E. is best described by choices "A" and "D" above.

29. A company that uses activity-based budgeting performs the following:

1—Plans activities for the budget period.
2—Forecasts the demand for products and services as well as the customers to be served.
3—Budgets the resources necessary to carry out activities.
Which of the following denotes the proper order of the preceding activities? 
A. 1-2-3.
B. 2-1-3.
C. 2-3-1.
D. 3-1-2.
E. 3-2-1.

9-8
Chapter 09 - Profit Planning and Activity-Based Budgeting

30. Sainte Claire Corporation has a highly automated production facility. Which of the
following correctly shows the two factors that would likely have the most direct influence on
the company's manufacturing overhead budget? 
A. Sales volume and labor hours.
B. Contribution margin and cash payments.
C. Production volume and management judgment.
D. Labor hours and management judgment.
E. Management judgment and indirect labor cost.

31. Mayze Production Company, which uses activity-based budgeting, is in the process of

preparing a manufacturing overhead budget. Which of the following would likely appear on
that budget? 
A. Batch-level costs: Production setup.
B. Unit-level costs: Depreciation.
C. Unit-level costs: Maintenance.
D. Product-level costs: Insurance and property taxes.
E. Facility and general operations-level costs: Indirect material.

32. FastTec sells electronics in retail outlets and on the Internet. It uses activity-based
budgeting in the preparation of its selling, general, and administrative expense budget. Which
of the following costs would the company likely classify as a unit-level expense on its
budget? 
A. Media advertising.
B. Retail outlet sales commissions.
C. Salaries of web-site maintenance personnel.
D. Administrative salaries.
E. Salary of the sales manager employed at store no. 23.

33. Which of the following would have no effect, either direct or indirect, on an organization's
cash budget? 
A. Sales revenues.
B. Outlays for professional labor.
C. Advertising expenditures.
D. Raw material purchases.
E. None of these, since all of these items would have some influence.

9-9
Chapter 09 - Profit Planning and Activity-Based Budgeting

 Swamp Fox has the following sales forecasts for its hip waders next year:
First Quarter..10,000 pairs
Second Quarter.5% increase over first quarter
Third Quarter3% decrease from second quarter
Fourth Quarter..8% increase over first quarter

34. What is Swamp Fox's estimated sales in units for next year? 

A. 41,485 pairs.
B. 38,300 pairs.
C. 40,000 pairs.
D. 40,685 pairs.
E. Some other amount.

35. What is Swamp Fox's estimated sales revenue for next year if each pair sells for an
average of $30? 
A. $1,149,000.
B. $1,200,000.
C. $1,220,550.
D. $1,244,550.
E. Some other amount.

36. Bird plans to sell 5,000 units each quarter next year. During the first two quarters each
unit will sell for $12; during the last two quarters the sales price will increase $1.50 per unit.
What is Bird's estimated sales revenue for next year? 
A. $240,000.
B. $255,000.
C. $270,000.
D. $244,000.
E. Some other amount.

9-10
Chapter 09 - Profit Planning and Activity-Based Budgeting

37. Bison Sporting Goods sells bicycles throughout the northeastern United States. The
following data were taken from the most recent quarterly sales forecast:

   

On the basis of the information presented, how many bicycles should the company purchase
in August? 
A. 1,860.
B. 1,950.
C. 2,040.
D. 2,250.
E. Some other amount.

38. Swansong plans to sell 10,000 units of a particular product during July, and expects sales
to increase at the rate of 10% per month during the remainder of the year. The June 30 and
September 30 ending inventories are anticipated to be 1,100 units and 950 units, respectively.
On the basis of this information, how many units should Swansong purchase for the quarter
ended September 30? 
A. 31,850.
B. 32,150.
C. 32,950.
D. 33,250.
E. Some other amount.

39. Yorkley Corporation plans to sell 41,000 units of its single product in March. The
company has 2,800 units in its March 1 finished-goods inventory and anticipates having 2,400
completed units in inventory on March 31. On the basis of this information, how many units
does Yorkley plan to produce during March? 
A. 40,600.
B. 41,400.
C. 43,800.
D. 46,200.
E. Some other amount.

9-11
Chapter 09 - Profit Planning and Activity-Based Budgeting

40. Coleman, Inc. anticipates sales of 50,000 units, 48,000 units, and 51,000 units in July,
August, and September, respectively. Company policy is to maintain an ending finished-
goods inventory equal to 40% of the following month's sales. On the basis of this information,
how many units would the company plan to produce in July? 
A. 46,800.
B. 49,200.
C. 49,800.
D. 52,200.
E. Some other amount.

41. Coleman, Inc. anticipates sales of 50,000 units, 48,000 units, and 51,000 units in July,
August, and September, respectively. Company policy is to maintain an ending finished-
goods inventory equal to 40% of the following month's sales. On the basis of this information,
how many units would the company plan to produce in August? 
A. 48,000.
B. 49,200.
C. 49,800.
D. 50,600.
E. Some other amount.

42. Coleman, Inc. anticipates sales of 50,000 units, 48,000 units, 51,000 units and 50,000
units in July, August, September and October, respectively. Company policy is to maintain an
ending finished-goods inventory equal to 40% of the following month's sales. On the basis of
this information, how many units would the company plan to produce in September? 
A. 46,800.
B. 49,200.
C. 49,800.
D. 50,600.
E. Some other amount.

9-12
Chapter 09 - Profit Planning and Activity-Based Budgeting

43. Telfair & Company had 3,000 units in finished-goods inventory on December 31. The
following data are available for the upcoming year:

   

The number of units the company expects to sell in January is: 

A. 6,900.
B. 8,900.
C. 9,400.
D. 9,900.
E. 11,900.

44. To derive the raw material to purchase during an accounting period, an accountant would
calculate the raw material required for production and then: 
A. add the beginning raw-material inventory and the desired ending raw-material inventory.
B. subtract the beginning raw-material inventory and the desired ending raw-material
inventory.
C. add the beginning raw-material inventory and subtract the desired ending raw-material
inventory.
D. add the desired ending raw-material inventory and subtract the beginning raw-material
inventory.
E. add the desired ending raw-material inventory and subtract both the beginning raw-material
inventory and the expected units to be sold.

9-13
Chapter 09 - Profit Planning and Activity-Based Budgeting

45. Tidewater plans to sell 85,000 units of product no. 794 in May, and each of these units
requires three units of raw material. Pertinent data follow.

   

On the basis of the information presented, how many units of raw material should Tidewater
purchase for use in May production? 
A. 228,000.
B. 246,000.
C. 264,000.
D. 282,000.
E. Some other amount.

46. An examination of Shorter Corporation's inventory accounts revealed the following

information:
Raw materials, June 1: 46,000 units
Raw materials, June 30: 51,000 units
Purchases of raw materials during June: 185,000 units
Shorter's finished product requires four units of raw materials. On the basis of this
information, how many finished products were manufactured during June? 
A. 45,000.
B. 47,500.
C. 57,750.
D. 70,500.
E. Some other amount.

9-14
Chapter 09 - Profit Planning and Activity-Based Budgeting

47. Nguyen plans to sell 40,000 units of product no. 75 in June, and each of these units
requires five square feet of raw material. Pertinent data follow.

   

If the company purchases 201,000 square feet of raw material during the month, the estimated
raw-material inventory on June 30 would be: 
A. 11,000 square feet.
B. 13,000 square feet.
C. 23,000 square feet.
D. 25,000 square feet.
E. some other amount.

48. Northwest manufactures a product requiring 0.5 ounces of platinum per unit. The cost of
platinum is approximately $360 per ounce; the company maintains an ending platinum
inventory equal to 10% of the following month's production usage. The following data were
taken from the most recent quarterly production budget:

   

The cost of platinum to be purchased to support August production is: 

A. $195,840.
B. $198,000.
C. $200,160.
D. $391,680.
E. Some other amount.

9-15
Chapter 09 - Profit Planning and Activity-Based Budgeting

49. Northwest's production data for one of its products were taken from the most recent
quarterly production budget:

   

If it takes two direct labor hours to produce each unit and Northwest's cost per labor hour is
$15, direct labor cost for August would be budgeted at: 
A. $16,500.
B. $31,200.
C. $33,000.
D. $34,800.
E. Some other amount.

50. Northcutt's production data for a new deluxe product were taken from the most recent
quarterly production budget:

   

In addition, Northcutt produces 5,000 units a month of its standard product. It takes two direct
labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe
unit. Northwest's cost per labor hour is $15. Direct labor cost for July would be budgeted at: 
A. $183,750.
B. $187,125.
C. $189,125.
D. $194,750.
E. Some other amount.

9-16
Chapter 09 - Profit Planning and Activity-Based Budgeting

51. Northcutt's production data for a new deluxe product were taken from the most recent
quarterly production budget:

   

In addition, Northcutt produces 5,000 units a month of its standard product. It takes two direct
labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe
unit. Northwest's cost per labor hour is $15. Direct labor cost for August would be budgeted
at: 
A. $187,125.
B. $194,750.
C. $197,107.
D. $183,250.
E. Some other amount.

52. Northcutt's production data for a new deluxe product were taken from the most recent
quarterly production budget:

   

In addition, Northcutt produces 5,000 units a month of its standard product. It takes two direct
labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe
unit. Northwest's cost per labor hour is $15. Direct labor cost for September would be
budgeted at: 
A. $187,125.
B. $183,075.
C. $194,750.
D. $197,075.
E. Some other amount.

9-17
Chapter 09 - Profit Planning and Activity-Based Budgeting

53. Northcutt's production data for a new deluxe product were taken from the most recent
quarterly production budget:

   

In addition, Northcutt produces 5,000 units a month of its standard product. It takes two direct
labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe
unit. Northwest's cost per labor hour is $15. Direct labor cost for the quarter would be
budgeted at: 
A. $519,075.
B. $533,125.
C. $547,750.
D. $553,950.
E. Some other amount.

54. Quattro began operations in April of this year. It makes all sales on account, subject to the
following collection pattern: 30% are collected in the month of sale; 60% are collected in the
first month after sale; and 10% are collected in the second month after sale. If sales for April,
May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's
budgeted collections for April? 
A. $18,000.
B. $21,000.
C. $60,000.
D. $65,000.
E. Some other amount.

55. Quattro began operations in April of this year. It makes all sales on account, subject to the
following collection pattern: 30% are collected in the month of sale; 60% are collected in the
first month after sale; and 10% are collected in the second month after sale. If sales for April,
May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's
budgeted collections for May? 
A. $21,000.
B. $60,000.
C. $69,000.
D. $75,000.
E. Some other amount.

9-18
Chapter 09 - Profit Planning and Activity-Based Budgeting

56. Quattro began operations in April of this year. It makes all sales on account, subject to the
following collection pattern: 30% are collected in the month of sale; 60% are collected in the
first month after sale; and 10% are collected in the second month after sale. If sales for April,
May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's
budgeted collections for June? 
A. $21,000.
B. $60,000.
C. $69,000.
D. $75,000.
E. Some other amount.

57. Quattro began operations in April of this year. It makes all sales on account, subject to the
following collection pattern: 30% are collected in the month of sale; 60% are collected in the
first month after sale; and 10% are collected in the second month after sale. If sales for April,
May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's
budgeted collections for the quarter? 
A. $121,000.
B. $140,000.
C. $153,000.
D. $175,000.
E. Some other amount.

58. Verna's makes all sales on account, subject to the following collection pattern: 20% are
collected in the month of sale; 70% are collected in the first month after sale; and 10% are
collected in the second month after sale. If sales for October, November, and December were
$70,000, $60,000, and $50,000, respectively, what was the budgeted receivables balance on
December 31? 
A. $40,000.
B. $46,000.
C. $49,000.
D. $59,000.
E. Some other amount.

9-19
Chapter 09 - Profit Planning and Activity-Based Budgeting

59. Dragon makes all sales on account, subject to the following collection pattern: 30% are
collected in the month of sale; 60% are collected in the first month after sale; and 10% are
collected in the second month after sale. If sales for June, July, and August were $120,000,
$160,000, and $220,000, respectively, what were the firm's budgeted collections for August
and the company's budgeted receivables balance on August 31?

   
 
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

60. The following selected data pertain to Phineus Corporation:

   

July's cash disbursements are expected to be: 

A. $404,000.
B. $464,000.
C. $674,000.
D. $734,000.
E. Some other amount.

9-20
Chapter 09 - Profit Planning and Activity-Based Budgeting

61. Digregory makes all purchases on account, subject to the following payment pattern:
Paid in the month of purchase: 30%
Paid in the first month following purchase: 60%
Paid in the second month following purchase: 10%
If purchases for January, February, and March were $200,000, $180,000, and $230,000,
respectively, what were the firm's budgeted payments in March? 
A. $69,000.
B. $138,000.
C. $177,000.
D. $197,000.
E. Some other amount.

62. Brooke-lyn makes all purchases on account, subject to the following payment pattern:
Paid in the month of purchase: 30%
Paid in the first month following purchase: 65%
Paid in the second month following purchase: 5%
If purchases for April, May, and June were $200,000, $160,000, and $250,000, respectively,
what was the firm's budgeted payables balance on June 30? 
A. $175,000.
B. $179,000.
C. $183,000.
D. $189,000.
E. Some other amount.

9-21
Chapter 09 - Profit Planning and Activity-Based Budgeting

63. Wolverine, Inc. began operations on January 1 of the current year with a $12,000 cash
balance. Forty percent of sales are collected in the month of sale; 60% are collected in the
month following sale. Similarly, 20% of purchases are paid in the month of purchase, and
80% are paid in the month following purchase. The following data apply to January and
February:

   

If operating expenses are paid in the month incurred and include monthly depreciation
charges of $2,500, determine the change in Wolverine's cash balance during February. 
A. $2,000 increase.
B. $4,500 increase.
C. $5,000 increase.
D. $7,500 increase.
E. Some other amount.

9-22
Chapter 09 - Profit Planning and Activity-Based Budgeting

 The Gingham Company's budgeted income statement reflects the following amounts:

   

Sales are collected 50% in the month of sale, 30% in the month following sale, and 19% in
the second month following sale. One percent of sales is uncollectible and expensed at the end
of the year.
Gingham pays for all purchases in the month following purchase and takes advantage of a 3%
discount. The following balances are as of January 1:

   

*Of this balance, $35,000 will be collected in January and the remaining amount will be
collected in February.
The monthly expense figures include $5,000 of depreciation. The expenses are paid in the
month incurred.

64. Gingham's expected cash balance at the end of January is: 

A. $87,000.
B. $89,160.
C. $92,000.
D. $94,160.
E. $113,160.

65. Gingham's budgeted cash receipts in February are: 

A. $91,000.
B. $95,000.
C. $113,090.
D. $113,640.
E. $114,000.

9-23
Chapter 09 - Profit Planning and Activity-Based Budgeting

66. Gingham's budgeted cash payments in February are: 

A. $75,660.
B. $94,860.
C. $97,200.
D. $99,860.
E. $102,200.

67. Gingham's expected cash balance at the end of February is: 

A. $87,000.
B. $89,160.
C. $92,000.
D. $94,160.
E. $113,300.

68. End-of-period figures for accounts receivable and payables to suppliers would be found
on the: 
A. cash budget.
B. budgeted schedule of cost of goods manufactured.
C. budgeted income statement.
D. budgeted balance sheet.
E. budgeted statement of cash flows.

69. Which of the following statements about financial planning models (FPMs) is (are) false? 
A. FPMs express a company's financial and operating relationships in mathematical terms.
B. FPMs allow a user to explore the impact of changes in variables.
C. FPMs are commonly known as "what-if" models.
D. FPMs have become less popular in recent years because of computers and spreadsheets.
E. Statements "C" and "D" are both false.

9-24
Chapter 09 - Profit Planning and Activity-Based Budgeting

70. Consider the following statements about budget administration:

I. The budgeting process is a very formal process in all organizations regardless of an
organization's size.
II. The budget manual is prepared to communicate budget procedures and deadlines to
employees throughout an organization.
III. Effective internal control procedures require that the budget director be an individual
other than the controller.
Which of the above statements is (are) true? 
A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.

71. Which of the following statements concerning the budget director is false? 

A. The budget director is often an organization's controller.
B. The budget director has the responsibility of specifying the process by which budget data
will be gathered.
C. The budget director collects information and participates in preparing the master budget.
D. The budget director communicates budget procedures and deadlines to employees
throughout an organization.
E. The budget director usually has the authority to give final approval to the master budget.

72. Consider the following statements about companies that are involved with international
operations:
I. Budgeting for these firms is often very involved because of fluctuating values in foreign
currencies.
II. Multinational firms may encounter hyperinflationary economies.
III. Such organizations often face changing laws and political climates that affect business
activity.
Which of the above statements is (are) true? 
A. I only.
B. III only.
C. I and II.
D. II and III.
E. I, II, and III.

9-25
Chapter 09 - Profit Planning and Activity-Based Budgeting

73. The budgeting technique that focuses on different phases of a product such as planning
and concept design, testing, manufacturing, and distribution and customer service is known
as: 
A. cash-flow budgeting.
B. integrative budgeting.
C. base budgeting.
D. comprehensive budgeting.
E. life-cycle budgeting.

74. Consider the following statements about budgeting and a product's life cycle:
I. Budgets should focus on costs that are incurred only after a product has been introduced to
the marketplace.
II. Life-cycle costs would include those related to product planning, preliminary design,
detailed design and testing, production, and distribution and customer service.
III. When a life cycle is short, companies must make certain that before a commitment is
made to a product, the product's life-cycle costs are covered.
Which of the above statements is (are) true? 
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.

75. The difference between the revenue or cost projection that a person provides, and a
realistic estimate of the revenue or cost, is called: 
A. passing the buck.
B. budgetary slack.
C. false budgeting.
D. participative budgeting.
E. resource allocation processing.

9-26
Chapter 09 - Profit Planning and Activity-Based Budgeting

76. If a manager builds slack into a budget, how would that manager handle estimates of
revenues and expenses?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

77. The following events took place when Managers A, B, and C were preparing budgets for
the upcoming period:
I. Manager A increased property tax expenditures by 2% when she was informed of a recent
rate hike by local authorities.
II. Manager B reduced sales revenues by 4% when informed of recent aggressive actions by a
new competitor.
III. Manager C, who supervises employees with widely varying skill levels, used the highest
wage rate in the department when preparing the labor budget.
Assuming that the percentage amounts given are reasonable, which of the preceding cases is
(are) an example of building slack in budgets? 
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.

9-27
Chapter 09 - Profit Planning and Activity-Based Budgeting

78. Consider the following statements about budgetary slack:

I. Managers build slack into a budget so that they stand a greater chance of receiving
favorable performance evaluations.
II. Budgetary slack is used by managers to guard against uncertainty and unforeseen events.
III. Budgetary slack is used by managers to guard against dollar cuts by top management in
the resource allocation process.
Which of the above statements is (are) true? 
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.

79. When an organization involves its many employees in the budgeting process in a

meaningful way, the organization is said to be using an approach most commonly known as: 
A. budgetary slack.
B. participative budgeting.
C. budget padding.
D. imposed budgeting.
E. employee-based budgeting.

80. Which of the following outcomes is (are) sometimes associated with participative

budgeting? 
A. Employees make little effort to achieve budgetary goals.
B. Budget preparation time can be somewhat lengthy.
C. The problem of budget padding may arise.
D. Financial modeling becomes much more difficult to undertake.
E. Both choices B and C are correct.

9-28
Chapter 09 - Profit Planning and Activity-Based Budgeting

81. Company A uses a heavily participative budgeting approach whereas at Company B, top

management develops all budgets and imposes them on lower-level personnel. Which of the
following statements is false? 
A. A's employees will likely be more motivated to achieve budgetary goals than the
employees of Company B.
B. B's employees may be somewhat disenchanted because although they will be evaluated
against a budget, they really had little say in budget development.
C. Budget padding will likely be a greater problem at Company B.
D. Budget preparation time will likely be longer at Company A.
E. Ethical issues are more likely to arise at Company A, especially when the budget is used as
a basis for performance appraisal.

 
 

Essay Questions
 

82. Virginia State University (VSU) is preparing its master budget for the upcoming academic
year (an academic year consists of two semesters). Currently, 12,000 students are enrolled on
campus; however, the admissions office is forecasting a 5% growth in the student body
despite a tuition hike to $80 per credit hour. The following additional information has been
gathered from an examination of university records and conversations with university
officials:
· VSU is planning to award 150 tuition-free scholarships.
· The average class has 30 students, and the typical student takes 15 credit hours each
semester.
· Each class is three credit hours.
· Each faculty member teaches five classes during the academic year.
Required:
A. Compute the budgeted tuition revenue for the upcoming academic year.
B. Determine the number of faculty members needed to cover classes.
C. In preparing the university's master budget, should the administration begin with a forecast
of students or a forecast of faculty members? Briefly explain. 

 
 

9-29
Chapter 09 - Profit Planning and Activity-Based Budgeting

83. Santorini Corporation has experienced a number of out-of-stock situations with respect to

its finished-goods inventories. Inventory at the end of May, for example, was only 50 units—
an all-time low.
Management desires to implement a policy whereby finished-goods inventory is 70% of the
following month's sales. Budgeted sales for June, July, and August are expected to be 5,000
units, 5,600 units, and 5,500 units, respectively.
Required:
Determine the number of units that Santorini must produce in June and July. 

 
 

84. Turbon Manufacturing plans to produce 20,000 units, 24,000 units, and 30,000 units,
respectively, in October, November, and December. Each of these units requires four units of
part no. 879, which the company can purchase for $7 each. Turbon has 35,000 units of part
no. 879 in stock on September 30.
Required:
Prepare a direct-material purchases budget for October and November in units and dollars.
Management desires to maintain an ending raw-material inventory equal to 40% of the
following month's production usage. 

 
 

9-30
Chapter 09 - Profit Planning and Activity-Based Budgeting

85. Scotch Company plans to sell 400,000 units of finished product in July 20x1.
Management (1) anticipates a growth rate in sales of 5% per month thereafter and (2) desires
a monthly ending finished-goods inventory (in units) of 80% of the following month's
estimated sales. There are 300,000 completed units in the June 30, 20x1 inventory.
Each unit of finished product requires four pounds of direct material at a cost of $1.50 per
pound. There are 1,600,000 pounds of direct material in inventory on June 30, 20x1.
Required:
A. Prepare a production budget for the quarter ended September 30, 20x1. Note: For both part
"A" and part "B" of this problem, prepare your budget on a quarterly (not monthly) basis.
B. Independent of your answer to part "A," assume that Scotch plans to produce 1,200,000
units of finished product for the quarter ended September 30. If the firm desires to stock direct
materials at the end of this period equal to 25% of current production usage, compute the cost
of direct material purchases for the quarter. 

 
 

9-31
Chapter 09 - Profit Planning and Activity-Based Budgeting

86. Atlantis Corporation assembles bicycles by purchasing frames, wheels, and other parts
from various suppliers. Consider the following data:
· The company plans to sell 25,000 bicycles during each month of the year's first quarter.
· A review of the accounting records disclosed a finished-goods inventory of 1,400 bicycles
on January 1 and an expected finished-goods inventory of 1,850 bicycles on January 31.
· Atlantis has 4,300 wheels in inventory on January 1, a level that is expected to drop by 5%
at month-end.
· Assembly time totals 30 minutes per bicycle, and workers are paid $14 per hour.
· Atlantis accounts for employee benefits as a component of direct labor cost. Pension and
insurance costs average $2 per hour (total); additionally, the company pays Social Security
taxes that amount to 8% of gross wages earned.
Required:
A. How many bicycles does Atlantis expect to produce (i.e., assemble) in January?
B. How many wheels are budgeted to be purchased in January?
C. Compute Atlantis's total direct labor cost for January.
D. Briefly explain how the company's purchasing activity would affect the end-of-period
balance sheet. 

 
 

9-32
Chapter 09 - Profit Planning and Activity-Based Budgeting

87. Jaergin manufactures two products: A and B. The company predicts a sales volume of
10,000 units for product A and ending finished-goods inventory of 2,000 units. These
numbers for product B are 12,000 and 3,000, respectively. Jaergin currently has 7,000 units of
A in inventory and 9,000 units of B.
The following raw materials are required to manufacture these products:

   

Product A requires three hours of cutting time and two hours of finishing time; B requires one
hour and three hours, respectively. The direct labor rate for cutting is $10 per hour and $18
per hour for finishing.
Required:
A. Prepare a production budget in units for products A and B.
B. Prepare a materials usage budget in pounds and dollars for materials X, Y, and Z.
C. Prepare a direct labor budget in hours and dollars for product A. 

 
 

9-33
Chapter 09 - Profit Planning and Activity-Based Budgeting

88. Tiara Company has the following historical collection pattern for its credit sales:
70% collected in month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible
Budgeted credit sales for the last six months of the year follow.

   

Required:
A. Calculate the estimated total cash collections during October.
B. Calculate the estimated total cash collections during the year's fourth quarter. 

 
 

9-34
Chapter 09 - Profit Planning and Activity-Based Budgeting

89. The accounting records of Backspace, Inc., revealed an accounts receivable balance of

$195,000 on January 1, 20x6. Forty percent of the company's sales are for cash, and the
remaining 60% are on account. Of the credit sales, 30% are collected in the month of sale and
70% are collected in the following month. Total sales in January and February are expected to
amount to $500,000 and $530,000, respectively.
Assume that in the latter half of 20x6, Backspace hired a new sales manager who aggressively
tried to maximize the company's market share. She implemented a compensation system for
the sales force that was 100% commission based, with the commission calculated on the basis
of gross sales dollars. Sales volume increased dramatically in a very short period of time, and
the sales and collection patterns changed, as follows:

   

Required:
A. Compute the company's cash inflows for January and February, 20x6.
B. Determine the outstanding receivables balance at the end of February.
C. Compare the sales and collection patterns before and after the arrival of the new sales
manager. Have things improved or deteriorated? Explain.
D. On the basis of the information presented, determine what likely caused the improvement
or deterioration in collection patterns. 

 
 

9-35
Chapter 09 - Profit Planning and Activity-Based Budgeting

90. Bentson Corporation, a wholesaler, provided the following information:

   

Customers pay 60% of their balances in the month of sale, 30% in the month following sale,
and 10% in the second month following sale. The company pays all invoices in the month
following purchase and takes advantage of a 3% discount on all amounts due. Cash payments
for operating expenses in May will be $119,500; Bentson's cash balance on May 1 was
$127,800.
Required:
Determine the following:
A. Expected cash collections during May.
B. Expected cash disbursements during May.
C. Expected cash balance on May 31. 

 
 

9-36
Chapter 09 - Profit Planning and Activity-Based Budgeting

91. Millage Manufacturing has a cash balance of $8,000 on August 1 of the current year. The
company's controller forecast the following cash receipts and cash disbursements for the
upcoming two months of activity:

   

Management desires to maintain a minimum cash balance of $8,000 at all times. If necessary,
additional financing can be obtained in $1,000 multiples at a 12% interest rate. All
borrowings are made at the beginning of the month; debt retirement, on the other hand, occurs
at the end of the month. Interest is paid at the time of repaying loan principal and is computed
on the portion of debt repaid.
Required:
A. Determine the ending cash balance in August both before and after any necessary
financing or debt retirement.
B. Repeat part "A" for September. 

 
 

9-37
Chapter 09 - Profit Planning and Activity-Based Budgeting

92. Stiles Enterprises reported the following cash collections in July and August from credit
sales:

   

The company sells a single product for $20, and all sales are collected over a two-month
period.
Required:
A. Determine the number of units that were sold in July.
B. Determine the percent of credit sales collected in the month of sale and the percent of sales
collected in the month following sale.
C. How many units were sold in August?
D. Determine the accounts receivable balance as of August 31. 

 
 

9-38
Chapter 09 - Profit Planning and Activity-Based Budgeting

93. Sherman Company provides services in the retail flooring industry. The following
information is available for 20x5:
· Twenty percent of the firm's services are for cash and the remaining 80% are on account. Of
the credit services, 40% are collected in the month that the service is provided, with the
remaining 60% collected in the following month.
· Services provided in January are expected to total $250,000 and grow at the rate of 5% per
month thereafter.
· January's cash collections are expected to be $240,400, and month-end receivables are
forecast at $120,000.
· Monthly cash operating costs and depreciation during the first quarter of the year are
approximated at $250,000 and $15,000, respectively.
· Sherman's December 31, 20x4 balance sheet revealed accounts payable balances of $28,000.
This amount is related to the company's operating costs and is expected to grow to $36,000 by
the end of 20x5's first quarter. All operating costs are paid within 30 days of incurrence.
· Company policy requires that a $20,000 minimum cash balance be maintained, and
Sherman's 20x4 year-end balance sheet showed that the firm was in compliance with policy
by having cash of $23,000.
Required:
A. Determine the sales revenue earned that will appear on the income statement for the
quarter ended March 31, 20x5.
B. Compute the company's first-quarter cash collections.
C. Compute the cash balance that would appear on the March 31, 20x5 balance sheet.
D. What are some possible actions the company could pursue if, at any time during the
quarter, it finds that the cash balance has fallen below the stated minimum? 

 
 

9-39
Chapter 09 - Profit Planning and Activity-Based Budgeting

94. The following information relates to DFW Corporation:

· All sales are on account and are budgeted as follows: February, $350,000; March, $360,000;
and April, $400,000. DFW collects 70% of its sales in the month of sale and 30% in the
following month.
· Cost of goods sold averages 60% of sales. Purchases total 65% of the following month's
sales and are paid in the month following acquisition.
· Cash operating expenses total $60,000 per month and are paid when incurred. Monthly
depreciation amounts to $18,000.
· Selected amounts taken from the January 31 balance sheet were: accounts receivable,
$115,000; plant and equipment (net), $107,000; and retained earnings, $85,000.
Required: (NOTE: Ignore income taxes in answering these questions).
A. Prepare a budgeted income statement that summarizes activity for the two months ended
March 31, 20x1.
B. Compute the amounts that would appear on the March 31 balance sheet for accounts
receivable, plant and equipment (net), and retained earnings. 

 
 

95. Discuss the importance of budgeting and identify five purposes of budgeting systems. 

 
 

96. List several factors that an organization might consider when developing a sales forecast. 

 
 

9-40
Chapter 09 - Profit Planning and Activity-Based Budgeting

97. Terry Pineno, new-accounts manager at East Bank of Clarion, has been asked to project
how many new accounts she will open during 20x2. The local economy has been growing,
and the bank has experienced a 10% increase in the number of new accounts over each of the
past five years. In 20x1, the bank had 10,000 accounts.
Pineno is paid a salary, plus a bonus of $20 for every new account above the budgeted
amount. Thus, if the annual budget calls for 1,000 new accounts, and 1,080 new accounts are
obtained, her bonus will be $1,600 (80  $20).
Pineno believes that the local economy will continue to grow at the same rate in 20x2 as it has
in recent years. She decided to submit a projection of 700 new accounts for 20x2.
Required:
Your consulting firm has been hired by the bank president to make recommendations for
improving the bank's operation. Write a memorandum to the president defining and
explaining the negative consequences of budgetary slack. Also discuss the bank's bonus
system for the new-accounts manager and how the bonus program tends to encourage
budgetary slack. 

 
 

98. James Corporation, headquartered in Chicago, has a manufacturing plant in Dallas. Plant

managers desire to participate in the company's budget efforts, which, for the past 10 years,
have been handled solely by top executives in Chicago. Dallas managers feel that by
becoming involved, they can make great strides in terms of improving operating performance
of their aging facility.
Required:
Briefly discuss this situation, focusing on the benefits and problems of letting Dallas
managers participate in the company's budgetary efforts. 

 
 

Chapter 09 Profit Planning and Activity-Based Budgeting Answer Key

 

9-41
Chapter 09 - Profit Planning and Activity-Based Budgeting
 

True / False Questions

 

1. The comprehensive set of budgets that serves as a company's overall financial plan is
commonly known as the financial budget. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

2. A company's sales forecast would likely not consider general economic and industry
trends. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

3. Sainte Claire Corporation has a highly automated production facility. Production volume
and management judgment are the two factors that would likely have the most direct
influence on the company's manufacturing overhead budget. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-42
Chapter 09 - Profit Planning and Activity-Based Budgeting

4. The budgeting technique that focuses on different phases of a product such as planning and
concept design, testing, manufacturing, and distribution and customer service is known as
comprehensive budgeting. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Global
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-07 Understand the importance of budgeting product life-cycle costs.
 

5. That employees make little effort to achieve budgetary goals is an outcome sometimes
associated with participative budgeting. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Resource Management
AICPA FN: Measurement
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 
 

Multiple Choice Questions

 

6. Generally speaking, budgets are not used to: 

A. identify a company's most profitable products.
B. evaluate performance.
C. create a plan of action.
D. assist in the control of profit and operations.
E. facilitate communication and coordinate activities.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

9-43
Chapter 09 - Profit Planning and Activity-Based Budgeting

7. Which of the following choices correctly denotes managerial functions that are commonly
associated with budgeting?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

8. A formal budget program will almost always result in: 

A. higher sales.
B. more cash inflows than cash outflows.
C. decreased expenses.
D. improved profits.
E. a detailed plan against which actual results can be compared.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC, N
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

9-44
Chapter 09 - Profit Planning and Activity-Based Budgeting

9. A budget serves as a benchmark against which: 

A. actual results can be compared.
B. allocated results can be compared.
C. actual results become inconsequential.
D. allocated results become inconsequential.
E. cash balances can be compared to expense totals.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

10. The comprehensive set of budgets that serves as a company's overall financial plan is
commonly known as: 
A. an integrated budget.
B. a pro-forma budget.
C. a master budget.
D. a financial budget.
E. a rolling budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

11. A company's plan for the acquisition of long-lived assets, such as buildings and
equipment, is commonly called a: 
A. pro-forma budget.
B. master budget.
C. financial budget.
D. profit plan.
E. capital budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

9-45
Chapter 09 - Profit Planning and Activity-Based Budgeting

12. A company's plan for the issuance of stock or incurrence of debt is commonly called a: 
A. pro-forma budget.
B. master budget.
C. financial budget.
D. profit plan.
E. capital budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

13. A company's expected receipts from sales and planned disbursements to pay bills is
commonly called a: 
A. pro-forma budget.
B. master budget.
C. financial budget.
D. profit plan.
E. cash budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

9-46
Chapter 09 - Profit Planning and Activity-Based Budgeting

14. Wilmar Corporation is budgeting its equipment needs on an on-going basis, with a new
quarter being added to the budget as the current quarter is completed. This type of budget is
most commonly known as a: 
A. capital budget.
B. rolling budget.
C. revised budget.
D. pro-forma budget.
E. financial budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

15. An organization's budgets will often be prepared to cover: 

A. one month.
B. one quarter.
C. one year.
D. periods longer than one year.
E. All of these.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

9-47
Chapter 09 - Profit Planning and Activity-Based Budgeting

16. A manufacturing firm would begin preparation of its master budget by constructing a: 
A. sales budget.
B. production budget.
C. cash budget.
D. capital budget.
E. set of pro-forma financial statements.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

17. Which of the following budgets is based on many other master-budget components? 

A. Direct labor budget.
B. Overhead budget.
C. Sales budget.
D. Cash budget.
E. Selling and administrative expense budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-48
Chapter 09 - Profit Planning and Activity-Based Budgeting

18. The budgeted income statement, budgeted balance sheet, and budgeted statement of cash
flows comprise: 
A. the final portion of the master budget.
B. the depiction of an organization's overall actual financial results.
C. the first step of the master budget.
D. the portion of the master budget prepared after the sales forecast and before the remainder
of the operational budgets.
E. the second step of the master budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

19. Which of the following budgets is prepared at the end of the budget-construction cycle? 
A. Sales budget.
B. Production budget.
C. Budgeted financial statements.
D. Cash budget.
E. Overhead budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-49
Chapter 09 - Profit Planning and Activity-Based Budgeting

20. Which of the following would depict the logical order for preparing (1) a production
budget, (2) a cash budget, (3) a sales budget, and (4) a direct-labor budget? 
A. 1-3-4-2.
B. 2-3-1-4.
C. 2-1-3-4.
D. 3-1-4-2.
E. 3-1-2-4.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

21. The master budget contains the following components, among others: (1) direct-material
budget, (2) budgeted balance sheet, (3) production budget, and (4) cash budget. Which of
these components would be prepared first and which would be prepared last?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-50
Chapter 09 - Profit Planning and Activity-Based Budgeting

22. A company's sales forecast would likely consider all of the following factors except: 
A. political and legal events.
B. advertising and pricing policies.
C. general economic and industry trends.
D. top management's attitude toward decentralized operating structures.
E. competition.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

23. Which of the following would be considered when preparing a company's sales forecast?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

9-51
Chapter 09 - Profit Planning and Activity-Based Budgeting

24. A company's sales forecast would likely consider all of the following factors except: 
A. past sales levels and trends.
B. the company's intended pricing policy.
C. the company's product costing policy.
D. market research studies.
E. planned advertising and promotions.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

25. Which of the following statements best describes the relationship between the sales-
forecasting process and the master-budgeting process? 
A. The sales forecast is typically completed after completion of the master budget.
B. The sales forecast is typically completed approximately halfway through the master-budget
process.
C. The sales forecast is typically completed before the master budget and has no impact on the
master budget.
D. The sales forecast is typically completed before the master budget and has little impact on
the master budget.
E. The sales forecast is typically completed before the master budget and has significant
impact on the master budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Medium
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

9-52
Chapter 09 - Profit Planning and Activity-Based Budgeting

26. Which of the following organizations is not likely to use budgets? 

A. Manufacturing firms.
B. Merchandising firms.
C. Firms in service industries.
D. Nonprofit organizations.
E. None of these, because all are likely to use budgets.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-02 Describe the similarities and differences in the operational budgets prepared by manufacturers
Learning Objective: and nonprofit organizations.
Learning Objective: merchandisers
Learning Objective: service-industry firms
 

27. Nonprofit organizations begin their budgeting process with: 

A. a sales budget.
B. anticipated funding.
C. proforma financial statements.
D. services to be provided.
E. a cash budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-02 Describe the similarities and differences in the operational budgets prepared by manufacturers
Learning Objective: and nonprofit organizations.
Learning Objective: merchandisers
Learning Objective: service-industry firms
 

9-53
Chapter 09 - Profit Planning and Activity-Based Budgeting

28. Activity-based budgeting: 
A. begins with a forecast of products and services to be produced, and customers served.
B. ends with a forecast of products and services to be produced, and customers served.
C. parallels the flow of analysis that is associated with activity-based costing.
D. reverses the flow of analysis that is associated with activity-based costing.
E. is best described by choices "A" and "D" above.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-03 Explain the concept of activity-based budgeting and the benefits it brings to the budgeting process.
 

29. A company that uses activity-based budgeting performs the following:

1—Plans activities for the budget period.
2—Forecasts the demand for products and services as well as the customers to be served.
3—Budgets the resources necessary to carry out activities.
Which of the following denotes the proper order of the preceding activities? 
A. 1-2-3.
B. 2-1-3.
C. 2-3-1.
D. 3-1-2.
E. 3-2-1.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-03 Explain the concept of activity-based budgeting and the benefits it brings to the budgeting process.
 

9-54
Chapter 09 - Profit Planning and Activity-Based Budgeting

30. Sainte Claire Corporation has a highly automated production facility. Which of the
following correctly shows the two factors that would likely have the most direct influence on
the company's manufacturing overhead budget? 
A. Sales volume and labor hours.
B. Contribution margin and cash payments.
C. Production volume and management judgment.
D. Labor hours and management judgment.
E. Management judgment and indirect labor cost.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

31. Mayze Production Company, which uses activity-based budgeting, is in the process of

preparing a manufacturing overhead budget. Which of the following would likely appear on
that budget? 
A. Batch-level costs: Production setup.
B. Unit-level costs: Depreciation.
C. Unit-level costs: Maintenance.
D. Product-level costs: Insurance and property taxes.
E. Facility and general operations-level costs: Indirect material.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-55
Chapter 09 - Profit Planning and Activity-Based Budgeting

32. FastTec sells electronics in retail outlets and on the Internet. It uses activity-based
budgeting in the preparation of its selling, general, and administrative expense budget. Which
of the following costs would the company likely classify as a unit-level expense on its
budget? 
A. Media advertising.
B. Retail outlet sales commissions.
C. Salaries of web-site maintenance personnel.
D. Administrative salaries.
E. Salary of the sales manager employed at store no. 23.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

33. Which of the following would have no effect, either direct or indirect, on an organization's
cash budget? 
A. Sales revenues.
B. Outlays for professional labor.
C. Advertising expenditures.
D. Raw material purchases.
E. None of these, since all of these items would have some influence.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

 Swamp Fox has the following sales forecasts for its hip waders next year:
First Quarter..10,000 pairs
Second Quarter.5% increase over first quarter
Third Quarter3% decrease from second quarter
Fourth Quarter..8% increase over first quarter

9-56
Chapter 09 - Profit Planning and Activity-Based Budgeting

34. What is Swamp Fox's estimated sales in units for next year? 

A. 41,485 pairs.
B. 38,300 pairs.
C. 40,000 pairs.
D. 40,685 pairs.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Medium
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

35. What is Swamp Fox's estimated sales revenue for next year if each pair sells for an
average of $30? 
A. $1,149,000.
B. $1,200,000.
C. $1,220,550.
D. $1,244,550.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Medium
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-57
Chapter 09 - Profit Planning and Activity-Based Budgeting

36. Bird plans to sell 5,000 units each quarter next year. During the first two quarters each
unit will sell for $12; during the last two quarters the sales price will increase $1.50 per unit.
What is Bird's estimated sales revenue for next year? 
A. $240,000.
B. $255,000.
C. $270,000.
D. $244,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Medium
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

37. Bison Sporting Goods sells bicycles throughout the northeastern United States. The
following data were taken from the most recent quarterly sales forecast:

   

On the basis of the information presented, how many bicycles should the company purchase
in August? 
A. 1,860.
B. 1,950.
C. 2,040.
D. 2,250.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Medium
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-58
Chapter 09 - Profit Planning and Activity-Based Budgeting

38. Swansong plans to sell 10,000 units of a particular product during July, and expects sales
to increase at the rate of 10% per month during the remainder of the year. The June 30 and
September 30 ending inventories are anticipated to be 1,100 units and 950 units, respectively.
On the basis of this information, how many units should Swansong purchase for the quarter
ended September 30? 
A. 31,850.
B. 32,150.
C. 32,950.
D. 33,250.
E. Some other amount.

AACSB: A1nalytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A, N
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

39. Yorkley Corporation plans to sell 41,000 units of its single product in March. The
company has 2,800 units in its March 1 finished-goods inventory and anticipates having 2,400
completed units in inventory on March 31. On the basis of this information, how many units
does Yorkley plan to produce during March? 
A. 40,600.
B. 41,400.
C. 43,800.
D. 46,200.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-59
Chapter 09 - Profit Planning and Activity-Based Budgeting

40. Coleman, Inc. anticipates sales of 50,000 units, 48,000 units, and 51,000 units in July,
August, and September, respectively. Company policy is to maintain an ending finished-
goods inventory equal to 40% of the following month's sales. On the basis of this information,
how many units would the company plan to produce in July? 
A. 46,800.
B. 49,200.
C. 49,800.
D. 52,200.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

41. Coleman, Inc. anticipates sales of 50,000 units, 48,000 units, and 51,000 units in July,
August, and September, respectively. Company policy is to maintain an ending finished-
goods inventory equal to 40% of the following month's sales. On the basis of this information,
how many units would the company plan to produce in August? 
A. 48,000.
B. 49,200.
C. 49,800.
D. 50,600.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-60
Chapter 09 - Profit Planning and Activity-Based Budgeting

42. Coleman, Inc. anticipates sales of 50,000 units, 48,000 units, 51,000 units and 50,000
units in July, August, September and October, respectively. Company policy is to maintain an
ending finished-goods inventory equal to 40% of the following month's sales. On the basis of
this information, how many units would the company plan to produce in September? 
A. 46,800.
B. 49,200.
C. 49,800.
D. 50,600.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

43. Telfair & Company had 3,000 units in finished-goods inventory on December 31. The
following data are available for the upcoming year:

   

The number of units the company expects to sell in January is: 

A. 6,900.
B. 8,900.
C. 9,400.
D. 9,900.
E. 11,900.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-61
Chapter 09 - Profit Planning and Activity-Based Budgeting

44. To derive the raw material to purchase during an accounting period, an accountant would
calculate the raw material required for production and then: 
A. add the beginning raw-material inventory and the desired ending raw-material inventory.
B. subtract the beginning raw-material inventory and the desired ending raw-material
inventory.
C. add the beginning raw-material inventory and subtract the desired ending raw-material
inventory.
D. add the desired ending raw-material inventory and subtract the beginning raw-material
inventory.
E. add the desired ending raw-material inventory and subtract both the beginning raw-material
inventory and the expected units to be sold.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

45. Tidewater plans to sell 85,000 units of product no. 794 in May, and each of these units
requires three units of raw material. Pertinent data follow.

   

On the basis of the information presented, how many units of raw material should Tidewater
purchase for use in May production? 
A. 228,000.
B. 246,000.
C. 264,000.
D. 282,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-62
Chapter 09 - Profit Planning and Activity-Based Budgeting

46. An examination of Shorter Corporation's inventory accounts revealed the following

information:
Raw materials, June 1: 46,000 units
Raw materials, June 30: 51,000 units
Purchases of raw materials during June: 185,000 units
Shorter's finished product requires four units of raw materials. On the basis of this
information, how many finished products were manufactured during June? 
A. 45,000.
B. 47,500.
C. 57,750.
D. 70,500.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

47. Nguyen plans to sell 40,000 units of product no. 75 in June, and each of these units
requires five square feet of raw material. Pertinent data follow.

   

If the company purchases 201,000 square feet of raw material during the month, the estimated
raw-material inventory on June 30 would be: 
A. 11,000 square feet.
B. 13,000 square feet.
C. 23,000 square feet.
D. 25,000 square feet.
E. some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-63
Chapter 09 - Profit Planning and Activity-Based Budgeting

48. Northwest manufactures a product requiring 0.5 ounces of platinum per unit. The cost of
platinum is approximately $360 per ounce; the company maintains an ending platinum
inventory equal to 10% of the following month's production usage. The following data were
taken from the most recent quarterly production budget:

   

The cost of platinum to be purchased to support August production is: 

A. $195,840.
B. $198,000.
C. $200,160.
D. $391,680.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

49. Northwest's production data for one of its products were taken from the most recent
quarterly production budget:

   

If it takes two direct labor hours to produce each unit and Northwest's cost per labor hour is
$15, direct labor cost for August would be budgeted at: 
A. $16,500.
B. $31,200.
C. $33,000.
D. $34,800.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-64
Chapter 09 - Profit Planning and Activity-Based Budgeting

50. Northcutt's production data for a new deluxe product were taken from the most recent
quarterly production budget:

   

In addition, Northcutt produces 5,000 units a month of its standard product. It takes two direct
labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe
unit. Northwest's cost per labor hour is $15. Direct labor cost for July would be budgeted at: 
A. $183,750.
B. $187,125.
C. $189,125.
D. $194,750.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-65
Chapter 09 - Profit Planning and Activity-Based Budgeting

51. Northcutt's production data for a new deluxe product were taken from the most recent
quarterly production budget:

   

In addition, Northcutt produces 5,000 units a month of its standard product. It takes two direct
labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe
unit. Northwest's cost per labor hour is $15. Direct labor cost for August would be budgeted
at: 
A. $187,125.
B. $194,750.
C. $197,107.
D. $183,250.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-66
Chapter 09 - Profit Planning and Activity-Based Budgeting

52. Northcutt's production data for a new deluxe product were taken from the most recent
quarterly production budget:

   

In addition, Northcutt produces 5,000 units a month of its standard product. It takes two direct
labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe
unit. Northwest's cost per labor hour is $15. Direct labor cost for September would be
budgeted at: 
A. $187,125.
B. $183,075.
C. $194,750.
D. $197,075.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-67
Chapter 09 - Profit Planning and Activity-Based Budgeting

53. Northcutt's production data for a new deluxe product were taken from the most recent
quarterly production budget:

   

In addition, Northcutt produces 5,000 units a month of its standard product. It takes two direct
labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe
unit. Northwest's cost per labor hour is $15. Direct labor cost for the quarter would be
budgeted at: 
A. $519,075.
B. $533,125.
C. $547,750.
D. $553,950.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

54. Quattro began operations in April of this year. It makes all sales on account, subject to the
following collection pattern: 30% are collected in the month of sale; 60% are collected in the
first month after sale; and 10% are collected in the second month after sale. If sales for April,
May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's
budgeted collections for April? 
A. $18,000.
B. $21,000.
C. $60,000.
D. $65,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-68
Chapter 09 - Profit Planning and Activity-Based Budgeting

55. Quattro began operations in April of this year. It makes all sales on account, subject to the
following collection pattern: 30% are collected in the month of sale; 60% are collected in the
first month after sale; and 10% are collected in the second month after sale. If sales for April,
May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's
budgeted collections for May? 
A. $21,000.
B. $60,000.
C. $69,000.
D. $75,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

56. Quattro began operations in April of this year. It makes all sales on account, subject to the
following collection pattern: 30% are collected in the month of sale; 60% are collected in the
first month after sale; and 10% are collected in the second month after sale. If sales for April,
May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's
budgeted collections for June? 
A. $21,000.
B. $60,000.
C. $69,000.
D. $75,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-69
Chapter 09 - Profit Planning and Activity-Based Budgeting

57. Quattro began operations in April of this year. It makes all sales on account, subject to the
following collection pattern: 30% are collected in the month of sale; 60% are collected in the
first month after sale; and 10% are collected in the second month after sale. If sales for April,
May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's
budgeted collections for the quarter? 
A. $121,000.
B. $140,000.
C. $153,000.
D. $175,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

58. Verna's makes all sales on account, subject to the following collection pattern: 20% are
collected in the month of sale; 70% are collected in the first month after sale; and 10% are
collected in the second month after sale. If sales for October, November, and December were
$70,000, $60,000, and $50,000, respectively, what was the budgeted receivables balance on
December 31? 
A. $40,000.
B. $46,000.
C. $49,000.
D. $59,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-70
Chapter 09 - Profit Planning and Activity-Based Budgeting

59. Dragon makes all sales on account, subject to the following collection pattern: 30% are
collected in the month of sale; 60% are collected in the first month after sale; and 10% are
collected in the second month after sale. If sales for June, July, and August were $120,000,
$160,000, and $220,000, respectively, what were the firm's budgeted collections for August
and the company's budgeted receivables balance on August 31?

   
 
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-71
Chapter 09 - Profit Planning and Activity-Based Budgeting

60. The following selected data pertain to Phineus Corporation:

   

July's cash disbursements are expected to be: 

A. $404,000.
B. $464,000.
C. $674,000.
D. $734,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

61. Digregory makes all purchases on account, subject to the following payment pattern:
Paid in the month of purchase: 30%
Paid in the first month following purchase: 60%
Paid in the second month following purchase: 10%
If purchases for January, February, and March were $200,000, $180,000, and $230,000,
respectively, what were the firm's budgeted payments in March? 
A. $69,000.
B. $138,000.
C. $177,000.
D. $197,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-72
Chapter 09 - Profit Planning and Activity-Based Budgeting

62. Brooke-lyn makes all purchases on account, subject to the following payment pattern:
Paid in the month of purchase: 30%
Paid in the first month following purchase: 65%
Paid in the second month following purchase: 5%
If purchases for April, May, and June were $200,000, $160,000, and $250,000, respectively,
what was the firm's budgeted payables balance on June 30? 
A. $175,000.
B. $179,000.
C. $183,000.
D. $189,000.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-73
Chapter 09 - Profit Planning and Activity-Based Budgeting

63. Wolverine, Inc. began operations on January 1 of the current year with a $12,000 cash
balance. Forty percent of sales are collected in the month of sale; 60% are collected in the
month following sale. Similarly, 20% of purchases are paid in the month of purchase, and
80% are paid in the month following purchase. The following data apply to January and
February:

   

If operating expenses are paid in the month incurred and include monthly depreciation
charges of $2,500, determine the change in Wolverine's cash balance during February. 
A. $2,000 increase.
B. $4,500 increase.
C. $5,000 increase.
D. $7,500 increase.
E. Some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-74
Chapter 09 - Profit Planning and Activity-Based Budgeting

 The Gingham Company's budgeted income statement reflects the following amounts:

   

Sales are collected 50% in the month of sale, 30% in the month following sale, and 19% in
the second month following sale. One percent of sales is uncollectible and expensed at the end
of the year.
Gingham pays for all purchases in the month following purchase and takes advantage of a 3%
discount. The following balances are as of January 1:

   

*Of this balance, $35,000 will be collected in January and the remaining amount will be
collected in February.
The monthly expense figures include $5,000 of depreciation. The expenses are paid in the
month incurred.

64. Gingham's expected cash balance at the end of January is: 

A. $87,000.
B. $89,160.
C. $92,000.
D. $94,160.
E. $113,160.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-75
Chapter 09 - Profit Planning and Activity-Based Budgeting

65. Gingham's budgeted cash receipts in February are: 

A. $91,000.
B. $95,000.
C. $113,090.
D. $113,640.
E. $114,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

66. Gingham's budgeted cash payments in February are: 

A. $75,660.
B. $94,860.
C. $97,200.
D. $99,860.
E. $102,200.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

67. Gingham's expected cash balance at the end of February is: 

A. $87,000.
B. $89,160.
C. $92,000.
D. $94,160.
E. $113,300.

Change numbering through the remainder of chapter! ok

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-76
Chapter 09 - Profit Planning and Activity-Based Budgeting

68. End-of-period figures for accounts receivable and payables to suppliers would be found
on the: 
A. cash budget.
B. budgeted schedule of cost of goods manufactured.
C. budgeted income statement.
D. budgeted balance sheet.
E. budgeted statement of cash flows.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

69. Which of the following statements about financial planning models (FPMs) is (are) false? 
A. FPMs express a company's financial and operating relationships in mathematical terms.
B. FPMs allow a user to explore the impact of changes in variables.
C. FPMs are commonly known as "what-if" models.
D. FPMs have become less popular in recent years because of computers and spreadsheets.
E. Statements "C" and "D" are both false.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-05 Discuss the role of assumptions and predictions in budgeting.
 

9-77
Chapter 09 - Profit Planning and Activity-Based Budgeting

70. Consider the following statements about budget administration:

I. The budgeting process is a very formal process in all organizations regardless of an
organization's size.
II. The budget manual is prepared to communicate budget procedures and deadlines to
employees throughout an organization.
III. Effective internal control procedures require that the budget director be an individual
other than the controller.
Which of the above statements is (are) true? 
A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: N
Difficulty: Easy
Learning Objective: 09-06 Describe a typical organization's process of budget administration.
 

71. Which of the following statements concerning the budget director is false? 

A. The budget director is often an organization's controller.
B. The budget director has the responsibility of specifying the process by which budget data
will be gathered.
C. The budget director collects information and participates in preparing the master budget.
D. The budget director communicates budget procedures and deadlines to employees
throughout an organization.
E. The budget director usually has the authority to give final approval to the master budget.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-06 Describe a typical organization's process of budget administration.
 

9-78
Chapter 09 - Profit Planning and Activity-Based Budgeting

72. Consider the following statements about companies that are involved with international
operations:
I. Budgeting for these firms is often very involved because of fluctuating values in foreign
currencies.
II. Multinational firms may encounter hyperinflationary economies.
III. Such organizations often face changing laws and political climates that affect business
activity.
Which of the above statements is (are) true? 
A. I only.
B. III only.
C. I and II.
D. II and III.
E. I, II, and III.

AACSB: Reflective Thinking

AICPA BB: Global
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-06 Describe a typical organization's process of budget administration.
 

73. The budgeting technique that focuses on different phases of a product such as planning
and concept design, testing, manufacturing, and distribution and customer service is known
as: 
A. cash-flow budgeting.
B. integrative budgeting.
C. base budgeting.
D. comprehensive budgeting.
E. life-cycle budgeting.

AACSB: Reflective Thinking

AICPA BB: Global
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-07 Understand the importance of budgeting product life-cycle costs.
 

9-79
Chapter 09 - Profit Planning and Activity-Based Budgeting

74. Consider the following statements about budgeting and a product's life cycle:
I. Budgets should focus on costs that are incurred only after a product has been introduced to
the marketplace.
II. Life-cycle costs would include those related to product planning, preliminary design,
detailed design and testing, production, and distribution and customer service.
III. When a life cycle is short, companies must make certain that before a commitment is
made to a product, the product's life-cycle costs are covered.
Which of the above statements is (are) true? 
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-07 Understand the importance of budgeting product life-cycle costs.
 

75. The difference between the revenue or cost projection that a person provides, and a
realistic estimate of the revenue or cost, is called: 
A. passing the buck.
B. budgetary slack.
C. false budgeting.
D. participative budgeting.
E. resource allocation processing.

AACSB: Ethics
AICPA BB: Resource Management
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 

9-80
Chapter 09 - Profit Planning and Activity-Based Budgeting

76. If a manager builds slack into a budget, how would that manager handle estimates of
revenues and expenses?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Ethics
AICPA BB: Resource Management
AICPA FN: Research
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 

9-81
Chapter 09 - Profit Planning and Activity-Based Budgeting

77. The following events took place when Managers A, B, and C were preparing budgets for
the upcoming period:
I. Manager A increased property tax expenditures by 2% when she was informed of a recent
rate hike by local authorities.
II. Manager B reduced sales revenues by 4% when informed of recent aggressive actions by a
new competitor.
III. Manager C, who supervises employees with widely varying skill levels, used the highest
wage rate in the department when preparing the labor budget.
Assuming that the percentage amounts given are reasonable, which of the preceding cases is
(are) an example of building slack in budgets? 
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.

AACSB: Ethics
AICPA BB: Resource Management
AICPA FN: Research
Bloom's: N
Difficulty: Medium
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 

78. Consider the following statements about budgetary slack:

I. Managers build slack into a budget so that they stand a greater chance of receiving
favorable performance evaluations.
II. Budgetary slack is used by managers to guard against uncertainty and unforeseen events.
III. Budgetary slack is used by managers to guard against dollar cuts by top management in
the resource allocation process.
Which of the above statements is (are) true? 
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.

AACSB: Ethics
AICPA BB: Resource Management
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 

9-82
Chapter 09 - Profit Planning and Activity-Based Budgeting

79. When an organization involves its many employees in the budgeting process in a

meaningful way, the organization is said to be using an approach most commonly known as: 
A. budgetary slack.
B. participative budgeting.
C. budget padding.
D. imposed budgeting.
E. employee-based budgeting.

AACSB: Reflective Thinking

AICPA BB: Resource Management
AICPA FN: Measurement
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 

80. Which of the following outcomes is (are) sometimes associated with participative

budgeting? 
A. Employees make little effort to achieve budgetary goals.
B. Budget preparation time can be somewhat lengthy.
C. The problem of budget padding may arise.
D. Financial modeling becomes much more difficult to undertake.
E. Both choices B and C are correct.

AACSB: Reflective Thinking

AICPA BB: Resource Management
AICPA FN: Measurement
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 

9-83
Chapter 09 - Profit Planning and Activity-Based Budgeting

81. Company A uses a heavily participative budgeting approach whereas at Company B, top

management develops all budgets and imposes them on lower-level personnel. Which of the
following statements is false? 
A. A's employees will likely be more motivated to achieve budgetary goals than the
employees of Company B.
B. B's employees may be somewhat disenchanted because although they will be evaluated
against a budget, they really had little say in budget development.
C. Budget padding will likely be a greater problem at Company B.
D. Budget preparation time will likely be longer at Company A.
E. Ethical issues are more likely to arise at Company A, especially when the budget is used as
a basis for performance appraisal.

AACSB: Ethics
AICPA BB: Resource Management
AICPA FN: Measurement
Bloom's: N
Difficulty: Medium
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 
 

Essay Questions
 

9-84
Chapter 09 - Profit Planning and Activity-Based Budgeting

82. Virginia State University (VSU) is preparing its master budget for the upcoming academic
year (an academic year consists of two semesters). Currently, 12,000 students are enrolled on
campus; however, the admissions office is forecasting a 5% growth in the student body
despite a tuition hike to $80 per credit hour. The following additional information has been
gathered from an examination of university records and conversations with university
officials:
· VSU is planning to award 150 tuition-free scholarships.
· The average class has 30 students, and the typical student takes 15 credit hours each
semester.
· Each class is three credit hours.
· Each faculty member teaches five classes during the academic year.
Required:
A. Compute the budgeted tuition revenue for the upcoming academic year.
B. Determine the number of faculty members needed to cover classes.
C. In preparing the university's master budget, should the administration begin with a forecast
of students or a forecast of faculty members? Briefly explain. 

A. Total student body: 12,000 + (12,000  5%) = 12,600;

Tuition-paying students: 12,600 - 150 = 12,450;
Forecasted tuition revenue: 12,450 students  30 credit hours  $80 = $29,880,000
B. Each student generates 10 "enrollments" per year (15 credit hours  2 semesters  3 credit
hours per class). Thus, 126,000 "enrollments" (12,600 students  10) must be covered.
Classes to be taught: 126,000  30 students per class = 4,200 classes;
Faculty needed: 4,200 classes  5 classes per professor = 840 faculty
C. The university should begin with a forecast of the number of students. While the number of
faculty may be a key driver for a variety of expenditures, the number of faculty is highly
dependent on the number of students. Students (and tuition revenue) are akin to sales—the
starting point in the budgeting process.

AACSB: Reflective Thinking

AICPA BB: Resource Management
AICPA FN: Measurement
Bloom's: A, N
Difficulty: Medium
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-85
Chapter 09 - Profit Planning and Activity-Based Budgeting

83. Santorini Corporation has experienced a number of out-of-stock situations with respect to

its finished-goods inventories. Inventory at the end of May, for example, was only 50 units—
an all-time low.
Management desires to implement a policy whereby finished-goods inventory is 70% of the
following month's sales. Budgeted sales for June, July, and August are expected to be 5,000
units, 5,600 units, and 5,500 units, respectively.
Required:
Determine the number of units that Santorini must produce in June and July. 

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-86
Chapter 09 - Profit Planning and Activity-Based Budgeting

84. Turbon Manufacturing plans to produce 20,000 units, 24,000 units, and 30,000 units,
respectively, in October, November, and December. Each of these units requires four units of
part no. 879, which the company can purchase for $7 each. Turbon has 35,000 units of part
no. 879 in stock on September 30.
Required:
Prepare a direct-material purchases budget for October and November in units and dollars.
Management desires to maintain an ending raw-material inventory equal to 40% of the
following month's production usage. 

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-87
Chapter 09 - Profit Planning and Activity-Based Budgeting

85. Scotch Company plans to sell 400,000 units of finished product in July 20x1.
Management (1) anticipates a growth rate in sales of 5% per month thereafter and (2) desires
a monthly ending finished-goods inventory (in units) of 80% of the following month's
estimated sales. There are 300,000 completed units in the June 30, 20x1 inventory.
Each unit of finished product requires four pounds of direct material at a cost of $1.50 per
pound. There are 1,600,000 pounds of direct material in inventory on June 30, 20x1.
Required:
A. Prepare a production budget for the quarter ended September 30, 20x1. Note: For both part
"A" and part "B" of this problem, prepare your budget on a quarterly (not monthly) basis.
B. Independent of your answer to part "A," assume that Scotch plans to produce 1,200,000
units of finished product for the quarter ended September 30. If the firm desires to stock direct
materials at the end of this period equal to 25% of current production usage, compute the cost
of direct material purchases for the quarter. 

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-88
Chapter 09 - Profit Planning and Activity-Based Budgeting

86. Atlantis Corporation assembles bicycles by purchasing frames, wheels, and other parts
from various suppliers. Consider the following data:
· The company plans to sell 25,000 bicycles during each month of the year's first quarter.
· A review of the accounting records disclosed a finished-goods inventory of 1,400 bicycles
on January 1 and an expected finished-goods inventory of 1,850 bicycles on January 31.
· Atlantis has 4,300 wheels in inventory on January 1, a level that is expected to drop by 5%
at month-end.
· Assembly time totals 30 minutes per bicycle, and workers are paid $14 per hour.
· Atlantis accounts for employee benefits as a component of direct labor cost. Pension and
insurance costs average $2 per hour (total); additionally, the company pays Social Security
taxes that amount to 8% of gross wages earned.
Required:
A. How many bicycles does Atlantis expect to produce (i.e., assemble) in January?
B. How many wheels are budgeted to be purchased in January?
C. Compute Atlantis's total direct labor cost for January.
D. Briefly explain how the company's purchasing activity would affect the end-of-period
balance sheet. 

A. Finished-goods inventory is expected to increase by 450 units (1,850 - 1,400). Thus, the
company will assemble 25,450 bicycles (25,000 + 450).
B. Atlantis's production will require 50,900 wheels (25,450  2). Given that inventory will
drop by 215 units (4,300  5%), the company must purchase 50,685 wheels (50,900 - 215).
C. Assembly time: 25,450 bicycles  30/60 = 12,725 hours

   

D. Purchasing activity would likely affect the balance sheet in several ways. Atlantis's Cash
account would decrease and any end-of-period obligations to suppliers would be disclosed as
accounts payable. In addition, the wheels on hand at the end of the period would affect raw-
material inventories, and the cost of wheels acquired and used would influence the ending
inventory of bicycles.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A, N
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-89
Chapter 09 - Profit Planning and Activity-Based Budgeting

87. Jaergin manufactures two products: A and B. The company predicts a sales volume of
10,000 units for product A and ending finished-goods inventory of 2,000 units. These
numbers for product B are 12,000 and 3,000, respectively. Jaergin currently has 7,000 units of
A in inventory and 9,000 units of B.
The following raw materials are required to manufacture these products:

   

Product A requires three hours of cutting time and two hours of finishing time; B requires one
hour and three hours, respectively. The direct labor rate for cutting is $10 per hour and $18
per hour for finishing.
Required:
A. Prepare a production budget in units for products A and B.
B. Prepare a materials usage budget in pounds and dollars for materials X, Y, and Z.
C. Prepare a direct labor budget in hours and dollars for product A. 

9-90
Chapter 09 - Profit Planning and Activity-Based Budgeting

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-91
Chapter 09 - Profit Planning and Activity-Based Budgeting

88. Tiara Company has the following historical collection pattern for its credit sales:
70% collected in month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible
Budgeted credit sales for the last six months of the year follow.

   

Required:
A. Calculate the estimated total cash collections during October.
B. Calculate the estimated total cash collections during the year's fourth quarter. 

   

9-92
Chapter 09 - Profit Planning and Activity-Based Budgeting

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-93
Chapter 09 - Profit Planning and Activity-Based Budgeting

89. The accounting records of Backspace, Inc., revealed an accounts receivable balance of

$195,000 on January 1, 20x6. Forty percent of the company's sales are for cash, and the
remaining 60% are on account. Of the credit sales, 30% are collected in the month of sale and
70% are collected in the following month. Total sales in January and February are expected to
amount to $500,000 and $530,000, respectively.
Assume that in the latter half of 20x6, Backspace hired a new sales manager who aggressively
tried to maximize the company's market share. She implemented a compensation system for
the sales force that was 100% commission based, with the commission calculated on the basis
of gross sales dollars. Sales volume increased dramatically in a very short period of time, and
the sales and collection patterns changed, as follows:

   

Required:
A. Compute the company's cash inflows for January and February, 20x6.
B. Determine the outstanding receivables balance at the end of February.
C. Compare the sales and collection patterns before and after the arrival of the new sales
manager. Have things improved or deteriorated? Explain.
D. On the basis of the information presented, determine what likely caused the improvement
or deterioration in collection patterns. 

A. January: Accounts receivable ($195,000) + January cash sales ($500,000  40%)

+ January credit sales collected in January ($500,000  60%  30%) = $485,000
February: January credit sales collected in February ($500,000  60%  70%) +
February cash sales ($530,000  40%) + February credit sales collected in February
($530,000  60%  30%) = $517,400
B. Since credit sales are collected over two months, 70% of February's credit sales are still
outstanding: $530,000  60%  70% = $222,600
C. Although sales have increased, the credit and collection patterns have deteriorated. One of
the company's likely objectives is to accelerate cash inflows. Notice that in percentage terms,
cash sales have declined (40% vs. 20%); credit customers now take longer to pay as judged by
collections in the month of sale (30% vs. 15%); and high levels of uncollectibles have arisen
(0% vs. 10%).
D. The data reveal that total sales increased as did the percentage of sales made on credit. It
appears that the sales manager's emphasis on market share may have led to sales being made
to poor credit risks [as judged by the high rate of uncollectibles and reduced percentages of
sales being settled in the month of sale (both cash and credit)]. These actions may have been
triggered by a commission system based on gross sales, thus "encouraging" employees to
increase sales despite the credit worthiness and profitability of the customer.

9-94
Chapter 09 - Profit Planning and Activity-Based Budgeting
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A, N
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-95
Chapter 09 - Profit Planning and Activity-Based Budgeting

90. Bentson Corporation, a wholesaler, provided the following information:

   

Customers pay 60% of their balances in the month of sale, 30% in the month following sale,
and 10% in the second month following sale. The company pays all invoices in the month
following purchase and takes advantage of a 3% discount on all amounts due. Cash payments
for operating expenses in May will be $119,500; Bentson's cash balance on May 1 was
$127,800.
Required:
Determine the following:
A. Expected cash collections during May.
B. Expected cash disbursements during May.
C. Expected cash balance on May 31. 

   

9-96
Chapter 09 - Profit Planning and Activity-Based Budgeting

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-97
Chapter 09 - Profit Planning and Activity-Based Budgeting

91. Millage Manufacturing has a cash balance of $8,000 on August 1 of the current year. The
company's controller forecast the following cash receipts and cash disbursements for the
upcoming two months of activity:

   

Management desires to maintain a minimum cash balance of $8,000 at all times. If necessary,
additional financing can be obtained in $1,000 multiples at a 12% interest rate. All
borrowings are made at the beginning of the month; debt retirement, on the other hand, occurs
at the end of the month. Interest is paid at the time of repaying loan principal and is computed
on the portion of debt repaid.
Required:
A. Determine the ending cash balance in August both before and after any necessary
financing or debt retirement.
B. Repeat part "A" for September. 

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A, N
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-98
Chapter 09 - Profit Planning and Activity-Based Budgeting

92. Stiles Enterprises reported the following cash collections in July and August from credit
sales:

   

The company sells a single product for $20, and all sales are collected over a two-month
period.
Required:
A. Determine the number of units that were sold in July.
B. Determine the percent of credit sales collected in the month of sale and the percent of sales
collected in the month following sale.
C. How many units were sold in August?
D. Determine the accounts receivable balance as of August 31. 

A. July sales: $105,000 + $45,000 = $150,000; $150,000  $20 = 7,500 units

B. July sales collected in July: $105,000  $150,000 = 70%
Seventy percent of credit sales are collected in the month of sale; the remaining 30% are
collected in the month following sale.
C. Seventy percent of August sales were collected in August; thus, total August sales =
$168,000  0.70, or $240,000. August sales in units: $240,000  $20 = 12,000
D. $240,000 - $168,000 = $72,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A, N
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-99
Chapter 09 - Profit Planning and Activity-Based Budgeting

93. Sherman Company provides services in the retail flooring industry. The following
information is available for 20x5:
· Twenty percent of the firm's services are for cash and the remaining 80% are on account. Of
the credit services, 40% are collected in the month that the service is provided, with the
remaining 60% collected in the following month.
· Services provided in January are expected to total $250,000 and grow at the rate of 5% per
month thereafter.
· January's cash collections are expected to be $240,400, and month-end receivables are
forecast at $120,000.
· Monthly cash operating costs and depreciation during the first quarter of the year are
approximated at $250,000 and $15,000, respectively.
· Sherman's December 31, 20x4 balance sheet revealed accounts payable balances of $28,000.
This amount is related to the company's operating costs and is expected to grow to $36,000 by
the end of 20x5's first quarter. All operating costs are paid within 30 days of incurrence.
· Company policy requires that a $20,000 minimum cash balance be maintained, and
Sherman's 20x4 year-end balance sheet showed that the firm was in compliance with policy
by having cash of $23,000.
Required:
A. Determine the sales revenue earned that will appear on the income statement for the
quarter ended March 31, 20x5.
B. Compute the company's first-quarter cash collections.
C. Compute the cash balance that would appear on the March 31, 20x5 balance sheet.
D. What are some possible actions the company could pursue if, at any time during the
quarter, it finds that the cash balance has fallen below the stated minimum? 

9-100
Chapter 09 - Profit Planning and Activity-Based Budgeting

A. The income statement will report revenues earned of $788,125 [$250,000 + ($250,000 
1.05 = $262,500) + ($262,500  1.05 = $275,625)].
B. Collections for the first quarter total $766,225 ($240,400 + $256,500 + $269,325):

   

C. The ending cash balance is $47,225: $23,000 (January 1 balance) + $766,225 (collections)
- $28,000 (December payables) - $750,000 (monthly cash expenses  3) + $36,000 (March
payables).
D. Several possible actions include securing a short-term loan or line of credit, working with
clients in an attempt to accelerate inflows, and working with vendors to temporarily delay
payments. The goal is to have added funds on hand so that operations continue smoothly and
are not disrupted because of sporadic or ongoing shortages.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A, N
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-101
Chapter 09 - Profit Planning and Activity-Based Budgeting

94. The following information relates to DFW Corporation:

· All sales are on account and are budgeted as follows: February, $350,000; March, $360,000;
and April, $400,000. DFW collects 70% of its sales in the month of sale and 30% in the
following month.
· Cost of goods sold averages 60% of sales. Purchases total 65% of the following month's
sales and are paid in the month following acquisition.
· Cash operating expenses total $60,000 per month and are paid when incurred. Monthly
depreciation amounts to $18,000.
· Selected amounts taken from the January 31 balance sheet were: accounts receivable,
$115,000; plant and equipment (net), $107,000; and retained earnings, $85,000.
Required: (NOTE: Ignore income taxes in answering these questions).
A. Prepare a budgeted income statement that summarizes activity for the two months ended
March 31, 20x1.
B. Compute the amounts that would appear on the March 31 balance sheet for accounts
receivable, plant and equipment (net), and retained earnings. 

A.

   

B. Accounts receivable: $115,000 - $115,000 + $350,000 - ($350,000  70%) + $360,000 -

($350,000  30%) - ($360,000  70%) = $108,000
Plant and equipment (net): $107,000 - $18,000 - $18,000 = $71,000
Retained earnings: $85,000 + $128,000 = $213,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: A
Difficulty: Hard
Learning Objective: 09-04 Prepare each of the budget schedules that make up the master budget.
 

9-102
Chapter 09 - Profit Planning and Activity-Based Budgeting

95. Discuss the importance of budgeting and identify five purposes of budgeting systems. 

Budgets aid in determining how to acquire resources, and when and how these resources
should be used. In simple terms, a formal budgeting program is a key ingredient to effective
management. The five purposes of budgeting are to:
1. develop a plan of action.
2. facilitate communication of the plan and coordinate various views within an organization.
3. allocate limited resources effectively and efficiently.
4. serve as a benchmark to control profit and operations.
5. evaluate performance and provide incentives to managers.

AACSB: Reflective Thinking

AICPA BB: Resource Management
AICPA FN: Research
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

96. List several factors that an organization might consider when developing a sales forecast. 

· Past sales levels and economic trends for the firm as well as for the industry as a whole
· General conditions in the economy such as growth or decline, recession or boom, etc.
· External forces such as weather or potential strikes
· Political or legal factors such as litigation or new legislation
· Pricing policies of the organization
· Advertising and promotion plans
· Competitors' actions
· Potential for new product lines
· Market research studies

AACSB: Reflective Thinking

AICPA BB: Resource Management
AICPA FN: Research
Bloom's: RC
Difficulty: Easy
Learning Objective: 09-01 List and explain five purposes of budgeting systems.
 

9-103
Chapter 09 - Profit Planning and Activity-Based Budgeting

97. Terry Pineno, new-accounts manager at East Bank of Clarion, has been asked to project
how many new accounts she will open during 20x2. The local economy has been growing,
and the bank has experienced a 10% increase in the number of new accounts over each of the
past five years. In 20x1, the bank had 10,000 accounts.
Pineno is paid a salary, plus a bonus of $20 for every new account above the budgeted
amount. Thus, if the annual budget calls for 1,000 new accounts, and 1,080 new accounts are
obtained, her bonus will be $1,600 (80  $20).
Pineno believes that the local economy will continue to grow at the same rate in 20x2 as it has
in recent years. She decided to submit a projection of 700 new accounts for 20x2.
Required:
Your consulting firm has been hired by the bank president to make recommendations for
improving the bank's operation. Write a memorandum to the president defining and
explaining the negative consequences of budgetary slack. Also discuss the bank's bonus
system for the new-accounts manager and how the bonus program tends to encourage
budgetary slack. 

Memorandum
Date: Today
To: President, East Bank of Clarion
From: I.M. Student and Associates
Subject: Budgetary slack
Budgetary slack is the difference between a budget estimate that a person provides and a
realistic determination of the amount. The practice of creating budgetary slack is called
padding the budget. The primary negative consequence of slack is that it undermines the
credibility and usefulness of the budget as a planning and control tool. When a budget
includes slack, the amounts in the budget no longer portray a realistic view of future
operations.
The bank's bonus system for the new-accounts manager tends to encourage budgetary slack.
Since the manager's bonus is determined by the number of new accounts opened in excess of
the budgeted number, there is an incentive for the manager to understate her activity
projections. There is evidence of this behavior, as a 10% increase over the bank's current
10,000 accounts would be 1,000 new accounts in 20x2. Pineno's projection, however, is only
700.

AACSB: Ethics
AICPA BB: Industry
AICPA FN: Risk Analysis
Bloom's: RC
Difficulty: Medium
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 

9-104
Chapter 09 - Profit Planning and Activity-Based Budgeting

98. James Corporation, headquartered in Chicago, has a manufacturing plant in Dallas. Plant

managers desire to participate in the company's budget efforts, which, for the past 10 years,
have been handled solely by top executives in Chicago. Dallas managers feel that by
becoming involved, they can make great strides in terms of improving operating performance
of their aging facility.
Required:
Briefly discuss this situation, focusing on the benefits and problems of letting Dallas
managers participate in the company's budgetary efforts. 

Participative budgets will make the plant managers feel that their opinions are valued by top
management and, generally speaking, the plant managers will have a better attitude about
trying to achieve the budget. Additionally, it is possible in this case that the participative
approach will result in a more realistic budget document. Chicago personnel may be too far
removed from daily activities in Dallas to get an accurate picture of on-going operations.
On the negative side, a participative budget may take longer to prepare and may lead to some
local in-fighting when compared with one that is imposed from corporate headquarters. Also,
participative budgets may have some padding or slack, as the Dallas managers are faced with
an aging facility. This facility may be inefficient and, with their participation, managers may
bend the numbers a bit to improve appearance.

AACSB: Ethics
AICPA BB: Resource Management
AICPA FN: Research
Bloom's: RC, N
Difficulty: Medium
Learning Objective: 09-08 Discuss the behavioral implications of budgetary slack and participative budgeting.
 

9-105