CHAPTER 13 THE MASTER BUDGET MULTIPLE CHOICE A budget aids in a b c d communication motivation coordination all of the above ANSWER: Planning Controlling Organizing Staffing ANSWER: b EASY The preparation of an organization’s budget a b c d forces management to look ahead and try to see the future of the organization requires that the entire management team work together to make and carry out the yearly plan makes performance review possible at all levels of management all of the above ANSWER: EASY Measuring the firm’s performance against established objectives is part of which of the following functions? a b c d d d EASY Which of the following is a basic element of effective budgetary control? a b c d cost behavior patterns cost-volume-profit analysis standard costing all of the above ANSWER: a EASY 13–1 13–2 Chapter 13 When actual performance varies from the budgeted performance, managers will be more likely to revise future budgets if the variances were a b c d controllable rather than uncontrollable uncontrollable rather than controllable favorable rather than unfavorable small ANSWER: b EASY A budget is a b c d a planning tool a control tool a means of communicating goals to the firm’s divisions all of the above ANSWER: d EASY Ineffective budgets and/or control systems are characterized by the use of a b c d budgets as a planning tool only and disregarding them for control purposes budgets for motivation budgets for coordination the budget for communication ANSWER: MEDIUM annual budget industry price and cost structure talents possessed by its managers board of directors ANSWER: b External factors that cause the achievement of company goals are the a b c d The Master Budget a EASY Strategic planning is a b c d planning activities for promoting products for the future planning for appropriate assignments of resources setting standards for the use of important but hard-to-find materials stating and establishing long-term plans ANSWER: d EASY Chapter 13 10 The Master Budget Key variables that are identified in strategic planning are a b c d normally controllable if they are internal seldom if ever controllable normally controllable if they occur in a domestic market normally uncontrollable if they are internal ANSWER: 11 c EASY Which of the following statements is true? a b c d All organizations have the same set of budgets All organizations are required to budget Budgets are a quantitative expression of an organization’s goals and objectives Budgets should never be used to evaluate performance ANSWER: c EASY Which of the following is not an “operating” budget? a b c d sales budget production budget purchases budget capital budget ANSWER: 14 EASY middle top middle and top operational ANSWER: 13 a Tactical planning usually involves which level of management? a b c d 12 13–3 d EASY The master budget is a static budget because it a b c d is geared to only one level of production and sales never changes from one year to the next covers a preset period of time always contains the same operating and financial budgets ANSWER: a EASY 13–4 15 Chapter 13 The master budget is a a b c d static budget flexible budget qualitative expression of a prior goal qualitative expression of a future goal ANSWER: 16 d EASY Which of the following is usually perceived as being the master budget’s greatest advantage to management? a b c d performance analysis increased communication increased coordination required planning ANSWER: d EASY Chronologically, the first part of the master budget to be prepared would be the a b c d sales budget production budget cash budget pro forma financial statements ANSWER: 19 EASY an operating budget a capital budget pro forma financial statements all of the above ANSWER: 18 a The master budget usually includes a b c d 17 The Master Budget a EASY An example of a recurring short-term plan is a b c d a probable product line change expansion of plant and facilities a unit sales forecast a change in marketing strategies ANSWER: c EASY Chapter 13 20 The Master Budget If the chief accountant of a firm has to prepare an operating budget for the coming year, the first budget to be prepared is the a b c d sales budget cash budget purchases budget capital budget ANSWER: 21 EASY capital budget cash budget purchases budget pro forma balance sheet ANSWER: a EASY Budgeted production for a period is equal to a b c d the beginning inventory + sales – the ending inventory the ending inventory + sales – the beginning inventory the ending inventory + the beginning inventory – sales sales – the beginning inventory + purchases ANSWER: 23 a It is least likely that a production budget revision would cause a revision in the a b c d 22 13–5 b EASY Chronologically, in what order are the sales, purchases, and production budgets prepared? a b c d sales, purchases, production sales, production, purchases production, sales, purchases purchases, sales, production ANSWER: b EASY 13–6 24 Chapter 13 The material purchases budget tells a manager all of the following except the a b c d quantity of material to be purchased each period quantity of material to be consumed each period cost of material to be purchased each period cash payment for material each period ANSWER: 25 EASY sales material usage revenues general and administrative ANSWER: b EASY The amount of raw material purchased in a period may be different than the amount of material used that period because a b c d the number of units sold may be different from the number of units produced finished goods inventory may fluctuate during the period the raw material inventory may increase/decrease during the period companies often pay for material in the period after it is purchased ANSWER: 27 d Of the following budgets, which one is least likely to be determined by the dictates of top management? a b c d 26 The Master Budget c MEDIUM A purchases budget is a b c d not affected by the firm’s policy of granting credit to customers the same thing as a production budget needed only if a firm does not pay for its merchandise in the same period as it is purchased affected by a firm’s inventory policy only if the firm purchases on credit ANSWER: a EASY Chapter 13 28 The Master Budget 13–7 Which of the following equations can be used to budget purchases? (BI = beginning inventory, EI = ending inventory desired, CGS = budgeted cost of goods sold, P = budgeted purchases) a b c d P = CGS + BI – EI P = CGS + BI P = CGS + EI + BI P = CGS + EI – BI ANSWER: 29 material purchases budget production budget pro forma income statement cash budget ANSWER: a EASY A company that maintains a raw material inventory, which is based on the following month’s production needs, will purchase less material than it uses in a month where a b c d sales exceed production production exceeds sales planned production exceeds the next month’s planned production planned production is less than the next month’s planned production ANSWER: 31 EASY Both the budgeted quantity of material to be purchased and the budgeted quantity of material to be consumed can be found in the a b c d 30 d c MEDIUM If a company has a policy of maintaining an inventory of finished goods at a specified percentage of the next month’s budgeted sales, budgeted production for January will exceed budgeted sales for January when budgeted a b c d February sales exceed budgeted January sales January sales exceed budgeted December sales January sales exceed budgeted February sales December sales exceed budgeted January sales ANSWER: a MEDIUM 13–8 32 Chapter 13 Depreciation on the production equipment would appear in which of the following budgets? a b c d cash budget production budget selling and administrative expense budget manufacturing overhead budget ANSWER: 33 EASY production sales cash purchases ANSWER: b EASY The budgeted amount of selling and administrative expense for a period can be found in the a b c d sales budget cash budget pro forma income statement pro forma balance sheet ANSWER: 35 d The selling, general, and administrative expense budget is based on the _ budget a b c d 34 The Master Budget c EASY Which of the following represents a proper sequencing in which the budgets below are prepared? a b c d Direct Material Purchases, Cash, Sales Production, Sales, Income Statement Sales, Balance Sheet, Direct Labor Sales, Production, Manufacturing Overhead ANSWER: d EASY Chapter 13 36 The Master Budget The detailed plan for the acquisition and replacement of major portions of property, plant, and equipment is known as the a b c d capital budget purchases budget commitments budget treasury budget ANSWER: 37 EASY labor budget pro forma income statement selling, general, and administrative expense budget cash budget ANSWER: d EASY The cash budget ignores all a b c d dividend payments sales of capital assets noncash accounting accruals sales of common stock ANSWER: 39 a The budgeted payment for labor cost each period would be found in the a b c d 38 13–9 c EASY Which of the following items would not be found in the financing section of the cash budget? a b c d cash payments for debt retirement cash payments for interest dividend payments payment of accounts payable ANSWER: d EASY 13–10 40 Chapter 13 The primary reason that managers impose a minimum cash balance in the cash budget is a b c d because management needs discretionary cash for unforeseen business opportunities managers lack discipline to control their spending that it protects the organization from the uncertainty of the budgeting process that it makes the financial statements look more appealing to creditors ANSWER: 41 EASY pro forma financial statements cash budget capital budget production budget ANSWER: a EASY The pro forma income statement is not a component of the a b c d master budget financial budgets operating budgets capital budget ANSWER: 43 c Chronologically, the last part of the master budget to be prepared would be the a b c d 42 The Master Budget c EASY A pro forma financial statement is a b c d a financial statement for past periods a projected or budgeted financial statement presented for the form but contains no dollar amounts a statement of planned production ANSWER: b EASY 13–18 62 Chapter 13 The Master Budget Volkers Hospital has provided you with the following budget information for April: Cash collections April cash balance Cash disbursements $876,000 23,000 978,600 Volkers has a policy of maintaining a minimum cash balance of $20,000 and borrows only in $1,000 increments How much will Volkers borrow in April? a b c d $80,000 $79,600 $99,000 $100,000 ANSWER: d MEDIUM Use the following information for questions 63–65 Beginning cash balance Cash collections Cash disbursements Cash excess (shortage) Borrowing (repayments) Ending cash 63 CASH BUDGET CASE B $ 300 400 ? ? 100 200 In CASE A, what are the budgeted cash collections? a b c d $700 $500 $300 $400 ANSWER: 64 CASE A $ 100 ? 500 ? 300 200 c MEDIUM In CASE B, what are the budgeted cash disbursements? a b c d $600 $700 $500 $400 ANSWER: a MEDIUM CASE C $ 700 ? 600 400 ? 100 Chapter 13 65 The Master Budget 13–19 In CASE C, what are the budgeted cash collections? a b c d $200 $300 $400 $500 ANSWER: b MEDIUM Use the following information for questions 66–69 Beginning cash Cash collections Cash disbursements Cash excess (shortage) Borrowing (repayments) Ending Cash 66 What is the correct value of item A in the cash budget? a b c d $200 $300 $400 $900 ANSWER: 67 QTR $300 900 B 200 ? 200 CASH BUDGET QTR QTR QTR $200 $ ? $? 700 C ? ? 600 ? (400) ? ? 600 (300) ? 200 ? b EASY What is the correct value of item B in the cash budget? a b c d $1,000 $1,200 $800 $700 ANSWER: a MEDIUM YEAR $ A 3,300 3,500 ? ? D 13–20 68 Chapter 13 What is the correct value of item C in the cash budget? a b c d $1,400 $1,200 $900 $700 ANSWER: 69 a MEDIUM Managers may be more willing to accept a budget if a b c d it is continuous it is imposed it is very hard to attain they can participate in its development ANSWER: d EASY (Appendix) A budget manual should include which of the following? a b c d a list of specific budgetary activities to be performed original, revised, and approved budgets a calendar of scheduled budgetary activities all of the above ANSWER: 72 MEDIUM $200 $300 $400 $1,000 ANSWER: 71 c What is the correct value of item D in the cash budget? a b c d 70 The Master Budget d EASY Which of the following is not true about an imposed budget? a b c d It reduces the budgeting process time frame It uses the knowledge of top management as it relates to resource availability It enhances coordination It increases the feeling of teamwork ANSWER: d EASY Chapter 13 73 The Master Budget A disadvantage of participatory budgets is that a b c d there is a high degree of acceptance of the goals and objectives by operating management they are usually more realistic they lead to better morale and higher motivation they usually require more time to prepare ANSWER: 74 13–21 d EASY The master budget a b c d reflects the determination of an organization’s cost of capital serves as a managerial tool for the organization includes only an organization’s pro forma financial statements utilizes only information from the financial accounting system ANSWER: b EASY SHORT ANSWER/PROBLEMS Explain why managers might want to build slack into a budget ANSWER: Building slack into the budget allows managers to achieve the budgeted level of performance with less effort Thus, they have a higher probability of achieving the budget and any bonus or compensation that may be tied to that performance standard MEDIUM What role does the budgeting activity play in managerial compensation and performance evaluation? ANSWER: Once set, the budget is not only a plan for the organization, but it becomes a standard against which actual performance may be compared Recognizing the budget as a performance standard, organizations may base employee compensation (to some extent) on how well actual performance compares to the budgeted performance Such a compensatory arrangement frequently involves a bonus plan that permits bonuses to go up as performance relative to the budget goes up MEDIUM 13–22 Chapter 13 The Master Budget Why will there frequently be a difference between the budgeted cost of material in the material purchases budget and the budgeted cash disbursement for material in the cash budget? ANSWER: Because firms not necessarily pay for material in the same period in which they are purchased, the amounts in these two budgets will frequently differ The material purchases budget is based on the cost of material purchased in a period while the cash budget only reflects expected actual payments for material in the period MEDIUM Explain why different types of organizations will have different sets of budgets ANSWER: We may think of the set of budgets as the plan for producing outputs and acquiring inputs As different organizations have different inputs and outputs, we would naturally expect them to have different budgets For example, a retailing firm would find no need for a production budget because it does not manufacture anything On the other hand, the need for a production budget in a manufacturing organization is obvious Likewise, governmental organizations will have budgets that are different than private organizations MEDIUM Why have many managers in recent years moved toward emphasizing employee participation in the budgeting process rather than simply imposing the budget on the employees? ANSWER: Many managers believe that the quality of the budget is enhanced through employee participation This is attributable in part to the fact that many employees possess technical information that management does not have Through the budgeting process this technical information is imparted to management Further, participation in the budgeting process may lead employees to be more attentive to the budget and feel like a more important part of the organizational team Employees feel more committed to meeting a budget they helped prepare Preparing a budget gives the preparer management training, which makes him or her better prepared for advancement in the company MEDIUM Chapter 13 The Master Budget 13–23 The I M Broke Co has the following collection pattern for its accounts receivable: 40 percent in the month of sale 50 percent in the month following the sale percent in the second month following the sale percent uncollectible The company has recent credit sales as follows: April: May: June: $200,000 420,000 350,000 How much should the company expect to collect on its receivables in June? ANSWER: JUNE COLLECTIONS From April sales: $200,000 × 08 From May sales: 420,000 × 50 From June sales: 350,000 × 40 Total MEDIUM $ 16,000 210,000 140,000 $366,000 13–24 Chapter 13 The Master Budget Use the following information for questions and Barnes Company manufactures three products (A, B, and C) from three raw materials (X, Y, and Z) The following table indicates the number of pounds of each material that is required to manufacture each type of product: Product A B C Material X 2 Material Y Material Z 2 The company has a policy of maintaining an inventory of finished goods on all three products equal to 25 percent of the next month’s budgeted sales Listed below is the sales budget for the first quarter of 2001: Month Jan Feb Mar Product A 10,000 9,000 11,000 Product B 11,000 12,000 10,000 Product C 12,000 8,000 10,000 Assuming that the company meets its required inventory policy, prepare a production budget for the first months of 2001 for each of the three products ANSWER: Required ending inventory Projected sales Total production needs Less the beginning inventory Budgeted production Product A January February 2,250 2,750 10,000 9,000 12,250 11,750 (2,500) (2,250 ) 9,750 9,500 Required ending inventory Projected sales Total production needs Less the beginning inventory Budgeted production Product B January February 3,000 2,500 11,000 12,000 14,000 14,500 (2,750) (3,000 ) 11,250 11,500 Required ending inventory Projected sales Total production needs Less the beginning inventory Budgeted production Product C January February 2,000 2,500 12,000 8,000 14,000 10,500 (3,000) (2,000 ) 11,000 8,500 MEDIUM Chapter 13 The Master Budget 13–25 Unit costs of materials X, Y, and Z are respectively $4, $3, and $5 The Barnes Company has a policy of maintaining its raw material inventories at 50 percent of the next month’s production needs Assuming that this policy is satisfied, prepare a material purchases budget for all three materials in both pounds and dollars for January ANSWER: Prod × lbs Tot Product A Jan Feb 9,750 9,500 ×2 ×2 19,500 19,000 Material X Purchases Product B Jan Feb 11,250 11,500 ×2 ×2 22,500 23,000 Required EI (19,000 + 23,000 + 25,500) × 50 = Needed: (19,500 + 22,500 + 33,000) = Total raw material X needed: Less: BI (75,000 × 50) Material X to be purchased in January (pounds): Multiply by cost of Material X per lb.: Budgeted Cost of Material X for January: Prod × lbs Tot Product A Jan Feb 9,750 9,500 ×3 ×3 29,250 28,500 Material Y Purchases Product B Jan Feb 11,250 11,500 ×1 ×1 11,250 11,500 Required EI (28,500 + 11,500 + 17,000) × 50 = Needed: (29,250 + 11,250 + 22,000) = Total raw material Y needed: Less BI (62,500 × 50) Material Y to be purchased in January (pounds): Multiply by cost of Material Y per lb.: Budgeted Cost of Material Y for January: Product C Jan Feb 11,000 8,500 ×3 ×3 33,000 25,500 33,750 75,000 108,750 (37,500) 71,250 × $4 $285,000 Product C Jan Feb 11,000 8,500 ×2 ×2 22,000 17,000 28,500 62,500 91,000 (31,250) 59,750 × $3 $179,250 13–26 Chapter 13 Prod × lbs Tot Product A Jan Feb 9,750 9,500 ×2 ×2 19,500 19,000 Material Z Purchases Product B Jan Feb 11,250 11,500 ×2 ×2 22,500 23,000 Required EI (19,000 + 23,000 + 17,000) × 50 = Needed: (19,500 + 22,500 + 22,000) = Total raw material Z needed: Less BI (64,000 × 50) Material Z to be purchased in January (pounds): Multiply by cost of Material Z per lb.: Budgeted Cost of Material Z for January: The budgeted cost of all materials to be purchased in Jan would be $285,000 + $179,250 + $307,500 = DIFFICULT The Master Budget Product C Jan Feb 11,000 8,500 ×2 ×2 22,000 17,000 29,500 64,000 93,500 (32,000 ) 61,500 ×5 $307,500 $771,750 Chapter 13 The Master Budget 13–27 Use the following information for questions and 10 Farr Music Inc sells Baldwin pianos The following information regarding operating costs has been extracted from budgets of Farr Music for December of this year and the first few months of next year: Payroll Insurance Rent Depreciation Taxes Dec $12,000 4,000 6,000 2,000 1,200 Jan $13,000 4,000 6,000 2,000 1,400 Feb $22,000 4,000 6,000 2,000 2,300 Mar $16,000 4,000 6,000 2,000 2,000 In addition to the above operating costs, enough pianos are purchased each month to maintain the inventory at 40 percent of the projected next month’s sales The firm is expected to be in compliance with this policy on December Budgeted sales are: Budgeted sales in units: Dec 40 Jan 45 Feb 60 Mar 50 Apr 40 The average cost of a piano is $500 Merchandise is paid for in the month following its purchase All other expenses are paid in the month in which they are incurred Prepare a budget of the cash disbursements for Farr Music Inc for the first three months of next year First, prepare a purchases budget for December through March for the pianos ANSWER: Required ending inventory Projected sales Total pianos needed Less the beginning inventory Pianos to be purchased × the cost of the piano Budgeted purchases Dec 18 40 58 (16) 42 × $500 $21,000 Payroll Insurance Rent Taxes Merchandise purchases Total Budgeted cash disbursements Jan Feb Mar $13,000 $22,000 $16,000 4,000 4,000 4,000 6,000 6,000 6,000 1,400 2,300 2,000 21,000 25,500 28,000 $45,400 $59,800 $56,000 MEDIUM Jan 24 45 69 (18) 51 × $500 $25,500 Feb 20 60 80 (24) 56 × $500 $28,000 Mar 16 50 66 (20 ) 46 × $500 $23,000 13–28 10 Chapter 13 The Master Budget The average cost of a piano is $500 Merchandise is paid for in the month following its purchase All other expenses are paid in the month in which they are incurred On average, a piano sells for $1,500 Of each sale, 40 percent of the sales price is collected in the month of sale The balance is collected in the month following the sale Prepare a cash budget for the first three months of next year The beginning cash balance on January is budgeted to be $50,000 ANSWER: Beginning cash Cash collections: Dec sales Jan sales Feb sales Mar Sales Cash available Less cash disb Ending cash MEDIUM CASH BUDGET FARR MUSIC INC Jan Feb $50,000 $ 67,600 36,000 27,000 _ 113,000 (45,400) $ 67,600 40,500 36,000 _ 144,100 (59,800) $ 84,300 Mar $ 84,300 54,000 30,000 168,300 (56,000 ) $112,300 Chapter 13 11 The Master Budget 13–29 Shown below are the totals from 2002 period budgets Revenue budget Materials usage from production budget Labor cost budget Manufacturing overhead budget General and administrative budget Capital expenditure budget Work in Progress Inventories: Beginning of 2002 End of 2002 Finished Goods Inventory: Beginning of 2002 End of 2002 Tax Rate $100,000 15,000 20,000 20,000 30,000 20,000 10,000 5,000 15,000 10,000 40% Required: Prepare a forecasted Income Statement for 2002 ANSWER: Revenue Less: COGS COGM RM used (production budget) DL (labor budget) Mfg OH (OH budget) Current Mfg costs Plus: Beg WIP Total In-Process Less: End WIP COGM Plus: Beg FG Goods Avail for Sale Less: End FG COGS Gross Margin Less: G & A expense budget Income before income taxes Less: taxes @ 40% Net Income MEDIUM $100,000 $ 15,000 20,000 20,000 $ 55,000 10,000 $ 65,000 (5,000) $ 60,000 15,000 $ 75,000 (10,000 ) 65,000 $ 35,000 (30,000) $ 5,000 (2,000 ) $ 3,000 13–30 12 Chapter 13 The Master Budget The following are forecasts of sales and purchases for a company April May June Sales $80,000 90,000 85,000 Purchases $30,000 40,000 30,000 All sales are on credit Records show that 70 percent of the customers pay the month of the sale, 20 percent pay the month after the sale, and the remaining 10 percent pay the second month after the sale Purchases are all paid the following month at a percent discount Cash disbursements for operating expenses in June were $5,000 Required: Prepare a schedule of cash receipts and disbursement for June ANSWER: Schedules of Cash Receipts and Disbursements for June Cash Receipts: From current month sale (June) From month prior sale (May) From month prior sale (April) Total cash receipts Cash Disbursements: May purchases @ 98% (less discount) Operating expenses Total cash disbursements Net increase in cash for June MEDIUM (.7 × 85,000) (.2 × 90,000) (.1 × 80,000) $59,500 18,000 8,000 $85,500 (.98 × 40,000) $39,200 5,000 $44,200 $41,300 Chapter 13 13 The Master Budget 13–31 Flour International is in the building construction business In 2002, it is expected that 40 percent of a month’s sales will be collected in cash, with the balance being collected the following month Of the purchases, 50 percent are paid the following month, 30 percent are paid in two months, and the remaining 20 percent are paid during the month of purchase The sales force receives $2,000 a month base pay plus a percent commission Labor expenses are expected to be $4,000 a month Other operating expenses are expected to run about $2,000 a month, including $500 for depreciation The ending cash balance for 2001 was $4,500 2001—Actual November December 2002—Budgeted January February March Sales Purchases $80,000 90,000 $70,000 80,000 70,000 90,000 30,000 70,000 60,000 50,000 Required: a Prepare a cash budget and determine the projected ending cash balances for the first three months of 2002 b Determine the months that the company would either borrow or invest cash 13–32 Chapter 13 ANSWER: a Sales Purchases 2001 Nov $80,000 70,000 Dec $90,000 80,000 Cash Receipts: Beginning cash balance From current month sales From prior month sales Total cash receipts Total cash available Cash Disbursements: From Purchases: Current month @ 20% From mo prior purchases @ 50% From mo prior purchases @ 30% Total payments on purchases Labor expense Sales salaries Commissions @ 2% of sales Other expenses exclude depr ($500) Total cash disbursements Ending cash balance b Jan $70,000 70,000 2002 Feb $90,000 60,000 Mar $30,000 50,000 Jan $ 4,500 $28,000 54,000 $82,000 $86,500 Feb $ 2,600 $36,000 42,000 $78,000 $80,600 Mar $ 300 $12,000 54,000 $66,000 $66,300 $14,000 40,000 21,000 $75,000 4,000 2,000 1,400 1,500 $83,900 $ 2,600 $12,000 35,000 24,000 $71,000 4,000 2,000 1,800 1,500 $80,300 $ 300 $10,000 30,000 21,000 $61,000 4,000 2,000 600 1,500 $69,100 $ (2,800) Borrow—March; invest—January and February DIFFICULT The Master Budget ... there is a high degree of acceptance of the goals and objectives by operating management they are usually more realistic they lead to better morale and higher motivation they usually require more... Material Z to be purchased in January (pounds): Multiply by cost of Material Z per lb.: Budgeted Cost of Material Z for January: The budgeted cost of all materials to be purchased in Jan would be... one is least likely to be determined by the dictates of top management? a b c d 26 The Master Budget c MEDIUM A purchases budget is a b c d not affected by the firm’s policy of granting credit