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1

The direct materials budget must concern itself with both the cost of raw materials purchased and the cost of those actually used in production.


True.
False.

True.
Your answer is correct.
The direct materials budget is concerned with both units and input prices. Two dollar amounts are calculated: the cost of raw materials actually used in production and the total cost of raw materials purchased.

2

Which of the following types of budgets is the last budget to be produced during the budgeting process?
A Capital.
B Cost of goods sold.
C Cash.
D Marketing.

C Cash.
his answer is correct.
The cash budget can be prepared only after all of the operating budgets and the capital budget have been completed.

3


In the past, 4 direct labor hours were required to produce each unit of product Y. Material costs were $200 per unit, the direct labor rate was $20 per hour, and factory overhead was three times direct labor cost. In budgeting for next year, management is planning to outsource some manufacturing activities and to further automate others. Management estimates these plans will reduce labor hours by 25%, increase the factory overhead rate to 3.6 times direct labor costs, and increase material costs by $30 per unit. Management plans to manufacture 10,000 units. What amount should management budget for cost of goods manufactured?
A $5,980,000
B $4,700,000
C $5,060,000
D $5,200,000

C $5,060,000
This answer is correct.
Direct labor hours per unit equal 3 [4 × (1.0 – .25]. Direct labor cost per unit equals $60 (3 × $20). Applied overhead per unit equals $216 (3.6 × $60). Unit materials cost equals $230 ($200 + $30). Accordingly, budgeted cost of goods manufactured equals $5,060,000 [10,000 units × ($60 + $216 + $230)].

4

Flesher Farms is preparing its cash budget for the next year. Sales are expected to be $100,000 in January, $200,000 in February, $300,000 in March, and $100,000 in April. Approximately half of all sales are cash sales, and the other half are on credit. Experience indicates that 70% of the credit sales will be collected in the month following the sale, 20% the month after that, and 10% in the third month after the sale. What are the budgeted collections for April?
A $180,000
B $360,000
C $260,000
D $130,000

A $180,000
This answer is correct.
Collections from April cash sales will be half of total sales, or $50,000. From January’s $50,000 of credit sales, collections should be 10%, or $5,000. From February’s $100,000 of credit sales, collections should be 20%, or $20,000. From March’s $150,000 of credit sales, collections will be 70%, or $105,000. Thus, total collections will amount to $180,000.

5

Mien Co. is budgeting sales of 53,000 units of product Nous for next month. The manufacture of one unit of Nous requires 4 kilos of chemical Loire. During the month, Mien plans to reduce the inventory of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000 units. There is no Nous work-in-process inventory. How many kilos of Loire is Mien budgeting to purchase next month?
A 138,000
B 238,000
C 186,000
D 162,000

C 186,000
This answer is correct.
Projected sales of 53,000 units and a 6,000-unit increase in inventory require production of 59,000 units. Thus, 236,000 (59,000 × 4) kilos of Loire are needed for production. Mien intends to reduce the inventory of Loire by 50,000 kilos, so 186,000 (236,000 – 50,000) kilos must be purchased.

6

Swan Company is a maker of men’s slacks. The company would like to maintain 20,000 yards of fabric in ending inventory. The beginning fabric inventory is expected to contain 25,000 yards. The expected yards of fabric needed for sales is 90,000. Compute the yards of fabric that Swan needs to purchase.
A 85,000
B 95,000
C 90,000
D 135,000

A 85,000
This answer is correct.
Swan’s fabric purchase requirements can be calculated as follows:
Needed for sales

90,000
Add: ending inventory

20,000
Less: beginning inventory

(25,000)

Total purchases

85,000

View Subunit 16.3 Outline

7

Fact Pattern: Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter. Streeter usually maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be sold in the next quarter.
How many units should Streeter produce in the second quarter?

A. 78,000
B. 75,000
C. 84,000
D. 72,000

A. 78,000
Answer (A) is correct.
Streeter’s required production for the second quarter can be calculated as follows:
Sales for quarter

72,000
Add: buffer for next quarter (84,000 × 50%)

42,000
Less: buffer from previous quarter (72,000 × 50%)

(36,000)

Required production

78,000
(16.3.74)

8

Which of the following options lists the correct sequence for preparing budgets?

A. Sales budget, production budget, budgeted balance sheet, budgeted income statement.
B. Material purchases budget, production budget, cost of goods sold budget, cash receipts budget.
C. Production budget, material purchases budget, budgeted income statement, budgeted balance sheet.
D. Cost of goods sold budget, sales budget, budgeted income statement, budgeted balance sheet.

C. Production budget, material purchases budget, budgeted income statement, budgeted balance sheet.
Answer (C) is correct.
The components of the operating budget are prepared in the following order: sales (revenue) budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, ending finished goods inventory budget, cost of goods sold budget, and nonmanufacturing budget. Later in the budgeting process, the budgeted income statement is prepared and is followed by the cash budget and capital budget. Only after that is the budgeted balance sheet prepared.
(16.1.33)

9

Fact Pattern: Berol Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of the next month’s estimated sales. There are 150,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of direct materials at a cost of $1.20 per pound. There are 800,000 pounds of direct materials in inventory on June 30
Berol Company’s production requirement in units of finished product for the 3-month period ending September 30 is

A. 638,000 units.
B. 712,025 units.
C. 630,500 units.
D. 665,720 units.

D. 665,720 units.
Answer (D) is correct.
Sales are expected to increase at the rate of 5% per month. Given that July sales are estimated to be 200,000 units, August, September, and October sales are expected to be 210,000 units (200,000 × 1.05), 220,500 units (210,000 × 1.05), and 231,525 units (220,500 × 1.05), respectively. Moreover, September ending inventory must be 80% of October’s estimated sales, or 185,220 units (231,525 × 80%). Consequently, the production requirement for the 3-month period is 665,720 units (200,000 + 210,000 + 220,500 + 185,220 September EI – 150,000 July BI).
(16.3.70)

10

The Jung Corporation’s budget calls for the following production:
Qtr 1 -- 45,000 units
Qtr 2 -- 38,000 units
Qtr 3 -- 34,000 units
Qtr 4 -- 48,000 units
Each unit of product requires three pounds of direct material. The company’s policy is to begin each quarter with an inventory of direct materials equal to 30% of that quarter’s direct material requirements. Budgeted direct materials purchases for the third quarter would be

A. 114,600 pounds.
B. 30,600 pounds.
C. 38,200 pounds.
D. 43,200 pounds.

Answer (A) is correct.
Beginning inventory should be 30,600 pounds (34,000 units of budgeted sales × 3 pounds × 30%). Ending inventory should be 43,200 pounds (48,000 units of budgeted sales for Quarter 4 × 3 pounds × 30%). Since BI plus purchases minus EI equals Quarter 3 budgeted sales, purchases must be 114,600.
30,600 + X – 43,200

=

3 × 34,000
X – 12,600

=

102,000
X

=

114,600

11

Which of the following inputs would be most beneficial to consider when management is developing the capital budget?

A. Current product sales prices and costs.
B. Wage trends.
C. Supply/demand for the company’s products.
D. Profit center equipment requests.

D. Profit center equipment requests.
Answer (D) is correct.
The capital budget is part of the financial budget, so its emphasis is on obtaining the funds needed to acquire operating assets. It may be prepared more than a year in advance to allow time to plan financing of major expenditures for such long-term assets as equipment, buildings, and land. Thus, profit center equipment requests are directly relevant to development of the capital budget.

12

Fact Pattern: Berol Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of the next month’s estimated sales. There are 150,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of direct materials at a cost of $1.20 per pound. There are 800,000 pounds of direct materials in inventory on June 30
Assume Berol Company plans to produce 600,000 units of finished product in the 3-month period ending September 30 and to have direct materials inventory on hand at the end of the 3-month period equal to 25% of the use in that period. The estimated cost of direct materials purchases for the 3-month period ending September 30 is

A. $2,400,000
B. $2,200,000
C. $2,880,000
D. $2,640,000

D. $2,640,000
Answer (D) is correct.
Production of 600,000 units will require 2,400,000 pounds of direct materials (600,000 units × 4 lbs.). In addition, ending inventory will be 25% of the period’s usage, or 600,000 pounds (2,400,000 × 25%). Thus, 3,000,000 total pounds will be needed. However, given 800,000 pounds in inventory, purchases will be only 2,200,000 pounds. At $1.20 per pound, the cost will be $2,640,000.
(16.3.71)

13

Fact Pattern: Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have accounted for 10% of total sales, and payments for credit sales have been received as follows:

40% of credit sales in the month of the sale
30% of credit sales in the first subsequent month
25% of credit sales in the second subsequent month
5% of credit sales in the third subsequent month

The forecast for both cash and credit sales is as follows:
Month Sales
January $95,000
February 65,000
March 70,000
April 80,000
May 85,000

What is the forecasted cash inflow for Pine Hill Wood Products for May?

A. $76,500
B. $70,875
C. $83,650
D. $79,375

Answer (D) is correct.
The cash inflows for May will come from May cash sales of $8,500 ($85,000 × 10%), May credit sales of $30,600 ($85,000 × 90% × 40%), April sales of $21,600 ($80,000 × 30% × 90%), March sales of $15,750 ($70,000 × 25% × 90%), and February sales of $2,925 ($65,000 × 5% × 90%). The total is $79,375.
(16.4.96)

14

Hannon Retailing Company prices its products by adding 30% to its cost. Hannon anticipates sales of $715,000 in July, $728,000 in August, and $624,000 in September. Hannon’s policy is to have on hand enough inventory at the end of the month to cover 25% of the next month’s sales. What will be the cost of the inventory that Hannon should budget for purchase in August?

A. $560,000
B. $509,600
C. $680,000
D. $540,000

D. $540,000
Answer (D) is correct.
The first step is to determine the cost of goods sold for each month. Since sales are 130% of cost, cost of goods sold can be calculated as follows:
July

$715,000 ÷ 130%

=

$550,000
August

728,000 ÷ 130%

=

560,000
September

624,000 ÷ 130%

=

480,000
Purchases for August can now be calculated as follows:
Projected sales at cost

$560,000
Add: required ending inventory

($480,000 × 25%)

120,000

Total goods needed

$680,000
Less: beginning inventory

(140,000)

Purchases

$540,000
(16.3.73)

15

A cash budget is being prepared for the purchase of Toyi, a merchandise item. Budgeted data are

Cost of goods sold for upcoming year

$300,000

Accounts payable, beginning of upcoming year

20,000

Inventory, beginning of upcoming year

30,000

Inventory, end of upcoming year

42,000
Purchases will be made in 12 equal monthly amounts and paid for in the following month. What is the budgeted cash payment for purchases of Toyi?

A. $312,000
B. $295,000
C. $300,000
D. $306,000

D. $306,000
Answer (D) is correct.
Purchases equal cost of goods sold, plus ending inventory, minus beginning inventory, or $312,000 ($300,000 + $42,000 – $30,000). Purchases are made evenly throughout the year at a rate of $26,000 per month ($312,000 ÷ 12). Given that 11 payments will be made in the upcoming year for that year’s purchases, the total cash payment will be $306,000 [(11 × $26,000) + $20,000 beginning accounts payable balance].
(16.4.85)

16

Lon Co.’s budget committee is preparing its master budget on the basis of the following projections:
Sales

$2,800,000
Decrease in inventories

70,000
Decrease in accounts payable

150,000
Gross margin

40%
What are Lon’s estimated cash disbursements for inventories?

A. $1,200,000
B. $1,600,000
C. $1,760,000
D. $1,040,000

C. $1,760,000
Answer (C) is correct.
Projected cost of sales is 60% of $2,800,000 of sales, which is $1,680,000. Projected purchases is the $1,680,000 cost of sales minus the $70,000 projected decrease in inventory, which is $1,610,000. Projected cash payments equal the projected purchases of $1,610,000 plus the $150,000 projected decrease in A/P, which is $1,760,000.
(16.4.84)

17

There are various budgets within the master budget cycle. One of these budgets is the production budget. Which one of the following best describes the production budget?

A. It includes required direct labor hours.
B. It summarizes all discretionary costs.
C. It is calculated from the desired ending inventory and the sales forecast.
D. It includes required material purchases.

C. It is calculated from the desired ending inventory and the sales forecast.
Answer (C) is correct.
A production budget is based on sales forecasts, in units, with adjustments for beginning and ending inventories. It is used to plan when items will be produced
(16.1.22)

18

A firm desires a finished goods ending inventory equal to 25% of the following month’s budgeted sales. January sales are budgeted at 10,000 units and February at 12,000 units. Each unit requires 2 pounds of Material X, which costs $4 per pound. The company has a just-in-time system and materials are delivered daily just prior to use, so no raw materials inventories are maintained. Materials are paid for in the month following purchase. The January 1 finished goods inventory is 2,500 units. In February, what amount should the company expect to pay as a cash outflow for raw materials?

A. $40,000
B. $84,000
C. $42,000
D. $21,000

B. $84,000
Answer (B) is correct.
The firm will need 10,000 units for January sales plus 3,000 (12,000 × 25%) for ending inventory. The production quota for January is therefore 10,500 (13,000 needed – 2,500 beginning inventory). Each unit requires 2 pounds of materials, or 21,000 pounds. At $4 per pound, the materials will cost $84,000, which will be paid in February.
(16.4.106)

19

RedRock Company uses flexible budgeting for cost control. RedRock produced 10,800 units of product during October, incurring indirect materials costs of $13,000. Its master budget for the year reflected indirect materials costs of $180,000 at a production volume of 144,000 units. A flexible budget for October production would reflect indirect materials costs of

A. $13,500
B. $11,700
C. $13,975
D. $13,000

A. $13,500
Answer (A) is correct.
The cost of indirect materials for 144,000 units was expected to be $180,000. Consequently, the unit cost of indirect materials is $1.25 ($180,000 ÷ 144,000). Multiplying the $1.25 unit cost times the 10,800 units produced results in an expected total indirect materials cost of $13,500
(16.5.124)

20

In the past, 4 direct labor hours were required to produce each unit of product Y. Material costs were $200 per unit, the direct labor rate was $20 per hour, and factory overhead was three times direct labor cost. In budgeting for next year, management is planning to outsource some manufacturing activities and to further automate others. Management estimates these plans will reduce labor hours by 25%, increase the factory overhead rate to 3.6 times direct labor costs, and increase material costs by $30 per unit. Management plans to manufacture 10,000 units. What amount should management budget for cost of goods manufactured?

A. $5,200,000
B. $4,700,000
C. $5,060,000
D. $5,980,000

C. $5,060,000
Answer (C) is correct.
Direct labor hours per unit equal 3 [4 × (1.0 – .25]. Direct labor cost per unit equals $60 (3 × $20). Applied overhead per unit equals $216 (3.6 × $60). Unit materials cost equals $230 ($200 + $30). Accordingly, budgeted cost of goods manufactured equals $5,060,000 [10,000 units × ($60 + $216 + $230)].
(16.3.46)

21

Compared with static budgets, flexible budgets

A. Provide a better understanding of the capacity variances during the period being evaluated.
B. Encourage managers to use fewer fixed cost items and more variable cost items that are under their control.
C. Offer managers a more realistic comparison of budget and actual fixed cost items under their control.
D. Offer managers a more realistic comparison of budget and actual revenue and cost items under their control.

D. Offer managers a more realistic comparison of budget and actual revenue and cost items under their control.
Answer (D) is correct.
A flexible budget provides managers with the revenues and costs that should have been earned and incurred given the actual level of production achieved. This information is far more useful than the static budget prepared before the fiscal period began when the production level was uncertain.
16.5.132)

22

Which one of the following may be considered an independent item in the preparation of the annual master budget?

A. Pro forma statement of financial position.
B. Ending inventory budget.
C. Pro forma income statement.
D. Capital investment budget.

D. Capital investment budget.
Answer (D) is correct.
The capital investment budget may be prepared more than a year in advance, unlike the other elements of the master budget. Because of the long-term commitments that must be made for some types of capital investments, planning must be done far in advance and is based on needs in future years as opposed to the current year’s needs.
(16.4.92)

23

Whopper, Inc., budgeted sales on account of $150,000 for July, $210,000 for August, and $198,000 for September. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36% the second month, and 4% will be uncollectible. The cash receipts from accounts receivable that should be budgeted for September equal

A. $194,400
B. $165,600
C. $198,000
D. $180,000

D. $180,000
Answer (D) is correct.
The budgeted cash collections for September equal $180,000.
July:

$150,000 × .36

=

$ 54,000
August:

210,000 × .60

=

126,000



$180,000

(16.4.94)

24


Mien Co. is budgeting sales of 53,000 units of product Nous for next month. The manufacture of one unit of Nous requires 4 kilos of chemical Loire. During the month, Mien plans to reduce the inventory of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000 units. There is no Nous work-in-process inventory. How many kilos of Loire is Mien budgeting to purchase next month?
A 162,000
B 238,000
C 186,000
D 138,000

C 186,000
This answer is correct.
Projected sales of 53,000 units and a 6,000-unit increase in inventory require production of 59,000 units. Thus, 236,000 (59,000 × 4) kilos of Loire are needed for production. Mien intends to reduce the inventory of Loire by 50,000 kilos, so 186,000 (236,000 – 50,000) kilos must be purchased.
View Subunit 16.3 Outline