Budgeting

Chapter 08
Budgetary Planning
True / False Questions
1. Control is forward looking while planning is backward looking.
True False
2. The budget translates a company's objectives into financial terms.
True False
3. A short-term objective is a specific action managers use to reach their long term goals.
True False
4. The strategic plan is management's vision of what they desire the organization to achieve over the
long term.
True False
5. An advantage of budgeting is that it requires managers to evaluate why things did not progress
according to the plan.
True False
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6. One advantage of participative budgeting is managers can build in budgetary slack.
True False
7. Participative budgeting allows employees throughout the organization to have input into the
budget-setting process.
True False
8. Top-down budgeting is when the local managers impose a budget on the top management.
True False
9. Budgets that are tight but attainable are less likely to motivate people than budgets that are easy
to achieve.
True False
10. Participative budgeting is more likely to motivate people to work toward the organization's goals
than is a top-down approach.
True False
11. Operating budgets focus on the financial resources needed to support operations.
True False
12. The production budget must be prepared before the sales budget can be prepared.
True False
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13. Preparing the sales budget includes calculating the revenues to be earned from units sold in
addition to the number of units to be sold.
True False
14. If a company produces and sells goods to order, the sales budget and production budget are
identical.
True False
15. Manufacturing firms prepare a separate raw materials purchases budget for each material used in
production.
True False
16. The direct labor budget is based on budgeted sales levels.
True False
17. Budgeted manufacturing overhead includes indirect manufacturing costs, but not selling or
administrative costs.
True False
18. Budgeted cost of goods sold reflects all the costs required to manufacture and sell the product.
True False
19. The selling and administrative expense budget is related to the production budget.
True False
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20. Budgeted cash collections are based on the sales budget.
True False
Multiple Choice Questions
21. Which of the following is the forward-looking phase of the planning and control cycle?
A. Planning
B. Directing/Leading
C. Organizing
D. Control
22. Creating a budget is an important part of which phase of the planning and control process?
A. Planning
B. Organizing
C. Directing/Leading
D. Control
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23. A detailed plan that translates the company's objectives into financial terms, identifying the
resources and expenditures that will be required over the planning horizon is a
A. Strategic plan
B. Budget
C. Tactic
D. Long-term objective
24. Which of the following is the backward-looking phase of the planning and control cycle?
A. Planning
C. Organizing
D. Control
25. ____________ are the specific actions managers use to achieve their objectives.
A. Strategic plans
B. Long-term objectives
C. Short-term objectives
D. Tactics
26. _____________ are the specific goals that managers want to achieve over a 5 to 10 year horizon.
A. Strategic plans
D. Tactics
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27. A _____________ is the vision of what management wants the organization to achieve over the long
term.
A. Strategic plan
B. Long-term objective
C. Short-term objective
D. Tactic
28. Which of the following is not a benefit of budgeting?
A. It forces managers to look to the future
B. It plays an important role in communication within the organization
C. It serves an important role in motivating and rewarding employees
D. It builds organizational slack
29. A top-down approach to budgeting is one that is
A. participative.
B. motivational.
C. imposed.
D. tight.
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30. Participative budgeting is an approach to budgeting that
A. is top-down in nature.
B. allows top management to set the budget.
C. discourages budget slack.
D. is more likely to motivate people to work towards the organization's goals than a top-down
approach.
31. Which of the following is not a way to reduce the dysfunctional behaviors associated with
budgeting?
A. Create budget slack.
B. Use different budgets for planning and for performance evaluation.
C. Use a continuous or rolling budget approach.
D. Use a zero-based budgeting approach.
32. Which of the following statements about employee motivation is true?
A. A budget that is too easy to achieve is more likely to motivate than a budget that is too difficult
or that is tight but attainable.
B. A budget that is too difficult to achieve is more likely to motivate than a budget that is too easy
or that is tight but attainable.
C. A budget that is tight but attainable is more likely to motivate than a budget that is too easy or
too difficult to achieve.
D. Budgets are difficult to use for motivation.
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33. Which of the following is not a component of the master budget?
A. Operating budget
B. Budgeted income statement
C. Budgeted balance sheet
D. Statement of return on investment
34. Which of the following is not included in the operating budget?
A. Budgeted balance sheet
B. Sales budget
C. Selling and administrative budget
D. Raw materials purchases budget
35. The starting point for preparing the master budget is the
A. inventory policy.
B. sales budget.
C. production budget.
D. budgeted balance sheet.
36. Which of the following budgets shows how many units will be produced each period?
A. Direct materials budget
B. Direct labor budget
C. Sales budget
D. Production budget
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37. A primary financial budget is the
A. Production budget.
B. Cash budget.
C. Inventory budget.
D. Selling and administrative budget.
38. Which of the following sequences is correct?
A. Sales budget - production budget - direct materials budget - budgeted income statement
B. Budgeted income statement - direct materials budget - production budget - sales budget
C. Cash receipts budget - sales budget - production budget - budgeted income statement
D. Inventory budget - production budget - sales budget - selling and administrative budget
39. Which of the following is not a source that can be used in preparing the sales budget?
A. Prior sales.
B. The production budget.
C. Industry trends.
D. Marketing activities.
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40. Parker Corp expects to sell 4,000 units in October, and expects sales to increase 20% each month
thereafter. Sales price is expected to stay constant at $8 per unit. What are budgeted revenues for
the fourth quarter?
A. $32,000
B. $96,000
C. $115,200
D. $116,480
41. Budgeted production is calculated by
A. adding budgeted unit sales to budgeted beginning finished goods inventory, and subtracting
budgeted ending finished goods inventory.
B. adding budgeted unit sales to budgeted beginning work in process inventory, and subtracting
budgeted ending work in process inventory.
C. adding budgeted unit sales to budgeted ending finished goods inventory, and subtracting
budgeted beginning finished goods inventory.
D. adding budgeted unit sales to budgeted ending work in process inventory, and subtracting
budgeted beginning work in process inventory.
42. If a company is planning to build inventory,
A. production should exceed sales.
B. sales should exceed production.
C. production should equal sales.
D. production should equal inventory.
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43. Lea Company produces hand tools. Budgeted sales for March are 10,000 units. Beginning finished
goods inventory in March is budgeted to be 1,300 units, and ending finished goods inventory is
budgeted to be 1,400 units. How many units will be produced in March?
A. 9,900
B. 10,000
C. 10,100
D. 12,700
44. Meadow Company produces hand tools. A sales budget for the next four months is as follows:
March 10,000 units, April 13,000, May 16,000 and June 21,000. Meadow Company's ending finished
goods inventory policy is 10% of the following month's sales. What is budgeted ending finished
goods inventory for May?
A. 1,000
B. 1,300
C. 1,600
D. 2,100
goods inventory policy is 10% of the following month's sales. March 1 inventory is projected to be
1,400 units. How many units will be produced in March?
A. 10,000
B. 9,900
C. 13,000
D. 10,100
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goods inventory policy is 10% of the following month's sales. March 1 inventory is projected to be
1,400 units. How many units will be produced in April?
A. 13,300
B. 15,900
C. 12,700
D. 13,000
47. Marlow Company produces hand tools. A production budget for the next four months is as
follows: March 10,300 units, April 13,300, May 16,500, and June 21,800. Marlow Company's ending
finished goods inventory policy is 10% of the following month's sales. Meadow plans to sell 16,000
units in May. How many units will be sold in April?
A. 12,380
B. 13,000
C. 13,570
D. 13,620
follows: March 10,300 units, April 13,300, May 16,500, and June 21,800. Marlow Company's ending
finished goods inventory policy is 10% of the following month's sales. Marlow plans to sell 16,000
units in May. What is budgeted ending inventory for March?
A. 1,030
B. 1,300
C. 1,330
D. 1,650
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49. The formula for budgeted raw materials purchases is
A. Budgeted production units + Ending raw materials inventory - Beginning raw materials
inventory.
B. Budgeted production units + Beginning raw materials inventory - Ending raw materials
inventory.
C. Materials needed for production + Ending raw materials inventory - Beginning raw materials
inventory.
D. Materials needed for production + Beginning raw materials inventory - Ending raw materials
inventory.
50. When calculating raw materials purchases, the starting point should be
A. actual materials purchases from the previous year.
B. budgeted sales.
C. budgeted production.
D. budgeted cost of raw materials.
51. Jeremy Inc. produces leather handbags. The production budget for the next four months is: July
5,000 units, August 7,000, September 7,500, October 8,000. Each handbag requires 0.5 square
meters of leather. Jeremy Inc.'s leather inventory policy is 30% of next month's production needs. If
the leather policy is met, what will the July 1 inventory be?
A. 750 square meters
B. 1,050 square meters
C. 1,825 square meters
D. 300 square meters
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52. Johnson Inc. produces leather handbags. Johnson Inc. estimates it will use 3,500 square meters of
leather in production in August, and 3,750 square meters of leather in production in September.
Johnson Inc.'s leather inventory policy is 30% of next month's production needs. What will leather
purchases be in August?
A. 3,425 square meters
D. 4,625 square meters
53. Jackson Inc. produces leather handbags. The production budget for the next four months is: July
meters of leather. Jackson Inc.'s leather inventory policy is 30% of next month's production needs.
On July 1 leather inventory was expected to be 1,000 square meters. What will leather purchases be
in August?
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On July 1 leather inventory was expected to be 1,000 square meters. What will leather purchases be
in July?
On July 1 leather inventory was expected to be 1,000 square meters. Leather is expected to cost
$5.00 per square meter in June, but go up to $6.00 per square meter in July. What is the expected
cost of leather purchases in July?
A. $13,800
B. $15,300
C. $16,200
D. $16,300
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56. Jared Inc. produces leather handbags. The sales budget for the next four months is: July 5,000
units, August 7,000, September 7,500, October 8,000. Each handbag requires 0.5 square meters of
leather. Jared Inc.'s finished goods inventory policy is 10% of next month's sales needs. Jared Inc.'s
leather inventory policy is 30% of next month's production needs. What will leather purchases be
in August?
57. Budgeted direct labor hours are calculated as
A. Budgeted production units Direct labor requirements per unit + Ending inventory - Beginning
inventory.
B. Budgeted production units Direct labor requirements per unit + Beginning inventory - Ending
inventory.
C. Budgeted production units Direct labor requirements per unit.
D. Budgeted sales units Direct labor requirements per unit.
58. When calculating the direct labor budget, the starting point should be
A. actual direct labor hours from the previous year.
B. budgeted sales.
D. budgeted cost of direct labor.
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59. Jillian Inc. produces leather handbags. The production budget for the next four months is: July
5,000 units, August 7,000, September 7,500, October 8,000. Each handbag requires 1.3 hours of
unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How many
unskilled labor hours will be budgeted for August?
A. 7,000
B. 9,100
C. 15,400
D. 24,500
total labor hours will be budgeted for September?
A. 7,500
B. 9,750
C. 16,500
D. 26,250
unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How much will
be paid to skilled labor during the three months July through September?
A. $742,500
B. $643,500
C. $4,387,500
D. $292,500
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unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). What will be
the total labor cost for the month of August?
A. $303,800
B. $231,000
C. $121,500
D. $161,000
63. Jaybird Inc. produces leather handbags. The sales budget for the next four months is: July 5,000
units, August 7,000, September 7,500, October 8,000. Jaybird Inc.'s ending finished goods
inventory policy is 10% of the following month's sales. Each handbag requires 1.3 hours of unskilled
labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). What will be the total
labor cost for the month of August?
A. $24,675
B. $225,680
C. $303,800
D. $305,970
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inventory policy is 10% of the following month's sales. Each handbag requires 1.3 hours of unskilled
labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How much is total labor
cost during the three months July through September?
A. $69,300
B. $327,670
C. $846,300
D. $859,320
65. Skylark has forecast production for the next three months as follows: July 4,900 units, August 6,600
units, September 7,500 units. Monthly manufacturing overhead is budgeted to be $17,000 plus $6
per unit produced. What is budgeted manufacturing overhead for July?
A. $29,400
B. $47,000
C. $46,400
D. $17,000
66. Skylark has forecast production for the next three months as follows: July 4,900 units, August 6,600
units, September 7,500 units. Monthly manufacturing overhead is budgeted to be $17,000 plus $6
per unit produced. What is budgeted manufacturing overhead for August?
A. $56,600
B. $17,000
C. $39,600
D. $62,000
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67. Larken has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Larken's policy is to have an ending inventory of 40% of the next month's
sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly manufacturing
overhead is budgeted to be $17,000 plus $6 per unit produced. What is budgeted manufacturing
overhead for July?
A. $29,400
B. $41,000
C. $46,400
D. $17,000
68. Larken has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Larken's policy is to have an ending inventory of 40% of the next month's
sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly manufacturing
overhead is budgeted to be $17,000 plus $6 per unit produced. What is budgeted manufacturing
overhead for August?
A. $56,600
B. $17,000
C. $53,000
D. $38,600
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69. Skybird has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Skybird's policy is to have an ending inventory of 40% of the next month's
sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly costs are budgeted as
follows:
What is budgeted manufacturing overhead cost for July?
A. $32,000
B. $41,000
C. $46,400
D. $17,000
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70. Pacific has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Pacific's policy is to have an ending inventory of 40% of the next month's
sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly costs are budgeted as
follows:
What is budgeted manufacturing overhead cost for August?
A. $50,000
B. $47,000
C. $33,000
D. $32,000
71. Budgeted cost of goods sold should include which of the following?
A. Raw materials and direct labor.
B. Raw materials, direct labor, and manufacturing overhead.
C. Raw materials, direct labor, manufacturing overhead, and selling expenses.
D. Raw materials, direct labor, manufacturing overhead, selling expenses, and administrative
expenses.
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72. Harney, Inc. has prepared the following budgets for March. In March, budgeted production equals
budgeted sales, and raw materials inventory will stay constant.
What is budgeted cost of goods sold for March?
A. $14,560
B. $24,960
C. $27,560
D. $37,960
73. Atlantic, Inc. has prepared the following budgets for March. In March, budgeted production equals
budgeted sales of 1,000 units, and raw materials inventory will stay constant.
A. $16,800
B. $24,300
C. $31,800
D. $43,800
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74. Crystal, Inc. has prepared the following budgets for March. In March, budgeted production is 1,000
units, budgeted sales is 1,200 units, and raw materials inventory will stay constant.
A. $20,367
B. $21,200
C. $25,440
D. $35,040
75. Crystal, Inc. has prepared the following budgets for March. In March, budgeted production is 1,000
units, budgeted sales is 1,200 units, and raw materials inventory unit costs will stay constant.
A. $30,551
B. $31,800
C. $36,660
D. $38,160
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76. Lemon, Inc. has prepared the following budgets for March. In March, budgeted production is 1,000
units, budgeted sales is 1,200 units, and raw materials inventory and unit costs will stay constant.
A. $40,734
B. $42,400
C. $48,880
D. $50,880
77. Which of the following would not be an example of a cost to include in a selling and administrative
expense budget?
A. Legal expenses
B. Accounting services
C. Fixed manufacturing overhead
D. Franchise fees
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78. Walnut has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Walnut's policy is to have an ending inventory of 40% of the next month's
sales needs on hand. July 1 inventory is projected to be 1,500 units. Selling and administrative costs
are budgeted to be $15,000 per month plus $5 per unit sold. What are budgeted selling and
administrative expenses for July?
A. $24,500
B. $39,500
C. $35,000
D. $30,500
79. Walnut has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units. Walnut's policy is to have an ending inventory of 40% of the next month's
sales needs on hand. July 1 inventory is projected to be 1,500 units. Selling and administrative costs
are budgeted to be $15,000 per month plus $5 per unit sold. What are budgeted selling and
administrative expenses for September?
A. $30,000
B. $67,500
C. $32,500
D. $52,500
80. The budgeted income statement is a combination of
A. All the operating budgets.
B. All the operating budgets plus the budgeted balance sheet.
C. The direct materials budget, the direct labor budget, and the manufacturing overhead budget.
D. The production budget, the cost of goods sold budget, and the selling and administrative
expense budget.
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81. The purpose of the cash budget is to
A. be used as a basis for the operating budgets.
B. provide external users with an estimate of future cash flows.
C. help managers plan ahead to make certain they will have enough cash on hand to meet their
operating needs.
D. summarize the cash flowing into and out of the business during the past period.
82. The basic form of the cash budget is:
A. Budgeted cash collections - Budgeted cash payments +/- Cash borrowed or repaid = Ending
cash balance
B. Beginning cash balance + Budgeted cash collections - Budgeted cash payments +/- Cash
borrowed or repaid = Ending cash balance
C. Beginning cash balance - Budgeted cash collections + Budgeted cash payments +/- Cash
D. Beginning cash balance + Budgeted cash collections - Budgeted cash payments = Cash
borrowed or repaid
83. Which of the following is not a component of the cash budget?
A. Budgeted cash collections
B. Budgeted cash payments
C. Depreciation expense
D. Cash borrowed or repaid
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84. Which component of the cash budget is shown as a line item on the budgeted balance sheet?
C. Cash repaid
D. Ending cash balance
85. Grover has forecast sales to be $125,000 in February, $135,000 in March, $150,000 in April, and
$140,000 in May. The average cost of goods sold is 70% of sales. All sales are on made on credit
and sales are collected 60% in the month of sale, and 40% the month following. What are
budgeted cash receipts in March?
A. $131,000
B. $135,000
C. $94,500
D. $91,700
$140,000 in May. The average cost of goods sold is 70% of sales. All sales are made on credit and
sales are collected 60% in the month of sale, and 40% the month following. What are budgeted
cash receipts in April?
A. $105,000
B. $141,000
C. $150,000
D. $144,000
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87. Dayton has forecast sales to be $205,000 in February, $270,000 in March, $290,000 in April, and
sales are collected 50% in the month of sale, 30% the month following and the remainder two
months after the sale. What are budgeted cash receipts in May?
A. $267,000
B. $296,000
C. $161,250
D. $241,500
88. Blue has forecast sales to be $410,000 in February, $540,000 in March, $580,000 in April, and
months after the sale. What are budgeted cash receipts in May?
A. $592,000
B. $620,000
C. $310,000
D. $483,334
89. Dane Inc. has forecast purchases on account to be $465,000 in March, $555,000 in April, $630,000
in May, and $735,000 in June. Seventy percent of purchases are paid for in the month of purchase,
the remaining 30% are paid in the following month. What are budgeted cash payments for April?
A. $528,000
B. $577,500
C. $388,500
D. $189,000
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90. Ivory Inc. has forecast purchases on account to be $310,000 in March, $370,000 in April, $420,000
in May, and $490,000 in June. Seventy percent of purchases are paid for in the month of purchase,
the remaining 30% are paid in the following month. What are budgeted cash payments for June?
A. $441,000
B. $469,000
C. $343,000
D. $294,000
91. Cedar Co. has forecast purchases to be $330,000 in June, $375,000 in July, $310,000 in August, and
$270,000 in September. Purchases average 30% paid in cash, 70% are on credit. Credit purchases
are paid 60% in the month of purchase, 30% during the month following, and 10% the second
month following the purchase. Cash disbursements in September would be
A. $113,400.
B. $204,750.
C. $261,450.
D. $285,750.
92. Arbor Co. has forecast sales to be $400,000 in May, $475,000 in June, $575,000 in July and
$700,000 in August. Forty percent of sales are cash, the remainder is on credit. Credit sales are
collected 60% in the month of sale, the remaining the following month. What are budgeted cash
collections for July?
A. $230,000
B. $334,000
C. $459,000
D. $551,000
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93. Ebony Co. has forecast sales to be $300,000 in May, $375,000 in June, $475,000 in July and
$600,000 in August. Forty percent of sales are cash, the remainder is on account. Credit sales are
partially collected in the month of sale, with all collections completed by the end of the month
following the sale. The August 31 accounts receivable is budgeted to be $108,000. What are
budgeted cash collections for July?
A. $389,500
B. $267,000
C. $457,000
D. $415,000
94. Which of the following budgets do not provide information needed for the budgeted balance
sheet?
A. Materials purchases budget
B. Production budget
C. Selling and administrative expense budget
D. Cash budget
95. Orchard has forecast sales to be $250,000 in February, $270,000 in March, $300,000 in April, and
sales are collected 60% in the month of sale, and 40% the month following. What is the budgeted
Accounts Receivable balance on May 31?
A. $196,000
B. $117,600
C. $112,000
D. $168,000
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96. Boxwood Inc. has forecast purchases on account to be $620,000 in March, $740,000 in April,
$840,000 in May, and $980,000 in June. Seventy percent of purchases are paid for in the month of
purchase, the remaining 30% are paid in the following month. What is the budgeted Accounts
Payable balance for June 30?
A. $588,000
B. $686,000
C. $294,000
D. $252,000
97. Audrey has forecast sales to be $205,000 in February, $270,000 in March, $290,000 in April, and
months after the sale. What is the budgeted Accounts Receivable balance on May 31?
A. $155,000
B. $213,000
C. $127,800
D. $186,000
98. Which of the following budgets would not exist for a merchandising firm?
A. Sales budget
B. Purchases budget
C. Production budget
D. Selling and administrative expense budget
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99. Clare purchases a single product for $15 and sells it for $30. Forecasted sales for the next three
months are July 4,000 units, August 6,000 units, September 7,500 units. Clare's policy is to have an
ending inventory of 40% of the next month's sales needs on hand. July 1 inventory is projected to
be 1,500 units. What are budgeted purchases in units for August?
A. 6,600 units
B. 10,400 units
C. 5,400 units
D. 600 units
100. Parsley Inc, a merchandising firm, has forecasted sales to be $125,000 in February, $135,000 in
March, $150,000 in April, and $140,000 in May. The average cost of goods sold is 60% of sales. The
merchandise inventory policy is to carry 50% of next month's sales needs. If actual February 1
inventory is $40,000, what will the cost of March purchases be?
A. $58,500
B. $142,500
C. $81,000
D. $85,500
Essay Questions
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101. Mango Place has forecast its sales for the coming months as follows:
The standard unit sells for $200, the deluxe unit sells for $350.
Required: Prepare a sales budget for each of the three months April through June as well as the
total for the quarter. Present the budget for each product as well as total sales.
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102. Edna Inc. has forecast its sales for the coming months as follows:
The standard model sells for $28, the economy model sells for $21, and the deluxe model sells for
$49.
Required: Prepare a sales budget for each of the three months July through September as well as
the total for the quarter. Present the budget for each product as well as total sales.
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103. Willow Products expects the following sales of its single product:
Willow Products desires an ending finished goods inventory to be equal to 30% of the next
month's sales needs. Actual March 1 inventory is projected to be 1,300 units.

Required: Prepare a production budget for Willow Products for as many months as is possible.
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104. Heather Products expects the following sales of its single product:
Heather desires an ending finished goods inventory to be equal to 20% of the next month's sales
needs. Actual May 1 inventory will be 3,300 units.
Required: Prepare a production budget for Heather for as many months as is possible.
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105. Wheat Inc. has forecast its sales for the coming months as follows:
Wheat maintains finished goods inventory equal to 20% of the next month's sales requirements.
April 1 inventories were 14 standard units and 10 deluxe.
Required: Prepare a production schedule for April through June.
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106. Cherry Inc. has forecast its sales for the coming months as follows:
Cherry maintains finished goods inventory equal to 40% of the next month's sales requirements.
April 1 inventories were 74 standard units and 72 deluxe.

8-39
107. Gertrude Products expects the following sales of its single product:
Gertrude desires an ending finished goods inventory to be equal to 10% of the next month's sales
needs. July 1 inventory is projected to be 800 units. Each unit requires 5 pounds of Chemical A and
14 pounds of Chemical B. July 1 materials inventory includes 8,600 pounds of Chemical A and
76,000 pounds of Chemical B. Gertrude desires to maintain a Chemical A inventory equal to 20%
of next month's production needs and a Chemical B inventory equal to 100% of next month's
production needs.
a. Prepare a production budget for Gertrude for as many months as is possible.

b. Prepare a raw materials purchases budget for both Chemical A and Chemical B for the months
of July through September.
8-40
108. Crest Products expects the following sales of its single product:
Crest desires an ending finished goods inventory to be equal to 30% of the next month's sales
needs. August 1 inventory is projected to be 7,800 units. Each finished unit requires 2 units of
component X and 11 units of component Z. August 1 materials inventory includes 5,000 units of
component X and 184,000 units of component Z. Crest desires to maintain a component X

inventory equal to 10% of next month's production needs and a component Z inventory equal to
70% of next month's production needs.
a. Prepare a production budget for Crest for as many months as is possible.
b. Prepare a raw materials purchases budget for both Component X and Component Z for the
months of August through October.
8-41
109. Honeysuckle Inc. produces canvas bags. The production budget for the next four months is: July
5,000 units, August 7,000, September 7,500, October 8,000. Each bag requires 2.6 hours of
unskilled labor (paid $8 per hour) and 4.4 hours of skilled labor (paid $15 per hour).
Required: Prepare a labor budget for the three months July through September. Provide the labor
requirements according to skill level in hours and in labor cost as well as in total. Provide the
budget monthly as well as a total for the quarter.
110. Maple Inc. produces wooden boxes. The production budget for the next four months is: July
15,000 units, August 17,000, September 17,500. Each box requires three skill levels: 1.0 hours of
unskilled labor (paid $8 per hour), 1.5 hours of semi-skilled labor (paid $10) and 2.0 hours of skilled
labor (paid $15 per hour).
Required: Prepare a labor budget for the three months July - September. Provide the labor
8-42
111. Sugar has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units,
September 7,500 units, and October 8,000 units. Sugar's policy is to have an ending inventory of
40% of the next month's sales needs on hand. July 1 inventory is projected to be 1,500 units.
Manufacturing overhead is budgeted to be $17,000 plus $5 per unit produced.
a. Prepare a production budget for Sugar for as many months as is possible.

b. Prepare a manufacturing overhead budget for the three months July - September. Be sure to
include a total for the quarter as well.
8-43
112. Butler has forecast sales for the next three months as follows: July 14,000 units, August 16,000 units,
September 17,500 units, October 18,000 units. Butler's policy is to have an ending inventory of 20%
of the next month's sales needs on hand. July 1 inventory is projected to be 2,500 units.
Manufacturing overhead is budgeted to be $18,000 (depreciation $2,000, supervision $7,000,
factory lease $1,500, maintenance $4,000, training $3,500) plus $5 per unit produced ($3 indirect
materials, $2 utilities).
a. Prepare a production budget for Butler for as many months as is possible.

b. Prepare a manufacturing overhead budget for the three months July through September. Be
sure to include a total for the quarter as well.
8-44
113. Bear Corp. sells its product for $120. Forecast sales are 1,200 units in October, 1,500 in November,
and 1,600 in December. Variable costs are based on sales, and consist of commissions (7% of
sales), advertising (3%) and shipping (5%). Fixed costs per month are $4,000 sales salaries, $3,300
office salaries, $2,000 depreciation, $1,800 office rent, $750 insurance and $900 utilities.
Required: Prepare Bear Corp's selling and administrative expense budget for the period October
through December. Present monthly totals as well as a 3-month total.
114. Rapid Corp. sells its product for $200. Forecast sales are 1,500 units in January, 1,800 in February,
and 1,600 in March. Variable costs are based on sales, and consist of commissions (6% of sales),
cooperative advertising (2%) and shipping (6%). Monthly fixed costs are $7,000 sales salaries,
$6,500 office salaries, $2,500 depreciation, $1,800 office rent, $900 insurance and $1,200 utilities.
a. Prepare Rapid's selling and administrative expense budget for the period January through
March. Present monthly totals as well as a 3-month total.
8-45
115. Meredith Company has budgeted sales for the upcoming months as follows:
Forty percent of the sales are credit sales, the remainder are cash sales. Credit sales are collected
50% in the month of sale, 40% in the month following the sale, and 8% in the second month
following the sale.
a. Compute Meredith Company's cash receipts for June.

b. Compute Meredith Company's cash receipts for July.
c. Compute Meredith Company's cash receipts for August.
8-46
116. Spencer Company has budgeted sales for the upcoming months as follows:
Seventy percent of the sales are credit sales, the remainder are cash sales. Credit sales are
collected 40% in the month of sale, 50% in the month following the sale, and 10% in the second
month following the sale.
a. Compute Spencer's cash receipts for April.
b. Compute Spencer's cash receipts for May.

c. Compute the accounts receivable balance for May 31.
8-47
117. Blair is a retailer of assorted baby products. The sales forecast for the coming months is:
All sales are credit sales. The cash collection pattern is 20% in the month of sale, 70% in the month
following the sale, and the remainder in the second month following the sale. Accounts receivable
on June 1 were $177,500.
a. Prepare a cash receipts schedule for the period June through August (by month).
b. What will the Accounts Receivable balance be on August 31?
8-48
118. Portia is a retailer of scrapbooking products. The sales forecast for the coming months is:
Portia's sales are all credit. The collection pattern is 60% in the month of sale, 35% the following
month and the remainder in the second month following the sale. Accounts receivable on April 1
were $122,500.
8-49
119. Young is a retailer of assorted baby products. The sales forecast for the coming months is:
Young's cost of sales averages 60% of revenues. The inventory policy is to carry 30% of next
month's sales needs. April 1 inventory will be as expected under the policy. Young pays for
purchases 80% in the month of purchase and 20% the following month. Accounts payable on April
1 is $22,400.
a. Prepare a purchases budget for as many months as is possible.
b. Prepare a cash payments budget for April through June.
8-50
120. Carmen is a retailer of scrapbooking products. The sales forecast for the coming months is:
Carmen's sales are 70% cash and 30% store credit. The credit sales are collected 60% in the month
of sale, the remainder the following month. Accounts receivable on April 1 are $32,000.
Carmen's cost of sales averages 65% of revenues. The inventory policy is to carry 40% of next
month's sales needs. April 1 inventory will be as expected under the policy. Carmen pays for
purchases 30% in the month of purchase and 70% the following month. Accounts payable on April
1 is $125,000.

c. Prepare a cash receipts budget for April through June.
8-51
Chapter 08 Budgetary Planning Answer Key
True / False Questions
1. Control is forward looking while planning is backward looking.
FALSE
Control is backward looking while planning is forward looking.
AACSB: Reflective Thinking

AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Describe (a) how and why organizations use budgets for planning and control and (b) potential
behavioral issues to consider when implementing a budget.
Topic: Planning and control cycle
2. The budget translates a company's objectives into financial terms.
TRUE
The budget's role in the organizing process is to translate the company's objectives into
financial terms.

Blooms: Remember
Difficulty: 1 Easy
8-52
3. A short-term objective is a specific action managers use to reach their long term goals.
FALSE
A short-term objective is a specific goal that managers need to achieve in no more than a year
to reach their long-term goals.

Blooms: Understand
Difficulty: 2 Medium
4. The strategic plan is management's vision of what they desire the organization to achieve over
the long term.
TRUE
This is the definition of a strategic plan.

Blooms: Remember
Difficulty: 1 Easy
8-53
5. An advantage of budgeting is that it requires managers to evaluate why things did not progress
according to the plan.
FALSE
This is not a requirement of budgeting, although managers can use budgets in this way.

Blooms: Understand
Difficulty: 1 Easy
Topic: Benefits of budgeting
6. One advantage of participative budgeting is managers can build in budgetary slack.
FALSE
Budgetary slack is a drawback to participative budgeting, not an advantage.

Blooms: Remember
Difficulty: 1 Easy
Topic: Behavioral effects of budgets
8-54
7. Participative budgeting allows employees throughout the organization to have input into the
budget-setting process.
TRUE
This is the main purpose of participative budgeting.

Blooms: Remember
Difficulty: 1 Easy
8. Top-down budgeting is when the local managers impose a budget on the top management.
FALSE
Top-town budgeting is when top management sets the budget and imposes it on lower levels
of the organization.

Blooms: Remember
Difficulty: 1 Easy
8-55
9. Budgets that are tight but attainable are less likely to motivate people than budgets that are
easy to achieve.
FALSE
Budgets that are tight but attainable are more likely to motivate people than budgets that are
either too easy or too difficult to achieve.

Blooms: Understand
Difficulty: 1 Easy
10. Participative budgeting is more likely to motivate people to work toward the organization's
goals than is a top-down approach.
TRUE
This is one of the main advantages of participative budgeting.

Blooms: Understand
Difficulty: 1 Easy
8-56
11. Operating budgets focus on the financial resources needed to support operations.
FALSE
Operating budgets cover the organization's planned operating activities for a particular period;
financial budgets focus on the financial resources needed to support operations.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Describe the major components of the master budget and their interrelationships.
Topic: Components of the master budget
12. The production budget must be prepared before the sales budget can be prepared.
FALSE
The sales budget is the starting point for preparing the master budget.

Blooms: Remember
Difficulty: 1 Easy
8-57
13. Preparing the sales budget includes calculating the revenues to be earned from units sold in
addition to the number of units to be sold.
TRUE
Preparation of the sales budget requires multiplying the number of units expected to be sold
by the budgeted sales price.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03a Sales budget.
Topic: Sales budget
14. If a company produces and sells goods to order, the sales budget and production budget are
identical.
TRUE
A company that produces and sells goods to order would not carry a finished goods inventory,
which is the difference between a sales budget and a production budget.

Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-03b Production budget.
Topic: Production budget
8-58
15. Manufacturing firms prepare a separate raw materials purchases budget for each material used
in production.
TRUE
Each material should have its own budget.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03c Raw materials purchases budget.
Topic: Raw materials purchases budget
16. The direct labor budget is based on budgeted sales levels.
FALSE
The direct labor budget is based on budgeted production levels.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03d Direct labor budget.
Topic: Direct labor budget
8-59
17. Budgeted manufacturing overhead includes indirect manufacturing costs, but not selling or
administrative costs.
TRUE
Budgeted manufacturing overhead includes all indirect manufacturing costs such as rent,
depreciation on equipment, and utilities.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03e Manufacturing overhead budget.
Topic: Manufacturing overhead budget
18. Budgeted cost of goods sold reflects all the costs required to manufacture and sell the
product.
FALSE
Budgeted cost of goods sold reflects all the costs required to manufacture the product, but not
sell it.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03f Cost of goods sold budget.
Topic: Budgeted cost of goods sold
8-60
19. The selling and administrative expense budget is related to the production budget.
FALSE
The selling and administrative expense budget includes all the costs related to selling the
product and managing the business, not the costs of producing the product.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03g Selling and administrative expense budget.
Topic: Selling and administrative expense budget
20. Budgeted cash collections are based on the sales budget.
TRUE
Budgeted cash collections translates the sales budget into when it is collected in cash.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Prepare the cash budget and describe the relationships among the operating budgets; cash budget;
and budgeted balance sheet.
Topic: Budgeted cash receipts
Multiple Choice Questions
8-61
21. Which of the following is the forward-looking phase of the planning and control cycle?
A. Planning
C. Organizing
D. Control
Planning is the forward-looking phase of the cycle; it involves setting long-term objectives and
defining short-term tactics that will help achieve them.

Blooms: Remember
Difficulty: 1 Easy
22. Creating a budget is an important part of which phase of the planning and control process?
A. Planning
B. Organizing
C. Directing/Leading
D. Control
A budget is a detailed plan that translates the company's objectives into financial terms. This
aids in the organizing process, in which managers arrange for the necessary resources needed
to achieve the plan.

Blooms: Remember
8-62
23. A detailed plan that translates the company's objectives into financial terms, identifying the
resources and expenditures that will be required over the planning horizon is a
A. Strategic plan
B. Budget
C. Tactic
D. Long-term objective
This is the definition of a budget.

Blooms: Remember
Difficulty: 1 Easy
8-63
24. Which of the following is the backward-looking phase of the planning and control cycle?
A. Planning
C. Organizing
D. Control
This is the phase in which managers compare actual to budgeted results to determine whether
the objectives set during the planning stage were met, and take corrective action where
necessary.

Blooms: Remember
Difficulty: 1 Easy
25. ____________ are the specific actions managers use to achieve their objectives.
A. Strategic plans
D. Tactics
This is the definition of tactics.

Blooms: Remember
Difficulty: 1 Easy
8-64
26. _____________ are the specific goals that managers want to achieve over a 5 to 10 year horizon.
A. Strategic plans
D. Tactics
This is the definition of long-term objectives.

Blooms: Remember
Difficulty: 1 Easy
Topic: The Planning and control cycle
27. A _____________ is the vision of what management wants the organization to achieve over the
long term.
A. Strategic plan
B. Long-term objective
C. Short-term objective
D. Tactic
This is the definition of a strategic plan.
8-65
Blooms: Remember
Difficulty: 1 Easy
28. Which of the following is not a benefit of budgeting?
A. It forces managers to look to the future
B. It plays an important role in communication within the organization
C. It serves an important role in motivating and rewarding employees
D. It builds organizational slack
Organizational slack is not a positive result of budgeting.

Blooms: Understand
Difficulty: 1 Easy
Topic: Benefits of budgeting
8-66
29. A top-down approach to budgeting is one that is
A. participative.
B. motivational.
C. imposed.
D. tight.
A top-down approach is one in which top management sets the budget and imposes it on
lower levels of the organization.

Blooms: Remember
Difficulty: 1 Easy
30. Participative budgeting is an approach to budgeting that
A. is top-down in nature.
B. allows top management to set the budget.
C. discourages budget slack.
D. is more likely to motivate people to work towards the organization's goals than a top-down
approach.
One of the major advantages of participative budgeting is that it is motivational.

Blooms: Remember
Difficulty: 1 Easy
8-67
31. Which of the following is not a way to reduce the dysfunctional behaviors associated with
budgeting?
A. Create budget slack.
B. Use different budgets for planning and for performance evaluation.
C. Use a continuous or rolling budget approach.
D. Use a zero-based budgeting approach.
Creating budget slack is a dysfunctional behavior associated with budgeting.

Blooms: Remember
Difficulty: 1 Easy
8-68
32. Which of the following statements about employee motivation is true?
A. A budget that is too easy to achieve is more likely to motivate than a budget that is too
difficult or that is tight but attainable.
B. A budget that is too difficult to achieve is more likely to motivate than a budget that is too
easy or that is tight but attainable.
C. A budget that is tight but attainable is more likely to motivate than a budget that is too easy
or too difficult to achieve.
D. Budgets are difficult to use for motivation.
Research suggests that budgets that are tight but attainable are more likely to motivate people
than budgets that are either too easy or too difficult to achieve.

Blooms: Understand
8-69
33. Which of the following is not a component of the master budget?
A. Operating budget
B. Budgeted income statement
C. Budgeted balance sheet
D. Statement of return on investment
The components of the operating budget, when combined, form the budgeted income
statement. Together with the financial budgets, which combine to form the budgeted balance
sheet, these comprise the master budget.

Blooms: Remember
Difficulty: 1 Easy
34. Which of the following is not included in the operating budget?
A. Budgeted balance sheet
B. Sales budget
C. Selling and administrative budget
D. Raw materials purchases budget
The budgeted balance sheet is a financial budget, not an operating budget.

Blooms: Remember
Difficulty: 1 Easy
8-70
35. The starting point for preparing the master budget is the
A. inventory policy.
B. sales budget.
C. production budget.
D. budgeted balance sheet.
The sales budget, an estimate of the number of units to be sold and total sales revenue, is the
basis for all the other components of the operating budget.

Blooms: Remember
Difficulty: 1 Easy
36. Which of the following budgets shows how many units will be produced each period?
A. Direct materials budget
B. Direct labor budget
C. Sales budget
D. Production budget
This is the purpose of the production budget.

Blooms: Remember
Difficulty: 1 Easy
8-71
37. A primary financial budget is the
A. Production budget.
B. Cash budget.
C. Inventory budget.
D. Selling and administrative budget.
The cash budget is a component of the financial budgets. All others listed are operating
budgets.

Blooms: Remember
Difficulty: 1 Easy
38. Which of the following sequences is correct?
A. Sales budget - production budget - direct materials budget - budgeted income statement
B. Budgeted income statement - direct materials budget - production budget - sales budget
C. Cash receipts budget - sales budget - production budget - budgeted income statement
D. Inventory budget - production budget - sales budget - selling and administrative budget
The sales budget is needed to prepare the production budget, which is needed to prepare the
direct materials budget, which is needed to prepare the budgeted income statement.

8-72
Blooms: Remember
Difficulty: 1 Easy
39. Which of the following is not a source that can be used in preparing the sales budget?
A. Prior sales.
B. The production budget.
C. Industry trends.
D. Marketing activities.
The sales department usually bases sales estimates on information such as prior sales, industry
trends, and marketing activities. The production budget is based on the sales budget.

Blooms: Remember
Difficulty: 1 Easy
Topic: Sales budget
8-73
40. Parker Corp expects to sell 4,000 units in October, and expects sales to increase 20% each
month thereafter. Sales price is expected to stay constant at $8 per unit. What are budgeted
revenues for the fourth quarter?
A. $32,000
B. $96,000
C. $115,200
D. $116,480
[(4,000) + (4,000 1.2) + (4,000 1.2 1.2)] $8.00 = $116,480.
AACSB: Analytic
Blooms: Apply
Topic: Sales budget
8-74
41. Budgeted production is calculated by
A. adding budgeted unit sales to budgeted beginning finished goods inventory, and
subtracting budgeted ending finished goods inventory.
B. adding budgeted unit sales to budgeted beginning work in process inventory, and
subtracting budgeted ending work in process inventory.
C. adding budgeted unit sales to budgeted ending finished goods inventory, and subtracting
budgeted beginning finished goods inventory.
D. adding budgeted unit sales to budgeted ending work in process inventory, and subtracting
budgeted beginning work in process inventory.
Budgeted production units = Budgeted unit sales + Budgeted ending finished goods inventory
- Budgeted beginning finished goods inventory.

Blooms: Remember
Difficulty: 1 Easy
42. If a company is planning to build inventory,
A. production should exceed sales.
B. sales should exceed production.
C. production should equal sales.
D. production should equal inventory.
To build inventory, production must be greater than sales.
8-75
Blooms: Understand
Difficulty: 1 Easy
43. Lea Company produces hand tools. Budgeted sales for March are 10,000 units. Beginning
finished goods inventory in March is budgeted to be 1,300 units, and ending finished goods
inventory is budgeted to be 1,400 units. How many units will be produced in March?
A. 9,900
B. 10,000
C. 10,100
D. 12,700
10,000 + 1,400 - 1,300 = 10,100.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
8-76
March 10,000 units, April 13,000, May 16,000 and June 21,000. Meadow Company's ending
finished goods inventory policy is 10% of the following month's sales. What is budgeted ending
finished goods inventory for May?
A. 1,000
B. 1,300
C. 1,600
D. 2,100
(10% 21,000) - 2,100.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
8-77
finished goods inventory policy is 10% of the following month's sales. March 1 inventory is
projected to be 1,400 units. How many units will be produced in March?
A. 10,000
B. 9,900
C. 13,000
D. 10,100
10,000 + 10% 13,000 - 1,400 = 9,900.
AACSB: Analytic
Blooms: Apply
8-78
finished goods inventory policy is 10% of the following month's sales. March 1 inventory is
projected to be 1,400 units. How many units will be produced in April?
A. 13,300
B. 15,900
C. 12,700
D. 13,000
13,000 + (10% 16,000) - (10% 13,000) = 13,300.
AACSB: Analytic
Blooms: Apply
8-79
follows: March 10,300 units, April 13,300, May 16,500, and June 21,800. Marlow Company's
ending finished goods inventory policy is 10% of the following month's sales. Meadow plans to
sell 16,000 units in May. How many units will be sold in April?
A. 12,380
B. 13,000
C. 13,570
D. 13,620
April sales + (16,000 10%) - (April sales 10%) = 13,300. So April sales 90% = 11,700, which
means April sales is 13,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-80
follows: March 10,300 units, April 13,300, May 16,500, and June 21,800. Marlow Company's
ending finished goods inventory policy is 10% of the following month's sales. Marlow plans to
sell 16,000 units in May. What is budgeted ending inventory for March?
A. 1,030
B. 1,300
C. 1,330
D. 1,650
April sales + (16,000 10%) - (April sales 10%) = 13,300. So April sales 90% = 11,700, which
means April sales is 13,000. March ending inventory is 10% 13,000 = 1,300, which is the
beginning inventory for April.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-81
49. The formula for budgeted raw materials purchases is
A. Budgeted production units + Ending raw materials inventory - Beginning raw materials
inventory.
B. Budgeted production units + Beginning raw materials inventory - Ending raw materials
inventory.
C. Materials needed for production + Ending raw materials inventory - Beginning raw materials
inventory.
D. Materials needed for production + Beginning raw materials inventory - Ending raw materials
inventory.
This is the formula for the raw materials purchases budget.

Blooms: Remember
Difficulty: 1 Easy
50. When calculating raw materials purchases, the starting point should be
A. actual materials purchases from the previous year.
B. budgeted sales.
D. budgeted cost of raw materials.
Raw materials to be purchased will be used in manufacturing the units to be produced.

8-82
Blooms: Remember
Difficulty: 1 Easy
51. Jeremy Inc. produces leather handbags. The production budget for the next four months is: July
meters of leather. Jeremy Inc.'s leather inventory policy is 30% of next month's production
needs. If the leather policy is met, what will the July 1 inventory be?
A. 750 square meters
D. 300 square meters
30% (5,000 0.5) = 750.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
8-83
52. Johnson Inc. produces leather handbags. Johnson Inc. estimates it will use 3,500 square meters
of leather in production in August, and 3,750 square meters of leather in production in
September. Johnson Inc.'s leather inventory policy is 30% of next month's production needs.
What will leather purchases be in August?
3,500 + (0.30 3,750) - (0.30 3,500) = 3,575.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
8-84
53. Jackson Inc. produces leather handbags. The production budget for the next four months is:
July 5,000 units, August 7,000, September 7,500, October 8,000. Each handbag requires 0.5
square meters of leather. Jackson Inc.'s leather inventory policy is 30% of next month's
production needs. On July 1 leather inventory was expected to be 1,000 square meters. What
will leather purchases be in August?
(7,000 0.5) + (7,500 0.5 30%) - (7,000 0.5 30%) = 3,575.
AACSB: Analytic
Blooms: Apply
8-85
production needs. On July 1 leather inventory was expected to be 1,000 square meters. What
will leather purchases be in July?
(5,000 0.5) + (7,000 0.5 30%) - 1,000 = 2,550.
AACSB: Analytic
Blooms: Apply
8-86
production needs. On July 1 leather inventory was expected to be 1,000 square meters. Leather
is expected to cost $5.00 per square meter in June, but go up to $6.00 per square meter in July.
What is the expected cost of leather purchases in July?
A. $13,800
B. $15,300
C. $16,200
D. $16,300
(5,000 0.5) + (7,000 0.5 30%) - 1,000 = 2,550 square meters to be purchased. 2,550
$6.00 = $15,300.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-87
56. Jared Inc. produces leather handbags. The sales budget for the next four months is: July 5,000
units, August 7,000, September 7,500, October 8,000. Each handbag requires 0.5 square meters
of leather. Jared Inc.'s finished goods inventory policy is 10% of next month's sales needs. Jared
Inc.'s leather inventory policy is 30% of next month's production needs. What will leather
purchases be in August?
Production in August is 7,000 + (7,500 10%) - (7,000 10%) = 7,050. Production in

September is 7,500 + (8,000 10%) - (7,500 10%) = 7,550. Leather purchases in August are
(7,050 0.50) + (7,550 0.50 30%) - (7,050 0.50 30%) = 3,600 square meters.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-88
57. Budgeted direct labor hours are calculated as
A. Budgeted production units Direct labor requirements per unit + Ending inventory -
Beginning inventory.
B. Budgeted production units Direct labor requirements per unit + Beginning inventory -
Ending inventory.
C. Budgeted production units Direct labor requirements per unit.
D. Budgeted sales units Direct labor requirements per unit.
This is the formula for budgeted direct labor hours.

Blooms: Remember
Difficulty: 1 Easy
58. When calculating the direct labor budget, the starting point should be
A. actual direct labor hours from the previous year.
B. budgeted sales.
D. budgeted cost of direct labor.
Direct labor will be used in manufacturing the units to be produced.

Blooms: Remember
Difficulty: 1 Easy
8-89
unskilled labor hours will be budgeted for August?
A. 7,000
B. 9,100
C. 15,400
D. 24,500
7,000 1.3 = 9,100 hours.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
8-90
total labor hours will be budgeted for September?
A. 7,500
B. 9,750
C. 16,500
D. 26,250
(7,500 1.3) + (7,500 2.2) = 26,250.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
8-91
unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How much
will be paid to skilled labor during the three months July through September?
A. $742,500
B. $643,500
C. $4,387,500
D. $292,500
(5,000 2.2 $15) + (7,000 2.2 $15) + (7,500 2.2 $15) = $643,500.
AACSB: Analytic
Blooms: Apply
8-92
unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). What will
be the total labor cost for the month of August?
A. $303,800
B. $231,000
C. $121,500
D. $161,000
(7,000 1.3 $8) + (7,000 2.2 $15) = $303,800.
AACSB: Analytic
Blooms: Apply
8-93
inventory policy is 10% of the following month's sales. Each handbag requires 1.3 hours of
unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). What will
be the total labor cost for the month of August?
A. $24,675
B. $225,680
C. $303,800
D. $305,970
Production = (7,000 + 10% 7,500) - (10% 7,000) = 7,050. Cost = (7,050 1.3 $8) + (7,050
2.2 $15) = $305,970.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-94
inventory policy is 10% of the following month's sales. Each handbag requires 1.3 hours of
unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How much
is total labor cost during the three months July through September?
A. $69,300
B. $327,670
C. $846,300
D. $859,320
Production = (5,000 + 7,000 + 7,500) + (10% 8,000) - (10% 5,000) = 19,800. Labor cost =
(19,800 1.3 $8) + (19,800 2.2 $15) = $859,320.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-95
65. Skylark has forecast production for the next three months as follows: July 4,900 units, August
6,600 units, September 7,500 units. Monthly manufacturing overhead is budgeted to be $17,000
plus $6 per unit produced. What is budgeted manufacturing overhead for July?
A. $29,400
B. $47,000
C. $46,400
D. $17,000
Budgeted manufacturing overhead is (4,900 $6) + $17,000 = $46,400.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
66. Skylark has forecast production for the next three months as follows: July 4,900 units, August
6,600 units, September 7,500 units. Monthly manufacturing overhead is budgeted to be $17,000
plus $6 per unit produced. What is budgeted manufacturing overhead for August?
A. $56,600
B. $17,000
C. $39,600
D. $62,000
Budgeted manufacturing overhead = (6,600 $6) + $17,000 = $56,600.
AACSB: Analytic
8-96
Blooms: Apply
Difficulty: 1 Easy
67. Larken has forecast sales for the next three months as follows: July 4,000 units, August 6,000
units, September 7,500 units. Larken's policy is to have an ending inventory of 40% of the next
month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly
manufacturing overhead is budgeted to be $17,000 plus $6 per unit produced. What is
budgeted manufacturing overhead for July?
A. $29,400
B. $41,000
C. $46,400
D. $17,000
Production for July is 4,000 + (40% 6,000) - 1,500 = 4,900. Budgeted manufacturing overhead
is (4,900 $6) + $17,000 = $46,400.
AACSB: Analytic
Blooms: Apply
Topic: Manufacturing overhead cost budget
8-97
68. Larken has forecast sales for the next three months as follows: July 4,000 units, August 6,000
units, September 7,500 units. Larken's policy is to have an ending inventory of 40% of the next
month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly
manufacturing overhead is budgeted to be $17,000 plus $6 per unit produced. What is

budgeted manufacturing overhead for August?
A. $56,600
B. $17,000
C. $53,000
D. $38,600
Production = 6,000 + (40% 7,500) - (40% 6,000) = 6,600. Budgeted manufacturing

overhead = (6,600 $6) + $17,000 = $56,600.
AACSB: Analytic
Blooms: Apply
8-98
69. Skybird has forecast sales for the next three months as follows: July 4,000 units, August 6,000
units, September 7,500 units. Skybird's policy is to have an ending inventory of 40% of the next
month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly costs are
budgeted as follows:
What is budgeted manufacturing overhead cost for July?
A. $32,000
B. $41,000
C. $46,400
D. $17,000
Production for July is 4,000 + (40% 6,000) - 1,500 = 4,900. Budgeted manufacturing overhead
is (4,900 $6) + $17,000 = $46,400.
AACSB: Analytic
Blooms: Apply
8-99
70. Pacific has forecast sales for the next three months as follows: July 4,000 units, August 6,000
units, September 7,500 units. Pacific's policy is to have an ending inventory of 40% of the next
month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly costs are
budgeted as follows:
What is budgeted manufacturing overhead cost for August?
A. $50,000
B. $47,000
C. $33,000
D. $32,000
Production = 6,000 + (40% 7,500) - (40% 6,000) = 6,600. Budgeted manufacturing

overhead = (6,600 $5) + $17,000 = $50,000.
AACSB: Analytic
Blooms: Apply
8-100
71. Budgeted cost of goods sold should include which of the following?
A. Raw materials and direct labor.
B. Raw materials, direct labor, and manufacturing overhead.
C. Raw materials, direct labor, manufacturing overhead, and selling expenses.
D. Raw materials, direct labor, manufacturing overhead, selling expenses, and administrative
expenses.
Budgeted cost of goods sold should reflect all costs required to manufacture the product
including raw materials, direct labor, and manufacturing overhead.

Blooms: Remember
Difficulty: 1 Easy
8-101
72. Harney, Inc. has prepared the following budgets for March. In March, budgeted production
equals budgeted sales, and raw materials inventory will stay constant.
A. $14,560
B. $24,960
C. $27,560
D. $37,960
$5,200 + $9,360 + $13,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
8-102
73. Atlantic, Inc. has prepared the following budgets for March. In March, budgeted production
equals budgeted sales of 1,000 units, and raw materials inventory will stay constant.
A. $16,800
B. $24,300
C. $31,800
D. $43,800
[($6.00 + $10.80 + $7.50) 1,000] + $7,500 = $31,800.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
8-103
74. Crystal, Inc. has prepared the following budgets for March. In March, budgeted production is
1,000 units, budgeted sales is 1,200 units, and raw materials inventory will stay constant.
A. $20,367
B. $21,200
C. $25,440
D. $35,040
($4.00 + $7.20 + $10.00) 1,200 = $25,440.
AACSB: Analytic
Blooms: Apply
8-104
75. Crystal, Inc. has prepared the following budgets for March. In March, budgeted production is
1,000 units, budgeted sales is 1,200 units, and raw materials inventory unit costs will stay
constant.
A. $30,551
B. $31,800
C. $36,660
D. $38,160
[($6.00 + $10.80 + $7.50) 1,200] + [($7,500/1,000) 1,200] = $38,160.
AACSB: Analytic
Blooms: Apply
8-105
76. Lemon, Inc. has prepared the following budgets for March. In March, budgeted production is
1,000 units, budgeted sales is 1,200 units, and raw materials inventory and unit costs will stay
constant.
A. $40,734
B. $42,400
C. $48,880
D. $50,880
($8,000 + $14,400 + $20,000)/1,000 = $42.40 per unit. $42.40 1,200 = $50,880.
AACSB: Analytic
Blooms: Apply
8-106
77. Which of the following would not be an example of a cost to include in a selling and
administrative expense budget?
A. Legal expenses
B. Accounting services
C. Fixed manufacturing overhead
D. Franchise fees
The selling and administrative expense budget should include all the costs related to selling the
product and managing the business, but not manufacturing costs.

Blooms: Remember
Difficulty: 1 Easy
8-107
78. Walnut has forecast sales for the next three months as follows: July 4,000 units, August 6,000
units, September 7,500 units. Walnut's policy is to have an ending inventory of 40% of the next
month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Selling and
administrative costs are budgeted to be $15,000 per month plus $5 per unit sold. What are
budgeted selling and administrative expenses for July?
A. $24,500
B. $39,500
C. $35,000
D. $30,500
(4,000 $5) + $15,000 = $35,000.
AACSB: Analytic
Blooms: Apply
8-108
79. Walnut has forecast sales for the next three months as follows: July 4,000 units, August 6,000
units, September 7,500 units. Walnut's policy is to have an ending inventory of 40% of the next
month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Selling and
administrative costs are budgeted to be $15,000 per month plus $5 per unit sold. What are
budgeted selling and administrative expenses for September?
A. $30,000
B. $67,500
C. $32,500
D. $52,500
(7,500 $5) + $15,000 = $52,500.
AACSB: Analytic
Blooms: Apply
8-109
80. The budgeted income statement is a combination of
A. All the operating budgets.
B. All the operating budgets plus the budgeted balance sheet.
C. The direct materials budget, the direct labor budget, and the manufacturing overhead
budget.
D. The production budget, the cost of goods sold budget, and the selling and administrative
expense budget.
The budgeted income statement combines all operating budgets.

Blooms: Apply
Learning Objective: 08-03h Budgeted income statement.
Topic: Budgeted income statement
81. The purpose of the cash budget is to
A. be used as a basis for the operating budgets.
B. provide external users with an estimate of future cash flows.
C. help managers plan ahead to make certain they will have enough cash on hand to meet
their operating needs.
D. summarize the cash flowing into and out of the business during the past period.
The cash budget helps managers plan ahead to make certain they will have enough cash on
hand to meet their operating needs.

8-110
Blooms: Remember
Difficulty: 1 Easy
Topic: Budgeted cash payments
82. The basic form of the cash budget is:
A. Budgeted cash collections - Budgeted cash payments +/- Cash borrowed or repaid =
Ending cash balance
B. Beginning cash balance + Budgeted cash collections - Budgeted cash payments +/- Cash
C. Beginning cash balance - Budgeted cash collections + Budgeted cash payments +/- Cash
D. Beginning cash balance + Budgeted cash collections - Budgeted cash payments = Cash
borrowed or repaid
This is the formula for the cash budget.

Blooms: Remember
Difficulty: 1 Easy
Topic: Budgeted cash payments
8-111
83. Which of the following is not a component of the cash budget?
C. Depreciation expense
D. Cash borrowed or repaid
Depreciation expense is a non-cash expense.

Blooms: Remember
Difficulty: 1 Easy
Topic: Cash budget
84. Which component of the cash budget is shown as a line item on the budgeted balance sheet?
C. Cash repaid
D. Ending cash balance
The ending cash balance is an asset that would be shown on the budgeted balance sheet.

Blooms: Remember
Difficulty: 1 Easy
8-112
Topic: Cash budget
$140,000 in May. The average cost of goods sold is 70% of sales. All sales are on made on
credit and sales are collected 60% in the month of sale, and 40% the month following. What are
budgeted cash receipts in March?
A. $131,000
B. $135,000
C. $94,500
D. $91,700
($135,000 60%) + ($125,000 40%) = $131,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Topic: Cash budget
8-113
$140,000 in May. The average cost of goods sold is 70% of sales. All sales are made on credit
and sales are collected 60% in the month of sale, and 40% the month following. What are
budgeted cash receipts in April?
A. $105,000
B. $141,000
C. $150,000
D. $144,000
($150,000 60%) + ($135,000 40%) = $144,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Topic: Cash budget
8-114
87. Dayton has forecast sales to be $205,000 in February, $270,000 in March, $290,000 in April, and
and sales are collected 50% in the month of sale, 30% the month following and the remainder
two months after the sale. What are budgeted cash receipts in May?
A. $267,000
B. $296,000
C. $161,250
D. $241,500
($310,000 50%) + ($290,000 30%) + ($270,000 20%) = $296,000.
AACSB: Analytic
Blooms: Apply
Topic: Cash budget
8-115
88. Blue has forecast sales to be $410,000 in February, $540,000 in March, $580,000 in April, and
two months after the sale. What are budgeted cash receipts in May?
A. $592,000
B. $620,000
C. $310,000
D. $483,334
($620,000 50%) + ($580,000 30%) + ($540,000 20%) = $592,000.
AACSB: Analytic
Blooms: Apply
Topic: Cash budget
8-116
89. Dane Inc. has forecast purchases on account to be $465,000 in March, $555,000 in April,
$630,000 in May, and $735,000 in June. Seventy percent of purchases are paid for in the month
of purchase, the remaining 30% are paid in the following month. What are budgeted cash
payments for April?
A. $528,000
B. $577,500
C. $388,500
D. $189,000
($555,000 70%) + ($465,000 30%) = $528,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Topic: Cash budget
8-117
90. Ivory Inc. has forecast purchases on account to be $310,000 in March, $370,000 in April,
of purchase, the remaining 30% are paid in the following month. What are budgeted cash
payments for June?
A. $441,000
B. $469,000
C. $343,000
D. $294,000
($490,000 70%) + ($420,000 30%) = $469,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Topic: Cash budget
8-118
91. Cedar Co. has forecast purchases to be $330,000 in June, $375,000 in July, $310,000 in August,
and $270,000 in September. Purchases average 30% paid in cash, 70% are on credit. Credit
purchases are paid 60% in the month of purchase, 30% during the month following, and 10%
the second month following the purchase. Cash disbursements in September would be
A. $113,400.
B. $204,750.
C. $261,450.
D. $285,750.
($270,000 30%) + ($270,000 70% 60%) + ($310,000 70% 30%) + ($375,000 70%
10%) = $285,750.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Topic: Cash budget
8-119
92. Arbor Co. has forecast sales to be $400,000 in May, $475,000 in June, $575,000 in July and
$700,000 in August. Forty percent of sales are cash, the remainder is on credit. Credit sales are
collected 60% in the month of sale, the remaining the following month. What are budgeted
cash collections for July?
A. $230,000
B. $334,000
C. $459,000
D. $551,000
($575,000 40%) + ($575,000 60% 60%) + ($475,000 60% 40%) = $551,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Topic: Cash budget
8-120
93. Ebony Co. has forecast sales to be $300,000 in May, $375,000 in June, $475,000 in July and
$600,000 in August. Forty percent of sales are cash, the remainder is on account. Credit sales
are partially collected in the month of sale, with all collections completed by the end of the
month following the sale. The August 31 accounts receivable is budgeted to be $108,000. What
are budgeted cash collections for July?
A. $389,500
B. $267,000
C. $457,000
D. $415,000
For August, $600,000 60% = $360,000 of sales are on account. $108,000/$360,000 = 30% of
credit sales are still not collected at the end of August, so 70% are collected in the month of
sale. For July, then, collections will be $475,000 40% = $190,000 in cash, plus ($475,000
60% 70%) + ($375,000 60% 30%) = $267,000 in credit collections, for a total of $457,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Topic: Cash budget
8-121
94. Which of the following budgets do not provide information needed for the budgeted balance
sheet?
A. Materials purchases budget
B. Production budget
C. Selling and administrative expense budget
D. Cash budget
The selling and administrative expense budget includes only expenses, which would not affect
the balance sheet.

Blooms: Understand
Topic: Budgeted balance sheet
8-122
95. Orchard has forecast sales to be $250,000 in February, $270,000 in March, $300,000 in April,
and $280,000 in May. The average cost of goods sold is 70% of sales. All sales are made on
credit and sales are collected 60% in the month of sale, and 40% the month following. What is
the budgeted Accounts Receivable balance on May 31?
A. $196,000
B. $117,600
C. $112,000
D. $168,000
$280,000 40% = $112,000.
AACSB: Analytic
Blooms: Apply
8-123
96. Boxwood Inc. has forecast purchases on account to be $620,000 in March, $740,000 in April,
of purchase, the remaining 30% are paid in the following month. What is the budgeted
Accounts Payable balance for June 30?
A. $588,000
B. $686,000
C. $294,000
D. $252,000
$980,000 30% = $294,000.
AACSB: Analytic
Blooms: Apply
8-124
97. Audrey has forecast sales to be $205,000 in February, $270,000 in March, $290,000 in April, and
two months after the sale. What is the budgeted Accounts Receivable balance on May 31?
A. $155,000
B. $213,000
C. $127,800
D. $186,000
$310,000 50% + $290,000 20% = $213,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
98. Which of the following budgets would not exist for a merchandising firm?
A. Sales budget
B. Purchases budget
C. Production budget
D. Selling and administrative expense budget
A merchandising firm does not produce the goods it sells, so it would not need a production
budget.
8-125
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-05 Prepare a merchandise purchases budget for a merchandising firm.
Topic: Budgeting in nonmanufacturing firms
99. Clare purchases a single product for $15 and sells it for $30. Forecasted sales for the next three
months are July 4,000 units, August 6,000 units, September 7,500 units. Clare's policy is to have
an ending inventory of 40% of the next month's sales needs on hand. July 1 inventory is
projected to be 1,500 units. What are budgeted purchases in units for August?
A. 6,600 units
B. 10,400 units
C. 5,400 units
D. 600 units
(6,000 60%) + (7,500 40%) = 6,600 units.
AACSB: Analytic
Blooms: Apply
8-126
100. Parsley Inc, a merchandising firm, has forecasted sales to be $125,000 in February, $135,000 in
March, $150,000 in April, and $140,000 in May. The average cost of goods sold is 60% of sales.
The merchandise inventory policy is to carry 50% of next month's sales needs. If actual February
1 inventory is $40,000, what will the cost of March purchases be?
A. $58,500
B. $142,500
C. $81,000
D. $85,500
($135,000 60%) + ($150,000 60% 50%) - ($135,000 60% 50%) = $85,500.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Essay Questions
8-127
101. Mango Place has forecast its sales for the coming months as follows:
The standard unit sells for $200, the deluxe unit sells for $350.
Required: Prepare a sales budget for each of the three months April through June as well as the
total for the quarter. Present the budget for each product as well as total sales.
Feedback: Preparation of the sales budget requires multiplying the number of units expected to
be sold each period by the budgeted sales price.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Topic: Sales budget
8-128
102. Edna Inc. has forecast its sales for the coming months as follows:
The standard model sells for $28, the economy model sells for $21, and the deluxe model sells
for $49.
Required: Prepare a sales budget for each of the three months July through September as well
as the total for the quarter. Present the budget for each product as well as total sales.
Feedback: Preparation of the sales budget requires multiplying the number of units expected to
be sold each period by the budgeted sales price.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Topic: Sales budget
8-129
103. Willow Products expects the following sales of its single product:
Willow Products desires an ending finished goods inventory to be equal to 30% of the next
month's sales needs. Actual March 1 inventory is projected to be 1,300 units.
Required: Prepare a production budget for Willow Products for as many months as is possible.
Feedback: Budgeted production units = Budgeted unit sales + Budgeted ending finished goods
inventory - Budgeted beginning finished goods inventory
AACSB: Analytic
Blooms: Apply
8-130
104. Heather Products expects the following sales of its single product:
Heather desires an ending finished goods inventory to be equal to 20% of the next month's
sales needs. Actual May 1 inventory will be 3,300 units.

Required: Prepare a production budget for Heather for as many months as is possible.
inventory - Budgeted beginning finished goods inventory.
AACSB: Analytic
Blooms: Apply
8-131
105. Wheat Inc. has forecast its sales for the coming months as follows:
Wheat maintains finished goods inventory equal to 20% of the next month's sales
requirements. April 1 inventories were 14 standard units and 10 deluxe.
AACSB: Analytic
Blooms: Apply
8-132
106. Cherry Inc. has forecast its sales for the coming months as follows:
Cherry maintains finished goods inventory equal to 40% of the next month's sales
requirements. April 1 inventories were 74 standard units and 72 deluxe.
AACSB: Analytic
Blooms: Apply
8-133
107. Gertrude Products expects the following sales of its single product:
Gertrude desires an ending finished goods inventory to be equal to 10% of the next month's
sales needs. July 1 inventory is projected to be 800 units. Each unit requires 5 pounds of
Chemical A and 14 pounds of Chemical B. July 1 materials inventory includes 8,600 pounds of
Chemical A and 76,000 pounds of Chemical B. Gertrude desires to maintain a Chemical A
inventory equal to 20% of next month's production needs and a Chemical B inventory equal to
100% of next month's production needs.
a. Prepare a production budget for Gertrude for as many months as is possible.

b. Prepare a raw materials purchases budget for both Chemical A and Chemical B for the
months of July through September.
8-134
inventory - Budgeted beginning finished goods inventory. Budgeted raw materials purchases =
Materials needed for budgeted production needs + Budgeted ending raw materials inventory -
Budgeted beginning raw materials inventory.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-135
108. Crest Products expects the following sales of its single product:
Crest desires an ending finished goods inventory to be equal to 30% of the next month's sales
needs. August 1 inventory is projected to be 7,800 units. Each finished unit requires 2 units of
component X and 11 units of component Z. August 1 materials inventory includes 5,000 units of
component X and 184,000 units of component Z. Crest desires to maintain a component X
inventory equal to 10% of next month's production needs and a component Z inventory equal
to 70% of next month's production needs.
a. Prepare a production budget for Crest for as many months as is possible.
b. Prepare a raw materials purchases budget for both Component X and Component Z for the
months of August through October.
8-136
inventory - Budgeted beginning finished goods inventory. Budgeted raw materials purchases =
Materials needed for budgeted production needs + Budgeted ending raw materials inventory -
Budgeted beginning raw materials inventory.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-137
109. Honeysuckle Inc. produces canvas bags. The production budget for the next four months is:
July 5,000 units, August 7,000, September 7,500, October 8,000. Each bag requires 2.6 hours of
unskilled labor (paid $8 per hour) and 4.4 hours of skilled labor (paid $15 per hour).
Required: Prepare a labor budget for the three months July through September. Provide the
labor requirements according to skill level in hours and in labor cost as well as in total. Provide
the budget monthly as well as a total for the quarter.
Feedback: Budgeted direct labor cost = Budgeted production Direct labor requirements per
unit Direct labor cost per hour.
AACSB: Analytic
Blooms: Apply
8-138
110. Maple Inc. produces wooden boxes. The production budget for the next four months is: July
15,000 units, August 17,000, September 17,500. Each box requires three skill levels: 1.0 hours of
unskilled labor (paid $8 per hour), 1.5 hours of semi-skilled labor (paid $10) and 2.0 hours of
skilled labor (paid $15 per hour).

Required: Prepare a labor budget for the three months July - September. Provide the labor
Feedback: Budgeted direct labor cost = Budgeted production Direct labor requirements per
unit Direct labor cost per hour.
AACSB: Analytic
Blooms: Apply
8-139
111. Sugar has forecast sales for the next three months as follows: July 4,000 units, August 6,000
units, September 7,500 units, and October 8,000 units. Sugar's policy is to have an ending
inventory of 40% of the next month's sales needs on hand. July 1 inventory is projected to be
1,500 units. Manufacturing overhead is budgeted to be $17,000 plus $5 per unit produced.
a. Prepare a production budget for Sugar for as many months as is possible.
b. Prepare a manufacturing overhead budget for the three months July - September. Be sure to
include a total for the quarter as well.
inventory - Budgeted beginning finished goods inventory. Budgeted manufacturing overhead =

Budgeted production Variable overhead rate + Budgeted fixed manufacturing overhead.
AACSB: Analytic
Blooms: Apply
8-140
112. Butler has forecast sales for the next three months as follows: July 14,000 units, August 16,000
units, September 17,500 units, October 18,000 units. Butler's policy is to have an ending
inventory of 20% of the next month's sales needs on hand. July 1 inventory is projected to be
2,500 units. Manufacturing overhead is budgeted to be $18,000 (depreciation $2,000,

supervision $7,000, factory lease $1,500, maintenance $4,000, training $3,500) plus $5 per unit
produced ($3 indirect materials, $2 utilities).
a. Prepare a production budget for Butler for as many months as is possible.

b. Prepare a manufacturing overhead budget for the three months July through September. Be
sure to include a total for the quarter as well.
inventory - Budgeted beginning finished goods inventory. Budgeted manufacturing overhead =
Budgeted production Variable overhead cost per unit + Budgeted fixed manufacturing
overhead.
AACSB: Analytic
Blooms: Apply
8-141
113. Bear Corp. sells its product for $120. Forecast sales are 1,200 units in October, 1,500 in
November, and 1,600 in December. Variable costs are based on sales, and consist of
commissions (7% of sales), advertising (3%) and shipping (5%). Fixed costs per month are
$4,000 sales salaries, $3,300 office salaries, $2,000 depreciation, $1,800 office rent, $750
insurance and $900 utilities.

Required: Prepare Bear Corp's selling and administrative expense budget for the period
October through December. Present monthly totals as well as a 3-month total.
Feedback: Budgeted variable selling and administrative expenses are calculated by multiplying
budgeted sales by the appropriate rate. Budgeted total selling and administrative expenses are
calculated by adding budgeted variable to budgeted fixed selling and administrative expenses.
AACSB: Analytic
Blooms: Apply
8-142
114. Rapid Corp. sells its product for $200. Forecast sales are 1,500 units in January, 1,800 in
February, and 1,600 in March. Variable costs are based on sales, and consist of commissions
(6% of sales), cooperative advertising (2%) and shipping (6%). Monthly fixed costs are $7,000
sales salaries, $6,500 office salaries, $2,500 depreciation, $1,800 office rent, $900 insurance and
$1,200 utilities.
a. Prepare Rapid's selling and administrative expense budget for the period January through
March. Present monthly totals as well as a 3-month total.
Feedback: Budgeted variable selling and administrative expenses are calculated by multiplying
budgeted sales by the appropriate rate. Budgeted total selling and administrative expenses are
calculated by adding budgeted variable to budgeted fixed selling and administrative expenses.
AACSB: Analytic
Blooms: Apply
8-143
115. Meredith Company has budgeted sales for the upcoming months as follows:
Forty percent of the sales are credit sales, the remainder are cash sales. Credit sales are
a. Compute Meredith Company's cash receipts for June.

b. Compute Meredith Company's cash receipts for July.
c. Compute Meredith Company's cash receipts for August.
a. $384,640 = ($392,000 .60) + ($392,000 .40 .50) + ($372,000 .40 .40) + ($360,000
.40 .08)
b. $404,224 = ($412,000 .60) + ($412,000 .40 .50) + ($392,000 .40 .40) + ($372,000
.40 .08)
c. $398,464 = ($400,000 .60) + ($400,000 .40 .50) + ($412,000 .40 .40) + ($392,000
.40 .08)
Feedback: Cash collections for a month are calculated by multiplying sales revenue for that
month by the percentage collected in cash, and also by the percentage of credit sales collected
in the month of sale, and adding in the amount to be collected in cash from sales made in prior
months.
AACSB: Analytic
8-144
Blooms: Apply
Topic: Cash budget
8-145
116. Spencer Company has budgeted sales for the upcoming months as follows:
Seventy percent of the sales are credit sales, the remainder are cash sales. Credit sales are
a. Compute Spencer's cash receipts for April.
b. Compute Spencer's cash receipts for May.
c. Compute the accounts receivable balance for May 31.
a. $631,350 = ($645,000 .30) + ($645,000 .70 .40) + ($615,000 .70 .50) + ($600,000
.70 .10)
b. $657,400 = ($670,000 .30) + ($670,000 .70 .40) + ($645,000 .70 .50) + ($615,000
.70 .10)
c. $326,550 = May ($670,000 .70 .60) + April ($645,000 .70 .10)
months. The accounts receivable balance in a month is calculated as the sales revenue earned
to date that has not yet been collected in cash.
AACSB: Analytic
Blooms: Apply
8-146
Topic: Cash budget
117. Blair is a retailer of assorted baby products. The sales forecast for the coming months is:
All sales are credit sales. The cash collection pattern is 20% in the month of sale, 70% in the
month following the sale, and the remainder in the second month following the sale. Accounts
receivable on June 1 were $177,500.
b. $208,000 = July ($240,000) 10% + August ($230,000 80%) = $24,000 + $184,000
AACSB: Analytic
8-147
Blooms: Apply
Topic: Cash budget
8-148
118. Portia is a retailer of scrapbooking products. The sales forecast for the coming months is:
Portia's sales are all credit. The collection pattern is 60% in the month of sale, 35% the following
month and the remainder in the second month following the sale. Accounts receivable on April
1 were $122,500.
b. $157,500 = July ($350,000 5%) + August ($350,000 40%) = $17,500 + $140,000
AACSB: Analytic
Blooms: Apply
8-149
Topic: Cash budget
119. Young is a retailer of assorted baby products. The sales forecast for the coming months is:
Young's cost of sales averages 60% of revenues. The inventory policy is to carry 30% of next
month's sales needs. April 1 inventory will be as expected under the policy. Young pays for
purchases 80% in the month of purchase and 20% the following month. Accounts payable on
April 1 is $22,400.

Feedback: Budgeted merchandise purchases = Budgeted sales + Budgeted ending finished
goods inventory - Budgeted beginning finished goods inventory. Budgeted cash payments are
calculated by multiplying purchases for the month by the percentage paid in cash, and adding
in the amounts to be paid in the current month from purchases made in prior months.
AACSB: Analytic
8-150
Blooms: Apply
Difficulty: 3 Hard
Topic: Cash budget
8-151
120. Carmen is a retailer of scrapbooking products. The sales forecast for the coming months is:
Carmen's sales are 70% cash and 30% store credit. The credit sales are collected 60% in the
month of sale, the remainder the following month. Accounts receivable on April 1 are $32,000.
Carmen's cost of sales averages 65% of revenues. The inventory policy is to carry 40% of next
month's sales needs. April 1 inventory will be as expected under the policy. Carmen pays for
purchases 30% in the month of purchase and 70% the following month. Accounts payable on
April 1 is $125,000.

c. Prepare a cash receipts budget for April through June.
8-152
Feedback: Budgeted merchandise purchases = Budgeted sales + Budgeted ending finished
goods inventory - Budgeted beginning finished goods inventory. Budgeted cash payments are
calculated by multiplying purchases for the month by the percentage paid in cash, and adding
in the amounts to be paid in the current month from purchases made in prior months. Cash
collections for a month are calculated by multiplying sales revenue for that month by the
percentage collected in cash, and also by the percentage of credit sales collected in the month
of sale, and adding in the amount to be collected in cash from sales made in prior months.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Topic: Cash budget
8-153

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Chapter 08

True / False Questions

1. Control is forward looking while planning is backward looking.

2. The budget translates a company's objectives into financial terms.

addition to the number of units to be sold.

16. The direct labor budget is based on budgeted sales levels.

Multiple Choice Questions

28. Which of the following is not a benefit of budgeting?

A. It forces managers to look to the future

B. It plays an important role in communication within the organization

C. It serves an important role in motivating and rewarding employees

D. It builds organizational slack

29. A top-down approach to budgeting is one that is

B. allows top management to set the budget.

C. discourages budget slack.

A. Create budget slack.

B. Use different budgets for planning and for performance evaluation.

C. Use a continuous or rolling budget approach.

D. Use a zero-based budgeting approach.

32. Which of the following statements about employee motivation is true?

too difficult to achieve.

D. Budgets are difficult to use for motivation.

B. Budgeted income statement

C. Budgeted balance sheet

D. Statement of return on investment

34. Which of the following is not included in the operating budget?

A. Budgeted balance sheet

C. Selling and administrative budget

D. Raw materials purchases budget

D. budgeted balance sheet.

A. Direct materials budget

B. Direct labor budget

D. Selling and administrative budget.

38. Which of the following sequences is correct?

B. The production budget.

41. Budgeted production is calculated by

budgeted ending work in process inventory.

budgeted beginning finished goods inventory.

42. If a company is planning to build inventory,

A. production should exceed sales.

B. sales should exceed production.

C. production should equal sales.

D. production should equal inventory.

goods inventory for May?

1,400 units. How many units will be produced in March?

A. actual materials purchases from the previous year.

D. budgeted cost of raw materials.

A. 750 square meters

B. 1,050 square meters

C. 1,825 square meters

D. 300 square meters

A. 3,425 square meters

B. 3,500 square meters

C. 3,575 square meters

D. 4,625 square meters

A. 7,150 square meters

B. 3,575 square meters

C. 7,075 square meters

D. 3,425 square meters

A. 2,300 square meters

B. 2,550 square meters

C. 2,700 square meters

D. 3,575 square meters

cost of leather purchases in July?