Chapter 9-Profit Planning: Multiple Choice

Chapter 9—Profit Planning
MULTIPLE CHOICE
1. Which of the following is an advantage of budgeting?

a. Forces managers to plan.
b. Provides information useful for control.
c. Provides information for improved decision making.
d. Improves communication.
e. All of these.
ANS: E PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 9-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Budget Preparation | ACBSP: APC-36-Budgeting and
Responsibility KEY: Bloom's: Knowledge NOT: 1 min.
2. Which of the following is a use of budgets for control?

a. Plans can be made for the future.
b. If conditions change between the formation of the budget and the current time, budgets
can be quickly adapted.
c. Budgets set a standard against which results can be compared.
d. Communication is improved.
e. All of these.
ANS: C PTS: 1 DIF: Difficulty: Moderate
3. Which of the following budgets can be used for control?

a. Production budget
b. Cash budget
c. Budgeted income statement
d. Selling and administrative expense budget
e. All of these
ANS: E PTS: 1 DIF: Difficulty: Moderate
4. In a (n) ____, as one month expires, an additional month in the future is added to the budget so that the
company always has a 12-month plan on hand.
a. continuous budget
b. financial budget
c. operational budget
d. yearly budget
e. master budget
ANS: A PTS: 1 DIF: Difficulty: Easy
5. The ____ is the person responsible for directing and coordinating the organization's overall budget
process.
a. budget master
b. controller
c. chief financial planner
d. budget director
e. chief accountant
ANS: D PTS: 1 DIF: Difficulty: Easy
6. Looking backward to determine what actually happened and comparing it with the previously planned
outcomes is
a. control.
b. communicating.
c. decision making.
d. strategic planning.
e. budgeting.
7. Budgets are
a. key components of planning.
b. financial plans for the future.
c. an identifier of objectives and the actions needed to achieve them.
d. used for communication and coordination.
e. all of these.
8. The master budget is

a. the selective financial plan for the organization as a whole.
b. typically for a 1-year period corresponding to the fiscal year of the company.
c. broken down into daily and weekly budgets.
d. used for misinformation and coordination.
e. all of these.
ANS: B PTS: 1 DIF: Difficulty: Easy
9. Which of the following is not true?

a. The sales forecast is done before the sales budget.
b. The master budget is the comprehensive plan for the organization as a whole.
c. The production budget is prepared in units and dollars.
d. One approach to forecasting sales is the bottom-up approach.
e. In creating the sales forecast, outside factors such as the state of the economy, should be
considered.
ANS: C PTS: 1 DIF: Difficulty: Easy
10. The first step in creating the master budget is the creation of the
a. production budget.
b. direct labor budget.
c. cash budget.
d. sales budget.
e. budgeted income statement.
11. The budget that describes how many units must be produced in order to meet sales needs and ending
inventory objectives is the
b. direct materials purchases budget.
c. cash budget.
d. budgeted income statement.
e. none of these.
12. Direct materials needed for production is calculated by

a. multiplying units to be produced by direct materials per unit.
b. subtracting units to be produced from direct materials per unit.
c. dividing units to be produced by direct materials per unit.
d. adding units to be produced to direct materials per unit.
e. subtracting direct materials per unit from units to be produced.
ANS: A PTS: 1 DIF: Difficulty: Moderate
13. In preparing the overhead budget, many companies use

a. activity-based costing.
b. multiple drivers for a simple budget.
c. participative costing.
d. a unit-based driver such as direct labor hours.
e. none of these.
14. Which of the following statements is true?

a. The overhead budget is typically composed of variable overhead and fixed overhead.
b. The direct labor budget uses an average wage rate for direct labor.
c. The production budget is not converted into dollars.
d. The sales budget includes both units and dollars.
e. All of these.
15. The ending finished goods inventory budget supplies information needed for the
a. sales budget.
b. cash budget.
c. budgeted income statement.
d. cost of goods sold budget.
e. all of these.
16. Which of the following budgets are needed to calculate a budgeted unit cost?
a. Direct materials purchases budget
b. Direct labor budget
c. Overhead budget
d. Direct materials purchases budget and overhead budget
e. Direct materials purchases budget, direct labor budget, and overhead budget
17. The selling and administrative expenses budget includes

a. cost of goods sold.
b. overhead.
c. fixed production expense.
d. variable cost of selling.
e. all of these.
18. Budgeted operating income includes

a. budgeted interest expense.
b. budgeted income taxes.
c. budgeted cost of goods sold.
d. budgeted net income.
e. none of these.
19. Depreciation expense on sales equipment appears in a separate line on which of the following budgets?
a. Cash budget
b. Selling and administrative expenses budget
c. Direct labor budget
d. Production budget
e. Overhead budget
20. Rodriquez Company budgeted the following sales in units:
January 30,000
February 20,000
March 40,000
Rodriquez's policy is to have 20% of the following month's sales in inventory. On January 1, inventory
equaled 7,500 units. February production in units is
a. 20,000.
b. 28,000.
c. 40,000.
d. 26,500.
e. 24,000.
ANS: E
January February
Sales 30,000 20,000
+ Desired EI 4,000 8,000
Units needed 34,000 28,000
 Beginning inventory 7,500 4,000
Production 26,500 24,000
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

NAT: BUSPROG: Analytic
Responsibility KEY: Bloom's: Application NOT: 3 min.
21. A company has had stable sales and production for several years. Next year, sales are expected to
increase by at least 50%. Assuming that the company maintains its policy for desired ending
inventories of finished product and direct materials purchases, what will be the likely effect on the
desired ending inventory of finished product?
a. It will increase
b. It will decrease
c. It will stay the same
d. It will be twice the size of the desired ending inventory of raw materials
e. None of these
Responsibility KEY: Bloom's: Comprehension NOT: 1 min.
22. A company expects the following sales for the coming year:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Units 40,000 30,000 60,000 80,000
Average selling price $5 $5 $5 $6
Budgeted sales revenue for the year is

a. $1,050,000
b. $1,260,000
c. $1,155,000
d. $1,130,000
e. it is impossible to tell from this information
ANS: D
Budgeted sales = (40,000 + 30,000 + 60,000)($5) + (80,000)($6) = $1,130,000

23. A company provided the following information on sales for the coming year:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Units 40,000 40,000 30,000 80,000
Average selling price $5 $5 $5 $6
Assuming that the beginning inventory is 3,000 units, and that the company policy is to have 25% of
the next quarter's sales in ending inventory, which quarter will have the lowest production?
a. Quarter 4
b. Quarter 3
c. Quarter 2
d. Quarter 1
e. All quarters have the same production
ANS: C
Production budget:
Qtr 1 Qtr 2 Qtr 3 Qtr 4
Sales 40,000 40,000 30,000 80,000
+ Desired ending inventory 10,000 7,500 20,000
Units needed 50,000 47,500 50,000
 Beginning inventory  3,000  10,000  7,500
Production 47,000 37,500 42,500
Since Quarter 4 must have production that is at least 60,000 (80,000 + some level of desired ending
inventory  20,000), Quarter 2 is the lowest.
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

24. Belant Company budgeted 200,000 units of production for June, 210,000 units for July and 300,000
units for August. Each unit requires 0.25 direct labor hours. How many direct labor hours are budgeted
for August?
a. 50,000
b. 5,000
c. 75,000
d. 52,500
e. 300,000
ANS: C
Direct labor hours = 0.25  300,000 = 75,000

25. In budgeting direct labor hours for the coming year, it is important to
a. multiply production in units by the direct labor hours per unit.
b. divide production in units by the direct labor hours per unit.
c. subtract production in units from the direct labor hours per unit.
d. subtract direct labor hours per unit from production in units.
e. multiply production in units by the labor wage rate.
26. Galvern Company provided the following data for July:
Direct materials $50,000

Direct labor $25,000
Overhead $90,000
Beginning finished goods $15,000
Ending finished goods $34,000
Production in units 10,000
What is the cost of goods sold?

a. $165,000
b. $146,000
c. $214,000
d. $184,000
e. $75,000
ANS: B
Cost of goods manufactured = $50,000 + $25,000 + $90,000 = $165,000
Cost of goods sold = $165,000 + $15,000  $34,000 = $146,000

27. A production budget is most important for which of the following?

a. retail stores
b. manufacturing firms
c. not-for-profit agencies
d. local government agencies
e. all of these
ANS: B PTS: 1 DIF: Difficulty: Moderate
28. A company requires 200 pounds of plastic to meet the production needs of a product. It currently has
20 pounds of plastic inventory. The desired ending inventory of plastic is 60 pounds. How many
pounds of plastic should be budgeted for purchasing during the coming period?
a. 200 pounds
b. 240 pounds
c. 260 pounds
d. 280 pounds
e. 160 pounds
ANS: B
Pounds of plastic to purchase = 200 + 60  20 = 240

29. A company plans on selling 400 units. The selling price per unit is $5. There are 40 units in beginning
inventory, and the company would like to have 75 units in ending inventory. How many units should
be produced for the coming period?
a. 435
b. 400
c. 365
d. 2,000
e. 2,035
ANS: A
Units to produce = 400 + 75  40 = 435

30. A company has provided a sales budget for the next four months. It bases its production budget on the
sales budget, and has a policy that each month's ending inventory of finished product must be equal to
25% of the following month's sales needs. The direct materials purchases budget is based on the
production budget. The company's policy for each month's ending inventory of raw materials is that
they must be equal to 10% of the following month's production needs for raw materials. Given this
information, the company can prepare direct materials purchases budgets for how many months?
a. One
b. Two
c. Three
d. Four
e. Five
ANS: B
Four months of sales budgets allows the calculation of three months of production budgets. The fourth
month is impossible without the fifth month of sales to figure the desired ending inventory for month
four. Similarly, three months of production budgets allows calculation for two months worth of direct
materials purchases budgets. The third month is impossible without the fourth month of production to
figure the desired ending inventory for month three.
PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 9-2

31. Which of the following is the most common starting point in the information gathering process for
budgeting?
a. The personnel forecast
b. The sales forecast
c. The production forecast
d. The projected income statement
32. Which of the following is an operating budget?

a. Budgeted statement of cash flows
b. Capital expenditures budget
d. Cash budget
33. What is the formula used to compute the units to be produced?

a. Units produced = Units sold
b. Units produced = Units sold + Units in beginning inventory + Units in ending inventory
c. Units produced = Units sold + Units in beginning inventory  Units in ending inventory
d. Units Produced = Units sold  Units in beginning inventory + Units in ending inventory
ANS: D PTS: 1 DIF: Difficulty: Moderate

34. Candace Company produces and sells pillows. It expects to sell 10,000 pillows in the year 2015 and
had 1,000 pillows in finished goods inventory at the end of 2014. Candace would like to complete
operations in the year 2015 with at least 1,250 completed pillows in inventory. There is no ending
work-in-process inventory. The pillows sell for $5 each. How many pillows would be produced in the
year 2015?
a. 10,000 pillows
b. 11,000 pillows
c. 11,250 pillows
d. 10,250 pillows
ANS: D
SUPPORTING CALCULATIONS:
10,000 + 1,250  1,000 = 10,250 pillows

35. Bright Lamp Company manufactures lamps. The estimated number of lamp sales for the last three
months of 2014 are as follows:
Month Sales
October 10,000
November 14,000
December 13,000
Finished goods inventory at the end of September was 3,000 units. Ending finished goods inventory is
budgeted to equal 25% of the next month's sales. Bright Lamp expects to sell the lamps for $25 each.
January 2015 sales are projected at 16,000 lamps. How many lamps should be produced in November?
a. 11,000 lamps
b. 10,500 lamps
c. 14,000 lamps
d. 13,750 lamps
ANS: D
(13,000  .25) + 14,000  (14,000  .25) = 13,750 lamps

36. In going from the sales budget to the production budget, adjustments to the sales budget need to be
made for
a. finished goods inventories.
b. cash receipts.
c. factory overhead costs.
d. selling expenses.
37. Watson Corporation manufactures boxes. The estimated numbers of boxes sold for the first three
months of 2014 are as follows:
Month Sales
January 3,000
February 4,200
March 3,900
Finished goods inventory at the end of December was 600 units. Ending finished goods inventory is
equal to 20% of the next month's sales. Watson Corporation expects to sell the boxes for $5 each. April
2014 sales are projected at 4,500 boxes. How many boxes should be produced in February?
a. 4,140 boxes
b. 4,200 boxes
c. 4,260 boxes
d. 3,900 boxes
ANS: A
4,200 + (0.20  3,900)  (0.20  4,200) = 4,140 boxes

Figure 9-1.
Saphire Company budgeted the following production in units for the second quarter of the year:
April 45,000
May 38,000
June 42,000
Each unit requires four pounds of raw material. Saphire's policy is to have 30% of the following
month's production needs for materials in inventory. This policy was met in March.
38. Refer to Figure 9-1. Raw materials purchases budgeted for May in pounds equal:
a. 156,800
b. 202,400
c. 45,600
d. 171,600
e. 225,600
ANS: A
April May June
Production 45,000 38,000 42,000
x materials per unit x4 x4 x4
Raw materials for production 180,000 152,000 168,000
Desired ending inventory 45,600 50,400
Raw materials needed 225,600 202,400
Less: beginning inventory (54,000) (45,600)
Purchases 171,600 156,800

39. Refer to Figure 9-1. Desired ending inventory for April in pounds equals:
a. 45,600
b. 11,400
c. 10.500
d. 38,300
e. 54,000
ANS: A
April May June
Production 45,000 38,000 42,000
x materials per unit x4 x4 x4
Raw materials for production 180,000 152,000 168,000
Raw materials needed 225,600 202,400
Purchases 171,600 156,800

Figure 9-2.
Kenner Company produces two products: SR200 and TX500. Budgeted sales for four months are as
follows:
SR200 TX500
May 8,000 20,000
June 13,000 32,000
July 11,000 39,000
August 18,000 46,000
Kenner's ending inventory policy is that SR200 should have 15% of next month's sales in ending
inventory and TX500 should have 40% of next month's sales in ending inventory. On May 1, there
were 1,200 units of SR200 and 9,000 units of TX500.
TX500 requires 6 units of component A. (SR200 does not use component A.) There were 30,000 units
of component A in inventory on May 1. Kenner wants to have 20% of the following month's
production needs in inventory for Component A.
40. Refer to Figure 9-2. How many units of TX500 are budgeted for production in June?
a. 47,600
b. 34,800
c. 32,000
d. 45,000
e. 12,800
ANS: B
May June
Sales 20,000 32,000

41. Refer to Figure 9-2. What is the budgeted production of SR200 for May in units?
a. 8,750
b. 9,950
c. 8,000
d. 1,200
e. 10,500
ANS: A
May June
Sales 8,000 13,000

42. Refer to Figure 9-2. What is the budgeted amount of component A to be purchased in May?
a. 41,760
b. 142,800
c. 154,560
d. 164,600
e. 66,600
ANS: C
May June
x units of component A x6 x6
Component A needed for production 142,800 208,800
Desired ending inventory 41,760
Units needed 184,560
Less: beginning inventory (30,000)
Production 154,560

43. Refer to Figure 9-2. What is the desired ending inventory of component A for May?
a. 86,000
b. 180,000
c. 58,500
d. 41,760
e. 30,000
ANS: D
May June
x units of component A x6 x6
Component A needed for production 142,800 208,800
Desired ending inventory* 41,760
Production 154,560
*208,800 x 20% = 41,760

Figure 9-3.
Zion Company manufactures sneakers. Production of their new sneaker for the coming three months is
budgeted as follows:
August 26,000
September 48,000
October 31,000
Each sneaker requires 1.5 hours of direct labor time. Direct labor wages average $13 per hour.
Monthly overhead averages $8 per direct labor hour plus fixed overhead of $4,300.
44. Refer to Figure 9-3. What is the direct labor cost budgeted for September?
a. $820,000
b. $750,000
c. $140,000
d. $936,000
e. $625,000
ANS: D
September direct labor cost = (48,000)(1.5)($13) = $936,000

45. Refer to Figure 9-3. What is the total overhead budgeted for the month of September?
a. $680,000
b. $580,300
c. $142,100
d. $460,000
e. $362,100
ANS: B
Budgeted overhead = $8(48,000)(1.5) + $4,300 = $580,300

Figure 9-4.
Bickford Company plans to sell 135,000 units in November and 180,000 units in December. Bickford's
policy is that 10% of the following month's sales must be in ending inventory. On November 1, there
were 14,000 units in inventory.
It takes 30 minutes of direct labor time to make one unit. Direct labor wages average $17 per hour.
Variable overhead is applied at the rate of $5 per direct labor hour. Fixed overhead is budgeted at
$56,500 per month.
46. Refer to Figure 9-4. What is the direct labor cost budgeted for November?
a. $1,181,500
b. $950,600
c. $707,600
d. $2,152,000
e. $622,800
ANS: A
November production = 135,000 + (0.10)(180,000)  14,000 = 139,000 units
Direct labor hours = 0.50 hours per unit x 139,000 = 69,500 hours
Direct labor cost = $17 x 69,500 = $1,181,500

47. Refer to Figure 9-4. What is the budgeted production in units for November?
a. 100,000
b. 140,000
c. 121,000
d. 125,600
e. 139,000
ANS: E

48. Refer to Figure 9-4. What is the budgeted overhead for November?
a. $444,500
b. $280,700
c. $404,000
d. $348,420
e. $192,920
ANS: C
Direct labor hours = 0.50 hours per unit x 139,000 = 69,500 hours
Budgeted overhead for November = ($5 x 69,500) + 56,500 = $404,000

Figure 9-5.
Sully Company provided the following information for last month.
Production in units 3,000

Direct materials cost $7,000
Direct labor cost $10,000
Overhead cost $9,600
Sales commission per unit sold $ 4
Price per unit sold $29
Fixed selling and administrative expense $7,000
There were no beginning and ending inventories.
49. Refer to Figure 9-5. What is Sully's cost of goods sold per unit?
a. $12.60
b. $8.87
c. $10.00
d. $12.50
e. $16.60
ANS: B
Direct materials cost $7,000

Direct labor cost $10,000
Overhead cost $9,600
Total manufacturing costs $26,600
units produced 3,000
Cost of goods sold per unit $8.87

50. Refer to Figure 9-5. What is gross margin for Sully Company last month?
a. $54,000
b. $64,600
c. $32,400
d. $47,400
e. $60,400
ANS: E
Sales ($29 x 3,000) $87,000
Cost of goods sold ($7,000 + 10,000 + 9,600) 26,600
Gross margin $60,400
Less: commission ($4 x 3,000) (12,000)
Less: fixed selling and admin. expense (7,000)
Operating income $41,400

51. Refer to Figure 9-5. What is operating income for Sully Company for last month?
a. $24,000
b. $34,600
c. $49,400
d. $27,400
e. $41,400
ANS: E
Sales ($29 x 3,000) $87,000
Cost of goods sold ($7,000 + 10,000 + 9,600) 26,600
Gross margin $60,400
Less: commission ($4 x 3,000) (12,000)
Less: fixed selling and admin. expense (7,000)
Operating income $41,400

Figure 9-10.
Connor Company produces speaker systems for cars. Estimated sales (in units) in January are 40,000;
in February 37,000; and in March 34,000. Each unit is priced at $60. Connor wants to have 35% of the
following month's sales in ending inventory. That requirement was met on January 1.
Each speaker system requires 3 boxes and 15 yards of wire. Boxes cost $4 each and wire is $0.60 per
yard. Connor wants to have 20% of the following month's production needs in ending raw materials
inventory. On January 1, Connor had 24,000 boxes and 100,000 yards of wire in inventory.
52. Refer to Figure 9-10. What is Connor's expected sales revenue for February?
a. $2,020,000
b. $1,900,000
c. $60
d. $1,125,000
e. $2,220,000
ANS: E
February revenue = 37,000  $60 = $2,220,000

53. Refer to Figure 9-10. How many units does Connor expect to produce in February?
a. 25,700
b. 30,500
c. 23,750
d. 35,950
e. 25,000
ANS: D
January February
Sales 40,000 37,000
Desired ending inventory (35%) 12,950 11,900

54. Refer to Figure 9-10. How many boxes does Connor expect to purchase in January?
a. 159,650
b. 114,420
c. 214,550
d. 148,500
e. 138,420
ANS: B
January February
x raw materials per unit x3 x3
Raw materials for production 116,850 107,850
Purchases in units 114,420

Figure 9-11.
Pallen Company estimated sales of 11,000 units at $40 each, unit cost of goods sold of $22, marketing
expense of $65,000 and a 10% commission on each unit sold. Administrative expense is budgeted at
$50,000.
55. Refer to Figure 9-11. What is total selling expense?

a. $65,000
b. $44,000
c. $84,000
d. $109,000
e. $39,000
ANS: D
Total selling expense = $109,000
[109,000 = $65,000 + ($40  0.10  11,000)]

56. Refer to Figure 9-11. What is Pallen's budgeted operating income?

a. $281,000
b. $39,000
c. $198,000
d. $83,000
e. $440,000
ANS: B
Budgeted operating income = $39,000
[39,000 = ($40  11,000)  ($22  11,000)  $109,000*  $50,000]
*[109,000 = $65,000 + ($40  0.10  11,000)] = Budgeted Marketing Expenses

57. Budgets are prepared in which of the following orders?

a. production budget, sales budget, direct labor budget
b. production budget, cost of goods sold budget, direct labor budget
c. sales budget, cash budget, production budget
d. sales budget, production budget, direct materials purchases budget
e. production budget, cash budget, direct materials purchases budget
58. Suppose that a company has the following accounts receivable collection pattern:
Paid in the month of sale 30%

Paid in the month following sale 70%
All sales are on credit. If credit sales for January and February are $200,000 and $100,000
respectively, the cash collection for February is
a. $210,000
b. $100,000
c. $130,000
d. $140,000
e. $170,000
ANS: E
Cash from January sales (0.7)($200,000) $140,000
Cash from February sales (0.3)($100,000) 30,000
Cash received in February $170,000

59. Which of the following statements is true?

a. The production budget is the first budget to be prepared in the master budget.
b. The cash budget is prepared before the direct materials purchases budget.
c. The budgeted balance sheet is prepared after the cash budget.
d. Service firms need not prepare a master budget.
e. The cost of goods sold budget is prepared before the direct labor and overhead budgets.
ANS: C PTS: 1 DIF: Difficulty: Moderate
Figure 9-9.
Yummy Jams Company produces a line of jams. Yummy's estimated production of jars of jam for the
fourth quarter of the year is as follows:
October 75,000
November 98,000
December 63,000
Each jar requires half a pound of berries. Yummy prefers to buy the freshest berries, so its policy is to
have just 3% of the following month's production needs in ending inventory. On October 1, the
company had 1,125 pounds of berries in inventory. Yummy's pays $0.60 per pound of berries. It buys
all berries on account and typically pays 40% of a month's purchases in that month, and the remaining
60% the following month.
60. Refer to Figure 9-9. How many pounds of berries will be purchased during the month of November?
a. 23,375
b. 48,475
c. 39,925
d. 41,950
e. 49,945
ANS: B
October November December
Production 75,000 98,000 63,000
x .50 lbs x .50 x .50 x .50
Berries needed for production 37,500 49,000 31,500
Desired ending inventory 1,470 945
Berries needed 38,970 49,945
Berries purchases in pounds 37,845 48,475

61. Refer to Figure 9-9. What is the dollar cost of purchases for October?
a. $19,925
b. $22,707
c. $18,450
d. $23,300
e. $33,320
ANS: B
October
Production 75,000
x .50 lbs x .50
Berries needed for production 37,500
Berries needed 38,970
Berries purchases in pounds 37,845
x .60 per pound x .60
Total direct materials cost 22,707
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2 | LO: 9-3

62. Refer to Figure 9-9. How much cash is paid in November for berry purchases (rounded to the nearest
dollar)?
a. $25,258
b. $21,088
c. $28,900
d. $19,963
e. $32,212
ANS: A
Cash paid in November for purchases:

October purchases $22,707 x .60 = 13,624.20
November purchases $29,085 x .40 = 11,634
Total $25,258.20

63. Bank loan officers would find which of the following budgets to be one of the most important in
determining whether or not to give a company a loan?
a. Sales budget
b. Production budget
d. Budgeted balance sheet
e. Cash budget
64. A company anticipates selling $200,000 of goods, of which $15,000 will probably be uncollectible.
Which of the following statements is true?
a. $15,000 does not appear on the cash budget.
b. $215,000 is added to the cash budget.
c. $15,000 is subtracted from the cash budget.
d. $185,000 appears as a disbursement on the cash budget.
e. None of these.
65. A company's planned borrowings and repayments appear on the

b. selling and administrative expenses budget.
c. interest income budget.
d. cash budget.
e. operating budget.
66. The planned ending cash balance for the year appears on which of the following statements?
a. Budgeted income statement
b. Budgeted balance sheet
c. Production budget
d. Budgeted cash receipts
e. Budgeted cash disbursements
ANS: B PTS: 1 DIF: Difficulty: Moderate
67. Gilbert Company purchased $40,000 of goods in July and expects to purchase $60,000 of goods in
August. Gilbert typically pays for 25% of purchases in the month of purchase and 75% in the
following month. What are Gilbert Company's total expected cash disbursements for purchases in the
month of August?
a. $65,000
b. $40,000
c. $45,000
d. $60,000
e. $100,000
ANS: C
Expected cash disbursements = ($40,000  0.75) + ($60,000  0.25) = $45,000

68. Which of the following appears on the budgeted balance sheet?

a. Estimated sales
b. Estimated cost of goods sold
c. Estimated ending accounts receivable
d. Estimated fixed selling expense
e. Estimated fixed factory overhead
69. Cash budgeting is important to which of the following?

a. retail stores
b. manufacturing firms
c. not-for-profit agencies
d. local government agencies
e. all of these
70. Ressen Company finds that typically 30% of a month's sales are for cash. Payments on accounts
receivable are 60% in the month of sale and 38% in the month following sale. Budgeted sales for June
are $100,000, for July $140,000, and for August $120,000. What are the total cash receipts budgeted
for July?
a. $127,400
b. $85,400
c. $122,000
d. $262,000
e. $140,000
ANS: A
July
Cash sales ($140,000  0.30) $ 42,000
Payments on account for sales in:
June ($100,000)(0.7)(0.38) 26,600
July ($140,000)(0.70)(0.60) 58,800
Total cash receipts $127,400

71. Schrandt Company, an importer and retailer of Polish pottery and kitchenware, prepares a monthly
master budget. Data for the July master budget are given below:
The June 30th balance sheet follows:
Cash $ 25,000 Accounts payable $ 45,000

Accounts receivable 110,000 Capital stock 300,000
Inventory 54,000 Retained earnings 94,000
Building and equipment (net) 250,000
Actual sales for June and budgeted sales for July, August, and September are given below:
June $137,500
July 360,000
August 400,000
September 320,000
Sales are 20% for cash and 80% on credit. All credit sales are collected in the month following the
sale. There are no bad debts.
The gross margin percentage is 40% of sales. The desired ending inventory is equal to 25% of the
following month's sales. One fourth of the purchases are paid for in the month of purchase and the
others are purchased on account and paid in full the following month.
The monthly cash operating expenses are $43,000, and the monthly depreciation expenses are $7,000.
What is the balance of the accounts receivable at the end of July?

a. $110,000
b. $288,000
c. $360,000
d. $398,000
ANS: B
80%  360,000 = $288,000

72. June Corporation has the following sales forecasts for the first three months of the current year:
Month Sales
January $36,000
February 24,000
March 40,000
75% of sales are collected in the month of the sale and the remainder is collected in the following
month.
Accounts receivable balance (January 1) $22,800

Cash balance (January 1) 22,000
Minimum cash balance needed 20,000
What is the cash balance at the end of January, assuming that cash is received only from customers and
that $48,000 is paid out during January?
a. $19,400
b. $23,800
c. $20,600
d. $21,000
ANS: B
$22,000 + $22,800 + (0.75  $36,000)  $48,000 = $23,800

Figure 9-6.
Toscano Company makes all its sales on account. Accounts receivable payment experience is as
follows:
Percent paid in the month of sale 25%

Percent paid in the month after the sale 64%
Percent paid in the second month after the sale 5%
Toscano provided information on sales as follows:
May $140,000
June $115,000
July $126,000
August (expected) $132,000
73. Refer to Figure 9-6. How much of May's sales are expected to be uncollectible?
a. $8,400
b. $5,000
c. $2,500
d. $7,200
e. $0
ANS: A
May uncollectible sales = $140,000  0.06 = $8,400
6% is obtained by the following: (1.00  .25 + .64 + .5) = .06

74. Refer to Figure 9-6. How much of June credit sales are expected to be collected in the month of July?
a. $30,000
b. $60,000
c. $36,000
d. $73,600
e. $80,000
ANS: D
June credit sales collected in July = $115,000  0.64 = $73,600

75. Refer to Figure 9-6. What is budgeted cash to be collected on account for the month of August?
a. $45,000
b. $132,000
c. $119,390
d. $150,000
e. $154,600
ANS: C
From June ($115,000 x 0.05) $5,750
From July ($126,000 x 0.64) 80,640
From August ($132,000 x 0.25) 33,000
Total cash expected $119,390

Figure 9-7.
Lambert Company purchased $140,000 of goods in September and expects to purchase $130,000 of
goods in October. Lambert typically pays for 20% of purchases in the month of purchase and 80% in
the following month.
Every month, Lambert must make the following payments:
Rent $ 5,000
Wages $14,000
Utilities $ 3,000
Telephone $ 400
Loan on equipment $ 1,200
In mid-October, Lambert expects to buy a new computer for $4,500 using the company credit card.
Typically, the credit card bill is paid in full in the following month. September credit card purchases
totaled $6,000.
76. Refer to Figure 9-7. What is Lambert's expected cash disbursement in October for purchases of goods?
a. $140,000
b. $130,000
c. $112,000
d. $138,000
e. $26,000
ANS: D
Cash payments for goods in October = $140,000(0.8) + $130,000(0.2) = $138,000

77. Refer to Figure 9-7. What are the total cash disbursements expected by Lambert during the month of
October?
a. $167,600
b. $172,100
c. $161,600
d. $55,600
e. $60,100
ANS: A
Rent $ 5,000
Wages 14,000
Utilities 3,000
Telephone 400
Loan on equipment 1,200
Payments for goods $140,000(0.8) + $130,000(0.2) 138,000
Payment for September credit card purchases 6,000
Total cash disbursements in October $167,600

Figure 9-8.
Cohlmia Company makes all its sales on account. Cohlmia's accounts receivable payment experience
is as follows:
Percent paid in the month of sale 20%

Percent paid in the month after the sale 75%
Percent paid in the second month after the sale 2%
Cohlmia provided information on sales as follows:
September $100,000
October $120,000
November $200,000
December (expected) $250,000
78. Refer to Figure 9-8. What are the expected cash receipts in the month of November?
a. $200,000
b. $40,000
c. $190,000
d. $132,000
e. $114,000
ANS: D
November cash receipts = ($200,000)(0.20) + ($120,000)(0.75) + ($100,000)(0.02) = $132,000

79. Refer to Figure 9-8. What are the expected cash receipts in December?
a. $202,400
b. $210,400
c. $50,000
d. $250,000
e. $179,000
ANS: A
December cash receipts = ($250,000)(0.20) + ($200,000)(0.75) + ($120,000)(0.02) = $202,400

80. The following forecasted sales pertain to Micah Company:
Month Sales
April $200,000
May 250,000
June 150,000
July 100,000
Collection pattern:
60% in month of sale
40% in month following the sale
Accounts receivable as of March 31 $35,000

Finished goods inventory as of March 31 4,000 units
The company has a selling price of $10 per unit and expects to maintain ending inventories equal to
20% of the next month's sales. How many units are expected to be produced in April?
a. 21,000 units
b. 19,000 units
c. 25,000 units
d. 20,000 units
ANS: A
($200,000/$10) + [($250,000/$10)  0.2]  4,000 = 21,000 units
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2 | LO: 9-3

81. The alignment of managerial and organizational goals is referred to as goal

a. congruence.
b. participation.
c. pseudoparticipation.
d. feedback.
e. incentives.
82. Traditional organization theory uses which of the following to motivate workers?
a. Bonuses
b. Self-esteem
c. Nature of the work itself
d. Increased responsibility
e. Job satisfaction
83. ____ occurs when a manager deliberately underestimates revenues or overestimates costs.
a. Budgetary slack
b. Pseudoparticipation
c. Goal congruence
d. Setting standards too high
e. None of these
84. Which of the following is true of the master budget?

a. Monthly budgets are derived by dividing the master budget by 12.
b. Fixed costs cannot change from one month to another.
c. Variable costs cannot change from one month to another.
d. The master budget can reflect seasonal effects.
e. None of these.
85. Which of the following is not an advantage of participative budgeting?
a. It fosters a sense of creativity in managers.
b. It encourages the introduction of budgetary slack.
c. It encourages greater goal congruence.
d. It encourages a higher level of performance.
e. It fosters a sense of managerial responsibility.
86. Which of the following is an advantage of participative budgeting?

a. It fosters pseudoparticipation.
b. It encourages budgetary slack.
c. It tends to discourage goal congruence.
d. It fosters a sense of responsibility.
e. There are no advantages of participative budgeting.
87. Which of the following is an example of myopic behavior?

a. Promotion of deserving employees.
b. Reducing expenditures on preventive maintenance.
c. Increased spending on research and development.
d. Productivity training for new employees.
e. Buying cheaper materials of the same quality to decrease the amount spent on raw
materials.

Chapter 9-Profit Planning: Multiple Choice

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Chapter 9—Profit Planning

1. Which of the following is an advantage of budgeting?

2. Which of the following is a use of budgets for control?

3. Which of the following budgets can be used for control?

8. The master budget is

9. Which of the following is not true?

12. Direct materials needed for production is calculated by

13. In preparing the overhead budget, many companies use

14. Which of the following statements is true?

17. The selling and administrative expenses budget includes

18. Budgeted operating income includes

20. Rodriquez Company budgeted the following sales in units:

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Budgeted sales revenue for the year is

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

26. Galvern Company provided the following data for July:

Direct materials $50,000

What is the cost of goods sold?

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

27. A production budget is most important for which of the following?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 9-2

32. Which of the following is an operating budget?

33. What is the formula used to compute the units to be produced?

ANS: D PTS: 1 DIF: Difficulty: Moderate

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

*208,800 x 20% = 41,760

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

Direct labor cost = $17 x 69,500 = $1,181,500

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

Budgeted overhead for November = ($5 x 69,500) + 56,500 = $404,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

Production in units 3,000

There were no beginning and ending inventories.

Direct materials cost $7,000

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

55. Refer to Figure 9-11. What is total selling expense?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 9-2

56. Refer to Figure 9-11. What is Pallen's budgeted operating income?

*[109,000 = $65,000 + ($40  0.10  11,000)] = Budgeted Marketing Expenses

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 9-2

57. Budgets are prepared in which of the following orders?

Paid in the month of sale 30%