Revision sheet

Cash budget
Flexible budget

1. A master budget can be used as a(n):

A. Aid to planning.
B. Evaluation tool.
C. Means to coordinate activities.
D. All of the above.

2. As the volume of output increases:

A. Variable costs per unit will increase.
B. Variable costs per unit will decrease.
C. Variable costs per unit will not change.
D. Variable costs in total will decrease.

3. As the volume of output decreases:

A. Fixed costs per unit will increase.
B. Fixed costs per unit will decrease.
C. Fixed costs per unit will not change.
D. Fixed costs in total will decrease.

4. Which of the following is not considered an operating budget?

A. Manufacturing cost budget.
B. Production schedule.
C. Capital expenditures budget.
D. Sales forecast.

5. Which element of a master budget would normally be prepared first?

A. A production budget.
B. A cash budget.
C. A budget of operating expenses.
D. A sales forecast.

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6. Which of the following is considered a financial budget estimate?
A. The manufacturing cost budget.
B. The cost of goods sold budget.
C. The operating expense budget.
D. The prepayments budget.

7. Which element of a master budget would normally be prepared last?

A. A cash budget.
B. A budgeted balance sheet.
C. A budgeted income statement.
D. A production budget.

8. A cash budget is affected directly by each of the following except:

A. A capital expenditures budget.
B. A sales forecast.
C. A Direct materials budget.
D. A budgeted income statement.

9. A budget that can be adjusted easily to show budgeted revenues, costs, and cash flows at
different levels of activity is known as:
A. A flexible budget.
B. A master budget.
C. A production budget.
D. A multi-level budget.

10. A flexible budget is one that:

A. Is revised monthly in the light of changing business conditions.
B. Is a compromise plan reflecting diverse views of various supervisors.
C. Contains estimated cost data for several different levels of activity.
D. Separates factory overhead between the variable and fixed portions.

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11. A flexible budget:
A. Consists of advance estimates of costs and expenses for various possible levels of activity.
B. Is designed to be adjusted at frequent intervals for changes in the general price level.
C. Is better suited for use with a job cost system than a standard cost system.
D. Cannot be prepared when a standard cost system is in use.

12. Flexible budgeting may be used for profit centers by applying cost-volume-profit
relationships to the actual level of:
A. Units produced.
B. Resources consumed.
C. Costs incurred.
D. Sales achieved.

13. In a flexible budget for a profit center which of the following items would not be
expected to vary with the level of activity?
A. Revenue.
B. Fixed manufacturing overhead.
C. Direct materials cost.
D. Variable manufacturing overhead.

The following information is from the manufacturing budget and budgeted financial
statements of Altman Corp.:

14. Refer to the information above. For the year, budgeted purchases of direct materials
amounted to:
A. $344,000.
B. $328,000.
C. $360,000.
D. $370,000.

$86,000 + x -$344,000 = $102,000

X = $360,000

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15. Refer to the information above. For the year, budgeted cash payments to suppliers
amounted to:
A. $344,000.
B. $350,000.
C. $334,000.
D. $354,000.

$54,000 + $360,000 - x = $64,000

X = $350,000

16. Wateredge Corporation has budgeted a total of $361,800 in costs and expenses for the
upcoming quarter. Of this amount, $45,000 represents depreciation expense and $7,300
represents the expiration of prepayments. Wateredge's current payables balance is $265,000 at
the beginning of the quarter. Budgeted payments on current payables for the quarter amount to
$370,000. The company's estimated current payables balance at the end of the quarter is:
A. $179,500.
B. $204,500.
C. $203,500.
D. $310,000.

$265,000 + ($361,800 - $45,000 - $7,300) - $370,000 = $204,500

17. Sherman has budgeted sales for the upcoming quarter as follows:

The desired ending finished goods inventory for each month is one-half of next month's
budgeted sales. Three pounds of direct material are required for each unit produced. If direct
material costs $5 per pound, and must be paid for in the month of purchase, the budgeted
direct materials purchases (in dollars) for April are:
A. $17,500
B. $40,500.
C. $26,250.
D. $38,250.

.5(1,600) + . 5(1,900) = 1,750  3 = 5,250  $5 = $26,250

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Ross Corporation makes all sales on account. The June 30th balance sheet balance in its
accounts receivable is $400,000, of which $240,000 pertain to sales that were made during
June. Budgeted sales for July are $1,250,000. Ross collects 70% of sales in the month of sale;
20% in the following month; and the final 10% in the second month after the sale.

18. Refer to the information above. What are Ross's budgeted collections for July?
A. $800,000.
B. $939,000.
C. $1,083,000.
D. $915,000.

.7($1,250,000) + .2($240,000) + .1($160,000) = $939,000

19. Refer to the information above. What is the budgeted balance of Ross's accounts
receivable as of July 31?
A. $375,000.
B. $399,000.
C. $415,000.
D. $396,000.

.3($1,250,000) + .1($240,000) = $399,000

On October 1 of the current year, Molloy Corporation prepared a cash budget for October,
November, and December. All of Molloy's sales are made on account. The following
information was used in preparing estimated cash collections:

Approximately 60% of all sales are collected in the month of the sale, 30% is collected in the
following month, and 10% is collected in the month thereafter.

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20. Refer to the information above. Budgeted collections from customers in October total:
A. $39,000.
B. $27,000.
C. $31,000.
D. $110,000.

.6($20,000) + .3($50,000) + .1($40,000) = $31,000

21. Refer to the information above. Budgeted collections from customers in November total:
A. $32,000.
B. $53,000.
C. $59,000.
D. $48,000.

.6($70,000) + .3($20,000) + .1($50,000) = $53,000

22. Refer to the information above. Budgeted collections from customers in December total:
A. $55,000.
B. $60,000.
C. $64,000.
D. $59,000.

.6($60,000) + .3($70,000) + .1($20,000) = $59,000

23 Arnstrong, Inc. uses a flexible budget. Armstrong produced 16,000 units in May incurring
direct materials cost of $20,480. Its master budget for the year projected direct materials cost
of $362,500, at a production volume of 290,000 units. A flexible budget for May should
reflect direct materials cost of:
A. $20,480.
B. $20,000.
C. $21,000.
D. $19,750.

$362,500/290,000 = $1.25  16,000 = $20,000

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 Skelton Corporation had planned to produce 50,000 units of product during the first quarter
of the current year. The company prepared the following budget on May 1:

During the first quarter, Carson produced 60,000 units and incurred total manufacturing costs
of $180,000.

24. Refer to the information above. Which of the following amounts should not be included in
Skelton's flexible budget at a 60,000-unit level?
A. Direct materials used, $43,200.
B. Direct labor, $54,000.
C. Variable overhead, $27,000.
D. Fixed manufacturing overhead, $70,200.

At 60,000 units, fixed overhead remains $58,500

25. Refer to the information above. A performance report for Skelton's first quarter of
operations using a flexible budget approach would show:
A. Actual costs over budget by $1,300
B. Actual costs over budget by $11,700
C. Actual costs over budget by $15,150
D. Total costs per the flexible budget of $194,400.

$184,000 - $43,200 - $54,000 - $27,000 - $58,500 = $1,300

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26. Refer to the information above. The cost-volume relationship used to prepare Skelton's
flexible budget for various production levels includes:
A. Fixed cost of $1.17 per unit.
B. Manufacturing overhead costs of $1.43 per unit.
C. Variable costs of $2.07 per unit.
D. Total cost of $3.05 per unit.

$.72 + $.90+$ .45 = $2.07

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27. Budgeted material purchases and payments to suppliers
On January 1 of the current period, Gotham Corporation has direct materials on hand of
$82,000. Of this amount, Gotham owes suppliers $51,000 on account. The company has
prepared the following budget estimates for January:

(a) Purchases of direct materials budgeted in January amount to: $_______________

(b) Cash payments to suppliers budgeted in January amount to: $_______________
Computations

(a) $317,000 (b) $306,000

Computations:

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28. Cash receipts budget
The director of budgeting for Bond Products is beginning the process of preparing a cash
budget for each month of the coming year. The sales forecast for the month of January is as
follows:

In the past, the accounts receivable originating from credit sales have been collected in the
following pattern:

Credit sales in the last two months of the current year, some of which remain uncollected at
year-end, were as follows:

Compute the amount of cash expected to be collected from customers in January of the
coming year.

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29. Preparation of cash budget
Use the following information to prepare a cash budget for Knightsbridge Corporation for the
month of June 2010.
In May, 30-day credit sales were $175,000; 80% of this amount is estimated to be collectible
in June.
June sales are estimated to be $425,000; cash sales are usually 25% of total sales. Only 10%
of credit sales are collected in the month in which the sale is made.
Total fixed expenses are $60,000 per month, including $26,000 depreciation. Variable
expenses are 55% of sales. All expenses requiring payment are paid in cash when incurred.
A $40,000 note payable must be paid on June 30.
As of May 31, the cash balance is $94,000.

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30. Flexible budget-variances
The cost accountant for Bradley, Inc., prepared the following monthly performance report
relating to the Finishing Department:

(a) Compute the amounts that should be included for each of the following in a flexible
budget prepared for a 6,500-unit level of production:
(1) Direct materials: $_______________
(2) Direct labor: $_______________
(3) Fixed manufacturing overhead: $_______________
(b) Assume that a revised performance report is prepared for the 6,500-unit level of
production using a flexible budget approach. Compute the cost variances for each of the
following. Indicate whether each variance is favorable (F) or unfavorable (U).

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 Essay questions

Flexible budgeting
What is meant by the term flexible budget? What role do flexible budgets play in evaluating
performance?

A flexible budget is one which may be geared to any volume level; budgeted amounts,
therefore, can be based upon the actual (as distinguished from the planned) level of volume
attained during a budget period.
If management is using budgets as a means of evaluating performance, flexible budget
amounts provide a reasonable yardstick for comparison--management can determine easily
what costs should have been at the volume of activity actually attained. A comparison
between these budgeted figures for any responsibility center and actual results achieved then
becomes a reasonable basis for evaluation. Differences between planned and actual volume
(which may not be within the control of the person being evaluated) are eliminated from
consideration.

31. Harding Company expected sales to be 50,000 units in February, 45,000 in March and
55,000 units in April. Each unit sells for $18.00 each. The following costs pertain to each unit:

Harding is considering an advertising campaign which will cost $15,000 per month from
January to March and is expected to increase sales by 8% a month. At the same time Harding
will reduce sales prices to $17.00 per unit while keeping costs steady.
Required:
(A.) What will operating income be in each of the three months before the advertising
campaign?
(B.) If Harding goes ahead with the advertising campaign, how much would operating income
increase or decrease each month? Would you advise them to go ahead with the campaign?

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Total operating income for the three months decreases at all sales levels. There is no financial
advantage to have the advertising campaign.

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32. The cost accountant for Sherman’s Co. prepared the following monthly performance report relating to
the Production Department.

Budgeted Actual
Production Production
(10,000 Units) (11,000 Units)

Direct materials used.......................................................... $240,000 $260,000

Direct labor ..................................................................... $100,000 $101,000
Variable manufacturing overhead....................................... $60,000 $65,000
Fixed manufacturing overhead........................................... $160,000 $164,000
.
1 Refer to the above data. Compute the amounts that should be included for each of the following in
a flexible budget prepared at an 11,000-unit level of production:

a Direct materials: $____________

b Direct labor: $____________

c Fixed manufacturing overhead: $____________

2 Refer to the above data. Assume that a revised performance report is prepared for the 11,000-unit
level of production using a flexible budget approach. Compute the cost variances for each of the
following. Indicate whether each variance is favorable (F) or unfavorable (U).

a Direct materials variance from flexible budget: $____________

b Direct labor variance from flexible budget: $____________

c Total manufacturing overhead variance from flexible budget: $____________

Answers
1
a ($240,000/10,000 units) x 11,000 units = $264,000
b ($100,000/10,000 units) x 11,000 units = $110,000
c $160,000 (Fixed costs remain unchanged throughout a relevant range of production)

2
a $264,000 flexible budget - $260,000 actual cost = $4,000 F
b $110,000 flexible budget - $101,000 actual cost = $9,000 F

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c $6,000 U
Total overhead per flexible budget:
Fixed.................................................................................... $160,000
Variable ($60,000/10,000) x 11,000...................................... 66,000 $226,000
Actual overhead ($164,000 + $65,000)...................................... (229,000)
Cost variance-total manufacturing overhead............................... $3,000 U

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