CHAPTER 6: FINANCIAL PLANNING AND BUDGETS

Budgeting: Concepts
1. Budgeting is
A. Used to compare actual costs with standard costs
B. Used to determine the cost of manufactured products
C. A detailed plan that translates objectives or goals into financial. terms
D A means of product costing that emphasizes activities as basic cost objects

C. Option A pertains to standard costing.

Option B is incorrect since we do not determine the cost of manufactured products. In
budgeting, we only use manufacturing cost as basis for total production costs.
Option C is incorrect since budgeting is not a product costing method.
2. The major objectives of any budget system are to
A Define responsibility centers, provide a framework for performance evaluation, and promote
communication and coordination among organization segments.
B. Define responsibility centers, facilitate the fixing of blame for missed budget predictions, and
ensure goal congruence between superiors and subordinates.
C. Foster the planning of operations, provide a framework for performance evaluation, and promote
communication and coordination among organization segments.
D. Foster the planning of operations, facilitate the fixing of blame for missed budget predictions, and
ensure goal congruence between superiors and subordinates.

C.
3. Which of the following is false regarding budgeting?
A. The essential features of the budgeting process are planning and control
B. Availability of idle cash for investment is shown in the capital expenditures budget
C. Comparing actual results with budgeted results will help mangers evaluate the performance of
individuals
D. Budgeting requires managers from different functional areas to communicate and coordinate their
activities

B. Budgeting only covers operational and financial budgets. Idle cash for investment
purposes may be seen in the financial budget when we prepare a cash budget.
Option C is not in contrast with Option A in Item 1. Budgeted results are different from
standard costs. Budgets are different from standards. In budgeting, there is that function of
measuring performance while in standards, there is an imposition of responsibility for the
resulting variance
4. Which of the following statements regarding budgets is false?
A. Budgets are used only as a planning function.
B. Budgets may be developed for cash flows or labor usage.
C. A budget is a plan that contains a quantitative statement of expected results.
D. Budgets present organizational plans in a formal, logical, and integrated manner.

A. As mention in Option A in Item 3, budgeting is used for planning and control.

5. Which of the following is not part of the operating budget?
A. Sales budget
B. Capital budget
C. Manufacturing overhead
D. budget

B. The operating budget mainly focuses on operations. Clear capital budget pertains to capital
expenditures which are outside routine operations (such as sales and purchases)
6. Budgeting
A Is primarily a bookkeeping task.
B. Primarily focuses on past performance.
C Involves the input from a broad range of managers.
D. Should be built from the bottom of the hierarchy to the top.

C. Budgeting is also used as communication tool.it coordinates activities between the

management and subordinate. Thus, to establish an effective and und budget, we need the
input from a broad range of managers.
7. Budgeting involves the concept "management by exception" which takes
into consideration
A. Only rare events that would occur
B. Only significant unfavorable deviations
C. The samples selected at random or arbitrarily from a population
D. Those items that vary materially from expectations, favorable or
unfavorable

D. Again, we are introduced with the concept of management by exception (also brought up in
Chapter 4 Standard Casting). In budgeting, we only consider those items that vary materially
from expectations.
8. The following are reasons why a company would prepare a budget, except
A To make sure the company expands its operations
B. To provide a basis for comparison of actual performance
C. To control income and expenditure in a particular period
D. To communicate the company's plans throughout the entire business organization

A. There is no guaranteed assurance that the company can expand its operations. Budgeting
is not made for this рuгроse.
9. The following are distinguishable attributes of a budget, except
A. It is a motivating device.
B. It is a guideline for operations.
C. It is a guarantee of actual results.
D. It is an organization's operational plan.

C. As mentioned, budgeting cannot be a guarantee of actual results. It serves as a mere

expectation of actual results (ie, expected results).
10. Each organization plans and budgets its operations for slightly different reasons. Which one of the
following is not a significant reason for planning?
A. Ensuring profitable operations.
B. Providing a basis for controlling operations.
C. Checking progress toward the objectives of the organization. D. Forcing managers to consider
expected future trends and
conditions.

A. The preparation of budgets neither guarantees actual results nor ensure profitable
operations. It is only a plan that contains a quantitative statement of expected results.
11. Which of the following is a use of budgets for control?
A. Communication is improved.
B. Plans can be made for the future.
C. Budgets set a standard against which results can be compared.
D. If conditions change between the formation of the budget and
the current time, budgets can be quickly adapted.

C. We go back to a basic function of management control Here, the budgets are used so set a
standard against which results can be compared.
Option A pertains to budgeting as a communication tool;
Option B pertains to planning, a separate function; and
Option D goes beyond the control function
12. Which of the following budgets can be used for control?
A. Cash budget
B. Production budget
C. Budgeted income
D. All of the choices
D.
Advantages of Budgeting
13 Budgeting
A.. Forces managers to look ahead and address potential problems
B. Motivates employees to work hard to meet the company's objectives
statement
C. Fosters the planning of operations, provide a framework for performance evaluation and promote
communication and coordination among organization segments
D. All of the above

D.
14. One of the primary advantages of budgeting is that it
A. Bases the profit plan on estimates.
B. Is continually adapted to fit changing circumstances.
C. Does not take the place of management and administration.
D. Require departmental managers to make plans in conjunction
with the plans of other interdependent departments.

D. Budgeting is also used as a communication tool. It would require managers to make plans
in conjunction with the plans of other interdependent departments.
15. Which one of the following is usually not cited as being an advantage of
a formal budgetary process?
A. Provides a formal benchmark to be used for feedback and
performance evaluation.
B. Ensures improved cost control within the organization and prevents inefficiencies.
C. Serves as a coordination and communication device between
management and subordinates.
D. Forces management to evaluate the reasonableness of assumptions used and goals identified in
the budgetary process.

B. Budgeting does not improve cost control. Again, this is only a plan that contains a
quantitative statement of expected results.
16. All of the following are advantages of the use of budgets in a
management control system except that bu
A. Provide performance criteria.
B. Limit unauthorized expenditures.
C. Force management planning.
D. Promote communication and coordination within the
organization.

B. A budget contains the costs that are expected to be Incurred. However, it cannot limit
unauthorized expenditures. There is no assurance that unauthorized/ expenditures can
happen. Unauthorized expenditures mar still occur even though the company has a concrete
budget .
17. Which of the following is not an advantage of budgeting?
A. It requires managers to state their objectives.
8. It facilitates control by permitting comparisons of budgeted and
actual results.
C. It provides a check-up device that allows managers to keep
close tabs on their subordinates.
D. It facilitates performance evaluation by permitting comparisons
of budgeted and actual results.

C. Budgeting facilitates evaluation of performance and provision of Incentives since it

compares actual results with/ budgeted results which will help managers evaluate the
performance of individuals, departments, divisions, or entire companies. Budgeting could
also be used to provide Incentives for people to perform well. It is not used to provide a
check-up device so managers would keep close tabs on their subordinates.
Role of Top Management
18. In the process of budgeting, the role of the top management should
A. Be limited to the approval process
B. Be involved, including using the budget process to communicate goals
C. Be limited because they do not have sufficient information of daily operations
D. None of the above

B. The role of top management is very important to make a successful budget. Management
should be involved. Although Option C may seem correct since top management do not have
sufficient information of dally operations, this does not mean that top management should
limit its participation. To make a budget, top management should be there to supervise.
19. Which one of the following best describes the role of top management in
the budgeting process? Top management
A. Should be involved only in the approval process.
B. Needs to be involved, including using the budget process to communicate goals.
C. Lacks the detailed knowledge of the daily operations and should
limit their involvement.
D. Needs to separate the budgeting process and the business planning process into two separate
processes.

B. The role of top management is very important to make a successful budget. Management
should be involved. To make a budget, top management should be there to supervise.
20. The primary role of the budget director and the budgeting department is
A. Compile the budget and manage the budget process.
B. Justify the budget to the executive committee of the board of
directors.
C. Settle disputes among operating executives during the development of the annual operating plan.
D. Develop the annual profit plan by selecting the alternatives to be adopted from the suggestions
submitted by the various operating segments.
A.
21. Which one of the following is most important to a successful budgeting
effort?
A. Experienced analysts
B. Integrated software
C. Top management support budget
D. Reliable forecasts and trend analyses

C. The role of top management is very important to make a successful budget. Management
should be involved. To make a budget, top management should be there to supervise.
22 The budgeting process should be one that motivates managers and employees to work toward
organizational goals. Which one of the flowing is least likely to motivate managers?
A. Use of management by exception.
B. Having top management set budget levels.
C. Setting budget targets at attainable levels.
D. Participation in the budgetary process.

B. By having top management set budget levels, the subordinates are given no opportunity to
voice their opinions and/or concerns. This is a top-down approach which is usually frowned
upon as compared to the bottom- up approach.
Department managers have the most detailed knowledge about organizational operations,
they should use this information as the building blocks of the operating budget.
Budgeting Process
23. A budget manual, which enhances the operation of a budget system,
is most likely to include
A. A chart of accounts
B. Distribution instructions for budget schedules
C Employee hiring policies
D. Documentation of the accounting system software
B.

24. When developing a budget, an external factor to consider in the

planning process is
A. New product development
B. The merger of two competitors
C The implementation of a new bonus program.
D. A change to a decentralized management system

B. Options A, C, and D would also affect the budget, but the item is looking for external
factors. A merger of two competitors would affect the budget (e.g., sales forecast).
25. A planning calendar, for budgeting purposes is the
A. Calendar year covered by the budget
B. Schedule of dates at which goals are to be
C. Schedule of activities for the development and adoption of the budget
D. Schedule of dates when new products should be launched in the market

C. The common error in this item is choosing Option A. When ABC Company makes a budget
for 2019, the planning calendar is not from January 1, 2019 to December 31, 2019. The
planning calendar is actually the schedule of activities for the development and adoption of
the budget (e.g., September 1, interview sales department; or December 10, Obtain top
management approval).
26. Which one of the following statements concerning approaches for the budget development
process is correct?
A. The top-down approach to budgeting will ensure adherence to strategic organizational goals.
B. With the information technology available, the role of budgets as an organizational communication
device has declined.
C. To prevent ambiguity, once departmental budgeted goals have been developed, they should
remain fixed even if the sales forecast upon which they are based proves to be wrong in the middle of
the fiscal year.
D. Since department managers have the most detailed knowledge about organizational operations,
they should use this Information as the building blocks of the operating budget.
D.

27. Which one of the following is not a characteristic of a successful budget process?
A Gaining top management's support.
B. Using market feedback to assist in setting expectations.
C Setting specific expectations to compare to actual results.
D. Implementing the budget as the only benchmark for performance evaluation.

D.
28. All of the following are advantages of the budgeting process except th
the budget
A Allocates resources on an as-needed basis.
B. Facilitates communication among organizational units.
C. Forces management to assess the future objective of the
company.
D. Establishes benchmarks to identify unsatisfactory organizational performance.

A.
Ineffective Budgets
29. An ineffective budget control system is characterized by
A. Lack of timely feedback in the use of the budget.
B. Use of budgets as a planning but not a control tool.
C. Use of budgets for harassment of individuals rather than motivation.
D. All of the answers are correct.

D.
30. An improperly executed budget process might have the effect(s) of
A. Inflated budget requests
B. Meeting short-term but not long-term goals
C. Disregard of overall company goals
D. All of the choices

D.
31. The finance department of a large company has prepared a master budget with very limited
expense budgets for each department. The department managers are worried about being held
accountable for these assigned targets, but senior management wants to keep spending reduced to
allow for contingencies and strategic adjustments to the company-wide master budget. Based on this
information, this budget process is
A. Not a successful budgeting process because it has not been widely accepted by the employees.
B. Not a successful budgeting process because management has left too much room for strategic
unknowns.
C.A successful budgeting process because it will encourage the associates to work their hardest to
meet the goals.
D. A successful budgeting process because it will be a very useful tool to hold people accountable for
overspending.
A.
Budgetary Slack
32 When budgets are used to evaluate performance and to set limits on spending, the process will
often result in departments adding something
extra to ensure the budgets will be met. This 'extra' is
A. Budgetary slack
B. Management by objectives
C. Strategic planning
D. Continuous budgeting

A. A budgetary slack is created when employees estimate Costs too high and estimate sales
too low.
33. There is budgetary slack when
A Costs are estimated too high, but sales are estimated too low
B. Costs are estimated too low and sales are estimated too low
C. Costs are estimated too high and sales are estimated too high
D. Costs are estimated too low, but sales are estimated too high Master Budget Budgetary Slack

A. A budgetary slack is created when employees estimate costs too high and estimate sales
too low.
34. Which of the following statements best describes budgetary slack?
A. The margin of error assigned to each cost center to encourage the manager to budget accurately
and consistently.
B. The total amount that actual expenses are below budgeted expenses and actual revenues exceed
budgeted revenues.
C. The practice of understating budgeted revenues or overestimating budgeted costs to make
budgeted targets more achievable.
D. The practice of management assigning relaxed budgetary goals after the company achieves the
first several months of the annual budget.

C.A budgetary slack is created when employees estimate costs too high and estimate sales
too low.
35. Which of the following is correct regarding budgetary slack?
A. It eliminates the likelihood that a manager will receive the personal rewards that follow from
meeting the expectations of superiors
B. It is the process of making the budget look good by either overstating expected sales or
understating budgeted expenses
C. The use of which allows the use of budget to control subordinate performance
D. From the perspective of corporate management, the use of budgetary slack increases the
likelihood of inefficient resource allocation

D. One of the main reasons why budgetary slacks are frowned resource allocation. In Chapter
12: Relevant Costing, upon is that there would be the likelihood of inefficient one of the
subtopics is resource allocation in case there are insufficient resources. Remember that the
product to which the resources are allocated first is not the one with the highest contribution
margin per unit but the one with the highest contribution margin per constrained resource. So,
if an employee adds a budgetary slack, e.g., underestimating sales forecasts of A and B, then
the allocation of resources would be altered as well.

Master Budget
36. In an organization that plans by using comprehensive budgeting, w master budget is
A. The current budget updated for operations for part of the current year.
B. A budget for a non-profit entity after it as approved by the appropriate authoritative body.
C. The booklet containing budget guidelines, policies, and forms to use in the budgeting process.
D. A compilation of all the separate operational and financial budget schedules of the organization.

D. The master budget is a comprehensive set of budgets that covers all phases of an
organization's planned activities for a specified period. Within the master budget are
individual budgets which can be classified as either operating budgets or financial budgets.

37. The master budget

A Reflects controllable costs only
B. Shows forecasted and actual results
C Contains the operating budget
D. Can be used to determine manufacturing cost variances

C. The master budget is a comprehensive set of budgets that covers all phases of an
organization's planned activities for a specified period. Within the master budget are
individual budgets which can be classified as either operating budgets or financial budgets.
38. Which one of the following may be considered an independent item in
the preparation of the master budget?
A. Ending inventory budget
B. Pro forma income statement
C. Capital investment budget
D. Pro forma statement of financial position

C. The master budget is a comprehensive set of budgets that covers all phases of an
organization's planned activities for a specified period. Within the master budget are
individual budgets which can be classified as either operating budgets or financial budgets.
Capital investment budget is separate from the master budget since the latter covers only the
phases of an. organization's operations.

39. The preparation of a comprehensive master budget culminates with the

preparation of the
A. Production budget
B. Strategic budget
C. Capital investment budget
D. Cash management and working capital budget

D. The preparation of the cash management and working capital budget needs all the
information from the other budgets in the master budget. E.g., To get cash receipts, we need
information from the sales budget; to get cash disbursements, we need information from the
purchasing budget, labor budget, overhead budget, etc.
40. ABC Company uses a comprehensive planning and budgeting system.
The proper order for ABC to prepare certain budget schedules would be
A. CGS, balance sheet, income statement and statement of cash flows.
B. Income statement, balance sheet, statement of cash flows, and CGS
C. Statement of cash flows, CGS, Income statement, and balance sheet
D. CGS, income statement, balance sheet, and statement of cash flows

D. If you follow the sequence in our material, we start off with the sales budget to know how
many units will be sold, thus knowing how many units must be produced (if manufacturing
firm) or purchased (if merchandising firm). From there, we determine the cost of the
production or purchase of these products. Thus, we are first coming up with the cost of goods
sold. Then we proceed with the non-manufacturing costs; such as your selling and
administrative expenses. Combine that with the sales budget and CGS budget, you have your
budgeted net income (or income statement).
Although not presented in our material, the next outcome would be the balance sheet: AR
balance from the cash receipts budget; AP balance for the cash disbursement budget; Cash
balance from the cash budget, etc.

Sales Budget
41. A comprehensive budget operational budget starts with
A. Sales forecast
C. Budgeted Income statement
B. Production budget
D. Raw materials purchase budget
A.

42. The foundation of a profit plan is the

A Sales forecast
B. Production plan
C. Capital budget
D. Cost and expense budget
A.

43.Which of the following is the usual starting point in developing a sales forecast?
A. The production budget
B. The cash receipts budget
C. Last year's level of sales
D. Competitor budget information
C.
.

44 Using the concept of 'expected value' in sales forecasting means that the
sales forecast to be used as
A Based on probabilities.
B. Based on expected selling prices of the products.
C. Developed using the indicator method.
D. The sum of the sales expected by the individual.
A.
45 which one of the following items should be done first when developing a comprehensive budget for
a manufacturing company?
A. Development of a sales budget
B. Development of a capital budget
C Determination of the advertising budget
D. Preparation of a pro forma income statement
A

46. An overly optimistic sales budget would most likely result in

A. Excessive inventories
B. Increased sales during the year
C. Insufficient inventories
D. Increases in selling prices late in the year
A. If the company overestimates its sales, it may result to excessive amounts of inventories.
Thus, if it estimates its sales to be 100,000 although it only managed to sell 10,000, there
would be excess inventories amounting to 90,000 units.
Purchasing Budget
47. Bucks Company desires an ending inventory of Php62,000 and a beginning inventory of
Php55,000. Gross profit is estimated to be 25% of sales. The expected sales amounted to
Php320,000. Budgeted purchases would amount to
A Php230,000
B. Php240,000
C. Php247,000
D. Php370,000
C. To get the budgeted purchases, adjust sales to get the cost of goods sold and then use the
formula for cost of goods sold:

Sales Php320,000
Divide: CGS rate (1-25%) 75%
Cost of goods sold Php240,000
Add: Desired ending inventory 62,000
Less: Beginning inventory 55,000
Budgeted purchases Php247,000

48. ABC Company is a maker of men's jeans. The company would like to maintain 32,000 yards of
fabric in ending inventory. The beginning fabric ventory is expected to contain 40,000 yards. The
expected yards of fabric needed for sales is 144,000. Compute the yards of fabric that ABC needs to
purchase.
A 136,000 yards
B. 144,000 yards
C. 152,000 yards
D. 216,000 yards
A. Fairly the same as the previous item:
Raw materials needed for sales 144,000 yards
Add: Desired ending inventory 32,000 yards
Less: Beginning inventory 40,000 yards
Budgeted purchases (in yards) 136,000 yards

You have to be careful what the problem is looking for. It can be budgeted purchases in raw
materials (e.g., yards) or in peso. If the problem is looking for budgeted purchases in pesos,
you have to multiply the budgeted purchases in raw materials by the purchase price of each
raw material.
Production Budget
49. The budget that would provide necessary input data for the raw m purchase budget, direct labor
budget and manufacturing overhead budget is
A Sales forecast
B. Production budget
C. Cash receipts budget
D. Cash disbursement budget

B. The production shows the number of units that are to be produced during the budget. From
budget production the organization would know the inputs from raw materials, direct labor
and overhead necessary for production.
50. Which one of the following best describes the production budget?
A. It summarizes all discretionary costs.
B. It includes required direct labor hours.
C. It includes required material purchases.
D. It is calculated from the desired ending inventory and the sales forecast.

D. Option A is incorrect since no budget summarizes all production budget stops at the
number of units needed for discretionary costs. Option B is also incorrect since the
production. Required labor hours can be seen in the direct labor budget. Lastly, Option C is
also incorrect since required material purchases can be found in the raw materials purchase
budget. The RM budget and DL budget are not part of the production budget.
51. In going from the sales budget to the production budget, adjustments to the sales budget need to
be made for
A. Cash receipts
B. Selling expenses
C. Factory overhead costs
D. Finished goods inventories

D. Remember the equation: Budgeted sales (in units) + Desired EI-Desired BI = Budgeted
production. As you can see, budgeted sales is adjusted by the inventory balances
to come up with the budgeted production.

52. The production budget process usually begins with the

A. Sales budget
B. Direct labor budget
C. Direct materials budget
D. Manufacturing overhead budget
A.

53. A company has had stable sales and production for several years. Next year, sales are expected
to increase by at least 50%. If 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 stay the same
C. It will decrease
D. It will be twice the size of desired ending inventory

A. Remember that the amount of ending inventory is usually dependent on the amount of
sales needed for the succeeding period. Thus, if sales were to increase by at least 50% in the
next year, ending inventory will be sure to
increase.

54. ABC Company's sales budget shows quarterly sales for the next year as follows:
Quarter Units Quarter Units

1 14,500 3 17,400
2 11,600 4 20,300

Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the
net quarter's sales. Budgeted production for
the second quarter of the next year would be
A. 10,440 units
B. 11,600 units
C. 12,180 units
D. 12,760 units
A company provided the following information on sales for the coming
We need the format for production budget:
Q1 Q2 Q3 Q4
Sales (u) 14,500 u 11,600 u 17,400 u 20,300 u
Add: Required EI 2,320 u 3,480 u 4,060 u -
Less: Required BI - 2,320 u 3,480 u -
B. Production - 12,760 u 17,980 u -

D.

55.
Q1 Q2 Q3 Q4
Units 40,000 40,000 30,000 80,000
Average selling price Php5 Php5 Php5 Php6

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 QI
B. Q2
C. Q3
D. Q4
Q1 Q2 Q3 Q4
Sales (u) 40,000 u 40,000 u 30,000 u 80,000 u
Add: Required EI 10,000 u 7,500 u 20,000 u -
Less: Required BI 3,000 u 10,000 u 7,500 u -
B. Production 47,000 u 37,500 u 42,500 u -

B.

Raw Materials Purchase Budget

56 Direct materials needed for production is calculated by
A. Adding units to be produced to direct materials per unit.
B. Dividing units to be produced by direct materials per unit.
C. Multiplying units to be produced by direct materials per unit.
D. Subtracting units to be produced from direct materials per unit.
C.

57. Straw Company manufactures a single product. It has a policy of keeping finished goods
inventory amounting to 150% the coming month's budgeted sales. Raw materials, on the other hand,
are kept at twice the coming month's budgeted production requirements. Each unit of product
requires 4 kilos of raw materials. The production budgets (in units) consist of the following:
January 5,000 units February 5,500 units
March 4,700 units April 4,500 un
Purchases of raw materials in March would be
A. 15,600 kilos
B. 17,200 kilos
C. 18,000 kilos
D. 24,000 kilos
B. Let's try to get used to answering the specific question instead of making the whole table as was
done in the previous items. In this problem, we are looking for the budgeted purchases of raw
materials in March. So, we focus on the month of March:

Production 4,700 u
Multiply: Raw materials/u 4RM/U
Total RM needed 18,800 RM
Add: RM, Ending inventory (18,000* 2) 36,000 RM
Less: RM, Beginning inventory (18,800*2) 37,600 RM
Budgeted purchases 17,200 RM

items 58 and 59 are based on the following information:

DELL Company has budgeted sales of 60,000 units in July; 80,000 units in August; and 120,000 in
September. The Company has 6,000 units of finished goods and 49,600 pieces of raw materials on
hand on July 1. Each unit of product requires 4 pieces of materials. The desired inventorsy
of finished goods is 10% of the next month's sales. The desired Inventory
of materials is 20% of the next month's production needs. Each raw
material can be purchased for Php0.50 per material.
58. How many pieces of raw materials are purchased in July?
A. 248,000 pieces
B. 265,600 pieces
C. 345,600 pieces
D. 355,200 pieces
B. To get the budgeted purchases we need to pass by the production budget to get budgeted
production to use for the raw materials purchase budget:
Sales

JULY AUGUST SEPT

Sales (u) 60,000 u 80,000 u 120,000 u
Add: EI 8,000 12,000 u
Less: BI 6,000 8,000 u
 B. Production 62,000 u 84,000 u
RM/u 4RM/U 4RM u
RM/needed 248,000 RM 336,000 RM
Add RM, EI 67,200 RM
Less RM, BI 49,600 RM
RM Purchases 265,600 RM
(RM)

59. How much would be the purchases in July?

A. Php132,800
8. Php177,600
C. Php172,800
D. None

A. Note that RM purchases can be expressed in raw materials (as shown in the previous item)
or in peso. To get the peso value, we simply multiply the budgeted purchases in raw materials
by the purchase price for each raw material.
Thus, 265,600 raw materials multiplied by Php0.50/RM or Php132,800 is the budgeted
purchases (php ) .

Direct Labor Budget

60. The budget schedule that would provide the necessary input data for the
direct labor budget would be the
A. Production budget
B. Raw materials purchase
C. Sales forecast
D. Schedule of cash receipts budget and disbursements

A. Note that the production budget is the starting point of the following budgets: (1) RM
purchase budget; (2) DL budget; and (3) OH budget.
61. Each unit of Product X requires two direct labor hours. Employee bene costs are treated as direct
labor costs. Data on direct labor are
Number of direct employees 25
Weekly productive hours per employee 35
Estimated weekly wages per employee Php12,250
Employee benefits (related to weekly wages). 20%
The standard direct labor cost per unit of Product X is
A Php840.00
B. Php945.00
C. Php1,323.00
D. Php1,653.75

A. Here we just need to keep track with the conversion. Note that we are looking for cost per
unit (Php/u). So, we need to convert all the given information to bring out cost per unit:

Weekly wages per employee Php12,250/emp

Divide: Weekly productive hrs. per 35 hrs./emp
 emp. Php350/hour
Cost per hour 2 hours/u
Multiply: Hours per unit Php700/u
Cost per unit (w/o benefits) Php140/u
Benefit (Php700 20%) Php840/u
Cost per unit (w/ benefits)

Overhead Budget
62. A company that manufactures furniture is establishing its budget for the upcoming year. All of the
following items would appear in the overhead budget except for the
A Fringe benefits paid to the production supervisor.
B. Cost of glue used to secure the attachment of the legs to the tables.
C. Overtime paid to the workers who perform production scheduling.
D. Freight charges paid for the delivery of raw materials to the company.

D. Freight charges paid for the delivery are part of the purchase price and inventoriable (or
part of direct materials).
63. The information contained in a cost of goods manufactured budget most directly relates to the
A Materials used, direct labor, overhead applied, and ending work-in-process.
B. Materials used, direct labor, overhead applied, and finished goods inventories budgets.
C Materials used, direct labor, overhead applied, and work-in process inventories budgets.
D. Materials used, direct labor, overhead applied, and work-in process inventories, and finished
goods inventories budgets.

C. For this, you should know the computation for cost of goods manufactured:

RM Purchases PhpXXX
Add: RM, BI XXXX
Total goods available for production XXX
(TGAFP)
Less: RM, ET XXXX
Direct materials XXXX
Direct labor XXX
Manufacturing overhead XXX
Total manufacturing cost XXXX
Add: WIP, BI XXXX
Total goods put into production XXXX
(TGPIP) Less: WIP, EI XXXX
Cost of goods manufactured XXXX

Notice how to get to 'cost of goods materials manufactured’ we materials used, labor,
overhead and then adjust the total manufacturing cost using the inventory balances of
'work-in-process'.

64.Selling and Administrative Expenses Budget which one of the following statements regarding
selling and
administrative budgets is most accurate?
A Selling and administrative budgets are fixed in nature.
B. Selling and administrative budgets are usually optional
C Selling and administrative budgets need to be detailed in order, that the key assumptions can be
better understood
D. Selling and administrative budgets are difficult to allocate by month and are best presented as one
number for the entire year.

C. As with any other budget, the selling and administrative understanding on the key
assumptions. They are not fed in nature since we also have variable selling and administrative
expenses. It is not optional but forms part of the mater budget.
65.ABC Company pays out sales commissions to its sales team in the month the company receives
cash for payment. These commissions equal 8% of total (monthly) cash inflows as a result of sales.
ABC has budgeted sales of Php375,000 for August, Php500,000 for September, and Rp250,000 for
October. Approximately 80% of all sales are on credit, and the remaining balance is cash sales.
Experience indicates that 60% of the budgeted credit sales will be collected in the month following the
sale, 30% the month after that, and 10% of the sales will be uncollectible. Based on this information,
what should be the total amount of sales commissions paid out by ABC in the month of October?
A Php21,250
B. Php26,400
C. Php27,500
D. Php30,400

D. Note that in this problem, commissions are based on cash inflow, not revenue sales. So,
the first thing we need to is to compute for the collections during the year (although this is
financial budgeting, we have no choice).
For collections, remember that sales may either be cash sales or credit sales. Cash sales are
automatic cash collections. On the other hand, the credit sales are subject to the collection
pattern that the company may have. So, you have to separate the cash sales and the credit
sales.

August Sept. OCT

Sales Php375,000 Php500,000 Php250,000
Credit ratio 80% 80% 80%
Credit sale Php300,000 Php400,000 Php200,000
Pattern:
Month after Php180,000 0 Php240,00
(60%) -
2 months after - - 90,000
Total - Php330,000
Cash sales 50,000
Total Php380,000
receipts
Comm
Rate 8%
Comm. Php30,400
Exp

Financial Budget: Cash Budget

66.The financial budget process includes
A The cash budget
B. The budgeted statement of cash flows
C. The capital budget
D. All of the choices
D. The financial budget is used to project cash flow and identify likely cash shortfalls and
surpluses. This would affect the cash budget, budgeted statement of cash flows, and the
capital budget.

67. Which of the following is normally included in the financial budget of a

firm?
A. Direct materials budget
B. Budgeted balance sheet
C. Sales budget
D. Selling expense budget

B. All the other options are part of the operating budget.

68. Bank loan officers would find which of the following budgets to be one of
the most important in determining whether to give a company a loan?
A Sales budget
B. Cash budgets
C. Production budget
D. Budgeted balance sheet

B.
69.The last budget schedule prepared before the financial statements is the
A. Cash budget
B. Cost of goods sold budget
C. Manufacturing overhead budget
D. Selling and administrative expenses budget

A. This is the last budget since you need the information from Options B, C and D to prepare
the cash budget.
70. A cash budget should help to ensure
A That cash dividends can be paid every quarter.
B. Sufficient liquidity without an excess amount of idle cash.
C. That enough cash is always on hand to satisfy maximum cash requirements.
D. That enough cash is available to pay salaries and wages, even if it means borrowing money.

B. Note that the cash budget would indicate the ending balance after adjusting the beginning
balance by the collections and disbursements during the period.
What happens next is more important. Imagine a scenario where the disbursements are more
than the receipts that would result to a negative ending cash balance. What should the
company do? Should it decrease its disbursements? Should it adjust its collection pattern so
more cash is collected? The answers are no.
To maintain a positive cash balance, what the company should do would be to borrow money
to offset the negative cash balance. Using that method, the company will not disrupt routine
operations. This is true when the company has excess cash as the ending balance. The
company would not increase its disbursements nor decrease its collections. It would invest
the excess cash balance at the beginning of the period. Note that knowing whether the
company has excess cash or deficient cash would help the company decide what to do on the
financial side (either borrow money, issue shares for cash or invest excess cash),
71. A company anticipates selling Php200,000 of goods, of which Php15,000 will probably be
uncollectible. Which of the following statements is true?
A. Php215,000 is added to the cash budget.
B. Php15,000 is subtracted from the cash budget.
C. Php15,000 does not appear on the cash budget.
D. Php185,000 appears as a disbursement on the cash budget.

C. The Php15,000 uncollectible balance would never appear in the cash budget since the same
is a non-cash expense.
72. As part of the master budget process, a merchandising company begins to prepare the cash
budget for the same period. Which of the following additional information will be most useful to
management in preparing this budget?
A. Credit policies, projected expenses, and inventory procurement policies.
B. Sales credit policies, purchasing terms, and planned capital acquisition.
C. Projected revenues, projected expenses, and intended financing activities.
D. Planned direct material purchases, planned direct labor, and purchasing terms.

B. Option B is the best answer since it directly relates to the preparation of the cash budget
(e.g., instead of knowing the sales revenue, it is more direct to know the sales credit policies,
like collecting from said revenues)
73. ABC Company uses a calendar year and prepares a cash budget for each month of the year.
Which one of the following items should be considered when developing July's cash budget?
A. Recognition that 0.5% of the July sales on account will be uncollectible.
B. Quarterly cash dividends scheduled to be declared on July 15 and paid on August 6 to
shareholders of record as of July 25.
C. National income tax and Social Security contributions withheld from employees' June pay checks
to be remitted to the Bureau of Internal Revenue in July.
D. Property taxes levied in the last calendar year scheduled to be paid quarterly in the coming year
during the last month of each calendar quarter.

C. Note that although the expense pertains to the month of June, we are looking for
disbursements. A remittance to the BIR is a disbursement on the part of the company since
whatever amount withheld from the employee (as advance ta payment) will be given to the BIR
in the following month.

Collections and Disbursements

74.Which of the following would be found in the cash receipts budget?
A Loan proceeds
B. Depreciation of factory equipment
C. Extinguishing a loan
D. Amount of factory supplies on hand

A. Option B-depreciation is a non-cash expense which would never appear in the cash budget.
Option C-extinguishing a loan is an example of a cash disbursement.
Option D supplies on hand says nothing about cash receipts nor disbursements.
75. Which one of the following items would have to be included for a company preparing a schedule
of cash receipts and disbursements for calendar Year 1?
A The amount of uncollectible customer accounts for Year 1.
B.A purchase order issued in December Year 1 for items to be delivered in February Year 2.
C. Dividends declared in November Year 1 to be paid in January Year 2 to shareholders of record as
of December Year 1.
D. The borrowing of funds from a bank on a note payable taken out in June Year 1 with an agreement
to pay the principal and interest in June Year 2.

D. Option A-the recording of uncollectible accounts has no effect on cash (dr. BDE; cr. AFBD)
Option B-A purchase order is not a cash disbursement yet
It is merely an order a certain number of goods.
Option C-dividends declared on Year 1 but paid In Year 21 declaration is Dr. RE; Cr. Dividends
payable. There is no is a disbursement in Year 2. Note that the entry for the
cash disbursement as of the date of declaration.

76. ABC Company budgeted sales of Php220,000 for June, Php200,000 for July, Php280,000 for
August, Php264,000 for September, Php244,000 for October, and Php300,000 for November.
Approximately 75% of sales are on credit; the remainder are cash sales. Collection experience
indicates that 60% of the budgeted credit sales will be collected the month after the sale, 36% the
second month, and 4% will be uncollectible. Which month has the highest budgeted cash receipts?
A. August
B. September
C. October
D. November

D. Remember to separate the credit sales and cash sales Credit sales have to go through the
collection pattern while cash sales are automatic cash receipts:

Jun July Aug Sept Oct Nov

Sales P220 Php200 Php280 php264 Php244 Php300
75% 75% 75% 75% 75% 75%
Cr s. Php16 Php150 Php210 Php198 Php183 Php225
Collection 5
pattern
60% 99 90.0 126 118.8 109..80
36% 54.4 54 75.6 71.28
Total 149.4 180 194.4 181.8
Cash 70.0 66 61.0 75.00
Total 219.4 246 255.4 256.8

ITEMS 77 and 78 are based on the following information:

The PAD Company has the following historical pattern on its credit sales:
●60% collected in the month of sale
●20% is collected in the first month after sale
⚫ 12% is collected in the second month after sale
●5% is collected in the third month after sale
●3% uncollectible
The sales on open account have been budgeted for last six months of 2018 are show below:
July Php84,000 October Php125,000
August 90,000 November 140,000
September 110,000 December 120,000

77. The estimated total cash collection during the fourth calendar quarter would be
A Php120,500
8. Php247,200
C. Php299,000
D. Php359,200

D.
Jul Aug Sept Oct Nov Dec
Sales Php84 Php90 Php110 Php125 Php140 Php120
Collection
pattern
60% 50.4 54 66 75 84 72
20% 16.8 18 22 25 28
12% 10.8 10.8 13.2 15
5% 4.2 4.5 5.5
TOTAL PHP112 PHP126.7 PHP120.5

78. The estimated total cash collections during the fourth calendar quarter from sales made during
the fourth calendar quarter would be
A Php120,500
B. Php247,200
C. Php299,000
D. Php359,200

C. This item is looking for a more specific answer. We are only looking for collections during
the fourth quarter from fourth quarter sales. Thus, the Php5,500 collection in December
should not be counted since this is a collection from September sales.

Jul Aug Sept Oct Nov Dec

Sales Php84 Php90 Php110 Php125 Php140 Php120
Collection Pattern
60% 50.4 54 66 75 84 72
20% 18 22 25 28
12% 10.08 10.8 13.2 15
5% 4.2 4.5 5.5
Total Php112 Php126.7 120.5

79. ABC Company's master budget was prepared based on the follow projects:
Sales Php5,400,000
Decrease in inventories 135,000
Decrease in accounts payable 225,000
Gross margin rate 30%

ABC's estimated cash disbursements for inventories are

A. Php2,070,000
B. Php2,250,000
C. Php3,150,000
D. Php3,870,000

D. To get cash disbursements from inventories, we have to work all the way back from sales.
Two equations should be In mind: (1) Cost of goods sold equation; and (2) Accounts
payable balance.
For the first: purchases +Beginning inventory – ending inventory = CGS.
For the second: beginning balance + credit purchases – Disbursement = ending balance
So we move from sales to CGS, then from CGS to purchases, then lastly from purchases to
Disbursement:

Sales Php5,400,000
Multiply: CGS rate (1-30%) 70%
Cost of goods sold Php3,780,000
Less: decrease in inventories 135,000
Purchases Php3,645,000
Add: decrease in AP 225,000
Disbursement Php3,870,000

To understand why we deduct the decrease in inventories and add the decrease in accounts, just try
to go back with the given formula. In increase/decrease items, assume that one balance is zero (e.g.,
decrease in inventories, assume ending inventory is equal to zero). From there, substitute the
amounts in the formula.

Comprehensive Problems; Operating Budget Items 80 to 84 are based on the following information:
MJY Company produces and sells only one product. The selling price is expected to be the prevailing
price of Php14 per unit. The company expects to sell 270,000 units of product during the period. The
desired finished goods inventory at the end of the period is 180,000 units while the expected
beginning inventory is 150,000 units.
Each unit of product requires 3.60 kilograms of raw materials. Only one kind of raw material is used,
and it is expected to cost Php0.50 per kilogram. The desired ending inventory of raw materials is
28,800 kilograms; the expected beginning inventory is 22,800 kilograms. Direct labor is Php5.00 per
hour. Each product requires
1hour completing.
Factory overhead is applied to production on the basis of direct labor hours. Variable factory
overhead cost at the planned level of operations is budgeted at Php135,000; fixed budgeted
overhead is budgeted at Php450,000.
Variable selling and administrative expenses amounted to Php3.50 per unit of product sold while fixed
selling and administrative expenses is budgeted at Php200,000.
80. The budgeted production is
A.125,000 units
B. 240,000 units
C. 270,000 units
D. 300,000 units
D. To get budgeted production, simply adjust the budgeted sales by the inventory
requirements:

Budgeted sales 270,000 u

Add: Desired ending inventory 180,000 u
Less: Estimated beginning inventory 150,000 u
Budgeted production 300,000 u

81. The budgeted material purchases for the period is

A. Php57,000
B. Php537,000
C. Php543,000
D. Php1,086,000
C.
The starting point of the DM, DL and OH budget would be Budgeted production to know how
much RM is needed to satisfy the production requirements and then adjust for inventory
requirements

budgeted production. 300,000 u

Multiply: RM needed for each unit 3.60 RM/U
Total RM needed 1,080,000 RM
Add: RM, ending 28,800 RM
Less: RM, beginning 22,800 RM
RM Purchases (Php 1,086,000 RM
Multiply: Cost per RM Php0.50/RM
Php543,000
RM Purchases (RM)
82.The budgeted direct labor cost is
A300,000
B. 900,000
C. 1,200,000
D. 1,500,000

D. The format for the DL budget is used (again, the starting point is the budgeted production):
Budgeted production 300,000

Multiply Hours needed for each unit 1 HOUR

Total DLH needed Php300,000

Multiply Cost per hour PHP5

Direct labor cost 1,500,000

Note that there are no inventory adjustments for dire labor since we do not stock direct labor hours in
inventory
(there is no such thing).

83.The budgeted cost of goods sold on an absorption costing basis is

A Php2,362,500
Php2,421,000
C. (Php1,186,500)
D. (Php1,244,000)
A. Cost of goods sold comprises of the sold portion of the total product cost (DM+ DL+ OH).
Thus, we need to get the total product cost first then divide the by the number of units
produced then multiply by the number of units sole Not, however that for direct materials cost,
we do not use PHp543,000. This amount is the purchases for raw materials, not the raw
materials used. To get raw materials cost, we multiply the raw materials to be used in
production by the cost per raw material. Thus:

RM needed for production 1,080,000 RM

Multiply: Cost per RM Php0.50/RM
Direct materials cost Php540,000
Add: Direct labor cost 1,500,00
Add: Overhead cost (VOH+FOH) 585,000
Total product cost Php2,625,000
Divide: Budgeted production 300,000
Cost per unit Php8.75/u
Multiply: Budgeted sales 270,000
Cost of goods sold Php2,362,500

84.The budgeted income before tax is

A Php214,000
B. Php272,500
C. Php3,820,500
D. Php3,879,000

B. The only thing missing for the computation of income would be the budgeted operating
expenses.
This is simply obtained by multiplying the variable selling and administrative expense rate by
the number of units expected to be sold then adding the product to the fixed selling
administrative expense.
Once obtained, solve for net income:

Budgeted sales 270,000 u

Multiply: Sales price per unit Php14
Budgeted sales revenue Php3,780,000
Less: Budgeted cost of goods sold 2,362,500
Budgeted gross profit Php1,417,500
Less: Budgeted operating expenses 1,145,000
Budgeted net income Php272,500

85-90 are based on the following information:

Resented below is the balance sheet of ABC Company as of December 31,2017
Assets Liabilities & Equity
Cash IT payable Php4,800
PHP30,400
AR Ordinary Shares256,000
48,000 Retained Earnings67,200
Inventory
17,600
PPE
232,000

Total Assets Php328,000 Total L&Ε Php328,000

The manager instructs you to update the balances based on the budget below:
1Q 2Q 3Q 4Q
 Sales Php112,000 Php128,000 Php144,000 Php140,800
Production Costs 76,800 80,000 89,600 80,000
Operating 25,600 27,200 28,800 30,400
expenses

●Annual depreciation (included in the amounts above):

Production costs: Php70,400
Operating expenses: Php19,200
●Inventory balances are expected to be:
March 31 Php56,000 June 30: 52,000
September 30: Php60,000 December 31: 48,000
●All production costs and operating expenses, except depreciation, are to be paid during the quarter
incurred.
●Sales are made either through cash or credit. The Company expects quarterly sales to be made
20% in cash and 80% in credit. As to the credit sales, the same are collected 50% in the quarter of
sales and 48% in the quarter after the sale. The rest are budgeted to be uncollectible and recognized
as bad debts in the quarter incurred. There is no allowance for bad debts as of December 31, 2017.
● Dividends are paid at the end of June and December. The number of dividends is based on 10% of
the cash balance available at the end of the 14 quarter for June dividends and the 3rd quarter for
December dividends.
●Income tax is equal to 30% of the quarter's income tax and is paid the following quarter.
The December 31, 2018 budgeted balance sheet would show
85. Budgeted cash of
A Php110,992.00
B. Php139,776.00
C. Php142,280.00
D. Php153,379.20

C. Note that the only items that would affect the cash balance are cash receipts and cash
disbursements. As a summary, here are the items that are looking for the cash balance at the
end of the year. would affect both:

Cash receipts Cash disbursements

Cash sales Cash paid for purchases of
RM
Collections from credit Cash paid for labor sales
Cash paid for overhead
Cash paid for operating
expenses

Things to note:
●Depreciation and bad debts expenses should be excluded in the cash disbursements summary.
●Interest income and dividends are typically non- routine, so they are not part of the list above. To
account for these items, they are considered only after the routine collections and disbursements.

This is more complicated than just thinking about collections and disbursements. For the easy part,
let's compute for cash receipts from sales. Please remember that sales are divided into cash sales
and credit sales. The cash sales are automatic cash receipts while credit sales are not. We apply the
collection pattern for credit sales. Thus:

Q1 Q2 Q3 Q4
 Sales Php112,000 Php128,000 Php144,000 Php140,800
Cash ratio 20% 20% 20% 20%
Cash sales Php22,400 Php25,600 Php28,800 Php28,160
Credit Php89,600 Php102,400 Php115,200 Php112,640
Sales
Collection
pattern Php44,800 51,200 Php57,600 Php56,320
Q1 of sale 48,000 43,008 49,152 55,296
Q after
Sale 92,800 94,207 106,752 111,616
Collections 22,400 25,600 28.800 28,160
Cash sales Php115,200 Php119,808 Php135,552 Php139,776
Total 1,792 2,048 2,304 2,253
Bad debts

86. Budgeted accounts receivable (net) of

A Php54,067.20
B. Php55,296.00
C. Php61,440.00
D. Php62,464.00

A. It gets easier from this point since we already calculated all the items needed for the
next item
For accounts receivable, we go to the collections budget. Notice that 48% of the sales in
Q4 are to be collected in Q1 of the next year. Thus, the same 48% would be the accounts
receivable balance (net of allowance)

87. Budgeted Inventory of

A Php48,000
B. Php52,000
C. Php56,000
D. Php60,000

A. The ending inventory would of course be the Php48,000 already indicated in the problem.
The expected ending inventory for Q4 will be the ending inventory for the whole
year.

88. Budgeted Property, Plant and Equipment of

A Php142,400
B. Php164,800
C. Php187,200
D. Php209,600
A. Note that property, plant and equipment (net of accumulated depreciation) are commonly
affected by three transactions: (1) acquisition; (2) disposal; and (3) depreciation.
Since there were no acquisitions nor disposals, we only consider depreciation

Q1 Q2 Q3 Q4
Beg. Bal. Php232,000 Php209,600 Php187,200 Php164,800
 Dep. 22,400 22,400 22,400 22,400
Exp.
End bal. 209,600 187,200 164,800 142,400

89. Budgeted income tax payable of

A Php4,425.60
B Php4,844.16
C. Php125,903.04
D. Php125,669.20

B. Note that, even for financial accounting, taxes are not paid during the quarter (or even year)
it is incurred. The income tax expense for December last year is most likely paid in the first
quarter of the next year. Income tax expense for Q1 is most likely paid in Q2, and so on. Thus,
the income tax payable for Q4 this year will be a payable account since it is expected to be
paid next year.

90. Budgeted retained earnings of

A. Php99,545.60
B. Php103,792.00
C. Php9,388.80
D. Php13,862.40

C. The common transactions that would affect retained earnings are: (1) net income/loss; and
(2) dividends. So, to compute:

Q1 Q2 Q3 Q4
Beg. Bal. Php67,200 99,546 103,792 125,699
Net 32,346 10,326 21,907 11,303
Income
Dividends 6,080 11,088
End. bal. 99,546 103,792 125,903

Assets Liabilities & Equity

Cash Php142,280 IT payable Php4,844
AR 54,067
Inventory 48,000 Ordinary Shares 256,000
PPE 142,400 Retained Earnings Php125,903
Total Php385,747 Total L&E Php386,747

Comprehensive Problems: Financial Budget

Items 91 and 92 are based on the following information:
CNI Company is preparing its cash budget for the last two months of the
fourth quarter of the calendar year 2016. Following are some pertinent budget data gathered by the
company's budget committee:
October November December
Sales Php280,000 Php300,000 Php360,000
Accounts payable for
merchandise 100,000 140,000 144,000
 purchases
Salaries 100,000 150,000 180,000
Other expenses 110,000 130,000 58,500

Additional information from the budgets is presented below: Collection pattern: 60% of each month's
sales is ●collected in the month of sale; the balance is collected in the following month
●Payment of accounts payable: 80% of the current month accounts payable budget is paid during the
month of purchase and the balance is paid in the following month
●The budgeted other expenses Include depreciation in the amount of Php22,000 per month.
Expenses requiring cash outlays are paid for in the month of incurrence.
●The company intends to maintain a cash balance Php100,000. In case of deficits, the company may
borrow from its bank in multiples of Php10,000 which would bear an interest rate of 12% per year.
Principal repayments are to be made in any month in which there is a surplus of cash. Interest is paid
monthly.
●There is no outstanding balance of loans from banks as of November 1.
●If there is no outstanding balance on the loan, the company will invest any cash in excess of its
desired end-of-month cash balance in government securities. No investments were outstanding as of
November 1.
91.Determine the amount borrowed for the month of November
A. Php0
B. Php80,000
C. Php90,000
D. Php100,00
D. To determine the amount borrowed, we need to know how much the ending cash balance
was (before borrowing, if any) in the month of November. To know the cash balance, we need
to know the collections and disbursements for the month of November. For future use, we will
compute for collections and disbursements for November and December. Let's start with
collections:
Oct. Nov. Dec
Sales Php280,000 Php300,000 Php360,000
Collection pattern
60% Month of sale Php168,000 Php180,000 Php216,000
40% Month after sale Php292,000
Total 112,000 Php336,000

92.For the month of December, determine the ending cash balance

A Php77,300
B PHP 20,000
C. Php102,000
D. Php107,300

D Please see Item 91 for the solution.

Participative Budgeting
93.A budgeting process where information flows top down and bottom up is referred to as:
A. Joint budgeting
B. Perpetual budgeting
C. Continuous budgeting
D. Participative budgeting
D. Participative budgeting allows employees throughout the organization to have an input in
the budget-setting process. This is a bottom-up approach.
94.Which one of the following is not an advantage of a participatory budgeting process?
A. Goal congruence
B Control of uncertainties
C. Coordination between departments
D. Communication between Departments

B. Whatever type of budgeting the company may use, there is no way that it can control
uncertainties.

95. The following are the benefits of participative budgeting, except?

A. It involves those most directly affected
B. It is more likely to motivate people to work toward organization's goals
C. It improves accountability because managers are he responsible for reaching goals, such that they
cannot shit the responsibility by blaming the unrealistic goals demanded by the
D. Top management need not be concerned with the overall profitability of the current operations
because lower-level managers set the final target for the budget

D. Participative budgeting allows employees throughout the organization to have an input in

the budget-setting process. This is a bottom-up approach. This process would motivate
people to work toward the organization's goals as opposed to a tow-down approach.
Top management would still be concerned with the overall profitability of the current
operations.

96. Participative budgeting

A Is the same as an imposed budget
B. Would be the responsibility of each responsibility unit
C. Does not require the support of top management to promote budget participation
D. Does not require the review and approval of top management

B. Participative budgeting allows employees throughout the organization to have an input in

the budget-setting process. This is a bottom-up approach. This process would motivate
people to work toward the organization's goals as opposed to a tow-down approach.
Each subunit will be responsible for the setting of its particular budget.
.
97. An advantage of participative budgeting is that it
A Minimizes the cost of developing budgets.
B. Encourages acceptance of the budget by employees.
C. Reduces the effect on the budgetary process of employee biases.
D. Yields information known to management but not to employees.

B. Unlike the top-down approach, where top management merely set the budget and the
lower-level employees merely follow or adhere to the budget, participative budgeting
encourages acceptance of the budget by the employees because the latter were directly
included in the construction of the budget.

98. Which one of the following is not considered to be a benefit of participative budgeting?
A. The budget estimates are prepared by those in direct contact with various activities.
B. Managers are more motivated to reach the budget objectives since they participated in setting
them.
C. Individuals at all organizational levels are recognized as being part of the team; this results in
greater support of the organization.
D. When managers set the final targets for the budget, senior management need not be concerned
with the overall profitability of current operations.
D. Senior management should still be concerned with the overall profitability of current
operations.

Zero-Based Budgeting
99. One of the techniques or processes in budgeting is zero-based budgeting,
which is
A Developing budgeted costs from clear-cut measured relationships between inputs and outputs.
B. Budgeting from the ground up as though the budget process were being initiated for the first time.
C. Using the prior year's budget as a base year and adjusting it based on the experiences of the prior
year and the expectations for the coming year.
D. Budgeting for cash inflows and outflows to time investments and borrowings in a way to maintain a
bank account with a minimum balance.

B. Zero-based budgeting is the process of developing budget estimates by requiring all levels
of management to estimate sales, production, and other operating data as though operations
were being initiated for the first time.
100. The major appeal of zero-based budgeting is that it
A. Solves the problem of measuring program effectiveness.
B. Reduces significantly the time required to review a budget.
C. Deals with some of the problems of the incremental approach to budgeting.
D. Relates performance to resource inputs by an integrated planning and resource-allocation
process.

C. Options A, B and D may sound appealing, but they do not pertain to zero-based budgeting.
The contrast of zero- based budgeting would be incremental budgeting. The major appeal of
the former would be the problems encountered in the latter
101.Which of the following pertains to zero-based budgeting?
A. A variant of fiscal year budgeting whereby a twelve-month projection in the future is maintained
B. Involves the review of each cost component from a cost/benefit perspective
C. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity
levels
D. A budgeting approach which top management sets the budget and imposes it on lower levels of
the organization

B. Zero-based budgeting is the process of developing b estimates by requiring all levels of

management to estimate sales, production, and other operating data as though Zero-based
budgeting is the process of developing bud operations were being initiated for the first time.
102. The major feature of zero-based budgeting is that it
A. Takes the previous year's budgets and adjusts them for inflation.
B. Focuses on planned capital outlays for property, plant, and equipment.
C. Questions each activity and determines whether it should be maintained as it is, reduced, or
eliminated.
D. Assumes all activities are legitimate and worthy of receiving budget increases to cover any
increased costs.

C. Zero-based budgeting is the process of developing budget estimates by requiring all levels
of management to e sales, production, and other operating data as though operations were
being initiated for the first time.

103.A company that uses zero-based budgeting has

A. An expense budget of zero.
B. An assumed sales level of zero.
C. A zero variance between budgeted and actual performance.
D. Zero as the starting point of budgeting the coming year's expenses.

D.Zero-based budgeting is the process of developing budget estimates by requiring all levels
of management to estimate sales, production, and other operating data as though operations
were being initiated for the first time.
104.Zero-based budgeting forces managers to
A. Prepare a budget based on historical costs.
B. Formulate a budget by objective rather than function.
C Justify all expenditures at the beginning of every budget period
D. Estimate a product's revenues and expenses over its expected life.
period

C.This is one of the significant advantages of using zero-based budgeting. If an employee

suggests an input in the budget, he/she must justify said input whether it was an expenditure
or a sales forecast. There must be reasons why each item in the budget is placed there.

105.An advantage of incremental budgeting when compared with zero based budgeting is that
incremental budgeting
A. Encourages adopting new projects quickly.
B. Accepts the existing base as being satisfactory.
C. Eliminates functions and duties that have outlived their usefulness.
D. Eliminates the need to review all functions periodically to obtain optimum use of resources.

B. Incremental budgeting is easier to make since there is no need to justify all the inputs made
by the employees. Management would accept the existing base as satisfactory
Continuous Budgeting
106.A continuous profit plan
A. Is an annual plan that is part of a 10-year plan.
B. Is a plan that is revised monthly or quarterly.
C. Is a plan devised by a full-time planning staff.
D. Works best for a company that can reliably forecast events a year or more into the future.

B. A continuous profit plan is a variant of fiscal-year budgeting whereby a twelve-month

projection is always maintained. It is updated monthly or quarterly and where a month or
quarter is dropped, another is added.

107.A continuous (rolling) budget

A. Is a plan that is revised monthly or quarterly, dropping one period and adding another.
B. Presents the plan for a range of activity so the plan can be adjusted for changes in activity.
C. Presents the plan for only one level of activity and does not adjust to changes in the level of
activity.
D. Is one of the budgets that is part of a long-range strategic plan, unchanged unless the strategy of
the company changes.

A. A continuous profit plan is a variant of fiscal-year budgeting whereby a twelve-month

projection is always maintained, It is updated monthly or quarterly and where a month or
quarter is dropped, another is added.

Static Budgeting
108. The use of the master budget throughout the year as a constant comparison with actual results
signifies that the master budget is also a
A. Static budget
B. Capital budget
C. Flexible budget
D. Zero-based budget

A. A static budget is established at the beginning of the period and is not adjusted for
different levels of actual sales activity. It is a constant comparison with actual results.
109.A state budget
A. Presents a statement of expectations for a period but does not present a firm commitment.
B. Presents the plan for only one level of activity and does not adjust to changes in the level of
activity.
C. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity.
D. Drops the current month or quarter and adds a future month or a future quarter as the current
month or quarter is completed.

B. This is the main difference between static budgeting and flexible budgeting. In the former,
there is only one level of activity and does not adjust to changes in the level of activity. In the
latter, it's the exact opposite.

110. A major disadvantage of static budget that

A. It is made for only one level of activity.
B. It is more difficult to develop than a flexible budget
C. Variances tend to be smaller than when flexible budgeting is used.
D. Variances are more difficult to compute then when flexible budgeting is used.

A. A static budget is established at the beginning of the period and is not adjusted for
different levels of actual sales activity. It is a constant comparison with actual results.
.
Flexible Budgeting
111.A flexible budget is
A. The same as a continuous budget.
B. One that can be changed whenever a manager so desires.
C. Adjusted to reflect expected costs at the actual level of activity.
D. One that uses the formula "total cost per units produced"

C. A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels
112. Which one of the following statements regarding the difference between a flexible budget and a
static budget is true?
A. A flexible budget includes only variable costs, whereas a static budget includes only fixed costs.
B. A flexible budget is established by operating management, while a static budget is determined by
top management.
C. A flexible budget primarily is prepared for planning purposes, while a static budget is prepared for
performance evaluation.
D. A flexible budget provides cost allowances for different levels of activity whereas a static budget
provides costs for one level of activity.

D.A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.

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

D.A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.
114.An advantage of using a flexible budget compared to a statistic budget is that, in a flexible
Budget.

A. Fixed cost variances are more clearly presented.

B. Shortfalls in planned production are clearly presented.
C. Standards can easily be changed to adjust to changing circumstances.
D. Budget costs for a given output level can be compared with actual costs for the same level of
output.
D.A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.

115. Which of the following pertains to flexible budgeting?

A. A budget that presents the plan for a range of activity
B. A budget that sets allowances based on prior year expenditures
C. A budget that is established at the beginning of the period and not adjusted for different levels of
actual sales activity
D. The process of developing budget estimates by requiring all levels of management to estimate
sales, production, and other operating data as though operations were being initiated for the first time

A. A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.

116. Which one of the following budgeting methodologies would be most appropriate for a firm facing
a significant level of uncertainty in unit sales volumes for next year?
A Static budgeting
B. Flexible budgeting
C. Life-cycle budgeting
D. Top-down budgeting

B. A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.

117.When preparing a performance report for a cost center using flexible budgeting techniques, the
planned cost column should be based on the
A. Actual amount for the same period in the preceding year.
B. Budget adjusted to the actual level of activity for the period being reported.
C. Budget adjusted to the planned level of activity for the period reported.
D. Budgeted amount in the original budget prepared before the beginning of the year.

B. A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.
118. The difference between the actual amounts and the flexible budget amounts for the actual output
achieved is the
A. Sales volume variance
B. Flexible budget variance
C. Production variance volume
D. Standard cost variance
B. A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.
Scenario Analysis
119.ABC, Inc. has prepared budgets for the next 5 months: May, June, July, August, and September.
As soon as May results are reported, ABC will add October to their budget plans. What type of budget
system is ABC using?
A. Project budgeting
B. Flexible budgeting
C. Continuous budgeting
D. Activity-based budgeting

C. A continuous profit plan is a variant of fiscal-year budgeting whereby a twelve-month

projection is always maintained. It is updated monthly or quarterly and where a month or
quarter is dropped, another is added.

120. ABC has found that its annual budgets are quickly outdated once actual the period being
budgeted by the time the annual budget is finished, data is recorded. Sometimes actual preparations
have already begun for to be as up to date as possible, and management is willing to revise budgets
as needed. Which budgeting solution would be most appropriate for ABC?
A Flexible budgeting
B. Zero-based budgeting
C. Continuous budgeting
D. Activity-based budgeting

C. A continuous profit plan is a variant of fiscal-year budgeting whereby a twelve-month

projection is always maintained. It is updated monthly or quarterly and where a month or
quarter is dropped, another is added.

121.A company is focused on continuous improvement and wants to ensure that its budgeting
process supports this goal. The company has already eliminated much of the waste from activities
during previous budget periods and now wants to concentrate on value-added activities and
improving relationships with suppliers and customers. Which of the following is the least beneficial
budget solution for this company?
A Flexible budgeting
B. Zero-based budgeting
C. Continuous budgeting
D. Activity-based budgeting

A. A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.

122 ABC Company has certain peak seasons; namely the Christmas season, the summer season,
and the last 2 weeks of February. During these periods of increased output, the firm leases additional
production equipment and hires additional temporary employees. Which of the following budget
techniques would best fit this firm's needs?
A Flexible budgeting
B. Zero-based budgeting
C. Continuous budgeting
D. Activity-based budgeting
A. A flexible budget presents the plan for a range of activities so that the plan can be adjusted
for changes in activity levels.
123. ABC, Inc. has a goal to reduce wastefulness and develop a tight, efficient budget. The
management team knows that this will take time, so they plan to allow more time and additional
resources in the budget process For the next budget year, a complete review of all activities and
functions will be undertaken. The controller has elected to use this year's master budget as the
starting point for next year's budget process. Considering management's goals, did the controller
make the most appropriate choice of budgeting methodologies?
A No, he should select zero-based budgeting to allow no costs unless they are justified.
B. No, he should select activity-based budgeting to focus on the historical patterns.
C. No, he should implement a continuous budget to provide current Information.
D. Yes, he should take the current budget and make incremental changes to reduce waste.
A. Note that the goal of the company is to reduce wastefulness and develop a tight and
efficient budget. Thus, it should have selected zero-based budgeting to allow no costs unless
they are justified.

124.After performing a thorough study of ABC Company's operations, independent consultant

determined that the firm's labor standards were probably too tight. Which one of the following facts
would be inconsistent with the consultant's conclusion?
A. ABC's budgeting process was well-defined and based on a bottom-up philosophy.
8. Management noted that minimal incentive bonuses have been paid in recent periods.
C. A review of performance reports revealed the presence of many unfavorable efficiency variances.
D. Production supervisors found several significant fluctuations in manufacturing volume, with short-
term increases on output being followed by rapid, sustained declines.
A.