Management Accounting: Concepts, Techniques & Controversial Issues

James R. Martin

Chapter 9
The Master Budget or Financial Plan
Extra MC Questions Solution

The following Extends problem 9-6 to March. The Microtable Company produces and sells special wood tables that are used with microcomputers. The various parts of the table are cut and assembled by robots, thus direct labor is not involved. Budgeted or standard costs for each table are as follows:

* Robot (machine) hours.

Overhead rates are based on a capacity level 500 machine hours per month and overhead is applied on the basis of robot (machine) hours. Desired ending inventories of materials are based on 10% of the next months materials needed for production. Desired ending finished goods are based on 15% of next periods budgeted unit sales.

Unit Sales are budgeted as follows:

The budgeted sales price is $250 per table. Sales are budgeted as 90% credit sales and 10% cash sales. Past experience indicates that 80% of credit sales are collected during the month of sale, 17% are collected in the following month, and 3% are uncollectible. A 1% cash discount is allowed to all customers (cash or credit) who pay within the month the sale takes place. Selling and administrative expenses are budgeted as follows: Variable expenses are $50 per unit, fixed expenses are $50,000.

1. The net sales dollars budgeted for March is
    a. 1,300,000
    b. 1,290,640
    c. 1,289,340
    d. 1,287,000
    e. None of these

2. The cash collections budgeted for March is
    a. 1,139,140
    b. 1,055,340
    c. 926,640
    d. 1,246,590
    e. None of the above.

3. Budgeted units (i.e., tables) to be produced for March is
    a. 5,200
    b. 5,250
    c. 5,155
    d. 5,230
    e. None of these.

4. For the remainder of this problem ignore your answer to question 3 and assume that the budgeted units to be produced for March are 5,245. The number of board feet of Direct Material to be purchased for March is
    a. 104,900
    b. 107,410
    c. 105,710
    d. 104,090
    e. Some other amount.

5. The Budgeted cost of direct material used for March is
    a. 314,700
    b. 317,130
    c. 312,000
    d. 312,270
    e. None of these.

6. The budgeted total factory overhead costs for March is
    a. 262,250
    b. 252,450
    c. 260,000
    d. 252,000
    e. Some other amount.

7. The budgeted cost of goods sold for March is
    a. 572,000
    b. 581,800
    c. 572,100
    d. 562,200
    e. None of these.

8. The amount and status (i.e., favorable or unfavorable) of the planned production volume variance for March is
    a. Zero
    b. 9,800 favorable
    c. 9,800 unfavorable
    d. 1,800 unfavorable
    e. Some other amount.

9. The Budgeted selling and administrative expenses for March is
    a. 260,000
    b. 262,250
    c. 310,000
    d. 312,250
    e. None of these.

10. During March no specific accounts receivable were determined to be uncollectible. The amount of bad debt expense that should appear on the Budgeted Income Statement for March is
    a. Zero
    b. 39,000
    c. 28,080
    d. 35,100
    e. Some other amount.

11. Assume 500 additional units of production are budgeted for March with no change in budgeted unit sales. What effect will this have on budgeted net income for March?
    a. Budgeted net income will not change.
    b. Budgeted net income will increase by $55,000
    c. Budgeted net income will increase by $20,000
    d. Budgeted net income will decrease by $55,000
    e. None of the above.

12. In overhead variance analysis, when direct labor hours are used as the allocation basis, the capacity or idle capacity variance will be favorable if
    a. actual fixed overhead is less than budgeted.
    b. actual fixed overhead is less than applied.
    c. budgeted fixed overhead is more than applied.
    d. budgeted fixed overhead is less than applied.
    e. none of these.

13. Appropriation budgets
    a. are based on engineered input output relationships.
    b. may be incremental, priority incremental or zero based.
    c. are frequently used for direct materials and direct labor.
    d. are frequently used for factory overhead.
    e. none of these.

14. The two main parts of a master budget are
    a. the sales budget and the income statement.
    b. the income statement and the cash budget.
    c. the production budget and the selling & administrative budget.
    d. the operating budget and the financial budget.
    e. none of these.

15. The main purpose of participative budgeting is to
    a. reduce the adverse behavioral effects of budgeting.
    b. reduce the cost of preparing the master budget.
    c. to relieve the budget department of much of the budgeting work.
    d. to obtain proper matching.
    e. all of the above.

The Brace Company produces and sells a single product with budgeted or standard costs as follows:

Overhead rates are based on 5,000 standard direct labor hours per month, i.e., this is the master budget denominator activity level. Desired ending inventory of materials is based on 10% of the next periods materials needed for production. Desired ending finished goods is based on 5% of next periods sales. Selling and administrative expenses include $40 per unit for variable costs and $50,000 per month for fixed costs. Unit Sales are budgeted as follows:

The budgeted sales price is $400 per unit. All sales are budgeted as credit sales. Past experience indicates that 75% are collected during the month of sale, 20% are collected in the following month, and 5% eventually become uncollectible. A 1% cash discount is allowed to customers who pay within the month the sale takes place. The budgeted units to be produced are 1,305.

16. Net sales dollars budgeted for March are
    a. 520,000 
    b. 516,100 
    c. 514,800 
    d. 489,060 
    e. None of these

17. Collections budgeted for March are
    a. 386,100 
    b. 481,140 
    c. 482,100 
    d. 486,000 
    e. None of the above

18. Budgeted direct material quantity need for production for march is
    a. 6,525 
    b. 6,500 
    c. 6,475 
    d. 6,850 
    e. Some other number

19. Budgeted direct material quantity to be purchased for March is
    a. 6,500 
    b. 6,525 
    c. 6,550 
    d. 6,575 
    e. Some other number

20. Budgeted cost of direct labor for March is
    a. 45,000 
    b. 46,800 
    c. 46,980 
    d. 47,340 
    e. None of the above

21. Budgeted factory overhead cost for March is
    a. 155,000 
    b. 166,220 
    c. 161,820 
    d. 159,400 
    e. 157,420

22. Budgeted cost of goods sold for March is
    a. 274,500 
    b. 273,000 
    c. 269,650 
    d. 268,600 
    e. None of these

23. The planned production volume variance budgeted for March is
    a. 4,400 unfavorable 
    b. 4,400 favorable 
    c. 6,820 unfavorable
    d. 6,820 favorable 
    e. Some other number

24. Budgeted selling and administrative expenses for March are
    a. 100,000 
    b. 101,610 
    c. 102,000 
    d. 102,200 
    e. None of these

25. Budgeted bad debts expense for March is
    a. 25,000 
    b. 25,740 
    c. 25,805 
    d. 26,000 
    e. Some other amount

26. If the budgeted units to be produced were increased from 1,305 to 1,310 with no change in sales, budgeted net income before taxes for March would
    a. not change 
    b. increase by $400 
    c. decrease by $400
    d. decrease by $1,050 
    e. change by some other amount

The Vera Company produces and sells a single product with budgeted or standard unit costs as follows:

Overhead rates are based on a capacity level of 1,350 direct labor hours per month. Desired ending inventories of materials are based on 20% of the next months materials needed for production. Desired ending finished goods are based on 10% of next periods budgeted unit sales.

Unit Sales are budgeted as follows:

The budgeted sales price is $630 per unit. Sales are budgeted as 75% credit sales and 25% cash sales. Past experience indicates that 60% of credit sales are collected during the month of sale, 38% are collected in the following month, and 2% are uncollectible. A 1% cash discount is allowed to all customers (cash or credit) who pay within the month the sale takes place. Selling and administrative expenses are budgeted as follows: Variable expenses are 5% of sales dollars, fixed expenses are $60,000.

27. The net sales dollars budgeted for February are
    a. 535,500.00
    b. 530,145.00
    c. 531,751.50
    d. 533,090.25
    e. None of these.

Sales (850)(630) $535,500.00 - Cash Discounts (535,500)[(.25 + (.75)(.6)](.01) 3,748.50 = Net Sales $531,751.50

28. The cash collections budgeted for February are
    a. 514,741.50
    b. 371,101.50
    c. 382,205.25
    d. 673,785.00
    e. None of these.

From January (800)(630)(.75)(.38)                  $143,640.00
From February Cash (535,500)(.25)(.99)          132,536.25
From February Credit (535,500)(.75)(.6)(.99)   238,565.25
Total cash collections                                    $514,741.50

29. The budgeted units to be produced for February are
    a. 850
    b. 846 
    c. 939
    d. 854             850 + .10(890) - .10(850) = 854 units
    e. None of these.

30. Now ignore your answer to question 3 and assume that the budgeted units to be produced are 854. The number of ounces of Direct Material to be purchased for February is
    a. 1,708.0
    b. 1,724.4
    c. 1,722.4
    d. 1,691.6
    e. None of these.

1,708* + .20(1,790**) - .20(1,708) = 1,724.4 ounces
*Material needed for February = (854)(2)
** Material needed for March = [890 + .10(940) - .10(890)](2)

31. The Budgeted cost of direct material used for February is
    a. 25,500
    b. 25,866 
    c. 12,810
    d. 12,750
    e. None of these.             (1,708)($15) = $25,620

32. The budgeted cost of direct labor used for February is
    a. 25,620                         (854)(1.5 hours)($20) = $25,620
    b. 25,500
    c. 38,250
    d. 38,430
    e. None of these.

33. The budgeted total factory overhead costs for February is
    a. 217,770
    b. 216,750
    c. 225,360
    d. 229,500
    e. None of these.

Variable (60)(854)(1.5) + Fixed (1,350 Denominator hours)(110) = 76,860 + 148,500 = $225,360
or (854)(1.5)(170) + 7,590 = 217,770 standard + unfavorable PPVV 7,590

34. The budgeted cost of goods sold for February is
    a. 267,750
    b. 275,340
    c. 276,600
    d. 277,860
    e. None of these.

DM + DL + FO + BFG - EFG = 25,620 + 25,620 + 225,360 + (85)(315) - (89)(315) = $275,340
or standard COGS + unfav PPVV = (850)(315) + 7,590 = 275,340

35. The planned production volume variance for February is
    a. 8,250 favorable
    b. 8,250 unfavorable
    c. 7,590 favorable
    d. 7,590 unfavorable               (900-854)(165) or (1,350-1,281)(110) = 7,590 Unfavorable
    e. None of these.

36. The Budgeted selling and administrative expenses for February are
    a. 86,775.00                          (535,500)(.05) = 60,000 = $86,775
    b. 73,767.00
    c. 86,587.58
    d. 26,775.00
    e. None of these.

37. The amount of bad debts that should appear on the Budgeted Income Statement for February is
    a. 4,819.50
    b. 7,976.27
    c. 8,032.50                        (535,500)(.75)(.02) = $8,032.50
    d. 10,710.00
    e. None of these.

38. Suppose the budgeted unit sales for March had been 910 rather than 890. Precisely what effect would this have on budgeted net income for February?
    a. No effect.
    b. 630 increase
    c. 630 decrease
    d. 330 increase
    e. None of these.

Desired EFG for February would increase by (.10)(910-890) = 2 units. Each unit would absorb $165 in fixed overhead that would otherwise be included in the budgeted COGS amount. Thus, budgeted net income would increase by (2)(165) = $330.

Note: Although the variable cost of production would increase, these additional costs will also remain in EFG. The difference is that budgeted fixed costs do not change if two more units are produced, but where they appear on the income statement does. The more the firm produces, (holding sales constant) the more fixed costs remain in the inventory and the less fixed costs are expensed in COGS.

39. In the budget equation for factory overhead, Y = a + bX, the letter "a" would most likely include which type of cost?
    a. mixed costs.
    b. engineered costs.
    c. discretionary costs.    
    d. variable costs.
    e. period costs.

40. Research and development costs fall into which of the cost categories listed below?
    a. engineered costs.
    b. discretionary costs.
    c. committed costs.
    d. product costs.
    e. variable costs.

41. Appropriation budgets are generally used for which type of costs? 
    a. engineered costs.
    b. discretionary costs.
    c. committed costs.
    d. product costs.
    e. variable costs.

42. A priority incremental budget is a (an)
    a. flexible budget.
    b. master budget.
    c. capital budget.
    d. appropriation budget.
    e. none of these.

43. Conceptually, zero-based budgeting means that the manager must
    a. justify 100% of his or her budget.
    b. justify 80% of his or her budget.
    c. justify 50% of his or her budget.
    d. justify 20% of his or her budget.
    e. justify 10% of his or her budget.

44. The two overall purposes of the master budget are
    a. planning and coordinating.
    b. motivating and controlling.
    c. integrating and communicating.
    d. planning and controlling.
    e. product costing and pricing.

45. A type of budgeting that has been recommended to reduce behavioral conflicts is the
    a. rolling budget.
    b. priority budget.
    c. optimistic or reach budget.
    d. flexible budget.
    e. participative budget.

46. The two main parts of a master budget include
    a. the sales budget and the cash budget.
    b. the income statement and the balance sheet.
    c. the operating budget and the financial budget.
    d. the production budget and selling & administrative budget.
    e. none of these.

Assume that direct labor hours are used as the basis for determining factory overhead rates. The following symbols are applicable to the next two questions:

BH = budgeted direct labor hours needed for production.
DH = denominator direct labor hours used for overhead rate calculations.
AHU = actual direct labor hours used during the period.
SFOR = standard fixed overhead rate per hour.
SVOR = standard variable overhead rate per hour.
PPVV = planned production volume variance.

47. The planned production volume variance is the difference between
    a. (SFOR)(DH) and (SFOR)(AHU) 
    b. (SFOR)(DH) and (SFOR)(BH)
    c. (SFOR)(BH) and (SFOR)(AHU) 
    d. (SVOR)(AHU) and (SVOR)(BH) 
    e. None of these.

48. Which of the following represents a correct calculation for budgeted factory overhead costs?
    a. (SFOR + SVOR)(BH) + unfavorable PPVV. 
    b.(SFOR + SVOR)(BH) - unfavorable PPVV.
    c. (SFOR)(BH) + favorable PPVV. 
    d. (SFOR)(BH) - favorable PPVV. 
    e. None of these.

49. In the budget equation for factory overhead (Y = a + bX) the letter "b" would most likely include which type of cost?
    a. fixed costs. 
    b. engineered costs. 
    c. discretionary costs. 
    d. committed costs. 
    e. period costs.

50. Employee training costs fall into which of the cost categories listed below?
    a. engineered costs. 
    b. committed costs. 
    c. discretionary costs.
    d. product costs. 
    e. variable costs.

51. Appropriation budgets would probably not be used for which type of costs listed below?
    a. managers’ travel to professional conferences. 
    b. research and development.
    c. landscaping around the factory. 
    d. direct labor. 
    e. public relations advertising.

52. Which of the following types of budgets provides the weakest form of cost control?
    a. priority incremental. 
    b. flexible. 
    c. master. 
    d. zero based. 
    e. incremental.

53. Which type of budgeting requires managers to justify current spending as well as proposed future increases in spending?
    a. priority incremental. 
    b. flexible. 
    c. master. 
    d. zero based. 
    e. incremental.

54. A type of budgeting mainly recommended to reduce behavioral conflicts is the
    a. participative budget. 
    b. priority incremental budget. 
    c. optimistic or reach budget.
    d. zero-based budget. 
    e. incremental budget.

55. Critics of accounting and budgeting mainly criticize which of the following budgeting purposes?
    a. planning 
    b. controlling 
    c. coordinating. 
    d. communicating. 
    e. integrating.

The Q Company produces a single product with the following budgeted price and costs.
    Budgeted Sales price = $100.
    Budgeted variable manufacturing costs per unit = $25 for direct materials and $5 for conversion.
    Budgeted fixed manufacturing costs per unit = $20.
    Budgeted variable selling & administrative costs per unit = $5.

Suppose that budgeted units to be produced for January are increased by 1,000 units as a result of an increase in expected unit sales for February and that budgeted unit sales for January remain the same as in the original budget.

56. What effect would the budgeted production increase have on budgeted net income for January assuming Q Company uses absorption costing?
    a. No effect.
    b. Increase by $20,000.
    c. Decrease by $5,000.
    d. Increase by $50,000.
    e. Some other effect.

57. Assume the same situation as in the question above, but Q Company uses direct costing. Then what effect would the budgeted production increase have on budgeted net income for January?
    a. No effect.
    b. Increase by $20,000.
    c. Decrease by $5,000.
    d. Increase by $50,000.
    e. Some other effect.

58. Assume the same situation as in the two questions above, but Q Company uses throughput costing. Then what effect would the budgeted production increase have on budgeted net income for January?
    a. No effect.
    b. Increase by $20,000.
    c. Decrease by $5,000.
    d. Increase by $50,000.
    e. Some other effect.

59. The planned production volume variance results because
    a. planned production for the month is different from actual production for the month.
    b. planned production for the month is different from budgeted production for the month.
    c. planned production for the month is different from denominator production for the month.
    d. excess capacity exists.
    e. of forecast errors.

60. In comparing budgeted costs to standard costs, which of the following statements is true?
    a. Standard unit costs are the same as budgeted unit costs for both variable and fixed inputs.
    b. Standard unit costs are the same as budgeted unit costs for variable inputs only.
    c. Total standard costs are the same as total budgeted costs.
    d. a and c.
    e. none of these.