Budgeting. MCQs. Gleim Book. Gleim CD. IMA - Retired IMA - Retired Contains: in a random basis. By: Mohamed hengoo to dvd4arab.

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1 Budgeting MCQs Contains: in a random basis Gleim Book Gleim CD IMA - Retired 2005 IMA - Retired 2008 By: Mohamed hengoo to dvd4arab.com members

2 [1] Gleim #: Source: CIA 589 IV-12 A company has $10,000 in cash and $150,000 in merchandise inventory on March 31. The desired cash and merchandise inventory balances on June 30 are $20,000 and $250,000, respectively. Sales for the quarter are expected to be $300,000, all in cash. Gross margin is 40% of sales. Cash operating expenses are expected to be $50,000. All merchandise inventory purchases are paid for in cash at the time of purchase. What amount of financing will the company need during the quarter? $40,000 $20,000 $50,000 $30,000 [2] Gleim #: Source: CMA The production budget process usually begins with the Direct materials budget. Sales budget. Direct labor budget. Manufacturing overhead budget. [3] Gleim #: Source: CIA 1192 IV-19 There are many different budget techniques or processes that business organizations can employ. One of these techniques or processes is zero-based budgeting, which is 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. Budgeting for cash inflows and outflows to time investments and borrowings in a way to maintain a bank account with a minimum balance. Budgeting from the ground up as though the budget process were being initiated for the first time. Developing budgeted costs from clear-cut measured relationships between inputs and outputs. [4] Gleim #: Source: CMA A budgeting approach that requires a manager to justify the entire budget for each budget period is known as Performance budgeting. Program budgeting. Zero-based budgeting. Incremental budgeting. Copyright 2008 Gleim Publications, Inc. Page 1

3 [Fact Pattern #1] Polk Retailers is developing cash and other budget information for July, August, and September. At June 30, Polk had cash of $6,600, accounts receivable of $524,000, inventories of $371,280, and accounts payable of $159,666. The budget is to be based on the following assumptions: Sales Each month s sales are billed on the last day of the month. Customers are allowed a 2% discount if payment is made within 10 days after the billing date. Receivables are booked gross. 65% of the billings are collected within the discount period, 20% are collected by the end of the month, 10% are collected by the end of the second month, and 5% prove uncollectible. Purchases 60% of all purchases of materials and selling, general, and administrative expenses are paid in the month purchased and the remainder in the following month. Each month s ending inventory in units is equal to 120% of the next month s units of sales. The cost of each unit of inventory is $25. Selling, general, and administrative expenses, of which $3,000 is depreciation, are equal to 20% of the current month s sales. Actual and projected sales are as follows: Dollars Units May $424,000 10,600 June 436,000 10,900 July 428,000 10,700 August 408,000 10,200 September 432,000 10,800 October 440,000 11,000 [5] Gleim #: Source: Publisher (Refers to Fact Pattern #1) Polk s budgeted cash disbursements during August are $272,518 $345,000 $262,300 $297,306 [Fact Pattern #2] Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have accounted for 10% of total sales, and payments for credit sales have been received as follows: 40% of credit sales in the month of the sale 30% of credit sales in the first subsequent month 25% of credit sales in the second subsequent month 5% of credit sales in the third subsequent month The forecast for both cash and credit sales is as follows: Month Sales January $95,000 February 65,000 March 70,000 April 80,000 May 85,000 Copyright 2008 Gleim Publications, Inc. Page 2

4 [6] Gleim #: Source: CMA (Refers to Fact Pattern #2) Due to deteriorating economic conditions, Pine Hill Wood Products has now decided that its cash forecast should include a bad debt adjustment of 2% of credit sales, beginning with sales for the month of April. The 5% collection in the fourth month should be reduced to reflect the bad debt. Because of this policy change, the total expected cash inflow in April related to sales made in April will Decrease by $1, Decrease by $1, Decrease by $1, Be unchanged. [Fact Pattern #3] Simpson, Inc. is in the process of preparing its annual budget. The following beginning and ending inventory levels (in units) are planned for the year ending December 31. Beginning Inventory Ending Inventory Raw material* 40,000 50,000 Work-in-process 10,000 10,000 Finished goods 80,000 50,000 *Two units of raw material are needed to produce each unit of finished product. [7] Gleim #: Source: CMA (Refers to Fact Pattern #3) If Simpson, Inc. plans to sell 480,000 units during the year, the number of units it would have to manufacture during the year would be 440,000 units. 450,000 units. 480,000 units. 510,000 units. [8] Gleim #: Source: CMA Many companies use comprehensive budgeting in planning for the next year s activities. When both an operating budget and a financial budget are prepared, which one of the following is correct concerning the financial budget? Included in the Financial Budget Capital Pro-forma Cash Budget Balance Sheet Budget No No No No Yes No Yes Yes Yes Yes No Yes Copyright 2008 Gleim Publications, Inc. Page 3

5 [9] Gleim #: Source: CIA 585 III-20 The major feature of zero-based budgeting (ZBB) is that it Questions each activity and determines whether it should be maintained as it is, reduced, or eliminated. Assumes all activities are legitimate and worthy of receiving budget increases to cover any increased costs. Focuses on planned capital outlays for property, plant, and equipment. Takes the previous year s budgets and adjusts them for inflation. [10] Gleim #: Source: CMA Steers Company has just completed its prospective financial statements for the coming year. Relevant information is summarized below: Projected net income $100,000 Anticipated capital expenditures 50,000 Increase in working capital 25,000 Depreciation expense 15,000 From the information provided above, the increase in Steers cash account for the coming year will be $25,000 $90,000 $160,000 $40,000 [11] Gleim #: Source: Publisher Bradley Co. budgets its total production costs at $220,000 for 75,000 units of output and $275,000 for 100,000 units of output. Since additional facilities are needed to produce 100,000 units, fixed costs are budgeted at 20% more than for 75,000 units. What is Bradley s budgeted variable cost per unit of output? $2.75 $1.10 $2.20 $1.20 Copyright 2008 Gleim Publications, Inc. Page 4

6 [Fact Pattern #4] Scarborough Corporation manufactures and sells two products, Thingone and Thingtwo. Scarborough s budget department gathered the following data to project sales and budget requirements: Projected Sales Product Units Price Thingone 60,000 $ 70 Thingtwo 40, Projected Inventories -- in units Expected Desired Product January 1 December 31 Thingone 20,000 25,000 Thingtwo 8,000 9,000 To produce one unit of Thingone and Thingtwo, the following raw materials are used: Raw Material Unit Thingone Thingtwo A lb. 4 5 B lb. 2 3 C each 0 1 Projected data for the year with respect to raw materials are as follows: Anticipated Expected Desired Raw Purchase Inventories Inventories Material Price 1/1 12/31 A $8 32,000 lb. 36,000 lb. B 5 29,000 lb. 32,000 lb. C 3 6,000 each 7,000 each Projected direct labor requirements and rates are as follows: Thingone -- 2 hours per unit at $3 per hour Thingtwo -- 3 hours per unit at $4 per hour Overhead is applied at the rate of $2 per direct labor hour. [12] Gleim #: Source: Publisher (Refers to Fact Pattern #4) What is Scarborough s raw materials budget in quantities? A B C 465, ,000 41, , ,000 48, , ,000 42, , ,000 54,000 Copyright 2008 Gleim Publications, Inc. Page 5

7 [Fact Pattern #5] Daffy Tunes manufactures a toy rabbit with moving parts and a built-in voice box. Projected sales in units for the next 5 months are as follows: Month Projected Sales in Units January 30,000 February 36,000 March 33,000 April 40,000 May 29,000 Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit, and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month. Daffy s policy is to manufacture 1.5 times the coming month s projected sales every other month, starting with January (i.e., odd-numbered months) for February sales, and to manufacture 0.5 times the coming month s projected sales in alternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to other products as needed during the even-numbered months. [13] Gleim #: Source: CMA (Refers to Fact Pattern #5) Daffy Tunes dollar production budget for toy rabbits for February is $390,000 $113,500 $327,000 $127,500 [14] Gleim #: Source: Publisher Juice Company budgeted $148,000 sales on account for June, $120,000 for July, $211,000 for August, $198,000 for September, and $164,000 for October. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36% will be collected the second month, and 4% will be uncollectible. Which month should have the largest amount of cash receipts from accounts receivable budgeted? November. September. October. August. Copyright 2008 Gleim Publications, Inc. Page 6

8 [Fact Pattern #6] Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with 60% collected in the month of sale and 40% collected in the following month. A partial schedule of cash collections for January through March of the coming year reveals the following receipts for the period: Cash Receipts January February March December receivables $32,000 From January sales 54,000 $36,000 From February sales 66,000 $44,000 Other information includes the following. Inventories are maintained at 30% of the following month s sales. Tidwell desires to keep a minimum cash balance of $15,000. Total payments in January are expected to be $106,500, which excludes $12,000 of depreciation expense. Any required borrowings are in multiples of $1,000. The December 31 balance sheet for the preceding year revealed a cash balance of $24,900. [15] Gleim #: Source: CMA (Refers to Fact Pattern #6) March sales total $150,000. The number of units Tidwell must purchase in February is 4,900 3,850 6,100 7,750 [16] Gleim #: Source: CMA The master budget process usually begins with the Operating budget. Production budget. Sales budget. Financial budget. [17] Gleim #: Source: CMA When sales volume is seasonal in nature, certain items in the budget must be coordinated. The three most significant items to coordinate in budgeting seasonal sales volume are Raw material inventory, direct labor hours, and manufacturing overhead costs. Direct labor hours, work-in-process inventory, and sales volume. Raw material inventory, work-in-process inventory, and production volume. Production volume, finished goods inventory, and sales volume. Copyright 2008 Gleim Publications, Inc. Page 7

9 [18] Gleim #: Source: CMA Netco s sales budget for the coming year is as follows. Item Volume in Units Sales Price Sales Revenue 1 200,000 $50 $10,000, , ,500, , ,000,000 Total sales revenue $20,500,000 Items 1 and 3 are different models of the same product. Item 2 is a complement to Item 1. Past experience indicates that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. Netco is considering a 10% price increase for the coming year for Item 1, which will cause sales of Item 1 to decline by 20%, while simultaneously causing sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item 1, total sales revenue will decrease by $550,000 $850,000 $750,000 $1,050,000 [Fact Pattern #7] Wellfleet Company manufactures recreational equipment and prepares annual operational budgets for each department. The Purchasing Department is finalizing plans for the fiscal year ending June 30, Year 2, and has gathered the information regarding two of the components used in both tricycles and bicycles. Wellfleet uses the first-in, first-out inventory method. A19 B12 Tricycles Bicycles Beginning inventory, July 1, Year 1 3,500 1, ,150 Ending inventory, June 30, Year 2 2,000 1,800 1, Unit cost $1.20 $4.50 $54.50 $89.60 Projected fiscal year unit sales , ,000 Component usage: Tricycles 2/unit 1/unit Bicycles 2/unit 4/unit [19] Gleim #: Source: CMA (Refers to Fact Pattern #7) If the economic order quantity of Component B12 is 70,000 units, the number of times that Wellfleet Company should purchase this component during the fiscal year ended June 30, Year 2, is Nine times. Four times. Eight times. Five times. Copyright 2008 Gleim Publications, Inc. Page 8

10 [20] Gleim #: Source: CMA Which one of the following statements regarding the difference between a flexible budget and a static budget is true? A flexible budget primarily is prepared for planning purposes, while a static budget is prepared for performance evaluation. A flexible budget provides cost allowances for different levels of activity, whereas a static budget provides costs for one level of activity. A flexible budget includes only variable costs, whereas a static budget includes only fixed costs. A flexible budget is established by operating management, while a static budget is determined by top management. [21] Gleim #: Source: Publisher Nick Klaus is a divisional manager for Tot Toys. He has been assigned the task of creating a production budget for his division, which produces the company s most popular stuffed animal. Budgeted sales for this toy for the next year have been set at 650,000 units, desired ending finished goods inventory is 200,000 units, and Klaus would like there to be 100,000 equivalent units in ending work-in-process inventory. The starting finished goods inventory for the next year will be 300,000 units, with 75,000 equivalent units in beginning work-in-process inventory. How many equivalent units should Klaus plan for his division to produce? 550, , , ,000 [22] Gleim #: Source: Publisher Harvin, Inc. pays out sales commissions to its sales team in the month the company receives cash for payment. These commissions equal 5% of total (monthly) cash inflows as a result of sales. Harvin has budgeted sales of $300,000 for August, $400,000 for September, and $200,000 for October. Approximately half of all sales are on credit, and the other half are cash sales. Experience indicates that 70% of the budgeted credit sales will be collected in the month following the sale, 20% 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 Harvin in the month of October? $22,000 $17,000 $8,500 $13,500 [23] Gleim #: Source: CMA A continuous profit plan Works best for a company that can reliably forecast events a year or more into the future. Is an annual plan that is part of a 5-year plan. Is a plan that is revised monthly or quarterly. Is a plan devised by a full-time planning staff. Copyright 2008 Gleim Publications, Inc. Page 9

11 [24] Gleim #: Source: CMA (Refers to Fact Pattern #3) If 500,000 finished units were to be manufactured for the year by Simpson, Inc., the units of raw material that must be purchased would be 1,020,000 units. 990,000 units. 1,010,000 units. 1,000,000 units. [25] Gleim #: Source: CMA The controller of Nottingham Stores has asked a staff accountant to prepare detailed reports that summarize the firm s cash flows for the upcoming accounting period and cash position at the end of the period. Accordingly, the controller has requested preparation of a cash budget, a pro-forma statement of cash flows, a detailed listing of cash collections from customers, and a detailed listing of cash payments for merchandise purchases. Which one of the following correctly identifies the first and last document to be prepared by the accountant? First Document Last Document Cash budget Either the listing of cash collections or listing of cash payments, the order of which is unimportant Listing of cash collections Listing of cash collections Listing of cash payments Cash budget Pro-forma statement of cash flows Either the pro-forma statement of cash flows or the cash budget, the order of which is unimportant [26] Gleim #: Source: CMA Monroe Products is preparing a cash forecast based on the following information: Monthly sales: December, $200,000; January, $200,000; February, $350,000; March, $400,000. All sales are on credit and collected the month following the sale. Purchases are 60% of next month s sales and are paid for in the month of purchase. Other monthly expenses are $25,000, including $5,000 of depreciation. If the January beginning cash balance is $30,000, and Monroe is required to maintain a minimum cash balance of $10,000, how much short-term borrowing will be required at the end of February? $60,000 $70,000 $75,000 $80,000 Copyright 2008 Gleim Publications, Inc. Page 10

12 [27] Gleim #: Source: CMA A plan that is created using budgeted revenue and costs but is based on the actual units of output is known as a Flexible budget. Continuous budget. Strategic plan. Static budget. [28] Gleim #: Source: CMA A method of budgeting in which the cost of each program must be justified, starting with the one most vital to the company, is Probabilistic budgeting. Flexible budgeting. Zero-based budgeting. Continuous budgeting. [Fact Pattern #8] Information pertaining to Noskey Corporation s sales revenue is presented in the following table: November December January Year 1 Year 1 Year 2 (Actual) (Budget) (Budget) Cash sales $ 80,000 $100,000 $ 60,000 Credit sales 240, , ,000 Total sales $320,000 $460,000 $240,000 Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% are collected in the month of sale and the remainder in the month following the sale. Purchases of inventory are equal to next month s sales, and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in the month of purchase, and the remainder are paid in the month following the purchase. [29] Gleim #: Source: CMA (Refers to Fact Pattern #8) Noskey Corporation s budgeted cash collections in December Year 1 from November Year 1 credit sales are $136,800 $91,200 $84,000 $228,000 Copyright 2008 Gleim Publications, Inc. Page 11

13 [30] Gleim #: Source: CMA 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? Top-down budgeting. Flexible budgeting. Life-cycle budgeting. Static budgeting. [31] Gleim #: Source: CIA 1190 IV-16 A company is preparing its cash budget for the coming month. All sales are made on account. Given the following: Beginning Balances Budgeted Amounts Cash $ 50,000 Accounts receivable 180,000 Sales $800,000 Cash disbursements 780,000 Depreciation 25,000 Ending accounts receivable balance 210,000 What is the expected cash balance of the company at the end of the coming month? $40,000 $15,000 $70,000 $45,000 Copyright 2008 Gleim Publications, Inc. Page 12

14 [32] Gleim #: Source: CMA Data regarding Rombo Company s budget are shown below. Planned sales Material cost Direct labor Direct labor rate Finished goods beginning inventory Finished goods ending inventory Direct materials beginning inventory Direct materials ending inventory Materials used per unit 4,000 units $2.50 per pound 3 hours per unit $7 per hour 900 units 600 units 4,300 units 4,500 units 6 pounds Rombo Company s production budget will show total units to be produced of 3,700 4,300 4,600 4,000 [33] Gleim #: Source: CMA Which one of the following statements concerning approaches for the budget development process is correct? With the information technology available, the role of budgets as an organizational communication device has declined. The top-down approach to budgeting will not ensure adherence to strategic organizational goals. 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. Since department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the operating budget. [34] Gleim #: Source: CIA 1194 III-54 The major objectives of any budget system are to Foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among organization segments. Foster the planning of operations, facilitate the fixing of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates. Define responsibility centers, facilitate the fixing of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates. Define responsibility centers, provide a framework for performance evaluation, and promote communication and coordination among organization segments. Copyright 2008 Gleim Publications, Inc. Page 13

15 [35] Gleim #: Source: CMA The preparation of a comprehensive master budget culminates with the preparation of the Production budget. Strategic budget. Cash management and working capital budget. Capital investment budget. [36] Gleim #: Source: CMA After performing a thorough study of Michigan Company s operations, an 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? Michigan s budgeting process was well-defined and based on a bottom-up philosophy. Production supervisors found several significant fluctuations in manufacturing volume, with short-term increases on output being followed by rapid, sustained declines. A review of performance reports revealed the presence of many unfavorable efficiency variances. Management noted that minimal incentive bonuses have been paid in recent periods. [37] Gleim #: Source: CMA Flexible budgets Are used to evaluate capacity use. Are static budgets that have been revised for changes in prices. Accommodate changes in activity levels. Accommodate changes in the inflation rate. [38] Gleim #: Source: CMA A static budget Drops the current month or quarter and adds a future month or a future quarter as the current month or quarter is completed. Presents the plan for only one level of activity and does not adjust to changes in the level of activity. Presents a statement of expectations for a period but does not present a firm commitment. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity. Copyright 2008 Gleim Publications, Inc. Page 14

16 [39] Gleim #: Source: CMA Selo Imports uses flexible budgeting for the control of costs. The company s annual master budget includes $324,000 for fixed production supervisory salaries at a volume of 180,000 units. Supervisory salaries are expected to be incurred uniformly throughout the year. During the month of September, 15,750 units were produced, and production supervisory salaries incurred were $28,000. A performance report for September would reflect a budget variance of $1,000 unfavorable. $350 favorable. $350 unfavorable. $1,000 favorable. [40] Gleim #: Source: CMA Which one of the following is the best characteristic concerning the capital budget? The capital budget is a(n) Plan that results in the cash requirements during the operating cycle. Plan to insure that there are sufficient funds available for the operating needs of the company. Plan that assesses the long-term needs of the company for plant and equipment purchases. Exercise that sets the long-range goals of the company including the consideration of external influences caused by others in the market. [41] Gleim #: Source: CMA Flexible budgets Accommodate changes in activity levels. Are budgets that project costs based on anticipated future improvements. Provide for external factors affecting company profitability. Are used to evaluate capacity use. [42] Gleim #: Source: CMA (Refers to Fact Pattern #6) Ignoring income taxes, the financing Tidwell will need in January to maintain the firm s minimum cash balance is $10,600 $11,000 $8,000 $23,000 Copyright 2008 Gleim Publications, Inc. Page 15

17 [43] Gleim #: Source: CMA The following sequence of steps is employed by a company to develop its annual profit plan: Planning guidelines are disseminated downward by top management after receiving input from all levels of management. A sales budget is prepared by individual sales units reflecting the sales targets of the various segments. This provides the basis for departmental production budgets and other related components by the various operating units. Communication is primarily lateral with some upward communication possible. A profit plan is submitted to top management for coordination and review. Top management s recommendations and revisions are acted upon by middle management. A revised profit plan is resubmitted for further review to top management. Top management grants final approval and distributes the formal plan downward to the various operating units. This outline of steps best describes which one of the following approaches to budget development? Bottom-up approach. Total justification of all activities by operating units. Top-down approach. Imposed budgeting by top management. [44] Gleim #: Source: CMA The Yummy Dog Bone Company is anticipating that a major supplier might experience a strike this year. Because of the nature of the product and emphasis on quality, extra production cannot be stored as finished goods inventory. When developing a contingency budget that would anticipate a direct materials buildup, the two most significant items that will be affected are Direct materials and cash flow. Sales and ending inventory. Production volume and direct material. Production and cash flow. [45] Gleim #: Source: CMA Which one of the following items is the last schedule to be prepared in the normal budget preparation process? Cost of goods sold budget. Selling expense budget. Cash budget. Manufacturing overhead budget. Copyright 2008 Gleim Publications, Inc. Page 16

18 [46] Gleim #: Source: Publisher The Maxwell Company s cash budget for March includes the following information. This information concerns its accounts receivable: Estimated credit sales for March $300,000 Actual credit sales for February $250,000 Estimated collections in March for credit sales in March 30% Estimated collections in March for credit sales in February 60% Estimated collections in March for credit sales prior to February $15,000 Estimated write-offs in March for uncollectible credit sales $7,000 Estimated provision for bad debts in March for credit sales in March $8,000 Determine the estimated cash receipts from accounts receivable collections in March. $240,000 $255,000 $247,000 $248,000 [47] Gleim #: Source: CMA Ming Company has budgeted sales at 6,300 units for the next fiscal year and desires to have 590 good units on hand at the end of that year. Beginning inventory is 470 units. Ming has found from past experience that 10% of all units produced do not pass final inspection and therefore must be destroyed. How many units should Ming plan to produce in the next fiscal year? 7,186 6,890 7,062 7,133 [48] Gleim #: Source: CMA Myers 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? 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. Recognition that 0.5% of the July sales on account will be uncollectible. Federal income tax and Social Security tax withheld from employees June paychecks to be remitted to the Internal Revenue Service in July. Quarterly cash dividends scheduled to be declared on July 15 and paid on August 6 to shareholders of record as of July 25. Copyright 2008 Gleim Publications, Inc. Page 17

19 [Fact Pattern #9] Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table tops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly Department takes a manufactured table top and attaches the four purchased table legs. It takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables to ensure that 40% of next month s sales are in the finished goods inventory. Rokat also purchases sufficient raw materials to ensure that direct materials inventory is 60% of the following month s scheduled production. Rokat s sales budget in units for the next quarter is as follows: July 2,300 August 2,500 September 2,100 Rokat s ending inventories in units for June 30 are Finished goods 1,900 Direct materials (legs) 4,000 [49] Gleim #: Source: CMA (Refers to Fact Pattern #9) The number of tables to be produced by Rokat during August is 1,440 tables. 1,900 tables. 1,400 tables. 2,340 tables. [50] Gleim #: Source: CMA The use of the master budget throughout the year as a constant comparison with actual results signifies that the master budget is also a Capital budget. Static budget. Zero-base budget. Flexible budget. [51] Gleim #: Source: CMA Of the following items, the one item that would not be considered in evaluating the adequacy of the budgeted annual operating income for a company is Earnings per share. Industry average for earnings on sales. Price-earnings ratio. Internal rate of return. Copyright 2008 Gleim Publications, Inc. Page 18

20 [52] Gleim #: Source: CMA Which one of the following is usually not cited as being an advantage of a formal budgetary process? Forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary process. Ensures improved cost control within the organization and prevents inefficiencies. Provides a formal benchmark to be used for feedback and performance evaluation. Serves as a coordination and communication device between management and subordinates. [53] Gleim #: Source: CMA Which one of the following may be considered an independent item in the preparation of the master budget? Ending inventory budget. Pro forma income statement. Pro forma statement of financial position. Capital investment budget. [Fact Pattern #10] PortCo Products is a divisionalized furniture manufacturer. The divisions are autonomous segments, with each division being responsible for its own sales, costs of operations, working capital management, and equipment acquisition. Each division serves a different market in the furniture industry. Because the markets and products of the divisions are so different, there have never been any transfers between divisions. The Commercial Division manufactures equipment and furniture that is purchased by the restaurant industry. The division plans to introduce a new line of counter and chair units that feature a cushioned seat for the counter chairs. John Kline, the division manager, has discussed the manufacturing of the cushioned seat with Russ Fiegel of the Office Division. They both believe a cushioned seat currently made by the Office Division for use on its deluxe office stool could be modified for use on the new counter chair. Consequently, Kline has asked Russ Fiegel for a price for 100-unit lots of the cushioned seat. The following conversation took place about the price to be charged for the cushioned seats: Fiegel: John, we can make the necessary modifications to the cushioned seat easily. The direct materials used in your seat are slightly different and should cost about 10% more than those used in our deluxe office stool. However, the direct labor time should be the same because the seat fabrication operation basically is the same. I would price the seat at our regular rate--full cost plus 30% markup. Kline: That s higher than I expected, Russ. I was thinking that a good price would be your variable manufacturing costs. After all, your capacity costs will be incurred regardless of this job. Fiegel: John, I m at capacity. By making the cushion seats for you, I ll have to cut my production of deluxe office stools. Of course, I can increase my production of economy office stools. The direct labor time freed by not having to fabricate the frame or assemble the deluxe stool can be shifted to the frame fabrication and assembly of the economy office stool. Fortunately, I can switch my labor force between these two models of stools without any loss of efficiency. As you know, overtime is not a feasible alternative in our community. I d like to sell it to you at variable cost, but I have excess demand for both products. I don t mind changing my product mix to the economy model if I get a good return on the seats I make for you. Here are my standard costs for the two stools and a schedule of my overhead. Copyright 2008 Gleim Publications, Inc. Page 19

21 Kline: I guess I see your point, Russ, but I don t want to price myself out of the market. Maybe we should talk to Corporate to see if they can give us any guidance. Office Division Standard Costs and Prices Deluxe Office Stool Economy Office Stool Direct materials Framing $ 8.15 $ 9.76 Cushioned seat Padding Vinyl Molded seat (purchased) Direct labor Frame fabrication (.5 $7.50 per DLH) 3.75 (.5 $7.50 per DLH) 3.75 Cushion fabrication (.5 $7.50 per DLH) Assembly* (.5 $7.50 per DLH) 3.75 (.3 $7.50 per DLH) 2.25 Overhead (1.5 DLH $12.80 per DLH) (.8 DLH $12.80 per DLH) Total standard cost $45.00 $32.00 Selling price (30% markup) $58.50 $41.60 *Attaching seats to frames and attaching rubber feet. Office Division Overhead Budget Overhead Item Nature Amount Supplies Variable--at current market prices $ 420,000 Indirect labor Variable 375,000 Supervision Nonvariable 250,000 Power Use varies with activity; rates are fixed 180,000 Heat and light Nonvariable--light is fixed regardless of production while heat/air conditioning varies with fuel charges 140,000 Property taxes and insurance taxes Nonvariable--any change in amounts/rates is independent of production 200,000 Depreciation Fixed dollar total 1,700,000 Employee benefits 20% of supervision, direct and indirect labor 575,000 Total overhead $3,840,000 Capacity in DLH 300,000 Overhead rate per DLH $ Copyright 2008 Gleim Publications, Inc. Page 20

22 [54] Gleim #: Source: Publisher (Refers to Fact Pattern #10) What is PortCo s fixed manufacturing overhead rate? $7.80 per hr. $11.25 per hr. $5.00 per hr. $5.17 per hr. [Fact Pattern #11] This information was adapted from a question on Part 4 of the June 1990 CMA examination that concerned preparation of a pro forma income statement. Easecom manufactures products for networking video-conferencing equipment. Production of specialized units is, to a large extent, performed under contract, with standard units manufactured to marketing projections. Maintenance of customer equipment is an important area of customer satisfaction. Easecom s income statement for the fiscal year ended October 31, Year 1, is presented below. Easecom Income Statement For the Year Ended October 31, Year 1 ($000 omitted) Net sales: Equipment $6,000 Maintenance contracts 1,800 Total net sales 7,800 Expenses: Cost of goods sold 4,600 Customer maintenance 1,000 Selling expense 600 Administrative expense 900 Interest expense 150 Total expenses 7,250 Income before income taxes 550 Income taxes 220 Net income $ 330 Easecom s management considered the growing videoconferencing market when it proposed the following actions for fiscal Year 2: Increase equipment sales prices by 10%. Increase the cost of each unit sold by 3% for needed technology and quality improvements, and increased variable costs. Increase maintenance inventory by $250,000 at the beginning of the year and add two maintenance technicians at a total cost of $130,000 to cover wages and related travel expenses. These revisions are intended to improve customer service and response time. The increased inventory will be financed at an annual interest rate of 12%; no other borrowings or loan reductions are contemplated during fiscal Year 2. All other assets will be held to fiscal Year 1 levels. Increase selling expenses by $250,000 but hold administrative expenses at Year 1 levels. The effective rate for Year 2 federal and state taxes is expected to be 40%, the same as Year 1. These actions are expected to increase equipment unit sales by 6%, with a corresponding 6% growth in maintenance contracts. Copyright 2008 Gleim Publications, Inc. Page 21

23 [55] Gleim #: Source: Publisher (Refers to Fact Pattern #11) In its pro forma income statement for the fiscal year ending October 31, Year 2, Easecom estimated that total net sales will be $8,904,000 $6,996,000 $6,000,000 $7,800,000 [56] Gleim #: Source: CMA Zohar Company s budget contains the following information: Zohar Company Units Beginning finished goods inventory 85 Beginning work-in-process in equivalent units 10 Desired ending finished goods inventory 100 Desired ending work-in-process in equivalent units 40 Projected sales 1,800 How many equivalent units should Zohar plan to produce? 1,800 1,565 1,815 1,845 Copyright 2008 Gleim Publications, Inc. Page 22

24 [Fact Pattern #12] This information was adapted from a question on Part 4 of the December 1988 CMA examination that concerned preparation of a pro forma statement of financial position. Jefferson Binders, Inc. is a manufacturer of notebooks with a comprehensive annual budgeting process that ends with the preparation of pro forma financial statements. All underlying budget schedules have been completed for the year ending December 31, Year 2, and selected data from these schedules are presented below. Also shown are the pro forma statement of cash receipts and disbursements for the year ending December 31, Year 2, and the pro forma statement of financial position as of December 31, Year 1. Jefferson uses the accrual basis of accounting. To facilitate the budgeting process, Jefferson accumulates all raw materials, direct labor, manufacturing overhead (with the exception of depreciation), selling, and administrative costs in an account called expenses payable. The company s income tax rate is 40%, and income tax expense is classified as current income taxes payable. The majority of sales are on account. Unit Sales Unit Price Total Revenue 9,500,000 $5.50 $52,250,000 Production Total Production Units Unit Cost Manufacturing Cost 9,640,000 $4.75 $45,790,000 Raw Materials Purchases Unit Total Item Quantity Cost Purchases Ring Assembly 9,600,000 $.80 $7,680,000 Cover (2 per unit) 18,800,000 $.30 $5,640,000 Direct Labor Worked Production Hours Cost per Hour Total Cost 2,410,000 $9.00 $21,690,000 Each unit requires 15 minutes of direct labor time. Jefferson Binders, Inc. Pro Forma Statement of Cash Receipts and Disbursements For the Year Ending December 31, Year 2 ($000 omitted) Cash balance 1/1/Year 2 (estimated) $ 565 Cash receipts Cash sales 5,300 Collection of accounts receivable 46,600 Proceeds from sale of additional common stock (20,000 shares) 420 Total cash available $52,885 Cash disbursements Raw materials $13,380 Direct labor 21,640 Manufacturing overhead 9,650 The manufacturing overhead rate is $4.40 per direct labor hour ($10,604,000 2,410,000 hours). Variable overhead $ 5,790,000 Supervisory salaries 1,250,000 Depreciation 724,000 Other fixed costs 2,840,000 Total manufacturing overhead $10,604,000 Selling and Administrative Expenses Selling expense $1,875,000 Administrative expense 3,080,000 Total expense $4,955,000 Each semi-annual mortgage payment consists of interest plus an even principal reduction of $100,000. Interest payments for Year 2 are $250,000. Jefferson Binders, Inc. Pro Forma Statement of Financial Position as of December 31, Year 1 ($000 omitted) Assets Cash $ 565 Accounts receivable 825 Raw materials inventory* 301 Finished goods inventory** 608 Total current assets $ 2,299 Land $ 1,757 Property, plant, and equipment 12,400 Minus: Accumulated depreciation 2,960 Total long-term assets $11,197 Total assets $13,496 Liabilities and Equity Expenses payable $ 690 Mortgage payable 200 Income taxes payable 356 Copyright 2008 Gleim Publications, Inc. Page 23

25 [57] Gleim #: Source: Publisher (Refers to Fact Pattern #12) Jefferson s pro forma net income for the year ending December 31, Year 2, is $1,302,000 $2,170,000 $1,920,000 $1,152,000 [58] Gleim #: Source: CMA Budgeting problems where departmental managers are repeatedly achieving easy goals or failing to achieve demanding goals can be best minimized by establishing Better communication whereby managers discuss budget matters daily with their superiors. Preventive controls. A policy that allows managers to build slack into the budget. Participative budgeting where managers pursue objectives consistent with those set by top management. [59] Gleim #: Source: CMA (Refers to Fact Pattern #8) Noskey Corporation s budgeted total cash receipts in January Year 2 are $299,400 $240,000 $294,000 $239,400 [60] Gleim #: Source: CMA All of the following are disadvantages of top-down budgeting as opposed to participatory budgeting, except that it May limit the acceptance of proposed goals and objectives. Reduces the time required for budgeting. May result in a budget that is not possible to achieve. Reduces the communication between employees and management. Copyright 2008 Gleim Publications, Inc. Page 24

26 [61] Gleim #: Source: CMA Granite Company sells products exclusively on account and has experienced the following collection pattern: 60% in the month of sale, 25% in the month after sale, and 15% in the second month after sale. Uncollectible accounts are negligible. Customers who pay in the month of sale are given a 2% discount. If sales are $220,000 in January, $200,000 in February, $280,000 in March, and $260,000 in April, Granite s accounts receivable balance on May 1 will be $143,920 $146,000 $204,000 $107,120 [62] Gleim #: Source: CMA Which one of the following schedules would be the last item to be prepared in the normal budget preparation process? Cash budget. Direct labor budget. Cost of goods sold budget. Manufacturing overhead budget. [63] Gleim #: Source: CMA The information contained in a cost of goods manufactured budget most directly relates to the Materials used, direct labor, overhead applied, and ending work-in-process budgets. Materials used, direct labor, overhead applied, and work-in-process inventories budgets. Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods inventories budgets. Materials used, direct labor, overhead applied, and finished goods inventories budgets. [Fact Pattern #13] Paradise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, Year 1, through June 30, Year 2. July 1, Year 1 June 30, Year 2 Raw material* 40,000 50,000 Work-in-process 10,000 10,000 Finished goods 80,000 50,000 * Two (2) units of raw material are needed to produce each unit of finished product. Copyright 2008 Gleim Publications, Inc. Page 25

27 [64] Gleim #: Source: CMA (Refers to Fact Pattern #13) If 500,000 complete units were to be manufactured during the fiscal year by Paradise Company, the number of units of raw materials to be purchased is 990,000 units. 1,020,000 units. 1,000,000 units. 1,010,000 units. [65] Gleim #: Source: CMA Stevens Company manufactures electronic components used in automobile manufacturing. Each component uses two raw materials, Geo and Clio. Standard usage of the two materials required to produce one finished electronic component, as well as the current inventory, are shown below. Standard Material Per Unit Price Current Inventory Geo 2.0 pounds $15/lb. 5,000 pounds Clio 1.5 pounds $10/lb. 7,500 pounds Stevens forecasts sales of 20,000 components for the next two production periods. Company policy dictates that 25% of the raw materials needed to produce the next period s projected sales be maintained in ending direct materials inventory. Based on this information, the budgeted direct material purchases for the coming period would be Geo Clio $825,000 $450,000 $675,000 $300,000 $450,000 $450,000 $675,000 $400,000 [66] Gleim #: Source: CMA Each unit of Product XK-46 requires three direct labor hours. Employee benefit 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 $245 Employee benefits (related to weekly wages) 25% The standard direct labor cost per unit of Product XK-46 is $36.75 $29.40 $21.00 $26.25 Copyright 2008 Gleim Publications, Inc. Page 26

28 [67] Gleim #: Source: CMA When compared with ideal standards, practical standards Incorporate very generous allowance for spoilage and worker inefficiencies. Produce lower per-unit product costs. Serve as a better motivating target for manufacturing personnel. Result in a less desirable basis for the development of budgets. [68] Gleim #: Source: CIA 578 IV-18 An organization s sales revenue is expected to be $72,600, a 10% increase over last year. For the same period, total fixed costs of $22,000 are expected to be the same as last year. If the number of units sold is expected to increase by 1,100, the marginal revenue per unit will be $4 $20 $6 $46 [69] Gleim #: Source: CMA All of the following would appear on a projected schedule of cost of goods manufactured except for Applied manufacturing overhead. Ending work-in-process inventory. Beginning finished goods inventory. The cost of raw materials used. Copyright 2008 Gleim Publications, Inc. Page 27

29 [70] Gleim #: Source: CMA Tip-Top Cleaning Supply carries a large number of different items in its inventory, giving the firm a competitive advantage in its industry. Below is part of Tip-Top s budget for the first quarter of next year. Sales $855,000 Cost of goods sold 425,000 Rent and salary expenses 375,000 Historically, all of the sales are on account and are made evenly over the quarter. 5% of all sales are determined to be uncollectible and written off. The balance of the receivables is collected in 50 days. This sales and collection experience is expected to continue in the first quarter. The projected balance sheet for the first day of the quarter includes the following account balances. Cash $ 10,000 Accounts receivable (net) 450,000 Inventory 900,000 Accounts payable 800,000 How much cash can Tip-Top anticipate collecting in the first quarter (based on a 360-day year)? $811,000 $902,500 $830,000 $901,250 [71] Gleim #: Source: Publisher The major disadvantage of a budget produced by means of a top-down process is Absence of a significant motivational effect. Lack of involvement by upper-level management. Inconsistency with strategic plans. Impairment of goal congruence. [72] Gleim #: Source: CMA Which one of the following is not considered to be a benefit of participative budgeting? Individuals at all organizational levels are recognized as being part of the team; this results in greater support of the organization. When managers set the final targets for the budget, senior management need not be concerned with the overall profitability of current operations. Managers are more motivated to reach the budget objectives since they participated in setting them. The budget estimates are prepared by those in direct contact with various activities. Copyright 2008 Gleim Publications, Inc. Page 28

30 [Fact Pattern #14] Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company s Statement of Financial Position for the year ended November 30, is as follows: Super Drive Statement of Financial Position Position November 30 Assets Cash $ 52,000 Accounts receivable, net 150,000 Inventory 315,000 Property, plant, and equipment 1,000,000 Total assets $1,517,000 Liabilities and shareholders equity Accounts payable $ 175,000 Common stock 900,000 Retained earnings 442,000 Total liabilities and shareholders equity $1,517,000 Additional information regarding Super Drive s operations include the following: Sales are budgeted at $520,000 for December and $500,000 for January of the next year. Collections are expected to be 60% in the month of sale and 40% in the month following the sale. 80% of the disk drive components are purchased in the month prior to the month of sale, and 20% are purchased in the month of sale. Purchased components are 40% of the cost of goods sold. Payment for the components is made in the month following the purchase. Cost of goods sold is 80% of sales. [73] Gleim #: Source: CMA (Refers to Fact Pattern #14) Super Drive s budgeted cash collections for the month of December are $402,000 $520,000 $462,000 $208,000 [74] Gleim #: Source: CMA Comparing actual results with a budget based on achieved volume is possible with the use of a Rolling budget. Master budget. Flexible budget. Monthly budget. Copyright 2008 Gleim Publications, Inc. Page 29