Cost Accounting

Practice Exam Chapters 8-9

strategic planning

master budget

sales budget

budgetary slack

1. The budget that focuses on an organization’s long-term needs is referred to as a __________________________.

2. A budget is
a. a planning tool.
b. a control tool.
c. a means of communicating goals to the firm's divisions.
d. all of the above.
3. The master budget is a static budget because it
a. is geared to only one level of production and sales.
b. never changes from one year to the next.
c. covers a preset period of time.
d. always contains the same operating and financial budgets.

4. It is least likely that a production budget revision would cause a revision in the
a. capital budget.
b. cash budget.
c. purchases budget.
d. pro forma balance sheet.

5. Which of the following equations can be used to budget purchases?

(BI = beginning inventory, EI = ending inventory desired, CGS = budgeted cost of goods sold, P = budgeted
purchases)
a. P = CGS + BI - EI
b. P = CGS + BI
c. P = CGS + EI + BI
d. P = CGS + EI - BI

6. A company that maintains a raw material inventory, which is based on the following month's production needs, will
purchase less material than it uses in a month where
a. sales exceed production.
b. production exceeds sales.
c. planned production exceeds the next month's planned production.
d. planned production is less than the next month's planned production.

7. The primary reason that managers impose a minimum cash balance in the cash budget is
a. because management needs discretionary cash for unforeseen business opportunities.
 b. managers lack discipline to control their spending.
c. that it protects the organization from the uncertainty of the budgeting process.
d. that it makes the financial statements look more appealing to creditors.
8. With respect to fixed costs, CVP analysis assumes total fixed costs
a. per unit remain constant as volume changes.
b. remain constant from one period to the next.
c. vary directly with volume.
d. remain constant across changes in volume.

9. Given the following notation, what is the break-even sales level in units?

SP = selling price per unit, FC = total fixed cost, VC = variable cost per unit
a. SP/(FC/VC)
b. FC/(VC/SP)
c. VC/(SP - FC)
d. FC/(SP - VC)

10. If a firm's net income does not change as its volume changes, the firm('s)
a. must be in the service industry.
b. must have no fixed costs.
c. sales price must equal $0.
d. sales price must equal its variable costs.

11. The margin of safety is a key concept of CVP analysis. The margin of safety is the
a. contribution margin rate.
b. difference between budgeted contribution margin and actual contribution margin.
c. difference between budgeted contribution margin and break-even contribution margin.
d. difference between budgeted sales and break-even sales.

12. If a company's variable costs per unit were to increase but its unit selling price stays constant, the effect on a profit-
volume graph would be that the
a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).
13. What are some of the benefits of a well-prepared budget?
14. What are the major assumptions of CVP analysis?

15. Cline Company has the following collection pattern for its accounts receivable:

50 percent in the month of sale

40 percent in the month following the sale
5 percent in the second month following the sale
5 percent uncollectible

The company has recent credit sales as follows:

April: $300,000
May: 500,000
June: 400,000

How much should the company expect to collect on its receivables in June?
 Oakwood Music, Inc.

Oakwood Music, Inc. sells Baldwin pianos. The following information regarding operating costs has been
extracted from budgets of Oakwood Music for December of this year and the first few months of next year:

Dec. Jan. Feb. Mar.

Payroll $10,000 $15,000 $20,000 $15,000
Insurance 5,000 5,000 5,000 5,000
Rent 5,000 5,000 5,000 5,000
Depreciation 1,000 1,000 1,000 1,000
Taxes 1,000 1,500 2,000 2,000

In addition to the above operating costs, enough pianos are purchased each month to maintain the inventory at 40
percent of the projected next month's sales. The firm is expected to be in compliance with this policy on
December 1. Budgeted sales are:

Dec. Jan. Feb. Mar. Apr.

Budgeted sales in units: 40 35 60 60 30

16. Refer to Oakwood Music, Inc. The average cost of a piano is $500. Merchandise is paid for in the month following
its purchase. All other expenses are paid in the month in which they are incurred. Prepare a budget of the cash
disbursements for Oakwood Music, Inc. for the first three months of next year.

First, prepare a purchases budget for December through March for the pianos.

ANS:
17. The Graves Company makes three products. The cost data for these three products is as follows:

Product A Product B Product C

Selling price $10 $20 $30
Variable costs 5 10 15

Total annual fixed costs are $500,000. The firm's experience has been that about 30 percent of dollar sales come
from product A, 40 percent from B, and 30 percent from C.

Required:
a. Compute break-even in sales dollars.

b. Determine the number of units to be sold at the break-even point.

ANS:

18. Anderson Company produces and sells two products: A and B in the ratio of 3A to 5B. Selling prices for A and B
are, respectively, $1,000 and $250; respective variable costs are $500 and $150. The company's fixed costs are
$1,000,000 per year.

Compute the volume of sales in units of each product needed to:

Required:
a. break even.

b. earn $1,000,000 of income before income taxes.