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THEORIES: 4. Which of the following is least likely a reason why a company prepares its budget?
Basic Concepts A. To provide a basis for comparison of actual performance
1. The concept of “management by exception” refers to management’s consideration of B. To communicate the company’s plans throughout the entire business organization
A. only those items that vary materially from expectations. C. To control income and expenditure in a particular period.
B. only rare events. D. To make sure the company expands its operations.
C. samples selected at random.
D. only significant unfavorable deviations. 5. Which of the following does not contribute to an effective budgeting?
A. Top management is involved in budgeting.
8. A formal written statement of management’s plans for the future, packaged in financial B. To give each manager a free hand in the preparation of the budget, the data within the
terms, is a: master budget are flexible.
A. Responsibility report. C. Cost of production report. C. The organization is divided into responsibility units.
B. Performance report. D. Budget. D. There is communication of results.
2. Budgets are related to which of the following management functions? 6. The budgets that are based on a very high levels of performance, like expected costs using
A. Planning C. Control ideal standards,
B. Performance evaluation D. all of these A. assist in planning the operations of the company
B. stimulate people to perform better than they ordinarily would
22. Budgeting supports the planning process by encouraging all of the following activities C. are helpful in evaluating the performance of managers
except: D. can lead to low levels of performance
A. Requiring all organizational units to establish their goals for the coming period.
B. Increasing the motivation of managers and employees by providing agreed-upon 7. Which of the following statements is incorrect?
expectations. A. An imposed budget is the same as a participative budget.
C. Improving overall decision making by considering all viewpoints, options, and cost B. Preparation of the budget would be the responsibility of each responsibility unit.
control programs. C. Top management’s support is necessary to promote budget participation.
D. Directing and coordinating operations during the period. D. The top management should review and approve each responsibility unit’s budget.
3. Which of the following advantages does a budget mostly provide? 9. The primary role of the budget director and the budgeting department is to
A. Coordination is increased. A. Settle disputes among operating executives during the development of the annual
B. Planning is emphasized. operating plan.
C. Communication is continuous. B. Develop the annual profit plan by selecting the alternatives to be adopted form the
D. Comparison of actual versus budgeted data. suggestions submitted by the various operating segments.
C. Compile the budget and manage the budget process.
24. Which of the following is NOT an advantage of budgeting? D. Justify the budget to the corporate planning committee of the board of directors.
A. It forces managers to plan.
B. It provides resource information that can be used to improve decision making. 10. The primary variable affecting active participation and commitment to the budget and the
C. It aids in the use of resources and employees by setting a benchmark that can be used control system is
for the subsequent evaluation of performance. A. Management efforts to achieve the budget rather than optimize results.
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36. The term “decision package” relates to 20. Which of the following statements about Zero-based budgeting is incorrect?
A. comprehensive budgeting C. program budgeting A. All activities in the company are organized into break-up units called packages.
B. zero-based budgeting D. line budgeting B. All costs have to be justified every budgeting period.
C. The process is not time consuming since justification of costs can be done as a routine
41. The budget approach that is more relevant when the continuance of an activity or operation matter.
must be justified on the basis of its need or usefulness to the organization. D. Zero-based budgeting includes variable costs only.
A. the incremental approach C. the baseline approach
B. the zero-based approach D. both a and b are true 34. Budgeting expenditures by purpose is called
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A. program budgeting C. zero-based budgeting A. Flexible budget considers only variable costs but a master budget considers all costs.
B. line budgeting D. flexible budgeting B. Flexible budget allows management latitude in meeting goals whereas a master budget
is based on a fixed standard.
28. A static budget is not appropriate in evaluating a manager's effectiveness if a company has C. Master budget is for an entire production facility but a flexible budget is applicable to
A. substantial fixed costs. single department only.
B. substantial variable costs. D. Master budget is based on one specific level of production and a flexible budget can be
C. planned activity levels that match actual activity levels. prepared for any production level within a relevant range
D. no variable costs.
47. Which of the following is a difference between a static budget and a flexible budgets?
45. Flexible budgeting is a reporting system wherein the A. A flexible budget includes only variable costs; a static budget includes only fixed costs.
A. Budget standards may be adjusted at management’s discretion. B. A flexible budget includes all costs, a static budget includes only fixed costs.
B. Planned level of activity is adjusted to the actual level of activity before the performance C. A flexible budget gives different allowances for different levels of activity, a static budget
report is prepared. does not.
C. Reporting dates vary according to the managerial levels of the users. D. There is no difference between the two.
D. Packages of activities vary from period to period.
17. A system that classifies budget requests by activity and estimates the benefits arising from
15. A budget that presents the plan for a range of activity so that the plan can be adjusted for each activity:
changes in activity levels is referred to as: A. Incremental budgeting system.
A. Zero-based budgeting. B. Static budgeting system.
B. Continuous budgeting. C. Program planning and budgeting system.
C. Flexible budgeting. D. Participative system.
D. Program planning and budgeting system.
21. A budget that identifies revenues and costs with an individual controlling their incurrence is
16. A flexible budget is A. Master budget C. Product budget
A. one that can be changed whenever a manager so desires B. Responsibility budget D. None of the above
B. adjusted to reflect expected costs at the actual level of activity
C. one that uses the formula total costs = cost per unit x units produced 25. The difference between an individual's submitted budget projection and his or her best
D. the same as a continuous budget estimate of the item being projected is an example of
A. padding the budget
26. A series of budgets for varying levels of activity is a: B. adhering to zero-based budgeting assumptions
A. Variable cost budget. C. Master budget. C. creating budgetary slack
B. Flexible budget. D. Zero-based budget. D. being incongruent with participative budgeting
48. If a company wishes to establish a factory overhead budget system in which estimated costs 43. Budget slack is a condition in which
can be derived directly from estimates of activity levels, it should prepare a A. Demand is low at various times of the year
A. flexible budget. C. Discretionary budget. B. Excess machine capacity exists in some areas of the plant
B. Program budget. D. Manufacturing budget. C. There is an intentional overestimate of expenses or an underestimate of revenues
D. Managers grant favored employees extra time-off
46. The basic difference between a master budget and a flexible budget is that a
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39. The procedure for setting profit objectives in which the determination of profit objectives is A. a forecast of expected operating expenses.
subordinated to the planning, and the objectives emerge as the product of the planning itself B. a forecast of operating expenses and related revenues.
is the C. a forecast of units of production.
A. a priori method C. practical method D. concerned with the income-generating activities of a firm.
B. theoretical method D. a posteriori method
54. What is the proper preparation sequencing of the following budgets?
40. The procedure for setting profit objectives in which management specifies a given rate of 1. Budgeted Balance Sheet
return that it seeks to realize in the long run by means of planning toward that end is the 2. Sales Budget
A. a priori method C. pragmatic method 3. Selling and Administrative Budget
B. theoretical method D. ad hoc method 4. Budgeted Income Statement
A. 1, 2, 3, 4 C. 2, 3, 4, 1
50. Budgeting process in which information flows top down and bottom up is referred to as: B 2, 3, 1, 4 D. 2, 4, 1, 3
A. Continuous budgeting. C. Perpetual budgeting
B. Participative budgeting D. Joint budgeting 29. In estimating the sales volume for a master budget, which of the following techniques may
be used to improve the projections?
42. Which of the following is not a potential problem with participative budgeting? A. Brainstorming.
A. setting standards that are either too high or too low B. Statistical analysis.
B. padding the budget C. Estimating from previous sales volume.
C. build slack into the budget D. All of these are useful.
D. all of the above are potential problems
30. Using the concept of ‘expected value” in sales forecasting means that the sales forecast to be
33. The ideal financial planning process would be used is
A. top-down planning. A. developed using the indicator method
B. bottom-up planning. B. the sum of the sales expected by individual managers
C. a combination of top-down and bottom-up planning. C. based on expected selling prices of the products
D. None of the above D. based on probabilities
44. A common starting point in the budgeting process is 31. Several sales forecasts are available from different sources and the managers have good
A. expected future net income. C. to motivate the sales force. ideas about their likelihoods. This situation call for the use of
B. past performance. D. a clean slate, with no expectations. A. the expected value concept C. indicator methods
B. historical analysis D. a scatter diagram
57. Which one of the following is an external factor that would need to be considered in forming an
initial budget proposal? 53. An overly optimistic sales budget may result in
A. changes in product design A. increases in selling prices late in the year.
B. introduction of a new product B. insufficient inventories.
C. competitors' actions C. increased sales during the year.
D. adoption of a new manufacturing process D. excessive inventories.
14. Operating budgets are 56. Which of the following budgets provides the data for the preparation of the direct labor cost
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and 90,000, respectively. A production of one unit requires the following materials:
Production budget Material LL 0.50 lb. @ P0.60
vi. Montalban Company’s sales budget shows the following expected sales for the following Material MM 1.00 lb. @ P1.70
year: Material NN 1.20 lb. @ P1.00
Quarter Units What are the respective peso amounts of each material to be used in production during the
First 120,000 year?
Second 160,000 Material LL Material MM Material NN
Third 90,000 A. P181,200 P1,026,800 P724,800
Fourth 110,000 B. P181,200 P1,026,800 P746,400
Total 480,000 C. P186,600 P1,057,400 P746,400
The inventory at December 31 of the prior year was budgeted at 36,000 units. The quantity D. P186,600 P1,057,400 P724,800
of finished goods inventory at the end of each quarter is to equal 30% of the next quarter’s
budgeted sales of units. Raw materials purchases budget
How much should the production budget show for units to be produced during the first x. If there were 30,000 pounds of raw material on hand on January 1, 60,000 pounds are
quarter? desired for inventory at December 31, and 180,000 pounds are required for annual
A. 48,000 C. 132,000 production, how many pounds of raw material should be purchased during the year?
B. 96,000 D. 144,000 A. 150,000 pounds C. 120,000 pounds
B. 240,000 pounds D. 210,000 pounds
vii. Lorie Company plans to sell 400,000 units of finished product in July an anticipates a growth
rate in sales of 5% per month. The desired monthly ending inventory in units of finished xi. Silver Bowl Company manufactures a single product. It keeps its inventory of finished goods
product is 80% of the next month’s estimated sales. at 75% the coming month’s budgeted sales. It also keeps its inventory of raw materials at 50%
There are 300,000 finished units in the inventory on June 30. Each unit of finished product of the coming month’s budgeted production. Each unit of product requires two pounds of
requires four pounds of direct materials at a cost of P2.50 per pound. There are 800,000 materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; august,
pounds of direct materials in the inventory on June 30. 1,600. Raw material purchases in July would be
How many units should be produced for the three-month period ending September 30? A. 1,525 pounds C. 2,550 pounds
A. 1,260,000 C. 1,331,440 B. 2,900 pounds D. 3,050 pounds
B. 1,328,000 D. 1,424,050
xii. Each unit of finished product uses 6 kilograms of raw materials. The production and inventory
Ending inventory budget budgets for May 2007 are as follows:
viii. If the required direct materials purchases are 8,000 pounds and the direct materials required Beginning Inventory:
for production is three times the direct materials purchases, and the beginning direct Finished goods 15,000 units
materials are three and a half times the direct materials purchases, what are the desired Raw materials 21,000 kg.
ending direct material in pounds? Budgeted unit sales 18,000 units
A. 20,000 C. 12,000 Planned ending inventory
B. 4,000 D. 32,000 Finished goods 11,400 units
Raw materials 24,400 kg.
Raw materials usage budget During the production process, it is usually found that 10% of production units are scrapped as
ix. Minerva Company sells a single product. Budgeted sales for the year are anticipated to be defective and this loss occurs after the raw materials have been placed in process.
640,000 units. The estimated beginning and ending finished goods inventory are 108,000 How many kilograms of raw materials should be purchased in June?
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A. 89,800 C. 96,000
B. 98,440 D. 99,400 xvi. Diliman Corporation includes the following quarterly budget for production:
Quarter Production
xiii. Violet Company manufactures a single product. It keeps its inventory of finished goods at First 60,000 units
twice the coming month’s budgeted sales, inventory of raw materials at 150% of the coming Second 45,000 units
month’s budgeted production requirements. Each unit of product requires two pounds of Third 40,000 units
materials. The production budgets in units consist of the following:. Fourth 65,000 units
May 1,000 Each unit of product requires 2.5 kilograms of direct materials. The company begins each
June 1,200 quarter with inventory of direct materials equal to 25 percent of the total quarter’s material
July 1,300 requirements.
August 1,600 What is the budgeted purchases of materials for the second quarter?
Raw material purchases in June would be A. 113,750 C. 46,250
A. 2,600 pounds C. 2,400 pounds B. 109,375 D. 112,500
B. 1,800 pounds D. 2,700 pounds
Indirect labor costs
xiv. Sales Company is budgeting sales of 300,000 units of its only product for the coming year. xvii. Namuco, Inc. uses flexible budgeting for cost control. During the month of September,
Production of one unit of product requires three pounds of Material Q and 2 pounds of Namuco, Inc. produced 14,500 units of finished goods with indirect labor costs of P25,375.
Material L. Inventory units at the beginning of the year are: Its annual master budget reflects an indirect labor costs, a variable cost, of P360,000 based
Actual, Jan. 1 Budgeted, Dec 31 on an annual production of 200,000 units. In the preparation of performance analysis for the
Finished goods 60,000 50,000 month of September, how much flexible budget should be allowed for indirect labor costs?
Material Q 80,000 60,000 A. P30,000 C. P25,375
Material L 88,000 96,000 B. P29,167 D. P26,100
How many pounds of Material Q is Sales planning to buy during the coming year?
A. 850,000 C. 862,000 Cash receipts budget
B. 890,000 D. 908,000 Sales
xviii. Generous Company began its operations on January 1 of the current year. Budgeted sales
xv. Strama Company prepares its budgets on annual basis. The following beginning and for the first quarter are P240,000, P300,000, and P420,000, respectively, for January,
ending inventory unit levels are planned for the fiscal year of June 1, 2006 through May 31, February and March. Generous Company expects 20% of its sales cash and the remainder
2007. on account. Of the sales on account, 70% are expected to be collected in the month of sale,
June 1, 2006 May 31, 2007 25% in the month following the sale, and the remainder in the following month.
Raw material* 40,000 50,000 How much should Generous receive from sales in March?
Work-in-process 10,000 10,000 A. P304,800 C. P388,800
Finished goods 80,000 50,000 B. 294,000 D. P295,200
*Two (2) units of raw material are needed to produce each unit of finished product.
If 500,000 finished units were to be manufactured during the 2006-2007 fiscal year by Credit sales
Strama Company, the units of raw material needed to be purchased would be xix. Mendrez Company has a collection schedule of 60% during the month of sales, 15% the
A. 1,000,000 units C. 1,020,000 units following month, and 15% subsequently. The total credit sales in the current month of
B. 1,010,000 units D. 990,000 units September were P80,000 and total collections in September were P57,000. What were the
credit sales in July?
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xxxiv. How much will be paid in the month of January for the purchase of materials? xxxvii. The cumulative amount of marketable securities purchased as of July 31 amounts to:
A. P 27,200 C. P137,856 A. P126,000 C. P143,300
B. P117,200 D. P 33,600 B. 132,500 D. P 0
xxxv. How much does Atlanta plan to disburse in the month of June? xxxviii. The amount of loan to be obtained to maintain a balance of P50,000 cash as of
A. P 41,600 C. P207,200 September 30 will be:
B. P100,000 D. P117,200 A. P109.4 C. P 9.4
B. P 59.4 D. P 0.0
Question Nos. 36 through 38 are based on the following:
Super Sales’ actual sales and purchases for April and May are shown here along with forecasted Question Nos. 39 through 45 are based on the following data:
sales and purchases for June through September. The Ingo Corporation makes standard-size 2-inch fasteners, which it sells for P155 per thousand.
Irine Tee, the major stockholder, manages the inventory and finances of the company. She
Sales Purchases estimates sales for the following months to be:
April (Actual) P390,000 P200,000
May (Actual) 420,000 220,000 January P263,500 (1,700,000 fasteners)
June (forecast) 390,000 210,000 February P186,000 (1,200,000 fasteners)
July (forecast) 350,000 240,000 March P217,000 (1,400,000 fasteners)
August (forecast) 420,000 320,000 April P310,000 (2,000,000 fasteners)
September (forecast) 410,000 230,000 May P387,500 (2,500,000 fasteners)
The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sales, Last year Ingo Corporation's sales were P175,000 in November and P232,500 in December
30 percent are collected in the month after the sale and 70 percent are collected two months after. (1,500,000 fasteners).
Super Sales pays for 45 percent of its purchases in the month after purchase and 55 percent two
months after. Ms. Tee is preparing for a meeting with Peninsula Banking Corporation to arrange the financing for
the first quarter. Based on her sales forecast and the following information she has provided, you
Labor expense equals 15 percent of the current month's sales. General overhead expense equals have to prepare a monthly cash budget, a monthly and quarterly pro forma income statement, a
P10,000 per month. Interest payments of P35,000 are due in June and September. A cash pro forma quarterly balance sheet, and all necessary supporting schedules for the first quarter.
dividend of P25,000 is scheduled to be paid in June. Tax payments of P30,000 are due in June
and September. There is a scheduled purchase for cash of an equipment, P290,000 in September. Past history shows that Ingo Corporation collects 50 percent of its accounts receivable in the
normal 30-day credit period (the month after the sale) and the other 50 percent in 60 days (two
Super Sales’ ending cash balance in May is P25,000. The minimum desired cash balance is months after the sale). It pays for its materials 30 days after receipt. In general, Ms. Tee likes to
P20,000. The maximum desired cash balance is P50,000. Excess cash (above P50,000) is used keep a two-month supply of inventory in anticipation of sales. Inventory at the beginning of
to buy marketable securities. Marketable securities are sold before borrowing funds in case of a December was 2,600,000 units. (This was not equal to her desired two-month supply.)
cash shortfall (less than P20,000).
The major cost of production is the purchase of raw materials in the form of steel rods, which are
xxxvi. During the month of June, Super Sales expects to receive cash from sales amounting to: cut, threaded, and finished. Last year raw material costs were P52 per 1,000 fasteners, but Ms.
A. P606,000 C. P398,100 Tee has just been notified that material costs have risen, effective January 1, to P60 per 1,000
B. P408,900 D. P359,100 fasteners. The Ingo Corporation uses FIFO inventory accounting. Labor costs are relatively
constant at P20 per thousand fasteners, since workers are paid on a piecework basis. Overhead is
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allocated at P10 per thousand units, and selling and administrative expense is 20 percent of sales.
Labor expense and overhead are direct cash outflows paid in the month incurred, while interest xli. The expected cash collections on accounts receivable in the month of February are:
and taxes are paid quarterly. A. P224,750 C. P 93,000
B. P248,000 D. P186,000
The corporation usually maintains a minimum cash balance of P25,000, and it puts its excess cash
into marketable securities. The average tax rate is 40 percent, and the company usually pays out xlii. The amount of accounts receivable outstanding as of March 31, 2007 is:
50 percent of net income in dividends to stockholders. Marketable securities are sold before funds A. P217,000 C. P310,000
are borrowed when a cash shortage is faced. Ignore the interest on any short-term borrowings. B. P224,750 D. P108,500
Interest on the long-term debt is paid in March, as are taxes and dividends.
xliii. The cost of goods sold for the first quarter of the coming year amounts to:
As of year-end, the Ingo Corporation balance sheet was as follows: A. P363,800 C. P426,400
Ingo Corporation B. P453,600 D. P373,400
Balance Sheet
December 31, 2006 xliv. The total cash and marketable securities as of January 31 will be:
A. P45,450 C. P91,800
ASSETS B. P25,000 D. P54,450
Current assets:
Cash P 30,000 xlv. The expected net income during the first quarter of the coming year is:
Accounts receivable 320,000 A. P 91,080 C. P 96,840
Inventory 237,800 B. P161,400 D. P151,800
Total current assets 587,800
Plant and equipment, net of accumulated depreciation of P200,000 800,000 Question Nos. 46 through 48 are based on the Russon Corporation, a retailer whose sales are all
Total Assets P1,387,800 made on credit. Sales are billed twice monthly, on the 10th of the month for the last half of the
prior month’s sales, and on the 20th of the month for the first half of the current month’s sales. The
LIABILITIES AND STOCKHOLDERS’ EQUITY terms of all sales are 2/10, net 30. Based upon past experience, the collection of accounts
Accounts payable P 93,600 receivable is as follows:
Long-term debt, 8% 400,000
Common stock 504,200 Within the discount period 80%
Retained earnings 390,000 On the 30th day 18%
Total Liabilities and Stockholders’ Equity P1,387,800 Uncollectible 2%
xxxix. The budgeted production respective to each month of the first quarter of the coming year Russon’s average markup on its products is 20% of the sales price. All sales and purchases occur
are: uniformly throughout the month. The sales value of shipments for May and the forecasts for the
A. 1,400,000; 2,000,000; 2,500,000 C. 2,500,000; 2,000,000; 1,400,000 next four months follow:
B. 1,400,000; 2,500,000; 2,000,000 D. 2,000,000; 1,400,000; 2,500,000 May (actual) P500,000
June 600,000
xl. The amount of accounts payable paid in March for the purchase of materials is: July 700,000
A. P150,000 C. P104,000 August 700,000
B. P120,000 D. P130,000 September 400,000
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Russon purchases merchandise for resale to meet the current month’s sales demand and to
maintain a desired monthly ending inventory of 25% of the next month’s sales. All purchases are
on credit with terms of net/30. Russon pays for 50% of a month’s purchases in the month of
purchase and 50% in the month following the purchase.
xlvi. How much cash can Russon plan to collect in September from sales made in August?
A. P337,400 C. P400,400
B. P343,000 D. P280,000
xlviii. How much cash can Russon plan to collect from accounts receivable during July?
A. P574,000 C. P619,000
B. P662,600 D. P608,600
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xlv. Answer: C
Proforma Income Statement
January February March Total
Sales 263,500 186,000 217,000 666,500
Cost of goods sold 139,400 98,400 126,000 363,800
Gross profit 124,100 87,600 91,000 302,700
Selling expenses, 20% 52,700 37,200 43,400 133,300
Operating income 71,400 50,400 47,600 169,400
Interest expense 2,667 2,667 2,666 8,000
Income before tax 68,733 47,733 44,934 161,400
Income tax, 40% 27,493 19,093 17,974 64,560
Net income 41,240 28,640 26,960 96,840
xlvi. Answer: A
August sales
Billed 8/20 P350,000 x 18% P 63,000
Billed 9/10 P350,000 x 80% x 98% 274,400
Collections in Sept of Aug sales P337,400
xlvii. Answer: B
Russon provides 25 percent of next month’s quantity sales.
25% x P400,000 x 80% = P80,000
xlviii. Answer: D
May sales billed June 10 250,000x18% P 45,000
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