Master Budget

CHAPTER 13
THE MASTER BUDGET

MULTIPLE CHOICE
1.
A budget aids in
a.
b.
c.
d.
communication.
motivation.
coordination.
all of the above.
ANSWER:
2.
Planning
Controlling
Organizing
Staffing
ANSWER:
EASY
The preparation of an organizations budget

a.
b.
c.
d.
forces management to look ahead and try to see the future of the organization.
requires that the entire management team work together to make and carry out the
yearly plan.
makes performance review possible at all levels of management.
all of the above.
ANSWER:
4.
EASY
Measuring the firms performance against established objectives is part of which of the
following functions?
a.
b.
c.
d.
3.
EASY
Which of the following is a basic element of effective budgetary control?

a.
b.
c.
d.
cost behavior patterns

cost-volume-profit analysis
standard costing
all of the above
ANSWER:
EASY
131
132
5.
Chapter 13
When actual performance varies from the budgeted performance, managers will be more
likely to revise future budgets if the variances were
a.
b.
c.
d.
controllable rather than uncontrollable.

uncontrollable rather than controllable.
favorable rather than unfavorable.
small.
ANSWER:
6.
EASY
A budget is
a.
b.
c.
d.
a planning tool.
a control tool.
a means of communicating goals to the firms divisions.
all of the above.
ANSWER:
EASY
Ineffective budgets and/or control systems are characterized by the use of

a.
b.
c.
d.
budgets as a planning tool only and disregarding them for control purposes.
budgets for motivation.
budgets for coordination.
the budget for communication.
ANSWER:
9.
MEDIUM
annual budget.
industry price and cost structure.
talents possessed by its managers.
board of directors.
ANSWER:
8.
External factors that cause the achievement of company goals are the
a.
b.
c.
d.
7.
The Master Budget
EASY
Strategic planning is
a.
b.
c.
d.
planning activities for promoting products for the future.

planning for appropriate assignments of resources.
setting standards for the use of important but hard-to-find materials.
stating and establishing long-term plans.
ANSWER:
EASY
Chapter 13
10.
The Master Budget
Key variables that are identified in strategic planning are

a.
b.
c.
d.
normally controllable if they are internal.

seldom if ever controllable.
normally controllable if they occur in a domestic market.
normally uncontrollable if they are internal.
ANSWER:
11.
EASY
Which of the following statements is true?

a.
b.
c.
d.
All organizations have the same set of budgets.

All organizations are required to budget.
Budgets are a quantitative expression of an organizations goals and objectives.
Budgets should never be used to evaluate performance.
ANSWER:
EASY
Which of the following is not an operating budget?

a.
b.
c.
d.
sales budget
production budget
purchases budget
capital budget
ANSWER:
14.
EASY
middle
top
middle and top
operational
ANSWER:
13.
Tactical planning usually involves which level of management?

a.
b.
c.
d.
12.
133
EASY
The master budget is a static budget because it

a.
b.
c.
d.
is geared to only one level of production and sales.

never changes from one year to the next.
covers a preset period of time.
always contains the same operating and financial budgets.
ANSWER:
EASY
134
15.
Chapter 13
The master budget is a

a.
b.
c.
d.
static budget.
flexible budget.
qualitative expression of a prior goal.
qualitative expression of a future goal.
ANSWER:
16.
EASY
Which of the following is usually perceived as being the master budgets greatest advantage
to management?
a.
b.
c.
d.
performance analysis
increased communication
increased coordination
required planning
ANSWER:
EASY
Chronologically, the first part of the master budget to be prepared would be the
a.
b.
c.
d.
sales budget.
production budget.
cash budget.
pro forma financial statements.
ANSWER:
19.
EASY
an operating budget.
a capital budget.
all of the above.
ANSWER:
18.
The master budget usually includes

a.
b.
c.
d.
17.
The Master Budget
EASY
An example of a recurring short-term plan is

a.
b.
c.
d.
a probable product line change.

expansion of plant and facilities.
a unit sales forecast.
a change in marketing strategies.
ANSWER:
EASY
Chapter 13
20.
The Master Budget
If the chief accountant of a firm has to prepare an operating budget for the coming year, the
first budget to be prepared is the
a.
b.
c.
d.
sales budget.
cash budget.
purchases budget.
capital budget.
ANSWER:
21.
EASY
capital budget.
cash budget.
purchases budget.
pro forma balance sheet.
ANSWER:
EASY
Budgeted production for a period is equal to

a.
b.
c.
d.
the beginning inventory + sales the ending inventory.

the ending inventory + sales the beginning inventory.
the ending inventory + the beginning inventory sales.
sales the beginning inventory + purchases.
ANSWER:
23.
It is least likely that a production budget revision would cause a revision in the
a.
b.
c.
d.
22.
135
EASY
Chronologically, in what order are the sales, purchases, and production budgets prepared?
a.
b.
c.
d.
sales, purchases, production

sales, production, purchases
production, sales, purchases
purchases, sales, production
ANSWER:
EASY
136
24.
Chapter 13
The material purchases budget tells a manager all of the following except the
a.
b.
c.
d.
quantity of material to be purchased each period.

quantity of material to be consumed each period.
cost of material to be purchased each period.
cash payment for material each period.
ANSWER:
25.
EASY
sales
material usage
revenues
general and administrative
ANSWER:
EASY
The amount of raw material purchased in a period may be different than the amount of
material used that period because
a.
b.
c.
d.
the number of units sold may be different from the number of units produced.
finished goods inventory may fluctuate during the period.
the raw material inventory may increase/decrease during the period.
companies often pay for material in the period after it is purchased.
ANSWER:
27.
Of the following budgets, which one is least likely to be determined by the dictates of top
management?
a.
b.
c.
d.
26.
The Master Budget
MEDIUM
A purchases budget is
a.
b.
c.
d.
not affected by the firms policy of granting credit to customers.

the same thing as a production budget.
needed only if a firm does not pay for its merchandise in the same period as it is
purchased.
affected by a firms inventory policy only if the firm purchases on credit.
ANSWER:
EASY
Chapter 13
28.
The Master Budget
137
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.
b.
c.
d.
P = CGS + BI EI
P = CGS + BI
P = CGS + EI + BI
P = CGS + EI BI
ANSWER:
29.
material purchases budget.

production budget.
pro forma income statement.
cash budget.
ANSWER:
EASY
A company that maintains a raw material inventory, which is based on the following
months production needs, will purchase less material than it uses in a month where
a.
b.
c.
d.
sales exceed production.

production exceeds sales.
planned production exceeds the next months planned production.
planned production is less than the next months planned production.
ANSWER:
31.
EASY
Both the budgeted quantity of material to be purchased and the budgeted quantity of
material to be consumed can be found in the
a.
b.
c.
d.
30.
MEDIUM
If a company has a policy of maintaining an inventory of finished goods at a specified

percentage of the next months budgeted sales, budgeted production for January will
exceed budgeted sales for January when budgeted
a.
b.
c.
d.
February sales exceed budgeted January sales.

January sales exceed budgeted December sales.
January sales exceed budgeted February sales.
December sales exceed budgeted January sales.
ANSWER:
MEDIUM
138
32.
Chapter 13
Depreciation on the production equipment would appear in which of the following

budgets?
a.
b.
c.
d.
cash budget
production budget
selling and administrative expense budget
manufacturing overhead budget
ANSWER:
33.
EASY
production
sales
cash
purchases
ANSWER:
EASY
The budgeted amount of selling and administrative expense for a period can be found in the
a.
b.
c.
d.
sales budget.
cash budget.
pro forma balance sheet.
ANSWER:
35.
The selling, general, and administrative expense budget is based on the _______________
budget.
a.
b.
c.
d.
34.
The Master Budget
EASY
Which of the following represents a proper sequencing in which the budgets below are
prepared?
a.
b.
c.
d.
Direct Material Purchases, Cash, Sales

Production, Sales, Income Statement
Sales, Balance Sheet, Direct Labor
Sales, Production, Manufacturing Overhead
ANSWER:
EASY
Chapter 13
36.
The Master Budget
The detailed plan for the acquisition and replacement of major portions of property, plant,
and equipment is known as the
a.
b.
c.
d.
capital budget.
purchases budget.
commitments budget.
treasury budget.
ANSWER:
37.
EASY
labor budget.
selling, general, and administrative expense budget.
cash budget.
ANSWER:
EASY
The cash budget ignores all

a.
b.
c.
d.
dividend payments.
sales of capital assets.
noncash accounting accruals.
sales of common stock.
ANSWER:
39.
The budgeted payment for labor cost each period would be found in the
a.
b.
c.
d.
38.
139
EASY
Which of the following items would not be found in the financing section of the cash
budget?
a.
b.
c.
d.
cash payments for debt retirement

cash payments for interest
dividend payments
payment of accounts payable
ANSWER:
EASY
1310
40.
Chapter 13
The primary reason that managers impose a minimum cash balance in the cash budget is
a.
b.
c.
d.
because management needs discretionary cash for unforeseen business

opportunities.
managers lack discipline to control their spending.
that it protects the organization from the uncertainty of the budgeting process.
that it makes the financial statements look more appealing to creditors.
ANSWER:
41.
EASY

cash budget.
capital budget
production budget.
ANSWER:
EASY
The pro forma income statement is not a component of the

a.
b.
c.
d.
master budget.
financial budgets.
operating budgets.
capital budget.
ANSWER:
43.
Chronologically, the last part of the master budget to be prepared would be the
a.
b.
c.
d.
42.
The Master Budget
EASY
A pro forma financial statement is

a.
b.
c.
d.
a financial statement for past periods.

a projected or budgeted financial statement.
presented for the form but contains no dollar amounts.
a statement of planned production.
ANSWER:
EASY
Chapter 13
44.
The Master Budget
A master budget contains which of the following?

a.
b.
c.
d.
Sales
yes
no
no
yes
ANSWER:
45.
Pro forma statements

yes
yes
no
yes
EASY
production budget.
sales budget.
purchases budget.
ANSWER:
EASY
A budget that includes a 12-month planning period at all times is called a ____________
budget.
a.
b.
c.
d.
pro forma
flexible
master
continuous
ANSWER:
47.
Production
yes
no
no
no
The budgeted cost of products to be sold in a future period would be found in the
a.
b.
c.
d.
46.
1311
EASY
The method of budgeting that adds one months budget to the end of the plan when the
current months budget is dropped from the plan is called ____________ budgeting.
a.
b.
c.
d.
long-term
operations
incremental
continuous
ANSWER:
EASY
1312
48.
Chapter 13
Slack in operating budgets

a.
b.
c.
d.
results from unintentional managerial acts.

makes an organization more efficient and effective.
requires managers to work harder to achieve the budget.
is greater when managers are allowed to participate in the budgeting process.
ANSWER:
49.
EASY
Budget slack is a condition in which

a.
b.
c.
d.
demand is low at various times of the year.

excess machine capacity exists in some areas of the plant.
there is an intentional overestimate of expenses or an underestimate of revenues.
managers grant favored employees extra time off.
ANSWER:
50.
The Master Budget
EASY
E Co. has the following expected pattern of collections on credit sales: 70 percent collected
in the month of sale, 15 percent in the month after the month of sale, and 14 percent in the
second month after the month of sale. The remaining 1 percent is never collected. At the
end of May, E Co. has the following accounts receivable balances:
From April sales
From May sales
$21,000
48,000
Es expected sales for June are $150,000. What were total sales for April?
a.
b.
c.
d.
$150,000
$72,414
$70,000
$140,000
ANSWER:
MEDIUM
Chapter 13
51.
The Master Budget
Ball Company has a policy of maintaining an inventory of finished goods equal to 30

percent of the following months sales. For the forthcoming month of March, Ball has
budgeted the beginning inventory at 30,000 units and the ending inventory at 33,000 units.
This suggests that
a.
b.
c.
d.
February sales are budgeted at 10,000 units less than March sales.
March sales are budgeted at 10,000 units less than April sales.
February sales are budgeted at 3,000 units less than March sales.
March sales are budgeted at 3,000 units less than April sales.
ANSWER:
52.
1313
MEDIUM
Budgeted sales for the first six months of 2001 for Henry Corp. are listed below:
UNITS:
JANUARY
6,000
FEBRUARY
7,000
MARCH
8,000
APRIL
7,000
MAY
5,000
JUNE
4,000
Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent
of the next months budgeted sales. If Henry Corp. plans to produce 6,000 units in June,
what are budgeted sales for July?
a.
b.
c.
d.
3,600 units
1,000 units
9,000 units
8,000 units
ANSWER:
53.
DIFFICULT
McGill Co. manufactures card tables. The company has a policy of maintaining a finished
goods inventory equal to 40 percent of the next months planned sales. Each card table
requires 3 hours of labor. The budgeted labor rate for the coming year is $13 per hour.
Planned sales for the months of April, May, and June are respectively 4,000; 5,000; and
3,000 units. The budgeted direct labor cost for June for McGill Co. is $136,500. What are
budgeted sales for July for McGill Co.?
a.
b.
c.
d.
3,500 units
4,250 units
4,000 units
3,750 units
ANSWER:
DIFFICULT
1314
54.
Chapter 13
The Master Budget
Budgeted sales for K Inc. for the first quarter of 2001 are shown below:
UNITS:
JANUARY
35,000
FEBRUARY
25,000
MARCH
32,000
The company has a policy that requires the ending inventory in each period to be 10
percent of the following periods sales. Assuming that the company follows this policy,
what quantity of production should be scheduled for February?
a.
b.
c.
d.
24,300 units
24,700 units
25,000 units
25,700 units
ANSWER:
55.
MEDIUM
Budgeted sales for the first six months of 2001 for Henry Corp. are listed below:
UNITS:
JANUARY
6,000
FEBRUARY
7,000
MARCH
8,000
APRIL
7,000
MAY
5,000
JUNE
4,000
Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent
of the next months budgeted sales. How many units has Henry Corp. budgeted to produce
in the first quarter of 2001?
a.
b.
c.
d.
21,400 units
20,600 units
19,000 units
23,000 units
ANSWER:
DIFFICULT
Chapter 13
56.
The Master Budget
1315
Production of Product X has been budgeted at 200,000 units for May. One unit of X
requires 2 lbs. of raw material. The projected beginning and ending materials inventory for
May are:
Beginning inventory: 2,000 lbs.
Ending inventory: 10,000 lbs.
How many lbs. of material should be purchased during May?
a.
b.
c.
d.
192,000
208,000
408,000
416,000
ANSWER:
57.
MEDIUM
X Co. manufactures toy airplanes. Information on X Co.s labor costs follow:

Sales commissions
Administration
Indirect factory labor
Direct factory labor
$5 per plane
$10,000 per month
$3 per plane
$5 per plane
The following information applies to the upcoming month of July for X Co.:
Budgeted production
Budget sales
1,200 units
1,000 units
What amount of budgeted labor cost would appear in the July selling, general, and
administrative expense budget?
a.
b.
c.
d.
$10,000
$16,000
$15,000
$23,000
ANSWER:
MEDIUM
1316
58.
Chapter 13
McGill Co. manufactures card tables. The company has a policy of maintaining a finished
goods inventory equal to 40 percent of the next months planned sales. Each card table
requires 3 hours of labor. The budgeted labor rate for the coming year is $13 per hour.
Planned sales for the months of April, May, and June are respectively 4,000; 5,000; and
3,000 units. What is McGill Co.s budgeted direct labor cost for May?
a.
b.
c.
d.
$54,600
$163,800
$226,200
$179,400
ANSWER:
59.
The Master Budget
DIFFICULT
X Co. manufactures toy airplanes. Information on X Co.s labor costs follow:

Sales commissions
Administration
Indirect factory labor
Direct factory labor
$5 per plane
$10,000 per month
$3 per plane
$5 per plane
The following information applies to the upcoming month of July for X Co.:
Budgeted production
Budget sales
1,200 units
1,000 units
What is X Co.s budgeted factory labor cost for July?

a.
b.
c.
d.
$8,000
$15,600
$25,600
$9,600
ANSWER:
MEDIUM
Chapter 13
60.
The Master Budget
1317
E Co. has the following expected pattern of collections on credit sales: 70 percent collected
in the month of sale, 15 percent in the month after the month of sale, and 14 percent in the
second month after the month of sale. The remaining 1 percent is never collected.
At the end of May, E Co. has the following accounts receivable balances:
From April sales
From May sales
$21,000
48,000
Es expected sales for June are $150,000. How much cash will E Co. expect to collect in
June?
a.
b.
c.
d.
$127,400
$129,000
$148,600
$152,520
ANSWER:
61.
DIFFICULT
For the month of October, P Corp. predicts total cash collections to be $1 million. Also for
October, P Corp. estimates that its beginning cash balance will be $50,000 and that it will
borrow cash in the amount of $70,000. If P Corp. estimates an ending cash balance of
$30,000 for October, what must its projected cash disbursements be?
a.
b.
c.
d.
$1,090,000
$1,120,000
$1,070,000
$1,020,000
ANSWER:
MEDIUM
1318
62.
Chapter 13
The Master Budget
Volkers Hospital has provided you with the following budget information for April:
Cash collections
April 1 cash balance
Cash disbursements
$876,000
23,000
978,600
Volkers has a policy of maintaining a minimum cash balance of $20,000 and borrows only
in $1,000 increments. How much will Volkers borrow in April?
a.
b.
c.
d.
$80,000
$79,600
$99,000
$100,000
ANSWER:
MEDIUM
Use the following information for questions 6365.
Beginning cash balance

Cash collections
Cash disbursements
Cash excess (shortage)
Borrowing (repayments)
Ending cash
63.
CASH BUDGET
CASE B
$ 300
400
?
?
100
200
In CASE A, what are the budgeted cash collections?

a.
b.
c.
d.
$700
$500
$300
$400
ANSWER:
64.
CASE A
$ 100
?
500
?
300
200
MEDIUM
In CASE B, what are the budgeted cash disbursements?

a.
b.
c.
d.
$600
$700
$500
$400
ANSWER:
MEDIUM
CASE C
$ 700
?
600
400
?
100
Chapter 13
65.
The Master Budget
1319
In CASE C, what are the budgeted cash collections?

a.
b.
c.
d.
$200
$300
$400
$500
ANSWER:
MEDIUM
Use the following information for questions 6669.
Beginning cash
Cash collections
Cash disbursements
Cash excess (shortage)
Borrowing (repayments)
Ending Cash
66.
What is the correct value of item A in the cash budget?

a.
b.
c.
d.
$200
$300
$400
$900
ANSWER:
67.
QTR 1
$300
900
B
200
?
200
CASH BUDGET
QTR 2
QTR 3
QTR 4
$200
$ ?
$?
700
C
?
?
600
?
(400)
?
?
600
(300)
0
?
200
?
EASY
What is the correct value of item B in the cash budget?

a.
b.
c.
d.
$1,000
$1,200
$800
$700
ANSWER:
MEDIUM
YEAR
$
A
3,300
3,500
?
?
D
1320
68.
Chapter 13
What is the correct value of item C in the cash budget?

a.
b.
c.
d.
$1,400
$1,200
$900
$700
ANSWER:
69.
MEDIUM
Managers may be more willing to accept a budget if

a.
b.
c.
d.
it is continuous.
it is imposed.
it is very hard to attain.
they can participate in its development.
ANSWER:
EASY
(Appendix) A budget manual should include which of the following?

a.
b.
c.
d.
a list of specific budgetary activities to be performed

original, revised, and approved budgets
a calendar of scheduled budgetary activities
all of the above
ANSWER:
72.
MEDIUM
$200
$300
$400
$1,000
ANSWER:
71.
What is the correct value of item D in the cash budget?

a.
b.
c.
d.
70.
The Master Budget
EASY
Which of the following is not true about an imposed budget?

a.
b.
c.
d.
It reduces the budgeting process time frame.

It uses the knowledge of top management as it relates to resource availability.
It enhances coordination.
It increases the feeling of teamwork.
ANSWER:
EASY
Chapter 13
73.
The Master Budget
A disadvantage of participatory budgets is that

a.
b.
c.
d.
there is a high degree of acceptance of the goals and objectives by operating

management.
they are usually more realistic.
they lead to better morale and higher motivation.
they usually require more time to prepare.
ANSWER:
74.
1321
EASY
The master budget

a.
b.
c.
d.
reflects the determination of an organizations cost of capital.

serves as a managerial tool for the organization.
includes only an organizations pro forma financial statements.
utilizes only information from the financial accounting system.
ANSWER:
EASY
SHORT ANSWER/PROBLEMS
1.
Explain why managers might want to build slack into a budget.

ANSWER:
Building slack into the budget allows managers to achieve the budgeted
level of performance with less effort. Thus, they have a higher probability of achieving the
budget and any bonus or compensation that may be tied to that performance standard.
MEDIUM
2.
What role does the budgeting activity play in managerial compensation and performance
evaluation?
ANSWER:
Once set, the budget is not only a plan for the organization, but it becomes a
standard against which actual performance may be compared. Recognizing the budget as a
performance standard, organizations may base employee compensation (to some extent) on
how well actual performance compares to the budgeted performance. Such a compensatory
arrangement frequently involves a bonus plan that permits bonuses to go up as performance
relative to the budget goes up.
MEDIUM
1322
3.
Chapter 13
The Master Budget
Why will there frequently be a difference between the budgeted cost of material in the
material purchases budget and the budgeted cash disbursement for material in the cash
budget?
ANSWER:
Because firms do not necessarily pay for material in the same period in
which they are purchased, the amounts in these two budgets will frequently differ. The
material purchases budget is based on the cost of material purchased in a period while the
cash budget only reflects expected actual payments for material in the period.
MEDIUM
4.
Explain why different types of organizations will have different sets of budgets.
ANSWER:
We may think of the set of budgets as the plan for producing outputs and
acquiring inputs. As different organizations have different inputs and outputs, we would
naturally expect them to have different budgets. For example, a retailing firm would find no
need for a production budget because it does not manufacture anything. On the other
hand, the need for a production budget in a manufacturing organization is obvious.
Likewise, governmental organizations will have budgets that are different than private
organizations.
MEDIUM
5.
Why have many managers in recent years moved toward emphasizing employee
participation in the budgeting process rather than simply imposing the budget on the
employees?
ANSWER:
Many managers believe that the quality of the budget is enhanced through
employee participation. This is attributable in part to the fact that many employees possess
technical information that management does not have. Through the budgeting process this
technical information is imparted to management. Further, participation in the budgeting
process may lead employees to be more attentive to the budget and feel like a more
important part of the organizational team. Employees feel more committed to meeting a
budget they helped prepare. Preparing a budget gives the preparer management training,
which makes him or her better prepared for advancement in the company.
MEDIUM
Chapter 13
6.
The Master Budget
1323
The I. M. Broke Co. has the following collection pattern for its accounts receivable:
40 percent in the month of sale
50 percent in the month following the sale
8 percent in the second month following the sale
2 percent uncollectible
The company has recent credit sales as follows:
April:
May:
June:
$200,000
420,000
350,000
How much should the company expect to collect on its receivables in June?
ANSWER:
JUNE COLLECTIONS
From April sales: $200,000 .08
From May sales: 420,000 .50
From June sales: 350,000 .40
Total
MEDIUM
$ 16,000
210,000
140,000
$366,000
1324
Chapter 13
The Master Budget
Use the following information for questions 7 and 8.

7.
Barnes Company manufactures three products (A, B, and C) from three raw materials (X,
Y, and Z). The following table indicates the number of pounds of each material that is
required to manufacture each type of product:
Product
A
B
C
Material X
2
2
3
Material Y
3
1
2
Material Z
2
2
2
The company has a policy of maintaining an inventory of finished goods on all three
products equal to 25 percent of the next months budgeted sales. Listed below is the sales
budget for the first quarter of 2001:
Month
Jan.
Feb.
Mar.
Product A
10,000
9,000
11,000
Product B
11,000
12,000
10,000
Product C
12,000
8,000
10,000
Assuming that the company meets its required inventory policy, prepare a production
budget for the first 2 months of 2001 for each of the three products.
ANSWER:
Required ending inventory
Projected sales
Total production needs
Less the beginning inventory
Budgeted production
Product A
January
February
2,250
2,750
10,000
9,000
12,250
11,750
(2,500)
(2,250 )
9,750
9,500

Projected sales
Budgeted production
Product B
January
February
3,000
2,500
11,000
12,000
14,000
14,500
(2,750)
(3,000 )
11,250
11,500

Projected sales
Budgeted production
Product C
January
February
2,000
2,500
12,000
8,000
14,000
10,500
(3,000)
(2,000 )
11,000
8,500
MEDIUM
Chapter 13
8.
The Master Budget
1325
Unit costs of materials X, Y, and Z are respectively $4, $3, and $5. The Barnes Company
has a policy of maintaining its raw material inventories at 50 percent of the next months
production needs. Assuming that this policy is satisfied, prepare a material purchases
budget for all three materials in both pounds and dollars for January.
ANSWER:
Prod.
lbs.
Tot.
Product A
Jan.
Feb.
9,750
9,500
2
2
19,500 19,000
Material X Purchases
Product B
Jan.
Feb.
11,250 11,500
2
2
22,500 23,000
Required EI (19,000 + 23,000 + 25,500) .50 =

Needed: (19,500 + 22,500 + 33,000) =
Total raw material X needed:
Less: BI (75,000 .50)
Material X to be purchased in January (pounds):
Multiply by cost of Material X per lb.:
Budgeted Cost of Material X for January:
Prod.
lbs.
Tot.
Product A
Jan.
Feb.
9,750
9,500
3
3
29,250 28,500
Material Y Purchases
Product B
Jan.
Feb.
11,250 11,500
1
1
11,250 11,500
Required EI (28,500 + 11,500 + 17,000) .50 =

Needed: (29,250 + 11,250 + 22,000) =
Total raw material Y needed:
Less BI (62,500 .50)
Material Y to be purchased in January (pounds):
Multiply by cost of Material Y per lb.:
Budgeted Cost of Material Y for January:
Product C
Jan.
Feb.
11,000
8,500
3
3
33,000 25,500
33,750
75,000
108,750
(37,500)
71,250
$4
$285,000
Product C
Jan.
Feb.
11,000
8,500
2
2
22,000 17,000
28,500
62,500
91,000
(31,250)
59,750
$3
$179,250
1326
Chapter 13
Prod.
lbs.
Tot.
Product A
Jan.
Feb.
9,750
9,500
2
2
19,500 19,000
Material Z Purchases
Product B
Jan.
Feb.
11,250 11,500
2
2
22,500 23,000
Required EI (19,000 + 23,000 + 17,000) .50 =

Needed: (19,500 + 22,500 + 22,000) =
Total raw material Z needed:
Less BI (64,000 .50)
Material Z to be purchased in January (pounds):
Multiply by cost of Material Z per lb.:
Budgeted Cost of Material Z for January:
The budgeted cost of all materials to be purchased in
Jan. would be $285,000 + $179,250 + $307,500 =
DIFFICULT
The Master Budget
Product C
Jan.
Feb.
11,000
8,500
2
2
22,000 17,000
29,500
64,000
93,500
(32,000 )
61,500
5
$307,500
$771,750
Chapter 13
The Master Budget
1327
Use the following information for questions 9 and 10.

9.
Farr Music Inc. sells Baldwin pianos. The following information regarding operating costs
has been extracted from budgets of Farr Music for December of this year and the first few
months of next year:
Payroll
Insurance
Rent
Depreciation
Taxes
Dec.
$12,000
4,000
6,000
2,000
1,200
Jan.
$13,000
4,000
6,000
2,000
1,400
Feb.
$22,000
4,000
6,000
2,000
2,300
Mar.
$16,000
4,000
6,000
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 months sales. The firm is
expected to be in compliance with this policy on December 1. Budgeted sales are:
Budgeted sales in units:
Dec.
40
Jan.
45
Feb.
60
Mar.
50
Apr.
40
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 Farr Music Inc. for the first three months of next year.
First, prepare a purchases budget for December through March for the pianos.
ANSWER:
Projected sales
Total pianos needed
Pianos to be purchased
the cost of the piano
Budgeted purchases
Dec.
18
40
58
(16)
42
$500
$21,000
Payroll
Insurance
Rent
Taxes
Merchandise purchases
Total
Budgeted cash disbursements

Jan.
Feb.
Mar.
$13,000
$22,000
$16,000
4,000
4,000
4,000
6,000
6,000
6,000
1,400
2,300
2,000
21,000
25,500
28,000
$45,400
$59,800
$56,000
MEDIUM
Jan.
24
45
69
(18)
51
$500
$25,500
Feb.
20
60
80
(24)
56
$500
$28,000
Mar.
16
50
66
(20 )
46
$500
$23,000
1328
10.
Chapter 13
The Master Budget
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. On average,
a piano sells for $1,500. Of each sale, 40 percent of the sales price is collected in the month
of sale. The balance is collected in the month following the sale. Prepare a cash budget for
the first three months of next year. The beginning cash balance on January 1 is budgeted to
be $50,000.
ANSWER:
Beginning cash
Cash collections:
Dec. sales
Jan. sales
Feb. sales
Mar. Sales
Cash available
Less cash disb.
Ending cash
MEDIUM
CASH BUDGET
FARR MUSIC INC.
Jan.
Feb.
$50,000
$ 67,600
36,000
27,000
_______
113,000
(45,400)
$ 67,600
40,500
36,000
_______
144,100
(59,800)
$ 84,300
Mar.
$ 84,300
54,000
30,000
168,300
(56,000 )
$112,300
Chapter 13
11.
The Master Budget
1329
Shown below are the totals from 2002 period budgets.

Revenue budget
Materials usage from production budget
Labor cost budget
Manufacturing overhead budget
General and administrative budget
Capital expenditure budget
Work in Progress Inventories:
Beginning of 2002
End of 2002
Finished Goods Inventory:
Beginning of 2002
End of 2002
Tax Rate
$100,000
15,000
20,000
20,000
30,000
20,000
10,000
5,000
15,000
10,000
40%
Required: Prepare a forecasted Income Statement for 2002.

ANSWER:
Revenue
Less: COGS
COGM
RM used (production budget)
DL (labor budget)
Mfg. OH (OH budget)
Current Mfg. costs
Plus: Beg. WIP
Total In-Process
Less: End WIP
COGM
Plus: Beg. FG
Goods Avail. for Sale
Less: End FG
COGS
Gross Margin
Less: G & A expense budget
Income before income taxes
Less: taxes @ 40%
Net Income
MEDIUM
$100,000
$ 15,000
20,000
20,000
$ 55,000
10,000
$ 65,000
(5,000)
$ 60,000
15,000
$ 75,000
(10,000 )
65,000
$ 35,000
(30,000)
$ 5,000
(2,000 )
$ 3,000
1330
12.
Chapter 13
The Master Budget
The following are forecasts of sales and purchases for a company.

April
May
June
Sales
$80,000
90,000
85,000
Purchases
$30,000
40,000
30,000
All sales are on credit. Records show that 70 percent of the customers pay the month of the
sale, 20 percent pay the month after the sale, and the remaining 10 percent pay the second
month after the sale. Purchases are all paid the following month at a 2 percent discount.
Cash disbursements for operating expenses in June were $5,000.
Required: Prepare a schedule of cash receipts and disbursement for June.
ANSWER:
Schedules of Cash Receipts and Disbursements for June
Cash Receipts:
From current month sale (June)
From 1 month prior sale (May)
From 2 month prior sale (April)
Total cash receipts
Cash Disbursements:
May purchases @ 98% (less discount)
Operating expenses
Total cash disbursements
Net increase in cash for June
MEDIUM
(.7 85,000)
(.2 90,000)
(.1 80,000)
$59,500
18,000
8,000
$85,500
(.98 40,000)
$39,200
5,000
$44,200
$41,300
Chapter 13
13.
The Master Budget
1331
Flour International is in the building construction business. In 2002, it is expected that 40

percent of a months sales will be collected in cash, with the balance being collected the
following month. Of the purchases, 50 percent are paid the following month, 30 percent are
paid in two months, and the remaining 20 percent are paid during the month of purchase.
The sales force receives $2,000 a month base pay plus a 2 percent commission. Labor
expenses are expected to be $4,000 a month. Other operating expenses are expected to run
about $2,000 a month, including $500 for depreciation. The ending cash balance for 2001
was $4,500.
2001Actual
November
December
2002Budgeted
January
February
March
Sales
Purchases
$80,000
90,000
$70,000
80,000
70,000
90,000
30,000
70,000
60,000
50,000
Required:
a.
Prepare a cash budget and determine the projected ending cash balances for the first
three months of 2002.
b.
Determine the months that the company would either borrow or invest cash.
1332
Chapter 13
ANSWER:
a.
Sales
Purchases
2001
Nov.
$80,000
70,000
b.
Jan.
$70,000
70,000
2002
Feb.
$90,000
60,000
Mar.
$30,000
50,000
Jan.
$ 4,500
$28,000
54,000
$82,000
$86,500
Feb.
$ 2,600
$36,000
42,000
$78,000
$80,600
Mar.
$ 300
$12,000
54,000
$66,000
$66,300
$14,000
40,000
21,000
$75,000
4,000
2,000
1,400
1,500
$83,900
$ 2,600
$12,000
35,000
24,000
$71,000
4,000
2,000
1,800
1,500
$80,300
$ 300
$10,000
30,000
21,000
$61,000
4,000
2,000
600
1,500
$69,100
$ (2,800)
Dec.
$90,000
80,000
Cash Receipts:
Beginning cash balance
From current month sales
From prior month sales
Total cash receipts
Total cash available
Cash Disbursements:
From Purchases:
Current month @ 20%
From 1 mo. prior purchases @ 50%
From 2 mo. prior purchases @ 30%
Total payments on purchases
Labor expense
Sales salaries
Commissions @ 2% of sales
Other expenses exclude depr. ($500)
Total cash disbursements
Ending cash balance
BorrowMarch; investJanuary and February
DIFFICULT
The Master Budget

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CHAPTER 13

THE MASTER BUDGET

The preparation of an organizations budget

Which of the following is a basic element of effective budgetary control?

cost behavior patterns

controllable rather than uncontrollable.

Ineffective budgets and/or control systems are characterized by the use of

The Master Budget

planning activities for promoting products for the future.

The Master Budget

Key variables that are identified in strategic planning are

normally controllable if they are internal.

Which of the following statements is true?

All organizations have the same set of budgets.

Which of the following is not an operating budget?

Tactical planning usually involves which level of management?

The master budget is a static budget because it

is geared to only one level of production and sales.

The master budget is a

The master budget usually includes

The Master Budget

An example of a recurring short-term plan is

a probable product line change.

The Master Budget

Budgeted production for a period is equal to

the beginning inventory + sales the ending inventory.

sales, purchases, production

quantity of material to be purchased each period.

The Master Budget

not affected by the firms policy of granting credit to customers.

The Master Budget

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

material purchases budget.

sales exceed production.

If a company has a policy of maintaining an inventory of finished goods at a specified

February sales exceed budgeted January sales.

Depreciation on the production equipment would appear in which of the following

The Master Budget

Direct Material Purchases, Cash, Sales

The Master Budget

The cash budget ignores all

cash payments for debt retirement

because management needs discretionary cash for unforeseen business

pro forma financial statements.

The pro forma income statement is not a component of the

The Master Budget

A pro forma financial statement is

a financial statement for past periods.

The Master Budget

A master budget contains which of the following?

Pro forma statements

Slack in operating budgets

results from unintentional managerial acts.

Budget slack is a condition in which

demand is low at various times of the year.

The Master Budget

The Master Budget

Ball Company has a policy of maintaining an inventory of finished goods equal to 30

The Master Budget

The Master Budget

X Co. manufactures toy airplanes. Information on X Co.s labor costs follow:

The Master Budget

X Co. manufactures toy airplanes. Information on X Co.s labor costs follow:

What is X Co.s budgeted factory labor cost for July?