Title: Operating Budgets
Course: Question Banks

Q: A well prepared budget can assist a company by:
- Being a structured document that managers need to follow within their departments.
- Provide exact amounts to be spent by each department regardless of how much the company sells.
- Giving structure to the operations and a guide to future planning.
A: Giving structure to the operations and a guide to future planning.

Q: The budget to actual comparison can be done by managers or the accounting department to:
- Discipline managers who have overspent in their budgeted line items.
- Help production know when they have met their sales goals for the year, so they can discontinue production.
- Evaluate if expenditures were put to the correct budget item, or if there are increases or decreases in expenditures that need closer examination.
A: Evaluate if expenditures were put to the correct budget item, or if there are increases or decreases in expenditures that need closer examination.

Q: All businesses, whether big or small, need to create a budget so they can”
- Set lofty goals and obtain loans to finance them.
- Access managers by their ability to stay within their budgets.
- Obtain financing for growth, plan for the future and attract investors
A: Obtain financing for growth, plan for the future and attract investors

Q: The cell phone bill went up dramatically this last month and your manager is asking why? What might your responsibility be in this situation?
- You don’t have any responsibility, even though you negotiate the contract, since you can’t control the rate increases that the cell phone carrier just implemented. The budget will just have to be adjusted.
- Even though this isn’t a budgeted item you have control over, you should contact the person who does, and find out why the bill is so high, then prepare a report for your manager.
- If you manage who has cell phones, the plan that you sign a contract for, and it is part of your job to monitor this budget item, you will need to review the bill and determine why it is higher.
A: If you manage who has cell phones, the plan that you sign a contract for, and it is part of your job to monitor this budget item, you will need to review the bill and determine why it is higher.

Q: As a manager, you, in error, signed up for a cell phone plan that will cost 20% more than the budgeted amount this year. What are your options, if you are unable to change the plan?
- Just move some funds from another manager’s expenditure line to cover it.
- Tell your supervisor that rates went up, and there was nothing you could do about the increase.
- Since you are responsible for meeting the budget, and it was possible to do so, let your supervisor know, and ask if there is a way to adjust the budget to cover the error.
A: Since you are responsible for meeting the budget, and it was possible to do so, let your supervisor know, and ask if there is a way to adjust the budget to cover the error.

Q: As the production manager, you are held directly responsible for the amount budgeted for maintenance on the production floor. You know you are going to go over budget this year, due to an old piece of production equipment that has needed many repairs this year. What can you do?
- Tell your supervisor that you can’t help the overage in the maintenance budget and are not sure how to proceed.
- Buy a new piece of equipment to replace this one so you don’t go over budget again.
- Discuss with your direct supervisor if this machinery should continue to be fixed, or added to the capital budget and replaced next year.
A: Discuss with your direct supervisor if this machinery should continue to be fixed, or added to the capital budget and replaced next year.

Q: While reviewing your budget at the end of the calendar year, you noticed that there may be areas for improvement. What might you look at to determine ways to make your budget better fit your needs?
- In the standard calendar year budget, how can you make your expense line items fit so it works for you?
- Does the budget follow the standard annual budget divided into quarters or months?
- What is your natural year, and are your goals short term or long term?
A: What is your natural year, and are your goals short term or long term?

Q: How a company prepares a budget may be based on:
- The annual revenue of the company.
- How many employees a company has who are responsible for budgeting.
- The size, industry and needs of the company.
A: The size, industry and needs of the company.

Q: A company’s budgeting needs and type of budget might vary based on:
- Most companies use a similar budgeting format and timeframe.
- When someone has time to prepare the budget.
- Fiscal year, size and goals.
A: Fiscal year, size and goals.

Q: Participatory budgeting is a process where:
- A manager can be held solely responsible if the budget is not met.
- It encourages department managers to set unattainable goals for their staff.
- The people who are involved in processes have an opportunity to help create a workable budget.
A: The people who are involved in processes have an opportunity to help create a workable budget.

Q: Upper level managers, setting goals for lower level or front-line managers may:
- Create a sense of teamwork, as the front-line manager works to meet the budget.
- Create a harmonious work environment since upper-level managers have provided the guidelines.
- Cause resentment if goals are not reasonable, or if the front-line manager is held solely responsible when the budget is not met.
A: Cause resentment if goals are not reasonable, or if the front-line manager is held solely responsible when the budget is not met.

Q: Your supervisor handed you a budget, that you knew immediately would not be successful for your department. What might be a way to discuss participatory budgeting with your supervisor to help her understand how it works?
- Tell your supervisor directly that this budget is not workable, and hand him the budget you prepared.
- Let your supervisor know that you can’t work with the provided budget, and if she doesn’t alter it, you will need to quit.
- Explain the benefits of teamwork, and how with your knowledge of the needs of the department may help to lessen the work your supervisor needs to put in to preparing the budget.
A: Explain the benefits of teamwork, and how with your knowledge of the needs of the department may help to lessen the work your supervisor needs to put in to preparing the budget.

Q: ABC Company sold 10,000 units last year, and anticipate a 10% sales increase this year. They plan to sell a total of 11,000 units this year, divided equally between the four quarters. What is the next step for ABC Company?
- Before getting selling price, they can begin work on the production budget.
- The selling and administrative budgets can be prepared once they know how many items they will sell.
- The sales budget can be prepared with pricing and total sales in dollars for each quarter, giving the information needed to begin preparing the production budget.
A: The sales budget can be prepared with pricing and total sales in dollars for each quarter, giving the information needed to begin preparing the production budget.

Q: Master budgets can provide a great deal of information to managers and investors including:
- How much investors will get in dividends for the year.
- A clear guideline for production so they know when to quit making product.
- Sales forecasts that allow costing, production information, staffing, and cash flow information.
A: Sales forecasts that allow costing, production information, staffing, and cash flow information.

Q: The master budget interrelates so as a manager you can:
- Give your employees their budget assignments and meet when they have all completed their section of the budget.
- Start with the income statement and let each manager know which line they are responsible for completing a budget for.
- Lay out a schedule that begins with a sales budget, then moves through each subsequent budget in the order they need to be prepared.
A: Lay out a schedule that begins with a sales budget, then moves through each subsequent budget in the order they need to be prepared.

Q: You are the senior accountant at ABC company. You are waiting on some pieces of the budget before you can complete the cash budget. What will you need completed before you can do your work?
- The direct materials, labor and manufacturing overhead budgets.
- The sales and production budgets.
- All of the budgets, except the budgeted income statement and budgeted balance sheet will need to be completed first.
A: All of the budgets, except the budgeted income statement and budgeted balance sheet will need to be completed first.

Q: Your purchasing manager, who is responsible for your direct materials budget, just came in to let you know she had made a pricing error in the main component of your product. This error made a huge difference on their budget. What steps do you need to take to correct this error?
- All of the budgets will need to be corrected with the new information.
- Only the cash budget will need to be corrected, since that is the only one that the direct materials budget flows to.
- The cash budget and budgeted financial statements will need to be updated with the new information.
A: The cash budget and budgeted financial statements will need to be updated with the new information.

Q: Your production manager stops in your office so you can clarify some questions he has on the sales budget. He wants to make sure he is understanding how to manage the beginning and ending inventories correctly. What can you tell him to help?
- Just tell him to follow the sales budget directly and produce what is needed for each period.
- Just fill in the budget columns for him, since it will be easier for you.
- Give him the beginning inventory number, how many you would like him to end each period with, and then the final year end inventory number, so he can complete his production budget.
A: Give him the beginning inventory number, how many you would like him to end each period with, and then the final year end inventory number, so he can complete his production budget.

Q: The production manager is new this year, and wants to make sure she is clear on how many widgets she needs to produce each period. With the sales budget in hand, she stops in to have you clarify quantities for her. How can you explain each period’s production?
- Just let her know that if 500 widgets are budgeted to be sold, she needs to produce 500 widgets that period.
- Let her know to have enough widgets in stock at the end of each period to cover the next period sales.
- The sales number, plus desired finished goods inventory will equal the total needed for production. Subtract what you already have on hand, and the final number will be what is needed for production that period.
A: The sales number, plus desired finished goods inventory will equal the total needed for production. Subtract what you already have on hand, and the final number will be what is needed for production that period.

Q: ABC Company ended last year with 1000 widgets in inventory. The sales budget this year is for 25,000 widgets, but since they sell more in January than any other month, they would like to end the year with 2000 widgets in their finished goods inventory. How many should the production department budget to make to end with the appropriate inventory?
- 24,000 widgets
- 25,000 widgets
- 26,000 widgets
A: 26,000 widgets

Q: Each loaf of bread baked by FlourPower Bakery uses one pound of flour. The production budget calls for 1000 loaves of bread to be sold this period. If there are 100 pounds of flour in the beginning raw materials inventory, and they would like to end with 50 pounds in inventory, how many pounds of flour, should the buyer purchase?
- 1000 pounds
- 1050 pounds
- 950 pounds
A: 950 pounds

Q: If it takes 4 hours of labor at $30 per hour to build one bike at Mike’s Bikes, and they plan to build 125 bikes, how much should they budget for labor in dollars per bike?
- $15,625
- $3750
- $120
A: $120

Q: ABC Company is working on their direct labor budget. They have done a time study showing that it take 5 minutes to produce one of their widgets. The production budget for this period is to produce 5,000 widgets. The wage rate is $22.50/hour. How much should ABC Company budget for direct labor this period?
- $22,500
- $11,250
- $9,375
A: $9,375

Q: You work in the human resources department and are helping the production manager figure out his direct labor budget. He knows it take 6 minutes to complete one unit and the production budget is calling for 250,000 units to be produced this month. How many hours does he need to budget for this period?
- 41,667 hours
- 12,500 hours
- 25,000 hours
A: 25,000 hours

Q: By calculating the total variable overhead expenditures and dividing this total by the direct labor hours, we can efficiently assign:
- The fixed overhead rate to each individual product produced.
- Total manufacturing overhead to individual jobs.
- A dollar amount based on the direct labor hours that is added to the cost of each hour worked in manufacturing to allocate those expenditures that cannot be easily applied to an individual product or job.
A: A dollar amount based on the direct labor hours that is added to the cost of each hour worked in manufacturing to allocate those expenditures that cannot be easily applied to an individual product or job.

Q: If total manufacturing overhead is $8,600, including depreciation of $1,500, the cash disbursements for manufacturing over are:
- $8,600
- $10,100
- $7,100
A: $7,100

Q: XYZ Company has fixed manufacturing overhead of $9,000, which includes $1,250 of depreciation per period. Their variable manufacturing overhead has been calculated at $2.50 per direct labor hour. 200 direct labor hours are budgeted for the period. What is their total budgeted manufacturing overhead for the period?
- $10,750
- $8,250
- $9,500
A: $9,500

Q: ABC Company needs to know their budgeted ending finished goods inventory in dollars to get a working capital loan from their bank. As the senior accountant, they asked you to provide this information. You have the sales budget and production budget, but you still need some information to complete this request. What pieces of the puzzle are missing?
- Direct materials, direct labor and administrative and selling expense budgets.
- Direct labor and direct materials budgets.
- Direct labor, direct materials and manufacturing overhead budgets.
A: Direct labor, direct materials and manufacturing overhead budgets.

Q: Farmer Jane’s inventory is very perishable, so she budgets to end the period with a very low inventory. If she has calculated her unit production cost for a pound of tomatoes at $1.18, and her potatoes at $.54 and budgets to end the period with 289 pounds of tomatoes and 426 pounds of potatoes, what will the dollar value be of her ending inventory?
- $1,230
- $615
- $571
A: $571

Q: The dollar value of our ending inventory is needed to complete the budgeted balance sheet, but what other information does this budget provide?
- The selling price per unit.
- The unit product cost which we need to complete the cash budget.
- The unit product costs which provides us with the cost of goods sold per unit.
A: The unit product costs which provides us with the cost of goods sold per unit.

Q: Variable selling and administrative expenses can be calculated using:
- The number of hours the office will be open, due to hourly payrolls and utilities.
- The variable manufacturing overhead rate, because we already have that information available to use.
- The budgeted unit sales, since expenses such as data entry and sales commissions will vary based on units sold.
A: The budgeted unit sales, since expenses such as data entry and sales commissions will vary based on units sold.

Q: ABC Company has asked you to complete their selling and administrative expense budget. They give you the following information: Unit sales 1000. Variable expense per unit $12.50. Total fixed expenses $22,500, including depreciation of $2,250. What is the total selling and administrative expense budget for the period?
- $32,750
- $37,250
- $35,000
A: $35,000

Q: The cash budget does not include:
- Equipment purchases since we pay for them in total when we buy them.
- Variable overhead since it is an estimated amount.
- Depreciation because it is a non-cash expense.
A: Depreciation because it is a non-cash expense.

Q: ABC Company has just completed their cash budget, and noticed they will have a period of cash flow problems several times during the year. They are a bit concerned, but you advise them.
- Raise the selling price of their product so this doesn’t happen in the future.
- Only accept cash, so they aren’t waiting on payments from customers.
- Contact their bank to see if they can obtain a working capital line of credit, since this is a short term issue.
A: Contact their bank to see if they can obtain a working capital line of credit, since this is a short term issue.

Q: The previous cash balance is important when beginning work on the cash budget because:
- The beginning cash can be used in periods of cash flow issues.
- We can use this number to decide what terms to offer our customers.
- If we started without this information, we may show cash flow issues in error.
A: If we started without this information, we may show cash flow issues in error.

Q: Going from a cash based business, to offering terms to customers can help a business grow. It can also cause cash flow problems if not handled correctly. ABC Company has asked you how to start offering net 30 day terms to their customers. What is your advice, as it relates to their cash budget?
- Tell them not to extend terms, since they need their money at the time of sale to pay their bills.
- Advise them to simply pay their bills late, while they wait to receive payments from their customers.
- Review the cash flow, and note if there are times when they may need a working capital line of credit when cash may be low due to a lower sales period, while they wait to receive payments.
A: Review the cash flow, and note if there are times when they may need a working capital line of credit when cash may be low due to a lower sales period, while they wait to receive payments.

Q: Cost of goods sold is calculated by:
- Direct materials plus direct labor per unit is multiplied times the number of units produced.
- Direct labor plus direct materials per unit is multiplied by the number of units sold.
- Using the production cost per unit from our finished goods inventory budget and multiplying it times the number of units sold.
A: Using the production cost per unit from our finished goods inventory budget and multiplying it times the number of units sold.

Q: When approaching the preparation of the budgeted income statement it is best to:
- The sales budget and overhead budgets contain all of the information needed.
- The cash budget is the one needed, since all others have flowed to the cash budget.
- Have all previously prepared budgets available so you can review for needed information.
A: Have all previously prepared budgets available so you can review for needed information.

Q: Mike’s Bikes has provided you the following information: Sales $100,000, cost of goods sold $25,000, selling and administrative expenses $18,500, interest expense $7,500. What is their net operating income?
- $49,000
- $75,000
- $56,500
A: $56,500

Q: Some items that are not related to current year operations, may need to be found on an actual balance sheet from the prior year. These items could include:
- Accounts payable and accounts receivable
- Cash, payroll taxes payable, inventory
- Common stock, buildings and land
A: Common stock, buildings and land

Q: XYZ Company provided you with the following information for their budgeted balance sheet: Cash $20,000, Accounts Payable $10,500, Inventory $5,000. Where would you need to record the difference?
- $14,500 to other assets
- $14,500 to accounts receivable
- $14,500 to stockholder’s equity
A: $14,500 to stockholder’s equity

Q: The asset section of the balance sheet includes current assets, plant and equipment and any other long term assets. This section of the budgeted balance sheet can be completed when:
- The liabilities and owner’s (stockholder’s) equity section is complete, since the assets= liabilities + equity.
- Once the sales and cash budgets are done, the balance sheet can be completed.
- After completion of all components of the budget are complete and the beginning cash and asset balances are available or estimated.
A: After completion of all components of the budget are complete and the beginning cash and asset balances are available or estimated.

Q: When Lucy looked at her budget for the year, she noticed, that at the midpoint her department had already spent 75% of the budgeted amount for copy paper. She also noticed that the sales thus far was double what was originally budgeted, and since ten pieces of copy paper are used per order, for packing slips, invoicing and statements, it makes sense that she is closing in on her budget amount early. What are Lucy’s options?
- Lucy will need to stop printing packing slips once she runs out of budget for paper, print only one copy of the invoice and possibly quit sending statements.
- Lucy needs to immediately discontinue invoicing, since her copy paper will run out before the end of the year.
- Lucy will need to talk with her supervisor to adjust the budget for copy paper so she can continue preparing the necessary documents.
A: Lucy will need to talk with her supervisor to adjust the budget for copy paper so she can continue preparing the necessary documents.

Q: When building a static budget, it is important to:
- Hold managers accountable to their budgeted numbers, regardless of sales.
- Stop production when your department gets to the sales level in the static budget.
- Realize the limitation due to it only be based on one sales level.
A: Realize the limitation due to it only be based on one sales level.

Q: A flexible budget may be more effective than a static budget because:
- It holds managers accountable for the expenses of their department regardless of sales.
- Flexible budgets are not more effective than static budgets.
- It will allow for various levels of sales and adjust the expenses accordingly.
A: It will allow for various levels of sales and adjust the expenses accordingly.

Q: Mary is working on budget comparisons and noticed that sales were 10% less than budgeted. What items might she see decreases in with this lower sales amount?
- Rent, executive salaries and depreciation
- Supplies, depreciation and rent.
- Sales commissions, utilities and supplies.
A: Sales commissions, utilities and supplies.

Q: Jason just noticed a huge spike in the raw materials cost in his purchasing department. Concerned that an order may have been placed in error, he checks in with his purchasing supervisor who assures him the expense needed to be incurred. In a flexible budget process, why might this have happened?
- The order may have been placed to far in advance, and they will now be sitting on unused raw material inventory.
- Due to a price decrease, the purchasing manager ordered ahead to save money, even though the raw materials are a perishable item.
- An increase in sales may have caused the need to place an order for additional raw materials to meet production and sales goals.
A: An increase in sales may have caused the need to place an order for additional raw materials to meet production and sales goals.

Q: If sales were forecasted at 7,000 units, but the year ended at sales of 5,000 units may show
- A decrease in raw materials and depreciation.
- An increase in rent and depreciation and decrease in office supplies.
- A decrease in raw materials, direct labor and sales commissions.
A: A decrease in raw materials, direct labor and sales commissions.

Q: Examples of possible cost drivers may be:
- Rent and depreciation
- Insurance and labor
- Direct labor or manufacturing time
A: Direct labor or manufacturing time

Q: If ABC Fitness provides classes to 400 students per month, potential cost drivers may include:
- The fee charged to students based on the number of classes they take per month.
- The rent and insurance paid on the building.
- Number of classes taught and how instructors are compensated.
A: Number of classes taught and how instructors are compensated.

Q: If multiple cost drivers are present, such as wages, utilities or waste, it is important to:
- Take the easiest driver to track and make decisions based on it.
- Base decisions on direct labor, as that is typically the highest cost driver.
- Look at the budget from the perspective of each cost driver to determine the most important driver from a cost perspective.
A: Look at the budget from the perspective of each cost driver to determine the most important driver from a cost perspective.