Exam 10: Static and Flexible Budgets

(Appendix 10A) Gold Company has the following balances at December 31, 20x4: Cash $6,000; accounts receivable $34,000 ($10,000 from November and $24,000 from December); merchandise inventory $40,000; and accounts payable $20,000 (for merchandise purchases only). Budgeted sales follow: January \ 50,000 February 90,000 March 60,000 April 100,000 Other data: *Sales are 40% cash, 50% collected during the following month, and 10% collected during the second month after sale. A 3% cash discount is given on cash sales. *Cost of goods sold is 40% of sales. *Ending inventory must be 140% of the next month's cost of sales. *Purchases are paid 70% in month of purchase and 30% in the following month. *The selling and administrative cost function is: $6,000 + $0.2 × sales. This includes $1,000 for amortization. *All costs are paid in the month incurred. *Minimum cash balance requirement is $6,000. Cash receipts for April will be:

The manufacturing overhead budget: I. Compares revenue to overhead II. Forecasts overhead costs per unit for cost of goods sold calculations III. Forecasts total overhead costs

BNN Corporation expects to operate at a profit in its next fiscal year. Which of the following statements about its budgeted income statement is true?

To prepare a budgeted income statement, managers draw data from the revenue budget, the cost of goods sold budget, and the cash budget.

Horton Company produces and sells two products: round and square tables. In August 20x4, the budget projected the following for 20x5: Budgeted data for 20x5 direct labour and overhead are: Direct labour: Round 4 hours per unit at $6 per hour Square 6 hours per unit at $8 per hour Overhead: $4 per direct labour hour Total budgeted production of tables in 20x5 is:

The direct manufacturing labour budget: I. Is stated in direct labour hours and cost II. Is only stated in direct labour cost III. Includes hours and costs of supervisors

The master budget includes two components: an operating budget and a time budget.

TFS Corporation, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: Beginning inventory \ 10,000 Budgeted purchases 25,000 Expected revenue 150,000 Inflows of cash 120,000 Support departments costs 30,000 Total cash outflows 80,000 TFS' actual income for the next fiscal year will be:

TNR Corporation is preparing its budgeted income statement for the month of August. Budgeted sales are $18,000. Cost of goods sold is twice the amount of operating costs, and operating costs plus cost of goods sold equals 40% of net income. Return on sales (net income / sales) is anticipated to be 50%. TNR does not have any nonoperating items on its income statement. TNR's expected income tax rate is:

When an organization implements activity-based budgeting, managers must identify activities for:

The principles of activity-based costing can be applied to the budgeting process.

When evaluating actual results at the end of an accounting period, the static budget provides an appropriate benchmark for actual operations.

Kaizen budgeting is designed to improve quality and reduce cost over time.

The Dilly Company marks up all merchandise at 25% of gross purchase price. All purchases are made on account with terms of 1/10, (1% discount if paid in 10 days) net/60 (full amount due within 60 days). Purchase discounts, which are recorded as miscellaneous income, are always taken. Normally, 60% of each month's purchases are paid for in the first month after purchase, whereas the other 40% are paid during the first 10 days of the first month after purchase. Inventories of merchandise at the end of each month are kept at 30% of the next month's forecasted cost of goods sold. Terms for sales on account are 2/10 (2% discount if paid within 10 days), net/30 (full amount due in 30 days). Cash sales are not subject to discount. Fifty percent of each month's sales on account are collected during the month of sale, 45% are collected in the succeeding month, and the remainder is usually uncollectible. Seventy percent of the collections in the month of sale are subject to discount, and 10% of the collections in the succeeding month are subject to discount (2%). Forecasted sales data and cost of sales for selected months are as follows: Sales on Account (Gross) Cash Sales Cost of Goods sold December \ 1,900,000 \ 400,000 \ 1,840,000 January 1,500,000 250,000 1,400,000 February 1,700,000 350,000 1,640,000 March 1,600,000 300,000 1,520,000 Forecasted ending inventory for the month of December is:

Budget assumptions are gathered from: I. Last year's budgets II. Department heads with information about next year's plans III. Future expectations

All of the following are potential adjustments to flexible budgets except:

Korn, Inc., projects sales for its first three months of operation as follows: October November December Credit sales \ 100,000 \ 150,000 \ 200,000 Cash sales 40,000 60,000 50,000 Tota \ 140,000 \ 210,000 \2 50,000 Inventory on October 1 is $40,000. Subsequent beginning inventories should be 40% of that month's cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale, and the balance the third month. A 5% discount is given if payment is received in the month following sale. What is the projected cost of purchases for October?

Kaizen budgeting:

The budgeted income statement: I. Accumulates information from the supporting budgets II. Is based only on last year's income statement III. Is prepared a few weeks before the actual income statement is prepared for the period

One disadvantage of participative budgeting is employees' tendency to set targets too high to impress management with their motivation.