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410 Chapter 9 Profit Planning

12. A budget too easily achieved will lead to diminished performance. Do you agree? Explain.
13. What is the role of top management in participative budgeting?
14. Explain why a manager has an incentive to build slack into the budget.
15. Explain how a manager can milk the firm to improve budgetary performance.

MULTIPLE-CHOICE QUESTIONS
9-1 A budget
a. is a long-term plan. d. is a short-term financial plan.
b. covers at least 2 years. e. is necessary only for large firms.
c. is only a control tool.
9-2 Which of the following is part of the control process?
a. Monitoring of actual activity d. Taking corrective action
b. Comparison of actual with planned e. All of these.
activity
c. Investigating
9-3 Which of the following is not an advantage of budgeting?
a. It forces managers to plan. d. It provides a standard for perform-
b. It provides information for decision ance evaluation.
making. e. It improves communication and
c. It guarantees an improvement in coordination.
organizational efficiency.
9-4 The budget committee
a. reviews the budget. c. approves the final budget.
b. resolves differences that arise as the d. is directed (typically) by the controller.
budget is prepared. e. does all of these.
9-5 A moving, 12-month budget that is updated monthly is
a. not used by manufacturing firms. d. a continuous budget.
b. waste of time and effort. e. always used by firms that prepare a
c. a master budget. master budget.
9-6 Which of the following is not part of the operating budget?
a. The direct labor budget d. The capital budget
b. The cost of goods sold budget e. The selling and administrative
c. The production budget expenses budget
9-7 Before a direct materials purchases budget can be prepared, you should first
a. prepare a sales budget. d. obtain the expected price of each type
b. prepare a production budget. of material.
c. decide on the desired ending inven- e. do all of these.
tory of materials.
9-8 The first step in preparing the sales budget is to
a. prepare a sales forecast. d. talk with past customers.
b. review the production budget e. increase sales beyond the forecast
carefully. level.
c. assess the desired ending inventory of
finished goods.

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Chapter 9 Profit Planning 411

9-9 Which of the following is needed to prepare the production budget?

a. Direct materials needed for d. Units of materials in ending
production inventory
b. Direct labor needed for production e. None of these.
c. Expected unit sales
9-10 A company requires 100 pounds of plastic to meet the production needs of a small toy. It cur-
rently has 10 pounds of plastic inventory. The desired ending inventory of plastic is 30 pounds.
How many pounds of plastic should be budgeted for purchasing during the coming period?
a. 80 pounds d. 130 pounds
b. 110 pounds e. None of these.
c. 120 pounds
9-11 A company plans to sell 220 units. The selling price per unit is $24. There are 50 units in
beginning inventory, and the company would like to have 20 units in ending inventory.
How many units should be produced for the coming period?
a. 250 d. 220
b. 200 e. None of these.
c. 230
9-12 Which of the following is needed to prepare a budgeted income statement?
a. The production budget d. The capital expenditures budget
b. Budgeted selling and administrative e. Last year’s income statement
expenses
c. The budgeted balance sheet
9-13 Select the one budget below that is not an operating budget.
a. Cost of goods sold budget d. Overhead budget
b. Cash budget e. All of these are operating budgets.
c. Production budget
9-14 The cash budget serves which of the following purposes?
a. Documents the need for liberal inventory policies.
b. Reveals the amount of depreciation expense.
c. Reveals the amount lost due to uncollectible accounts.
d. Provides information about the ability to repay loans.
e. None of the above.
9-15 Assume that a company has the following accounts receivable collection pattern:

Month of sale 40%

Month following sale 60%

All sales are on credit. If credit sales for January and February are $100,000 and
$200,000, respectively, the cash collections for February are
a. $140,000. d. $160,000.
b. $300,000. e. $80,000.
c. $120,000.
9-16 The percentage of accounts receivable that are uncollectible can be ignored for cash budg-
eting because
a. no cash is received from an account that defaults.
b. it is included in cash sales.
c. it appears on the budgeted income statement.
d. for most companies, it is not a material amount.
e. none of the above is correct.

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412 Chapter 9 Profit Planning

9-17 An ideal budgetary system is one that

a. encourages dysfunctional behavior. d. encourages subversion of an organi-
b. encourages goal-congruent behavior. zation’s goals.
c. encourages myopic behavior. e. does none of these.
9-18 Some key budgetary features that tend to promote positive managerial behavior are
a. frequent feedback on performance. d. well-designed monetary and non-
b. participative budgeting. monetary incentives.
c. realistic standards. e. all of these.
9-19 Which of the following is not an advantage of participative budgeting?
a. It encourages budgetary slack. d. It encourages greater goal
b. It tends to lead to a higher level of congruence.
performance. e. It fosters a sense of creativity in
c. It fosters a sense of responsibility. managers.
9-20 Which of the following items is a possible example of myopic behavior?
a. Failure to promote deserving d. Buying cheaper, lower-quality mate-
employees rials so that the company does not
b. Reducing expenditures on preven- exceed the materials purchases
tive maintenance budget
c. Cutting back on new product e. All of these.
development

CORNERSTONE EXERCISES
OBJECTIVE 2 Cornerstone Exercise 9-21 Preparing a Sales Budget
CORNERSTONE 9.1 Patrick Inc. sells industrial solvents in five-gallon drums. Patrick expects the following units to
be sold in the first three months of the coming year:
January 41,000
February 38,000
March 50,000

The average price for a drum is $35.

Required:
Prepare a sales budget for the first three months of the coming year, showing units and sales rev-
enue by month and in total for the quarter.

OBJECTIVE 2 Cornerstone Exercise 9-22 Preparing a Production Budget

CORNERSTONE 9.2 Patrick Inc. makes industrial solvents. In the first four months of the coming year, Patrick
expects the following unit sales:
January 41,000
February 38,000
March 50,000
April 51,000

Patrick’s policy is to have 25% of next month’s sales in ending inventory. On January 1, it is
expected that there will be 6,700 drums of solvent on hand.

Required:
Prepare a production budget for the first quarter of the year. Show the number of drums that
should be produced each month as well as for the quarter in total.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.