7 Master Budget and Flexible Budgeting PDF

CHAPTER 7--MASTER BUDGET and FLEXIBLE BUDGETING
MULTIPLE CHOICE
1. Budgeting provides the framework for:

a. Process costing.
b. Breaking semivariable costs into their fixed and variable components.
c. Planning and control.
d. Delegating authority to managers.
ANS: C
Budgeting provides the framework for planning how the organization meet the goal of maximizing its
income and providing guidelines for controlling costs.
PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective
2. The budget should use historical data:

a. Only as a stepping-off point for projections into the future.
b. Because things don’t really change.
c. And add a 5% growth factor for each year.
d. Because management is satisfied with historical results.
ANS: A
Because the budgeting process involves looking to the future, historical data should only be used as a
stepping-off point. The budget must also consider other factors including economic developments and
the general business climate.

3. Which of the following is not a requirement of budgeting?

a. Goals must be realistic and possible to attain.
b. There must be accountability for actual results.
c. Management must clearly define its objectives.
d. The budget must not be changed under any circumstances.
ANS: D
The budget must be flexible enough so it can be modified in light of changing conditions.

4. A budget prepared for a single level of volume based on management’s best estimate of the level of
production and sales for the coming period is a:
a. Flexible budget.
b. Static budget.
c. Continuous budget.
d. Capital budget.
ANS: B
A static budget is prepared for a single level of volume. A flexible budget is prepared for several
levels of volume.
PTS: 1 DIF: Easy REF: P. OBJ: 2
NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic
5. A budget that adds a new month at the end of the budget when a month is completed, resulting in a
budget that is always one year in advance is a:
a. Flexible budget.
b. Static budget.
c. Continuous budget.
d. Capital budget.
ANS: C
A continuous or rolling budget “rolls forward” so that as one month is completed, another month is
added at the end of the budget.

6. Which of the following is not an operating budget?

a. Cash budget
b. Sales and administrative budget
c. Sales budget
d. Cost of goods sold budget
ANS: A
Operating budgets include components of the budgeted income statement which include options b, c,
and d. The cash budget is a financial budget.

7. The budget that is used as a basis for preparing all other budgets is the:
a. cash budget.
b. production budget.
c. budget balance sheet.
d. sales budget.
ANS: D
The sales budget is used as the basis for the production budget. The sales or production budgets are
needed to prepare all other budgets.

8. Managers should consider all of the following in developing a sales budget except:
a. Customer demand.
b. Development of new products.
c. Present and future economic conditions.
d. Cost of materials.
ANS: D
The cost of materials should be considered in the direct materials budget. Customer demand, new
products and economic conditions should be factored into the sales budget.

9. Participative budgeting:
a. Results in managers being less apt to meet or beat their budget projections.
b. Motivates managers to meet budget numbers because they set them.
c. Describes the budget meetings in which managers participate.
d. Leaves room to blame top management in the event budget numbers are not met.
ANS: B
Managers are more apt to meet or beat their budget projections when using participative budgeting.
They are more motivated because they set the numbers and there is no one else to blame for imposing
unrealistic standards.

10. Stan is the manager of a division that has been struggling lately. It is budget time and Stan feels he is
under the gun to do well next year. As such, he is building slack into his budget. How will he handle
estimates of revenues and expenses?
Revenues Expenses
a. Overestimate Overestimate
b. Overestimate Underestimate
c. Underestimate Underestimate
d. Underestimate Overestimate
ANS: D
Budget slack occurs when a manager sets unrealistically low goals in an effort to make average
performance look good. If Stan is building slack into his budget, he would budget his sales lower than
realistically expected so he would look good when sales beat the budget. Conversely, his budgeted
expenses would be higher than realistically expected, so he would look good when his expenses were
under budget.

11. Kerry Kola Company sells Kerry Kola in two sizes: 12 ounce and 32 ounce bottles, at a price of $1.00
and $2.25, respectively. Projected unit sale volumes by region follow:
East Region:
12 ounce bottles 200,000
West Region:
What is Kerry Kola’s budgeted sales?

a. $1,643,750
b. $1,425,000
c. $1,362,500
d. $1,581,250
ANS: B
Kerry Kola’s Sales Budget is calculated as follows:
Unit Sales Unit Selling
Product and Region Volume Price Total Sales
12 ounce bottles:
East 200,000 $1.00 $ 200,000
West 325,000 $1.00 325,000
$ 525,000
32 ounce bottles:
East 150,000 $2.25 $ 337,500
West 250,000 $2.25 562,500
$ 900,000
Total sales $1,425,000

12. Which of the following represents the correct relationship between budgets and inventories?
a. The direct materials budget includes the budgeted dollar value of the direct materials
inventory at the beginning and end of the budget period.
b. The direct materials budget includes the budgeted number of units in the direct materials
c. The production budget includes the budgeted number of units in the work in process
d. The direct labor budget includes the budgeted number of units in the work in process
ANS: B
The direct materials budget is computed as follows:
Budgeted production in units

x number of components required per unit
= Units of material required for production
+ Desired units in materials inventory at the end of the period
= Total
- Estimated units in materials inventory at the beginning of the period
= Number of units required to be purchased

13. Denny Door Company has budgeted door sales as follows:
Year Number of Units Budgeted Sales Dollars

March 50,000 $1,000,000
April 60,000 $1,200,000
Finished goods inventory at February 28 will be 8,000 units, but the company is making an effort to
reduce inventory and its new policy is that inventory at the end of the month should be 10% of the
budgeted sales for the following month. How many units should Denny Door Company produce in
March?
a. 52,000
b. 62,000
c. 51,000
d. 48,000
ANS: D
Denny’s production budget is calculated as follows:
Budgeted sales in units in March 50,000
+ Desired ending inventory (60,000 x 10%) 6,000
56,000
- Beginning inventory 8,000
48,000

14. Tacy Tires has budgeted production of 150,000 units this fiscal year. There were 15,000 units on hand
in finished goods inventory on January 1 and the company’s desired inventory at the end of the year is
12,000 units. Tacy’s sales budget in units is:
a. 147,000
b. 150,000
c. 153,000
d. 177,000
ANS: C
Budgeted sales, in units Unknown (2)
+ Desired units in inventory, end of period 12,000
Unknown (1)
- Estimated units inventory, beginning of period 15,000
= Budgeted production, in units 150,000
Unknown (1) = 150,000 + 15,000 = 165,000

Unknown (2) = 165,000 - 12,000 = 153,000
PTS: 1 DIF: Hard REF: P. OBJ: 2

15. Producing goods evenly throughout the year despite having a seasonal sales pattern could lead to:
a. Employee morale issues.
b. High costs for recruiting and training new employees.
c. The potential for inventory obsolescence.
d. Relatively stable inventory levels.
ANS: C
Even production coupled with a seasonal sales pattern would lead to fluctuating inventory levels.
Inventory levels would increase during periods when production levels exceeded sales volumes. If
inventory levels were too high, there is the potential that the product could spoil or become outdated
before those inventories could be sold.

16. The format of the direct materials budget is similar to that of the:
a. Factory overhead budget.
b. Sales budget.
c. Production budget.
d. Direct labor budget.
ANS: C
The format of the direct materials budget is similar to that of the production budget as they both
consider inventory levels.

17. Comfy Inc. uses five yards of wool in each blanket it produces. Comfy’s production budget next year
is 30,000 blankets. The anticipated wool inventory at January 1 is 40,000 yards, but the company
desires to reduce the inventory to 20,000 yards by the end of the year. Each yard of wool costs $10.
How many yards of wool should Comfy purchase?
a. 190,000 yards
b. 130,000 yards
c. 170,000 yards
d. 1,300,000 yards
ANS: B
Budgeted production of blankets in units 30,000

Yardage required per blanket x 5
Number of yards required for production 150,000
Desired inventory of wool in yards, December 31 20,000
170,000
Estimated inventory of wool in yards, January 1 40,000
Number of yards of wool to be purchased 130,000

18. Arwin Company’s production budget is as follows:

Budgeted sales in units 200,000
Desired units in inventory, December 31 35,000
235,000
Estimated units in inventory, January 1 25,000
Budgeted units of production 210,000
Each unit takes 20 minutes to produce and the standard labor rate is $15 per labor hour. What is
Arwin’s direct labor budget?
a. $1,050,000
b. $1,000,000
c. $1,175,000
d. $9,450,000
ANS: A
Budgeted units of production 210,000 x 1/3 hour each = 70,000 hours
70,000 hours x $15/hr. = $1,050,000

19. Lunchco Inc. produces picnic tables in a two-step process. Pretreated wood is cut in the Cutting
Department and then the lumber is assembled into tables in the Assembly Department. It takes 30
minutes of direct labor time to cut the lumber and the standard hourly labor rate in the Cutting
Department is $12. The tables take one hour to assemble and the standard hourly rate in the Assembly
Department is $10. If Lunchco’s production budget is 20,000, what is the company’s direct labor
budget?
a. $340,000
b. $680,000
c. $330,000
d. $320,000
ANS: D
Lunchco’s direct labor budget is calculated as follows:
Cutting Department 20,000 units x 1/2 hr/unit x $12/hr. $120,000
Assembly Department 20,000 units x 1 hr/unit x $10/hr. 200,000
Total budgeted direct labor $320,000

20. Which of the following is not considered when preparing the cost of goods sold budget?
a. Budgeted factory overhead.
b. Budgeted dollar value of finished goods inventory at the end of the period.
c. Budgeted sales dollars.
d. Budgeted dollar value of work-in-process inventory at the beginning of the year.
ANS: C
Budgeted sales dollars is not considered in preparing the cost of goods sold budget.

21. Budgeted inventories for the Remle Company follow:

January 1 December 31
Direct materials $24,800 $26,700
Work in process 57,600 55,200
Finished goods 83,300 87,400
Additional budget information follows:

Total manufacturing costs $354,500
Cost of goods manufactured 356,900
Calculate the budgeted cost of goods sold.

a. $352,800
b. $350,400
c. $361,000
d. $359,300
ANS: A
Finished goods inventory, January 1 $ 83,300
Total goods available for sale 440,200
Finished goods inventory, December 31 87,400
Cost of goods sold $352,800

22. Amounts from all of the following budgets feed into the pro-forma income statement except the:
a. Capital expenditures budget.
b. Factory overhead budget.
c. Direct materials budget.
d. Sales budget.
ANS: A
The capital expenditures budget is the budget for asset acquisitions. The sales budget feeds directly
into the (pro-forma income statement) income statement budget, while the factory overhead and direct
materials budgets feed into the income statement budget indirectly through the cost of goods sold
budget.

23. Information from the operating budgets of Northwest Industries follows:

Selling and administrative expenses $ 50,000
Factory overhead 70,000
Sales 450,000
Cost of goods sold 200,000
Direct labor 80,000
If Northwest’s income tax rate is 40%, what is the budgeted net income?
a. $120,000
b. $30,000
c. $200,000
d. $80,000
ANS: A
The budgeted income statement for Northwest Industries would be as follows:
Net sales $450,000
Cost of goods sold 200,000
Gross profit 250,000
Selling and administrative expenses 50,000
Operating income 200,000
Income tax ($200,000 x 40%) 80,000
Net income $120,000
Note that the amounts from the factory overhead and direct labor budgets would have already been
included in the amount shown in the cost of goods sold budget.

24. Consider the following budgets:

(1) Direct materials
(2) Income statement
(3) Production
(4) Cost of goods sold
In what order should these budgets be prepared?

a. 2, 3, 1, 4
b. 3, 4, 1, 2
c. 1, 3, 4, 2
d. 3, 1, 4, 2
ANS: D
The sales budget should be prepared first. The budgeted sales should be used to prepare the
production budget. The budgeted production will be needed to determine the direct materials budget.
The direct materials budget should be used to prepare the cost of goods sold budget. Once the cost of
goods sold budget is determined, that needs to be used to prepare the income statement budget.

25. A plan for timing acquisitions of buildings, equipment or other significant assets is a(n):
a. budget balance sheet.
b. capital expenditures budget.
c. asset budget.
d. financing budget.
ANS: B
A capital expenditures budget is a plan for timing acquisitions of buildings, equipment or other
significant assets.

26. The purpose of a flexible budget is to:

a. Compare actual and budgeted results at virtually any level of production.
b. Eliminate cyclical fluctuations in production reports by ignoring variable costs.
c. Allow management some latitude in meeting goals.
d. Reduce the total time in preparing the annual budget.
ANS: A
The purpose of a flexible budget is to compare actual and budgeted results at virtually any level of
production.

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective
27. Flexible budgeting is a reporting system wherein the:

a. Statements included in the budget report vary from period to period.
b. Budget standards may be adjusted at will.
c. Reporting dates vary according to the levels of activity reported upon.
d. Planned level of activity is adjusted to the actual level of activity before the budget
comparison report is prepared.
ANS: D
Flexible budgeting is a reporting system wherein the planned level of activity is adjusted to the actual
level of activity before the budget comparison report is prepared.

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic
28. Which of the following budgets is used to provide an “apples to apples” comparison of budgeted and
actual performance at the actual unit volume attained?
a. Continuous budget
b. Flexible budget
c. Master budget
d. Static budget
ANS: B
A flexible budget is used to compare actual and budgeted performance at the actual production
volume.

29. Julia Industries produces cookware. The master budget called for production of 75,000 units this year.
The budget at that level of production follows:
Sales $1,200,000
Direct materials 300,000
Direct labor 150,000
Variable factory overhead 225,000
Fixed factory overhead 262,500
Fixed selling and administrative expense 112,500
Operating income $ 150,000
Due to the popularity of cooking shows on television, Julia Industries now estimates sales will be
80,000 units. What is budgeted operating income at this level?
a. $185,000
b. $160,000
c. $230,000
d. $167,500
ANS: A
75,000 Units Per Unit* 80,000 Units
Sales $1,200,000 $16.00 $1,280,000
Direct materials 300,000 4.00 320,000
Direct labor 150,000 2.00 160,000
Variable factory overhead 225,000 3.00 240,000
Fixed factory overhead 262,500 not applicable 262,500
Fixed selling and administrative 112,500 not applicable 112,500
Operating income $ 150,000 $ 185,000
*For sales and variable costs: Per unit = budgeted amount at 75,000 units / 75,000

30. A summary of Tanner Company’s flexible budget of manufacturing costs follows:
10,000 Units
Direct materials $30,000
Direct labor 35,000
Total $96,000
What would the flexible budget of manufacturing costs be at a production volume of 12,000 units?
a. $80,000
b. $115,200
c. $109,000
d. $112,000
ANS: D
10,000 Units Cost per Unit* 12,000 Units
Direct materials $30,000 $3.00 $ 36,000
Direct labor 35,000 3.50 42,000
Variable factory overhead 15,000 1.50 18,000
Fixed factory overhead 16,000 not applicable 16,000
Total $96,000 $112,000
*Cost per unit = budgeted amount at 10,000 units/10,000

31. Quinn Company’s master budget called for 30,000 units of production. Budgeted direct material costs
at this level were $450,000 or $15 per unit. Quinn actually produced 32,000 units and incurred direct
material costs of $496,000. Quinn uses flexible budgeting to evaluate variances and determined that
there was a $16,000 unfavorable direct materials variance. All of the following reasons could have
contributed to the flexible budget variance except:
a. Quinn produced more than the master budget called for.
b. Quinn did a poor job of controlling the purchase cost of the raw materials.
c. Quinn did a poor job of controlling the quantity of the direct materials used in the
production process.
d. None of these is correct.
ANS: A
Because flexible budgeting compares actual results against budgeted amounts at the actual level of
production, in this case 32,000, the variance cannot be due to the fact that production levels were
different than what the master budget originally called for.

32. Consider the following about Taylor Corporation:

Direct materials budget based on 50,000 units produced $200,000
Actual direct materials incurred $190,000
Actual units produced 40,000
Assuming Taylor Corporation uses flexible budgeting, what is the variance related to direct materials?
a. $10,000 favorable
b. $50,000 unfavorable
c. $30,000 unfavorable
d. $38,000 unfavorable
ANS: C
Standard material cost per unit ($200,000 / 50,000 units) x $4.00
Budgeted material cost at 40,000 units $160,000
Actual direct material costs incurred 190,000
Unfavorable variance related to direct materials $ 30,000

33. Quinn Company’s master budget called for 30,000 units of production. Budgeted direct material costs
at this level were $450,000 or $15 per unit. Quinn actually produced 32,000 units and incurred direct
material costs of $496,000.
What is Quinn’s direct material variance using flexible budgeting?

a. $16,000 U
b. $46,000 U
c. $74,125 U
d. $16,000 F
ANS: A
Budgeted direct material costs per unit x 15
Budgeted direct material costs @ 32,000 units of 480,000
production
Actual direct material costs 496,000
Unfavorable direct material variance $ 16,000

34. Consider the flexible budget information relating to direct labor costs for Logan Ltd.:
48,000 units 50,000 units 52,000 units

Machining $2.50 per unit $120,000 $125,000 $130,000
Finishing $1.50 per unit 72,000 75,000 78,000
$192,000 $200,000 $208,000
Logan’s actual production was 51,000 units and the related cost was $205,500. What is the variance
related to direct labor?
a. $1,500 unfavorable
b. $5,500 unfavorable
c. $2,500 favorable
d. $1,500 favorable
ANS: A
Machining - 51,000 units x $2.50 $127,500
Finishing - 51,000 units x $1.50 76,500
Flexible budget for labor at 51,000 units 204,000
Actual labor costs incurred 205,500
Unfavorable variance $ 1,500

35. The absolute maximum number of units that would be possible under the best conceivable operating
conditions is a description of which type of manufacturing capacity?
a. Practical
b. Theoretical
c. Currently attainable (expected)
d. Normal
ANS: B
Theoretical capacity describes the absolute maximum number of units that would be possible under the
best conceivable operating conditions. Both practical and normal capacity have some allowance for
idle capacity.

36. The level of production that provides complete utilization of all facilities and personnel, but allows for
some idle capacity due to operating interruptions such as machinery breakdowns, idle time and other
inescapable inefficiencies is:
a. practical capacity.
b. theoretical capacity.
c. budgeted capacity.
d. normal capacity.
ANS: A
Practical capacity provides complete utilization of all facilities and personnel, but allows for some idle
capacity.

37. The level of production that is used by most firms for budget development because it represents a
logical balance between maximum production capacity and the capacity demanded by actual sales
volume is:
a. practical capacity.
b. theoretical capacity.
c. budgeted capacity.
d. normal capacity.
ANS: D
Normal capacity is the level of production that will meet normal requirements of ordinary sales
demand over the years. It is used by most manufacturing firms for budget development.

38. When using a flexible budget, what will occur to fixed costs (on a per unit basis) as production
increases?
a. Fixed costs are not considered in flexible budgeting.
b. Fixed costs per unit will decrease.
c. Fixed costs per unit will remain unchanged.
d. Fixed costs per unit will increase.
ANS: B
When using a flexible budget, fixed costs (on a per unit basis) will decrease as production increases.

39. The normal capacity of Noel Company is 4,000 units per month. At this volume, budgeted fixed and
variable factory overhead are $16,000 and $20,000, respectively. In May, actual production was 4,200
units and actual overhead incurred was $37,900.
What was the amount of factory overhead allowed for the actual level of production in May?
a. $36,000
b. $36,800
c. $37,000
d. $37,800
ANS: C
Budgeted variable overhead per unit ($20,000 / 4,000 units) $5.00
Actual units produced x 4,200
Budgeted variable overhead @ 4,200 units $21,000
Budgeted fixed overhead @ 4,200 units 16,000
Overhead allowed for 4,200 units produced $37,000

What is the factory overhead application rate at the actual level of production (rounded to the nearest
penny)?
a. $9.00
b. $8.81
c. $9.02
d. $8.57
ANS: B
Factory overhead application rate = $37,000/4,200 units = $8.81 per unit

41. Bisset Corporation has developed the following flexible budget formula for annual indirect labor cost:
Total costs = $9,600 + $0.75 per machine hour
Operating budgets for the current month are based upon 30,000 hours of planned machine time.
Indirect labor costs included in this planning budget are:
a. $23,300.
b. $22,500.
c. $32,100.
d. $2,425.
ANS: A
Annual fixed costs of $9,600 / 12 = monthly fixed cost $ 800
30,000 machine hours  $.75 per machine hour 22,500
Indirect labor cost budgeted for the month $23,300
42. The standard capacity of a factory is 9,000 units per month. Cost and production data follow:
Standard application rate for fixed factory overhead for 9,000 units $2.00
Standard application rate for variable factory overhead for 9,000 units .50
Actual number of units produced 8,800
Actual factory overhead incurred $22,700
What is the amount of overhead allowed for the actual volume of production?
a. $22,000
b. $22,400
c. $22,500
d. $22,700
ANS: B
Standard application rate for variable factory overhead x$ .50
Variable factory overhead allowed for 8,800 units $ 4,400
Standard capacity of factory 9,000
Standard application rate for fixed factory overhead x 2.00
Budgeted fixed factory overhead 18,000
Factory overhead allowed for 8,800 units produced $22,400

What is the variance between budgeted factory overhead per the flexible budget and actual overhead
incurred?
a. $1,900 U
b. $1,000 U
c. $900 U
d. $100 U
ANS: C
Actual overhead incurred 37,900
Unfavorable variance $ 900

44. The standard capacity of a factory is 9,000 units per month. Cost and production data follow:
Standard application rate for fixed factory overhead for 9,000 units $2.00
Standard application rate for variable factory overhead for 9,000 units .50
Actual factory overhead incurred $22,700
What is the variance between the overhead per the flexible budget and the actual overhead incurred?
a. $200 U
b. $300 U
c. $100 U
d. $300 F
ANS: B
Standard application rate for variable factory overhead x$ .50
Variable factory overhead allowed for 8,800 units $ 4,400
Standard capacity of factory 9,000
Standard application rate for fixed factory overhead x 2.00
Factory overhead allowed for 8,800 units produced $22,400
Actual overhead incurred 22,700
Unfavorable factory overhead variance $ 300

45. Which of the following is not true regarding service department expenses?
a. Preparing a budget for a service department requires the same procedures as those used for
production departments.
b. Expenses of the service departments are allocated to production departments using a
standard application rate.
c. Production departments will consider allocated service department expenses in developing
their budgets.
d. Variances are not computed for expenses in service departments.
ANS: D
Variances are computed in service departments. The variance will be the difference of the service
department’s actual expenses compared to the amount charged to the production departments.

PROBLEM
1. Keefe Clothing, Inc. manufactures two styles of blue jeans: standard, which sell for $35, and deluxe,
which sell for $50. The jeans are sold in three regions: East, West and South. Deluxe jeans account
for 25% of the sales in the East Region, 30% in the West Region and 20% in the South Region.
Forecasted total sales next year are 30,000, 50,000 and 35,000 in the East, West and South Regions,
respectively.
Prepare a sales budget for Keefe Clothing, Inc. for next year.
ANS:
Keefe Clothing, Inc.

Sales Budget
For the Year Ended December 31, 20--
Unit Sales Unit Sales

Product and Region Volume Price Total Sales
Standard:
East * 22,500 $35.00 $ 787,500
West ** 35,000 35.00 1,225,000
South *** 28,000 35.00 980,000
Total 85,500 $2,992,500
Deluxe:
East * 7,500 $50.00 $ 375,000
West ** 15,000 50.00 750,000
South *** 7,000 50.00 350,000
Total 29,500 $1,475,000
Total Revenue $4,467,500
* East 30,000 units x 25% = 7,500 units deluxe; 30,000 - 7,500 = 22,500 units standard
** West 50,000 units x 30% = 15,000 units deluxe; 50,000 - 15,000 = 35,000 units standard
*** South 35,000 units x 20% = 7,000 units deluxe; 35,000 - 7,000 = 28,000 units standard

2. Bradley Company has forecasted sales for the month of March for its single product to be 10,000 in its
Columbus Region, 13,000 units in its Cincinnati Region and 15,000 units in its Cleveland Region. The
estimated inventory on March 1 is 4,500 units and the company desires to have 3,800 units on hand
March 31. The budgeted sales price is $52.00 per unit.
(1) Prepare a sales budget for the month of March.

(2) Prepare a production budget for the month of March.
ANS:
Bradley Company
Sales Budget
For the Month Ended March 31, 20--
Units Unit Selling Price Total Sales
Region:
Columbus 10,000 $52.00 $ 520,000
Cincinnati 13,000 52.00 676,000
Cleveland 15,000 52.00 780,000
38,000 $1,976,000
Bradley Company
Production Budget
For the Month Ended March 31, 20--
Units
Sales 38,000
Plus desired ending inventory, March 31 3,800
Total 41,800
Less estimated beginning inventory, March 1 4,500
Total production 37,300
3. O’Reilly Outfitters Inc. has forecasted sales of 32,000 tents for the upcoming year. The anticipated
finished goods inventory at January 1 is 5,000 units, but management desires this inventory level to be
reduced by 20% on December 31.
Two materials are used in the production of tents: 36 square yards of nylon having a standard cost of
$2.00 per yard, and 20 feet of metal tubing having a standard cost of $.50 per linear foot. Raw
material inventory information is as follows:
Estimated inventory Desired inventory

January 1 December 31
Nylon 110,000 yds. 80,000 yds.
Metal tubing 45,000 ft. 35,000 ft.
(1) Prepare a production budget for the upcoming year.

(2) Prepare a direct materials budget for the upcoming year.
ANS:
O’Reilly Outfitters Inc.

Production Budget
Units
Budgeted sales 32,000
Plus desired ending inventory, December 31 * 4,000
Total 36,000
Less estimated beginning inventory, January 1 5,000
* 5,000 - (5,000 x 20%) = 4,000
O’Reilly Outfitters Inc.

Direct Materials Budget
Nylon Metal Tubing

Square Yards Linear Feet Total
Quantities required for production * 1,116,000 620,000
Plus desired ending inventory, Dec. 31 80,000 35,000
Total 1,196,000 655,000
Less estimated beginning inventory, Jan. 1 110,000 45,000
Total quantity to be purchased 1,086,000 610,000
Unit price $ 2.00 $ .50
Total direct materials purchases $2,172,000 $305,000 $2,477,000
* Nylon 31,000 units x 36 yards per unit = 1,116,000 yards

Metal tubing 31,000 units x 20 feet per unit = 620,000 feet

4. Phelps Company manufactures one product that requires 3 hours of machining direct labor and 2 hours
of assembly direct labor. The standard labor rate is $18.00 per direct labor hour in the Machining
Department and $15.00 per direct labor hour in the Assembly Department. The product has forecasted
sales of 2,000 units in May. The estimated finished goods inventory at May 1 is 250 units and the
desired ending inventory at May 31 is 450 units.
(1) Prepare a production budget for the month of May.

(2) Prepare a direct labor budget for the month of May.
ANS:
Phelps Company
Production Budget
For the Month Ended May 31, 20--
Units
Budgeted sales 2,000
Plus desired ending inventory, May 31 450
Total 2,450
Less estimated beginning inventory, May 1 250
Phelps Company
Direct Labor Budget
For the Month Ended May 31, 20--
Machining Assembly Total

Hours required for production * 6,600 4,400 11,000
Hourly rate $ 18.00 $ 15.00
Direct labor cost $118,800 $66,000 $184,800
* Machining 2,200 units x 3 hours per unit = 6,600 hours

Assembly 2,200 units x 2 hours per unit = 4,400 hours

5. Jasinski Jewelry produces a component for lapel pins. Budgeted production in April is 8,400 units.
Each unit requires 1/3 ounce of gold, and 2 hours of direct labor time. It is estimated that Jasinski will
have 100 ounces of gold on hand at April 1, and since management anticipates an increase in the price
of gold in the coming months, the desired ending inventory at the end of April is 150 ounces. The
standard cost of an ounce of gold is $300. The standard rate for direct labor is $25 per hour.
(1) Prepare a direct materials budget.

(2) Prepare a direct labor budget.
ANS:
Jasinski Jewelry
Direct Materials Budget
For the Month Ended April 30, 20--
Gold (ounces)
Quantity of gold required for production * 2,800
Plus desired ending inventory, April 30 150
Total 2,950
Less estimated beginning inventory, April 1 100
Total quantity to be purchased 2,850
Unit price x $300
Total direct material purchases $855,000
* Budgeted production 8,400 units x 1/3 ounce = 2,800 ounces
Jasinski Jewelry
Direct Labor Budget
For the Month Ended April 30, 20--
Direct Labor
Hours required for production ** 16,800
Hourly rate x 25
Total direct labor cost $420,000
** 8,400 units x 2 hours per unit = 16,800 hours

6. Prepare a cost of goods sold budget for the KAS Company for the upcoming year from the following
estimates:
Inventories:
Direct Materials Work in Process Finished Goods
January 1 $22,600 $32,500 $50,200
December 31 31,400 30,400 48,300
Totals from other budgets:

Direct materials purchased $234,500
ANS:
KAS Company
Cost of Goods Sold Budget
Finished goods inventory, Jan. 1 $ 50,200

Work in process inventory, Jan. 1 $ 32,500
Direct materials inventory, Jan. 1 $ 22,600
Direct materials purchases 234,500
Direct materials available for use 257,100
Less direct materials inventory, Dec. 31 31,400
Cost of direct materials used 225,700
Total manufacturing costs 604,000
Total work in process during the year 636,500
Less work in process inventory, Dec. 31 30,400
Cost of goods available for sale 656,300
Less finished goods inventory, Dec. 31 48,300
Cost of goods sold $608,000

7. Wernke Company has the following totals from its operating budgets for November:
Cost of goods sold $1,967,000

Sales 2,530,000
Prepare a budgeted income statement for the month of November assuming a 30% income tax rate.
ANS:
Wernke Company
Budgeted Income Statement
For the Month Ended November 30, 20--
Sales $2,530,000
Cost of goods sold 1,967,000
Gross profit 563,000
Operating income 241,000
Income tax * 72,300
Net income $ 168,700
* 241,000 x 30% = 72,300

8. The following information is from Franklin Industries master budget for the current year:
Number of units 15,000

Sales revenue $585,000
Direct labor 90,000
Variable selling and administrative expenses 60,000
Fixed selling and administrative expenses 20,000
Prepare flexible budgets for the production and sale of 14,000, 15,000 and 16,000 units, respectively.
ANS:
Number of units 15,000 Per unit amounts
Sales revenue $585,000/15,000 $39.00
Direct materials 165,000/15,000 11.00
Direct labor 90,000/15,000 6.00
Variable factory overhead 120,000/15000 8.00
Variable selling and administrative expenses 60,000/15,000 4.00
Franklin Industries
Flexible Budget

Sales revenue 546,000 585,000 624,000
Direct materials 154,000 165,000 176,000
Direct labor 84,000 90,000 96,000
Variable factory overhead 112,000 120,000 128,000
Variable selling and administrative expenses 56,000 60,000 64,000
Contribution margin 140,000 150,000 160,000
Fixed factory overhead 75,000 75,000 75,000
Fixed selling and administrative expenses 20,000 20,000 20,000
Operating income $ 45,000 $ 55,000 $ 65,000

9. Delaney Company has the following flexible budget formulas and amounts:
Selling price per unit $54.00

Direct materials per unit 18.00
Direct labor per unit 12.00
Variable factory overhead per unit 7.00
Variable selling and administrative expenses per unit 4.00
Fixed factory overhead $450,000
Actual results for the month of October for the production and sale of 48,000 units were as follows:
Sales revenue $2,605,000
Prepare a performance report for the month of October.
ANS:
Delaney Company
Performance Report
For the Month Ended October 31, 20--
Flexible Actual
Budget* Results Variance
Sales revenue $2,592,000 $2,605,000 $13,000 F
Direct materials 864,000 868,000 4,000 U
Direct labor 576,000 572,000 4,000 F
Variable factory overhead 336,000 334,000 2,000 F
Variable selling and administrative expenses 192,000 195,000 3,000 U
Contribution margin 624,000 636,000 12,000 F
Fixed factory overhead 450,000 458,000 8,000 U
Fixed selling and administrative expenses 100,000 105,000 5,000 U
Operating income $ 74,000 $ 73,000 $ 1,000 U
* Variable amounts = Number of units x per unit information.

NAT: IMA 2A - Budget Preparation; 2D - Performance Measurement
TOP: AACSB - Analytic
10. The following information is from Franklin Industries master budget for the current year:

Direct labor 90,000
Franklin actually produced 16,000 units. It’s actual results follow:

Direct labor 95,200
Prepare a performance report for the year.
ANS:
Per unit Amount @
Number of units amounts 16,000 units
Sales revenue $585,000/15,000 $39.00 $624,000
Direct materials 165,000/15,000 11.00 176,000
Direct labor 90,000/15,000 6.00 96,000
Variable factory overhead 120,000/15000 8.00 126,800
Variable selling and administrative 60,000/15,000 4.00 63,700
expenses
Franklin Industries
Performance Report
Flexible Actual
Budget Results Variance
Sales revenue $624,000 $620,000 $ 4,000 U
Direct materials 176,000 179,500 3,500 U
Direct labor 96,000 95,200 800 F
Variable factory overhead 128,000 126,800 1,200 F
Variable selling and administrative expenses 64,000 63,700 300 F
Contribution margin 160,000 154,800 5,200 U
Fixed factory overhead 75,000 78,300 3,300 U
Fixed selling and administrative expenses 20,000 22,400 2,400 U
Operating income $ 65,000 $ 54,100 $10,900 U

11. The standard annual capacity of Jones and Smith Company is 25,000 units per month. Two units can
be machined in one hour. The flexible budget for factory overhead at this volume follows:
Variable:
Power $ 80,000
Supplies 30,000
Maintenance 40,000
Total variable factory overhead 150,000
Fixed:
Supervisory salaries 70,000
Depreciation of buildings and equipment 20,000
Lights and heat 10,000
Property tax and insurance 20,000
Total fixed factory overhead 120,000
Total factory overhead $270,000
In June, actual production was 22,000 units and actual factory overhead incurred was $258,000.
(1) Calculate the standard application rates for fixed and variable overhead at the standard level of
volume in relation to units and machine hours.
(2) Calculate the amount of factory overhead allowed for the actual volume of production in June and
the variance between the actual and budgeted factory overhead.
ANS:
(1) Application rates for factory overhead per unit:
Variable $150,000 / 25,000 = $6.00 per unit
Fixed $120,000 / 25,000 = $4.80 per unit
Application rates for factory overhead per machine hour:
25,000 units x 1/2 hour per unit = 12,500
Variable $150,000 / 12,500 = $12.00 per machine hour

Fixed $120,000 / 12,500 = $ 9.60 per machine hour
(2) Factory overhead allowed for the actual volume of production in June is calculated as follows:
Variable factory overhead per unit $ 6.00
Actual production in June 22,000
Variable factory overhead allowed for 22,000 units $132,000
Factory overhead allowed for 22,000 units produced 252,000
Actual factory overhead incurred 258,000
Unfavorable factory overhead variance $ 6,000

12. The November monthly factory overhead cost budget for Brass Ltd. at normal capacity of 10,000 or
5,000 direct labor hours follows:
Variable:
Power $ 6,000
Supplies 12,000
Maintenance 15,000
Total variable factory overhead 33,000
Fixed:
Supervisory salaries 24,000
Depreciation of buildings and equipment 8,000
Lights and heat 6,000
Property tax and insurance 22,000
Total fixed factory overhead 60,000
Total factory overhead $93,000
(1) Prepare a flexible budget for 80%, 100% and 120% of normal capacity.
(2) Determine the rate for application of factory overhead to work in process at each level of volume
in relation to both units and direct labor hours.
ANS:
Standard labor hours per unit 5,000 / 10,000 = .5 hours
Per unit
amounts
Power $6,000/10,000 $.60
Supplies 12,000/10,000 1.20
Maintenance 15,000/10,000 1.50
10,000 units x 80% = 8,000 units

10,000 units x 120% = 12,000 units
Brass Ltd.
Factory Overhead Cost Budget
For the Month Ended November 30, 20--

4,000 labor 5,000 labor 6,000 labor
hrs hrs hrs
Variable:
Power $ 4,800 $ 6,000 $ 7,200
Supplies 9,600 12,000 14,400
Maintenance 12,000 15,000 18,000
Total variable factory overhead 26,400 33,000 39,600
Fixed:
Supervisory salaries 24,000 24,000 24,000
Depreciation of buildings and equipment 8,000 8,000 6,000
Lights and heat 6,000 6,000 6,000
Property tax and insurance 22,000 22,000 22,000
Total fixed factory overhead 60,000 60,000 60,000
Total factory overhead cost $86,400 $93,000 $99,600
Factory overhead per unit * $10.80 $ 9.30 $ 8.30
Factory overhead per direct labor hour ** $21.60 $18.60 $16.60
* $86,400 / 8,000 = $10.80

$93,000 / 10,000 = $9.30
$99,600 / 12,000 = $8.30
** $86,400 / 4,000 = $21.60

$93,000 / 4,000 = $18.60
$99,600 / 6,000 = $16.60


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CHAPTER 7--MASTER BUDGET and FLEXIBLE BUDGETING

1. Budgeting provides the framework for:

PTS: 1 DIF: Moderate REF: P. OBJ: 1

2. The budget should use historical data:

PTS: 1 DIF: Moderate REF: P. OBJ: 1

3. Which of the following is not a requirement of budgeting?

PTS: 1 DIF: Moderate REF: P. OBJ: 1

PTS: 1 DIF: Easy REF: P. OBJ: 2

6. Which of the following is not an operating budget?

PTS: 1 DIF: Easy REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

What is Kerry Kola’s budgeted sales?

PTS: 1 DIF: Moderate REF: P. OBJ: 2

Budgeted production in units

PTS: 1 DIF: Moderate REF: P. OBJ: 2

13. Denny Door Company has budgeted door sales as follows:

Year Number of Units Budgeted Sales Dollars

PTS: 1 DIF: Moderate REF: P. OBJ: 2

Unknown (1) = 150,000 + 15,000 = 165,000

PTS: 1 DIF: Hard REF: P. OBJ: 2

PTS: 1 DIF: Hard REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

Budgeted production of blankets in units 30,000

PTS: 1 DIF: Moderate REF: P. OBJ: 2

18. Arwin Company’s production budget is as follows:

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

21. Budgeted inventories for the Remle Company follow:

Additional budget information follows:

Calculate the budgeted cost of goods sold.

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Hard REF: P. OBJ: 2

23. Information from the operating budgets of Northwest Industries follows:

PTS: 1 DIF: Moderate REF: P. OBJ: 2

24. Consider the following budgets:

In what order should these budgets be prepared?

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Easy REF: P. OBJ: 2

26. The purpose of a flexible budget is to:

PTS: 1 DIF: Moderate REF: P. OBJ: 3

27. Flexible budgeting is a reporting system wherein the:

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Easy REF: P. OBJ: 3

PTS: 1 DIF: Moderate REF: P. OBJ: 3

30. A summary of Tanner Company’s flexible budget of manufacturing costs follows:

*Cost per unit = budgeted amount at 10,000 units/10,000

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Hard REF: P. OBJ: 3

32. Consider the following about Taylor Corporation:

PTS: 1 DIF: Moderate REF: P. OBJ: 3

What is Quinn’s direct material variance using flexible budgeting?

PTS: 1 DIF: Moderate REF: P. OBJ: 3

48,000 units 50,000 units 52,000 units

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Easy REF: P. OBJ: 4

PTS: 1 DIF: Easy REF: P. OBJ: 4

PTS: 1 DIF: Easy REF: P. OBJ: 4

PTS: 1 DIF: Moderate REF: P. OBJ: 4

PTS: 1 DIF: Moderate REF: P. OBJ: 4