AIM Mana Acct Quiz Wk 8 2016 A Solution PDF

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AIM | Management Accounting AIM MULTIPLE CHOICE QUESTIONS - WEEK 8 (A) Choose the appropriate answer Question 1 Which is the mostly likely purpose of budgeting? a) Planning and control of an organization's income and expenditure b) Preparation of a five-year business plan c) Company valuation d) Assess the non-financial performance of an organization ANSWER: a) A budget is a method of planning ahead and then controlling a business by comparing actual performance against budget. It is unusual to be longer than one year or to be used for the basis of a company valuation. While it may include non-financial information, it is primarily a plan based on financial measures. Question 2 What is meant by an incremental budget? a) A budget prepared from first principles b) The variable elements of a budget, excluding fixed costs c) A budget that is based on the previous year, adjusted for known changes d) A budget that breaks even ANSWER: c) The information for questions 3-5: John has made the following predictions for his business for the first six months of trading to 30 June 2016: Sales in Jan, Feb and March= £20,000 per month Sales in Apr, May and June= £35,000 per month Sales will be on one month's credit. Question 3 The total cash received from customers during the six months ended 30 June 2016, will be: a) £165,000. b) £145,000. c) £185,000. d) £130,000. ANSWER: d) £130,000. Cash received is £20k February, £20k March, £20k April, £35k May and £35k June = £130,000. Question 4 The cash received in April will be: a) £40,000. b) £20,000.

c) £35,000.

d) £55,000.

ANSWER: b) £20,000. Cash received in April is March's sales of £20,000. Question 5 Purchases will be for cash. If goods are sold at a gross profit margin of 40%, and goods are replaced as soon as they are sold, the amount payable to suppliers in March 2016, will be: a) £8,000. b) £10,000. c) £12,000. d) £14,000.

AIM | Management Accounting ANSWER: c) £12,000. March sales of £20,000 x 0.6 =£12,000. Question 6 An extract from Eddie's Cash Budget is given below:

What is the expected bank overdraft at the end of July? a) £(3,000). b) £3,000.

c) £(1,000).

d) £1,000.

ANSWER: a) £(3,000). The balance carried forward at the end of June is £(1,000), with net payments for July of £(2,000), giving a July balance of £(3,000). Question 7 Which of the following statements are not true? a) Cash sales are made when cash is received at the same time as the goods or services are delivered. b) Credit sales are made when the payment is received after the goods or services have been delivered. c) Cash purchases are those purchases for which cash payment will be made at the same time as the goods or services are received. d) Credit purchases are where the goods or services have not yet been received by the business and payment has not yet been made. ANSWER: d) Credit purchases are where the goods or services have not yet been received by the business and payment has not yet been made. Question 8 Which of the following would be included in a cash budget? a. depreciation charges. c. goodwill. b. dividends. d. patent amortization. ANSWER: b) Question 9 Which of the following budgets is normally prepared first? a. Cash budget c. Merchandise purchases budget d. Selling expense budget b. Sales budget ANSWER: b. Sales budget

AIM | Management Accounting The sales budget provides the basis for determining purchases (retailer), production budgets (manufacturer), inflows of cash (cash sales and receivables collection), and ending balances of some balance sheet accounts. Question 10 The following projections have been made: Cash sales, $380,000. Beginning cash balance, $30,000. Operating expenses of $420,000, including depreciation of $20,000 Interest expense of $12,000 is included in operating expenses Borrowing, $50,000. End-of-period accrued liabilities of $20,000 for operating expenses. What is the projected ending cash balance? a. $80,000 b. $40,000 c. $52,000

d.

$48,000

ANSWER: a. $80,000 Cash disbursements for operating expenses will be: $420,000 - $20,000 (depreciation) - $20,000 (accrued expenses) = $380,000. Ending cash balance will be: $30,000 + $380,000 (cash sales) - $380,000 (cash disbursements for expenses) + $50,000 (loan) = $80,000. Question 11 Sales Budget Month October November December January Credit Sales $40,000 $50,000 $60,000 $35,000 Expected cash collection pattern is 50% in the month of sale, 30% in the following month, and 15% in the second following month. Five percent of the credit sales are uncollectible. December collections will be: a. $35,000 b. $51,000 c. $54,000 d. $50,00 ANSWER: b. $51,000 50% of $60,000 ($30,000) plus 30% of $50,000 ($15,000) plus 15% of $40,000 ($6,000) equals $51,000. Question 12 Sales Budget Month October November December January Credit Sales $40,000 $50,000 $60,000 $35,000 Expected cash collection pattern is 50% in the month of sale, 30% in the following month, and 15% in the second following month. Five percent of the credit sales are uncollectible. November collections were $46,000. September sales were: a. $45,000 b. $60,000 c. $50,000 d. $55,000 ANSWER: b. $60,000 50% of $50,000 ($25,000) plus 30% of $40,000 ($12,000) equals $37,000. September sales were (($46,000 - $37,000) / .15) = $60,000.

AIM | Management Accounting Question 13 Which of the following statements is true? a. Budgeted bal. sheets are not dependent upon budgeted inc. statements b. Budgeted income statements include amortization expenses c. Cash budgets include amortization expenses d. Production bud. shows the cost of the raw material to be purchased ANSWER: b. Budgeted income statements include amortization expenses The budgeted income statement includes all budgeted expenses, including amortization. Question 14 What is a flexible budget? a. A budget that does not change through the budget period b. A budget that shows a detailed schedule of expected sales for the budget period c. A budget that does not change as volume changes d. A budget that adjusts for changes in the volume of activity ANSWER: d. A budget that adjusts for changes in the volume of activity A flexible budget will be adjusted to reveal the actual level of productivity that is attained. Therefore, costs will be adjusted to compensate for the fact that more or less has been generated than was originally anticipated. Question 15 Which of the following statement is correct? a. Traditional budgeting focuses on goals and objectives b. Zero-based budgeting produces a single level of appropriation for an activity c. Traditional budgeting starts with last year’s funding appropriation d. Zero-based budgeting does not systematically consider alternatives to current operations ANSWER: C. Traditional budgeting starts with last year’s funding appropriation, whereas zerobased budgeting starts with a minimal (or zero) figure for funding Question 16 Paneless Company makes storm-resistant windows. The company's sales manager estimated the sales volume to be 160,000 windows. Due to the increased hurricane activity this year, the total demand for this type of window increased from 800,000 windows to 1,000,000 windows. At the same time the company's market share fell from 20 percent to 15 percent. The company's standard contribution margin is $15.00 per window. What is the company's market share variance? a. $740,000 favorable d. $750,000 unfavorable e. None of the above. b. $740,000 unfavorable c. $750,000 favorable ANSWER: D The market share variance represents how much of the sales activity is due to changes in the market share. The actual industry sales volume is multiplied by the percentage change in market share and this is multiplied by the unit contribution margin.

AIM | Management Accounting Market share variance = actual industry sales volume of 1,000,000 units × percentage change in market share of (5%) (or 20% - 15%) × unit contribution margin of $15.00 = $750,000 unfavorable. Question 17 What is the term used to describe the difference between a planned result and the actual outcome? a. Flexible budget d. Financial budget b. Operating budget e. None of the above. c. Variance ANSWER: C. When actual results are compared to budgeted, or planned, results, there is almost always a difference or variance. Question 18 The Miles Corporation's budgeted revenues and expenses for last period were $400,000 and $250,000, respectively. The actual results were: revenues, $420,000; expenses, $280,000. Ignoring income tax effects, what was the company's profit variance? a. $10,000 unfavorable d. $20,000 favorable e. None of the above b. $10,000 favorable c. $20,000 unfavorable ANSWER: A Budgeted income = budgeted revenues of $400,000 – budgeted expenses of $250,000 = $150,000. Actual income = actual revenues of $420,000 – actual expenses of $280,000 = $140,000. Profit variance = budgeted income of $150,000 –actual income of $280,000 = $10,000. Since Miles earned less than was expected, the variance is unfavorable. Question 19 Smith Company's budgeted sales quantity was 80,000 units of product. The company's accountant, using regression analysis, used the following cost formula to estimate costs at the master budget level for this year: Total cost = $500,000 + ($5.20 × units produced and sold). The product had a budgeted selling price of $15.20 each. During the year, the actual sales were 82,000 units and selling price was $15.15 per unit. The actual variable costs were $418,200 and the fixed costs were $500,000. What was Smith's sales price variance? d. $6,300 unfavorable a. $4,100 favorable e. None of the above b. $4,100 unfavorable c. $6,300 favorable ANSWER: B Sales price variance = actual revenue – (budgeted selling price multiplied by the actual number of units sold). Sales price variance = actual revenue of $1,242,300 (or $15.15 × 82,000 units) – (budgeted selling price of $15.20 × actual number of units sold of 82,000 units) = $1,242,300 – $1,246,400 = ($4,100). Since the actual selling price of $15.15 was less than the budgeted selling price of $15.20, the variance is unfavorable.

AIM | Management Accounting Alternatively, the sales price variance = actual quantity sold of 82,000 × the difference in price of $0.05 (or $15.15 – $15.20) = $4,100. Since the actual selling price of $15.15 was less than the budgeted selling price of $15.20, the variance is unfavorable. Question 20 A flexible budget: a. is another name for management by exception b. is developed at the end of the period c. is based on the budgeted level of output d. provides favorable operating results ANSWER: B Question 21 A variance is: a. the gap between an actual result and a benchmark amount b. the required number of inputs for one standard output c. the difference between an actual result and a budgeted amount d. the difference between a budgeted amount and a standard amount ANSWER: C Question 22 A favorable variance indicates that: a. budgeted costs are less than actual costs b. actual revenues exceed budgeted revenues c. the actual amount decreased operating income relative to the budgeted amount d. All of these answers are correct. ANSWER: B

(B) State whether the following Statements are True or False 1. Generally, budgets are prepared to coincide with the financial year so that comparison of the actual performance with budgeted estimates would facilitate better interpretation and understanding. T 2. A flexible budget is one, which changes from year to year. F 3. Sales budget, normally, is the most important budget among all budgets. T 4. Budgeting is a technique for formulating budgets. T 5. Budgets are blueprints for action. T 6. A flexible budget is quickly recast based on changed volumes of activity. T 7. A budget is nothing but an estimate based on the past records. F

AIM | Management Accounting 8. The Master Budget is a summary budget, which incorporates all functional budgets in a summarised form. T 9. Normally, sales budget is prepared first and the other budgets are coordinated with it. T 10. A fixed budget is preferable to flexible budget. F 11. Before the functional budgets are prepared, master budget is prepared. F...