Test bank Managerial Accounting by Garrison (13e) Chapter 09 PDF

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Chapter 9 Profit Planning True/False Questions 1. The usual starting point in budgeting is to make a forecast of net income. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,9 Level: Easy 2. A budget committee helps provide consistency in the budgeting process because it prepares all of the budgets for the various segments of the organization. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 3. A continuous or perpetual budget is one which covers a 12-month period but which is constantly adding a new month on the end as the current month is completed. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 4. Control involves developing objectives and preparing the various budgets to achieve those objectives. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 5. A self-imposed budget is one prepared by top management and passed downward through an organization. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 6. When using the self-imposed budget approach, it is generally best for top management to accept all budget estimates without question in order to minimize adverse behavioral responses from employees. Ans: False AACSB: Reflective Thinking AICPA BB: Resource Management, Critical Thinking LO: 1 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

AICPA FN: Reporting

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Chapter 9 Profit Planning 7. Cash collections in a schedule of cash collections typically consist of collections on sales made to customers in prior periods plus collections on sales made in the current budget period. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy 8. In a production budget, if the number of units in finished goods inventory at the end of the period is less than the number of units in finished goods inventory at the beginning of the period, then the expected number of units sold is greater than the number of units to be produced during the period. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium 9. In a merchandising company, the required merchandise purchases for a period are determined by subtracting the units in beginning inventory from the sum of the units to be sold during the period and the desired ending inventory. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 10. The direct materials to be purchased for a period can be obtained by subtracting the desired ending inventory of direct materials from the total direct materials needed for the period. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium 11. The direct labor budget begins with sales in units from the sales budget. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy 12. The selling and administrative expense budget lists all costs of production other than direct materials and direct labor. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6,7 Level: Easy

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 9 Profit Planning 13. In the manufacturing overhead budget, the non-cash charges (such as depreciation) are deducted from the total budgeted manufacturing overhead to determine the expected cash disbursements for manufacturing overhead. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy 14. The selling and administrative expense budget lists the budgeted expenses for areas other than manufacturing. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy 15. The disbursements section of a cash budget consists of all cash payments for the period except cash payments for dividends. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium 16. Which of the following budgets are prepared before the sales budget? A) B) C) D)

Budgeted Income Statement Direct Labor Budget Yes Yes Yes No No Yes No No

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 17. The usual starting point for a master budget is: A) the direct materials purchase budget. B) the budgeted income statement. C) the sales forecast or sales budget. D) the production budget. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 9 Profit Planning 18. Which of the following budgets are prepared before the cash budget? A) B) C) D)

Selling and Administrative Expense Budget Production Budget Yes Yes Yes No No Yes No No

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 19. Which of the following benefits could an organization reasonably expect from an effective budget program? A) Better control of the organization's costs. B) Better coordination of an organization's activities. C) Better communication of the organization's objectives. D) All of the above. Ans: D AACSB: Reflective Thinking AICPA BB: Resource Management, Critical Thinking LO: 1 Level: Easy

AICPA FN: Reporting

20. An organization's budget program should not be used: A) to motivate employees. B) to assign blame to managers that do not meet budgetary goals. C) to help evaluate managers. D) to allocate resources to the various parts of an organization. Ans: B AACSB: Reflective Thinking AICPA BB: Resource Management, Critical Thinking LO: 1 Level: Easy

AICPA FN: Reporting

21. A basic idea underlying __________________ is that a manager should be held responsible only for those items that the manager can actually control to a significant extent. A) participative budgeting B) planning and control C) responsibility accounting D) the master budget Ans: C AACSB: Reflective Thinking AICPA BB: Resource Management, Critical Thinking LO: 1 Level: Easy

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AICPA FN: Reporting

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 9 Profit Planning 22. When preparing a merchandise purchases budget, the required purchases in units equals: A) budgeted unit sales + beginning merchandise inventory + desired merchandise ending inventory. B) budgeted unit sales - beginning merchandise inventory + desired merchandise ending inventory. C) budgeted unit sales - beginning merchandise inventory - desired merchandise ending inventory. D) budgeted unit sales + beginning merchandise inventory - desired merchandise ending inventory. Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 23. When preparing a direct materials budget, the required purchases of raw materials in units equals: A) raw materials needed to meet the production schedule + desired ending inventory of raw materials - beginning inventory of raw materials. B) raw materials needed to meet the production schedule - desired ending inventory of raw materials - beginning inventory of raw materials. C) raw materials needed to meet the production schedule - desired ending inventory of raw materials + beginning inventory of raw materials. D) raw materials needed to meet the production schedule + desired ending inventory of raw materials + beginning inventory of raw materials. Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy 24. Which of the following statements is NOT correct concerning the Manufacturing Overhead Budget? A) The Manufacturing Overhead Budget provides a schedule of all costs of production other than direct materials and labor costs. B) The Manufacturing Overhead Budget shows only the variable portion of manufacturing overhead. C) The Manufacturing Overhead Budget shows the expected cash disbursements for manufacturing overhead. D) The Manufacturing Overhead Budget is prepared after the Sales Budget. Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 9 Profit Planning 25. Which of the following statements is NOT correct concerning the Cash Budget? A) It is not necessary to prepare any other budgets before preparing the Cash Budget. B) The Cash Budget should be prepared before the Budgeted Income Statement. C) The Cash Budget should be prepared before the Budgeted Balance Sheet. D) The Cash Budget builds on earlier budgets and schedules as well as additional data. Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy 26. Pitkins Company collects 20% of a month's sales in the month of sale, 70% in the month following sale, and 6% in the second month following sale. The remainder is uncollectible. Budgeted sales for the next four months are: January February March April Budgeted sales....... $200,000 $300,000 $350,000 $250,000 Cash collections in April are budgeted to be: A) $321,000 B) $313,000 C) $320,000 D) $292,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: April sales ($250,000 × 20%).............. March sales ($350,000 × 70%)........... February sales ($300,000 × 6%)......... Total.....................................................

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$ 50,000 245,000 18,000 $313,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 9 Profit Planning 27. Sioux Company is estimating the following sales for the first six months of next year: January....... February..... March......... April........... May............

$250,000 $220,000 $240,000 $300,000 $360,000

Sales at Sioux are normally collected as 60% in the month of sale, 35% in the month following the sale, and the remaining 5% being uncollectible. Based on this information, how much cash should Sioux expect to collect during the month of April? A) $250,800 B) $264,000 C) $290,700 D) $306,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: April sales ($300,000 × 60%)............. March sales ($240,000 × 35%)........... Total.....................................................

$180,000 84,000 $264,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 9 Profit Planning 28. All of Gaylord Company's sales are on account. Thirty-five percent of the credit sales are collected in the month of sale, 45% in the month following sale, and the rest are collected in the second month following sale. Bad debts are negligible and should be ignored. The following are budgeted sales data for the company:

Total sales...............

January February March April $50,000 $60,000 $40,000 $30,000

What is the amount of cash that should be collected in March? A) $39,000 B) $37,000 C) $27,500 D) $51,000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: March sales ($40,000 × 35%).............. February sales ($60,000 × 45%)......... January sales ($50,000 × 20%*)......... Total..................................................... *100% − 35% − 45% = 20%

$14,000 27,000 10,000 $51,000

29. On January 1, Barnes Company has 8,000 units of Product A on hand. During the year, the company plans to sell 30,000 units of Product A, and plans to have 6,500 units on hand at year end. How many units of Product A must be produced during the year? A) 28,500 B) 31,500 C) 30,000 D) 36,500 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Solution: Units produced = Ending inventory + Units sold − Beginning inventory = 6,500 + 30,000 − 8,000 = 28,500

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 9 Profit Planning 30. Betz Company's sales budget shows the following projections for next year: First Quarter....................... Second Quarter................... Third Quarter..................... Fourth Quarter....................

Sales in units 60,000 80,000 45,000 55,000

Inventory at the beginning of the year was 18,000 units. The finished goods inventory at the end of each quarter is to equal 30% of the next quarter's budgeted unit sales. How many units should be produced during the first quarter? A) 24,000 B) 48,000 C) 66,000 D) 72,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted Solution: Units produced = Ending inventory + Units sold + Beginning inventory = (30% × 80,000) + 60,000 − 18,000 = 24,000 + 60,000 − 18,000 = 66,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 9 Profit Planning 31. The following information relates to Minorca Manufacturing Corporation for next quarter: January February March Expected sales (in units)............................ 440,000 390,000 400,000 Desired ending finished goods inventory (in units)................................................. 28,000 30,000 35,000 How many units should Minorca plan on producing for the month of February? A) 360,000 units B) 388,000 units C) 392,000 units D) 420,000 units Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Solution: Ending inventory + Units sold − Beginning inventory = 30,000 + 390,000 - 28,000 = 392,000

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 9 Profit Planning 32. MJ Department Store expects to generate the following sales figures for the next three months: July August September Expected sales........ $480,000 $560,000 $600,000 MJ's gross profit rate is 45% of sales dollars. At the end of each month, MJ wants a merchandise inventory balance equal to 30% of the following month's expected sales, stated at cost. What dollar amount of merchandise inventory should MJ plan to purchase in August? A) $257,400 B) $314,600 C) $320,000 D) $327,800 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard Solution: Inventory cost is 55% of sales dollars (1 – 45% gross profit rate) Inventory purchased = Ending inventory + Sales − Beginning inventory = [($600,000 × 30%) × 55%] + ($560,000 × 55%) − [($560,000 × 30%) × 55%] = ($180,000 × 55%) + $308,000 − ($168,000 × 55%) = $99,000 + $308,000 − $92,400 = $314,600 33. On October 1, The Gala Manufacturing Company has 300 units of Product XYZ on hand. The company plans to sell 1,200 units of Product XYZ during October, and plans to have 500 units on hand October 31. How many units of Product XYZ must be produced during October? A) 1,400 B) 1,500 C) 1,000 D) 2,000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Solution: Units produced = Ending inventory + Units sold − Beginning inventory = 500 + 1,200 − 300 = 1,400

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 9 Profit Planning 34. The following are budgeted data: Sales in units...................... Production in units.............

Month 1 Month 2 Month 3 15,000 20,000 18,000 16,000 22,000 15,000

One pound of material is required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month's production needs. At the beginning of Month 1, 3,200 lbs. of materials were on hand. Purchases of raw materials for Month 2 would be budgeted to be: A) 17,600 pounds B) 23,400 pounds C) 20,600 pounds D) 25,000 pounds Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium Solution: Materials purchased = Ending inventory + Materials used − Beginning inventory = (20% × 15,000) + 22,000 − (20% × 22,000) = 3,000 + 22,000 − 4,400 = 20,600 35. Alexis Fabrication, Inc. manufactures and sells box trailers for semi trucks. Each trailer requires two (2) axles. For next quarter, Alexis has scheduled 720 trailers for production and 750 for sale. Alexis is also moving to just-in-time purchasing next quarter and plans on reducing its inventory of trailer axles by 100. How many axles should Alexis budget for purchase for next quarter? A) 1,240 axles B) 1,300 axles C) 1,340 axles D) 1,400 axles Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium Solution: Materials to be purchased = Ending inventory + Materials to be used − Beginning inventory = Materials to be used + (Ending inventory − Beginning inventory) = (720 × 2) − 100 = 1,440 − 100 = 1,340

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 9 Profit Planning 36. Garry Manufacturing Corporation's most recent production budget indicates the following required production: October Required production (units)........... 210,000

November 175,000

December 110,000

Each unit of finished product requires 5 pounds of raw materials. The company maintains raw materials inventory equal to 25% of the next month's expected production needs. How many pounds of raw material should Garry plan on purchasing for the month of November? A) 1,006,250 B) 793,750 C) 1,012,500 D) 893,500 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy Solution: Materials to be purchased = Ending inventory + Materials to be used − Beginning inventory = (25% × 110,000 × 5) + (175,000 × 5) − (25% × 175,000 × 5) = 137,500 + 875,000 − 218,750 = 793,750 37. Depasquale Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.41 direct labor-hours. The direct labor rate is $8.10 per direct labor-hour. The production budget calls for producing 5,000 units in May and 5,400 units in June. If the direct labor work force is fully adjusted to the total direct labor-hours needed each month, what would be the total combined direct labor cost for the two months? A) $16,605.00 B) $17,933.40 C) $17,269.20 D) $34,538.40 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy Solution: Total direct labor-hours = 0.41 × (5,000 + 5,400) = 4,264 Direct labor cost = 4,264 × $8.10 = $34,538.40

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 9 Profit Planning 38. Pooler Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.15 direct labor-hours. The direct labor rate is $7.00 per direct labor-hour. The production budget calls for producing 6,500 units in April and 6,200 units in May. The company guarantees its direct labor workers a 40-hour paid work week. With the number of workers currently employed, that means that the company is committed to paying its direct labor work force for at least 1,000 hours in total each month even if there is not enough work to keep them busy. What would be the total combined direct labor cost for the two months? A) $13,825.00 B) $13,335.00 C) $14,000.00 D) $13,510.00 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy Solution: Direct labor-hours needed for production in April = 0.15 × 6,500 = 975 Direct labor-hours needed for production in May = 0.15 × 6,200 = 930 Even though both months’ production needs would require less than 1,000 hours, the company has committed to paying a minimum of 1,000 hours per month. Total direct labor-hours = 1,000 + 1,000 = 2,000 Direct labor cost = 2,000 × $7 = $14,000