Chapter 13 Budgeting

1. The following statements relate to budgeting:

i A forecast is an attempt to predict what will happen

ii A budget is a plan of what is intended to happen
iii All budgets are prepared in financial terms
iv The master budget consists of a budgeted profit and loss account and
budgeted balance sheet
v A flexible budget adjusts both fixed and variable costs for the level of
activity

Which of the following is true?

A All statements are correct

B Statements i and ii are correct
C Statements ii, iii and iv are correct
D Statements i, iii and v are correct

The correct answer is

i Correct
ii Correct
iii Incorrect, eg budget for number of employees required
iv Incorrect. Master budget also includes budgeted cash flow
v Incorrect. Adjusts variable costs. Fixed are fixed.

2. Which of the following statements is true?

A The principal budget factor is the person who is responsible for controlling
and coordinating the budget process
B A business must always produce its sales budget first, before any other
budgets can be decided on.
C The budget committee consists of managers with final responsibility for
agreeing the budget.

The correct answer is

3. An organisation is preparing its sales budget for the year ended 31 December 20Y1.
It expects to sell 2000 units of product A per month. The current sale price is $500
per unit and this will increase by 10% in June. Demand for Product B is declining.
First quarter sales are expected to be 4000 units in total and this will drop by 1000
units per quarter for each of the next three quarters. The selling price will be
constant at $300 per unit. Product C will be introduced in September. Sales are
expected to be 500 units per month at a selling price of $100 per unit..

What is the budgeted sales revenue for the year?

A $15,800,000
B $15,850,000
C $15,900,000
D $16,800,000

The correct answer is

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 Product A:
2000 units x 5months @ $500 = 5,000,000
2000 units x 7 months @ $550 = 7,700,000

Product B:
(4000+3000+2000+1000) @ $300 = 3,000,000

Product C:
500 units x 4 months @ $100 = 200,000

Total sales = 5000000 + 7700000 + 3000000 + 200000 = 15,900,000

4. An organisation is preparing its quarterly budget. It has consistently maintained

stock levels at 10% of the following month’s sales. Budgeted sales for January are
2000 units and sales are expected to increase by 500 units per month for the
following three months.

What is the budgeted production in units for February?

A 2050
B 2450
C 2500
D 2550

The correct answer is

Jan Feb Mar

Sales 2000 2500 3000
-Opening stock (200) (250) (300)
+Closing stock 250 300 350
Production 2050 2550 3050

5. The management accountant is preparing the master budget for her retail firm. The
following information has been supplied.

Sales $300,000
Opening stock $40,000
Closing stock $60,000
Mark-up 25%

What amount should be budgeted for purchases?

A $220,000
B $225,000
C $240,000
D $260,000

The correct answer is D

Margin = 25 125 = 20%

COGS = $300,000 x 0.8

= $240,000

Purchases = $(240,000 + 60,000 – 40,000)

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 = $260,000

6. An extract from next year’s budget for a manufacturing company is shown below.

Month 3 Month 4

Sales 100,000units 120,000units

Closing stocks of finished goods 6,000units 8,000units
Closing stocks of raw materials 22,000kg 12,000kg

Each unit requires 2kg material.

What is the budgeted material usage for month 4?

A 230,000 kg
B 234,000 kg
C 240,000 kg
D 244,000 kg

The correct answer is

Month 4 production = 120,000 +8,000 – 6000 = 122,000 units

Month 4 usage = 122,000 units @ 2kg = 244,000 kg

7. The following information has been supplied in connection with an organisation’s

labour and overhead budget:

Product alpha Product beta

Cost per unit Cost per unit
$ $
Unskilled labour (@$5/hr) 15 10
Skilled labour (@ $8/hr) 16 24
Total labour cost 31 34

Budgeted production 8,000 units 12,000 units

What is the total amount of skilled labour hours required in the period?

A 40,000 hours
B 48,000 hours
C 52,000 hours
D 60,000 hours

The correct answer is

Alpha Beta
Skilled Hours per unit 2 3
units 8000 12000
Total hours 16000 36000

Total hours required = 16000 + 36000 = 52,000

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