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Test Bank for Principles of Cost Accounting, 17th Edition
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CHAPTER 7: MASTER BUDGET and FLEXIBLE BUDGETING
1. Which of the following is not true about budgeting?
a. It is a formal method of detailed financial planning.
b. It is used to help a company reach long-term and short-term objectives.
c. It aids in the efficient use of resources.
d. All of the above are true.
ANSWER: d
RATIONALE: Budgeting is a formal method of planning that companies use to help reach operating
objectives. Because it encompasses the coordination and control of every significant item
on the balance sheet and income statement, if carried out in the proper manner,
budgeting aids in the efficient use of resources.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: PRIN.EDWA.16.1 - Introduction
ACCREDITING STANDARDS: AACSB Reflective Thinking
ACCT.AICPA.FN.03 - Measurement
BUSPROG.06 - Reflective Thinking
IMA-Budget Preparation
OTHER: Bloom's: Remembering
2. 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.
ANSWER: c
RATIONALE: Budgeting provides the framework for planning how the organization meet the goal of
maximizing its income and providing guidelines for controlling costs.
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: PRIN.EDWA.16.44 - LO1: Explain the general principles involved in the budgeting
process
TOPICS: Principles of Budgeting
3. The budget should use historical data:

a. Only as a stepping-off point for aiding 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.
ANSWER: a
RATIONALE: 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.
Cengage Learning Testing, Powered by Cognero Page 1
POINTS: 1
process
4. 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.
ANSWER: d
RATIONALE: The budget must be flexible enough so it can be modified in light of changing conditions.
POINTS: 1
process
OTHER: Bloom's: Understanding
5. 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.
ANSWER: b
RATIONALE: A static budget is prepared for a single level of volume. A flexible budget is prepared for
several levels of volume.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: PRIN.EDWA.16.45 - LO2: Identify and prepare the components of the master budget
ACCREDITING STANDARDS: AACSB Analytic
TOPICS: Preparing the Master Budget
6. 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.
ANSWER: c
RATIONALE: A continuous or rolling budget “rolls forward” so that as one month is completed, another
month is added at the end of the budget.
POINTS: 1
DIFFICULTY: Easy
7. Which of the following is not an operating budget?

a. Capital projects budget
b. Sales and administrative budget
c. Sales budget
d. Cost of goods sold budget
ANSWER: a
RATIONALE: Operating budgets include components of the budgeted income statement which include
options b, c, and d. The capital projects budget is a financial budget.
POINTS: 1
DIFFICULTY: Easy
BUSPROG.03 - Analytic
8. 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
ANSWER: d
RATIONALE: 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.
POINTS: 1
9. The budget that is used as a basis for preparing all other budgets is the:
a. cost of goods sold budget.
b. production budget.
c. budget balance sheet.
d. sales budget.
ANSWER: d
RATIONALE: The sales budget is used as the basis for the production budget. The sales or production
budgets are needed to prepare all other budgets.
POINTS: 1
10. 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. Plant manager salaries.
ANSWER: d
RATIONALE: Executive salaries would be considered in the sales and administrative expense budget.
Customer demand, new products and economic conditions should be factored into the
sales budget.

POINTS: 1
11. 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.
ANSWER: b
RATIONALE: 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.
POINTS: 1
12. The process of setting unrealistically low budgeting goals in an effort to make only average performance look good is:
a. safe budget
b. normal budget
c. budget cushion
d. budget slack
ANSWER: d
RATIONALE: The process of setting unrealistically low budgeting goals in an effort to make only
average performance look good is budget slack.
POINTS: 1
DIFFICULTY: Easy

13. 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
ANSWER: d
RATIONALE: 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.
POINTS: 1
OTHER: Bloom's: Analyzing
14. 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
ANSWER: b
RATIONALE: Kerry Kola’s Sales Budget is calculated as follows:
Unit Sales Unit Selling
Product and Region Total Sales
Volume Price
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
POINTS: 1
OTHER: Bloom's: Applying
15. Denny Door Company has budgeted door sales as follows:

Month 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 7,000 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. 53,000
b. 63,000
c. 56,000
d. 49,000
ANSWER: d
RATIONALE: 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
POINTS: 1
16. Cooper Carriers has budgeted production of 180,000 units this fiscal year. There were 12,000 units on hand in
finished goods inventory on January 1 and the company’s desired inventory at the end of the year is 15,000
units. Cooper’s sales budget in units is:
a. 165,000
b. 192,000
c. 183,000
d. 177,000
ANSWER: d
RATIONALE: Budgeted sales, in units Unknown (2)
+ Desired units in inventory, end of period 15,000
Unknown (1)
- Estimated units inventory, beginning of period 12,000
= Budgeted production, in units 180,000
Unknown (1) = 180,000 + 12,000 = 192,000 Unknown (2) = 192,000 - 15,000 = 177,000
POINTS: 1
DIFFICULTY: Challenging
17. 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.
ANSWER: c
RATIONALE: 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.
POINTS: 1
18. Scheduling different levels of production each month to maintain a relatively stable inventory could lead to all but:
a. idle production capacity in some months.
b. leasing additional warehouse space to store finished goods.
c. running a second or third shift during some months.
d. inefficiencies from hiring inexperienced workers to meet heavy production schedules.
ANSWER: b
RATIONALE: If the company is working to attain stable inventory levels, it should not be necessary to
lease additional space to store inventory.
POINTS: 1
19. 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.
ANSWER: c
RATIONALE: The format of the direct materials budget is similar to that of the production budget as
they both consider inventory levels.
POINTS: 1
20. 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 inventory at the
c. The production budget includes the budgeted number of units in the work in process inventory at the
d. The direct labor budget includes the budgeted number of units in the work in process inventory at the
ANSWER: b
RATIONALE: 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
POINTS: 1

21. 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 30,000 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. 200,000 yards
b. 140,000 yards
c. 170,000 yards
d. 1,400,000 yards
ANSWER: b
RATIONALE: 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 30,000
Number of yards of wool to be purchased 140,000
POINTS: 1
22. Darla Draperies manufactures top of the line window treatments. A standard package involves 18 yard of decorative
fabric costing $5.00 per yard. Darla has 10,000 yards of fabric on hand at the beginning of the month, but management
would like to reduce inventory levels, so it would like to have 8,000 yards on hand at the end of the month.
If Darla’s production budget is 3,000 packages, what should the company’s direct materials budget be?
a. $280,000
b. $270,000
c. $260,000
d. $268,000
ANSWER: c
RATIONALE: Darla’s Raw Materials Budget follows:
Budgeted units of production 3,000
Yard of fabric per unit x 18
54,000
Desired ending inventory of fabric 8,000
62,000
Beginning inventory of fabric 10,000
Yards of fabric needed 52,000

Price per yard x $5.00
$260,000
POINTS: 1
23. Chase Company’s production budget is as follows:

Budgeted sales in units 300,000
Desired units in inventory, December 31 70,000
370,000
Estimated units in inventory, January 1 50,000
Budgeted units of production 320,000
Each unit takes 30 minutes to produce and the standard labor rate is $18 per labor hour. What is Chase’s direct labor
budget?
a. $2,880,000
b. $2,700,000
c. $10,800,000
d. $5,760,000
ANSWER: a
RATIONALE: Budgeted units of production 320,000 x 1/2 hour each = 160,000 hours 160,000 hours x
$18/hr. = $2,880,000
POINTS: 1
24. 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. $320,000
c. $270,000
d. $260,000
ANSWER: d
RATIONALE: Lunchco’s direct labor budget is calculated as follows:
Cutting Department 20,000 units x 1/4 hr/unit x $12/hr. $ 60,000
Assembly Department 20,000 units x 1 hr/unit x $10/hr. 200,000
Total budgeted direct labor $260,000
POINTS: 1
25. 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.
ANSWER: c
RATIONALE: Budgeted sales dollars is not considered in preparing the cost of goods sold budget.
POINTS: 1
26. 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 81,300 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
ANSWER: a
RATIONALE: Finished goods inventory, January 1 $ 81,300

Total goods available for sale 438,200
Finished goods inventory, December 31 87,400
Cost of goods sold $350,800
POINTS: 1
27. Amounts from all of the following budgets feed into the pro-forma income statement except the:
a. Cash budget.
b. Factory overhead budget.
c. Direct materials budget.
d. Sales budget.
ANSWER: a
RATIONALE: The cash helps ensure that the necessary cash is available to pay obligations as they come
due. 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.
POINTS: 1
28. 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. cash budget.
ANSWER: b
RATIONALE: A capital expenditures budget is a plan for timing acquisitions of buildings, equipment or
other significant assets.
POINTS: 1
DIFFICULTY: Easy
29. Information from the operating budgets of Roswell Fabricators follows:

Selling and administrative expenses $ 140,000
Factory overhead 200,000
Sales 1,000,000
Cost of goods sold 450,000
Capital expenditures 100,000
If Northwest’s income tax rate is 30%, what is the budgeted net income?
a. $287,000
b. $126,000
c. $410,000
d. $186,000
ANSWER: a
RATIONALE: The budgeted income statement for Roswell Fabricators would be as follows:
Net sales $1,000,000
Cost of goods sold 450,000
Gross profit 550,000
Selling and administrative expenses 140,000
Operating income 410,000
Income tax ($410,000 x 30%) 123,000
Net income $ 287,000
Note that the budgeted factory overhead would have already been included in the amount
shown in the cost of goods sold budget. Budgeted capital expenditures do not impact the
budgeted income statement.
POINTS: 1
30. 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.
ANSWER: a
RATIONALE: The purpose of a flexible budget is to compare actual and budgeted results at virtually
any level of production.
POINTS: 1
LEARNING OBJECTIVES: PRIN.EDWA.16.46 - LO3: Identify and prepare the components of the flexible budget
IMA-Performance Measurement
TOPICS: Flexible Budgeting
31. 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.
ANSWER: d
RATIONALE: 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.
POINTS: 1
32. 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
ANSWER: b
RATIONALE: A flexible budget is used to compare actual and budgeted performance at the actual
production volume.
POINTS: 1
DIFFICULTY: Easy
33. When preparing the flexible budget for factory overhead, variable costs may include all but the following:
a. insurance
b. shop supplies
c. electricity to run the machines
d. repair costs
ANSWER: a
RATIONALE: Insurance would be a fixed cost because the cost of insurance would not change over a
given range of activity.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: PRIN.EDWA.16.47 - LO4: Explain the procedures to determine standard amounts of
factory overhead at different levels of production
TOPICS: Preparing the Flexible Budget for Factory Overhead
34. 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
ANSWER: a
RATIONALE: 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 112,500 not applicable 112,500
administrative
Operating income $ 150,000 $ 185,000
*For sales and variable costs: Per unit = budgeted amount at 75,000 units / 75,000
POINTS: 1

35. A summary of Jacob Company’s flexible budget of manufacturing costs follows:

20,000 Units
Direct materials $ 60,000
Direct labor 70,000
Total $192,000
What would the flexible budget of manufacturing costs be at a production volume of 18,000 units?
a. $144,000
b. $172,800
c. $192,000
d. $176,000
ANSWER: d
RATIONALE: 20,000 Units Cost per Unit* 18,000 Units
Direct materials $ 60,000 $3.00 $ 54,000
Direct labor 70,000 3.50 63,000
Variable factory overhead 30,000 1.50 27,000
Fixed factory overhead 32,000 not applicable 32,000
Total $192,000 $176,000
*Cost per unit = budgeted amount at 20,000 units/20,000

POINTS: 1
36. Consider the following about Taylor Corporation:

Direct materials budget based on 50,000 units produced $200,000
Actual direct materials used $180,000
Actual units produced 40,000
Assuming Taylor Corporation uses flexible budgeting, what is the direct materials variance?
a. $20,000 favorable
b. $40,000 unfavorable
c. $20,000 unfavorable
d. $28,000 unfavorable
ANSWER: c
RATIONALE: Actual units produced 40,000
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 180,000
Unfavorable variance related to direct materials $ 20,000
POINTS: 1
37. Allen Company’s master budget called for 50,000 units of production. Budgeted direct material costs at this level
were $450,000 or $9 per unit. Allen actually produced 54,000 units and incurred direct material costs of $496,000.
What is Allen’s direct material variance using flexible budgeting?

a. $10,000 U
b. $46,000 U
c. $36,000 U
d. $10,000 F
ANSWER: a
RATIONALE: Actual units produced 54,000
Budgeted direct material costs per unit x 9
Budgeted direct material costs @ 54,000 units of 486,000
production
Actual direct material costs 496,000
Unfavorable direct material variance $ 10,000
POINTS: 1
38. 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 direct labor variance?
a. $1,500 unfavorable
b. $5,500 unfavorable
c. $2,500 favorable
d. $1,500 favorable
ANSWER: a
RATIONALE: 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
POINTS: 1
39. 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.
ANSWER: a
RATIONALE: 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.
POINTS: 1
40. 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
ANSWER: b
RATIONALE: 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.
POINTS: 1
DIFFICULTY: Easy
41. 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.
ANSWER: a
RATIONALE: Practical capacity provides complete utilization of all facilities and personnel, but allows
for some idle capacity.
POINTS: 1
DIFFICULTY: Easy
42. 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.
ANSWER: d
RATIONALE: 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.
POINTS: 1
DIFFICULTY: Easy
43. 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
ANSWER: c
RATIONALE: Budgeted variable overhead per unit ($20,000 / 4,000 $5.00
units)
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
POINTS: 1
44. The normal capacity of Yule Company is 5,000 units per month. At this volume, budgeted fixed and variable factory
overhead are $25,000 and $20,000, respectively. In December, actual production was 4,800 units and actual overhead
incurred was $46,300.
What is the factory overhead application rate at the actual level of production (rounded to the nearest penny)?
a. $9.00
b. $9.21
c. $8.80

d. $9.26
ANSWER: b
units)
Factory overhead application rate = $44,200/4,800 units = $9.21 per unit
POINTS: 1
45. Shaw Corporation has developed the following flexible budget formula for annual indirect labor cost:
Total costs = $9,600 + $0.50 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. $15,800.
b. $15,000.
c. $24,600.
d. $2,460.
ANSWER: a
RATIONALE: Annual fixed costs of $9,600 / 12 = monthly fixed cost $ 800
30,000 machine hours × $.50 per machine hour 15,000
Indirect labor cost budgeted for the month $15,800
POINTS: 1
46. When using a flexible budget, what occurs 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.
ANSWER: b
RATIONALE: When using a flexible budget, fixed costs (on a per unit basis) will decrease as production
increases.
POINTS: 1
47. 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. $22,700
ANSWER: b
RATIONALE: Actual number of units produced 8,800
Standard application rate for variable factory x$ .50
overhead
Variable factory overhead allowed for 8,800 $ 4,400
units
Standard capacity of factory 9,000
Standard application rate for fixed factory x 2.00
overhead
Budgeted fixed factory overhead 18,000
Factory overhead allowed for 8,800 units $22,400
produced
POINTS: 1
48. 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 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
ANSWER: c
units)
Actual overhead incurred 37,900
Unfavorable variance $ 900
POINTS: 1
49. 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.
ANSWER: d
RATIONALE: 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.
POINTS: 1
50. It is important that a standard rate rather than actual expenses be used to charge service department costs to producing
departments so that:
a. production department managers know the amount of usage at the beginning of the year.
b. extra costs resulting from inefficient operations in service departments cannot be passed on to the production
departments.
c. service department managers don’t need to worry about meeting their budgets.
d. extra costs resulting from inefficient operations in production departments can not be passed on to the service
departments.
ANSWER: b
RATIONALE: It is important that a standard rate rather than actual expenses be used to charge service
department costs to producing departments so that extra costs resulting from inefficient
operations in service departments cannot be passed on to the production departments.
Managers should be held responsible only for those costs over which they can control.
POINTS: 1
51. Kircher Clothing, Inc. manufactures two styles of jackets: standard, which sell for $45, and waterproof, which sell for
$60. The jackets are sold in three regions: East, West and North. Waterproof jackets account for 20% of the sales in the
East Region, 25% in the West Region and 30% in the North Region. Forecasted total sales next year are 35,000, 30,000
and 50,000 in the East, West and North Regions, respectively.
Prepare a sales budget for Kircher Clothing, Inc. for next year.
ANSWER:
Kircher Clothing, Inc.
Sales Budget
For the Year Ended December 31, 20--
Unit Sales Unit Sales
Product and Region Total Sales
Volume Price
Standard:
East * 28,000 $1,260,000
$45.00
West ** 22,500 1,012,500
45.00
North *** 35,000 1,575,000
45.00
Total 85,500 $3,847,500

Waterproof:
East * 7,000 $ 420,000
$60.00
West ** 7,500 450,000
60.00
North *** 15,000 900,000
60.00
Total 29,500 $1,770,000
Total Revenue $5,617,500
* East 35,000 units x 20% = 7,000 units waterproof; 35,000 - 7,000 = 28,000 units
standard
** West 30,000 units x 25% = 7,500 units waterproof; 30,000 - 7,500 = 22,500 units
standard
*** North 50,000 units x 30% = 15,000 units waterproof; 50,000 - 15,000 = 35,000 units
standard
POINTS: 1
52. 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.
ANSWER:
Bradley Company
Sales Budget
For the Month Ended March 31, 20--
Units Unit Selling Price Total Sales
Region:
Columbus 10,000 $ 520,000
$52.00
Cincinnati 13,000 676,000
52.00
Cleveland 15,000 780,000
52.00
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
POINTS: 1
53. 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.
ANSWER:
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, 110,000 45,000
Jan. 1
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
POINTS: 1
54. Pinecroft Company manufactures one product that requires 4 hours of machining direct labor and 3 hours of assembly
direct labor. The standard labor rate is $20.00 per direct labor hour in the Machining Department and $16.00 per direct
labor hour in the Assembly Department. The product has forecasted sales of 3,000 units in July. The estimated finished
goods inventory at July 1 is 300 units and the desired ending inventory at July 31 is 400 units.
(1) Prepare a production budget for the month of July.
(2) Prepare a direct labor budget for the month of July.
ANSWER:
Pinecroft Company
Production Budget
For the Month Ended July 31, 20--
Units
Budgeted sales 3,000
Plus desired ending inventory, July 31 400
Total 3,400
Less estimated beginning inventory, July 1 300
Pinecroft Company
Direct Labor Budget
For the Month Ended July 31, 20--
Machining Assembly Total
Hours required for production * 12,400 9,300
21,700
Hourly rate $ 20.00 $ 16.00
Direct labor cost $248,000 $148,800
$396,800
* Machining 3,100 units x 4 hours per unit = 12,400 hours
Assembly 3,100 units x 3 hours per unit = 9,300 hours
POINTS: 1

55. 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.
ANSWER:
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
POINTS: 1
56. 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
ANSWER:
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. 30,400
31
Cost of goods available for sale 656,300
Less finished goods inventory, Dec. 31 48,300
Cost of goods sold $608,000
POINTS: 1
57. Logan Lighting, a manufacturer of light fixtures, has the following budgeted expenses for the year:
Advertising $ 42,000
Depreciation of factory equipment 108,000
Depreciation of office furniture 63,000
Executive salaries 425,000
Office supplies 22,000
Factory supplies 37,000
Sales commissions 125,000
Rent (80% of the building is the factory, 20% of the
building is the office) 80,000
Factory floor supervisor salaries 236,000
Telephone and copier 32,000
Travel 87,000
Prepare a selling and administrative expense budget for the year.

ANSWER:
Selling expenses:
Sales commissions expense $125,000
Travel expense 87,000
Advertising expense 42,000
Total selling expenses $254,000
Administrative expenses:
Executive salaries expense $425,000
Depreciation expense 63,000
Telephone and copier expense 32,000
Office supplies expense 22,000
Rent expense ($80,000 x 20%) 16,000
Total administrative expenses 558,000
Total selling and administrative expenses $812,000
POINTS: 1
58. 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.
ANSWER:
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
POINTS: 1
59. 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.
ANSWER: 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 56,000 60,000 64,000
expenses
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
POINTS: 1
60. 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.
ANSWER:
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 192,000 195,000 3,000 U
expenses
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.

POINTS: 1
61. The following information is from Devon Manufacturing master budget for the current year:
Devon actually produced 33,000 units. The company's actual results are presented below:

Prepare a performance report for the year.

ANSWER: Per unit Amount @
Number of units amounts 33,000 units
Sales revenue $875,000/35,000 $25.00 $825,000
Direct materials 315,000/35,000 9.00 297,000
Direct labor 175,000/35,000 5.00 165,000
Variable factory overhead 140,000/35,000 4.00 132,000
Variable selling and administrative 70,000/35,000 2.00 66,000
expenses
Devon Manufacturing
Performance Report
Actual
Flexible Budget Variance
Results
Sales revenue $825,000 $820,000 $ 5,000 U
Direct materials 297,000 301,400 4,400 U
Direct labor 165,000 164,800 200 F
Variable factory overhead 132,000 133,400 1,400 U
Variable selling and administrative 66,000 67,300 1,300 U
expenses
Contribution margin 165,000 153,100 11,900 U
Fixed factory overhead 45,000 46,200 1,200 U
Fixed selling and administrative expenses 30,000 29,700 300 F
Operating income $ 90,000 $ 77,200 $12,800 U
POINTS: 1
62. 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.
ANSWER: (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 hours
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
Budgeted fixed factory overhead 120,000
Factory overhead allowed for 22,000 units produced 252,000
Actual factory overhead incurred 258,000
Unfavorable factory overhead variance $ 6,000
POINTS: 1
63. The November monthly factory overhead cost budget for Brass Ltd. at normal capacity of 10,000 units 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.
ANSWER: 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 hrs 5,000 labor hrs 6,000 labor 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 8,000 8,000 6,000
equipment
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 / 5,000 = $18.60
$99,600 / 6,000 = $16.60
POINTS: 1

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2. Budgeting provides the framework for:

3. The budget should use historical data:

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

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

8. Consider the following budgets:

In what order should these budgets be prepared?

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11. Participative budgeting:

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What is Kerry Kola’s budgeted sales?

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

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23. Chase Company’s production budget is as follows:

26. Budgeted inventories for the Remle Company follow:

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29. Information from the operating budgets of Roswell Fabricators follows:

30. The purpose of a flexible budget is to:

31. Flexible budgeting is a reporting system wherein the:

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35. A summary of Jacob Company’s flexible budget of manufacturing costs follows:

*Cost per unit = budgeted amount at 20,000 units/20,000

36. Consider the following about Taylor Corporation:

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

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* 5,000 - (5,000 x 20%) = 4,000

* Nylon 31,000 units x 36 yards per unit = 1,116,000 yards

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Prepare a selling and administrative expense budget for the year.

Number of units 15,000

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* Variable amounts = Number of units x per unit information.

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Prepare a performance report for the year.

Application rates for factory overhead per machine hour:

25,000 units x 1/2 hour per unit = 12,500 hours

Variable $150,000 / 12,500 = $12.00 per machine hour

** $86,400 / 4,000 = $21.60

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CHAPTER 7: MASTER BUDGET and FLEXIBLE BUDGETING

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