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Principles of Accounting, Volume 2: Managerial Accounting

Chapter 7

Principles of Accounting, Volume 2: Managerial AccountingChapter 7

Chapter 7

Multiple Choice

1.

D

3.

A

5.

B

7.

D

9.

C

11.

C

13.

C

15.

C

17.

C

Questions

1.

A budget is a written financial plan for a set period, which is typically a year. There are several different types of budgets including the master budget, operating budget, financial budget, flexible budget, and operating budget.

3.

This approach begins at the lowest levels of management. These managers know the details involved with their departments. This allows for more accurate budget estimates when management understands how their department contributes to the company’s goals. Disadvantages include that this type of budgeting takes time, which leads to more labor costs, and when management doesn’t fully understand how it contributes to the company goals, the budget may support the department and not the company.

5.

Operating budgets plan the primary operations of the business and need accurate information in order to provide accurate planning. Assumptions such as sales in units, sales price, desired ending inventory in units, manufacturing costs per unit, which include direct material needed per unit, desired direct materials ending inventory, amount of direct labor hours and rate, and the overhead required for production and managing the company.

7.

The budgeted income statement includes the estimated revenue and expenses for the company. Using historical data on cash collections helps plan when the cash will be received and is used to develop the cash collections schedule. The company applies its payment policies on its purchases and other items requiring cash expenditures. This creates the cash payments schedule. Information from the cash collections schedule, cash payments schedule, and the capital expense budget are combined to develop the cash budget. The information from the cash budget and the ending balance sheet from the preceding year are used to develop the budgeted balance sheet.

9.

A. cash budget; B. cash receipts budget; C. production budget; D. cash payments schedule; E. capital assets budget

11.

This budget is the plan for the purchase and disposal of plant assets and lists the estimated dollar amounts for each.

13.

Before the time period begins, the organization’s goals should be defined so the budget can be set to achieve the goals. During the time period, the results should be properly measured and reported so necessary changes can be made during the year. Then, the results of the operations can be evaluated and compared to the original budget and organization’s goals.

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