ch 9
What two components is the Master Budget categorized into?
a. Operating budgets and financial budgets
b. Financial budgets and fiscal budgets
c. Labor budgets and production budgets
d. Corporate budgets and warehouse budgets
a. Operating budgets and financial budgets
explanation: Master budget: sets of interrelated budgets constituting a plan of action for a specified time period
- Operating budgets (prepared in order): sales, production, DM, DL, MOH, Selling and administrative
- Financial budgets: capital expenditures and cash budgets
Which of the following is false regarding a static budget?
a. Projects budget data at one level of activity
b. Ignores data for different levels of activity
c. Appropriate for fixed costs
d. appropriate for variable costs
d. appropriate for variable costs
explanation: Static budget: a projection of budget data at only one level of activity/quantity produced
- appropriate for fixed costs and sales revenue projections, since they remain constant regardless of activity
Which of the following is not an advantage of the standard costing process?
a. Facilitates management planning
b. Useful in setting selling prices
c. Allows easy comparison with other firms
d. Useful in highlighting variances in management by exception
c. Allows easy comparison with other firms
explanation:
Standard: budgeted amount by unit
Standard cost: the expected cost to produce a specific number of units
What is the primary purpose and advantage of using the cash payback technique?
a. Identifies the time period required to recover cost of capital investment from net annual cash inflow produced by investment
b. There is no real advantage, accountants only use this method for bookkeeping
c. It tells the firm the amount of net annual cash flows they will receive per year
d. It tells the firm how much they must pay in cash to payback their suppliers
a. Identifies the time period required to recover cost of capital investment from net annual cash inflow produced by investment
explanation: Cash payback: identifies the time it will take to recover the cost of a capital investment based on annual net cash inflows
Which of the following best describes budgetary slack?
a. The difference between budgeted and actual results caused by changes in activity.
b. The intentional understatement of revenues or overstatement of expenses to make targets easier to achieve.
c. An error in the master budget caused by incorrect sales forecasts.
d. The extra cash kept in the cash budget to meet the minimum cash balance.
b. The intentional understatement of revenues or overstatement of expenses to make targets easier to achieve.
When using the participative budgeting model, the company should?
a. Invite only c-suite level executives to participate the budget planning process
b. Invite all managers to create budgets that motivate employees to achieve low spending
c. Invite all levels of management to participate in creating a fair and achievable budget while meeting corporate goals
d. Invite all employees in the company to participate in creating the company budget
c. Invite all levels of management to participate in creating a fair and achievable budget while meeting corporate goals
Which of the following is false regarding a Flexible Budget?
a. Projects budget data for a single level of activity
b. Essentially a series of static budgets at a variety of activity levels
c. Can be prepared specifically for each type of budget within the master budget
d. Proves more useful as it is adaptable to changes in operating conditions
a. Projects budget data for a single level of activity
explanation: Flexible budget: projects budget data for various levels of activity
- Total fixed costs remain constant, while revenue and variable costs are adjusted for different activity levels
What is the difference between standards and budgets?
a. Standards are rules the company should be operating within, while staying within their outlined budget
b. Standards are the expected costs of a product, where the budget is the expected cost to complete a single product
c. A standard is a unit amount, while a budget is a total amount
d. There is no difference; they are the same thing
c. A standard is a unit amount while a budget is a total amount
Which of the following is false, in regard to the Net Present Value Method?
a. The cash inflows are discounted to their present value
b. The interest rate used in discounting is the required minimum rate of return
c. The lower the NPV is, the more attractive the investment is
d. The higher the NPV is, the more attractive the investment is
c. The lower the NPV is, the more attractive the investment is
explanation: Net present value (NPV) method: discounts future cash flows and compares them to the cost of the investment
Accept the investment if the NPV is greater than or equal to zero because it meets or exceeds the required rate of return
Which statement about operating and financial budgets is true?
a. Operating budgets include only sales and production; financial budgets include only the cash budget.
b. Operating budgets end with the budgeted income statement, while financial budgets help prepare the budgeted balance sheet.
c. Operating budgets are used only by manufacturing firms, while financial budgets are used only by service firms.
d. Operating budgets are always prepared after the cash budget is complete.
b. Operating budgets end with the budgeted income statement, while financial budgets help prepare the budgeted balance sheet.
Which of the following are all operating budgets?
a. Sales, production, cash, direct materials, direct labor, manufacturing overhead, selling and administrative, budgeted income statement
b. Capital expenditure, selling and administrative, production, sales
c. Capital expenditure, cash budget, budgeted balance sheet
d. Sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative
d. Sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative
Responsibility reports are different than budget to actual statements because they?
a. Distinguish between controllable and noncontrollable costs, and only include the costs a manager is accountable for
b. Include all costs (both controllable and noncontrollable) in the performance reports
c. Include only fixed costs
d. Ignore data for different levels of activity
a. Distinguish between controllable and noncontrollable costs, and only include the costs a manager is accountable for
Explanation: Responsibility accounting: evaluates managers based on items they have control over
Which of the following is not a factor that may cause a materials price variance to occur?
a. Availability of quantity and cash discounts
b. Quality of the materials requested
c. Shipping timeframe or method used
d. work is performed by someone paid at a higher hourly rate
work is performed by someone paid at a higher hourly rate
explanation: Variance: the difference between actual and budgeted results, evaluated in the context of the budgeted item
What is the assumption that must be made in order to use the Internal Rate of Return?
a. We have equal net annual cash flows
b. We have no expenditures
c. We cannot have equal net annual cash flows
d. There are no assumptions that must be made when using the internal rate of return
a. We have equal net annual cash flows
explanation: Internal rate of return (IRR) method: determines the exact rate of return earned by the project
Accept the investment if the IRR is equal to or greater than the required rate of return
A static budget is most appropriate for which situation?
a. When management wants to compare actual results to budget at multiple activity levels.
b. When actual activity is expected to vary significantly from planned activity.
c. When evaluating costs that remain the same regardless of the level of activity, such as fixed costs.
d. When preparing a budget for a non-profit organization.
c. When evaluating costs that remain the same regardless of the level of activity, such as fixed costs.
Which of the following is false regarding not-for-profit budgets?
a. Budgets are based upon the basis of cash flows
b. The starting point to determine their budget is to examine their expenditures
c. Budgeting for not-for-profits is less important than preparing a budget for for-profit organizations
d. Budgets must be followed, overspending is often illegal
c. Budgeting for not-for-profits is less important than preparing a budget for for-profit organizations
Noncontrollable costs are?
a. Costs a manager has control over
b. Costs incurred directly and are not allocated to a responsibility level
c. Costs incurred indirectly and allocated to a responsibility level
d. Costs a manager has control over and allocated to a responsibility level
c. Costs incurred indirectly and allocated to a responsibility level
explanation: Controllable cost: a cost that a manager has control over; includes all VCs; control over FC varies
A balanced scorecard does all of the following, except?
a. Allows the management team to compare previous years of budgetary data
b. Employs both financial and nonfinancial measures
c. Creates linkages so high-level corporate goals can be communicated throughout the organization
d. Provides measurable objectives for nonfinancial measures
a. Allows the management team to compare previous years of budgetary data
Explanation: Balanced scorecard: employs financial and nonfinancial measures to link a company’s performance with its goals.
Which of the following are included in determining a company’s discount rate?
a. Internal rate of return
b. Cut-off rate
c. Cost of capital
d. Risk element
e. both c and d
e. both c and d
explanation: Discount rate = (% Cost of Capital) + (% Risk Factor)
Which of the following correctly matches the responsibility center with the performance measures typically used to evaluate its manager?
a. Cost center – revenues, controllable costs, and average operating assets.
b. Profit center – revenues and controllable costs.
c. Investment center – only controllable costs.
d. Profit center – only variable costs.
b. Profit center – revenues and controllable costs.
Which of the following is not a benefit of budgeting?
a. Requires all levels of management to plan ahead
b. Provides definitive objectives for evaluating performance
c. Creates an early warning system for potential problems
d. Facilitates coordination of activities within the business
e. Results in greater management awareness of the entity’s overall operations
f. It motivates personnel throughout the organization to meet planned objectives
g. allows easy comparison of the entity's financials with other companies in the company
g. allows easy comparison of the entity's financials with other companies in the company
Return on Investment (ROI) is improved by which of the following actions, holding the others constant?
a. Increasing controllable margin and increasing average operating assets.
b. Decreasing controllable margin and decreasing average operating assets.
c. Increasing controllable margin while keeping average operating assets the same.
d. Decreasing sales and decreasing average operating assets.
c. Increasing controllable margin while keeping average operating assets the same.
explanation: ROI - controllable margin / avg. operating assets
Assets; higher margin with same assets increases ROI
Which of the following is not considered one of the four most commonly employed perspectives?
a. Financial
b. Budgetary
c. Internal Process
d. Learning and Growth
b. budgetary
explanation: 4 common perspectives (FLIC) : Financial, Learning & Growth, internal processes, Customer
Which of the following is a disadvantage of the cash payback method compared to NPV and IRR?
a. It ignores the time value of money and any cash flows that occur after the payback period.
b. It is too complicated to compute without present value tables.
c. It always gives a different accept/reject decision than the NPV method.
d. It requires that annual cash flows be equal each year.
a. It ignores the time value of money and any cash flows that occur after the payback period.
explanation: payback ignores TVM (time value of money) and ignores later cash flows
NPV/IRR fix that
Which statement best explains the difference between the cash payback method and the net present value (NPV) method?
a. Both methods consider the time value of money, but only NPV uses cash flows.
b. Payback focuses on profitability, while NPV focuses only on how quickly the investment is recovered.
c. Payback ignores the time value of money and cash flows after the payback period, while NPV considers the time value of money and all cash flows over the project’s life.
d. Payback is more accurate than NPV because it uses actual net income instead of cash flows.
c. Payback ignores the time value of money and cash flows after the payback period, while NPV considers the time value of money and all cash flows over the project’s life.