Financial and Managerial Accounting Study Set 1

Business

Quiz 22 :

Budgeting

Quiz 22 :

Budgeting

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Ethics and professional conduct in business The director of marketing for Starr Computer Co., Megan Hewitt, had the following discussion with the company controller, Cam Morley, on July 26 of the current year: Megan: Cam, it looks like I'm going to spend much less than indicated on my July budget. Cam: I'm glad to hear it. Megan: Well, I'm not so sure it's good news. I'm concerned that the president will see that I'm under budget and reduce my budget in the future. The only reason that I look good is that we've delayed an advertising campaign. Once the campaign hits in September, I'm sure my actual expenditures will go up. You see, we are also having our sales convention in September. Having the advertising campaign and the convention at the same time is going to kill my September numbers. Cam: I don't think that's anything to worry about. We all expect some variation in actual spending month to month. What's really important is staying within the budgeted targets for the year. Does that look as if it's going to be a problem? Megan: I don't think so, but just the same, I'd like to be on the safe side. Cam: What do you mean? Megan: Well, this is what I'd like to do. I want to pay the convention-related costs in advance this month. I'll pay the hotel for room and convention space and purchase the airline tickets in advance. In this way, I can charge all these expenditures to July's budget. This would cause my actual expenses to come close to budget for July. Moreover, when the big advertising campaign hits in September, I won't have to worry about expenditures for the convention on my September budget as well. The convention costs will already be paid. Thus, my September expenses should be pretty close to budget. Cam: I can't tell you when to make your convention purchases, but I'm not too sure that it should be expensed on July's budget. Megan: What's the problem? It looks like "no harm, no foul" to me. I can't see that there's anything wrong with this-it's just smart management. How should Cam Morley respond to Megan Hewitt's request to expense the advanced payments for convention-related costs against July's budget?
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Budgeting is used by the managers to determine the future course of actions of the organization. It helps the organizations to estimate its future action. It is useful in satisfying the future course of actions.
Mr. M 's request should be rejected by Mr. C.as Mr. M had requested to Mr. C to include the convention expenses in July's budget, which is very common issue that managers face. Usually the managers try to balance out the heavy future expenditure in the low expenditure months are tried to be balanced by the managers. Which is ethically incorrect. Budget should be prepared in a way that it projects the actions to be taken correctly.
At this point of time expenditure is not legitimate as the event might get cancelled or its schedule get change, it raises a question on the requirement of the expenditure. Moreover, it will lead to blockage of working capital and window dressing of budgets which will further reduce the authenticity of budget.
Budgetary integrity will suffer, and major object of budget preparation will be defeated, and it could not be depending upon for future decision making. Instead of making such adjustment, company could make provision of certain foreseeable future expenditure (i.e. advertisement) up to some extent it is certain that there will be an outflow of resources.

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What are the three major objectives of budgeting?
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The three major objectives of budgeting involve (1) establishing specific goals, (2) executing plans to achieve the goals, and (3) periodically comparing actual results with the goals.

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Personal budget At the beginning of the 2016 school year, Katherine Malloy decided to prepare a cash budget for the months of September, October, November, and December. The budget must plan for enough cash on December 31 to pay the spring semester tuition, which is the same as the fall tuition. The following information relates to the budget: img a. Prepare a cash budget for September, October, November, and December. b. Are the four monthly budgets that are presented prepared as static budgets or flexible budgets? c. What are the budget implications for Katherine Malloy?
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a. Cash Budget estimates the expected receipt (inflows ) and payment (outflows) of Cash during the given period. The Cash Budget for Katherine Malloy as below.
img Cash balance at the end of December 31, 2016 is $3,000
b. The Budget presented is a Static Budget since the Budgeted income and Expenses remain constant, and do not changes with respect to change in any variable factor.
c. Implication for Katherine Malloy is that cash requirements at the end of December 31 to pay spring semester tuition fee is $3,700. However cash available at the end of December is only $3,000, and hence, there would be a requirement of Bank Loan for the remaining amount.

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Flexible budgeting At the beginning of the period, the Assembly Department budgeted direct labor of $112,000 and property tax of $12,000 for 7,000 hours of production. The department actually completed 7,500 hours of production. Determine the budget for the department, assuming that it uses flexible budgeting. At the beginning of the period, the Fabricating Department budgeted direct labor of $9,280 and equipment depreciation of $2,300 for 640 hours of production. The department actually completed 600 hours of production. Determine the budget for the department, assuming that it uses flexible budgeting.
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Forecast sales volume and sales budget For 2016, Raphael Frame Company prepared the sales budget that follows. At the end of December 2016, the following unit sales data were reported for the year: img img For the year ending December 31, 2017, unit sales are expected to follow the patterns established during the year ending December 31, 2016. The unit selling price for the 8" × 10" frame is expected to increase to $17 and the unit selling price for the 12"× 16" frame is expected to increase to $32, effective January 1, 2017. Instructions 1. Compute the increase or decrease of actual unit sales for the year ended December 31, 2016, over budget. Place your answers in a columnar table with the following format: img 2. Assuming that the increase or decrease in actual sales to budget indicated in part (1) is to continue in 2017, compute the unit sales volume to be used for preparing the sales budget for the year ending December 31, 2017. Place your answers in a columnar table similar to that in part (1) but with the following column heads. Round budgeted units to the nearest unit. img 3. Prepare a sales budget for the year ending December 31, 2017.
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Forecast sales volume and sales budget Sentinel Systems Inc. prepared the following sales budget for 2016: img img At the end of December 2016, the following unit sales data were reported for the year: For the year ending December 31, 2017, unit sales are expected to follow the patterns established during the year ending December 31, 2016. The unit selling price for the Home Alert System is expected to increase to $250, and the unit selling price for the Business Alert System is expected to be decreased to $820, effective January 1, 2017. Instructions 1. Compute the increase or decrease of actual unit sales for the year ended December 31, 2016, over budget. Place your answers in a columnar table with the following format: img 2. Assuming that the increase or decrease in actual sales to budget indicated in part (1) is to continue in 2017, compute the unit sales volume to be used for preparing the sales budget for the year ending December 31, 2017. Place your answers in a columnar table similar to that in part (1) but with the following column heads. Round budgeted units to the nearest unit. img 3. Prepare a sales budget for the year ending December 31, 2017.
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Evaluating budgeting systems in a service company Children's Hospital of the King's Daughters Health System in Norfolk, Virginia, introduced a new budgeting method that allowed the hospital's annual plan to be updated for changes in operating plans. For example, if the budget was based on 400 patient-days (number of patients × number of days in the hospital) and the actual count rose to 450 patient-days, the variable costs of staffing, lab work, and medication costs could be adjusted to reflect this change. The budget manager stated, "I work with hospital directors to turn data into meaningful information and effect change before the month ends." a. What budgeting methods are being used under the new approach? b. Why are these methods superior to the former approaches?
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Briefly describe the type of human behavior problems that might arise if budget goals are set too tightly.
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Flexible budget for selling and administrative expenses for a service company Cloud Productivity Inc. uses flexible budgets that are based on the following data: img Prepare a flexible selling and administrative expenses budget for March 2016 for sales volumes of $400,000, $500,000, and $600,000.
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Production budget MyLife Chronicles Inc. projected sales of 240,000 diaries for 2016. The estimated January 1, 2016, inventory is 19,900 units, and the desired December 31, 2016, inventory is 18,800 units. What is the budgeted production (in units) for 2016? Magnolia Candle Inc. projected sales of 75,000 candles for 2016. The estimated January 1, 2016, inventory is 3,500 units, and the desired December 31, 2016, inventory is 2,700 units. What is the budgeted production (in units) for 2016?
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Sales, production, direct materials purchases, and direct labor cost budgets The budget director of Gourmet Grill Company requests estimates of sales, production, and other operating data from the various administrative units every month. Selected information concerning sales and production for July 2016 is summarized as follows: a. Estimated sales for July by sales territory: img img b. Estimated sales for July by 1: img c. Desired inventories at July 31: img d. Direct materials used in production: img e. Anticipated purchase price for direct materials: img f. Direct labor requirements: Instructions 1. Prepare a sales budget for July. 2. Prepare a production budget for July. 3. Prepare a direct materials purchases budget for July. 4. Prepare a direct labor cost budget for July.
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Sales, production, direct materials purchases, and direct labor cost budgets The budget director of Royal Furniture Company requests estimates of sales, production, and other operating data from the various administrative units every month. Selected information concerning sales and production for February 2016 is summarized as follows: a. Estimated sales of King and Prince chairs for February by sales territory: img a. Estimated inventories at February 1: img b. Desired inventories at February 1: img c. Direct materials used in production: img d. Anticipated purchase price for direct materials: img e. Direct labor requirements: img Instructions 1. Prepare a sales budget for February. 2. Prepare a production budget for February. 3. Prepare a direct materials purchases budget for February. 4. Prepare a direct labor cost budget for February.
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Static budget for a service company A bank manager of City Savings Bank Inc. uses the managerial accounting system to track the costs of operating the various departments within the bank. The departments include Cash Management, Trust, Commercial Loans, Mortgage Loans, Operations, Credit Card, and Branch Services. The static budget and actual results for the Operations Department are as follows: img a. What information is provided by the budget? Specifically, what questions can the bank manager ask of the Operations Department manager? b. What information does the static budget fail to provide? Specifically, could the budget information be presented differently to provide even more insight for the bank manager?
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What behavioral problems are associated with setting a budget too loosely?
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Static budget versus flexible budget The production supervisor of the Machining Department for Rodriguez Company agreed to the following monthly static budget for the upcoming year: img The actual amount spent and the actual units produced in the first three months of 2016 in the Machining Department were as follows: img The Machining Department supervisor has been very pleased with this performance because actual expenditures for January-March have been less than the monthly static budget of $480,000. However, the plant manager believes that the budget should not remain fixed for every month but should "flex" or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows: img a. Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume depreciation is a fixed cost. b.Compare the flexible budget with the actual expenditures for the first three months. What does this comparison suggest?
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Direct materials purchases budget MyLife Chronicles Inc. budgeted production of 238,900 diaries in 2016. Paper is required to produce a diary. Assume five square yards of paper are required for each diary. The estimated January 1, 2016, paper inventory is 32,400 square yards. The desired December 31, 2016, paper inventory is 30,800 square yards. If paper costs $0.30 per square yard, determine the direct materials purchases budget for 2016. Magnolia Candle Inc. budgeted production of 74,200 candles in 2016. Wax is required to produce a candle. Assume eight ounces (one-half of a pound) of wax is required for each candle. The estimated January 1, 2016, wax inventory is 2,500 pounds. The desired December 31, 2016, wax inventory is 2,100 pounds. If candle wax costs $4.10 per pound, determine the direct materials purchases budget for 2016.
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Budgeted income statement and supporting budgets The budget director of Feathered Friends Inc., with the assistance of the controller, treasurer, production manager, and sales manager, has gathered the following data for use in developing the budgeted income statement for December 2016: a. Estimated sales for December: img b. Estimated inventories at December 1: img c. Desired inventories at December 31: img d. Direct materials used in production: img e. Anticipated cost of purchases and beginning and ending inventory of direct materials: img f. Direct labor requirements: img g. Estimated factory overhead costs for December: img h. Estimated operating expenses for December: img i.Estimated other income and expense for December: img j. Estimated tax rate: 30% Instructions 1. Prepare a sales budget for December. 2. Prepare a production budget for December. 3. Prepare a direct materials purchases budget for December. 4. Prepare a direct labor cost budget for December. 5. Prepare a factory overhead cost budget for December. 6. Prepare a cost of goods sold budget for December. Work in process at the beginning of December is estimated to be $29,000, and work in process at the end of December is estimated to be $35,400. 7. Prepare a selling and administrative expenses budget for December. 8. Prepare a budgeted income statement for December.
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Budgeted income statement and supporting budgets The budget director of Gold Medal Athletic Co., with the assistance of the controller, treasurer, production manager, and sales manager, has gathered the following data for use in developing the budgeted income statement for March 2016: a. Estimated sales for March: img b. Estimated inventories at March 1: img c. Desired inventories at March 1: img d. Direct materials used in production: img e. Anticipated cost of purchases and beginning and ending inventory of direct materials: img f. Direct labor requirements: img g. Estimated factory overhead costs for March: img h. Estimated operating expenses for March: img i. Estimated other income and expense for March: img j. Estimated tax rate: 30% Instructions 1. Prepare a sales budget for March. 2. Prepare a production budget for March. 3. Prepare a direct materials purchases budget for March. 4. Prepare a direct labor cost budget for March. 5. Prepare a factory overhead cost budget for March. 6. Prepare a cost of goods sold budget for March. Work in process at the beginning of March is estimated to be $15,300, and work in process at the end of March is desired to be $14,800. 7. Prepare a selling and administrative expenses budget for March. 8. Prepare a budgeted income statement for March.
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Objectives of the master budget Domino's Pizza L.L.C. operates pizza delivery and carry-out restaurants. The annual report describes its business as follows: We offer a focused menu of high-quality, value-priced pizza with three types of crust (HandTossed, Thin Crust, and Deep Dish), along with buffalo wings, bread sticks, cheesy bread, CinnaStix ® , and Coca-Cola ® products. Our hand-tossed pizza is made from fresh dough produced in our regional distribution centers. We prepare every pizza using real cheese, pizza sauce made from fresh tomatoes, and a choice of high-quality meat and vegetable toppings in generous portions. Our focused menu and use of premium ingredients enable us to consistently and efficiently produce the highest-quality pizza. Over the 41 years since our founding, we have developed a simple, cost-efficient model. We offer a limited menu, our stores are designed for delivery and carry-out, and we do not generally offer dine-in service. As a result, our stores require relatively small, lower-rent locations and limited capital expenditures. How would a master budget support planning, directing, and control for Domino's?
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What behavioral problems are associated with establishing conflicting goals within the budget?
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