Operating budgets and financial budgets by IB4Qiw0


									1. When discussing the roles of budgets, a planning role in the budgeting process
     measuring outcomes against planned amounts
     developing the master budget
     assessing performance
     reporting actual amounts at the end of the budgeting period

2. Operating budgets and financial budgets:
     combined form the master budget
     are prepared before the master budget
     are prepared after the master budget
     have nothing to do with the master budget

3. Discretionary expenditures:
     are usually planned for first
     are amounts paid for the use of flexible resources
     are not determined by the organization’s level of production
     increase in amount during periods of greater activity

4. In __________, as one budget period passes, planners delete that budget period from
the master budget and add another one.
      zero-based budgeting
      periodic budgeting
      incremental budgeting
      continuous budgeting

5. The following information applies to Questions 5 and 6.

DH Manufacturing produces a single product that sells for $8. Variable (flexible) costs
per unit equal $3.20. The company expects the total fixed (capacity-related) costs to be
$7,200 for the next month at the projected sales level of 20,000 units. In an attempt to
improve performance, management is considering a number of alternative actions. Each
situation is to be evaluated separately.

What is the current break-even point in terms of number of units for the next month?
   1,500 units
   2,250 units
   3,333 units
   None of the above is correct.

= $7,200 / ($8.00 - $3.20)
= 1,500 units

6. Suppose that DH Manufacturing’s management believes that a $1,600 increase in the
monthly advertising expense will result in a considerable increase in sales. How much
must sales increase in a month to justify this additional expenditure?
     200 units
     334 units
     500 units
     None of the above is correct.

= $1,600 / ($8.00 - $3.20)

= 334 units

7. A favorable cost variance of significant magnitude:
     is the result of good planning
     may lead to improved production methods if it is investigated
     indicates that management does not need to be concerned about lax standards
     does not need to be investigated

8. A flexible budget contains:
     cost targets for actual output
     cost targets for planned output
     the difference between planned and actual output
     actual costs for actual output

The following Information applies to questions 9 and 10.

Abita Manufacturing has prepared the following flexible budget for October and it is in
the process of interpreting the variances. F denotes a favorable variance and U denotes an
unfavorable variance.
   Flexible Budget Price/Rate Use/Efficiency
Material A $20,000 $1,000 F $3,000 U
Material B 30,000 500 U 1,500 F
Direct labor 40,000 500 U 2,500 F

The most likely explanation of the above variances for Material A is that:
    a lower price than expected was paid for Material A
    higher quality raw materials were used than were planned
    the company used a new supplier
    d. Material A used during October was $2,000 less than expected
10. The most likely explanation of the above direct labor variances is that:
     the average wage rate paid to employees was less than expected
     employees did not work as efficiently as expected to accomplish the job
     the company may have assigned more experienced employees this month than
originally planned
     management may have a problem with budget slack and may be using lax standards
for both labor wage rates and expected efficiency

11. The purchase of long-term assets results in all of the following except:
     the creation of committed resources
     the creation of unit-related costs
     additional risk for the organization
     reduced organizational flexibility

12. The cost of capital:
     reflects the perceived level of risk that investors require
     is used to calculate the accounting rate of return
     is used to calculate the future value of
     is another term for the rate of return

13. The net present value (NPV) capital budgeting decision method:
     can be directly compared between alternatives
     incorporates the time value of money in the calculations
     is based on accounting net income
     indicates an acceptable capital project with a negative value

14. On a capital project, a net present value of ($250):
     indicates the capital project’s rate of return exceeds the company’s cost of capital
     for one project is considered superior to another project with a net present value of
     indicates the internal rate of return would be unacceptable
     indicates cash outflows total $250 for the capital project

15. A 13% internal rate of return (IRR) on a capital project indicates all of the following
     the actual rate of return of all cash inflows and outflows
     that a 13% discount rate will result in the calculation of a net present value of zero
     a better indication of acceptable capital projects when there is limited capital than
the net present value method
     an acceptable capital project if the cost of capital is 14%

16. Which of the following indicates an unacceptable capital project?
     The internal rate of return exceeds the cost of capital.
     The net present value of a project is 10.
     The profitability index of a project is 0.97.
     The accounting rate of return exceeds the target rate of return.

Consider the following two mutually exclusive projects, each of which requires an initial
investment of $30,000 and both provide cash inflows of $60,000 as shown below. This
organization has a 15% cost of capital.
Year Project A Project B
0 ($30,000) ($30,000)
1 $30,000 $10,000
2 20,000 20,000
3 10,000 30,000

Using the payback criterion, which is the most desirable project?
    Project A
    Project B
    Both projects A and B are equally acceptable.
    Neither project A or B is acceptable.

Payback is one year for Project A and two years for Project B

18. Using the net present value criterion, which is the most desirable project?
     Project A
     Project B
     Both projects A and B are equally acceptable.
     The desirability cannot be determined using the current information.

Because Project A receives more cash sooner, the net present value will be greater

The following Information applies to questions 19 and 20.

Sollberger Company is now investigating three mutually exclusive investment
opportunities. The company’s cost of capital is 10 percent. Information on the three
investment projects under study is given below:
   1 2 3
Initial investment $(40,000) $(36,000) $(45,000)
Net present value $(2,024) $7,340 $7,297
Profitability index 0.95 1.20 1.10
Internal rate of return 8% 14% 19%
Life of the project 5 yrs 12 yrs 3 yrs
Sollberger Company has limited funds available for investment and, therefore, it can’t
accept all of the projects listed above.

Which projects are acceptable to Sollberger?
    investment 2
    investment 3
    investment 2 and 3
    investment 1, 2, and 3

Investments 2 and 3 report positive net present values, which indicates the return is
greater than the required cost of capital

20. Which single investment do you recommend of these three mutually exclusive
     investment 1
     investment 2
     investment 3
     All of these investments could be recommended.

Investment 2 because it offers a 14% return over four years, and therefore, the
profitability index of 1.20 is the greatest.

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