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Exam 14: Planning for Profit and Cost Control

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Question 1

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The following budget information is available for the Arch Company for January 2014: $\begin{array} { | l | r | } \hline \text { Sales } & \$ 860,000 \\\hline \text { Cost of goods sold } & 540,000 \\\hline \text { Freight out } & 2,800 \\\hline \text { Administrative salaries } & 100,000 \\\hline \text { Sales commissions } & 5 \% \text { of sales } \\\hline \text { Advertising } & 20,000 \\\hline \text { Depreciation on store equipment } & 50,000 \\\hline \text { Rent on administration building } & 60,000 \\\hline \text { Miscellaneous administrative expenses } & 10,000 \\\hline\end{array}$ All operating expenses are paid in cash in the month incurred. Compute total budgeted selling and administrative expenses (excluding interest) amount for January 2014.

A) $262,500
B) $283,000
C) $240,000
D) $285,800

E) A) and D)
F) B) and C)

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Question 2

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Select the incorrect statement regarding the human factor in the budgeting process.

A) Budgets force employees to follow the organization's plan.
B) The evaluation feature of budget systems is frightening for many people.
C) There is a tendency for people to be uncomfortable with budgets.
D) Proper handling of human relations is essential to the establishment of an effective budget system.

E) All of the above
F) C) and D)

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Question 3

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Hilliard Company budgeted the following transactions for April 2014: $\begin{array} { |l | r | } \hline \text { Sales (75\% collected in month of sale) } & \$ 200,000 \\\hline \text { Cash Operating Expenses } & 105,000 \\\hline \text { Cash Purchases of Investments } & 75,000 \\\hline \text { Cash Payment of Debt } & 15,000 \\\hline \text { Depreciation on Operating Assets } & 12,000 \\\hline\end{array}$ The beginning cash balance was $50,000. The company desires to have a $25,000 ending cash balance. What is the amount of the cash surplus or shortage?

Oakton Furniture provided the following information relevant to its sales for December 2013 and the first quarter of 2014: $\begin{array}{|l|l|r|r|r|r} \hline & {\text { Dec. } 2013} &{\text { Jan. 2014 }} &{\text { Feb. 2014 }} & {\text { Mar. 2014 }} \\\hline &{\text { (Actual) }} &{\text { (Budgeted) }} & {\text { (Budgeted) }} & {\text { (Budgeted) }} \\\hline \text { Credit sales } & \$ 120,000 & \$ 280,000 & \$ 310,000 & \$ 220,000 \\\hline \text { Cash sales } & \$ 20,000 & \$ 50,000 & \$ 60,000 & \$ 24,000\\\hline \end{array}$ Based on the company's collection history, 2% of credit sales are uncollectible, 40% are collected in month of sale and the remainder collected in the following month. Cash collections in January from December 2013 credit sales would be:

In a participative budgeting system, budget information flows in both directions, from bottom to top, and from top to bottom.

If a budgeting system is designed correctly, top management will not have to get involved in the process.

The capital budget does not affect any of a company's operating budgets.

Which of the following accounts would appear on the inventory purchases budget and pro forma balance sheet?

Would you recommend that a business employ a participative approach to budgeting? Why or why not?

Strategic planning deals with the establishment of a long term company objectives.

Indicate whether each of the following statements is true or false. 1. Short-term plans are more specific and detailed than long-term plans. 2. Short-term planning focuses on the operations of a business for the next two to three years. 3. A decision to lease equipment would be part of a company's capital budgeting process. 4. The master budget focuses on long-term objectives and goals. 5. The master budget normally covers a period of one quarter.

The master budget details:

Bright Minds Toy Company prepared the following sales budget for the second quarter. Projected sales for each of the first three months of operations are as follows: $\begin{array}{|lrrr}\text { Sales Budget } &\text { April } &\text { May } &\text { June }\\\text { Cash Sales } & 30,000 & 43,000 & 55,000 \\\text { Sales on Account } & 370,000 & 432,000 & 405,000 \\\hline&400,000&475,000&460,000\end{array}$ Bright Minds expects to collect 70% of the sales on account in the month of sale, and 20% in the month following the sale, and the remainder in the second month following the sale. What is the amount of budgeted cash collections for June?

Interest expense is not included in the selling and administrative budget because a company cannot estimate interest expense until it prepares the cash budget and makes borrowing projections.

Select the term from the list of terms that best matches the description provided. $\begin{array} { | l | l | l | } \hline \text { Your Answer } & \text { Definition or Description } & \text { Term } \\\hline & \text { A. This shows the inventory needs for each month. } & \text { 1. Cash budget } \\\hline & \begin{array} { l } \text { B. This shows the projected financial condition of the } \\\text { company at the end of the budget period. }\end{array} & \begin{array} { l } \text { 2. Inventory purchases } \\\text { budget }\end{array} \\\hline & \begin{array} { l } \text { C. Comparison of actual results to budget } \\\text { expectations in order to evaluate employee and/or } \\\text { department performance. }\end{array} & \begin{array} { l } \text { 3. Performance } \\\text { measurement }\end{array} \\\hline & \begin{array} { l } \text { D. Expected borrowing (financing activities) and } \\\text { related interest expense are shown in this budget. }\end{array} & \begin{array} { l } \text { 4. Pro forma balance } \\\text { sheet }\end{array} \\\hline & \begin{array} { l } \text { E. This budget is the starting point for the entire } \\\text { master budget. }\end{array} & \begin{array} { l } \text { 5. Pro forma financial } \\\text { statements }\end{array} \\\hline & \begin{array} { l } \text { F. These are based on projected rather than historical } \\\text { information. }\end{array} & \begin{array} { l } \text { 6. Pro forma income } \\\text { statement }\end{array} \\\hline & \begin{array} { l } \text { G. This provides an advance estimate of the expected } \\\text { profitability. }\end{array} & \text { 7. Sales budget } \\\hline\end{array}$

One company's practice is to provide bonuses to salespeople who exceed their sales targets. Which of the following advantages of budgeting enabled the company to establish its recognition program?

Payne Company provided the following information relevant to its inventory sales and purchases for December 2013 and the first quarter of 2014: $\begin{array} { | l | c | c | c | c | } \hline & \text { Dec. } 2013 & \text { Jan. } 2014 & \text { Feb. 2014 } & \text { Mar. } 2014 \\\hline & \text { (Actual) } & \text { (Budgeted) } & \text { (Budgeted) } & \text { (Budgeted) } \\\hline \text { Cost of goods sold } & \$ 80,000 & \$ 140,000 & \$ 180,000 & \$ 120,000 \\\hline\end{array}$ Desired ending inventory levels are 25% of the following month's projected cost of goods sold. The company purchases all inventory on account. January 2014 budgeted purchases are $150,000. The normal schedule for inventory payments is 60% payment in month of purchase and 40% payment in month following purchase. Budgeted cash payments for inventory in February 2014 would be:

The Game Zone sells computer and other electronic games. The store has budgeted sales for January 2014 as indicated in the following table. The company expects a 4 percent increase in sales for the month of February and a 3 percent increase for March. $\begin{array}{|l|lr|c|c|}\hline\text { Sales } &{\text { January }} & \text { February } & \text { March } \\\hline \text { Cash sales } & \$ 40,000 & ? & ? \\\hline \text { Sales on account } & 80,000 & ? & ? \\\hline \text { Total budgeted sales } & \$ 120,000 & ? & ?\\\hline\end{array}$ Required: (a) Complete the sales budget by filling in the missing amounts. (b) What is the amount of sales revenue the company will report on its pro forma income statement for the first quarter?

Depreciation expense will appear on the schedule of cash payments for selling and administrative expenses.

The pro forma income statement gives managers an advance estimate of a company's profitability.