CH APTE R 10

Budgetary Planning and Control

True-False

1. A budget is a formal document that quantifies a company’s plans for achieving its goals.

2. Budgets are useful in the control process because they provide a basis for evaluating
performance.

3. A top-down approach to budgeting involves substantial input from lower level managers.

4. Most managers believe that budgeting is more successful when a top-down approach
rather than a bottom-up approach is used.

5. Generally, the longer the time period involved, the more detailed the budget.

6. An advantage of zero base budgeting is that it results in a fresh consideration of the

validity of budget amounts.

7. Only manufacturing firms need to prepare a budget.

8. Any significant deviation from planned performance is associated with managers doing a
good or poor job managing operations.

9. The first step in the budget process is preparing the sales forecasts.

10. If the number of units produced equals the number of units sold, the number of units in
ending inventory will equal the number of units in beginning inventory.

11. The sales budget is constructed after the production budget is finalized.

12. All of the dollar amounts in the manufacturing overhead budget represent cash flows in
the period incurred.

13. Items in the capital acquisitions budget appear in the cost of goods sold section of the
budgeted income statement.

14. The amount and timing of cash flows is the focus of the cash receipts and disbursements
budget.

15. A company will often have cash flow problems ahead of a period of increasing sales.

16. Just in time inventory eliminates the need for budgeting.

17. The budgeted balance sheet is also called a pro-forma balance sheet.
10-2 Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition

18. Using spreadsheet based computer programs will help a company perform “what if”
budget analysis.
 Chapter 10 Budgetary Planning and Control 10-3

19. The selling and administrative expense budget is based on the numbers in the production
budget.

20. Differences between budgeted and actual amounts are referred to as flexible budgets.

21. A static budget is prepared for a single anticipated level of production.

22. If volume differs from the original static budget, it is unfair to evaluate cost performance
against that budget.

23. A flexible budget is a set of budget relationships that can be adjusted to various activity
levels.

24. In a management by exception approach, only unfavorable variances will be investigated.

25. Managers may be tempted to move revenues and expenses between time periods to meet
performance targets.

26. Generally, it is best to evaluate managers against a single budget number.

27. Waiting until January 1 to ship an order that was ready on December 29 is an example of
income shifting.

28. When the same budget is used for planning and control, managers may be tempted to
build slack into their budgets.

29. There is an inherent conflict when budgets are used for both planning and control.

30. Only items that can be measured in monetary terms should be budgeted and used for
control purposes.

Answers
1 T 7 F 13 F 19 F 25 T
2 T 8 F 14 T 20 F 26 F
3 F 9 T 15 T 21 T 27 T
4 F 10 T 16 F 22 T 28 T
5 F 11 F 17 T 23 T 29 T
6 T 12 F 18 T 24 F 30 F
10-4 Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition

MULTIPLE CHOICE

31. A budget
A. is the formal document that quantifies a company’s plans for achieving its goals.
B. enhances communication within a company.
C. provides a basis for evaluating performance.
D. All of the above are true.

32. The formal documents that quantify a company’s plans for achieving its goals are called
A. variance reports.
B. budgets.
C. exception logs.
D. cost of production reports.

33. A budget is useful in the planning process because it

A. evaluates performance
B. forces managers to think about goals and objectives and means of achieving them
C. both A and B
D. neither A nor B

34. Development of a budget

A. is required by GAAP.
B. is a task best completed by the controller working alone.
C. enhances communication and coordination among managers.
D. guarantees that the company will be profitable.

35. Which of the following is not a reason that actual results may deviate from planned
performance?
A. A bottom-up approach to budgeting was used.
B. Managers have done a particularly good or particularly poor job of managing
operations.
C. Conditions have changed since the budget was developed.
D. The budget was poorly conceived and constructed.

36. The person evaluating a manager should consider

A. any deviation from budgeted amounts as an item that should be investigated.
B. all favorable variances as indications of good performance.
C. that managers will focus their attention on those measures that they know will be
part of their evaluation.
D. All of the above are true.

37. The group that is responsible for development and approval of the budget is the:
A. budget committee.
B. the union.
C. the auditors.
D. the board of directors.
 Chapter 10 Budgetary Planning and Control 10-5

38. The budget committee consists of

A. senior managers, including the CEO and CFO.
B. representatives from the stockholders and suppliers.
C. all those who have loaned money to the company.
D. all employees interested in providing input to the budgeting process.

39. In a bottom-up approach to budgeting

A. the CFO alone determines the budget.
B. lower level managers are the primary source of information used in setting the
budget.
C. the production budget is developed before the sales budget.
D. only the budget for the next month can be prepared.

40. In a bottom-up approach to budgeting, the primary source of information used in setting
the budget is
A. economists.
B. trade magazines.
C. the controller.
D. lower level managers.

41. Which of the following statements regarding approaches to budgeting is true?

A. Most managers believe that successful budgeting requires a bottom-up approach.
B. A top-down approach does not involve substantial input from lower level
managers.
C. Both A and B are true.
D. Neither A nor B is true.

42. Less detailed budgets are associated with

A. production costs.
B. non-profit organizations.
C. longer time periods.
D. zero base budgeting.

43. A method of budget preparation that requires all budgeted amounts to be justified by the
department, even if the amounts were supported in prior periods, is called
A. variance budgeting.
B. flexible budgeting.
C. current period budgeting.
D. zero base budgeting.

44. Which of the following is not a characteristic of zero base budgeting?

A. It is inconsistent with bottom-up budgeting.
B. It is expensive.
C. It has gained considerable support in governmental budgeting.
D. It results in a fresh consideration of the validity of budget amounts.
10-6 Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition

45. The comprehensive planning document that incorporates a number of individual budgets
is the
A. capital acquisitions budget.
B. master budget.
C. material purchases budget.
D. sales forecast.

46. Which of the following is not typically part of the master budget?
A. Direct material purchases budget.
B. Variance reports.
C. Projected cash receipts and disbursements.
D. A pro-forma balance sheet.

47. The master budget incorporates individual budgets such as those for
A. direct materials, direct labor, and selling and administrative expenses.
B. best case, worst case, and most likely sales forecasts.
C. one year ago, five years ago, and ten years ago.
D. each company in the industry.

48. Which of the following is a reasonable order in which to prepare budgets?

A. Budgeted income statement, sales budget, cash receipts and disbursements
budget.
B. Cash receipts and disbursements budget, capital acquisitions budget, labor budget.
C. Sales budget, production budget, material purchases budget.
D. Labor budget, budgeted income statement, sales budget.

49. Which of the following budgets is prepared last?

A. Sales budget.
B. Capital acquisitions budget.
C. Material purchases budget.
D. Budgeted balance sheet.

50. Which of the following budgets is prepared first?

A. Cash receipts and disbursements budget.
B. Sales budget.
C. Selling and administrative expense budget.
D. Budgeted balance sheet.

51. Companies estimate sales by using

A. models developed by economists.
B. trends in their own sales data.
C. estimates from their sales force.
D. All of the above.
 Chapter 10 Budgetary Planning and Control 10-7

52. Which of the following is not a method that can reasonably be used to forecast sales?
A. Trends in the company’s sales data.
B. Flexible budgets for various levels of production.
C. Estimates from the company’s salespersons.
D. Mathematical models adjusted by an experienced manager using professional
judgment.

53. The sales budget is based on assumptions about the

A. number of units to be sold and selling price per unit.
B. timing of cash receipts.
C. contribution margin per unit and the number of units to be sold.
D. costs of the units produced and the total fixed costs.

54. Setting the sales budget is very important because

A. the rest of the master budget is driven by the sales budget.
B. many performance targets are set by the sales budgets.
C. bonuses are often at stake based on achieving the sales budget.
D. All of the above.

55. Which of the following is not used in deciding how many units to produce in a period?
A. The desired number of units in ending inventory.
B. The expected sales in units.
C. The number of units in beginning inventory.
D. The number of units of raw material in inventory.

56. Concerning relationship between beginning inventory, ending inventory, production, and
sales, which of the following is true?
A. Production = Beginning Inventory + Sales – Ending Inventory
B. Production = Sales + Ending Inventory – Beginning Inventory
C. Production = Beginning Inventory + Ending Inventory – Sales
D. Production = Beginning Inventory – Ending Inventory + Sales

57. If the number of units in beginning inventory is more than the number of units in ending
inventory, the number of units sold is
A. less than the number of units produced.
B. greater than the number of units produced.
C. less than the number of units in beginning inventory.
D. greater than the number of units in ending inventory.

58. When constructing the production budget, the desired ending inventory for the first
period is
A. the beginning inventory for the second period.
B. often expressed as a percentage of the first period’s sales.
C. generally more than the beginning inventory for the first period.
D. not a factor in the production budget.
10-8 Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition

59. The amount of direct material that must be purchased during a period depends on the
amount of direct material
A. needed for production.
B. available in the beginning inventory.
C. desired as ending inventory.
D. All of the above are correct.

60. A significant difference between the direct material purchases budget and the direct labor
budget is that the direct material purchases budget
A. is based on units sold, while the direct labor budget is based on units produced.
B. considers beginning and ending inventory amounts, which are not part of a direct
labor budget.
C. is constructed for each quarter, while the direct labor budget is constructed for
each pay period.
D. is constructed from the top down, while the direct labor budget uses a bottom-up
approach.

61. Which of the following is likely to increase the amount budgeted for depreciation in the
manufacturing overhead budget?
A. Sale of the building housing the company headquarters.
B. Increased variable costs.
C. Planned acquisitions of new equipment.
D. A decrease in the number of units produced.

62. What is one reason the amount of cash paid out for overhead each period does not equal
the total overhead incurred?
A. Depreciation is an overhead expense that does not require the use of cash.
B. Overhead expenses are only estimates, they do not require cash.
C. Cash is only paid out for fixed manufacturing overhead expenses.
D. The amount of cash paid out is adjusted for the number of units sold.

63. Which of the following does not appear on the budgeted income statement?
A. Cost of goods sold.
B. Sales.
C. Selling and administrative expenses.
D. Accounts receivable.

64. Which of the following is not required in order to calculate the cost of goods sold in the
budgeted income statement?
A. Number of units sold.
B. Direct material and direct labor costs per unit.
C. Manufacturing overhead cost per unit.
D. Selling and administrative costs per unit.
 Chapter 10 Budgetary Planning and Control 10-9

Answers
31 D 53 A
32 B 54 D
33 C 55 D
34 C 56 B
35 A 57 B
36 C 58 A
37 A 59 D
38 A 60 B
39 B 61 C
40 D 62 A
41 C 63 D
42 C 64 D
43 D
44 A
45 B
46 B
47 A
48 C
49 D
50 B
51 D
52 B