Chapter 7
Profit Planning
True/False
1. The sales budget is usually prepared before the production budget.
Level: Easy LO: 1,2,3 Ans: T
2. The cash budget is the starting point in preparing the master budget.
Level: Medium LO: 1,8 Ans: F
3. The first budget a company prepares in a master budget is the production budget.
Level: Medium LO: 1 Ans: F
4. One of the weaknesses of budgets is that they are of little value in uncovering potential bottlenecks in
an organization.
Level: Medium LO: 1 Ans: F
5. One of the advantages of a self-imposed budget is that the person directly involved in an activity is
more likely to be in a position to make good budget estimates.
Level: Easy LO: 1 Ans: T
6. The basic idea behind responsibility accounting is that top management is responsible for preparing
detailed budgets by which the performance of middle and lower management will be evaluated.
Level: Easy LO: 1 Ans: F
7. Budgeting is a trade-off between planning and control in that increased use of budgeting will usually
improve planning but will weaken control.
Level: Medium LO: 1 Ans: F
8. The sales budget often includes a schedule of expected cash collections.
Level: Easy LO: 2 Ans: T
9. Uncollectible amounts on credit sales to customers will be listed as cash outflows on the schedule of
expected cash collections.
Level: Medium LO: 2 Ans: F
Brewer, Introduction to Managerial Accounting, 3/e 357
,10. The number of units to be produced in a period can be determined by adding the expected sales to the
desired ending inventory and then deducting the beginning inventory.
Level: Medium LO: 3 Ans: T
11. When preparing a direct materials budget, beginning inventory for raw materials should be added to
production needs, and desired ending inventory should be subtracted to determine the amount of raw
materials to be purchased.
Level: Medium LO: 4 Ans: F
12. The manufacturing overhead budget provides a schedule of all costs of production other than direct
materials and direct labor.
Level: Easy LO: 6 Ans: T
13. Both variable and fixed manufacturing overhead costs are included in the selling and administrative
expense budget.
Level: Medium LO: 7 Ans: F
14. On a cash budget, the total amount of budgeted cash payments for manufacturing overhead should not
include any amounts for depreciation on factory equipment.
Level: Easy LO: 8 Ans: T
15. In zero-base budgeting, only changes from the prior budget must be justified.
Level: Easy LO: 11 Ans: F
Multiple Choice
16. Which of the following budgets are prepared before the production budget?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1 Ans: C
358 Brewer, Introduction to Managerial Accounting, 3/e
,17. Which of the following represents the normal sequence in which the below budgets are prepared?
A) Sales, Balance Sheet, Income Statement
B) Balance Sheet, Sales, Income Statement
C) Sales, Income Statement, Balance Sheet
D) Income Statement, Sales, Balance Sheet
Level: Medium LO: 1 Ans: C
18. The budget method that maintains a constant twelve month planning horizon by adding a new month
on the end as the current month is completed is called:
A) an operating budget.
B) a capital budget.
C) a continuous budget.
D) a master budget.
Level: Easy LO: 1 Ans: C
19. In preparing a master budget, top management is generally best able to:
A) prepare detailed departmental-level budget figures.
B) provide a perspective on the company as a whole.
C) point out the particular persons who are to blame for inability to meet budget goals.
D) responses a, b, and c are all correct.
Level: Easy LO: 1 Ans: B
20. Which of the following benefits could an organization reasonably expect from an effective budget
program?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Easy LO: 1 Ans: A
21. Which of the following is an advantage of implementing a self-imposed budgeting system?
A) Budgeting is quick and easy because only a few individuals are involved in the budgeting process.
B) Upper level management does not have to review budget estimates.
C) Motivation to meet budget estimates is usually enhanced.
D) All of the above.
Level: Easy LO: 1 Ans: C
Brewer, Introduction to Managerial Accounting, 3/e 359
, 22. All the following are considered to be benefits of participative budgeting, except for:
A) Individuals at all organizational levels are recognized as being part of a team; this results in greater
support for the organization.
B) The budget estimates are prepared by those in directly involved in activities.
C) When managers set their own targets for the budget, top management need not be concerned with the
overall profitability of operations.
D) Managers are held responsible for reaching their goals and cannot easily shift responsibility by
blaming unrealistic goals set by others.
Source: CMA, adapted
Level: Easy LO: 1 Ans: C
23. Which of the following is NOT an objective of the budgeting process?
A) To communicate management’s plans throughout the entire organization.
B) To provide a means of allocating resources to those parts of the organization where they can be used
most effectively.
C) To ensure that the company continues to grow.
D) To uncover potential bottlenecks before they occur.
Level: Easy LO: 1 Ans: C
24. When preparing a production budget, the required production equals:
A) budgeted sales + beginning inventory + desired ending inventory.
B) budgeted sales - beginning inventory + desired ending inventory.
C) budgeted sales - beginning inventory - desired ending inventory.
D) budgeted sales + beginning inventory - desired ending inventory.
Source: CIMA, adapted
Level: Easy LO: 3 Ans: B
25. The direct labor budget is based on:
A) the desired ending inventory of finished goods.
B) the beginning inventory of finished goods.
C) the required production for the period.
D) the required materials purchases for the period.
Level: Easy LO: 5 Ans: C
360 Brewer, Introduction to Managerial Accounting, 3/e
Profit Planning
True/False
1. The sales budget is usually prepared before the production budget.
Level: Easy LO: 1,2,3 Ans: T
2. The cash budget is the starting point in preparing the master budget.
Level: Medium LO: 1,8 Ans: F
3. The first budget a company prepares in a master budget is the production budget.
Level: Medium LO: 1 Ans: F
4. One of the weaknesses of budgets is that they are of little value in uncovering potential bottlenecks in
an organization.
Level: Medium LO: 1 Ans: F
5. One of the advantages of a self-imposed budget is that the person directly involved in an activity is
more likely to be in a position to make good budget estimates.
Level: Easy LO: 1 Ans: T
6. The basic idea behind responsibility accounting is that top management is responsible for preparing
detailed budgets by which the performance of middle and lower management will be evaluated.
Level: Easy LO: 1 Ans: F
7. Budgeting is a trade-off between planning and control in that increased use of budgeting will usually
improve planning but will weaken control.
Level: Medium LO: 1 Ans: F
8. The sales budget often includes a schedule of expected cash collections.
Level: Easy LO: 2 Ans: T
9. Uncollectible amounts on credit sales to customers will be listed as cash outflows on the schedule of
expected cash collections.
Level: Medium LO: 2 Ans: F
Brewer, Introduction to Managerial Accounting, 3/e 357
,10. The number of units to be produced in a period can be determined by adding the expected sales to the
desired ending inventory and then deducting the beginning inventory.
Level: Medium LO: 3 Ans: T
11. When preparing a direct materials budget, beginning inventory for raw materials should be added to
production needs, and desired ending inventory should be subtracted to determine the amount of raw
materials to be purchased.
Level: Medium LO: 4 Ans: F
12. The manufacturing overhead budget provides a schedule of all costs of production other than direct
materials and direct labor.
Level: Easy LO: 6 Ans: T
13. Both variable and fixed manufacturing overhead costs are included in the selling and administrative
expense budget.
Level: Medium LO: 7 Ans: F
14. On a cash budget, the total amount of budgeted cash payments for manufacturing overhead should not
include any amounts for depreciation on factory equipment.
Level: Easy LO: 8 Ans: T
15. In zero-base budgeting, only changes from the prior budget must be justified.
Level: Easy LO: 11 Ans: F
Multiple Choice
16. Which of the following budgets are prepared before the production budget?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1 Ans: C
358 Brewer, Introduction to Managerial Accounting, 3/e
,17. Which of the following represents the normal sequence in which the below budgets are prepared?
A) Sales, Balance Sheet, Income Statement
B) Balance Sheet, Sales, Income Statement
C) Sales, Income Statement, Balance Sheet
D) Income Statement, Sales, Balance Sheet
Level: Medium LO: 1 Ans: C
18. The budget method that maintains a constant twelve month planning horizon by adding a new month
on the end as the current month is completed is called:
A) an operating budget.
B) a capital budget.
C) a continuous budget.
D) a master budget.
Level: Easy LO: 1 Ans: C
19. In preparing a master budget, top management is generally best able to:
A) prepare detailed departmental-level budget figures.
B) provide a perspective on the company as a whole.
C) point out the particular persons who are to blame for inability to meet budget goals.
D) responses a, b, and c are all correct.
Level: Easy LO: 1 Ans: B
20. Which of the following benefits could an organization reasonably expect from an effective budget
program?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Easy LO: 1 Ans: A
21. Which of the following is an advantage of implementing a self-imposed budgeting system?
A) Budgeting is quick and easy because only a few individuals are involved in the budgeting process.
B) Upper level management does not have to review budget estimates.
C) Motivation to meet budget estimates is usually enhanced.
D) All of the above.
Level: Easy LO: 1 Ans: C
Brewer, Introduction to Managerial Accounting, 3/e 359
, 22. All the following are considered to be benefits of participative budgeting, except for:
A) Individuals at all organizational levels are recognized as being part of a team; this results in greater
support for the organization.
B) The budget estimates are prepared by those in directly involved in activities.
C) When managers set their own targets for the budget, top management need not be concerned with the
overall profitability of operations.
D) Managers are held responsible for reaching their goals and cannot easily shift responsibility by
blaming unrealistic goals set by others.
Source: CMA, adapted
Level: Easy LO: 1 Ans: C
23. Which of the following is NOT an objective of the budgeting process?
A) To communicate management’s plans throughout the entire organization.
B) To provide a means of allocating resources to those parts of the organization where they can be used
most effectively.
C) To ensure that the company continues to grow.
D) To uncover potential bottlenecks before they occur.
Level: Easy LO: 1 Ans: C
24. When preparing a production budget, the required production equals:
A) budgeted sales + beginning inventory + desired ending inventory.
B) budgeted sales - beginning inventory + desired ending inventory.
C) budgeted sales - beginning inventory - desired ending inventory.
D) budgeted sales + beginning inventory - desired ending inventory.
Source: CIMA, adapted
Level: Easy LO: 3 Ans: B
25. The direct labor budget is based on:
A) the desired ending inventory of finished goods.
B) the beginning inventory of finished goods.
C) the required production for the period.
D) the required materials purchases for the period.
Level: Easy LO: 5 Ans: C
360 Brewer, Introduction to Managerial Accounting, 3/e
