THEORIES

1. Which of the following objectives is not a primary purpose of preparing a budget?

A. To make sure the company expands its operations.
B. To control income and expenditure in a given period.
C. To provide a basis for comparison of actual performance
D. To communicate the company’s plans throughout the entire business organization
2. For better management acceptance, the flow of data to be used for budgeting should begin with
A. Accounting department C. Lower levels of management
B. Budget committee D. Top management
3. Which of these statements are advantages of profit planning?
1. Develops profit-mindedness, encourages cost consciousness and resources utilization
throughout the company.
2. Provides vehicle to communicate objectives, gain support for the plan, of what is expected,
thereby developing a sense of commitment to achieve established goals.
3. Provides yardstick to evaluate actual performance; encouraging efficiency, increasing output
and reducing cost.
4. Provides a sense of direction for the company and enhances coordination of business activity.
5. Eliminates or takes over the role of administration by providing detailed information that allows
executives to operate toward achievement of the organization’s objectives.
A. Statements 1, 2, 3, and 4 only. C. Statements 3, 4, and 5 only.
B. Statements 1, 3, and 4 only. D. All five statements.
4. These statements are proper to the budgeting process except:
A. It is a tool to orchestrate the various functions of operations in a business.
B. It is a part of management’s responsibility to plan the use of its resources.
C. Actual results need not be compared with plan, since the process ends after budget is approved.
D. The involvement of the various levels of individuals in the company is necessary to gain its
acceptance and attain its goals.
5. In budgeting, which of the following statements is false?
A. Planning and control are the essential features of the budgeting process
B. Capital expenditures budget shows the availability of idle cash for investment
C. Budgeting provides a measuring device to which subsequent performances are compared and
evaluated.
D. Budget preparation is not the sole responsibility of any one department and is prepared by
combining the efforts of many individuals
6. A static budget report
A. shows costs at only 2 or 3 different levels of activity.
B. is appropriate in evaluating a manager's effectiveness in controlling variable costs.
C. should be used when the actual level of activity is materially different from the master budget
activity level.
D. may be appropriate in evaluating a manager's effectiveness in controlling costs when the
behavior of the costs in response to changes in activity is fixed.
7. The flexible budget
A. is prepared before the master budget.
B. is relevant both within and outside the relevant range.
C. eliminates the need for a master budget.
D. is a series of static budgets at different levels of activity.
8. Budget slack is a condition in which
A. demand is low at various times of the year.
B. managers grant favored employees extra time off.
C. excess machine capacity exists in some areas of the plant.
D. there is an intentional overestimate of expenses or an underestimate of revenues.
9. A budget that includes a 12-month planning period at all times is called a __________ budget.

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 1 of 7

 A. continuous C. master
B. flexible D. pro forma
10. A company's plan for the acquisition of long-lived assets, such as buildings and equipment, is
commonly called a:
A. pro-forma budget. D. profit plan.
B. master budget. E. capital budget.
C. financial budget.

11. Which of the following budgets are prepared first before the production budget?
A. B. C. D. E.
Cash Budget Yes No No Yes Yes
Overhead Budget No No No No Yes
Capital Budget Yes Yes No No Yes
12. In relation to comprehensive budgeting, determine whether the following statements are true or
false:
I. Budgets are normally used only by profit-making businesses.
II. The budgeting process is used to effectively communicate planned expectations regarding
profits and expenses to the entire organization.
III. Once a static budget has been determined, it is changed regularly as the underlying activity
changes.
A. B. C. D.
Statement I True True False False
Statement II False True True True
Statement III True False False True
13. Which information about the following can be found in a cash budget?
I. Deferred Tax Liability creating additional income tax expense
II. Accrual for freight cost chargeable to the company but paid in advance by the seller
III. Refinancing of bonds payable through issuance of shares
A. I only D. I, II and III
B. I and III E. None from I, II and III
C. I and II
14. Which of the following is LEAST likely to be affected if unit sales for this month are lower than
budgeted?
A. Cash receipts for next month. C. Production for next month.
B. Inventory at the end of this month. D. Production for this month.
15. If a company has a policy of maintaining an inventory of finished goods at a specified percentage of
the next month's budgeted sales, budgeted production for January will exceed budgeted sales for
January when budgeted
A. January sales exceed budgeted February sales.
B. February sales exceed budgeted January sales.
C. January sales exceed budgeted December sales.
D. December sales exceed budgeted January sales.
16. A company that maintains a raw material inventory, which is based on the following month's
production needs, will purchase less material than it uses in a month where
A. sales exceed production.
B. production exceeds sales.
C. planned production exceeds the next month's planned production.
D. planned production is less than the next month's planned production.
17. Which of the following statements is True?
A. Budget data are generally prepared by top management and distributed downward in an
organization.

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 2 of 7

 B. The budget committee is responsible for preparing detailed budget figures in an organization.
C. The primary purpose of the cash budget is to show the expected cash balance at the end of the
budget period.
D. Under zero-based budgeting, a manager is required to start at zero budget levels each period,
as if the programs involved were being initiated for the first time.
18. Which of the following represents a proper sequencing in which the budgets below are prepared?
A. Direct Material Purchases, Cash, Sales
B. Production, Sales, Income Statement
C. Sales, Balance Sheet, Direct Labor
D. Sales, Production, Manufacturing Overhead
19. Determine which of the following terms is not related to budgeting
A. Estimation C. Accuracy
B. Forecasted amounts D. Performance Evaluation
20. Statement 1: A cash budget is not part of the master budget since it is part of the financial budget.
Statement 2: The end product of a cash budget is the determination of what amount of cash is
available for use as an investment or if the cash balance is insufficient, what level of borrowing does
the company needed.
A. Only the first statement is true. C. Both statements are true.
B. Only the second statement is true. D. Both statements are false.

21. It is least likely that a production budget revision would cause a revision in the
A. capital budget. C. purchases budget.
B. cash budget. D. pro forma balance sheet.
22. Which of the following items should not be included in a company’s budget manual?
A. sample budgetary forms
B. a statement of desired results of the budget
C. a listing of budgetary activities to be performed
D. financial statements for the upcoming fiscal year
23. Ineffective budgets and/or control systems are characterized by the use of
A. budgets as a planning tool only and disregarding them for control purposes.
B. budgets for motivation.
C. budgets for coordination.
D. the budget for communication.
24. Which of the following items would not be found in the financing section of the cash budget?
A. cash payments for debt retirement C. cash payments for sales of investments
B. cash payments for interest D. payment of accounts payable
25. Which of the following statements is NOT correct concerning the Cash Budget?
A. It is not necessary to prepare any other budgets before preparing the Cash Budget.
B. The Cash Budget should be prepared before the Budgeted Income Statement.
C. The Cash Budget should be prepared before the Budgeted Balance Sheet.
D. The Cash Budget builds on earlier budgets and schedules as well as additional data.
26. To develop the flexible budget, management takes all of the following steps except identify the
A. activity index and the relevant range of activity.
B. variable costs and determine the budgeted variable cost per unit.
C. fixed costs and determine the budgeted fixed cost per unit.
D. All of these options are steps in developing the flexible budget.
27. Budgets set at very high levels of performance (i.e., very low costs)
A. assist in planning the operations of the company.
B. stimulate people to perform better than they ordinarily would.
C. are helpful in evaluating the performance of managers.
D. can lead to low levels of performance.
28. Which of the following organizations is not likely to use budgets?

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 3 of 7

 A. Manufacturing firms.
B. Merchandising firms.
C. Firms in service industries.
D. Nonprofit organizations.
E. None of the above, as all are likely to use budgets.
29. Just-in-time manufacturers are more likely than conventional manufacturers to
A. Experience cash shortages.
B. Prepare production budgets without a sales forecast.
C. Budget materials purchases equal to the current month’s needs for production.
D. Budget unit production for the month at greater than budgeted unit sales for the month.
30. A systematized approach known as zero-based budgeting (ZBB)
A. Commences with the current level of spending.
B. Presents planned activities for a period of time but does not present a firm commitment.
C. Divides the activities of individual responsibility centers into a series of packages that are
prioritized.
D. Classifies the budget by the prior year’s activity and estimates the benefits arising from each
activity.
PROBLEMS
1. DITTO CORP., plans to sell 200,000 units of Let-It-Be product in July and anticipate a growth in sales
of 5% per month. The target ending inventory in units of the product is 80% of the next month’s
estimated sales. There are 150,000 units in inventory as of the end of June. The production
requirement in units of Let-It-Be for the quarter ending September 30 would be
A. 665,720 C. 675,925
B. 670,560 D. 691,525
2. SNORLAX CORP. is budgeting sales of 53,000 units of product Nous for October 2000. The
manufacture of one unit of Nous requires 4 kilos of chemical Loire. During October 1998, SNORLAX
plans to reduce the inventory of Loire by 50,000 kilos and increase the finished goods inventory of
Nous by 6,000 units. There is no Nous work in process inventory. How many kilos of Loire is Mien
budgeting to purchase in October 2000?
A. 138,000 C. 186,000
B. 162,000 D. 238,000
Use the following information in answering the next item(s):
CHARIZARD CORP. is in the process of preparing its annual budget. The following beginning and
ending inventory levels are planned for the year.
Beginning Inventory Ending Inventory
Finished goods (units) 20,000 30,000
Raw material (grams) 50,000 40,000
Each unit of finished goods requires 7 grams of raw material.
3. If the company plans to sell 270,000 units during the year, the number of units it would have to
manufacture during the year would be:
A. 300,000 units C. 260,000 units
B. 270,000 units D. 280,000 units
4. How much of the raw material should the company purchase during the year?
A. 1,960,000 grams C. 1,970,000 grams
B. 1,950,000 grams D. 2,000,000 grams
5. MEW CORPORATION makes and sells a product called Product WZ. Each unit of Product WZ requires
3.5 hours of direct labor at the rate of P14.50 per direct labor-hour. Management would like you to
prepare a Direct Labor Budget for June. The company plans to sell 39,000 units of Product WZ in
June. The finished goods inventories on June 1 and June 30 are budgeted to be 200 and 100 units,
respectively. Budgeted direct labor costs for June would be:
A. P1,984,325 C. P1,979,250
B. P1,974,175 D. P564,050

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 4 of 7

6. CHARMANDER INC. pays out sales commissions to its sales team in the month the company receives
cash for payment. These commissions equal 5% of total (monthly) cash inflows as a result of sales.
CHARMANDER has budgeted sales of P300,000 for August, P400,000 for September, and P200,000
for October. Approximately, half of all sales are on credit, and the other half are all cash sales.
Experience indicates that 70% of the budgeted credit sales will be collected in the month following
the sale, 20% the month after that, and 10% of the sales will be uncollectible. Based on this
information, what should be the total amount of sales commissions paid out by CHARMANDER in the
month of October?
A. P8,500 C. P17,000
B. P13,500 D. P22,000
7. The following historical pattern on its credit sales of GENGAR CO. was presented:
• 70% collection during the month of sale.
• 15% in the first month after sale.
• 10% in the second month after sale.
• 4% in the third month after sale.
• 1% uncollectible.
The sales on account of the last six months of the year were reported as follows:
July P120,000
August 140,000
September 160,000
October 180,000
November 200,000
December 170,000
The total cash collections during the fourth calendar quarter from sales made on account during the
fourth calendar quarter would be
A. P345,000 C. P502,800
B. P460,000 D. P550,000
8. The January 1983 budget of BULBASAUR CORP. is being prepared by the budget officer of the
company. In the preparation of the cash budget the estimates for the month of January, 1983
include the following:
Sales P937,500
Gross profit (based on sales) 25%
Increase in inventories P75,000
Decrease in trade accounts payable P30,000
The estimated cash disbursements for inventories in January, 1983 is
A. P598,125 C. P748,125
B. P733,125 D. P808,125
Use the following information in answering the next item(s):
The manufacturing overhead budget at RAYQUAZA COMPANY is based on budgeted direct labor-
hours. The direct labor budget indicates that 2,300 direct labor-hours will be required in January. The
variable overhead rate is P1.00 per direct labor-hour. The company's budgeted fixed manufacturing
overhead is P28,060 per month, which includes depreciation of P4,600. All other fixed manufacturing
overhead costs represent current cash flows.
9. The company recomputes its predetermined overhead rate every month. The predetermined
overhead rate for January should be:
A. P1.00 C. P11.20
B. P12.20 D. P13.20
10. The January cash disbursements for manufacturing overhead on the manufacturing overhead budget
should be:
A. P30,360 C. P23,460
B. P2,300 D. P25,760
11. GARDEVOIR CORP. collects 20% of a month's sales in the month of sale, 70% in the month following
sale, and 6% in the second month following sale. The remainder is uncollectible. Budgeted sales for
the next four months are:

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 5 of 7

 January February March April
Budgeted sales P200,000 P300,000 P350,000 P250,000
Cash collections in April are budgeted to be:
A. P321,000 C. P320,000
B. P313,000 D. P292,000
12. SQUIRTLE COMPANY is currently preparing its cash budget for next month and has gathered the
following information:
Expected cash receipts P39,400
Expected disbursements:
Direct materials P12,000
Direct labor P9,000
Manufacturing overhead P11,500
Selling and administrative expenses P22,000
The beginning cash balance will be P6,000 and the company requires a minimum cash balance at the
end of the month of P5,000. How much will SQUIRTLE need to borrow to meet its cash needs for the
month?
A. P9,100 C. P20,100
B. P14,100 D. None of the above.
Use the following information in answering the next item(s):
Information on the actual sales and inventory purchases of the LUCARIO CORP. for the first quarter
follow:
Sales Inventory Purchases
January P120,000 P60,000
February P100,000 P78,000
March P130,000 P90,000
Collections from LUCARIO’s customers are normally 60% in the month of sale, 30% in the month
following sale, and 8% in the second month following sale. The balance is uncollectible. LUCARIO
takes full advantage of the 3% discount allowed on purchases paid for by the end of the following
month.
The company expects sales in April of P150,000 and inventory purchases of P100,000. Selling and
administrative expenses for the month of April are expected to be P38,000, of which P15,000 is
salaries and P8,000 is depreciation. The remaining selling and administrative expenses are variable
with respect to the amount of sales in dollars. Those selling and administrative expenses requiring a
cash outlay are paid for during the month incurred. LUCARIO’s cash balance on March 1 was P43,000,
and on April 1 was P35,000.
13. The expected cash collections from customers during April would be:
A. P150,000 C. P139,000
B. P137,000 D. P117,600
14. The expected cash disbursements during April for inventory purchases would be:
A. P100,000 C. P90,000
B. P97,000 D. P87,300
15. The expected cash disbursements during April for selling and administrative expenses would be:
A. P38,000 C. P23,000
B. P30,000 D. P15,000
16. The expected cash balance on April 30 would be:
A. P54,700 C. P19,700
B. P62,700 D. P28,700

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 6 of 7

Use the following information in answering the next item(s):
The following information has been gathered by the Budget Director of the DRAGONITE COMPANY,
another outfit managed by the DEOXYS CORP. The firm manufactures and sells only one product.
The selling price during the coming month is expected to be the prevailing price of P5 per unit.
Expected sales during the month is a total of 75,000 units of finished goods. Finished goods expected
to be on hand at the end of the month total 50,000 units. Finished goods expected to be on hand at
the beginning of the month total 42,000 units.
Direct labor cost is P3.00 per hour. One-fourth an hour of direct labor is required to manufacture
each unit of finished product.
Factory overhead is applied to work-in-process on the basis of direct labor hours. Variable factory
expenses at the planned level of operations is expected to amount to P33,200; fixed overhead is
expected to amount to P99,600.
The raw materials expected to be on hand at the beginning of the month total 5,000 gallons. Only
one kind of raw material is used to produce the finished goods. One and one-half gallons of raw
material are needed to manufacture each unit of finished product. Raw materials are expected to cost
P0.18 per gallon during the coming month, its prevailing cost. Raw materials expected to be on hand
at the end of the month total 8,000 gallons.
Variable administrative and selling expenses is P1.00 per unit.
In assisting the company to formulate the budget, you determined the following budget parameters.
17. Budgeted cost of raw materials to be used in production is
A. P8,910 C. P22,410
B. P14,940 D. P124,500
18. Budgeted raw materials purchases cost is
A. P22,410 C. P23,760
B. P22,950 D. P124,500
19. Budgeted direct labor is
A. P20,750 C. P62,250
B. P33,200 D. P83,000
20. Variable overhead cost per direct labor hour is
A. P1.60 C. P4.80
B. P1.80 D. P6.40
21. Fixed overhead cost per direct labor hour is
A. P1.60 C. P4.80
B. P1.80 D. P6.40
22. Budgeted contribution margin is
A. P1.80 C. P3.40
B. P2.58 D. P5.00
23. Budgeted cost of goods sold (full cost) is
A. P76,500 C. P196,500
B. P96,500 D. P304,000
24. Net profit before tax is
A. P53,000 C. P178,500
B. P103,500 D. P249,500
25. JIGGLYPUFF INC. makes payments for purchases 10% during the month of purchase, 60% in the
following month, and the remainder in the second month following the purchase. Purchases are
projected to be P130,000 in January, P140,000 in February, and P160,000 in March. The March 31
accounts payable balance will be
A. P48,000. C. P144,000.
B. P96,000. D. P186,000.

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 7 of 7

26. GYARADOS INC. budgeted sales of 50,000 units for January, 60,000 for February. GYARADOS desires
an ending inventory equal to one-half of the following month's sales needs. Inventory on January 1
was as desired. Budgeted production for January is
A. 22,000 units. C. 55,000 units.
B. 52,000 units. D. 74,000 units.
Use the following information in answering the next item(s):
GIRATANA CORP. is one of the manufacturers of a part used in the production of a popular consumer
product. Sales of the consumer product in 1985 are estimated at 5,000,000 units. GIRATANA
regularly supplies 40% of the parts used in the new products. Two parts units are needed for each
product unit. Aside from the new products, there is also a replacement parts market. Over the past
three years, the company has sold the following number of replacement parts:
1982 300,000
1983 330,000
1984 363,000
This trend is expected to continue. The parts are sold for P4 per piece in the new products market
and P4.50 in the replacement parts market.
27. The estimated number of parts to be sold by GIRATANA in 1985 is
A. 2,399,300 C. 4,399,300
B. 4,000,000 D. 4,435,600
28. The amount of expected revenue based on the estimated number of parts to be sold in 1985 is
A. P9,796,850 C. P17,597,200
B. P16,000,000 D. P17,796,850
Use the following information in answering the next item(s):
SYLVEON COMPANY is located in a small town in the rural west. Data regarding the store's operations
follow:
• Sales are budgeted at P290,000 for November, P310,000 for December, and P210,000 for
January.
• Collections are expected to be 65% in the month of sale, 33% in the month following the sale,
and 2% uncollectible.
• The cost of goods sold is 80% of sales.
• The company purchases 70% of its merchandise in the month prior to the month of sale and
30% in the month of sale. Payment for merchandise is made in the month following the
purchase.
• Other monthly expenses to be paid in cash are P21,100.
• Monthly depreciation is P21,000.
• Ignore taxes.
Statement of Financial Position
October 31
Assets:
Cash P 25,000
Accounts receivable
(net of allowance for uncollectible accounts) 77,000
Inventory 162,400
Property, plant and equipment
(net of P624,000 accumulated depreciation) 1,026,000
Total assets P1,290,400
Liabilities and Stockholders’ Equity:
Accounts payable P 239,000
Common stock 740,000
Retained earnings 311,400
Total liabilities and stockholders’ equity P1,290,400
29. Expected cash collections in December are:
A. P310,000 C. P297,200

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 8 of 7

 B. P95,700 D. P201,500
30. The cost of December merchandise purchases would be:
A. P248,000 C. P117,600
B. P232,000 D. P192,000
31. December cash disbursements for merchandise purchases would be:
A. P192,000 C. P117,600
B. P243,200 D. P248,000
32. The excess (deficiency) of cash available over disbursements for December would be:
A. P46,600 C. P13,700
B. P19,200 D. P32,900
33. The net income for December would be:
A. P13,700 C. P40,900
B. P32,900 D. P19,900
34. The cash balance at the end of December would be:
A. P63,300 C. P57,900
B. P25,000 D. P38,300
35. The accounts receivable balance, net of uncollectible accounts, at the end of December would be:
A. P102,300 C. P83,200
B. P198,000 D. P108,500

BUSINESS PLANNING AND SHORT-TERM BUDGETARY SYSTEM Page 9 of 7