Chapter 1 Master Budget and Responsibility Accounting

(EXERCISES SOLUTION)
True-False
1) A budget is the quantitative expression of a proposed plan of action by management for a
specified period. TRUE

2) A budget generally includes only the financial aspects of management's plan. FALSE
Explanation: The budget includes financial and nonfinancial aspects of the plan.

3) Operating plans are generally expressed through long-run budgets. FALSE

Explanation: Operating plans are generally expressed through short-run budgets. Strategic
plans are expressed through long-run budgets.

4) A budget is a communication aid, informing staff of expectations and providing information

that is essential to coordinating what needs to be done to implement the proposed plan.
TRUE

5) Financing decisions deal with how to best use the limited resources of an organization.
FALSE
Explanation: Financing decisions deal with how to obtain funds to acquire resources needed for
the organization.

6) A budgeting process can facilitate learning in that feedback from budgets can lead to
changes in plans and strategies. TRUE

7) After a budget is agreed upon and finalized by the management team, the amounts should NOT be
changed for any reason. FALSE
Explanation: Budgets should not be administered rigidly, but rather should be adjusted for changing
conditions.

8) Research shows that the performance of employees falls when they are asked to adhere to
challenging budgets. FALSE
Explanation: Research shows just the opposite. The performance of employees improves when they
receive a challenging budget. Most employees are motivated to work more intensely to avoid failure than
to achieve success (loss-averse).

9) When administered wisely, budgets promote communication and coordination among the various
subunits of the organization. TRUE

10) A rolling budget is the same as a continuous budget. TRUE

11) Sensitivity analysis is a useful tool that helps managers evaluate risks. TRUE

12) Computer-based systems, such as ERP systems, cannot perform calculations for financial planning
models. FALSE
Explanation: Managers can use computer-based systems, such as enterprise resource planning (ERP)
systems, to perform calculations for financial planning models.
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13) A responsibility center is a part, segment, or subunit of an organization, whose manager is
accountable for a specified set of activities that impact revenues, costs, or profits and in the case of an
investment center, profits. TRUE

14) In a revenue center, a manager is responsible for investments, revenues, and costs. FALSE
Explanation: In a revenue center, a manager is responsible for only revenues.

15) A responsibility center is a part, segment, or subunit of an organization whose manager is

accountable for a specified set of activities. TRUE

16) Responsibility accounting focuses on control, NOT on information and knowledge. FALSE
Explanation: Responsibility accounting focuses on information and knowledge, not on control.

17) The sales department in any organization is usually a profit center. FALSE
Explanation: The sales department is a revenue center because the sales manager is responsible primarily
for revenues, and the department's budget is primarily based on revenues.

MULTIPLE CHOICE
18) Which of the following is true of a budget?
A) Budgets are used to express only the operational plans and not the strategic plans of a company.
B) Budgets do not account for nonfinancial aspects of the upcoming period.
C) Budgets are most useful when they are planned independent of the company's strategic plans.
D) Budgets help managers to revise their plans and strategies.

19) Which of the following is a financial budget?

A) budgeted balance sheet
B) cash receivables budget
C) production budget
D) cost of goods sold budget

20) Budgets incorporate managements goals and

A) are a strategic long range plan
B) are both a short range and long range profit plan
C) includes only financial aspects of an operation as those are the only items that can be quantified
in a profit plan
D) express management's operating and financial plan for a specified period - usually a fiscal year

21) Which of the following is true of master budgets?

A) They include only financial aspects of a plan and exclude nonfinancial aspects.
B) Includes both financial and nonfinancial aspects of management's plans.
C) They aid in quantifying the expectations of all stakeholders.
D) They must be administered rigidly after they are committed to.

22) Operating decisions primarily deal with ________.

A) the best use of scarce resources
B) how to obtain funds to acquire resources
C) acquiring equipment and buildings
D) satisfying stockholders
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23) Financing decisions primarily deal with ________.
A) the use of scarce resources
B) how to obtain funds to acquire resources
C) acquiring equipment and buildings
D) preparing financial statements for stockholders

24) A master budget ________.

A) is the initial plan of what the company intends to accomplish in the period and evolves from both
the operating and financing decisions
B) is only prepared for manufacturers as they are the only type of company with material purchases
and work-in-process accounts.
C) improves companies' market capitalization and evolves from both the investing and financing
decisions
D) is another name given to the financial budget

25) Which of the following is true of budgets when they are administered thoughtfully?
A) They eliminate subjectivity in performance evaluation.
B) They can eliminate the uncertainty faced by a company.
C) They promote coordination within the subunits of a company.
D) They are a substitute the planning and coordination functions of management.

26) Budgets should ________.

A) not be so rigid that if conditions change, adjustments in spending can be made
B) be administered rigidly
C) only be developed for short periods of time such as quarters
D) include only variable costs

27) Which of the following is a component of operating budgets?

A) production budget
B) budgeted statement of cash flows
C) capital expenditures budget
D) budgeted balance sheet

28) The operating budget process generally concludes with the preparation of the ________.
A) production budget
B) cash flow statement
C) balance sheet
D) budgeted income statement

29) Which of the following best describes a rolling budget?

A) It is a budget that continually outlines the amount required to roll over debt in a future period.
B) It is created continually by adding a month, quarter, or year to the period just ended
C) It is a budget that outlines budgeted expenses while utilizing a moving average
D) It is a budget that is submitted to a bank at the beginning of every month as per a loan covenant.

30) The ________ is a component of financial budgets.

A) cost of goods sold budget
B) budgeted income statement
C) direct materials budget
D) budgeted statement of cash flows

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31) ________ include a budgeted statement of cash flows and a budgeted balance sheet.
A) Revenue budgets
B) Financial budgets
C) Operating budgets
D) Production budgets

32) In which order are the following developed? First to last:

A = Production budget
B = Direct materials costs budget
C = Budgeted income statement
D = Revenues budget

A) ABDC
B) DABC
C) DCAB
D) CABD

33) ________ is the usual starting point for budgeting.

A) The revenues budget
B) The estimated net income
C) The production budget
D) The cash budget

34) Costs such as supervision, plant and equipment (production) depreciation, maintenance, supplies,
and power. are included in the ________.
A) capital expenditures budget
B) distribution costs budget
C) revenues budget
D) manufacturing overhead budget

35) The number of units in the sales budget and the production budget may differ because of a change in
________.
A) ending finished goods inventory levels
B) total overhead charges for the year
C) beginning direct material inventory levels
D) sales returns and allowances

36) Which of the following is the basic formula of the direct materials usage budget?
A) Ending inventory of direct materials + direct materials purchased and used during the period =
direct materials to be used this period
B) Beginning inventory of direct materials + direct materials purchased and used during the period
= direct materials to be used this period
C) units used in production + target ending inventory - beginning inventory = purchases to be made
for the budget period
D) units used in production + target beginning inventory - ending inventory = purchases to be made
for the budget period

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37) Budgeted production equals ________.
A) beginning finished goods inventory + budgeted unit sales - targeted ending finished goods
inventory
B) targeted ending finished goods inventory + beginning finished goods inventory - budgeted unit
sales
C) budgeted unit sales + targeted ending finished goods inventory - beginning finished goods
inventory
D) budgeted unit sales + targeted ending finished goods inventory + beginning finished goods
inventory

38) To prepare the direct materials labor costs budget, which of the following budget must be prepared
first?
A) direct material purchase budget
B) production budget
C) direct material usage budget
D) budgeted manufacturing overhead

39) Sensitivity analysis helps managers evaluate risks ________.

A) by showing the effects of changes to the original data or an underlying assumption
B) by identifying inconsistencies in underlying assumptions and actual conditions
C) by removing the effects of foreign currency exposure and other uncontrollable factors
D) by identifying gaps in the production process using information on setups needed to
manufacture products

40) Which of the following is true of responsibility accounting?

A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility
center.
B) It is an arrangement of lines of responsibility and authority within a responsibility center.
C) It explicitly incorporates continuous improvement and changes due to learning curve.
D) It examines how a result will change if the original plan is not achieved.

41) A controllable cost is any cost that can be ________ by a responsibility center manager for a period of
time.
A) controlled
B) influenced
C) segregated
D) excluded

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 EXERCISES
EX.1. Listed below are elements of the master budget. Determine whether each budget is an operating
budget or a financial budget. Place an O for operating budget or F for a financial budget.

1. Capital expenditures budget

2. Cost of goods sold budget
3. Revenues budget
4. Budgeted statement of cash flows
5. Distribution costs budget
6. Marketing costs budget
7. Cash budget
8. Direct materials cost budget
9. Budgeted balance sheet
10. Budgeted income statement

Answer:
1. F 6. O
2. O 7. F
3. O 8. O
4. F 9. F
5. O 10. O

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