Breakfast Anytime produces and sells eight different varieties of cereal. The company has eight marketing managers, each of whom is responsible for advertising one of the varieties. Historically, the company has budgeted advertising costs as 10% of each product’s anticipated revenues, and actual advertising costs have been very close to budgeted amounts, yielding very insignificant variances. In order to provide for a more efficient allocation of resources available for its advertising, Breakfast Anytime should
Answer (C) is correct.
A zero-based budget is a planning process in which each manager must justify a department’s entire budget each year. The budget is built from the base of zero each year. Since individual marketing managers are in charge of individual cereal lines, they need to produce their own budget to allocate resources to advertising. If managers need to defend the entire budget, unnecessary costs will be eliminated.
The board of directors is concerned that the budget committee has fallen into the practice of applying a flat 3% growth to the prior year performance, placing too much emphasis on the past and not focusing on the future opportunities and related activities required to achieve them. The board would like the committee to take a different approach: Evaluate the activities needed to meet the strategic goals of the company and allocate resources accordingly, requiring management to justify each function and associated costs. Which budget methodology is the board recommending?
Answer (C) is correct. Zero-based budgeting would be the most appropriate budget methodology because it requires management to justify each function and associated costs. Costs that cannot be justified will not be allocated to that unit.
Which of the following statements apply to the continuous budget methodology? I. The current financial forecast reflects the most recent monthly results and any material changes to the company’s outlook or economy. II. Forecasts are updated every few months, reassessing the company’s outlook several times a year. III. The decision-making process to develop the budget takes place during the fourth quarter of the prior year being budgeted.
Answer (A) is correct. The current financial forecast reflects the most recent monthly results and any material changes to the company’s outlook or economy, and forecasts are updated every few months, reassessing the company’s outlook several times a year. However, in continuous budgeting, the decision-making process to develop the budget takes place continuously, not just during the fourth quarter of the prior year being budgeted.
The purpose of project budgeting is to identify, evaluate, and select beneficial projects that
Answer (C) is correct.
A project budget consists of all the costs expected to attach to a particular
project, such as designing a new aircraft. Projects often require large
expenditures over their life cycles. The project budget displays expected
expenditures related to different parts of the organization, such as
engineering, marketing, etc.
Reaction, Inc., has prepared budgets for the next 5 months: May, June, July, August, and
September. As soon as May results are reported, Reaction will add October to their budget
plans. What type of budget system is Reaction using?
Answer (A) is correct.
This is an example of continuous budgeting. A continuous (rolling)
budget is one that is revised on a regular (continuous) basis. Reaction
will add October to their budget plan as soon as May results are reported.
Crown Construction is a new home builder. The company offers its customers the choice of
1 of 12 home designs on lots located in several developing areas. During its 15-year
existence, Crown created its annual budget by adjusting the prior year’s actual results for
changes in inflation as well as in projected volume. During this time, Crown’s profit margins
have been among the lowest of all of the local home builders. Ownership of Crown recently
changed. New management believes there has been significant unnecessary spending in
many areas of the company, although they do not know exactly where or to what extent
overspending occurred. To improve profitability, the type of budgeting system Crown’s new
management should implement is
Answer (D) is correct. Zero-based budgeting is a budget and planning process in which each manager must justify his or her department’s entire budget every budget cycle. This kind of budgeting would be best for Crown in order to improve profitability because it would allow the new management to identify where or to what extent overspending occurred.
Crossfield Furniture Outlet needs to expand its warehouse capacity and is concerned about how this project will impact the financial outlook. Crossfield will hire a contractor to perform the work. Because the company’s margins are small and cash is always tight, Crossfield will need to use a bank loan to finance the project. The budget for this project, which is expected to take 6 months, should include the contractor’s bid price plus which of the following? I. Interest expense on the bank loan. II. Incremental insurance expense. III. Incremental property tax expense.
Answer (D) is correct. A project budget consists of all the costs expected to attach to a particular project, such as the design of a new airliner or the building of a single ship. Therefore, the project’s budget should include the interest expense on the bank loan, the incremental insurance expense, and the incremental property tax expense.
The Jung Corporation’s budget calls for the following production:
Qtr 1 -- 45,000 units
Qtr 2 -- 38,000 units
Qtr 3 -- 34,000 units
Qtr 4 -- 48,000 units
Each unit of product requires three pounds of direct material. The company’s policy is to
begin each quarter with an inventory of direct materials equal to 30% of that quarter’s direct
material requirements. Budgeted direct materials purchases for the third quarter would be
Answer (A) is correct.
Beginning inventory should be 30,600 pounds (34,000 units of budgeted
sales × 3 pounds × 30%). Ending inventory should be 43,200 pounds
(48,000 units of budgeted sales for Quarter 4 × 3 pounds × 30%). Since
BI plus purchases minus EI equals Quarter 3 budgeted sales, purchases
must be 114,600.
30,600 + X – 43,200 = 3 × 34,000
X – 12,600 = 102,000
X = 114,600
Superior Industries’ sales budget shows quarterly sales for the next year as follows:
Company policy is to have a finished goods inventory at the end of each quarter equal to
20% of the next quarter’s sales. Budgeted production for the second quarter of the next year
Answer (C) is correct.
The finished units needed for sales (8,000), plus the units desired for
ending inventory (12,000 units to be sold in the third quarter × 20% =
2,400), minus the units in beginning inventory (8,000 units to be sold in
the second quarter × 20% = 1,600), equals budgeted production for the
second quarter of 8,800 units.
Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter and 66,000 units in the fourth quarter. Streeter usually maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be sold in the next quarter.
How many units should Streeter produce in the second quarter?
Answer (C) is correct. Streeter’s required production for the second quarter can be calculated as follows: Sales for quarter 72,000 Add: buffer for next quarter (84,000 × 50%) 42,000 Less: buffer from previous quarter (72,000 × 50%) (36,000) Required production 78,000