Budgeting Paper 11

1

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






2

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?






3

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.






4

The purpose of project budgeting is to identify, evaluate, and select beneficial projects that require






5

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?






6

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






7

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.






8

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






9

Superior Industries’ sales budget shows quarterly sales for the next year as follows:
Quarter Units
1 ......10,000
2 ......8,000
3 ......12,000
4 ......14,000
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 would be






10

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?






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