Hock_Budgeting

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Question 1 - CMA 1292 H1 - Budget Methodologies

When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost columnshould be based on the

A. Budget adjusted to the planned level of activity for the period being reported.B. Budgeted amount in the original budget prepared before the beginning of the year.

C. Budget adjusted to the actual level of activity for the period being reported.D. Actual amount for the same period in the preceding year.

A. The flexible budget is the budget developed for the actual level of output. The budget utilizing the planned level ofactivity is the static budget.

B. The flexible budget is the budget developed for the actual level of output. Therefore, a performance report usingflexible budgeting techniques would not be based on the budgeted amount in the original budget prepared before thebeginning of the year, because that is the static budget.

C. The flexible budget is the budget developed for the actual level of output. When preparing a performancereport, the actual results need to be compared to what the expected results were for the actual level ofproduction. The actual results need to be compared to the flexible budget.

D. The flexible budget is the budget developed for the actual level of output. Comparing actual performance with theactual amount for the same period in the preceding year, although useful, is not a flexible budgeting technique.

Question 2 - HOCK CMA P3A H32 - Supply Chain Management

Which of the following is not a benefit of Enterprise Resource Planning (ERP)?

A. It helps production management avoid having to determine what parts are necessary for assembly of its products.B. It facilitates day-to-day operations.C. It simplifies resource planning.

D. Operational costs are reduced.

A. This is not a true statement. A company using ERP software still needs to determine what parts arenecessary for assembly of its products. However, ERP automates the process of determining whatsub-assemply parts need to be ordered and when to place the order, so that the needed inventory can beordered at the proper times.

B. This is a benefit of ERP. Employees can gain access to real-time information needed to perform their jobs, and easyaccess by managers facilitates their decision-making and control over the factors of production.

C. This is a benefit of ERP. Senior management has access to the information it needs in order to do strategicplanning.

D. This is a benefit of ERP. Communication between and among departments is improved, leading to greater

production efficiencies and greater efficiency in planning and decision-making that can lead to lower costs.

Question 2 - HOCK CMA P3A H32 - Strategic Planning

Which of the following is not a benefit of Enterprise Resource Planning (ERP)?

A. It helps production management avoid having to determine what parts are necessary for assembly of its products.

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B. It facilitates day-to-day operations.C. It simplifies resource planning.D. Operational costs are reduced.

A. This is not a true statement. A company using ERP software still needs to determine what parts arenecessary for assembly of its products. However, ERP automates the process of determining whatsub-assemply parts need to be ordered and when to place the order, so that the needed inventory can be

ordered at the proper times.

B. This is a benefit of ERP. Employees can gain access to real-time information needed to perform their jobs, and easyaccess by managers facilitates their decision-making and control over the factors of production.

C. This is a benefit of ERP. Senior management has access to the information it needs in order to do strategicplanning.

D. This is a benefit of ERP. Communication between and among departments is improved, leading to greaterproduction efficiencies and greater efficiency in planning and decision-making that can lead to lower costs.

Question 3 - ICMA 10.P1.031 - Risk, Uncertainty and Expected Value

According to recent focus sessions, Norton Corporation has a "can't miss" consumer product on its hands. Salesforecasts indicate either excellent or good results, with Norton's sales manager assigning a probability of .6 to a goodresults outcome. The company is now studying various sales compensation plans for the product and has determinedthe following contribution margin data.

Contribution Margin

If sales are excellent andPlan 1 is adopted $300,000Plan 2 is adopted 370,000

If sales are good and

Plan 1 is adopted 240,000Plan 2 is adopted 180,000

On the basis of this information, which of the following statements is correct?

A. Plan 2 should be adopted because it is $10,000 more attractive than Plan 1.B. Plan 1 should be adopted because it is $8,000 more attractive than Plan 2.C. Either Plan should be adopted, the decision being dependent on the probability of excellent sales results.D. Plan 1 should be adopted because of the sales manager's higher confidence in good results.

A.

This is not the correct answer. Please see the correct answer for an explanation.

We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the ExamSuccess screen. Thank you in advance for helping us to make the HOCK study materialsbetter.

B.

This question requires the calculation of the expected value of choosing Compensation Plan 1 and the

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expected value of choosing Compensation Plan 2, and then selecting the plan with the higher expected value.The expected value of each compensation plan is a weighted average of the possible contribution marginsthat would result under it, using the probabilities of the sales results as the weights. The contribution marginis total revenue minus total variable expenses.

Regardless of which compensation plan is chosen, there is a 60% probability that sales will be good. Sincesales will be either good or excellent, then there must be a 40% probability (100% − 60%) that sales will be

excellent.

Under Plan 1, the contribution margin will be $300,000 if sales are excellent (40% probability) and $240,000 ifsales are good (60% probability). So the expected value of choosing Plan 1 is ($300,000 × 0.40) + ($240,000 ×0.60), which is $264,000.

Under Plan 2, the contribution margin will be $370,000 if sales are excellent (40% probability) and $180,000 ifsales are good (60% probability). So the expected value of choosing Plan 2 is ($370,000 × 0.40) + ($180,000 ×0.60), or $256,000.

The expected value of Plan 1, $264,000, is $8,000 greater than the expected value of Plan 2, $256,000, so Plan 1should be adopted.

C. The plan that should be adopted is the one with the higher expected value.

D. The plan that should be adopted is the one with the higher expected value.

Question 4 - ICMA 10.P1.010 - Planning and Budgeting Concepts

Jura Corporation is developing standards for the next year. Currently XZ-26, one of the material components, is beingpurchased for $36.45 per unit. It is expected that the component’s cost will increase by approximately 10% next yearand the price could range from $38.75 to $44.18 per unit depending on the quantity purchased. The appropriatestandard for XZ-26 for next year should be set at the

A. highest price in the anticipated range to insure that there are only favorable purchase price variances.B. lowest purchase price in the anticipated range to keep pressure on purchasing to always buy in the lowest pricerange.C. current actual cost plus the forecasted 10% price increase.D. price agreed upon by the purchasing manager and the appropriate level of company management.

A. Standards should never be set to result in favorable variances. To do that renders the standard setting processuseless from the beginning. Standards need to be based on expected reality, considering all appropriate factors.

B. Standards are set using either an authoritative process or a participative process. Standards based on anticipatedcosts may be a starting point for discussion using either process, but there is no absolute standard that should be usedin this situation. Setting a standard in order to keep pressure on an employee or group of employees is not aparticipative process. Furthermore, pressure to obtain the lowest price may encourage the purchase of excessinventory, which creates increased inventory carrying costs.

C. Standards are set using either an authoritative process or a participative process. Standards based on historicalcosts plus an expected price increase may be a starting point for discussion using either process, but there is noabsolute standard that should be used in this situation.

D. Discussions between relevant managers to determine the exact quantities required and the timing of thosepurchases will help determine what price level would be most appropriate for the standard. This is theparticipative method of standard setting, and it is more likely to be supported by the employees than anauthoritative method of standard setting.

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Question 5 - ICMA 10.P1.078 - Budget Methodologies

Prudent Corporation's budget for the upcoming accounting period reveals total sales of $700,000 in April and $750,000in May. The sales cash collection pattern is

20% of each month's sales are cash sales.5% of a month's credit sales are uncollectible.70% of a month's credit sales are collected in the month of sale.25% of a month's credit sales are collected in the month following the sale.

If Prudent anticipates the cash sale of a piece of old equipment in May for $25,000, May's total budgeted cash receiptswould be

A. $560,000.B. $735,000.C. $737,500.D. $702,500.

A. This is 25% of April's credit sales plus 70% of May's credit sales. However, Prudent also has cash sales of product

that will take place during May, and it also plans to sell the old equipment for cash during May.

B.

20% of sales are for cash. Therefore, 80% of sales are on credit. The sale of the old equipment is not includedin those percentages, because those percentages relate to sales of products. The equipment sale is an assetsale, and it is for cash. May cash receipts will consist of:25% of April credit sales: $700,000 × 0.80 × 0.25 $140,000

70% of May credit sales: $750,000 × 0.80 × 0.70 420,000

May cash sales: $750,000 × 0.20 150,000

Cash sale of equipment during May 25,000

Total cash receipts $735,000

C. This is 95% of May sales of $750,000 (in recognition of the 5% that will be uncollectible) plus the $25,000 to bereceived from the equipment sale. However, the 95% of May sales for which cash will be collected will not all becollected during May. Furthermore, some of the collections during May will be from April credit sales.

D.


We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materialsbetter.


Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details regardingKarmee's sales for the first 6 months of the coming year are as follows:

MonthEstimated

Monthly SalesType of

Monthly Sale

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January $600,000

All Months: Cash sales 20%Credit sales 80%

February 650,000March 700,000 April 625,000May 720,000June 800,000

Collection Pattern for Credit SalesMonth of sale 30%One month following sale 40%Second month following sale25%

Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventoryequal to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the monthfollowing the sale. The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales andare paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these areincurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is paidquarterly in January, April, July, and October. Property taxes are paid twice a year in April and October.

Annual Fixed Operating Costs

Advertising $720,000Depreciation 420,000Insurance 180,000Property taxes 240,000Salaries 1,080,000

The total cash disbursements that Karmee Company will make for the operating expenses (expenses other than thecost of goods sold) during the month of April will be

A. $420,000B. $290,000C. $255,000D. $385,000

A. This answer incorrectly includes depreciation. Depreciation is not a cash expenditure. See the correct answer for acomplete explanation.

B. This answer does not include variable expenses or advertising and it includes depreciation. See the correct answerfor a complete explanation.

C. This answer does not include variable expenses or advertising. See the correct answer for a complete explanation.

D. Operating expenses other that COGS paid in the month of April are: 10% of March's sales, the advertisingmonthly payment, monthly salaries, the quarterly insurance payment and the property tax payment madetwice a year. Depreciation is not a cash expense and is therefore not included in calculation. Thedisbursements are: $70,000 for variable operating expenses (March sales of $700,000 × 10%), $60,000 foradvertising ($720,000 ÷ 12), $90,000 for salaries ($1,080,000 ÷ 12), $45,000 for insurance ($180,000 ÷ 4), and

$120,000 for property taxes ($240,000 ÷ 2). The total amount of disbursements in April is $385,000.

Question 7 - HOCK CMA P3A H22 - Business Process Improvement

One of the key sources of competitive advantage is:

A. Taking advantage of, and being a follower in, competitors' product innovation.

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B. Maintaining average quality.C. Slow adoption of more efficient business practices.D. Responsiveness to customer needs.

A. This could detract from gaining and sustaining competitive advantage.

B. This could detract from gaining and sustaining competitive advantage.

C. This could detract from gaining and sustaining competitive advantage.

D. In analyzing why some companies outperform others, we see that it comes in great part from their pursuitof responsiveness to customers' needs and customer satisfaction.


One of the key sources of competitive advantage is:

A. Taking advantage of, and being a follower in, competitors' product innovation.

B. Maintaining average quality.C. Slow adoption of more efficient business practices.D. Responsiveness to customer needs.

A. This could detract from gaining and sustaining competitive advantage.

B. This could detract from gaining and sustaining competitive advantage.

C. This could detract from gaining and sustaining competitive advantage.

D. In analyzing why some companies outperform others, we see that it comes in great part from their pursuitof responsiveness to customers' needs and customer satisfaction.

Question 8 - CMA 1291 3.24 - Budget Methodologies

Information pertaining to Noskey Corporation's sales revenue is presented in the following table.

November

Year 1(Actual)

December Year 1

(Budget)

JanuaryYear 2

(Budget)Cash sales $80,000 $100,000 $60,000Credit sales 240,000 360,000 180,000Total sales $320,000 $460,000$240,000

Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% are

collected in the month of sale and the remainder in the month following the sale. Purchases of inventory are equal tonext month's sales and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in themonth of purchase, and the remainder are paid in the month following the purchase.

Noskey Corporation's budgeted total cash receipts in January Year 2 are

A. $299,400.B. $294,000.C. $240,000.D. $239,400.

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Birch Corporation has the following historical pattern on its credit sales.

70% collected in month of sale15% collected in the first month after sale

10% collected in the second month after sale

4% collected in the third month after sale

1% uncollectible

The sales on open account have been budgeted for the first 6 months of the year are as follows:

MonthSales On

Open AccountJanuary $70,000February 90,000March 100,000

April 120,000May 100,000June 90,000

The estimated total cash collections during the second calendar quarter from sales made on open account during thesecond calendar quarter would be

A. $288,800B. $310,000C. $306,900D. $262,000

A.

This is not the correct answer. Please see the correct answer for a complete explanation.


B. This is the amount of projected total sales in the second quarter, not the projected cash collections in the secondquarter from the total projected sales made in the second quarter.

C. This is the total projected sales during the second quarter multiplied by 99%. That is the total amount that will

ultimately be collected from sales made during the second quarter; however, it is not the amount that will be collectedduring the second quarter from sales made during the second quarter.

D.

April, May and June are the months of the second quarter. The projected cash collections during the secondcalendar quarter from sales made on open account during the second calendar quarter are:

70% of these three months' estimated credit sales, collected during the month of the sale;

15% of credit sales made during April and May, collected during May and June;

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10% of credit sales made during April, collected during June.

Mathematically, this looks like this: [0.70 × ($120,000 + $100,000 +$90,000)] + [0.15 × ($120,000 + $100,000)] +[0.10 × $120,000]. Doing the math, we get $217,000 + $33,000 + $12,000 = $262,000.

This problem can also be solved by calculating each month's cash collection and then adding the resultstogether.

Question 11 - CMA 1288 5.14 - Probability

Ron Bagley is contemplating whether to investigate a labor efficiency variance in the Assembly Department. It will cost$6,000 to undertake the investigation and another $18,000 to correct operations if the department is found to beoperating improperly. If the department is operating improperly and Bagley failed to make the investigation, operatingcosts from the various inefficiencies are expected to amount to $33,000. Bagley would be indifferent betweeninvestigating and not investigating the variance if the probability of improper operation is

A. 0.71.B. 0.60.C. 0.29.D. 0.40.

A. If the probability of improper operation "X" is 0.71, investigation is expected to be cost beneficial. Therefore, Bagleywould not be indifferent.

B. If the probability of improper operation "X" is 0.60, investigation is expected to be cost beneficial. Therefore, Bagleywould not be indifferent.

C. If the probability of improper operations "X" is 0.29, the investigation is not expected to be cost beneficial. Therefore,Bagley would not be indifferent.

D.

In order to determine this percentage, we must determine at what percentage of likelihood of error theexpected cost of the investigation is equal to the expected cost of not investigating. In case of investigation,total costs will be equal to the sum of the cost of investigation itself ($6,000) and the expected cost ofcorrection ($18,000X), where "X" is the probability of improper operations. The expected cost of not doing aninvestigation is $33,000X. Equating both sides would allow us to find X, or the probability at which it wouldmake no difference to Bagley whether he investigates or not.

Our equation is:

33,000X = 6,000 + 18,000X.

To solve for X,

(1) Subtract 18,000X from both sides of the equation:

15,000X = 6,000

(2) Divide both sides of the equation by 15,000:

X = 0.40

If the probability of an improper operation is 40%, Bagley is indifferent as to whether or not he investigates.

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Question 12 - ICMA 10.P1.001 - Strategic Planning

Cerawell Products Company is a ceramics manufacturer that is facing several challenges in its operations. Which oneof the following is subject to the least control by the management of Cerawell in the current fiscal year?

A. A competitor has achieved an unexpected technological breakthrough that has given them a significant qualityadvantage, and has caused Cerawell to lose market share.B. Vendors have asked that the contract price for the goods they supply to Cerawell be renegotiated and adjusted forinflation.C. Experienced employees have decided to terminate their employment with Cerawell and go to work for thecompetition.D. A new machine that was purchased this year has not helped reduce Cerawell’s unfavorable labor efficiencyvariances.

A. Management cannot control what happens in another company. This would be an environmental issue thatmay propose a threat and should be taken into consideration, but it is not something that is controllable bymanagement.

B. Management would be actively involved in contract negotiations with suppliers and would have control over theterms agreed upon.

C. While employees are certainly an important part of the internal operations of any company, if they choose to leave,that is not something management can control. However, management does have some control over employeerelations including: salary, benefits, and working conditions.

D. Management would have control over this internal matter. The use of a new machine that has not providedefficiencies that were anticipated should be evaluated for possible operational changes, employee training needs, orprocess modifications.


Playtime Toys estimates that it will sell 200,000 dolls during the coming year. The beginning inventory is 12,000 dolls;the target ending inventory is 15,000 dolls. Each doll requires two shoes which are purchased from an outside supplier.The beginning inventory of shoes is 20,000; the target ending inventory is 18,000 shoes. The number of shoes thatshould be purchased during the year is

A. 398,000 shoes.B. 404,000 shoes.C. 402,000 shoes.D. 396,000 shoes.

A. This answer results from using the number of dolls to be sold instead of the number to be produced in calculatingthe number of shoes needed.

B.

The question tells us that beginning finished goods inventory of dolls on hand is 1,2000 dolls and the targetending units of finished dolls in inventory is 15,000 dolls. The company plans to sell 200,000 dolls. Theinventory formula is:

Beginning Inventory + Units Produced/Purchased − Units Sold/Used = Ending Inventory

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Letting P stand for Units Produced, we have the following formula:

Beginning Inventory of 12,000 finished dolls + P − 200,000 dolls sold = Ending Inventory of 15,000 dolls.

Solving for P, we get P = 203,000 dolls.

Since each doll produced requires 2 shoes, the total shoes required for production of 203,000 dolls = 203,000

× 2 = 406,000 shoes.

We now use the shoes needed for current production along with the beginning and ending inventories ofshoes to calculate the number of shoes that will need to be purchased. We use the same inventory formula:Beginning Inventory + Units Produced/Purchased − Units Sold/Used = Ending Inventory.

Letting P stand for Purchases of shoes, we have the following formula:

Beginning Inventory of 20,000 shoes + P − 406,000 shoes Used in Production = Ending Inventory of 18,000shoes.

Solving for P, we get P = 404,000 shoes.

C.This is not the correct answer. Please see the correct answer for an explanation.


D. This answer results from reversing the beginning and ending inventories when calculating both the number of dollsto be produced and the number of shoes to be purchased.


Butteco has the following cost components for 100,000 units of product for the year.Raw materials $200,000Direct labor 100,000Manufacturing overhead 200,000Selling/administrative expense 150,000

All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrativeexpenses. The total costs to produce and sell 110,000 units are

A. $650,000.B. $715,000.C. $495,000.D. $695,000.

A. This is the cost at a production level of 100,000 units.

B. This answer assumes no fixed costs.

C. This is the variable cost of production only.

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D. In order to solve this problem we need to determine a total fixed cost and the variable cost per unit. Thetotal fixed costs are $200,000 ($100,000 each of manufacturing and selling costs). The total variable costs inthe 100,000 unit budget are $450,000 ($200,000 raw materials + 100,000 direct labor + $100,000 manufacturingoverhead + $50,000 selling/administrative expense). This gives a standard variable cost of $4.50 per unit.Therefore, to produce 110,000 units the company will incur $495,000 in variable costs ($4.50 × 110,000 units)plus $200,000 in fixed costs for a total of $695,000.

Question 15 - HOCK CMA.P1A5.06 - Top-Level Planning and Analysis

Pro forma financial statements are used within a company for various purposes. They are not used for

A. comparison with actual results for performance reporting in order to determine employee bonuses.B. "what if" analysis, to forecast the effect of a proposed change.C. determining whether the company will be in compliance with required covenants on its long-term debt.D. determining the company's future needs for external financing.

A.

Pro forma financial statements are not used for comparison with actual results in order to determine employeebonuses. Comparing actual results to planned results for the purpose of performance reporting is done bycomparing the actual to either the flexible budget or the master budget. A pro forma financial statement maybe prepared as a part of the formal planning process that eventually results in the master budget or theflexible budget. Or pro forma statements may be prepared after the formal budget for the year has beenadopted, if the company is considering an activity that was not foreseen before the formal budget wasadopted. And if a pro forma statement has been prepared for an activity being considered, actual results willprobably be compared with the pro forma statement in order to determine whether the company's objectiveswere met. But pro forma statements are not used for formal performance reporting to determine employeebonuses.

B. One of the purposes of pro forma financial statements is for doing "what if" analysis, to forecast the effect of a

proposed change such as a price increase that management anticipates will reduce the demand for the product.

C. One of the purposes of pro forma financial statements is determining whether the company will be in compliancewith required covenants on its long-term debt.

D. One of the purposes of pro forma financial statements is determining in advance what the company's futurefinancing needs will be.


Barnes Corporation expected to sell 150,000 board games during the month of November, and the company's master

budget contained the following data related to the sale and production of these games:Revenue $2,400,000Direct materials 675,000Direct labor 300,000Variable overhead 450,000Contribution $ 975,000Fixed overhead 250,000Fixed selling/administration 500,000Operating income $ 225,000

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Actual sales during November were 180,000 games. Using a flexible budget, the company expects the operatingincome for the month of November to be

A. $270,000.B. $225,000.C. $420,000.D. $510,000.

A. This is calculated using the static budget operating income per unit of $1.50 ($225,000 ÷ 150,000) and multiplied bythe actual level of sales of 180,000. This gives the operating income of $270,000 ($1.5 × 180,000), but it ignores thefact that fixed costs do not vary with the level of activity.

B. This is the static budget operating income not adjusted for the actual level of output.

C.

The flexible budget is the budget developed for the actual achieved level of activity rather than the masterbudget level. To compute the flexible budget we must use the standard costing system, i.e. we need todetermine the budgeted selling price, budgeted variable cost per unit, and budgeted total amount of fixedcosts.

The budgeted selling price minus the budgeted cost per unit equal the contribution per unit, so we can usethe budgeted contribution per unit and need not calculate the first two items. The budgeted contribution perunit is $6.50 ($975,000 ÷ 150,000). Fixed costs for the flexible budget are the same as for the static budget,since fixed costs do not fluctuate with the level of output.

The flexible budget contribution margin for sales of 180,000 is $1,170,000 ($6.50 × 180,000). Subtracting thefixed costs from the expected contribution margin for the actual level of sales, we arrive at a flexible budgetoperating income of $420,000 ($1,170,000 − $250,000 − $500,000 = $420,000).

D. This answer results from incorrectly treating variable overhead costs as fixed costs. See the correct answer for acomplete explanation.

Question 17 - CMA 1294 4.28 - Learning Curves

Seacraft Inc. received a request for a competitive bid for the sale of one of its unique boating products with a desiredmodification. Seacraft is now in the process of manufacturing this product but with a slightly different modification foranother customer. These unique products are labor intensive and both will have long production runs. Which one of thefollowing methods should Seacraft use to estimate the cost of the new competitive bid?

A. Expected value analysis.B. Regression analysis.C. Continuous probability simulation.D. Learning curve analysis.

A. Expected value analysis is an effective method to use in conditions of risk. It is calculated by multiplying eachpossible outcome by related probability added up together. In other words it is weighted average of possible outcomes.It is used to select the best of given alternatives. Expected value analysis is not the best method for Seacraft to use toestimate the cost of the new competitive bid.

B.

Regression analysis is a quantitative method that is used to find an equation for the linear relationships between oramong variables. That result can be used to draw conclusions and make forecasts. To use regression analysis,historical data is required for the variable that we are forecasting or for the variables that are causal to this variable. If

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historical data is not available, regression analysis cannot be used. Even when historical data is available, if there hasbeen a significant change in the conditions surrounding that data, its use is questionable for predicting the future.Regression analysis is not the best method for Seacraft to use to estimate the cost of the new competitive bid.

C.

Simulation is a process of changing key variables to determine the possible change in the optimal solution because of

changes in the variables. It is used to define how sensitive the project (sales for example) is to a change in thosevariables. Continuous probability simulation is not the best method for Seacraft to use to estimate the cost of the newcompetitive bid.

D. Learning curve analysis states that the more experience people have with doing a task, the more efficientthey become in doing that task. As production involves intensive labor usage, learning curve analysis isappropriate to use to use to estimate the cost of the new competitive bid. Seacraft is placing a bid to producea customized, unique product. The company has had previous experience in producing a similar product foranother customer. Because of Seacraft's previous experience, its costs to produce a similar product will beless time consuming and consequently lower than if the company had never produced this type of productbefore. Seacraft can therefore set its bid lower because of its anticipated lower costs.

Question 18 - ICMA 10.P1.018 - Learning Curves

Which one of the following techniques would most likely be used to analyze reductions in the time required to performa task as experience with that task increases?

A. Regression analysis.B. Learning curve analysis.C. Sensitivity analysis.D. Normal probability analysis.

A. Regression analysis is a statistical technique used to find relationships between variables in order to predict futurevalues.

B. Learning curve analysis is be used to analyze reductions in the time required to perform a task asexperience with that task increases.

C. Sensitivity analysis is used to determine how an expected result can be expected to change if factors that wereinvolved in predicting the result change.

D. "Normal probability analysis" probably refers to the concept of "normal distribution," since there is no such thing as"normal probability analysis." A normal distribution in statistics is a frequency distribution that is in the shape of aclassic bell curve.


Netco's sales budget for the coming year is as follows.ItemVolume in UnitsSales PricesSales Revenue

1 200,000 $50 $10,000,0002 150,000 $10 1,500,0003 300,000 $30 9,000,000

Total Sales Revenue: $20,500,000

Items 1 and 3 are different models of the same product. Item 2 is a complement to Item 1. Past experience indicates

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that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. Netco is considering a 10%price increase for the coming year for Item 1, which will cause sales of Item 1 to decline by 20%, while simultaneouslycausing sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item 1, total sales revenue willdecrease by

A. $1,050,000B. $550,000

C. $850,000D. $750,000

A.

To answer this, we need to work out a revised budgeted revenue figure and compare it with the originalbudgeted revenue as given in the problem. The difference is the answer, as follows:Product Quantity Price Revenue

1 (200,000 × 0.80)($50 × 1.1) $8,800,000

2 (150,000 × 0.80) $10 1,200,000

3 (300,000 × 1.05) $30 9,450,000

$19,450,000

Original Revenue: 20,500,000

Decrease: $1,050,000

B.



C. This answer results from reducing Product 1's quantity by 10% instead of 20% and from not changing the price forProduct 1.

D. This answer results from not calculating the reduced sales of Product 2. The problem states that Product 2 is acomplement of Product 1, and that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant.Therefore, if the quantity sold of Product 1 decreases, the quantity sold of Product 2 will decrease by a proportionatelyequal amount.


Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly's

operations are as follows:Sales are budgeted at $220,000 for December year 1 and $200,000 for January year 2.

Collections are expected to be 60% in the month of sale and 38% in the month following the sale.

Gross margin is 25% of sales.

A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale and 20%is purchased in the month of sale. Payment for merchandise is made in the month following the purchase.

Other expected monthly expenses to be paid in cash are $22,600.

Annual depreciation is $216,000.

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Below is Kelly Company's statement of financial position at November 30, year 1.Assets Cash $22,000 Accounts receivable(net of $4,000 allowance for uncollectible accounts) 76,000Inventory 132,000Property, plant, and equipment(net of $680,000 accumulated depreciation) 870,000Total assets $1,100,000

Liabilities and Stockholders' Equity Accounts payable $162,000Common stock 800,000Retained earnings 138,000Total liabilities and stockholders' equity $1,100,000

The budgeted income (loss) before income taxes for December year 1 is

A. $10,000.B. $32,400.C. $28,000.

D. Some amount other than those given.

A.

The gross margin is $55,000 ($220,000 × 25%).

Bad debt expense is 2% of the budgeted $220,000 in sales for December, Year 1. Since no information is giventhat would permit use of the percentage of receivables method of calculating bad debt expense, we assumethe company uses the percentage of sales method. Sales of $220,000 are given in the problem, and the 2% inbad debts can be calculated. Since collections are expected to be 60% in the month of sale and 38% in themonth following the sale, that leaves 2% of sales that are uncollectible. Therefore, bad debt expense forDecember is $220,000 × 0.02, or $4,400.

Annual depreciation is given as $216,000, so December depreciation is 1/12 of that, or $18,000.

Subtracting other expected monthly expenses of $22,600, December bad debt expense of $4,400 andDecember depreciation of $18,000 from the gross margin of $55,000, leaves budgeted net income beforeincome taxes of $10,000.

B. This amount does not consider bad debt and depreciation expenses. See the correct answer for a completeexplanation.

C. This amount does not consider depreciation expenses. See the correct answer for a complete explanation.

D. The correct amount is given as one of the choices.

Question 21 - CMA 685 4.19 - Forecasting Techniques

Cascade Company had sales of $300,000 in 20X0 and the price index for its industry is expected to rise from 300 in20X0 to 320 in 20X1. The level of sales that Cascade must reach in 20X1 in order to achieve a real growth rate of 20%is

A. $360,000B. $384,000

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C. $320,000D. $337,500

A. This is $300,000 × 1.20, which would be the increased revenue if the price index had remained the same and thesales revenue growth came only from an increase of 20% in the volume of sales. The increase in the price index mustbe included in order to determine the sales that will be required to achieve a real growth rate of 20%.

B. The price index indicates that the company's sales will increase from $300,000 to $320,000 in value simplybecause of an increase in prices and not because of an increase in quantity sold ($300,000 × 320 ÷ 300).Therefore, sales will need to increase by 20% of $320,000 in order to have a real 20% increase. 20% of $320,000is $64,000. Therefore, in order to have real growth of 20%, sales will need to increase to $384,000 in 20X1.

An alternate way of calculating the correct answer of $384,000 (after finding $320,000 as the level of salesrevenue if sales volume remains level while the price index increases) is to multiply $320,000 by 1 + thepercentage of increase, or 1.20.

C. This answer is simply the increase in sales that will occur if the sales volume remains the same. This will occursimply because of an increase in the price level. In order to achieve a 20% real growth rate, the sales will need toincrease by 20% in constant dollar terms.

D.

This answer results from an incorrect calculation of the sales revenue that would result from maintaining the samevolume of sales while the price index increases. $300,000 × 300 ÷ 320 = $281,250. When $281,250 is multiplied by1.20 to calculate the revenue with 20% increase in sales volume, the result is $337,500.

$281,250 is lower than $300,000, and that would not occur if sales volume were to remain the same while the priceindex increased. Revenue would have to increase instead of decreasing.


Rainbow Inc. recently appointed Margaret Joyce as vice president of finance and asked her to design a new budgetingsystem. Joyce has changed to a monthly budgeting system by dividing the company’s annual budget by twelve. Joycethen prepared monthly budgets for each department and asked the managers to submit monthly reports comparingactual to budget. A sample monthly report for Department A is shown below.

Rainbow, Inc.Monthly Report for Department A

Actual BudgetVarianceUnits 1,000 900 100FVariable production costsDirect material $2,800 $2,700 $100UDirect labor 4,800 4,500 300UVariable factoy overhead 4,250 4,050 200UFixed costs

Depreciation 3,000 2,700 300UTaxes 1,000 900 100UInsurance 1,500 1,350 150U Administration 1,100 990 110UMarketing 1,000 900 100UTotal costs $19,450$18,090 $1,360U

This monthly budget has been imposed from the top and will create behavior problems. All of the following are causesof such problems except:

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A. The use of a flexible budget rather than a fixed budget.B. Top management's authoritarian attitude toward the budget process.C. The lack of consideration for factors such as seasonality.D. The inclusion of noncontrollable costs such as depreciation.

A.

The use of a flexible budget rather than a fixed budget is not a cause of behavior problems. The waymanagement chooses to develop the budget and the way management chooses to use the budget can becauses of behavior problems.

When senior management imposes the budget on employees without receiving any input from the employeeswho will be responsible for achieving the budget, this causes a lack of motivation in the employees becausethey don't see the budget as "theirs." When managers are held responsible for costs that they have no controlover, that is demotivating as well. Furthermore, just dividing annual budget amounts by 12 and expectingmanagers to account for their performance against the budget every month puts the managers in animpossible situation because it does not incorporate normal seasonal fluctuations that managers cannotcontrol. All of those things will create behavior problems.

When a flexible budget is used, variable items in the budget are adjusted to actual activity (production and

sales) levels by multiplying per unit budgeted amounts by the actual activity achieved in units. This ensuresthat the focus is on variances due to causes other than the volumes of output and sales. Use of a flexiblebudget does not guarantee that the budget will not be imposed in an authoritarian manner or that managerswill not be held responsible for costs that they cannot control. Use of a flexible budget does not, by itself,prevent behavior problems caused by those things. But use of a flexible budget also does not, by itself, causebehavior problems.

B. When workers feel that they are being dictated to, they are less likely to buy into the budget. An attitude of"Management didn’t ask for or respect my opinion, so why should I respect their wishes?" will lead to morale problemsas well as increased unfavorable budget variances.

C. Many companies experience seasonal demand for their products and this can easily be built into a budget. Bystraight lining the line items, some of the months will reflect significant unfavorable variances while other months will bedecidedly favorable. These swings can hide true budgetary problems or opportunities as variances will be brushed off

as resulting from seasonal fluctuations.

D. The inclusion of depreciation in and of itself isn't the problem. But depreciation is not controllable by the departmentmanagement in most cases, because decisions on purchases of fixed assets are usually made at a higher level.Department managers should not be held accountable for items beyond their control – in this case, that is likely all ofthe fixed costs.


One of the steps in the the strategic planning process is analyzing external factors in order to identify the organization'sopportunities and threats. Which of the following is not a part of external analysis?

A. Analysis of the national environment in which the company operates.B. Analysis of the macroenvironment.C. Examination of the industry in which the company operates.D. Identification of the company's strengths and weaknesses.

A. Analysis of the national environment in which the company operates is a part of external analysis. Analyzing thenational environment includes assessing domestic and international political risk and the impact of globalization oncompetition within the industry.

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B. Analysis of the macroenvironment is analysis of the wider environment in which the company operates. This is apart of external analysis. Analysis of the macroenvironment includes macroeconomic factors such as inflation and thelabor market, social factors such as environmental issues, and government, legal, international and technologicalfactors that affect the industry and the company.

C. Examination of the industry in which the company operates is a part of external analysis. The industry analysisinvolves assessing the company's industry, the company’s competitive position in the industry, and the competitive

positions of its major rivals. The nature of the industry, the stage the industry is in, the dynamics and the history are allpart of this analysis.

D. Identification of the company's strengths and weaknesses is a part of internal analysis, not externalanalysis. Strengths lead to superior performance and weaknesses lead to inferior performance in efficiency,quality, innovation, and customer responsiveness.

Question 24 - CMA 692 4.4 - Risk, Uncertainty and Expected Value

The expected monetary value of an event

A. Is the profit forgone by not choosing the best alternative.B. Is equal to the payoff of the event times the probability the event will occur.C. Is the absolute profit from a particular event.D. Cannot be computed when there is uncertainty associated with the event.

A. This is the definition of opportunity costs.

B. Expected value is calculated by multiplying each projected outcome by its corresponding probability andadding the products together. In other words, expected value is the weighted average of probable outcomes.

C. Expected value is the weighted average of the probable outcomes.

D. The expected monetary value of an event can be computed when there is uncertainty associated with the event.


Decisions are frequently classified as those made under certainty and those made under uncertainty. Certainty existswhen

A. The probability of the event is less than 1.0.B. The standard deviation of an event is greater than zero.C. There is absolutely no doubt that an event will occur.D. There is more than one outcome for each possible action.

A. The probability of an event under conditions of certainty is 1.0, not less than 1.0.

B. The standard deviation of a distribution is expressed in the same type of units as the distribution is expressed in.That is, if the distribution is a distribution of possible rates of return (i.e., percentages), one standard deviation will be arate of return, or percentage, amount. If the distribution is a possible distribution of units such as sales volume, onestandard distribution will be a number of units sold. Absolute certainty would exist only if the standard deviation of theevent were exactly zero.

C. When there is no doubt that an event will occur, the probability of the event is 1.0 or 100%, which happensonly under a condition of absolute certainty. Under conditions of certainty, conditions are deterministic and

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known and the probability is either 1.0 or 100% (event occurs) or 0% (event does not occur).

D. More that one outcome is not a characteristic of the conditions of certainty.

Question 26 - ICMA 13.P1.007 - Forecasting Techniques

Sunrise Corporation's actual sales for May were $22,000,000, a result $600,000 greater than projected. Actual salesfor June totaled $22,500,000. Using exponential smoothing with a smoothing factor (alpha) of 0.7, Sunrise's projectedsales for July would be

A. $22,476,000.B. $22,296,000.C. $21,820,000.D. $21,856,000.

A.



B.

The formula to calculate a forecast using exponential smoothing is

Ft+1 = α Yt + (1 − α ) Ft

Where:Ft+1 =forecast for the next period

Yt =actual value for period t

Ft =forecasted value for period t

α =smoothing constant (0-1)

To calculate forecasted sales for July, we first need to calculate forecasted sales for June, because that figureis needed to calculate forecasted sales for July.

June forecasted sales = (0.7 × $22,000,000) + (0.3 × $21,400,000) = $21,820,000.

July forecasted sales = (0.7 × $22,500,000) + (0.3 × $21,820,000) = $22,296,000.

C. This is the forecasted sales for June.

D. This answer results from reversing the 0.7 smoothing constant and (1 − 0.7) in the exponential smoothing formula.


An advantage of incremental budgeting when compared with zero-base budgeting is that incremental budgeting

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A. Accepts the existing base as being satisfactory.B. Eliminates the need to review all functions periodically to obtain optimum use of resources.C. Eliminates functions and duties that have outlived their usefulness.D. Encourages adopting new projects quickly.

A. Zero-based budgeting is the budgeting method in which the current year's budget is prepared without anyreference to, or use of, the prior period's budget or actual amounts. Incremental budgeting assumes that the

previous period's budgeted or actual results are satisfactory, and the budget is calculated by adjusting theprevious period budgeted or actual amount by a number, for example 1.1, to allow for changes planned for thenew budgeting period. Thus, it is easier to prepare an ncremental budget and less managerial effort isconsumed than when the budget is prepared under the ZBB concept.

B. Periodic review of business functions is required regardless the type of budget development approach used.

C. This is an advantage of zero-based budgeting, not incremental budgeting.

D. There is no difference of new project treatment under both of these budget development approaches.


Which one of the following is not an advantage of a participatory budgeting process?

A. Coordination between departments.B. Communication between departments.C. Goal congruence.D. Control of uncertainties.

A. This is an advantage of participatory budgeting.

B. This is an advantage of participatory budgeting.

C. This is an advantage of participatory budgeting.

D. Under any budgeting process, there will always be uncertainties that cannot be estimated or controlled, andthis will be true with a participatory budgeting process as much as with any other type of budgeting process.


The College Honor Society sells hot pretzels at the home football games.

The frequency distribution of the demand for pretzels per game is presented as follows:Sales Volume Probability

2,000 pretzels 0.103,000 pretzels 0.154,000 pretzels 0.205,000 pretzels 0.356,000 pretzels 0.20

The pretzels are sold for $1.00 each, and the cost per pretzel is $0.30. Any unsold pretzels are discarded because theywill be stale before the next home game.

The conditional profit per game of having 4,000 pretzels available and selling all 4,000 pretzels is

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A. $2,800.B. Some amount other than those given.C. $2,100.D. $1,200.

A.

The meaning of the word "conditional" in "conditional profit" is similar to the meaning of the word"conditional" in "conditional probability." The conditional probability of two events is the probability that thesecond event will occur when it is known that the first event has already occurred. Conditional profit isconditional because a certain amount of profit (or loss) is associated with each possible event, such aspurchasing a certain amount of inventory and selling a certain amount of inventory. The number of pretzelspurchased (4,000) and thenumber of pretzels sold (also 4,000) are both known. The profit associated with thatlevel of purchase and that level of sales is the conditional profit.

The first event is the purchase of 4,000 pretzels. So given that we know that 4,000 pretzels have beenpurchased, what is the profit from that course of action if demand is 4,000 pretzels? In other words, in thisproblem, there are actually two conditions that are known: (1) 4,000 pretzels are supplied, and (2) demand is4,000 pretzels. Since the amount supplied is given and the amount demanded is given, the frequencydistribution of the demand for pretzels is irrelevant. The probability of having 4,000 pretzels to sell is 100%.The probability of selling all 4,000 pretzels is also 100%.

If we assume that all 4,000 pretzels that are purchased are sold at $1.00 each and the cost per pretzel is $0.30,the profit will be ($1 − $0.30) × 4,000 = $2,800.

B. The correct answer is given. See the correct answer for a complete explanation.

C. This answer assumes that only 3,000 pretzels are sold at $1.00 each, and the cost of each sold pretzel is $0.30each. However, 4,000 pretzels are sold.

D. This is the profit if 4,000 pretzels are available but only 3,000 are sold. See the correct answer for a completeexplanation.

Question 30 - CMA 1295 H8 - Planning and Budgeting Concepts

The process of creating a formal plan and translating goals into a quantitative format is

A. Budget manual preparation.B. Job-order costing.C. Budgeting.D. Process costing.

A. A budget manual details the budgeting process.

B. Job-order costing is the method by which all of the costs associated with a specific job (or client) are accumulatedand charged to that job (or client). The costs are accumulated on what is called a job-cost sheet.

C. A budget is a realistic plan for the future expressed in quantitative terms.

D. Process costing is the method by which costs are assigned to individual products when the products are all relativelysimilar (homogeneous) and are mass-produced.

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When budgeting, the items to be considered by a manufacturing firm in going from a sales quantity budget to aproduction budget would be the

A. Expected change in the quantity of work-in-process inventories.B. Expected change in the quantity of finished goods and raw material inventories.C. Expected change in the availability of raw material without regard to inventory levels.D. Expected change in the quantity of finished goods and work-in-process inventories.

A. The expected change in the level of finished goods inventories should be considered as well in the development ofthe production budget.

B. The expected change in the work-in process inventory level, not the raw materials inventories levels should beconsidered in determining the production budget.

C. The existing levels of inventories of work-in-process and finished goods are both considered in the determination ofproduction levels.

D. To decide what quantity should be manufactured during a period given the amount of sales for the period,

the levels of finished goods inventory and work-in-process inventories should also be considered.


Daffy Tunes manufactures a toy rabbit with moving parts and a built-in voice box. Projected sales in units for the next 5months are as follows:Month Sales in Units

January 30,000February 36,000March 33,000 April 40,000May 29,000

Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes arepurchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit, and variable overhead cost is$.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month. Daffy's policy is tomanufacture 1.5 times the coming month's projected sales every other month, starting with January (i.e.,odd-numbered months) for February sales, and to manufacture 0.5 times the coming month's projected sales inalternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to otherproducts as needed during the even-numbered months.

The unit production budget for toy rabbits for January is

A. 14,500 units.

B. 45,000 units.C. 16,500 units.D. 54,000 units.

A. This is the budgeted production for April.

B. The level of production needs to be based on the following month projected sales, not on the current month's sales.

C. This is the budgeted production for February.

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D. This is a very long question, but with only a few important pieces of information. In January, the productionwill be equal to 1.5 times the expected sales in February. Expected February sales are 36,000, so in Januarythe company will produce 54,000 units.


Of the following items, the one item that would not be considered in evaluating the adequacy of the budgeted annualoperating income for a company is

A. Industry average for earnings on sales.B. Internal rate of return.C. Earnings per share.D. Price-earnings ratio.

A. The industry average for earnings on sales is a financial performance measure and can be used to measure theadequacy of the budgeted annual operating income.

B. The internal rate of return is used to evaluate investment decisions and involves the time value of money.IRR represents the discount rate at which the net present value of an investment is equal to zero. IRR is notused to evaluate the adequacy of budgeted operating income.

C. Earning per share represents a financial performance measure and can be used to measure the adequacy of thebudgeted annual operating income.

D. The price-earnings ratio is a financial performance measure and can be used to measure the adequacy of thebudgeted annual operating income.


Krouse Company is in the process of developing its operating budget for the coming year. Given below are selecteddata regarding the company's two products, laminated putter heads and forged putter heads, that are sold throughspecialty golf shops. Putter Heads Forged LaminatedRaw materials:Steel 2 pounds @ $5/pound 1 pound @ $5/poundCopper None 1 pound @ $15/poundDirect labor 1/4 hour @ $20/hour 1 hour @ $22/hour Expected sales (units) 8,200 2,000Selling price per unit $30 $80Ending inventory target (units) 100 60

Beginning inventory (units) 300 60Beginning inventory (cost) $5,250 $3,120

Manufacturing overhead is applied to units produced on the basis of direct labor hours. Variable manufacturingoverhead is projected to be $25,000, and fixed manufacturing overhead is expected to be $15,000.

The estimated cost to produce one unit of the laminated putter head is

A. $62.B. $52.C. $46.

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D. $42.

A. This amount includes applied overhead in the amount of $20, which is total overhead of $40,000 divided by the2,000 total units to be produced of Laminated Putter Heads. This means that all of the overhead is being applied to theLaminated Putter Heads and none to the Forged Putter Heads. The total overhead needs to be allocated to bothproducts on the basis of direct labor hours used by each product.

B.

We need to (1) determine the overhead application rate to be used, (2) calculate the amount of overhead to beapplied to each unit of laminated putter heads, and then (3) use that along with the other information given ondirect materials and direct labor cost to calculate the total cost for one laminated putter head.

(1) Determine the overhead application rate: We will use a combined overhead application rate (variable andfixed OH), since the problem does not give enough information to split it out. Since the overhead is to beapplied to both products, we must have production amounts for both products in order to determine theapplication rate per hour of direct labor to be used in producing both products.

(1a) Calculate the number of units to be manufactured of each product: The inventory equation is BeginningInventory in Units + Manufactured Units − Sold Units = Ending Inventory in Units

Forged: 300 + Manufactured Units − 8,200 = 100. Manufactured Forged Units = 8,000.

Laminated: 60 + Manufactured Units − 2,000 = 60. Manufactured Laminated Units = 2,000.

(1b) Calculate the number of direct labor hours required for production of both products:

Forged: 8,000 units × 1/4 hour per unit = 2,000 hours.

Laminated: 2,000 units × 1 hour per unit = 2,000 hours.

Total number of direct labor hours: 2,000 + 2,000 = 4,000.

(2) Calculate the amount of overhead to be applied to each unit of Laminated:

Total overhead of $25,000 variable plus $15,000 fixed = $40,000. $40,000 divided by the 4,000 total number ofdirect labor hours = $10 per direct labor hour.

Each unit of Laminated requires 1 hour of direct labor. Therefore, the amount of overhead to be applied toeach unit of Laminated will be $10 × 1, or $10.

(3) Calculate the total cost for one Laminated Putter Head:Raw materials:

1 pound steel @ $5/pound $ 5

1 pound copper @ $15/pound 15

Direct labor:

1 hour @ $22/hour 22

Overhead:1 direct labor hour @ $10/DLH 10

Total $52

C. This amount includes applied overhead in the amount of $4 per unit, which is total overhead of $40,000 divided bythe 10,000 total units to be produced. However, the problem indicates that overhead should be based on direct laborhours used, and the two products do not require the same number of direct labor hours to manufacture. The number ofhours required to produce each unit provides the basis for overhead allocation.

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D. This is the material and labor cost for a laminated putter, but it does not include any applied overhead.


Which one of the following reasons is not a significant reason for planning in an organization?

A. Forcing managers to consider expected future trends and conditions.B. Promoting coordination among operating units.C. Developing a basis for controlling operations.D. Monitoring profitable operations.

A. In the planning process managers need to consider future trends and conditions and this will assist the company intheir planning for, and potentially avoiding, negative events in the future.

B. The coordination of efforts between operating units is a reason for planning because planning helps make certainthat everyone is working towards the same goal.

C. Without a plan it is very difficult to control, so this is a reason for planning.

D. Monitoring is a control function, and not a planning function. Though monitoring is very important to thecompany, it is not a reason for planning.


Philip Enterprises, distributor of compact disks (CDs), is developing its budgeted cost of goods sold for 2013. Philip hasdeveloped the following range of sales estimates and associated probabilities for the year:

Sales Estimated Probability$60,000 25%

85,000 40%100,000 35%

Philip's cost of goods sold averages 80% of sales. What is the expected value of Philip's 2013 budgeted cost of goodssold?

A. $67,200B. $68,000C. $84,000D. $85,000

A. Cost of goods sold averages 80% of sales. In order to determine the expected value of cost of goods sold,we first need to calculate the expected value for sales. Cost of goods sold will be equal to 80% of the sales

value. The expected sales can be calculated by multiplying each of the possible outcomes by the probabilitythat it will occur and adding the products together. When we do this, we get $84,000 as the expected sales[($60,000 × 0.25) + ($85,000 × 0.4) + ($100,000 × 0.35)]. The expected value of cost of goods sold is 80% of this,or $67,200.

B. $68,000 is the cost of goods sold calculated using the sales estimate with the highest probability level.

C. $84,000 is the expected value for sales in 2013. The problem asks for the expected value of Philip's budgeted costof goods sold.

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D. $85,000 is the sales estimate with the highest probability level. The problem asks for the expected value of Philip'sbudgeted cost of goods sold.


It could be argued that the reason a company has succeeded in a very competitive market while its rivals have failed isbecause:

A. The company has evolved into a multi-divisional organization.B. The company has adopted a strategy with a low propensity for risk-taking.C. The successful company has adopted more steps to its formal strategic planning process.D. The strategies that the successful company pursues have a strong impact on its performance relative to its rivals.

A. Success does not rest on becoming a multi-divisional organization.

B.

Although some successful companies adopt strategies that involve low risk, a company that does not take risks will not

be very innovative. Superior innovation is one of the four factors derived from a company's distinctive competenciesthat create competitive advantage. (The four factors are superior efficiency, superior quality, superior innovation, andsuperior customer responsiveness.)

Innovation in products and processes is perhaps the most important component of competitive advantage. Competitionis driven by innovations. Product innovations give the innovator something that is unique, and this uniqueness providesdifferentiation which in turn allows the company to charge a premium price for its product. Process innovation canreduce unit costs below those of the competition.

C. Success does not rest on adopting a formal strategic planning process with many steps (there are typically fivesteps in the process).

D.

The company in a leadership position has developed and pursued strategies that succeed in its ownmarketplace and that build competitive advantage. The strategies that a company pursues can build newresources and capabilities or strengthen existing ones and thus can enhance the company’s distinctivecompetencies. At the same time, a company's distinctive competencies shape the strategies that the companyuses, and those strategies in turn lead to a competitive advantage and superior profitability. So therelationship between a company’s distinctive competencies and its strategies is a circular one. Strategies helpbuild and create distinctive competencies, and distinctive competencies in turn shape strategies.

There are typically five steps in the strategic planning process:

1. Defining the company’s mission and addressing the key corporate goals;

2. Analyzing the organization’s external competitive environment in order to identify the opportunities and

threats;

3. Analyzing the internal operating environment to identify the strengths and weaknesses of the organization;

4. Formulating and selecting strategies that, consistent with the organization’s mission and goals, willoptimize the organization’s strengths and correct its weaknesses for the purpose of taking advantage ofexternal opportunities while countering external threats (SWOT analysis); and

5. Developing and implementing the chosen strategies.

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All of the following are criticisms of the traditional budgeting process except that it

A. incorporates non-financial measures as well as financial measures into its output.B. is not used until the end of the budget period to evaluate performance.C. makes across-the-board cuts when early budget iterations show that planned expenses are too high.D. overemphasizes a fixed time horizon such as one year.

A. This is not a criticism of the traditional budgeting process, because it is not a feature of any budgetingprocess, traditional or non-traditional. A budget is quantitative and does not include non-financial measures inits output at all.

B. This is a criticism of traditional budgeting, because this can occur. Actual performance for a period is measuredagainst budgeted performance for that period. While it is necessary to wait until the end of a period to measure thebudgetary variance for the whole period, the budget period can be broken into smaller timeframes. A 12 month budgetcan, and often will, be divided into monthly amounts to allow for current month and year-to-date budget variancereporting throughout the year, so that operational adjustments can be made as necessary.

C. This is a criticism of traditional budgeting. The traditional budgeting process may lead to across-the-board cutswhen early budget iterations show that planned expenses are too high. However, budgeting should not necessarilyrequire across the board cuts, even when expenses are higher than desired. Cost cutting should be based on what isbest for the organization. Frequently cuts based on what is best for the organization will not be equally distributed.

D.

This is a criticism of traditional budgeting. Those who criticize it question why a budget needs to have a fixed timehorizon such as one year. They say that different segments of the same company have different needs for planning.The purpose of a forecast should be to recognize issues that need to be planned for in time to plan for them, and thiswill be different for every area of the company. So different forecasting horizons are needed for different areas, andthey need to be monitored individually. One size does not fit all in an organization today.


A firm develops an annual cash budget in order to

A. Determine the opportunity costs of alternative sales and production strategies.B. Ascertain which capital expenditure projects are feasible and which capital expenditure projects should be deferred.C. Avoid the opportunity costs of non-invested excess cash and minimize the cost of interim financing.D. Support the preparation of its cash flow statement for the annual report.

A. The cash budget does not determine the opportunity costs of alternative sales and production strategies.

B. The cash budget does not ascertain which capital expenditure projects are feasible or should be deferred. It onlyshows the cash available for projects and other activities.

C. The cash budget (or cash management and working capital budget) tracks the inflows and outflows of cashon a month-by-month (possibly even week-by-week or day-by-day) basis. If this budget is accurate it will allowthe company to plan for any cash shortfalls that may occur during the year and also enable it to plan for anyexcess cash accumulating during the year. This can enable the company to plan its short-term investments ofexcess cash so that they mature when the cash is needed. And prediction of cash shortfalls enables thecompany to obtain a loan more easily because it is aware of its need before the shortfall arrives, and it canpresent cash inflow and outflow projections to the bank to support its loan request.

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D. The cash flow statement in the annual report is based on actual results, not on budgeted figures.


Langley Corporation is developing a new product that will be manufactured in pairs. The company recently producedthe first two units of this product using 200 hours of direct labor time. If Langley has a 90% learning curve and uses thecumulative average-time learning model, the total direct labor time to manufacture the first four units of this newproduct is

A. 380 hours.B. 400 hours.C. 360 hours.D. 324 hours.

A.

This is the 200 hours required for the first two units plus 90% of 200 hours for the second two units. This is not the way

the cumulative average-time learning model works.

Under the cumulative average-time learning model, every time the total number of units produced doubles, theestimated cumulative (total) production time for all units produced decreases to a percentage of what it would havebeen if no learning had taken place.

B.

Under the cumulative average-time learning model, every time the total number of units produced doubles, theestimated cumulative (total) production time for all units produced decreases to a percentage of what it would havebeen if no learning had taken place.

If no learning had taken place, the first four units of the new product would require 400 hours, since the first two unitsrequired 200 hours. But since Langley is using a 90% learning curve, the estimated total time required to manufacture

the first four units will be 990% of 400 hours.

C.

Under the cumulative average-time learning model, every time the total number of units produced doubles, theestimated cumulative (total) production time for all units produced decreases to a percentage of what it wouldhave been if no learning had taken place.

If no learning had taken place, the first four units of the new product would require 400 hours, since the firsttwo units required 200 hours. With a 90% learning curve, the estimated total production time required toproduce four units will be 90% of what it would have been if no learning had taken place, or 400 × 0.90, whichis 360.

D.

This is 200 × 2 × 0.90 × 0.90.

If no learning had taken place, the first four units of the new product would require 400 hours (200 × 2), since the firsttwo units required 200 hours. With a 90% learning curve, the estimated total production time required to produce fourunits will be 90% of what it would have been if no learning had taken place. Therefore, 200 × 2 should be multiplied by0.90 only one time.

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The use of standard costs in the budgeting process signifies that an organization has most likely implemented a

A. Capital budget.B. Zero-base budget.

C. Static budget.D. Flexible budget.

A.

The capital budget is the budget in which all capital (property, plant and equipment) expenditures are planned. Thisbudget is often prepared years in advance so that the company is able to obtain the necessary financing or accumulatethe necessary cash to carry out its capital expansion plans. Although capital expansion plans that affect the budgetbeing developed must be incorporated into that budget, there is no reason to say that use of standard costs in thebudgeting process signifies that an organization has implemented a capital budget. To the extent that the capitalbudget is incorporated into the budget being developed, a capital budget is a part of any budget, whether it is a staticbudget, a flexible budget, or a zero-base budget.

B. Zero-based budgeting is the budgeting method in which the current year budget is prepared without any reference

to, or use of, the prior period's budget. The use of this form of budgeting does not require the use of standard costs.

C.

A fixed budget, or static budget, is a budget that is prepared for only one level of activity within the company. A staticbudget does not require the use of standard costs.

D. A flexible budget is a budget that is prepared for the actual activity level achieved during the period. This isdone using the standard cost per unit. Therefore, if a company is using standard costs it may indicate thatthey are also using a flexible budget.


The management of the Grow 'n' Glow Manufacturing Company expects a 10% increase in sales for the coming yearand has prepared the following pro forma balance sheet and income statement (000 omitted) for the coming year:BALANCE SHEET Assets LiabilitiesCash $ 10,670 Accounts payable $ 3,300 Accounts receivable 16,830 Notes payable 10,000Inventory 20,350 Accrued liabilities 6,600 Total current assets $ 47,850 Total current liabilities $ 19,900 Held-to-maturity securities $ 45,600 Long-term debt $ 35,600

Net fixed assets 32,200 Total liabilities $ 55,500 Total long-term assets $ 77,800Equity

Total assets $125,650 Common stock $ 10,000 Additional paid-in capital 30,000 Retained earnings 29,212 Total equity $ 69,212 Total liabilities & equity $124,712

Additional funds needed $ 938

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INCOME STATEMENTNet sales $110,000Cost of goods sold 72,820

Gross profit $ 37,180

Selling expense 18,040General & admin. expense 12,320

EBIT $ 6,820Net interest expense $ 1,396

EBT $ 5,424Taxes @ 35% 1,898

Net income $ 3,526Dividends 1,014 Addition to retained earnings $ 2,512

The financial analysts have been comparing the company's forecasted operating ratios with industry averages. Theindustry average for the inventory turnover ratio is 4 times. If Grow 'n' Glow's inventory turnover ratio next year were tomatch the industry average, what would the company's position be with respect to additional funds needed or additionalfunds available?

A. The company would need to borrow only $643 instead of $938.B. The company would have $1,207 additional funds available to use to either pay down its loans or invest instead ofneeding to borrow.C. The company would have $2,145 additional funds available to use to either pay down its loans or invest instead ofneeding to borrow.D. The company would need to borrow only $295 instead of $938.

A. This is the amount of additional funds needed minus the difference between the inventory level if the inventoryturnover ratio were 4 and the inventory level the previous year (calculated as $20,350 ÷ 1.10).

B.

The inventory turnover ratio is Cost of Goods Sold ÷ Inventory. Under the current pro forma financial

statements, Grow 'n' Glow's inventory turnover ratio is $72,820 ÷ $20,350, which equals 3.58 inventory turnsper year. This is worse than the industry average of 4 turns per year. If the company increases its inventoryturnover ratio to 4, inventory on the balance sheet would be $72,820 ÷ 4, or $18,205. The difference between$20,350 and $18,205 is $2,145.

At present, the company expects to need to increase its borrowing by $938 to support its increased sales.However, if it can increase its inventory turnover to 4 times, thereby decreasing its inventory level to $18,205,it will free up $2,145 in cash. Instead of needing to borrow $938, the company will have $2,145 − $938, or$1,207 in cash available to either invest or to use to pay down loans.

C. This is the amount of cash that would be freed up if the company can increase its inventory turnover ratio to 4.However, it is not what the company's position would be with respect to additional funds needed or additional fundsavailable.

D. This is the difference between the inventory level if the inventory turnover ratio were 4 and the inventory level theprevious year (calculated as $20,350 ÷ 1.10).


In competing as a subcontractor on a military contract, Aerosub Inc. has developed a new product for spacecraft thatincludes the manufacturing of a complex part. Management believes there is a good opportunity for its technical force

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to learn and improve as they become accustomed to the production process. Accordingly, management estimates an80% learning curve would apply to this unit. The overall contract will call for supplying eight units. Production of the firstunit requires 10,000 direct labor hours. The estimated total direct labor hours required to produce the seven additionalunits would be

A. 40,960 hours.B. 70,000 hours.

C. 30,960 hours.D. 56,000 hours.

A. This is the total number of direct labor hours required for all eight units. The number of direct labor hours requiredfor the additional seven units (units 2 through 8) will be this number minus the number of direct labor hours required forthe first unit.

B. This is the number of direct labor hours required for the first unit multiplied by 7. This would be correct only if nolearning had taken place. Since learning did take place, the number of direct labor hours required for the additionalseven units must be less than the number of hours for the first unit multiplied by 7.

C.

To find the number of direct labor hours required for the additional seven units, first find the total direct labor

hours required for all eight units. Then, to find the number of hours required for the seven additional units,subtract the 10,000 hours required for the first unit from the total number of hours required for all eight units.

The learning curve rate is given as 80%. Therefore, the formula to calculate the total direct labor hours

required for 8 units (3 doublings) is: 10,000 (2 × 0.8) (2 × 0.8) (2 × 0.8), or 10,000 (2 × 0.8)3, which is equal to40,960. The first unit required 10,000 direct labor hours, so we subtract the 10,000 hours required for the firstunit from the 40,960 hours required for all 8 units. The result, 30,960 hurs, is the number of hours required forunits 2-8, the seven additional units.

D.

This is the number of direct labor hours required for the first unit multiplied by 7 and the product multiplied by 0.80. Thisis not the correct way to find the number of direct labor hours required for the additional seven units.

Find the total number of direct labor hours required for all eight units. The number of direct labor hours required for theadditional seven units (units 2 through 8) will be that number minus the number of direct labor hours required for thefirst unit.


Aerosub Inc. has developed a new product for spacecraft that includes the manufacturing of a complex part. Themanufacturing of this part requires a high degree of technical skill. Management believes there is a good opportunityfor its technical force to learn and improve as they become accustomed to the production process. The production ofthe first unit requires 10,000 direct labor hours. If an 80% learning curve is used, the cumulative direct labor hours

required for producing a total of eight units would be

A. 64,000 hours.B. 29,520 hours.C. 80,000 hours.D. 40,960 hours.

A. This is 80% of the total number of hours that would be required to produce 8 units if no learning took place. This isnot the way to calculate the cumulative direcdt labor hours required for producing a total of eight units using theCumulative Average-Time Learning Model.

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B.

This answer results from multiplying $10,000 by 0.8 and getting $8,000; then multiplying $8,000 by 0.8 and getting$6,400; then multiplying $6,400 by 0.8 and getting $5,120; then summing $10,000 + $8,000 + $6,400 + $5,120 =$29,520.

Under the Incremental Unit-Time Learning Model, $10,000 is the cost of the first unit; $8,000 is the cost of the second

unit; $6,400 is the cost of the fourth unit; and $5,120 is the cost of the eighth unit. This is incorrect for two reasons: (1)the problem says to use the Cumulative Average-Time Learning Model, not the Incremental Unit-Time Learning Model;and (2) this would not be correct even for the Incremental Unit-Time Learning Model, because only the costs of thefirst, second, fourth and eighth units are included in the total.

C. This is the number of direct labor hours that would be required if no learning took place.

D.

The total number of direct labor hours required to produce 8 units using the Cumulative Average-TimeLearning Model is:

10,000 (2 × 0.80) (2 × 0.80) (2 × 0.80), or 10,000 (2 × 0.80)3, which equals 40,960 hours.


The foundation of a profit plan is the

A. Production plan.B. Cost and expense budget.C. Capital budget.D. Sales forecast.

A. The production plan can not be calculated until the sales volume is forecast.

B. Cost and expense budgets can not be calculated until the sales volume is forecast.

C. The capital budget is the budget in which all capital (property, plant and equipment) expenditures are planned. Thecapital expenditures budget is often prepared years in advance so that the company is able to obtain the necessaryfinancing or accumulate the necessary cash to carry out its capital expansion plans. This budget is related to many ofthe current period operating budgets because they are affected by the capital projects planned for the budget year.However, it is not the foundation for the whole profit plan for the coming year.

D. The sales forecast is usually the first forecast to be prepared in the budgeting process. After the sales levelhas been determined, the production budget and the other operating budgets can be prepared. Only after allof these other budgets are done can a budgeted income statement be prepared and profits estimated.


The sales manager of Serito Doll Company has suggested that an expanded advertising campaign costing $40,000would increase the sales and profits of the company. He has developed the following probability distribution for theeffect of the advertising campaign on company sales.Sales increase (units)Probability

15,000 0.10 30,000 0.35

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45,000 0.10 60,000 0.25 75,000 0.20

The company sells the dolls at $5.20 each. The cost of each doll is $3.20. Serito's expected incremental profit, if theadvertising campaign is adopted, would be

A. $6,500.B. $93,000.C. $46,500.D. $53,000.

A. This is the expected incremental increase in sales in units minus the cost of the advertising campaign. This answeromits the fact that each additional unit sold increases total profit by $2.00 ($5.20 − $3.20).

B. This is the expected increase in profit from the increased sales. However, the expected incremental profit from theadvertising campaign needs to include the cost of the campaign in the calculations.

C. This amount (without the dollar sign) is the expected incremental increase in sales in units. This answer omits thefact that each additional unit sold increases total profit by $2.00 ($5.20 − $3.20), and it also omits the cost of theadvertising campaign.

D.

The expected incremental profit is the expected total profit increase from the increased sales minus the costof the advertising program. The expected profit increase is the weighted average of the possible profitincreases, using the probabilities as the weights.

To calculate the expected incremental profit from the increased sales, we need to calculate the increased totalprofit at each possible level of sales increase by multiplying the sales increase in units by the profit per unit of$2.00 ($5.20 − $3.20). Then we will multiply each of those total profit increases by its probability. The sum ofthe products will be the expected incremental profit from the increased sales.

(15,000 × $2 × 0.10) + (30,000 × $2 × 0.35) + (45,000 × $2 × 0.10) + (60,000 × $2 × 0.25) + (75,000 × $2 × 0.20) =

$93,000.

The expected incremental profit is $93,000 − $40,000 advertising cost = $53,000.

Note: An alternate method of calculating the expected incremental profit from the increased sales is tomultiply each of the sales increase amounts by its probability and sum the results, then multiply the resultingsum by $2 additional profit per unit, as follows: (15,000 × 0.10) + (30,000 × 0.35) + (45,000 × 0.10) + (60,000 ×0.25) + (75,000 × 0.20) = 46,500. 46,500 × $2 = $93,000. $93,000 − $40,000 = $53,000.


A manufacturing firm plans to bid on a special order of 80 units that will be manufactured in lots of 10 units each. Theproduction manager estimates that the direct labor hours per unit will decline by a constant percentage each time thecumulative quantity of units produced doubles. The quantitative technique used to capture this phenomenon andestimate the direct labor hours required for the special order is

A. cost-profit-volume analysis.B. the Markov process.C. learning curve analysis.D. linear programming analysis.

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A. Cost-volume-profit analysis is used for short-run decision-making by firms to determine what products rthey willsupply and the amount they will supply at a given price and cost.

B. Markov process models are used to study systems and changes that take place in the systems during repeatedtrials. The information is used to make decisions because it can help determine the probabilities for the occudrrence ofcertain events. For instance, one type of Markov analysis is used to determine the probability of something happeningagain tomorrow if the same thing happened today. It might be used to determine the probability that a machine that is

functioning in the current period will continue to function in the next period or whether it will break down.

C. Learning curve analysis would be used to estimate the direct labor hours required for the special orderbecause it captures the decline in direct labor hours required that would occur each time the cumulativequantity of units produced doubles.

D. Linear programming can be used to allocate a scarce resource in a system in which there are constraints such aslimited quantities of some input, with the goal of either maximizing or minimizing some quantity without violating theconstraints.


Bootstrap Corporation anticipates the following sales during the last six months of the year.July $460,000 August 500,000September 525,000October 500,000November 480,000December 450,000

20% of Bootstrap's sales are for cash. The balance is subject to the collection pattern shown below.Percentage of balance collected in the month of sale 40%Percentage of balance collected in the month following sale 30%Percentage of balance collected in the second month following sale 25%Percentage of balance uncollectible 5%

What is the planned net accounts receivable balance as of December 31?

A. $367,500.B. $360,000C. $279,300.D. $294,000.

A. This answer results from using the full sales amounts for the relevant months to calculate the amount in netaccounts receivable. However, the amount in net accounts receivable should be based on the portion of sales that aremade on credit. See correct answer for complete calculation.

B. This is the entire credit sales portion of December sales. While some of this will be in accounts receivable at the endof December, 40% of it will have been collected before the end of the month. Furthermore, a portion of the receivablesfrom November's sales will also still be outstanding. See correct answer for complete calculation.

C. This is the December 31 net accounts receivable balance reduced by 5%. However, the December 31 net accountsreceivable balance is already adjusted for the 5% of credit sales that will be uncollectible. That is why it is called "net."See correct answer for details.

D.

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The question asks for the net accounts receivable balance as of December 31. That means that for thepurpose of answering this question, we disregard the receivables that will be uncollectible. The net accountsreceivable balance as of December 31 will consist of amounts that were sold before the end of the year thatwill be collected in January and February of the following year.

30% of accounts receivable balances are collected in the month following the sale, and 25% of the balancesare collected in the second month following the sale. (The 40% that are collected in the month of sale are not

relevant because they will not be outstanding any longer at the end of the month.)

The amounts that were sold before the end of the year that will be collected in January and February of thefollowing year are:

25% of November's credit sales that will be collected in January

30% of December's credit sales that will be collected in January

25% of December's credit sales that will be collected in February

Since 20% of the company's sales are for cash, 80% are on credit. Total sales for November will be $480,000,and 80%, or $384,000, will be on credit. Total sales for December will be $450,000, and 80%, or $360,000, will beon credit. Therefore, the ending net accounts receivable balance as of December 31 will be:25% of November credit sales of $384,000$ 96,000

30% of December credit sales of $360,000 108,00025% of December credit sales of $360,000 90,000

Net Accounts Receivable - Dec. 31 $294,000


The most direct way to prepare a cash budget for a manufacturing firm is to include

A. Projected sales, credit terms, and net income.B. Projected sales and purchases, percentages of collections, and terms of payments.

C. Projected net income, depreciation, and goodwill impairment.D. Projected purchases, percentages of purchases paid, and net income.

A. Net income is not included in the cash budget because it includes noncash items like depreciation and theamortization of bond premium.

B. All of these items listed are related to cash and would therefore be included in the preparation of a cashbudget.

C. Projected net income is not included in the cash budget because it includes noncash items like depreciation and theimpairment of goodwill. Depreciation and goodwill impairment are not included because they are noncash items.

D. Net income is not included in the cash budget because it includes noncash items like depreciation and theamortization of bond premium.


Granite Company sells products exclusively on account and has experienced the following collection pattern: 60% inthe month of sale, 25% in the month after the sale, and 15% in the second month after the sale. Uncollectible accountsare negligible. Customers who pay in the month of the sale are given a 2% discount. If sales are $220,000 in January,$200,000 in February, $280,000 in March, and $260,000 in April, Granite's accounts receivable balance on May 1 will

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be

A. $107,120.B. $143,920.C. $146,000.D. $204,000.

A.

This is the portion of April sales that was still outstanding in receivables at the end of April, increased by 2% of theamount of April sales that were collected during April. This answer is incorrect for two reasons.

One, it fails to take into account the portion of March sales that were also still outstanding at the end of April. 15% ofsales made in March had not been collected as of the end of April.

Two, it fails to recognize that when payments were received in April for sales made in April and the customers took the2% discount, the dollar amount of the discounts taken did not remain in accounts receivable as outstandingreceivables. As the discounts are honored, the unpaid 2% is debited to an expense account and credited to accountsreceivable, so it is removed from outstanding accounts receivable.

B. This is 15% of March sales plus 98% of 40% of April sales. The April sales amount still outstanding in receivables at

the end of April should not be decreased by the 2% discount.

C.

May 1 is the same as April 30. On April 30, the company will have outstanding (unpaid) receivables from itsMarch sales and its April sales only. All sales made during January and February will have been collected byApril 30.

The amount outstanding on April 30 from March sales will be 15% of March sales, because 60% of March saleswill have been collected during March and 25% of March sales will have been collected during April, for a totalof 85% collected. 100% − 85% collected leaves 15% yet to be collected as of April 30.

The amount outstanding on April 30 from April sales will be 40% of April sales, because 60% of April sales will

have been collected during April. 100% − 60% leaves 40% yet to be collected as of April 30.

Receivable balance as of April 30 from March sales: 15% of $280,000 sales = $42,000.

Receivable balance as of April 30 from April sales: 40% of $260,000 sales = $104,000.

The total receivable balance as of April 30 (May 1) is $42,000 + $104,000, which equals $146,000.

D. This answer fails to take into account collections of 15% of February sales and 25% of March sales that arereceived during April.

Question 51 - CIA 595 IV.52 - Top-Level Planning and Analysis

A company had $500,000 of sales for the year just ended and is projecting sales of $600,000 for the coming year. Forevery $1 increase in sales, 38 cents of additional financing is required for the purchase of additional assets. Theprojected profit margin is 20%, and 60% of profits will be retained for reinvestment in the company. The amount ofadditional external financing needed by the company in the coming year is:

A. $120,000.B. $0.C. $38,000.

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D. $72,000.

A. This is the amount of expected profit for the year ($600,000 x 20%).

B. The expected increase in sales is $100,000. Based on this, the company will need an additional $38,000($100,000 x 38%) of financing for the purchase of additional assets. The company plans to retain 60% of theprofits for financing purposes. If profits are expected to be $120,000 (20% of the $600,000 of sales) and 60% of

profits are retained, then $72,000 will be available for internal financing ($120,000 x 60%). Since the amountthat will be available from inside the company ($72,000) is larger than the amount needed ($38,000), thecompany will not need any additional external financing.

C. This is the amount of additional financing needed. However, it doesn't need to be external financing if there arefunds available internally from the profits of the company.

D. This is the amount of profit that can be reinvested ($120,000 x 60%).


A flexible budget is appropriate for

A. Control of direct labor and direct materials but not fixed factory overhead.B. Control of direct materials and direct labor but not selling and administrative expenses.C. Any level of activity.D. Control of fixed factory overhead but not direct materials and direct labor.

A. Fixed costs are the same for any level of activity within the relevant range. Thus, a flexible budget is notnecessary to control fixed factory overhead. In fact, total fixed costs are the same in a flexible budget as theyare in the static budget. However, a flexible budget is necessary to control direct materials and direct labor ifthe actual activity level differs from the static budget activity level.

B. A flexible budget is necessary to control direct materials and direct labor as well as variable selling and

administrative expenses if the actual activity level differs from the static budget activity level. To control fixed costs, theuse of static budget is appropriate, not necessarily the use of flexible budget.

C. While a flexible budget can be prepared for any level of activity, this is not the best answer to the question amongthe answer choices given.

D. Fixed costs are the same for any level of activity within the relevant range. Thus, a flexible budget is not necessaryto control fixed factory overhead. A flexible budget is necessary to control direct materials and direct labor if the actualactivity level differs from static budget activity level.


Moss Point Manufacturing recently completed and sold an order of 50 units that had costs as follows.Direct materials $1,500Direct labor (1,000 hours x $8.50) 8,500Variable overhead (1,000 hours x $4.00)* 4,000Fixed overhead** 1,400 $15,400

*Applied on the basis of direct labor hours.**Applied at the rate of 10% of variable cost.

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The company has now been requested to prepare a bid for 150 units of the same product.

If an 80% learning curve is applicable, Moss Point's total cost on this order would be estimated at

A. $41,800B. $26,400.

C. $38,000.D. $32,000.

A. This is the total cost for 200 units. However, the problem asks for the total cost for the last 150 units

B.

We need to include the first 50 units manufactured in this analysis, since they contributed to the learningcurve. So we will analyze the cost for the first 200 units and then subtract from that the cost for the first 50units in order to calculate the cost for units numbered 51 through 200, which are the units in the second orderof 150.

The first doubling takes place at unit no. 100. The second doubling takes place at unit no. 200. Therefore, thetime required for the total 200 units was 2,560 hours, calculated as follows: 1,000 hours × (0.8 × 2) × (0.8 × 2) =

2,560 hours for 200 units.

2,560 hours for 200 units minus the 1,000 hours required for the first 50 units = 1,560 hours required for thelast 150 units.

The next step is to calculate the total cost for the whole 200 units and then subtract from that the cost for thefirst 50 units, which is given in the problem as $15,400.

Using the costs for 50 units provided in the problem, we can calculate the variable costs for 200 units asfollows: Direct Materials cost per unit is $1,500 ÷ 50 units, or $30 per unit. Therefore, for 200 units, the totaldirect materials cost would be 30 × $200, or $6,000. Direct labor is $8.50 per hour for a total of 2,560 hours, or$21,760 for 200 units. Variable overhead is applied on the basis of direct labor hours at the rate of $4 per directlabor hour; so for 2,560 DL hours, variable overhead would be $10,240.

Thus, the total variable cost for 200 units is $6,000 + $21,760 + $10,240, for a total of $38,000.

Fixed overhead is applied at the rate of 10% of total variable cost, so fixed overhead applied is 10% of $38,000,or $3,800.

The total cost for 200 units is thus $38,000 + $3,800, or $41,800.

Subtracting the cost for the first 50 units from the total cost for the first 200 units, we get $41,800 − $15,400,or $26,400 as the cost for units 51 through 200.

C. This is the total variable cost for 200 units. However, it is not the total cost, or is it the cost for the last 150 units.

D. This is the total cost of the labor and variable overhead for 200 units. However, it is not the total cost, nor is it the

cost for the last 150 units.


Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly'soperations are as follows:

Sales are budgeted at $220,000 for December year 1 and $200,000 for January year 2.

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Other expected monthly expenses to be paid in cash are $22,600.

Annual depreciation is $216,000.


Liabilities and Stockholders' Equity Accounts payable $162,000Common stock 800,000Retained earnings 138,000Total liabilities and stockholders' equity $1,100,000

The projected balance in inventory on December 31, year 1 is

A. $160,000.B. $153,000.C. $150,000.D. $120,000.

A. This is the 80% of projected January sales. Ending inventory is equal to beginning inventory + purchases madeduring the period − cost of inventory sold during the period. See the correct answer for a complete explanation.

B. This is the total purchases to be made during the month of December, but it is not the ending inventory balance.Ending inventory is equal to beginning inventory + purchases made during the period − cost of inventory sold during theperiod. See the correct answer for a complete explanation.

C. This is 75% of projected January sales. Ending inventory is equal to beginning inventory + purchases made duringthe period − cost of inventory sold during the period. See the correct answer for a complete explanation.

D.

Ending inventory is equal to beginning inventory + purchases made during the period − cost of inventory soldduring the period.

Beginning inventory is given as $132,000.

Purchases during December are 80% of the cost of inventory projected to be sold during January and 20% ofthe cost of inventory projected to be sold during December. Since the gross margin is 25%, the projected costof sales will be 75% of projected sales. Sales are projected at $220,000 for December and $200,000 forJanuary. Therefore, total purchases during December will be (January sales of $200,000 × 0.75 × 0.80) +(December sales of $220,000 × 0.75 × 0.20), or $120,000 + $33,000, which equals $153,000.

The cost of inventory sold during the period is December sales of $220,000 × 0.75, which is $165,000.

Therefore, the ending inventory as of December 31 is:

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$132,000 + $153,000 − $165,000 = $120,000


Which one of the following will allow a better use of standard costs and variance analysis to help improve managerialdecision-making?

A. Company B uses the prior year’s average actual cost as the current year’s standard.B. Company A does not differentiate between variable and fixed overhead in calculating its overhead variances.C. Company D constantly revises standards to reflect learning curves.D. Company C investigates only negative variances.

A. Prior year's average cost is a fine place to start but other factors need to be considered, such as forecasted prices,required quantities, and alternative sources or materials.

B. Without distinguishing between fixed and variable costs Company A will be unable to pinpoint areas forimprovement or favorable areas that should be capitalized upon.

C. Economic conditions and production requirements are continually changing within the company and theworld. Through continued revisions, analysis and scrutiny Company D is in the best position to createmeaningful guidelines and information from the standards and variance analysis process.

D. Unfavorable variances certainly need to be investigated, but favorable variances can be revealing as well. Afavorable labor quantity variance can indicate that your employees don't need as long as standards allow to complete aprocess. The standard may be too high. Favorable material price variances could indicate a less expensive source ofmaterials and the standard could be adjusted accordingly. Failure to investigate could lead to wasteful spending, asstandards provide employees with guidelines. Too much extra room and they may be less cost conscious.

Question 56 - CIA 1190 IV.16 - Budget Methodologies

A company is preparing its cash budget for the coming month. All sales are made on account. Given the following:

BeginningBalances

BudgetedAmounts

Cash $50,000 Accounts receivable 180,000Sales $800,000Cash disbursements 780,000Depreciation 25,000Ending accounts receivable balance 210,000

What is the expected cash balance of the company at the end of the coming month?

A. $40,000B. $45,000C. $70,000D. $15,000

A.

The cash balance at the end of the period is equal to Beginning Cash + Cash Receipts − Cash Disbursements.

We know what Beginning Cash is and what Cash Disbursements are. Therefore, we need to determine how

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much cash the company expects to receive from accounts receivable collections during the coming month.

Beginning A/R + Sales Made on Account − Receivables Collected = Ending A/R. Whenever we know three ofthese four amounts, we can calculate the fourth one. We know Beginning A/R ($180,000), Sales Made onAccount ($800,000), and Ending A/R ($210,000). Therefore, we can calculate that Receivables Collected =$770,000.

Now, we can calculate the Ending Cash balance. The Ending Cash balance will be $50,000 Beginning Cash +$770,000 Cash Receipts − $780,000 Cash Disbursements = $40,000 Ending Cash.

Depreciation is a non-cash expense and is not included in calculation.

B.

This is not the correct answer. See the correct answer for a complete explanation.


C.

This answer results from adding the difference between sales and cash disbursements ($50,000 + $20,000) to thebeginning cash balance of $50,000. But sales is not the same thing as accounts receivable collections.

The cash balance at the end of the period is equal to Beginning Cash + Cash Receipts − Cash Disbursements.

We know what Beginning Cash is and what Cash Disbursements are. Therefore, to find what the ending cash balanceis, we need to determine how much cash the company expects to receive from accounts receivable collections duringthe coming month. To find the collections for the month, we can use the following formula and solve for receivablescollected: Beginning A/R + Sales Made on Account − Receivables Collected = Ending A/R.

D. In this answer the amount of depreciation is deducted. However, depreciation is a non-cash expense and is notincluded in the calculation of expected cash balance.


The Raymar Company is preparing its cash budget for the months of April and May. The firm has established a$200,000 line of credit with its bank at a 12% annual rate of interest on which borrowings for cash deficits must bemade in $10,000 increments. There is no outstanding balance on the line of credit loan on April 1. Principal repaymentsare to be made in any month in which there is a surplus of cash. Interest is to be paid monthly. If there are nooutstanding balances on the loans, Raymar will invest any cash in excess of its desired end-of-month cash balance in

U.S. Treasury bills. Raymar intends to maintain a minimum balance of $100,000 at the end of each month by eitherborrowing for deficits below the minimum balance or investing any excess cash. Monthly collection and disbursementpatterns are expected to be:

Collections. 50% of the current month's sales budget and 50% of the previous month's sales budget.

Accounts Payable Disbursements. 75% of the current month's accounts payable budget and 25% of theprevious month's accounts payable budget.

All other disbursements occur in the month in which they are budgeted.

Budget Information

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March April MaySales $40,000$50,000$100,000 Accounts payable 30,000 40,000 40,000Payroll 60,000 70,000 50,000Other disbursements 25,000 30,000 10,000

In April, Raymar's budget will result in

A. $45,000 in excess cash.B. A need to borrow $100,000 on its line of credit for the cash deficit.C. A need to borrow $50,000 on its line of credit for the cash deficit.D. A need to borrow $90,000 on its line of credit for the cash deficit.

A. This is the amount of cash collections only. It does not take into consideration the disbursements. See the correctanswer for a complete explanation.

B.

Since this question tells us that Raymar intends to maintain a minimum balance of $100,000 at the end of eachmonth by either borrowing for deficits below the minimum balance or investing any excess cash, we must

assume that the company's balance of cash at the end of March was $100,000. Thus the beginning balance forApril was also $100,000. The ending balance for April before any borrowing or investing will be the beginningbalance adjusted by the month's activity.

To determine the month's activity, we first need to determine the cash collections for April: 50% of April salesand 50% of March sales (or $25,000 + $20,000 = $45,000) will be collected in April.

Then, we need to determine the disbursements for April: 75% of April A/P and 25% of March A/P (or $30,000 +$7,500 = $37,500) will be paid on accounts payable in April. Other disbursements are paid in the month theyoccur, and for April they are: $70,000 for payroll plus $30,000 of other disbursements, totaling $100,000 indisbursements other than accounts payable.

Total cash receipts will be $45,000 and total cash disbursements will be $137,500. Subtracting the amount ofcash outflows from cash inflows, we get a $92,500 net cash deficit in the month's activity. Therefore, the

ending cash balance before any borrowing is $100,000 − $92,500, or $7,500.

The company needs to increase that to at least $100,000. Since borrowings for cash deficits must be made in$10,000 increments, the company needs to borrow $100,000 to cover the $92,500 cash deficit and bring theending cash balance from $7,500 to its required minimum of $100,000. The ending cash balance will actuallybe $107,500 after $100,000 is borrowed, but the extra $7,500 in the cash account is unavoidable because of the$10,000 incremental borrowing requirement.

C. Borrowing $50,000 on the line of credit would not be adequate, because the ending cash balance would not be therequired minimum balance of $100,000. See the correct answer for a complete explanation.

D. Borrowing $90,000 on the line of credit would not be adequate, because the ending cash balance would not be therequired minimum balance of $100,000. See the correct answer for a complete explanation.


Superflite expects April sales of its deluxe model airplane, the C-14, to be 402,000 units at $11 each. Each C-14requires three purchased components shown below.

Purchase

CostNumber Needed

for each C-14 Unit

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A-9 $0.50 1B-6 0.25 2

D-28 1.00 3

Factory direct labor and variable overhead per unit of C-14 totals $3.00. Fixed factory overhead is $1.00 per unit at aproduction level of 500,000 units. Superflite plans the following beginning and ending inventories for the month of Apriland uses standard absorption costing for valuing inventory.

Part No. Units at April 1

Units at April 30

C-14 12,000 10,000

A-9 21,000 9,000

B-6 32,000 10,000

D-28 14,000 6,000

Assume Superflite plans to manufacture 400,000 units in April. Superflite's April budget for the purchase of A-9 shouldbe

A. 402,000 units.B. 412,000 units.C. 379,000 units.

D. 388,000 units.

A. This is the number of unit sales of finished product. See the correct answer for a complete explanation.

B. This result is based on an incorrect inventory formula, using the ending inventory as the beginning inventory and thebeginning inventory as ending inventory. See the correct answer for a complete explanation.

C. This number does not take ending inventory level into consideration. See the correct answer for a completeexplanation.

D.

To solve these question we should use the formula for the physical flow of inventory:

Beginning Inventory + Purchases − Units Used in Production = Ending Inventory

Since 1 unit of A-9 is required to produce one unit of finished goods, the number of units of A-9 needed forproduction will be the same as the number of units to be produced: 400,000. The number of units in beginningand ending inventory are given as 21,000 and 9,000, respectively. Therefore, the formula will be:

21,000 + Purchases − 400,000 = 9,000

Solving for Purchases, we get Purchases = 388,000 units.


Aerosub Inc. has developed a new product for spacecraft that includes the manufacturing of a complex part. Themanufacturing of this part requires a high degree of technical skill. Management believes there is a good opportunityfor its technical force to learn and improve as they become accustomed to the production process. The production ofthe first unit requires 10,000 direct labor hours. If an 80% learning curve is used and eight units are produced, thecumulative average direct labor hours required per unit of the product will be

A. 6,400 hoursB. 8,000 hours.

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C. 5,120 hours.D. 10,000 hours.

A. 6,400 hours is the amount of time required to produce the first unit multiplied by 0.82. This does not result in thecumulative average direct labor hours required per unit for production of 8 units.

B. 8,000 hours is the amount of time required to produce the first unit (10,000 hours) multiplied by 0.8. This does not

result in the cumulative average direct labor hours required per unit for production of 8 units.

C.

The total number of direct labor hours required to produce 8 units is:

10,000 (2 × 0.80) (2 × 0.80) (2 × 0.80), or 10,000 (2 × 0.80)3, which equals 40,960 hours.

The cumulative average direct labor hours required per unit of the product will be 40,960 ÷ 8, or 5,120 hours.

The average number of hours per unit under the Cumulative Average-Time Learning Model can also becalculated by multiplying the time required for the first unit by the learning curve percentage raised to the

appropriate exponent. For this problem, the calculation would be 10,000 × 0.803 = 5,120.

Use of that formula can be confusing, however, since that same formula with those same amounts alsoresults in the amount of time required to manufacture the eighth unit under the Incremental Unit-TimeLearning Model. If you use that formula for a Cumulative Average-Time Learning Model problem, make surethe question is asking for the average number of hours per unit, not the amount of time required tomanufacture the last unit.

D. 10,000 hours is the amount of time required to produce the first unit. The subsequent units produced require lesstime.


When compared to static budgets, flexible budgets

A. encourage managers to use less fixed costs items and more variable cost items that are under their control.B. offer managers a more realistic comparison of budget and actual revenue and cost items under their control.C. offer managers a more realistic comparison of budget and actual fixed cost items under their control.D. provide a better understanding of the capacity variances during the period being evaluated.

A. Fixed and variable costs are not interchangeable within the organization. Simply using more raw materials will noteliminate the need to pay rent, for example.

B. A flexible budget takes the variable revenues and costs as they are planned in the master budget andadjusts the master budget amounts to what they would have been if the actual volume achieved had beenused in preparing the budget. A flexible budget prepared in addition to the master budget that is usedexclusively for reporting on variances other than those due to volume differences allows management tofocus on the variances that may be caused by production or administrative problems that need attention.

C. A flexible budget takes the variable revenues and costs as they are planned in the master budget and adjusts themaster budget amounts to what they would have been if the actual volume achieved had been used in preparing thebudget. Flexible budgets show how variable costs change at different production levels. Total budgeted fixed costs arethe same in both the static budget and the flexible budget, since fixed costs are not dependent in total upon capacityusage. Since fixed costs are often determined before the budget is developed, budgeted fixed costs are generally fairlyrealistic.

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D. Variance analysis, and specifically the fixed overhead production-volume variance, measures the variance due tothe actual production level being different from the production capacity level used to calculate the budgeted fixedoverhead cost to be applied to each unit produced. The production-volume variance, not the flexible budget, provides abetter understanding of the result of this difference. Total budgeted fixed costs are the same in both the static budgetand the flexible budget, since fixed costs are not dependent in total upon capacity usage.


A continuous profit plan

A. Is an annual plan that is part of a 5-year plan.B. Works best for a company that can reliably forecast events a year or more into the future.C. Is a plan devised by a full-time planning staff.D. Is a plan that is revised monthly or quarterly.

A. A continuous plan does not need to be part of a larger 5-year plan.

B. A continuous plan works for any company, whether or not they can accurately forecast more than a year into the

future.

C. A continuous plan may or may not be produced by a full-time planning staff.

D. A continuous plan is one that is automatically prepared for a certain period of time ahead of the present.For example, a 1-year continuous plan will be prepared at the end of every month for the next 12 months.


Propeller Inc. plans to manufacture a newly designed high-technology propeller for airplanes. Propeller forecasts thatas workers gain experience, they will need less time to complete the job. Based on prior experience, Propellerestimates a 70% cumulative learning curve and has projected the following costs.

If Propeller manufactures eight propellers, the total manufacturing cost would beCumulative number Manufacturing Projectionsof units produced Average cost per unit Total costs

1 $20,000 $20,0002 14,000 28,000

If Propeller produces eight units, the average manufacturing cost per unit will be

A. $14,000.B. $6,860.C. $1,647.

D. $9,800.

A.

This is the cost for the first unit multiplied by 0.70. That is not the correct way to find the average cost per unit using thecumulative average-time learning model.

One way to find the average cost per unit using the cumulative average-time learning model is to multiply the cost forthe first unit by the learning curve rate raised to the appropriate exponent for the number of times doubling will occur.

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B.

The quickest way to find the average cost per unit using the cumulative average-time learning model is tomultiply the cost for the first unit by the learning curve rate raised to the appropriate exponent for the numberof times doubling will occur. For eight units, doubling will occur three times (from 1 unit to 2 units; from 2

units to 4 units; and from 4 units to 8 units). $20,000 × 0.73 = $6,860.

Another way to calculate it would be to calculate the total cost for 8 units and divide that by 8 to find theaverage cost per unit. The total cost for 8 units is:

$20,000 (2 × 0.7)3 = $54,880.

$54,880 ÷ 8 = $6,860.

C.

This answer is not possible. If the average cost per unit for 8 units were $1,647, the total cost for 8 units would be$1,647 × 8, which is $13,176. $13,176 is less than the cost to produce the first unit.

One way to find the average cost per unit using the cumulative average-time learning model is to multiply the cost for

the first unit by the learning curve rate raised to the appropriate exponent for the number of times doubling will occur.

D.

This is the average cost per unit for the first two units multiplied by 0.70. That is not the correct way to find the averagecost per unit using the cumulative average-time learning model.

One way to find the average cost per unit using the cumulative average-time learning model is to multiply the cost forthe first unit by the learning curve rate raised to the appropriate exponent for the number of times doubling will occur.


A company has $10,000 in cash and $150,000 in merchandise inventory on March 31. The desired cash andmerchandise inventory balances on June 30 are $20,000 and $250,000, respectively. Sales for the quarter areexpected to be $300,000, all in cash. Gross margin is 40% of sales. Cash operating expenses are expected to be$50,000. All merchandise inventory purchases are paid for in cash at the time of purchase. What amount of financingwill the company need during the quarter?

A. $20,000B. $40,000C. $50,000D. $30,000

A. This answer does not include the ending cash balance. See the correct answer for a complete explanation.

B. First, we need to determine the amount of purchases during the quarter. Beginning merchandise inventorylevel is $150,000 and ending merchandise inventory is $250,000. The cost of sales expected to be made duringthe quarter is $180,000 ($300,000 in sales × 60%). Thus, the purchases are equal to $280,000 ($180,000 cost ofsales + $250,000 ending inventory − $150,000 beginning inventory). Now we can determine the amount offinancing the company will need during the quarter. It is equal to Purchases + Expenses + Ending cashbalance − Beginning cash balance − Proceeds from sales. We get: $280,000 + $50,000 + $20,000 − $10,000 −$300,000 = $40,000.

C. This answer does not include the beginning cash balance. See the correct answer for a complete explanation.

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D. This answer does not include the beginning or ending cash balance. See the correct answer for a completeexplanation.

Question 64 - CMA 697 3.20 - Planning and Budgeting Concepts

Which one of the following best describes the role of top management in the budgeting process? Top management

A. Lacks the detailed knowledge of the daily operations and should limit their involvement.B. Should be involved only in the approval process.C. Needs to be involved, including using the budget process to communicate goals.D. Needs to separate the budgeting process and the business planning process into two separate processes.

A. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation,motivation, communication, identifying future problems. To use the budget as a communication and motivational tool,top management should be involved in budgeting process even though they lack detailed knowledge of the dailyoperations.

B. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation,

motivation, communication, identifying future problems. To use the budget as a communication and motivation tool, thetop management should be involved in the whole budgeting process, not only in the approval process.

C. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation,motivation, communication, identifying future problems. To use the budget as a communication andmotivational tool top management should be involved in budgeting process.

D. The budget is a realistic plan for the future expressed in quantitative terms. In other words budgeting is a part ofoverall planning process.


Increases in sales generally cause spontaneous increases in some liability and net worth lines on the balance sheet.The liability and net worth items that increase spontaneously with increases in sales include all of the following except

A. notes payable.B. accrued salaries and wages.C. retained earnings.D. accounts payable.

A. Borrowed funds such as notes payable do not increase spontaneously with increases in sales. The firmmust make an effort to cause its borrowings to increase, by making intentional arrangements to borrow thefunds.

B. Accrued salaries and wages will increase spontaneously with increases in sales because as sales increase,additional employees will need to be hired to support the increased sales. The increase in staff will naturally lead to ahigher level of accrued salaries and wages.

C. Retained earnings will increase spontaneously with increases in sales because as sales increase, net income alsogenerally increases. The increase in net income will lead to a higher balance in the retained earnings account in theequity section of the balance sheet.

D. Accounts payable will increase spontaneously with increases in sales because as sales increase, so will purchasesof direct materials (for a manufacturer) or of inventory (for a reseller). These additional purchases will naturally lead to

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a higher level of accounts payable.


Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's Statement ofFinancial Position for the year ended November 30, is as follows:

Super DriveStatement of Financial Position

November 30

Assets Cash $ 52,000 Accounts receivable, net. 150,000Inventory 315,000Property, plant and equipment 1,000,000Total assets $1,517,000

Liabilities and Equity Accounts payable $ 175,000

Common stock 900,000Retained earnings 442,000Total liabilities and shareholders equity $1,517,000

Additional information regarding Super Drive's operations include the following:

Sales are budgeted at $520,000 for December and $500,000 for January of the next year.


80% of the disk drive components are purchased in the month prior to the month of sale, and 20% arepurchased in the month of sale. Purchased components are 40% of the cost of goods sold.

Payment for the components is made in the month following the purchase.

Cost of goods sold is 80% of sales.

The projected gross profit for the month ending December 31 is

A. $134,000B. $104,000C. $416,000D. $536,000

A.


We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --

not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materialsbetter.

B. Gross profit (gross margin) is equal to sales minus cost of goods sold. December sales are projected to be$520,000. Cost of goods sold is 80% of sales. Thus, the projected gross profit is 20% of sales, or $104,000.

C. This is the cost of goods sold for December. Gross profit (gross margin) is equal to sales minus cost of goods sold.

D. Gross profit (gross margin) is equal to sales minus cost of goods sold. Thus, gross profit cannot be greater than the

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amount of sales, and sales are budgeted at $520,000 for December. See the correct answer for a completeexplanation.


The budgeting process should be one that motivates managers and employees to work toward organizational goals.Which one of the following is least likely to motivate managers?

A. Use of management by exception.B. Holding subordinates accountable for the items they control.C. Participation by subordinates in the budgetary process.D. Having top management set budget levels.

A. Management by exception lets managers concentrate their attention on areas where problems are. This will likely bea motivating item for managers as they will feel that their efforts are being directed where they are needed.

B. Holding subordinates accountable for the items they control would most likely motivate managers and encourage abetter performance.

C. Participation in the budgetary process would motivate managers by giving them a sense of ownership of the budget.

D. A budget is a very useful tool in a number of areas: planning, control, evaluation, motivation,communication, identifying future problems. However, when top management sets the budget without anyparticipation from those who will be responsible for meeting the budgeted goals, employees will not have asense of ownership of the plan. This will not be motivating and thus, not very effective.

Question 68 - HOCK CMA P1A3 01 - Probability

Which of the following is not a property of a normal probability distribution?

A. The tails of the curve are asymptotic to the y-axis.B. The mean divides the population in half.C. The mean, median and mode of the distribution are all the same.D. The inflection points on the curve are at −1σ and +1σ from the mean.

A.

This is an incorrect statement because the tails of a normal distribution curve are asymptotic to the x-axis, notto the y-axis.

An asymptote is a straight line approached by a curve as one of the variables in the equation of the curveapproaches infinity. The distance between the curve and the straight line becomes smaller and smaller as the

curved line approaches infinity, but the curve does not intersect the line.

The two tails of a normal distribution curve continue in both directions to infinity, getting closer and closer tothe x-axis but never meeting it. We say that the tails of the curve are asymptotic to the x-axis, meaning theynever intersect the x axis.

B. This is a property of a normal distribution. When a vertical line is drawn from the peak of the curve to the meanscore on the x-axis, the area under the curve to the left of the vertical line is exactly half the total area (50%), and theother half (50%) of the area is to the right of the vertical line.

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C. This is a property of a normal distribution. The mean, the median, and the mode are the same value: the point onthe x-axis where the curve peaks.

D. This is a property of a normal distribution. The inflection points are the points on the curve where the curve changesfrom bending upward to bending over. The inflection points for a normal distribution are at exactly −1σ and +1σ.


Scarf Corporation's controller has decided to use a decision model to cope with uncertainty. With a particular proposal,currently under consideration, Scarf has two possible actions, invest or not invest in a joint venture with an internationalfirm. The controller has determined the following.

Action 1: Invest in the Joint VentureEvents and Probabilities: Probability of success = 60%.Cost of investment = $9.5 million.Cash flow if investment is successful = $15 million.Cash flow if investment is unsuccessful = $2.0 million.

Additional costs to be paid = $0Costs incurred up to this point = $650,000

Action 2: Do Not Invest in the Joint VentureEvents: Costs incurred up to this point = $650,000 Additional costs to be paid = $100,000.

Which one of the following alternatives correctly reflects the respective expected values of investing versus notinvesting?

A. $300,000 and $(750,000).B. $300,000 and $(100,000).C. $(350,000) and $(750,000).

D. $(350,000) and $(100,000).

A. Costs incurred up to this point are irrelevant to the decision to be made, because they are costs that have alreadybeen incurred (called "sunk" costs), and they cannot be changed. So the only cash flows that make a difference in thisdecisiion are the expected future cash flows.

B.

Costs incurred up to this point are irrelevant to the decision to be made, because they are costs that havealready been incurred (called "sunk" costs), and they cannot be changed. So the only cash flows that make adifference in this decisiion are the expected future cash flows.

Action 1, Invest in the Joint Venture, has one potential cash inflow if the investment is successful and a

different potential cash inflow if the investment is not successful. The expected value of the cash inflow is theweighted average of the two possible cash inflows, weighted according to their probabilities. So the expectedvalue of the cash inflows from investing is ($15,000,000 × 0.60) + ($2,000,000 × 0.40), which equals $9,800,000.The amount of the investment is $9,500,000. Subtracting the amount of the investment from the expectedvalue of the cash inflows, we get an expected value of investing of $9,800,000 − $9,500,000, which equals$300,000.

Action 2, Do Not Invest in the Joint Venture, has only one potential cash flow, a cash outflow. If the companydecides not to invest, it will have additional costs to pay of $100,000. There is no need to calculate a weightedaverage here, because the probability is 100% that if the company decides not to invest, it will have to pay out

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$100,000.

So the answer to the question is $300,000 and $(100,000).

C. Costs incurred up to this point are irrelevant to the decision to be made, because they are costs that have alreadybeen incurred (called "sunk" costs), and they cannot be changed. So the only cash flows that make a difference in thisdecisiion are the expected future cash flows.

D. Costs incurred up to this point are irrelevant to the decision to be made, because they are costs that have alreadybeen incurred (called "sunk" costs), and they cannot be changed. So the only cash flows that make a difference in thisdecisiion are the expected future cash flows.


The average labor cost per unit for the first batch produced by a new process is $120. The cumulative average laborcost after the second batch is $72 per product. Using a batch size of 100 and assuming the learning curve continues,the total labor cost of four batches will be

A. $10,368.B. $4,320.C. $17,280.D. $2,592.

A. This is the average cost of one unit after 800 units have been produced multiplied by 400.

B. This is the average cost of one unit after 400 units have been produced multiplied by 100.

C. To solve this problem first we need to identify the learning curve percentage. The learning curve is apercentage of time reduction to complete a task for each doubling of cumulative production. In this case it is60% ($72 ÷ $120). Hence, the cumulative average labor cost of a unit after the fourth batch is $43.20 ($72 ×60%). There are 400 units in 4 batches. The total labor cost is $17,280 ($43.20 × 400).

D. This is the average cost of one unit after 800 units have been produced multiplied by 100.


Which one of the following schedules would be the last item to be prepared in the normal budget preparation process?

A. Manufacturing overhead budget.B. Cost of goods sold budget.C. Direct labor budget.D. Cash budget.

A. The manufacturing overhead budget is part of the operating budget. The manufacturing overhead budget isdeveloped after the production budget, but it is not the last budget to be prepared.

B. The cost of goods sold budget is developed after the production budget. It is a part of the operating budget but it isnot the last budget to be prepared.

C. The direct labor budget is part of the operating budget. The direct labor budget is developed after the productionbudget is developed, but it is not the last budget to be prepared.

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D. Of all the budgets given in the answer choices, the cash budget is the last budget to be prepared becauseall other budgets are inputs to it.


Pardise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (inunits) are planned for the fiscal year of July 1 through June 30:

July 1 June 30Raw material* 40,000 50,000Work-in-process 10,000 20,000Finished goods 80,000 50,000

*Two units of raw materials are needed to produce each unit of finished product.

If Pardise Company plans to sell 480,000 units during the fiscal year, the number of units it will have to manufactureduring the year is

A. 510,000 units.B. 440,000 units.C. 480,000 units.D. 450,000 units.

A. This answer treats the beginning and ending finished goods inventory backwards.

B. The change in work-in-process does not need to be included in this calculation.

C. This is the number of units to be sold.

D. If Paradise will sell 480,000 units and they want to have 50,000 units in ending finished goods inventory,Paradise will need to have 530,000 units during the period. Since they already have 80,000 of these units in

beginning inventory, they will need to manufacture 450,000 units in order to be able to meet the sales andending inventory plans.


Country Ovens is a family restaurant chain. Due to an unexpected road construction project, traffic passing by theCountry Ovens restaurant in Newtown has significantly increased. As a result, restaurant volume has similarlyincreased well beyond the level expected. Which type of budget would be most appropriate in helping the restaurantmanager plan for restaurant labor costs?

A. Flexible budget.

B. Zero-based budget.C. Activity-based budget.D. Rolling budget.

A. A flexible budget would be the most appropriate budget, as it would allow management to measureoperating success at any activity level experienced. A flexible budget can be adjusted upward for increasedtraffic and, if necessary, adjusted back down when the construction is completed, providing management withaccurate budget variance information under a variety of circumstances.

B. Zero-based budgeting is a budgeting method in which the budget is prepared without any reference to, or use of, the

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current period’s budget and the likely operating results for the current period. Although this approach would beappropriate when the next year's volume is expected to far exceed this year’s sales volume, it is still a static budget. And a static budget does not make allowance for changes in volume that may take place. Therefore, this would not bethe best choice in this situation.

C. Activity-based budgeting is similar in concept to activity-based costing. Activities that drive the costs are identified, abudgeted level of activity for each of these drivers is determined based on a budgeted level of production, and

budgeted amounts are developed based on the budgeted level of activity. This is a good basis for developing a budget,but since it depends upon a budgeted level of activity, the budget developed will be a static budget that will not makeallowance for changes in volume that may take place. Therefore, this would not be the best choice in this situation.

D. A rolling budget is a continual budget that adds one month as another month is completed. This type of budget is astatic budget, and a static budget does not make allowance for changes in volume that may take place. Therefore, thiswould not be the best choice in this situation.


Wilson Company uses a comprehensive planning and budgeting system. The proper order for Wilson to prepare

certain budget schedules would be:

A. Cost of goods sold, balance sheet, income statement, and statement of cash flows.B. Income statement, balance sheet, statement of cash flows, and cost of goods sold.C. Statement of cash flows, cost of goods sold, income statement, and balance sheet.D. Cost of goods sold, income statement, balance sheet, and statement of cash flows.

A. The income statement is an input to the balance sheet, so the income statement is prepared before the balancesheet.

B. The budget for cost of goods sold is prepared before the budgeted income statement and before any of financialbudgets (capital budget, cash budget, budgeted balance sheet, budgeted statement of cash flows).

C. The statement of cash flows is the last financial statement to be prepared in the budgeting process.

D. Cost of goods sold is a part of operating budget which culminates in the preparation of the budgetedincome statement. The budgeted income statement is an input to the budgeted balance sheet, and thebudgeted statement of cash flows is the last to be prepared in the budgeting process.


A manufacturing company required 800 direct labor hours to produce the first lot of four units of a new motor.Management believes that a 90% learning curve will be experienced over the next four lots of production. How manydirect labor hours will be required to manufacture the next 12 units?

A. 2,016B. 1,944C. 2,160D. 1,792

A. This answer results from calculating the cumulative total number of hours correctly but also treating the cumulativetotals at each doubling as though they were incremental amounts. The correct way to calculate the number of directlabor hours required to manufacture the next 12 units after the first 4 units is to simply subtract the number of hoursrequired for the first 4 units (800 hours) from the cumulative total hours required for all 16 units (2,592 hours).

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B. This is the average cost per batch for the first four batches multiplied by 3 batches. This is not the correct way tocalculate the number of direct labor hours required to manufacture the next three batches (12 units).

Calculate the total number of direct labor hours required for the first four batches (2 doublings), then subtract thenumber of direct labor hours required for the first batch, and you will have the number of direct labor hours required forbatches 2 through 4.

C.

This answer results from multiplying the number of direct labor hours required for the first batch (800) by 3 and againby 0.90. This is not the correct way to calculate the number of direct labor hours required to manufacture the next threebatches (12 units).

Calculate the total number of direct labor hours required for the first four batches (2 doublings), then subtract thenumber of direct labor hours required for the first batch, and you will have the number of direct labor hours required forbatches 2 through 4.

D.

The first doubling occurs with the second lot of four, which consists of 4 additional units. The seconddoubling occurs with the fourth lot of four, which consists of lots three and 4, each consisting of 4 units. So

the second batch from the first doubling plus the third and fourth batches from the second doubling willconstitute the next 12 units that this question is asking for. We need to find the total number of hours requiredfor the first 16 units (batches 1 through 4), then subtract the number of hours required for the first 4 units(batch 1) from that number, and we have the number of hours required for the next 12 units after the first 4units.

800 (2 × 0.9) (2 × 0.9), which is the same thing as 800 (2 × 0.9)2 = 2,592. That is the total number of direct laborhours required for the first 4 batches (16 units).

Since the first batch of 4 units required 800 direct labor hours, the second, third and fourth batches willrequire 2,592 − 800, or 1,792 direct labor hours. That is the number of direct labor hours that will be required tomanufacture the next 12 units.


A company's need for external financing depends on several factors. A factor that does not affect the company's needfor external financing is

A. The company's retention ratio.B. Rapid sales growth.C. The company's spontaneous assets-to-sales ratio.D. The company's profit margin.

A. A company's retention ratio is a factor that affects the company's need for external financing. The retention ratio is

how much of the company's net income it does not pay out in dividends and thus retains in the company. The retentionratio is calculated as (net income − dividends paid) ÷ net income. Companies that pay out less of their net income individends have a higher retention ratio. The higher the retention ratio, the less need the company will have for externalfinancing. Companies with smaller retention ratios will have a greater need for additional funds.

B. Rapid sales growth is a factor that affects a company's need for external financing. Rapid sales growth requiresincreases in assets, and increases in assets generate the need for external financing. The higher the growth rate insales, the greater will be the need for additional financing.

C. It is the company's spontaneous liabilities-to-sales ratio that affects its need for external financing. A

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company with a higher spontaneous liabilities-to-sales ratio will have less need for external financing,because it can finance more of its working capital needs by using increases in accounts payable and accruedliabilities.

D. A company's profit margin is a factor that affects the company's need for external financing. The higher thecompany's profit margin is, the more net income will be available to fund increases in assets, and the less need thecompany will have for external financing.


The results of regressing Y against X are as follows. CoefficientIntercept 5.23Slope 1.54

When the value of X is 10, the estimated value of Y is

A. 53.84B. 6.77C. 8.05D. 20.63

A. This answer results from reversing the constant coefficient and the variable coefficient in the regression model. Thisis a regression model of the form y = ax + b, and to answer it properly, it is necessary to properly identify the constantcoefficient and the variable coefficient and use them, along with the value of x, to solve the equation.

B. This answer results from adding the intercept and the slope together. This is a regression model of the form y = ax +b, and to answer it properly, it is necessary to identify the constant coefficient and the variable coefficient and usethem, along with the value of x, to solve the equation.

C. This answer results from multiplying the intercept by the slope. This is a regression model of the form y = ax + b,

and to answer it properly, it is necessary to identify the constant coefficient and the variable coefficient and use them,along with the value of x, to solve the equation.

D.

In this simple regression model, the coefficient means the constant coefficient, or the y intercept, which is thevalue of y when x is equal to zero. The slope is the variable coefficient, which represents the amount ofincrease in y for each unit of increase in x; and the variable coefficient is always next to x in the equation.Therefore, the regression equation to be solved is y =ax + b

Where:a =1.54 x=10

b=5.23

Plugging the numbers into the equation, we get:y=(1.54× 10) + 5.23

y=20.63


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Which one of the following items is the last schedule to be prepared in the normal budget preparation process?

A. Cash budget.B. Manufacturing overhead budget.C. Selling expense budget.D. Cost of goods sold budget.

A.

The budgeting preparation process usually starts with the sales budget and continues through thepreparation of the income statement which is the last budget of the operating budget and ends withpreparation of the financial budget, which includes the cash budget, the budgeted balance sheet andstatement of cash flows, and the capital budget.

The cash budget is a part of the financial budget and is one of the last budgets to be prepared. It comes afterall the other answer choices given. This is because the cash budget is impacted by all of the other individualbudgets.

B. The manufacturing overhead budget is an operating budget and it is completed prior to the cash budget.

C. The selling expense budget is an operating budget and it is completed prior to the cash budget.

D. The cost of goods sold budget is a part of the operating budget and it is completed prior to the cash budget.


Moss Point Manufacturing recently completed and sold an order of 50 units that had costs as follows.Direct materials $1,500Direct labor (1,000 hours x $8.50) 8,500Variable overhead (1,000 hours x $4.00)* 4,000Fixed overhead** 1,400 $15,400

*Applied on the basis of direct labor hours.**Applied at the rate of 10% of variable cost.

If Moss Point had experienced a 70% learning curve, the bid for the 150 units would

A. Be 10% lower than the total bid at an 80% learning curve.B. Include 6.40 direct labor hours per unit at $8.50 per hour.C. Include increased fixed overhead costs.D. Show a 30% reduction in the total direct labor hours required with no learning curve.

A. If there were an 80% learning curve instead of 70%, the reduction in labor hours would be more than 25% (based on

the difference of 1,960 hours at an 80% learning curve and 1,560 hours at a 70% learning curve).

B. Since there are two doublings, the number of hours required for 200 units using a 70% learning curve is:1,000 hours × (0.7 × 2) × (0.7 × 2) = 1,960 hours. 1,960 hours required for 200 units less 1,000 hours required forthe first 50 units = 960 hours required for the last 150 units. 960 hours ÷ 150 units = 6.4 hours required per unitfor the last 150 units.

C. Fixed overhead costs per lot (a lot equals 50 units) would decrease since the cost is applied at a rate based ondirect labor hours, which is decreasing.

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D. If there were no learning curve the total direct hours would be approximately 4,000 hours, instead of 1,960 hours, achange of more than 200%.


Suboptimal decision making is not likely to occur when:

A. Guidance is given to subunit managers about how standards and goals affect them.B. The subunits in the organization compete with each other for the same input factors or for the same customers.C. There is little congruence among the overall organization goals, the subunit goals, and the individual goals ofdecision makers.D. Goals and standards of performance are set by the top-management.

A. This is correct. Guidance provided to managers allows them to work at their optimal level within theconstraints.

B. Creating a culture of competition within an organization for scarce resources (be they input factors or customers)cannot result in a win for the company as a whole. The company is directing their efforts inward rather than outward

and opportunities will be missed.

C. When goals at various levels are not connected there are many decisions that will be made with ineffectiveinformation and therefore the decisions will not necessarily be the best possible.

D. Senior management is not fully aware of day to day operations and would not be in the best position to develop themost optimal goals and standards. They simply don't have the best knowledge of the situation.


The Madison Company has decided to introduce a new product. The company estimates that there is a 30 percentprobability that the product will contribute $700,000 to profits, a 30 percent probability that it will contribute $200,000,and a 40 percent probability that the contribution will be a negative $400,000. The expected contribution of the newproduct is

A. $500,000.B. $110,000.C. $166,667.D. $380,000.

A. $500,000 is the sum of the three possible contributions to profits.

B. The expected value is calculated by multiplying each expected outcome by the probability that it will occurand then adding these products together. It is done as follows: ($700,000 × 0.30) + ($200,000 × 0.30) +

([$400,000] × 0.40) = $210,000 + $60,000 − $160,000 = $110,000.

C. $166,667 is the simple average of the three possible contributions to profits giving each outcome equal probability.

D.


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Denton Inc. manufactures industrial machinery and requires 100,000 switches per year in its assembly process. Whenswitches are received from a vendor they are installed in the specific machine and tested. If the switches fail, they arescrapped and the associated labor cost of $25 is considered lost productivity. Denton purchases "off the shelf"switches as opposed to custom-made switches and experiences quality problems with some vendors' products. Adecision must be made as to which vendor to buy from during the next year based on the following information.

VendorPrice per switchPercentage expected

to pass the testP $35 90%Q $37 94%R $39 97%

S $40 99%

Which vendor should Denton's controller recommend to management?

A. Vendor Q.B. Vendor P.C. Vendor S.D. Vendor R.

A. In order to have the 100,000 switches they need, the company will need to purchase more switches to compensatefor the defective ones, no matter which vendor they use. The lowest cost vendor will be the one where the company'stotal cost, including the cost to purchase all the required switches as well as the cost of lost productivity caused bydefective switches, is the lowest. This is not the lowest cost vendor.

B. The price per switch is the lowest from Vendor P. However, the defective rate is also the highest. If the companyuses Vendor P, it will have to purchase more switches in order to have 100,000 good switches than it will if it usesanother vendor. In addition, the company will have the highest cost in lost productivity. This is not the most economicalvendor to purchase from.

C.

The company needs 100,000 good switches per year. Because some of the switches provided by each vendorare defective, the company will have to purchase additional switches from each vendor in order to get thenumber of good switches they need, and that will add to the cost. In addition, the lost productivity caused bythe defective switches that have to be removed and replaced adds to the cost.

Total costs for each of the vendors' switches are as follows:

Vendor P: 90% are usable. Therefore, the company will need to buy 100,000 ÷ 0.90, or 111,112 switches peryear to get 100,000 good switches. Of those 111,112 switches, 10% will be defective and the company willincur a $25 labor cost for each defective switch. The total cost of 100,000 good switches from Vendor P will be:

(111,112 × $35) + (111,112 × 0.10 × $25) = $4,166,700.

Vendor Q: 94% are usable. Therefore, the company will need to buy 100,000 ÷ 0.94, or 106,383 switches peryear to get 100,000 good switches. Of those 106,383 switches, 6% will be defective and the company will incura $25 labor cost for each defective switch. The total cost of 100,000 good switches from Vendor Q will be:

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(106,383 × $37) + (106,383 × 0.06 × $25) = $4,095,746.

Vendor R: 97% are usable. Therefore, the company will need to buy 100,000 ÷ 0.97, or 103,093 switches peryear to get 100,000 good switches. Of those 103,093 switches, 3% will be defective and the company will incura $25 labor cost for each defective switch. The total cost of 100,000 good switches from Vendor R will be:

(103,093 × $39) + (103,093 × 0.03 × $25) = $4,097,947.

Vendor S: 99% are usable. Therefore, the company will need to buy 100,000 ÷ 0.99, or 101,011 switches peryear to get 100,000 good switches. Of those 101,011 switches, 1% will be defective and the company will incura $25 labor cost for each defective switch. The total cost of 100,000 good switches from Vendor S will be:

(101,011 × $40) + (101,011 × 0.01 × $25) = $4,065,693.

The lowest cost vendor is Vendor S.

D. In order to have the 100,000 switches they need, the company will need to purchase more switches to compensatefor the defective ones, no matter which vendor they use. The lowest cost vendor will be the one where the company'stotal cost, including the cost to purchase all the required switches as well as the cost of lost productivity caused bydefective switches, is the lowest. This is not the lowest cost vendor.


A continuous (rolling) budget

A. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity.B. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.C. Presents planned activities for a period but does not present a firm commitment.D. Drops the current month or quarter and adds a future month or quarter as the current month or quarter is completed.

A. A continuous budget can be prepared for only one level of activity. The budget that prepared for different levels of

activity is called a flexible budget.

B. A continuous budget can be prepared for different levels of activities. The budget that is prepared for only one levelof activity is a static budget.

C. A continuous budget represents the same firm commitment that other types of budgets represent.

D. A continuous budget, also called a rolling budget, is one that is prepared for a certain period of time aheadof the present. For example, a 1-year continuous budget will be prepared at the end of every month for thenext 12 months.


Health Foods Inc. has decided to start a cash budgeting program to improve overall cash management. Informationgathered from the past year reveals the following cash collection trends.

40% of sales are on credit

50% of credit sales are collected in month of sale

30% of credit sales are collected first month after sale

15% of credit sales are collected second month after sale

5% of credit sales result in bad debts

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Which one of the following statements concerning approaches for the budget development process is correct?

A. To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed even if the

sales forecast upon which they are based proves to be wrong in the middle of the fiscal year.B. Since department managers have the most detailed knowledge about organizational operations, they should usethis information as the building blocks of the operating budget.C. With the information technology available, the role of budgets as an organizational communication device hasdeclined.D. The top-down approach to budgeting will not ensure adherence to strategic organizational goals.

A. This statement is not correct. Budgets should always have some degree of flexibility. If forecasts are determined tobe incorrect, then the budget committee should explore options to get the budget back on track in total, or to implementa contingency budget so that departments are still working with a realistically challenging goal in mind.

B. This is correct. It is the department manager who is best aware of day to day operations, local issues thataffect the department, opportunities for efficiencies, and obstacles to success. These factors will assist indeveloping a budget that includes challenging and realistic goals that are accepted by the manager and theemployees.

C. This statement is not correct. Technology can certainly cut down on the time required for budgeting, but it cannotreplace discussion among and between various departments and levels of management. The budget is a consistentreminder of the importance of having each department work toward an individual goal in order to meet the overallcorporate objectives.

D. This statement is not correct. Under the top down approach the budget will be developed specifically to achievestrategic organizational goals as that is the primary focus of senior management – overall organizational performance.


The following table contains the profit outcomes for each state of nature and decision combination for a firm.<

States of Nature

S1 S2 S3

Decision 1 $24 $14 $(6)Decision 2 $20 $10 $5Decision 3 $(20) $8 $15Probabilities 0.10 0.50 0.40

The expected value of perfect information for this firm in this case is

A. $8.60.B. $8.40.C. $9.00.D. $6.40.

A.

This is the difference between the total of the three possible expected values without perfect information and thecompany's expected value with perfect information.

The expected value of perfect information is the difference between the company's expected value with perfect

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information and the single best expected value they can achieve without the perfect information.

B.

This is the difference between the expected profit with perfect information and the expected profit from makingDecision 1.

The expected value of perfect information is the difference between the company's expected value with perfectinformation and the single best expected value they can achieve without the perfect information.

C.

This is the expected profit without perfect information: the expected profit from making Decision 2, which is the highestexpected profit of the three possible decisions.

The expected value of perfect information is the difference between the company's expected value with perfectinformation and the single best expected value they can achieve without the perfect information.

D.

The expected value of perfect information is the price one would pay to obtain perfect information, and it iscalculated as the difference between the expected return with perfect information and the expected returnwithout it. With perfect information the company would be able to choose the correct decision in advance(let's call them levels of supply) for each of the possible states of nature (let's call them levels of demand). Ifthe company had perfect information, for each possible level of demand, the company will choose the bestsupply alternative in advance. Without perfect information, they will choose the decision (supply level) thathas the highest expected value of the three possible decisions.

First, we need to calculate an expected value without perfect information for each possible decision (supplylevel). If the company does not have perfect information and it makes a decision to supply an amount called"Decision 1," the expected value of that decision is $7 ($24 × 0.1) + ($14 × 0.5) + ([$6] × 0.4). If the companymakes a decision to supply an amount called "Decision 2," the expected value of that decision is $9 ($20 × 0.1)+ ($10 × 0.5) + ($5 × 0.4). The expected value of Decision 3 is $8 ([$20] × 0.1) + ($8 × 0.5) + ($15 × 0.4). Sowithout perfect information, the company would choose the supply level or decision with the highest

expected value. That would be Decision 2, because the expected value of Decision 2 without perfectinformation is $9.

If the company had perfect information, it would choose the best possible outcome for each of the possiblestates of nature, because they would know in advance which of the states of nature would occur. However, atthis point, the company does not yet know which state of nature the perfect information will tell them willoccur, because they do not yet have this perfect information. They are trying to figure out what the value ofthe perfect information will be before they know what the perfect information is, so they will know themaximum amount to pay for it. Therefore, the next step is to calculate their expected value if they had perfectinformation (which they do not yet have) using the highest possible return for each of the possible states ofnature (demand levels). That will be ($24 × 0.1) + ($14 × 0.5) + ($15 × 0.4), which is $15.40.

The difference between the best expected value they can achieve without perfect information and their

expected value with perfect information is $15.40 − $9.00, or $6.40. So that is the expected value of the perfectinformation, and it is the maximum price that one would pay for perfect information before knowing what theperfect information will tell them.


Which one of the following items would most likely cause the planning and budgeting system to fail? The lack of

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A. adherence to rigid budgets during the year.B. historical financial data.C. top management support.D. input from several levels of management.

A. Lack of adherence to rigid budgets during the year is not something that would cause the planning and budgetingsystem to fail. In fact, a budget needs to be flexible enough to be able to be changed if the assumptions upon which it

was built change significantly during the year.

B. Historical financial data is useful in developing a budget, as long as each line item of historical information is nottaken as the basis for the next year's budget without any real planning. However, lack of historical financial data is notthe item that would most likely cause the planning and budgeting system to fail.

C. Lack of top management support is the item that would most likely cause the planning and budgetingsystem to fail. If the budget is not supported by top management, lower level managers and employees willmake no effort to meet the budget targets, and the budget will become a meaningless exercise.

D. Input from several levels of management is important in developing a budget. However, lack of it is not the item thatwould most likely cause the planning and budgeting system to fail.


The Booster Club at Blair College sells hot dogs at home basketball games. The group has a frequency distribution ofthe demand for hot dogs per game and plans to apply the expected value decision rule to determine the number of hotdogs to stock.

The Booster Club should select the demand level that:

A. Has the greatest expected monetary value.B. Has the greatest probability of occurring.C. Has the greatest expected opportunity cost.

D. Is closest to the expected demand.

A. The expected monetary value is the criterion used to select the best alternative. The Booster Club shouldstock the quantity that corresponds to the demand level that has the highest expected value.

B. The greatest probability is not a criterion to select the demand level.

C. The greatest expected opportunity cost is not a criterion to select the demand level.

D. The expected demand is not a criterion to select the demand level.


The Mountain Mule Glove Company is in its first year of business. Mountain Mule had a beginning cash balance of$85,000 for the quarter. The company has a $50,000 short-term line of credit. The budgeted information for the firstquarter is shown below.

JanuaryFebruary MarchSales $60,000 $40,000$50,000Purchases 35,000 40,000 75,000Operating costs 25,000 25,000 25,000

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All sales are made on credit and are collected in the second month following the sale. Purchases are paid in the monthfollowing the purchase, while operating costs are paid in the month that they are incurred. How much will MountainMule need to borrow at the end of the quarter if the company needs to maintain a minimum cash balance of $5,000 asrequired by a loan covenant agreement?

A. $5,000.B. $0.

C. $10,000.D. $45,000.

A. This answer could result from assuming that all sales are collected during the month the sale is made and allpayments are made during the month the payable is incurred.

B. This answer could result from assuming that sales made on credit are collected in the month following the saleinstead of in the second month following the sale.

C.

Here is Mountain Mule's budgeted cash activity for the quarter:January beginning cash balance $85,000

January collections -0-

January disbursements:

Purchases -0-

January operating costs (25,000)

January ending/February beginning cash balance $60,000

February collections -0-

February disbursements:

January purchases (35,000)

February operating costs (25,000)

February ending cash balance before borrowing $-0-

February borrowing to maintain $5,000 minimum cash 5,000

February ending/March beginning cash balance $ 5,000

March collections: January sales $60,000

March disbursements: February purchases (40,000)

March operating costs (25,000)

March ending cash balance before borrowing $-0-

March borrowing to maintain $5,000 minimum cash 5,000

March ending balance after borrowing $5,000

If Mountain Mule's loan covenant requires the company to meet the required minimum cash balance at theend of each month, the company will need to borrow $5,000 at the end of February and $5,000 at the end ofMarch, for $10,000 total.

However, if the loan covenant requires Mountain Mule to have a minimum cash balance only at the end ofeach quarter, the company can wait until the end of the quarter to borrow full $10,000 required.

D.


We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the ExamSuccess screen. Thank you in advance for helping us to make the HOCK study materials

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better.


LCB, Inc. is preparing a bid to the Department of the Navy to produce engines for rescue boats. The company hasmanufactured these engines for the Navy for the past 3 years, on an exclusive contract, and has experienced thefollowing costs:Cumulative

UnitsProduced

TotalCumulative Materials

CumulativeLabor Costs

10 $ 60,000 $120,00020 120,000 192,00040 240,000 307,200

At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. Based on historical costs, LCB knowsthat the production of 40 engines will be allocated $100,000 of fixed overhead costs. The bid request is for anadditional 40 units; all companies submitting bids are allowed to charge a maximum of 25% above full cost for each

order.

In order to ensure that the company would not lose money on the project, LCB's minimum bid for the 40 units would be

A. $760,800B. $708,640C. $608,640D. $885,800

A. This is 25% above variable costs. The question asks for the minimum bid to avoid losing money. This is not theminimum bid to avoid losing money.

B. This answer includes the $100,000 of fixed costs that will be allocated to this contract, i.e., "full cost." The questionasks for the minimum bid to avoid losing money. Those $100,000 of fixed costs will be paid by the company as a whole

whether or not the company gets this contract. The only costs that should be included in this analysis are incrementalcosts that would be incurred only if the production of the additional 40 engines takes place. Since the $100,000 inallocated fixed cost is not an incremental cost, it should not be included.

C.

In order to determine the minimum bid, we need to calculate the costs that will be incurred only if theadditional 40 engines will be produced. This will include materials of $240,000 (equal to the cost of materialsfor the 40 units already produced) plus the costs of the labor and variable overhead. We will not include fixedoverhead that is allocated to the engines because this overhead would be incurred even if the engines are notproduced.

To determine the cost of the labor for the next 40 units, we first need to find the learning curve percentage thatapplies. The first 10 units cost $120,000 in labor. If no learning had taken place, then units 11 through 20

would have also cost $120,000, and the total cumulative labor cost for the first 20 units would have been$240,000. However, the cumulative labor cost for the first 20 units was $192,000. Under the CumulativeAverage-Time Learning Model, the formula to find the learning curve would be $120,000 × (2 × X) = $192,000,where X = the learning curve. Solving for X, we get $240,000X = $192,000, and X = 0.80. We can do the samething for units 21 through 40: $192,000 × (2 × X) = $307,200. $384,000X = $307,200, and X = 0.80. So we knowthe learning curve is 80%.

Therefore, we can calculate the cost of the labor to produce the next 40 engines as follows: $307,200 × (2 ×0.80) = X, where X = the cumulative cost of labor for all 80 units produced. Solving for X, we get X = $491,520.From this, we can calculate the labor cost to produce units 41 through 80. It will be $491,520 minus $307,200

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(the cost to produce the first 40 engines), or $184,320. Variable overhead will also be charged at $1 per directlabor dollar, so that will also be $184,320. The variable costs of production are therefore $608,640 ($240,000direct materials + $184,320 direct labor + $184,320 variable overhead).

D. This is 25% above full cost, which is the maximum the company would be allowed to charge. However, the questionasks for the minimum bid to avoid losing money.

Question 91 - CIA 585 III.20 - Budget Methodologies

The major feature of zero-based budgeting (ZBB) is that it:

A. Questions each activity and determines whether it should be maintained as it is, reduced, or eliminated.B. Focuses on planned capital outlays for property, plant, and equipment.C. Takes the previous year's budgets and adjusts them for inflation.D. Assumes all activities are legitimate and worthy of receiving budget increases to cover any increased costs.

A. Zero-based budgeting is the budgeting method in which the current year budget is prepared for variouslevels of service that may be provided without any reference to, or use of, the prior period's budget. Thoughthis method is more time consuming and difficult for all of the people involved, there are a number ofadvantages to the company as a result of using this method. Because the budget is built up from zero, eachmanager must justify all of the expenses in his or her department. Each component is evaluated from acost-benefit perspective and priorities are made. Zero-based budgeting enables the company to identifyexpenses that are not value adding or that should be reduced due to some development in productionmethods or something similar.

B. This is usually a major feature of a capital budget.

C. Incremental budgeting usually takes the previous period budget and make adjustments to develop a budget for afollowing period.

D. Incremental or traditional budget usually assumes that all activities are legitimate and worthy of receiving budget

increases to cover any increased costs. In ZBB all activities need to be justified each year.


What would be the correct chronological order of preparation for the following budgets?I. Cost of goods sold budget.

II. Production budget.III. Purchases budget.IV. Administrative budget.

A. I, II, III, IVB. II, III, I, IVC. IV, II, III, ID. III, II, IV, I

A. The COGS budget cannot be completed before the production budget and purchases budgets are complete.

B. The production budget indicates what needs to be produced and when, so this is information required forthe purchases budget. The COGS budget is based on desired beginning inventory, desired ending inventory,and expected purchases, so the purchases budget must be prepared before the COGS budget can beprepared. The administrative budget is last as some variable administrative expenses such as purchasing

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expenses will be based on the previous budgets.

C. The administrative budget must come last in this series, as some variable administrative expenses such aspurchasing expenses will be based on the previous budgets.

D. The purchases budget cannot be completed before the production budget is complete.


Stock X has the following probability distribution of expected future returns.ProbabilityExpected Return

.10 −20%

.20 5%

.40 15%

.20 20%

.10 30%

The expected rate of return on Stock X would be

A. 12%.B. 16%.C. 19%.D. 10%.

A.

The expected rate of return is the sum of each of the possible returns multiplied by its probability ofoccurring, or the weighted average of the possible returns.

(0.10 × [0.20]) + (0.20 × 0.05) + (0.40 × 0.15) + (0.20 × 0.20) + (0.10 × 0.30) = 0.12 or 12%

B. This answer results from using a positive return for the first return instead of a negative return.

C.



D. This is an unweighted average of the possible returns. The expected rate of return is a weighted average, using the

probabilities as the weights.

Question 94 - CIA 1194 II.46 - Forecasting Techniques

In regression analysis, which of the following correlation coefficients represents the strongest relationship between theindependent and dependent variables?

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A. 1.03B. -.02C. -.89D. .75

A. The coefficient of correlation lies between -1.0 and +1.0. Therefore, the coefficient of correlation could not be 1.03.

B. The correlation coefficient representing the strongest relationship between the independent and dependent variableis the one that is closest to either +1 or −1. This is the weakest correlation among the answer choices.

C. The coefficient of correlation is a numerical measure that measures both the direction (positive or negative)and the strength of the linear association between the dependent and independent variables. The coefficientof correlation lies between -1.0 and +1.0. When the correlation coefficient is positive (between 0 and +1), itmeans the dependent and independent variables move in the same direction. When the correlation coefficientis negative (between 0 and −1), it means they move in opposite directions, i.e., when the independent variablegoes up, the dependent variable goes down. When the coefficient of correlation is 0, it means either that thereis no correlation between the two variables, or that the relationship between them is not linear. To identify thestrongest correlation we need to determine the coefficient of correlation that is closest to either +1 or −1. Inthis case it is −.89.

D. This is not the strongest correlation. The strongest relationship between the independent and dependent variables isrepresented by a correlation coefficient that is closest to either +1 or −1. See the correct answer for a completeexplanation.


Which one of the following four probability distributions provides the highest expected monetary value? Alternative #1 Alternative #2 Alternative #3 Alternative #4

Prob. Cash InflowsProb. Cash Inflows Prob. Cash Inflows Prob. Cash Inflows

10% $50,000 10% $50,000 10% $50,000 10% $150,000

20% 75,000 20% 75,000 20% 75,000 20% 100,000

40% 100,000 45% 100,000 40% 100,000 40% 75,00030% 150,000 25% 150,000 30% 125,000 30% 50,000

A. Alternative #4.B. Alternative #3.C. Alternative #2.D. Alternative #1.

A. This alternative cannot have the highest expected value because its probabilities of the higher cash flows are lowerthan its probabilities of higher cash flows.

B. This alternative cannot have the highest expected value because its highest cash flow is lower than that of someother alternatives, whereas the probability of its highest cash flow is similar to other alternatives.

C. This alternative cannot have the highest expected value because its probability of the highest cash flow is thelowest, whereas its probability of the second highest cash flow is the highest.

D.

It is possible to answer this question by just looking at the values and their probabilities, though the correctanswer can also be calculated.

The alternative with the highest expected value will be the one where the higher values have higher

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probabilities. In Alternatives #1 and #2, a total of 70% probability is represented by values of $100,000 and$150,000. That is in contrast to Alternatives #3 and #4, where 70% probabilities are represented by $100,000and $125,000 and $75,000 and $50,000, respectively. So we can determine that the highest expected value willbe with either Alternative #1 or Alternative #2.

We can see that in Alternative #2, the lower of the two values, $100,000, has a higher probability of occurringthan it does in Alternative #1. And in Alternative #1, the higher of the two values, $150,000, has a higher

probabiity of occurring than it does in Alternative #2. Since the probabilities of values of $50,000 and $75,000are exactly the same for both alternatives, we can determine that Alternative #1 will have a higher expectedvalue (weighted average) than Alternative #2.

Or, we can calculate the expected value of each of the four alternatives and determine the highest of the four:

Alternative #1: (0.10 × $50,000) + (0.20 × $75,000) + (0.40 × $100,000) + (0.30 × $150,000) = $105,000.

Alternative #2: (0.10 × $50,000) + (0.20 × $75,000) + (0.45 × $100,000) + (0.25 × $150,000) = $102,500.

Alternative #3: (0.10 × $50,000) + (0.20 × $75,000) + (0.40 × $100,000) + (0.30 × $125,000) = $97,500.

Alternative #4: (0.10 × $150,000) + (0.20 × $100,000) + (0.40 × $75,000) + (0.30 × $50,000) = $80,000.

The alternative with the highest expected value is Alternative #1.

Question 96 - HOCK CMA.P1A2.01 - Forecasting Techniques

A linear relationship between an independent and a dependent variable means that

A. a forecast made using the historical data will be reasonably accurate.B. the relationship between the two variables must be a direct one.C. when the independent variable increases, the dependent variable increases by the same amount as theindependent variable has increased.

D. a graph of the two variables will result in a straight line within the relevant range.

A.

Just because a linear relationship exists between an independent variable and a dependent variable, that does notnecessarily mean that a forecast made using the historical data will be reasonably accurate. In order for a forecast tobe reasonably accurate, the historical changes in the two variables need to be correlated and there needs to be somereason for believing that changes in the independent variable are a cause of changes in the dependent variable.

Data can be linear without much correlation and without causation being present. And even when the variables appearto be well correlated, there may be no logical causative relationship between them. For example, one might say "Aselectric bills increase, sales of ice cream increase. Therefore, an increase in electricity use causes an increase in salesof ice cream." Even though electricity usage and ice cream sales might increase and decrease in tandem, there is nosupport for the statement that an increase in electricity usage causes an increase in sales of ice cream. It is, however,

very possible that both variables are being caused by a third factor, such as hot weather. A graph of temperatures onthe X axis and ice cream sales on the Y axis would likely indicate a strong correlation along with causation.

B. A direct relationship between two variables graphs as an upsloping line on an x-y coordinate graph. An upslopingline means that when the independent variable (x) increases, the dependent variable (y) also increases; and when theindependent variable decreases, the dependent variable also decreases. A linear relationship may be a directrelationship, but it is not required to be a direct relationship. It may also be an inverse relationship, in which thedependent variable changes in the opposite direction from the direction of change in the independent variable.

C.

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It is not necessary for the dependent variable to increase by the same amount as the independent variable increases inorder for a l inear relationship to exist between the independent and the dependent variable.

However, it is necessary for the dependent variable (y) to increase by the same amount for each unit of increase in theindependent variable (x). If the amount of increase in the dependent variable varies, the line on the graph will not be astraight one and the relationship will not be a linear one.

D.

If the relationship between an independent variable and a dependent variable is linear, it will graph as astraight line on an x-y coordinate graph. For each unit that the x variable changes, a proportional change willtake place in the y variable, and this proportional amount of change is a constant amount.

A linear function will have the form ŷ = ax + b, where

ŷ = the predicted value of y on the regression line corresponding to each value of x;a = the slope of the line (the amount by which y increases for each unit of increase in x);b = the y intercept, or the value of y when x is 0;x = the value of x on the x axis that corresponds to the value of y on the regression line.


Strategic managers use different business-level strategies to put the company's business model into action.Business-level strategies include all of the following except

A. What products should be offered and to which customer groups (market segments).B. How to improve the product attributes, the service attributes and personnel attributes associated with the company'sproduct.C. How much to differentiate and how to price the company's product or service.D. How and where to invest the company's capital in ways that will result in competitive advantage.

A. Business-level strategy involves decisions about what products should be offered and to which customer groups(market segments). The company needs to group customers according to their needs in order to determine whatproducts each market segment needs. The company must then decide whether to offer a product that will satisfy theneeds of each identified market segment.

B. Improving the product attributes, the service attributes and the personnel attributes associated with thecompany’s product leads to improved quality and improved customer satisfaction. The company needs toidentify the attributes that are important to its customers. It then needs to design its products and services toembody those attributes. It also needs to make sure that its personnel are trained so that the correct attributeswill be emphasized.

This is a functional-level strategy, not a business-level strategy. Functional-level strategies are developed toimprove the effectiveness of a company’s operations.

C. Business-level strategy involves decisions about customers’ needs and what needs are to be satisfied. This entailsdecisions about how much to differentiate the company's products versus the need to keep their costs down so that theproducts can be offered at a competitive price.

Some companies will choose to differentiate their products to a great degree through innovation, excellent quality, orresponsiveness to customers. These managers are investing their resources to create something distinct and different,and as a result they can often charge a premium price.

Other managers will base their business model on increasing efficiency and reliability in order to reduce costs. Thesemanagers are choosing to offer customers low-priced products.

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D. Business-level strategy involves choosing strategies to create products or services that will provide customers withthe most value while keeping the cost structure at a level that will permit them to be price competitive. The companyneeds to invest its capital in order to shape its distinctive competencies in a way that will result in a competitiveadvantage based on superior efficiency, quality, innovation, and responsiveness to customers.



November

Year 1(Actual)

December Year 1

(Budget)

JanuaryYear 2


Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% arecollected in the month of sale and the remainder in the month following the sale. Purchases of inventory are equal tonext month's sales and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in themonth of purchase, and the remainder are paid in the month following the purchase.

Noskey Corporation's budgeted cash collections in December Year 1 from November Year 1 credit sales are

A. $84,000B. $91,200C. $228,000D. $136,800

A. This represents 35% of the November credit sales. See the correct answer for a complete explanation.

B. November credit sales are $240,000. However, 5% of this total is not collectible. Therefore, the total

November credit sales that will be collectible are only $228,000 ($240,000 × 95%). Of this amount, 40% of thecollectible November credit sales will be collected in December. This is $91,200 ($228,000 × 40%).

C. This is the estimated credit sales made in November minus the uncollectible amount of November credit sales. Seethe correct answer for a complete explanation.

D. This is the cash collection of November sales in November. See the correct answer for a complete explanation.


The master budget

A. Shows forecasted and actual results.B. Can be used to determine manufacturing cost variances.C. Reflects controllable costs only.D. Contains the operating budgets.

A. The master budget is prepared for one level of output and made before or at the start of the budgeting period. Themaster budget represents what revenues and costs are planned to be for the budgeted period. Master budget do notinclude actual results.

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B. The master budget is prepared for one level of output and made before or at the start of the budgeting period. Themaster budget represents what revenues and costs are planned to be for the budgeted period. To determinemanufacturing cost variances the actual results and flexible budget data have to be used.

C. The master budget is prepared for one level of output and made before or at the start of the budgeting period. Themaster budget represents what revenues and costs are planned to be for the budgeted period. It includes all applicablecosts including costs that are not controllable by individual managers.

D. The master budget is the composition of pro forma of balance sheet, cash budget, statement of cash flowand the capital budget. Income statement which is the last budget of operating budget which is an input forbalance sheet. Thus, the master budget contains the operating budgets.


A quantitative technique useful in projecting a firm's sales and profits is

A. Gantt charting.B. Probability distribution theory.

C. Queuing theory.D. Learning curves.

A. Gantt charting is a project scheduling technique and it is not used in projecting firm's sales and profits.

B. Probability distribution theory is a mathematical technique that gives a numerical measure to how likely itis that each event in the distribution will occur. This technique can be used in different areas of businessincluding projection of sales and profits. Observing historical data of sales and profits, a probabilitydistribution can be developed.

C. Queuing theory is the process of determining the most efficient and effective way to move people or goods througha line, keeping waiting times to a minimum in the most economical manner. It is not used in projecting firm's sales andprofits.

D. Learning curve analysis states that the more experience people have with doing a task, the more efficient theybecome in doing that task. It is not used in projecting firm's sales and profits.


A simple two-state cost investigation model calls for a decision to investigate if the following inequality holds:

L(1 - P) > I + C(1 - P)

If:

L = excess operating cost if out of controlP = probability that the process is in controlI = cost of investigationC = cost of correction if out of control

The value (1 - P) must be

A. The probability that the process is out of control.B. The transpose of the probability matrix.C. A measure of the seriousness of the consequences.

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D. The inverse of the probability matrix.

A.

If P represents the probability that the process is in control, then (1 − P) must represent the probability that theprocess is out of control. The problem tells us that the model is a two-state model. The process can be eitherin control or out of control, and there can't be any other probabilities. The sum of all probabilities is always

equal to 1. Therefore, when P is the probability that the process is in control, (1 − P) must be the probabilitythat it is out of control.

Furthermore, L stands for the cost if the process is out of control, and C stands for the cost of correction ifthe process is out of control. We find the expected cost of an event by multiplying its cost by the probabilitythat the event will occur. Since L and C are both multiplied by (1 − P), (1 − P) must stand for the probabilitythat the process is out of control.

B.

In mathematics, a matrix is a rectangular array of numbers, symbols, or expressions. A probability matrix is a matrixused to describe the transitions of a Markov chain. A Markov chain is a mathematical system that undergoestransitions from one state to another, among a discrete (finite or countable) number of possible states.

Many events are influenced by previous occurrences or events. Therefore, certain outcomes tend to have specificconsequences, even though the occurrence of those outcomes is random. This idea of the chain of arbitrary resultswith a weighted likelihood of occurrence is Markov chain analysis. Simply said, it is he stream of events and how theyare connected to each other.

The model being used in this question is not an example of a Markov chain.

C. The value (1 - P) is not a measure of the seriousness of the consequences. There is no such measure.

D.

In mathematics, a matrix is a rectangular array of numbers, symbols, or expressions. A probability matrix is a matrixused to describe the transitions of a Markov chain. A Markov chain is a mathematical system that undergoes

transitions from one state to another, among a discrete (finite or countable) number of possible states.

Many events are influenced by previous occurrences or events. Therefore, certain outcomes tend to have specificconsequences, even though the occurrence of those outcomes is random. This idea of the chain of arbitrary resultswith a weighted likelihood of occurrence is Markov chain analysis. Simply said, it is he stream of events and how theyare connected to each other.

The model being used in this question is not an example of a Markov chain.


Based on past experience, a company has developed the following budget formula for estimating its shippingexpenses. The company's shipments average 12 lbs. per shipment:

Shipping costs = $16,000 + ($0.50 x lbs. shipped)

The planned activity and actual activity regarding orders and shipments for the current month are given in the followingschedule: Planned ActualSales orders 800 780Shipments 800 820

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Units shipped 8,000 9,000Sales $120,000$144,000Total pounds shipped 9,600 12,300

The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance forshipping costs for the purpose of performance evaluation would be

A. $20,800B. $22,150C. $20,680D. $20,920

A. This answer uses the planned number of pounds to be shipped. See the correct answer for a complete explanation.

B. There is a lot of information in this question, but much of it is not needed. We are told what the formula isand that the actual shipping was 12,300 pounds. Putting this into the formula, we get: $16,000 + ($0.50 ×12,300) = $22,150.

C. This answer uses the number of orders instead of the number of pounds shipped. See the correct answer for acomplete explanation.

D. This answer uses the number of shipments instead of the number of pounds shipped. See the correct answer for acomplete explanation.


Which one of the following is not considered to be a benefit of participative budgeting?

A. The budget estimates are prepared by those in direct contact with various activities.B. Managers are more motivated to reach the budget goals since they participated in setting them.C. Individuals at all organizational levels are recognized as being part of the team; this results in greater support of the

organization.D. When managers set the final targets for the budget, top management need not be concerned with the overallprofitability of current operations.

A. This is a benefit of participatory budgeting.

B. This is a benefit of participatory budgeting.

C. This is a benefit of participatory budgeting.

D. Just because managers that are more directly involved with the activity have participated in the budgetingprocess, does not mean that top management does not need to be concerned about overall profitability ofcurrent operations.


A company has the following budget data:Beginning finished goods inventory40,000 unitsSales 70,000 unitsEnding finished goods inventory 30,000 unitsDirect materials $10 per unit

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Direct labor $20 per unitVariable factory overhead $5 per unitSelling costs $2 per unitFixed factory overhead $80,000

What will be the total budgeted production costs?

A. $2,300,000B. $2,180,000C. $2,220,000D. $2,100,000

A. In this answer it incorrectly assumes that selling costs are a variable production cost. However, selling costs are aperiod cost.

B.

First, we need to determine the number of units produced in during the period using the formula for thephysical flow of goods: Beginning Inventory + Units Produced − Units Sold = Ending Inventory.

40,000 + Units Produced − 70,000 = 30,000.Units Produced = 60,000

We then multiply the unit variable production cost by the number of units produced and add the product tothe fixed overhead cost, since fixed overhead is a production cost also. Period costs such as selling costs arenot production costs and we do not take them into consideration when calculating the budgeted productioncosts.

Unit variable production costs are: $10 DM + $20 DL + $5 VOH = $35. Total variable production costs are: $35 ×60,000 = $2,100,000. Total production costs are: $2,100,000 + $80,000 = $2,180,000

C. In this answer it incorrectly assumes that selling costs are variable production costs, and fixed overhead are notincluded in calculation. However, selling costs are a period cost, not a production cost, and fixed overheads are aproduction cost.

D. This is the total variable costs of production.


A municipal government requires each department supervisor to submit an annual budget request stating the specificgoals of the department and listing a series of "decision packages" relating to each goal. Each decision packagedescribes a set of desired activities, the benefits of these activities, and the potential consequences of not performingthe activities. Funds are allocated based on the estimated costs and benefits of each package. This is an example of

A. An imposed budget.

B. Incremental budgeting.C. A static budget.D. Zero-base budgeting.

A. An imposed budget is budget that is prepared by top management without the participation of lower levelmanagement.

B. Incremental budgeting is based on the prior period's budget.

C. A static budget is a budget that is prepared for only one level of activity.

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D. Zero-based budgeting is the budgeting method in which the current year budget is prepared without anyreference to, or use of, the prior period's budget. Within zero-based budgeting all of the activities that adepartment undertakes are identified and then prioritized. This is the manner in which costs are justified andsupported. Also, because the manager needs to examine every single expenditure and activity within thedepartment, he is more likely to develop an alternative and, hopefully cheaper, method of accomplishing thesame thing.



UnitsProduced



10 $ 60,000 $120,00020 120,000 192,000

40 240,000 307,200

At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. Based on historical costs, LCB knowsthat the production of 40 engines will be allocated $100,000 of fixed overhead costs. The bid request is for anadditional 40 units; all companies submitting bids are allowed to charge a maximum of 25% above full cost for eachorder.

LCB's rate of learning on the 3-year engine contract is

A. 79.0%B. 80.0%.C. 62.5%.D. 75.5%.

A.

This is not the correct answer. The learning curve percentage (using the cumulative average-time learning model) isthe total time or cost actually required for the total production when production doubles divided by the total time or costif no learning had taken place. It can also be determined by calculating the cumulative average cost per unit at eachlevel and dividing the cumulative average cost per unit at the doubled levelby the cumulative average cost at theprevious level.

We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials

better.

B.

The learning curve percentage (using the cumulative average-time learning model) is the total time or costactually required for the total production when production doubles divided by the total time or cost if nolearning had taken place. It can also be determined by calculating the cumulative average cost per unit at eachlevel and dividing the cumulative average cost per unit at the doubled levelby the cumulative average cost atthe previous level.

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In looking at the information provided, we see that the materials costs do not have any efficiencies asproduction increases. For all levels of production the materials cost is $6,000 per unit. So our attention isfocused on the labor.

In order to produce 10 units, the company incurred $120,000 of labor. If that same productivity level were tocontinue (i.e., if no learning were taking place), in order to produce 20 units, they would incur $240,000 oflabor costs (2 × $120,000). However, they incurred only $192,000 of labor costs, which is 80% of $240,000

($192,000 ÷ $240,000). And at a cost of $192,000 for 20 units, if no learning took place as they manufacturedthe next 20 units, it would have cost a total of $384,000 to produce a total of 40 units, including the first 20.However, it cost only $307,200 for all 40 units, which is 80% of $384,000. So, every time production doubles,the company is experiencing a learning curve of 80%.

Calculating it another way, the cumulative average labor cost per unit is $12,000 when a total of 10 units hasbeen produced ($120,000 ÷ 10); and it is $9,600 per unit when 20 units have been produced ($192,000 ÷ 20).$9,600 ÷ $12,000 = 0.80, or an 80% learning curve.

C.

This is the cumulative labor cost of $120,000 for 10 units divided by the cumulative labor cost of $192,000 for 20 units;and also the cumulative labor cost of $192,000 for 20 units divided by the cumulative labor cost of $307,200 for 40

units. That is not the correct way to calculate a learning curve.

The learning curve percentage (using the cumulative average-time learning model) is the total time or cost actuallyrequired for the total production when production doubles divided by the total time or cost if no learning had takenplace. It can also be determined by calculating the cumulative average cost per unit at each level and dividing thecumulative average cost per unit at the doubled levelby the cumulative average cost at the previous level.

D.

This is not the correct answer. The learning curve percentage (using the cumulative average-time learning model) isthe total time or cost actually required for the total production when production doubles divided by the total time or costif no learning had taken place. It can also be determined by calculating the cumulative average cost per unit at eachlevel and dividing the cumulative average cost per unit at the doubled levelby the cumulative average cost at theprevious level.



The production budget process usually begins with the

A. Direct labor budget.B. Direct materials budget.C. Manufacturing overhead budget.D. Sales budget.

A. The direct labor budget can not be prepared until it is determined how much of product is going to be produced.

B. The direct materials budget can not be prepared until it is determined how much of product is going to be produced.

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C. The manufacturing overhead budget can not be prepared until it is determined how much of product is going to beproduced.

D. The budgeting process starts with the sales budget. It is impossible to prepare a production or masterbudget without the sales budget being prepared.


Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with 60% collected in the month ofsale and 40% collected in the following month. A partial schedule of cash collections for January through March of thecoming year reveals the following receipts for the period. Cash Receipts

January February MarchDecember receivables $32,000From January sales 54,000 $36,000From February sales 66,000 $44,000

Other information includes the following:Inventories are maintained at 30% of the following month's sales.

Assume that March sales total $150,000.

The number of units to be purchased in February is


A. This answer assumes that ending inventory is zero. Ending inventory should be 30% of March sales, or 2,250.

B.

Needed information to be calculated is beginning inventory for February, sales for February and endinginventory for February. These are needed in units in order to calculate purchases for February. The inventoryequation is Beginning Inventory + Purchases − Sales = Ending Inventory. When any three of these amountsare available or can be calculated, the fourth amount can always be calculated. This equation can be usedwith either monetary amounts or number of units. Here we have monetary amounts and will convert it tonumber of units using the product price of $20 per unit.

The beginning inventory for February will depend upon February sales. February sales can be calculated fromthe cash receipts given as $66,000 + $44,000, or $110,000. $110,000 in sales divided by the $20 price per unit =5,500 units sold during February. Beginning inventory for February will be 30% of 5,500, or 1,650 units.

Ending inventory for February will be based on the number of sales in March, which is $150,000 divided by

$20, or 7,500 units. Ending inventory for February will be 30% of 7,500, or 2,250 units.

The number of units to be purchased in February, using the inventory equation, will be:

1,650 + X − 5,500 = 2,250

X = 6,100 units

C. This calculation has all of the numbers correct but it reverses the beginning inventory and ending inventory balancesin the inventory equation. The inventory equation is Beginning Inventory + Purchases − Sales = Ending Inventory.

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D. This answer assumes that beginning inventory was zero. Beginning inventory should be 30% of February's sales, or1,650 units.


One approach for developing standard costs incorporates communication, bargaining, and interaction among productline managers; the immediate supervisors for whom the standards are being developed; and the accountants andengineers before the standards are accepted by top management. This approach would best be characterized as a(n):

A. Imposed approach.B. Centralized top-down approach.C. Team development approach.D. Engineering approach.

A. This implies that information is dictated. With four levels of involvement before top management accepts a number,the approach described is more participative.

B. This is incorrect as there exists a considerable amount of communication and negotiation before seniormanagement accepts the standards in this situation.

C. Communication, bargaining, and interaction involve multiple levels and multiple departments in thedevelopment of standards. This makes it more probable that every aspect of the final standards have beenwell thought out and reviewed by all parties concerned. This characterizes a team development approach.

D. An engineering approach focuses on the technical standards required for production. Here we also have input fromthe accountants and line managers as well, making it a little more all encompassing than a traditional engineeringapproach.


Below are a year-end actual balance sheet for Year 1 and pro forma balance sheet and income statement for Year 2for the Grow 'n' Glow Manufacturing Company (000 omitted).BALANCE SHEET YEAR 1-ACTUAL BALANCE SHEET YR 2-PRO FORMA Assets AssetsCash $ 9,700 Cash $ 10,670 Accounts receivable 15,300 Accounts receivable 16,830Inventory (incl. $820 depr.) 18,500 Inventory (incl. $950 depr.) 20,350 Total current assets $ 43,500 Total current assets $ 47,850 Held-to-maturity securities $ 45,600 Held-to-maturity securities $ 45,600Net fixed assets 32,200 Net fixed assets 35,000

Total long-term assets $ 77,800 Total long-term assets $ 80,600

Total assets $121,300 Total assets $128,450 Liabilities Liabilities Accounts payable $ 3,000 Accounts payable $ 3,300Notes payable 10,000 Notes payable (incl. addtl. fds. needed) 13,738 Accrued liabilities 6,000 Accrued liabilities 6,600 Total current liabilities $ 19,000 Total current liabilities $ 23,638

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Long-term debt 35,600 Long-term debt 35,600 Total liabilities $ 54,600 Total liabilities $ 59,238 Equity EquityCommon stock $ 10,000 Common stock $ 10,000 Additional paid-in capital 30,000 Additional paid-in capital 30,000Retained earnings 26,700 Retained earnings 29,212 Total equity $ 66,700 Total equity $ 69,212

Total liabilities & equity $121,300 Total liabilities & equity $128,450

INCOME STATEMENT YR 2-PRO FORMA

Net sales $110,000 COGS (incl. $3,200 depr.) 72,82 Gross profit $ 37,180

Selling expense 18,040 Gen & adm exp. (incl. $395 depr.) 12,320 EBIT $ 6,820 Net interest expense 1,396 EBT $ 5,424 Taxes @ 35% 1,898 Net income $ 3,526 Dividends 1,014 Addition to retained earnings $ 2,512

On the pro forma Statement of Cash flows, what is the company's net cash flow from financing activities?

A. $(2,410)B. $1,328C. $2,724D. $(1,014)

A. This is dividends paid of $(1,014) plus net interest expense of $(1,396). Net interest is part of operating activities.

B. This net cash flow amount includes dividends paid of $(1,014), net interest expense of $(1,396) and increase innotes payable of $3,738. Net interest expense is part of operating activities.

C. The net cash flow from financing activities includes dividends paid of $(1,014) and the increase in notespayable of $3,738. Thus, the net cash flow provided by financing activities is $2,724.

D. This is dividends paid. Net cash flow from financing activities includes increases/decreases in notes payable, as well.


Hannon Retailing Company prices its products by adding 30% to its cost. Hannon anticipates sales of $715,000 in July,$728,000 in August, and $624,000 in September. Hannon's policy is to have on hand enough inventory at the end ofthe month to cover 25% of the next month's sales. What will be the cost of the inventory that Hannon should budget forpurchase in August?

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A. $540,000B. $509,600C. $560,000D. $680,000

A.

All calculations need to be done using cost figures, not sales figures. So sales figures will need to beconverted into cost figures using this formula: Cost of inventory = Sales price ÷ 1.3.

Beginning inventory (Aug. 1) needs to be 25% of the cost of August sales. August sales are expected to be$728,000. Therefore, the cost of those sales will be $728,000 ÷ 1.3, or $560,000. And 25% of $560,000 is$140,000. So the beginning inventory will be $140,000.

Ending inventory (Aug. 31) needs to be 25% of the cost of September sales. September sales are expected tobe $624,000. Therefore, the cost of those sales will be $624,000 ÷ 1.3, or $480,000. And 25% of $480,000 is$120,000. So the ending inventory will be $120,000.

The inventory equation is:

Beginning Inventory + Purchases – Cost of Goods Sold = Ending Inventory

We have all of those amounts except the Purchases. Whenever we have three out of the four amounts, we canalways solve for the fourth amount.

Let X represent the August Purchases amount:

$140,000 + X - $560,000 = $120,000X = $540,000

B. This is simply 70% of the August sales figure. The correct way to calculate the cost of inventory is to divide the salesby 1 + 0.30 (the markup). Then beginning and ending inventory need to be taken into consideration. See correctanswer for full calculation.

C. This is the COGS for the month, but does not take into consideration beginning or ending inventory. See correctanswer for calculations.

D. This answer does not take into consideration the beginning inventory carried over from July's ending inventory.


Lake Corporation manufactures specialty components for the electronics industry in a highly labor intensiveenvironment. Arc Electronics has asked Lake to bid on a component that Lake made for Arc last month. The previousorder was for 80 units and required 120 hours of direct labor to manufacture. Arc would now like 240 additionalcomponents. Lake experiences an 80% learning curve on all of its jobs. The number of direct labor hours needed for

Lake to complete the 240 additional components is

A. 307.2.B. 256.0.C. 360.0.D. 187.2.

A. This is the amount of time it will take to produce 320 units, not the amount of time it will take to produce theadditional 240 units. Since the question asks how many hours will be needed to produce the additional 240 units, weneed to subtract the time required to produce the first 80 units from the time required to produce all 320 units.

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B.

This is 80 × 2 × 2 × 0.8. This is incorrect for three reasons.

(1) 80 is the number of units manufactured in the first order. It is not the number of hours of direct labor required tomanufacture those 80 units, and the number of hours of direct labor is what should be used.

(2) One multiplication by 0.8 is missing in the calculation. The number of hours required for the first order of 80 unitsshould be multiplied by 2 × 0.8 × 2 × 0.8 to find the number of hours required for units 1 through 320. But that numberof hours is still not the answer to the problem.

(3) The number of hours required for the first 80 units needs to be subtracted from the number of hours calculated in(2) to find the number of hours required for only units 81 through 320, because those units represent the new order for240 units.

C. This answer does not take into consideration the learning curve and the improvements that come with it. This is thenumber of direct labor hours that would be required to manufacture 240 units if no learning at all took place. See thecorrect answer for a complete explanation.

D.

With an 80% learning curve it means that each time production doubles, the number of hours required for thenew production will be 80% less than would be expected given previous production. Therefore, producing atotal of 160 units will take 192 hours (120 × 2 × 0.8). Based on the fact that the first 80 units took 120 hours, wewould expect that production of 160 units would take 240 hours. However, it took only 80% of that time, or 192hours. Given that 160 units take 192 hours, we would expect that 320 units would take 384 hours. However, itwill take only 80% of that time because of the learning curve. This means it will take only 307.2 hours toproduce 320 units.

Since the question is how many hours will be needed to produce the additional 240 units, we need to subtractthe time to produce the first 80 units (120 hours) from the time required to produce all 320 units (307.2 hours).This means that it will take 187.2 hours to produce the additional 240 units.


Stan Berry is considering selling peanuts at the Keefer High School football games. The peanuts would cost $.50 perbag and could be sold for $1.50 per bag. No other costs would be incurred to sell the peanuts. All unsold bags can bereturned to the supplier for $.30 each. Berry estimated the demand for peanuts at each football game and constructedthe payoff table that follows.

Payoffs at each supply level:

Demand(bags)

Probabilityof Demand

20 30 40 50

20 0.2 $20 $18 $16 $14

30 0.4 $20 $30 $28 $2640 0.3 $20 $30 $40 $3850 0.1 $20 $30 $40 $50

Expected value ofaction:

$20 $27.60$30.40 $29.60

The maximum that Stan Berry should pay for perfect information so that he could always stock the correct number ofbags of peanuts is

A. $2.60.

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B. $0.80.C. $30.00.D. $10.40.

A.

To determine the maximum amount that a company would pay for perfect information, we compare the

maximum profit that the company could achieve with perfect information with the best profit that would beavailable if we needed to choose one level when demand is not known.

With perfect information the company would be able to choose the correct level of supply for each of thelevels of demand. For example, if he knew the demand would be for 20 bags, Stan Berry would bring 20 bagsand his profit would be $20. If he knew the demand would be 30 bags, he would bring 30 bags and the profitwould be $30. And so on. However, he would be paying for this "perfect information" in advance, before heknows what the information will be. So to determine what he is willing to pay for the information in advance,he will calculate the expected value of his profit, assuming he will be able to bring exactly the right number ofbags once he knows what the demand will be. He will use the various probabilities of demand as the weightsin calculating this expected value.

Therefore, given that for each level of demand the company will choose the best supply alternative, the

expected value of the profit with perfect information is $33 [($20 × 0.2) + ($30 × 0.4) + ($40 ×0 0.3) + ($50 × 0.1)].

Without perfect information, Stan Berry would choose to stock 40 bags, because the expected profit forstocking 40 bags is $30.40, and that is higher than the expected profits for any of the other three potentialsupply levels.

Since perfect information would provide an expected profit of $33.00 while the expected profit without theperfect information is $30.40, Stan Berry would pay a maximum of $2.60 (the difference between $33.00 and$30.40) for the perfect information.

B. The price that Stan Berry would pay for perfect information is the difference between expected profit with perfectinformation and expected profit without perfect information. This answer is the difference between the highest expectedprofit he could earn without perfect information ($30.40) and the second highest expected profit he could earn, alsowithout perfect information ($29.60).

C. The price that Stan Berry would pay for perfect information is the difference between the expected profit with perfectinformation and the expected profit without perfect information. See the correct answer for a complete explanation.

D. The price that Stan Berry would pay for perfect information is the difference between expected profit with perfectinformation and expected profit without perfect information. This is the difference between the highest expected profithe could earn without perfect information ($30.40) and the lowest expected profit he could earn, also without perfectinformation ($20.00).


Which one of the following best describes the order in which budgets should be prepared when developing the annualmaster operating budget?

A. Revenue budget, direct material budget, production budget.B. Production budget, direct material budget, revenue budget.C. Revenue budget, production budget, direct material budget.D. Production budget, revenue budget, direct material budget.

A. Until the production budget has been prepared, the direct material budget cannot be prepared.

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B. Until the revenue budget and an estimate of how much will be sold has been prepared, the production budgetcannot be developed.

C. The revenue budget includes projected sales, which determines how much should be produced; and theamount to be produced determines how much direct material will be needed.

D. Until the revenue budget and an estimate of how much will be sold has been prepared, the production budget

cannot be developed.


An organization that specializes in reviewing and editing technical magazine articles sets the following standards forevaluating the performance of the professional staff:

Annual budgeted fixed costs for normal capacity level of 10,000 articles reviewed and edited: $600,000

Standard professional hours per 10 articles: 200 hours

Flexible budget of standard labor costs to process 10,000 articles: $10,000,000

The following data apply to the 9,500 articles that were actually reviewed and edited during the current year:Total hours used by professional staff: 192,000 hours

Flexible costs: $9,120,000

Total cost: 9,738,000

Using a flexible budget, the total cost planned for the review and editing of 9,500 articles should be

A. $10,570,000.B. $10,100,000.C. $9,500,000.D. $10,070,000.

A. Fixed costs are the same ($600,000) regardless to the level of production. This answer is calculated incorrectly byadjusting the fixed costs downward for production. Variable labor costs, however, change with the level of productionand need to be $9,500,000 [($10,000,000 ÷ 10,000) × 9,500].

B. The annual budgeted fixed costs for the normal capacity level of 10,000 articles reviewed and edited is$600,000 and it is the same for any other level of output, as fixed costs do not vary with the production level.The standard labor costs for the 9,500 articles is $9,500,000 [($10,000,000 ÷ 10,000) × 9,500]. The fixed costsplus the labor cost equal the total flexible budget cost planned for the review and editing of 9,500 articles:$600,000 + $9,500,000 = $10,100,000.

C. This is the variable labor costs only [($10,000,000 / 10,000) × 9,500].

D. Fixed costs are the same regardless to the level of production. This answer is calculated incorrectly by adjusting thefixed costs downward for production.



MonthEstimated

Monthly SalesType of

Monthly Sale

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January $600,000



Collection Pattern for Credit SalesMonth of sale 30%One month following sale 40%Second month following sale25%

Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventoryequal to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the monthfollowing the sale. The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales andare paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these areincurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is paidquarterly in January, April, July, and October. Property taxes are paid twice a year in April and October.

Annual Fixed Operating Costs

Advertising $720,000Depreciation 420,000Insurance 180,000Property taxes 240,000Salaries 1,080,000

The purchase of merchandise that Karmee Company will need to make during February will be

A. $254,000B. $260,000C. $338,000D. $266,000

A. This answer results from using the February ending inventory as the beginning inventory and the beginninginventory as the ending inventory when calculating the amount of purchases.

B. This is the February cost of goods sold. This amount is used in the calculation of the purchases for February, but itis not the February purchases. Beginning and ending inventory for February must also be considered in determiningthe amount to be purchased during the month.

C.

This is the sum of the beginning inventory and the cost of goods sold for the month of February. The calculation ofpurchases needs to include ending inventory, as well. Furthermore, the inventory formula is

Beginning Inventory + Purchases − Cost of Sales = Ending Inventory

Beginning inventory and cost of goods sold are not summed when using the inventory formula. Cost of goods soldrepresents the cost of the products that were sold during the period, so that amount is a deduction from inventory.

D.

Karmee's objective is to maintain a target inventory equal to 30% of the next month's sales in units. Since wedo not have any unit sales information, we must work with data in dollars, instead. This means that beginninginventory in February is expected to be 30% of February's sales and February's ending inventory is expectedto be 30% of March's sales. The cost of goods sold averages 40% of sales. The beginning inventory inFebruary is $78,000 (30% × February sales of $650,000 × 40%), and the ending inventory in February is $84,000

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(30% × March sales of $700,000 × 40%). The cost of sales is expected to be $260,000 in February (Februarysales of $650,000 × 40%). Now we can determine the cost of goods purchased using this formula:

Beginning Inventory + Purchases − Cost of Sales = Ending Inventory

$78,000 + Purchases − $260,000 = $84,000

Solving for Purchases, we get Purchases of $266,000.


The following sequence of steps are employed by a company to develop its annual profit plan.

Planning guidelines are disseminated downward by top management after receiving input from all levels ofmanagement.

A sales budget is prepared by individual sales units reflecting the sales targets of the various segments. Thisprovides the basis for departmental production budgets and other related components by the various operatingunits. Communication is primarily lateral with some upward communication possible.

A profit plan is submitted to top management for coordination and review. Top management's recommendationsand revisions are acted upon by middle management. A revised profit plan is resubmitted for further review totop management.

Top management grants final approval and distributes the formal plan downward to the various operating units.

This outline of steps best describes which one of the following approaches to budget development?

A. Imposed budgeting by top management.B. Bottom-up approach.C. Total justification of all activities by operating units.D. Top-down approach.

A. Management did not dictate the budget, just provided guidelines to give each department an idea of where thecompany should be headed.

B. While senior management provides guidelines, the bulk of the budget is developed from input fromindividual departments. After submission to top management for review, top management's recommendationsand revisions are made at the individual department level, and the individual department managers prepareand resubmit revised budget data to top management. This continues until the desired result is achieved forthe consolidated budget.

C. This would describe zero based budgeting and is not described by the activities listed above. With zero basedbudgeting, every line item is analyzed and justified in a time consuming process. The guidelines developed frommanagerial input do not indicate such a thorough analysis.

D. Management did not provide the budgeted numbers, just made recommendations for revisions to the budgetssubmitted by the various departments.


The balance sheet and income statement of the Grow 'n' Glow Manufacturing Company for the past year are as follows(000 omitted):BALANCE SHEET Assets Liabilities

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Cash $ 9,700 Accounts payable $ 3,000 Accounts receivable 15,300 Notes payable 10,000Inventory 18,500 Accrued liabilities 6,000Total current assets $ 43,500 Total current liabil ities $ 27,900 Held-to-maturity securities $ 45,600 Long-term debt $35,600Net fixed assets 32,200 Total liabilities $54,600Total long-term assets $77,800

EquityTotal assets $121,300 Common stock $10,000 Additional paid-in capital 30,000 Retained earnings 26,700 Total equity $ 66,700

Total liabilities & equity $121,300 INCOME STATEMENTNet sales $100,000Cost of goods sold 66,200

Gross profit $33,800

Selling expense 16,400General & admin. expense 11,200Operating income $ 6,200

Net interest expense $ 1,200Net income before tax $ 5,000Taxes @ 35% 1,750Net income $ 3,250

The company paid dividends during the past year of $975. During the past year, fixed assets were being used at 85%of capacity. In all other respects, the company was operating at full capacity.

The company's dividend policy is that dividends will grow at a rate of 4% per year. The past year's interest rate on debtwas 5% on short-term debt and 7% on long-term debt. The held-to-maturity securities earn 4% return and are notexpected to change next year.

If the company wants to be able to fund its growth internally, without needing any external financing, what is themaximum rate of sales growth it can achieve?

(Hint: Since the company is operating at 100% of capacity in all respects except for fixed assets, and sinceheld-to-maturity securities are not expected to change, all incomes and expenses and all assets except forheld-to-maturity securities and fixed assets will increase by the same amount for the next year. First, determine themaximum sales growth rate that the company can achieve without having to purchase any new fixed assets. Second,determine the maximum sales growth rate with no external financing, assuming no additional fixed assets arepurchased, using the following equation: Increase in Assets − Increase in Liabilities − Increase in Retained Earnings =

0. Finally, compare the first rate with the second rate. The lower of the two rates will be the answer to the question.

A. 17.65%B. 7.34%C. 1.60%D. 4.78%

A. This is the maximum achievable sales growth rate without needing to purchase any new fixed assets. However, thisis not the maximum achievable growth rate without needing any additional external financing.

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B.

The company's fixed assets are presently being used at 85% of their capacity to generate sales of $100,000. Ifthey were being used at 100% of their capacity, sales would be $100,000 ÷ 0.85, which is $117,647. Therefore,any sales growth rate of up to $17,647 ÷ $100,000, or 17.65%, would not require the purchase of additionalfixed assets.

The next step is to calculate the maximum sales growth rate that can be achieved with no external financingassuming no additional fixed assets are purchased. We will then compare the first growth rate with thesecond growth rate. The lower of the two rates will be the answer to the question.

Cash, accounts receivable and inventory will increase at the same rate, which we will call "g". We areassuming that net fixed assets will not increase at all, and the problem tells us that held-to-maturity securitieswill not change. Accounts payable and accrued liabilities will also increase at rate g. Since the goal is no newexternal financing, notes payable and long-term debt will not increase at all.

The amount of external financing needed will be the amount of increase in assets minus the amount ofincrease in liabilities minus the increase in retained earnings. Therefore, the equation we will be working withis:

Increase in Assets − Increase in Liabilities − Increase in Retained Earnings = 0

We set the equation equal to zero because we want the external financing needed to be zero.

Increase in Assets = Total Current Assets of $43,500 × g, where g is the growth rate in sales.

Increase in Liabilities = (Accounts Payable of $3,000 + Accrued Liabilities of $6,000) × g, or $9,000 × g.

The Increase in Retained Earnings is a little more complicated. Since borrowings and invested funds will notbe changing, we will assume that the net interest expense from last year will not change, either. It will remain$1,200. So we will begin with EBIT of $6,200 and we will say that that will increase by g. So EBIT for next yearwill be $6,200 + ($6,200 × g).

Since interest expense will be $1,200, EBT next year will be $6,200 + $6,200g − $1,200, which can be simplified

to $5,000 + $6,200g.

The tax rate is 0.35. Therefore, the amount of EBT not paid out in tax will be 1 − 0.35, which is 0.65.

Therefore, Net Income After Tax will be 0.65 × ($5,000 + $6,200g), which simplifies to $3,250 + $4,030g.

Dividends last year were $975, and the company's dividend policy is to increase dividends by 4% per year,regardless of how much net income changes. Therefore, dividends next year will be $975 × 1.04, or $1,014.

So our addition to retained earnings for next year will be $3,250 + $4,030g − $1,014, which simplifies to $2,236+ $4,030g.

So our equation will be:

43,500g − 9,000g − (2,236 + 4030g) = 0

Solving for g, we get:

30,470g − 2,236 = 0

30,470g = 2,236

g = 0.0734, or 7.34%

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Next, we compare the rate of sales growth that can be achieved without purchasing any new fixed assets(17.65%) with the rate assuming no new external financing (7.34%). Since the second rate (7.34%) is lower thanthe first (17.65%), the second rate is the answer to the question.

We can prove this by calculating what the increase in assets, the increase in liabilities, and the increase inretained earnings would be at a growth rate of 7.34%, as follows:

The increase in assets is $43,500× 0.0734, or $3,193.

The increase in liabilities is $9,000 × 0.0734, or $661.

The increase in retained earnings will require constructing a pro forma income statement. We will calculatethe income statement amounts by multiplying the past year's amounts by 1.0734.PRO FORMA INCOME STATEMENT

Net sales $100,000 × 1.0734 $107,340

Cost of goods sold $66,200 × 1.0734 71,059


Selling expense $16,400 × 1.0734 17,604

General & admin. expense $11,200 × 1.0734 12,022EBIT $ 6,655

Net interest expense Same as last year 1,200

EBT $ 5,455

Taxes @ 35% 1,909

Net income $3,546

Minus: dividends $975 × 1.04 1,014

Addition to retained earnings $2,532

The increase in retained earnings is $2,532.

We can now plug all of these figures into our equation, which is:

Increase in Assets − Increase in Liabilities − Increase in Retained Earnings = 0

$3,193 − $661 − $2,532 = 0, so the equation is true, and the maximum achievable sales growth rate without theneed for additional external financing is 7.34%.

C. This answer results from assuming that all assets and all liabilities will grow at the same rate, the rate of salesgrowth. Only current assets, accounts payable and accrued liabilities will grow at the rate of sales growth. See thecorrect answer for a full explanation.

D. This answer results from assuming that all current assets and all current liabilities will grow at the same rate, therate of sales growth. Only current assets, accounts payable and accrued liabilities will grow at the rate of sales growth.See the correct answer for a full explanation.

Question 119 - CIA 594 III.69 - Budget Methodologies

A company produces a product that requires 2 pounds of a raw material. The company forecasts that there will be6,000 pounds of raw material on hand at the end of June. At the end of any given month the company wishes to have30% of next month's raw material requirements on hand. The company has budgeted production of the product forJuly, August, September, and October to be 10,000, 12,000, 13,000, and 11,000 units, respectively. As of June 1, theraw material sells for $1.00 per pound.

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In the month of September, raw material purchases and ending inventory, respectively, will be (in pounds):

A. 24,800 and 6,600B. 28,600 and 6,600C. 13,000 and 3,900D. 32,600 and 6,600

A.

We need to determine the purchases of raw materials for September by using the formula for the physical flowof goods: Beginning inventory + Amount purchased − Production requirements = Ending inventory.

Beginning Inventory in September will be 13,000 × 2 × 0.30, which equals 7,800 units. Ending Inventory inSeptember will be 11,000 × 2 × 0.30, which equals 6,600 units. Materials used during September will be 13,000× 2, which equals 26,000 units. Therefore, the inventory formula is:

7,800 + Purchases − 26,000 = 6,600Purchases = 24,800, which is half of the answer.

The other half of the answer is the Ending Inventory which we calculated above as 6,600 units.

B. The amount of raw material purchases is incorrect. See the correct answer for a complete explanation.

C. 13,000 is the budgeted production in units. 3,900 is the number of finished units that could be produced from theSeptember beginning inventory of 7,800 lb. See the correct answer for a complete explanation.

D. The amount of raw material purchases is incorrect. See the correct answer for a complete explanation.


Superflite expects April sales of its deluxe model airplane, the C-14, to be 402,000 units at $11 each. Each C-14

requires three purchased components shown below.

PurchaseCost

Number Neededfor each C-14 Unit

A-9 $0.50 1B-6 0.25 2

D-28 1.00 3

Factory direct labor and variable overhead per unit of C-14 totals $3.00. Fixed factory overhead is $1.00 per unit at aproduction level of 500,000 units. Superflite plans the following beginning and ending inventories for the month of Apriland uses standard absorption costing for valuing inventory.

Part No.Units at April 1

Units at April 30

C-14 12,000 10,000

A-9 21,000 9,000B-6 32,000 10,000

D-28 14,000 6,000

The C-14 production budget for April should be based on the manufacture of


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A.

To solve these question we should use the formula of physical flow of finished goods inventory:

Beginning Inventory + Units Produced − Units Sold = Ending Inventory.

Whenever we have three of these amounts, we can always find the fourth. In this problem, Units Produced is

the amount needed.

Plugging numbers for C-14 into the formula, we get the following:

12,000 + Units Produced − 402,000 = 10,000

Solving for Units Produced, we get Units Produced = 400,000 units.

B.

This is the beginning inventory plus the ending inventory plus the number of units expected to be sold. To solve thesequestion we should use the formula of physical flow of finished goods inventory:

Beginning Inventory + Units Produced − Units Sold = Ending Inventory.

Whenever we have three of these amounts, we can always find the fourth. In this problem, Units Produced is theamount needed.

C. This answer ignores the requirements to have some ending inventory on hand. See the correct answer for acomplete explanation.

D. This is the number of unit sales. It does not take the change in inventory level into consideration. See the correctanswer for a complete explanation.


Johnson Software has developed a new software package. Johnson's sales manager has prepared the followingprobability distribution describing the relative likelihood of monthly sales levels and relative income (loss) for thecompany's new software package.Monthly Sales

In UnitsProbability Income (Loss)

10,000 0.2 $(4,000)20,000 0.3 10,00030,000 0.3 30,00040,000 0.2 60,000

If Johnson decides to market its new software package, the expected value of the additional monthly income will be

A. $40,000B. $24,000C. $23,200D. $24,800

A. This is an average of the monthly sales in units (both weighted and unweighted). The question asks for the expectedvalue of the additional monthly income. The expected value of the additional monthly income (or loss) is a weightedaverage of the possible monthly incomes or losses, with the probabilities serving as the weights.

B. This is an unweighted average of the possible incomes (losses). The expected value of the additional monthly

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income (or loss) is a weighted average of the possible monthly incomes or losses, with the probabilities serving as theweights.

C.

The expected value of the additional monthly income (or loss) is a weighted average of the possible monthlyincomes or losses, with the probabilities serving as the weights. Thus, the expected value of the additional

monthly income (loss) is:

(0.2 × $[4,000]) + (0.3 × $10,000) + (0.3 × $30,000) + (0.2 × $60,000) = $23,200.

D. This answer results from calculating the expected value of the additional monthly income (or loss) without using anegative amount for the first amount in the calculation. The $4,000 is a $4,000 loss, and it should be a negativenumber in the calculation of the expected value.


The balance sheet and income statement of the Grow 'n' Glow Manufacturing Company for the past year are as follows(000 omitted):BALANCE SHEET Assets LiabilitiesCash $ 9,700 Accounts payable $ 3,000 Accounts receivable 15,300 Notes payable 10,000Inventory 18,500 Accrued liabilities 6,000Total current assets $ 43,500 Total current liabil ities $ 27,900 Held-to-maturity securities $ 45,600 Long-term debt $35,600Net fixed assets 32,200 Total liabilities $54,600Total long-term assets $77,800

Equity

Total assets $121,300 Common stock $10,000 Additional paid-in capital 30,000 Retained earnings 26,700 Total equity $ 66,700

Total liabilities & equity $121,300 INCOME STATEMENTNet sales $100,000Cost of goods sold 66,200Gross profit $33,800

Selling expense 16,400

General & admin. expense 11,200Operating income $ 6,200

Net interest expense $ 1,200Net income before tax $ 5,000Taxes @ 35% 1,750Net income $ 3,250

The company paid dividends during the past year of $975. During the past year, fixed assets were being used at 85%

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of capacity. In all other respects, the company was operating at full capacity.

Assuming the company's dividend policy is that dividends will grow at a rate of 4% per year, by what percentage couldnext year's sales increase over the past year's sales without the company needing to increase its fixed assets?

A. 15%B. 27.4%

C. 67.8%D. 17.6%

A. This is the difference between 100% and 85%. To answer this question, it is necessary to calculate what saleswould be at 100% of capacity usage, then determine the percentage increase in sales represented by that amount.

B. This answer results from dividing $32,200 by $100,000 and multiplying the result by 0.85. To answer this question, itis necessary to calculate what sales would be at 100% of capacity usage, then determine the percentage increase insales represented by that amount.

C. This answer results from solving the following equation: 100,000 • (1 + x) = 32,200. To answer this question, it isnecessary to calculate what sales would be at 100% of capacity usage, then determine the percentage increase insales represented by that amount.

D. The company's fixed assets are presently being used at 85% of their capacity to generate sales of $100,000.If they were being used at 100% of their capacity, sales would be $100,000 ÷ 0.85, which is $117,647. $117,647would represent an increase of $17,647, or 17.6% of $100,000. Therefore, sales could grow at 17.6% before thecompany would need to purchase additional fixed assets.


Tut Company's selling and administrative costs for the month of August, when it sold 20,000 units, were as follows. Costs Per Unit Total

Variable costs $18.60$372,000Step costs 4.25 85,000Fixed costs 8.80 176,000Total selling and administrative costs $31.65$633,000

The variable costs represent sales commissions paid at the rate of 6.2% of sales. The step costs depend on thenumber of salespersons employed by the company. In August there were 17 persons on the sales force. However, twomembers have taken early retirement effective August 31. It is anticipated that these positions will remain vacant forseveral months. Total fixed costs are unchanged within a relevant range of 15,000 to 30,000 units per month. Tut isplanning a sales price cut of 10%, which it expects will increase sales volume to 24,000 units per month. If Tutimplements the sales price reduction, the total budgeted selling and administrative costs for the month of Septemberwould be

A. $714,960.

B. $679,760.C. $759,600.D. $652,760.

A. This answer results from two incorrect calculations: (1) the assumption is made that more salespeople will berequired to sell more product. I.e., it is assumed that since 17 salespeople were required in August to sell 20,000 units,then 20.4 salespeople will be required in September to sell 24,000 units (17 ÷ 20,000 × 24,000). At a step cost of$5,000 per salesperson ($85,000 August expense divided by 17 salespeople), this would mean the step costs forSeptember would be $5,000 × 20.4 salespeople, or $102,000. And (2) the fixed costs are assumed to increase with theincreased production, to $8.80 × 24,000, or to $211,200. However, the problem tells us that two salespeople will be

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leaving at the end of August and will not be replaced, so the number of salespeople in September will be only 15 at$5,000 each, for a total cost of $75,000. Furthermore, the fixed cost does not change with the increased sales,because the sales volume is still within the relevant range.

B.

This answer results from assuming that more salespeople will be required to sell more product. I.e., it is assumed that

since 17 salespeople were required in August to sell 20,000 units, then 20.4 salespeople will be required in Septemberto sell 24,000 units (17 ÷ 20,000 × 24,000). At a step cost of $5,000 per salesperson ($85,000 August expense dividedby 17 salespeople), this would mean the step costs for September would be $5,000 × 20.4 salespeople, or $102,000.However, the problem tells us that two salespeople will be leaving at the end of August and will not be replaced, so thenumber of salespeople in September will be only 15 at $5,000 each, for a total cost of $75,000.

Furthermore, the nature of step costs is that they stay at one level for a while and then make a large increase to thenext level. In this case, each time a salesperson is added, the total cost increases by $5,000; and each time asalesperson leaves, the total cost decreases by $5,000. The company does not hire part-time salespeople, so it couldnot possibly have 20.4 salespeople.

C. This is the total per unit cost at a sales level of 20,000 multiplied by 24,000 units. This fails to take into considerationthe facts that the step costs are based on the number of salespeople, not the number of units sold, and that fixed costsin total will not change because the anticipated sales volume is within the relevant range.

D. First, we need to find the August selling price per unit, so we can calculate what the price will be after theprice cut. To find the August selling price per unit, we begin by calculating the total sales revenue for themonth of August. The variable costs are the sales commissions, which are 6.2% of sales revenue. Therefore,sales revenue for August was $372,000 ÷ 0.062, or $6,000,000. Since that revenue was for 20,000 units, theprice per unit in August was $6,000,000 ÷ 20,000, or $300 per unit.

The price will be cut by 10%, to $270 per unit ($300 × 0.90). Number of units sold will increase to 24,000.Therefore, sales revenue for September will be $270 × 24,000, or $6,480,000. The variable cost is salescommissions at 6.2%, so the variable cost will be $6,480,000 × 0.062, or $401,760.

Step costs are based on the number of salespeople. In August, when there were 17 salespeople, the total stepcosts were $85,000. In September, there will be only 15 salespeople. So step costs will be $85,000 ÷ 17 × 15, or

$75,000.

Fixed costs will not change, because the fixed costs will stay the same until volume exceeds 30,000, andvolume will not exceed 30,000 in September. Therefore, fixed costs are $176,000.

The sum of all of these costs is $401,760 + $75,000 + $176,000 = $652,760.


Each organization plans and budgets its operations for slightly different reasons. Which one of the following is not asignificant reason for planning and budgeting?

A. Checking progress toward the objectives of the organization.B. Ensuring profitable operations.C. Forcing managers to consider expected future trends and conditions.D. Providing a basis for controlling operations.

A. Checking progress toward the objectives of the organization is a reason for developing plans and budgets.

B. The budget is a realistic plan expressed in quantitative terms. A budget serves as a number of tools:planning, control, motivation and communication tools. However, the budget by itself is not able to ensure

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profitable operations. "Ensure" means guarantee. A budget, if it is used properly to control operations, canhelp to increase the probability that operations will be profitable. But it cannot ensure that they will beprofitable.

C. Forcing managers to consider expected future trends and conditions is a reason for developing plans and budgets.

D. Providing a basis for controlling operations is a reason for developing plans and budgets.


A company's mission statement is, above all, intended to define:

A. Why the company exists, or its "reason to be."B. The specific actions that the company should take.C. The weaknesses of the firm.D. The company's profit objectives.

A. The mission statement defines why the company exists and also prioritizes and communicates thecompany's overall objectives.

B. The actions the company might take based on its strengths and weaknesses, along with its profit objectives, can bea result of the mission statement and the strategic planning process, but they are not what the mission statementdefines.

C. A recognition of the firm's weaknesses can be a result of the mission statement and the strategic planning process,but it is not what the mission statement defines.

D. The company's profit objectives can be a result of the mission statement and the strategic planning process, butthey are not what the mission statement defines.


When budgets are used to evaluate performance and to set limits on spending, the process will often result indepartments adding something "extra" to ensure the budgets will be met. This "extra" is

A. Budgetary slack.B. Management by objectives.C. Strategic planning.D. Continuous budgeting.

A. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists,either revenues are understated or expenses are overstated and this slack makes it difficult to properly

evaluate performance.

B. Management by objectives is a management approach that increases the amount of self-direction that employeeshave. In MBO, a manager and his or her workers are responsible for agreeing upon their objectives and the methods tobe used to obtain them.

C. Long-term (or Strategic) planning is usually for periods of five years or longer and is based on the objectives of theorganization. Some plans may extend up to 20 years. Strategic planning is directional, rather than operational. Thismeans it focuses on where we want to go instead of specifically how we are going to get there.

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D. A continuous budget, also called a rolling budget, is one that is prepared for a certain period of time ahead of thepresent. For example, a 1-year continuous budget will be prepared at the end of every month for the next 12 months.



UnitsProduced



10 $ 60,000 $120,00020 120,000 192,00040 240,000 307,200

At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. Based on historical costs, LCB knowsthat the production of 40 engines will be allocated $100,000 of fixed overhead costs. The bid request is for an

additional 40 units; all companies submitting bids are allowed to charge a maximum of 25% above full cost for eachorder.

The maximum bid price that LCB, Inc. could submit to the Department of the Navy for the 40 units is

A. $708,640.B. $885,800.C. $608,640.D. $760,800.

A. This answer does not include the markup – it is simply the full cost of production. See the correct answer for acomplete explanation.

B.

The company is able to charge 125% of the full cost for the order. The full cost will include $100,000 of fixedcosts and $240,000 of materials costs. In addition, there will be labor costs, However, we need to determinewhat those labor costs will be.

We can calculate that the learning curve is 80%. The first 10 units produced cost $120,000 in labor. If nolearning had taken place, the first 20 units would have cost $240,000 in labor. However, the labor cost for thefirst 20 units was $192,000. By dividing $192,000 by $240,000, we calculate that the learning curve is 80%.

We know that labor costs are $307,200 to produce the first 40 units. However, the company experiences an80% learning curve, which means that the labor cost to produce the next 40 units will not be $307,200, but$184,320. This is calculated as follows: The first 40 units cost $307,200 to produce. If no learning had takenplace, it would cost twice that amount, or $614,400 to produce the first 80 units (the first 40 units plus another40 units). However, as there is a learning curve of 80%, the total cost for the 80 units will be 80% of that$614,400 expected amount, or $491,520. Since the first set of 40 units cost $307,200, the incremental cost ofproducing the second set of 40 units was only $491,520 − $307,200, which equals $184,320.

Variable overhead will also be charged at $1 per direct labor dollar, or $184,320. Therefore, the total costs ofproduction are $708,640 ($100,000 + $240,000 + $184,320 + $184,320). Adding 25% to this, we get $885,800.

C. This answer does not include the $100,000 of fixed costs or the 25% markup. See the correct answer for acomplete explanation.

D. This answer does not include the $100,000 of fixed costs. See the correct answer for a complete explanation.

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Savior Corporation assembles backup tape drive systems for home microcomputers. For the first quarter, the budget

for sales is 67,500 units. Savior will finish the fourth quarter of last year with an inventory of 3,500 units, of which 200are obsolete. The target ending inventory is 10 days of sales (based upon 360 days). What is the budgeted productionfor the first quarter?

A. 71,700B. 71,500C. 64,350D. 75,000

A.

The first thing to do is figure out how much ending inventory is needed. The company wants to have anending inventory equal to 10 days of sales. The first quarter sales budget is 67,500 units. Since the companyuses a 360 day year, one quarter's sales will be sales for 90 days (360 ÷ 90). Therefore, sales for one day would

be 67,500 ÷ 90, or 750 units. Inventory for 10 days would be 10 days × 750 units, or 7,500 units needed inending inventory.

Now we can use the inventory formula to find the number of units to be produced. The inventory formula is:Beginning Inventory + Units Produced or Purchased − Units Sold = Ending Inventory. Whenever we have 3 ofthe 4 numbers, we can find the 4th number.

Beginning inventory = 3,300 good units (3,500 units minus the 200 obsolete units)Sales = 67,500 unitsEnding Inventory = 7,500 unit

3,300 + X − 67,500 = 7,500X = 71,700

B. This answer results from using a beginning inventory of 3,500 units. 3,500 units includes the 200 units that areobsolete and which should not be included.

C. This answer results from dividing the beginning inventory of 3,500 units by 10 to calculate the 10 days of desiredending inventory. The ending inventory should be based on the projected sales. To calculate the ending inventory,divide the 67,500 units that are expected to be sold in the first quarter by 90 days (360 days ÷ 4) to get the number ofunits sold per day. Use that to calculate the number of units needed for 10 days of sales, and that will be the endinginventory that is needed. Also, the beginning inventory of 3,500 units includes 200 units that are obsolete and will needto be subtracted from the beginning inventory in calculating the budgeted production for the quarter.

D. This answer does not ake into consideration the beginning inventory that does not need to be produced. Thebeginning inventory will lower budgeted production by 3,300 units.

Question 129 - CIA 590 IV.14 - Planning and Budgeting Concepts

One of the primary advantages of budgeting is that it:

A. Requires departmental managers to make plans in conjunction with the plans of other interdependent departments.B. Bases the profit plan on estimates.C. Is continually adapted to fit changing circumstances.

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D. Does not take the place of management and administration.

A. The budget is a realistic plan for the future expressed in quantitative terms. The budget serves as planning,control, coordination, evaluation tool, etc. Budgets of individual departments are formed into oneorganizational budget. Thus, one of the primary advantages of budgeting is that it requires departmentalmanagers to make plans in conjunction with the plans of other interdependent departments, thus promotingcoordination and communication among organization units and activities.

B. It is true that the profit plan is based on estimates. However, this is neither an advantage nor a disadvantage ofbudgeting.

C. It is true that the budget should be adapted to fit changing circumstances (though not continually -- only whenneeded). However, this is neither an advantage nor a disadvantage of budgeting.

D. It is true that budgeting does not take the place of management and administration. However, this is neither anadvantage nor a disadvantage of budgeting.


In decision making under conditions of uncertainty, expected value refers to the

A. Weighted average of probable outcomes of an action.B. Present value of alternative actions.C. Probability of a given outcome from a proposed action.D. Likely outcome of a proposed action.

A. Expected value is calculated by multiplying each possible outcome by its corresponding probability andadding them together. In other words, expected value is the weighted average of the probable outcomes, witheach outcome's probability serving as that outcome's weight.

B. Expected value is not the present value of the alternative actions.

C. Expected value is calculated by multiplying each possible outcome by its corresponding probability and adding theproducts together. Thus, the probability of a given outcome is only one component of expected value.

D. It is almost impossible for the expected value to actually predict the likely outcome of a proposed action.



Month

Estimated

Monthly Sales

Type of

Monthly SaleJanuary $600,000



Collection Pattern for Credit Sales

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Month of sale 30%One month following sale 40%Second month following sale25%

Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventoryequal to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the monthfollowing the sale. The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales and

are paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these areincurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is paidquarterly in January, April, July, and October. Property taxes are paid twice a year in April and October.

Annual Fixed Operating Costs Advertising $720,000Depreciation 420,000Insurance 180,000Property taxes 240,000Salaries 1,080,000

Karmee Company's total cash receipts for the month of April will be

A. $707,400B. $653,000C. $504,000D. $629,000

A. This is the collections in the month of June. See the correct answer for a complete explanation.

B. This answer includes the bad debts from January sales. See the correct answer for a complete explanation.

C. This answer does not include the cash sales in April. See the correct answer for a complete explanation.

D. In April the company receives the amount of April cash sales and the cash remitted for credit sales. Weknow that 80% of sales are credit sales. In April the company will receive 30% of April credit sales, 40% ofMarch credit sales, and 25% of February credit sales. The cash sales in April will be $125,000 (20% × $625,000).

The cash collections in April from credit sales will be as follows: From April credit sales cash collections willbe $150,000 ($625,000 × 80% × 30%). From March credit sales cash collections will be $224,000 ($700,000 ×80% × 40%). From February credit sales cash collections will be $130,000 ($650,000 × 80% × 25%). Addingthese amounts together, the total cash collections in April will be $629,000 ($125,000 + $150,000 + $224,000 +$130,000).


Ryotel is conducting market research to determine whether or not to launch a new product. Management believesthere is a 60% probability the research will yield favorable results with a 40% probability the results will be unfavorable.

If the results are favorable, there is a 70% probability the product will be successful; if the results are unfavorable, theprobability the product will be unsuccessful is 75%. If the product is successful, Ryotel anticipates annual profits of$10,000,000, but if the product is unsuccessful, Ryotel will lose $4,000,000 each year. The expected value of the newproduct's annual profit is

A. $3,000,000.B. $4,000,000.C. $3,280,000.D. $5,300,000.

A.

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This is the average of $10,000,000 and $(4,000,000). The answer could also be calculated as ($10,000,000 × 0.6 ×0.7) + ([$4,000,000] × 0.4 × 0.75). Neither way is correct.

The expected value of the new product's annual profit is a weighted average of the expected value of profits withfavorable research results and the expected value of profits with unfavorable research results. First, calculate theexpected value of profits with favorable research results and the expected value of profits with unfavorable research

results. Then, weight the expected values according to the 60% and 40% probability of each. The result will be theexpected value of the new product's annual profit.

B. This is [0.70 × $10,000,000] + [0.75 × $(4,000,000)]. The expected value of the new product's annual profit is aweighted average of the expected value of profits with favorable research results and the expected value of profits withunfavorable research results.

C.

The expected value of the new product's annual profit is a weighted average of the expected value of profitswith favorable research results and the expected value of profits with unfavorable research results.

The expected value of profits with favorable research results is [0.70 × $10,000,000] + [0.30 × $(4,000,000)] =$5,800,000. The probability that the research results will be favorable is 60%.

The expected value of profits with unfavorable research results is [0.25 × $10,000,000] + [0.75 × $(4,000,000)] =$(500,000). The probability that the research results will be unfavorable is 40%.

The expected value of the new product's annual profit is [0.60 × $5,800,000] + [0.40 × $(500,000)] = $3,280,000.

D. This answer results from summing the expected values of profits with favorable research results ($5,800,000) andwith unfavorable research results (−500,000). The correct answer is not a sum but is the weighted average of the twoexpected values, weighted according to the probabilities that the research will be favorable and unfavorable.


The correlation coefficient that indicates the weakest linear association between two variables is

A. 0.12B. -0.73C. 0.35D. -0.11

A. A coefficient of correlation that is close to zero usually means there is no, or very little, relationship between thevariables. Therefore, the weakest correlation coefficient is the one that is closest to zero. This is not the answer choicethat is closest to zero.

B. A coefficient of correlation that is close to zero usually means there is no, or very little, relationship between the

variables. Therefore, the weakest correlation coefficient is the one that is closest to zero. This is not the answer choicethat is closest to zero.

C. A coefficient of correlation that is close to zero usually means there is no, or very little, relationship between thevariables. Therefore, the weakest correlation coefficient is the one that is closest to zero. This is not the answer choicethat is closest to zero.

D. The coefficient of correlation is a numerical measure that measures both the direction (positive or negative)and the strength of the linear association between the dependent and independent variables. The coefficientof correlation lies between −1.0 and +1.0. When the correlation coefficient is positive (between 0 and +1), it

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means the dependent and independent variables move in the same direction. When the correlation coefficientis negative (between 0 and −1), it means they move in opposite directions, i.e., when the independent variablegoes up, the dependent variable goes down. When the coefficient of correlation is zero, it means either thatthere is no correlation between the two variables, or that the relationship between them is not linear. Toidentify the weakest correlation we need to determine the coefficient of correlation that is closest to 0. In thiscase it is −.11.


Propeller Inc. plans to manufacture a newly designed high-technology propeller for airplanes. Propeller forecasts thatas workers gain experience, they will need less time to complete the job. Based on prior experience, Propellerestimates a 70% cumulative learning curve and has projected the following costs.

If Propeller manufactures eight propellers, the total manufacturing cost would beCumulative number Manufacturing Projectionsof units produced Average cost per unit Total costs

1 $20,000 $20,000

2 14,000 28,000

The estimated cost of an order for seven additional propellers, after completing production of the first propeller, wouldbe

A. $34,880.B. $92,000.C. $54,880.D. $98,000.

A.

The cost for the seven additional propellers will be equal to the total cost for 8 propellers minus the cost forthe first propeller.

The total cost to produce eight propellers, using the Cumulative Average-Time Learning Model, is

$20,000 (2 × 0.70) (2 × 0.70) (2 × 0.70), or $20,000 (2 × 0.70)3 = $54,880.

The cost of the first propeller is $20,000. Therefore, the cost for seven additional propellers will be $54,880 −$20,000, which equals $34,880.

B. This is the average cost per unit after manufacturing two propellers multiplied by 8 and the cost of the first propellersubtracted from the product. This is not the correct way to find the cost for the additional seven units because themethod used to find the total cost for 8 propellers is incorrect.

C. This is the total cost for 8 propellers. The cost for the seven additional propellers will be equal to the total cost for 8

propellers minus the cost for the first propeller.D.

This is the cost for the first propeller multiplied by 7 and the product multiplied by 0.70. This is not the correct way tofind the cost for the additional seven units.

Find the total cost for 8 propellers. The cost for the additional seven propellers, after completing production of the firstpropeller, will be the cost for 8 propellers minus the cost for the first propeller.

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Month January 10,000February 8,000March 9,000 April 12,000

Each unit contains 3 pounds of raw material. The desired raw material ending inventory each month is 120% of thenext month's production, plus 500 pounds. (The beginning inventory meets this requirement.) Jordan has developedthe following direct labor standards for production of these units: Department 1Department 2Hours per unit 2.0 0.5Hourly rate $6.75 $12.00

How much raw material should Jordan Auto purchase in March?

A. 27,000 pounds.B. 36,000 pounds.C. 32,900 pounds.D. 37,800 pounds.

A. This is the amount of material used in production in March. See the correct answer for a complete explanation.

B. This is the amount of material used in production in April. See the correct answer for a complete explanation.

C. This is the beginning inventory in March. See the correct answer for a complete explanation.

D.

The basic inventory formula for raw materials inventory is

Beginning Inventory + Purchases − Used in Production = Ending Inventory

Beginning inventory in March is equal to ending inventory in February and is 32,900 pounds (9,000 units to beproduced in March × 3 lb. per unit × 120% + 500 lb.). The amount of raw material required for March productionvolume is 27,000 pounds (9,000 units to be produced in March × 3 lb. per unit). The amount of raw material forMarch ending inventory is 43,700 pounds (12,000 units to be produced in April × 3 lb. per unit × 120% + 500lb.).

Using the formula above, we have:

32,900 + P − 27,000 = 43,700

Solving for P, we get P = 37,800


Kallert Manufacturing currently uses the company's budget only as a planning tool. The company decided that it wouldbe beneficial to also use budgets for control purposes. In order to implement this change, the management accountantmust

A. Develop forecasting procedures.B. Synchronize the budgeting and accounting system with the organizational structure.C. Appoint a budget director.D. Organize a budget committee.

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A. The existing budget process should have forecasting procedures already in place.

B. In order to use the budget as both a planning and control tool, the budgeting and accounting systems needto be synchronized. The responsibility centers used for budgeting need to be the same as the responsibilitycenters used for accounting; the chart of accounts used for budgeting need to be the same as the chart ofaccounts used for accounting; and so forth. This enables management to compare the budget with the actuallevels of activity, revenues and expenditures and calculate variances.

C. Because the company already has a budget, there should already be a budget director.

D. Because the company already has a budget, there should already be a budget committee.


Which one of the following statements regarding the difference between a flexible budget and a static budget iscorrect?

A. A flexible budget provides cost allowances for different levels of activity, whereas a static budget provides costs forone level of activity.B. A flexible budget primarily is prepared for planning purposes, while a static budget is prepared for performanceevaluation.C. A flexible budget is established by operating management, while a static budget is determined by top management.D. A flexible budget includes only variable costs, whereas a static budget includes only fixed costs.

A. The static budget is based on the level of output planned at the start of the budget period. A flexible budgetis developed using budgeted revenues and costs amounts based on the level of actual output achieved in thebudget period. The major difference between a flexible budget and a static budget is the use of the actualoutput level in the flexible budget, whereas the static budget uses the output level planned at the beginning ofthe budget period.

B. Both, flexible and static budget are usually prepared for planning and performance evaluation purposes.

C. There are a number of methods of developing budgets: participative budgeting, bottom-up budgeting, top-downapproach, etc. Any level of management can establish either a flexible budget or a static budget.

D. Both flexible and static budget include variable and fixed costs.


The sources of a company's distinctive competencies are:

A. The company's resources and capabilities.

B. The company's prior strategic commitments.C. The company's threats and opportunities.D. High profitability and sustained profit growth.

A. What an organization does better than the competition are its distinctive competencies. Distinctivecompetencies are strengths that a company has that enable it to either (1) have a differentiation advantageand/or (2) have a cost advantage. The source of a company's distinctive competencies are its resources andcapabilities.

B. A company’s prior strategic commitments, such as investments, may limit its ability to respond to competitors'

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actions and to be flexible, causing a competitive disadvantage.

C. Threats and opportunities are external.

D. High profitability and sustained profit growth are means to achieving the goal of maximizing shareholder returns.


From the perspective of corporate management, the use of budgetary slack

A. Increases the probability that budgets will not be achieved.B. Increases the likelihood of inefficient resource allocation.C. Increases the ability to identify potential budget weaknesses.D. Increases the effectiveness of the corporate planning process.

A. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists eitherrevenues are understated or expenses are overstated.

B. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists,either revenues are understated or expenses are overstated or both. Hence, management won't work hard oncost-minimization as they simply have to achieve 'easily attainable goals'. Hence, the resources most likelywill be allocated inefficiently.

C. Budgetary slack exists when revenues are understated or expenses are overstated. Since the budgetary slackdistort a real attainable level of performance it is difficult to identify potential budget weaknesses.

D. Budgetary slack exists when revenues are understated or expenses are overstated. Budget should set high butattainable performance standards. However, budgetary slack makes it easy to achieve the budgeted level ofperformance. Thus, the effectiveness of the corporate planning process decreases when there is budgetary slack.


Companies group customers in order to gain a competitive advantage. This is called:

A. Positioning.B. Product differentiation.C. Market segmentation.D. Customer differentiation.

A. A product's position is the place it occupies in the minds of consumers, particularly in relation to competitors'products. Positioning involves deciding what position or positions the company wants to occupy in its chosensegment(s).

B. Differentiation is development of a product or service with unique attributes that customers perceive to be better ordifferent from competitive offerings.

C.

In market segmentation, a company looks at the many types of potential customers and groups themaccording to their needs. Market segmentation is used in strategic planning to decide which market segmentsoffer the best opportunities and to determine whether to offer a product that will satisfy the needs of eachidentified market segment.

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D. Customer differentiation is not a term used in strategic planning or marketing.


Over the past several years, McFadden Industries has experienced the following regarding the company's shippingexpenses.Fixed costs $16,000 Average shipment15 poundsCost per pound $0.50

Shown below are McFadden's budget data for the coming year.Number of units shipped 8,000Number of sales orders 800Number of shipments 800Total sales $1,200,000Total pounds shipped 9,600

McFadden's expected shipping costs for the coming year are

A. $4,800.B. $20,800.C. $20,000.D. $16,000.

A. This is the expected variable costs only.

B. McFadden’s historical variable cost per shipment for an average shipment of 15 pounds is $0.50 × 15, or$7.50. The company expects that in the coming year, the weight of an average shipment will be only 12pounds, calculated as 9,600 total pounds shipped ÷ 800 shipments. If the cost is assumed to be linear, thenthe cost of an average shipment in the coming year will be $0.50 × 12, or $6.00. Therefore, total variable costs

for 800 shipments will be 800 × $6, or $4,800. The fixed costs are given as $16,000. So total expected shippingcosts for the coming year are $16,000 + $4,800, for a total of $20,800.

C. This answer results from using $5 per shipment as the expected variable cost for the coming year. The expectedvariable cost is $0.50 per pound for an average shipment weight of 12 pounds in the coming year.

D. This is the expected fixed costs only.


A firm desires a finished goods ending inventory equal to 25% of the following month's budgeted sales. January sales

are budgeted at 10,000 units and February at 12,000 units. Each unit requires 2 pounds of Material X, which costs $4per pound. The company has a just-in-time system and materials are delivered daily just prior to use, so no rawmaterials inventories are maintained. Materials are paid for in the month following purchase. The January 1 finishedgoods inventory is 2,500 units. In February, what amount should the company expect to pay as a cash outflow for rawmaterials?

A. $84,000B. $21,000C. $40,000D. $42,000

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A.

Since no materials inventory is kept on hand, the amount of materials purchased each month is equal to theproduction requirements. Thus, the first thing we need to determine is the finished goods production inJanuary by using the formula of the physical flow of goods: Beginning Inventory + Units Produced − UnitsSold = Ending Inventory.

Finished goods inventory is equal to 25% of the following month's budgeted sales. January sales arebudgeted at 10,000 units. Thus, the ending finished goods inventory for December, which is the same as thebeginning inventory for January, will be 25% of 10,000, or 2,500 units. February sales are budgeted at 12,000units, so the ending inventory for January will be 25% of 12,000, or 3,000 units.

Plugging the numbers for finished goods into the formula we get: 2,500 + Units Produced − 10,000 = 3,000.Solving for Units Produced, we get Units Produced = 10,500.

Since the company makes payment the month after the purchase, January raw material purchases will be paidin February. Now we can determine the cash outlay for raw materials in February: 10,500 units × 2 lb. × $4.00 =$84,000.

B. This is the number of raw material purchases in January in pounds. See the correct answer for a complete

explanation.

C. This is the 10,000 units to be sold during January multiplied by $4 per pound of raw materials. This is incorrect fortwo reasons: (1) It does not consider beginning and ending inventories of finished goods, which will affect the numberof units to be produced during the month; and (2) It does not consider that 2 pounds of raw materials are required toproduce each unit of finished goods.

D. This answer does not consider the fact that 2 pounds of raw materials are needed to produce one unit of finishedproduct. See the correct answer for a complete explanation.


Diana Stinson, Cherry Valley Inc.'s factory manager, had lost her patience. Six months ago, she had appointed a teamfrom the production and service departments to finalize the allocation of costs and setting of standard costs. They werestill feuding, and so she had hired Brennan and Rose, a large consulting firm, to resolve the matter.

All of the following are potential consequences of having the standards set by Brennan and Rose except that

A. The standards may appear to lack management support.B. There could be dissatisfaction if the standards contain costs which are not controllable by the unit held responsible.C. Brennan and Rose may not fully understand Cherry Valley’s manufacturing process, resulting in suboptimalperformance.D. Employees could react negatively since they did not participate in setting the standards.

A. If management has hired an outside company to develop standards, the standards will appear to havemanagement support, since management has delegated the responsibility to the outside company. Therefore,the appearance of lacking management support is not a potential consequence of having the standards set byan outside company.

B. If a company segment is being held responsible for costs, that segment needs to have the authority to control thosecosts. If standards are set by an outside organization, that organization most likely will not know what costs arecontrolled by what company segments. Therefore, the standards could contain costs that are not controllable by theunit being held responsible, which could lead to de-motivation on the part of employees.

C. As outside consultants they cannot be as immediately familiar with the corporate manufacturing processes as

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internal teams would be, and the resulting standards may be unworkable.

D. Employees are likely to feel left out as the consultants arrive and therefore may not accept the consultants'recommendations. They may not be motivated to meet the standards.



The frequency distribution of the demand for pretzels per game is presented as follows:Sales Volume Probability2,000 pretzels 0.103,000 pretzels 0.154,000 pretzels 0.205,000 pretzels 0.356,000 pretzels 0.20


The conditional profit per game of having 4,000 pretzels available but only selling 3,000 pretzels is

A. $2,100.B. $1,800.C. $2,800.D. Some amount other than those given.

A. This answer is calculated without regard to the unsold pretzels that are discarded because they will be stale beforethe next home game. Those pretzels are a cost that needs to be included in the calculation of any profit.

B.

The meaning of the word "conditional" in "conditional profit" is similar to the meaning of the word"conditional" in "conditional probability." The conditional probability of two events is the probability that thesecond event will occur when it is known that the first event has already occurred. Conditional profit isconditional because a certain amount of profit (or loss) is associated with each event, such as purchasing acertain amount of inventory and selling a certain amount of inventory.

In this problem, the first event is the purchase of 4,000 pretzels. So given that we know that 4,000 pretzelshave been purchased, what is the profit from that course of action if demand is only 3,000 pretzels? In otherwords, in this problem, there are actually two conditions that are known: (1) 4,000 pretzels are supplied, and(2) demand is 3,000 pretzels. Since the amount supplied is given and the amount demanded is given, thefrequency distribution of the possible demand levels (sales volumes) for pretzels is irrelevant.

Since unsold pretzels are discarded, to calculate the profit we need to use the cost of all 4,000 pretzels thatwill be purchased to sell, not only the cost of the 3,000 pretzels that are sold. The cost is $1,200 (4,000 ×$0.30). The revenue from selling 3,000 pretzels is $3,000 (3,000 × $1). The difference between the revenue of$3,000 and the cost of $1,200 is the profit, which is $1,800.

C. This would be the profit if it were assumed that all 4,000 pretzels were sold. However, only 3,000 pretzels were sold.

D. The correct answer is given. See the correct answer for a complete explanation.

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When developing a budget, an external factor to consider in the planning process is

A. The implementation of a new bonus program.B. The merger of two competitors.

C. A change to a decentralized management system.D. New product development.

A. The implementation of a new bonus program is an internal factor.

B. In developing a budget, internal and external factors are considered and assumptions about those factorsare made. Internal factors are the factors that take place inside the organization, external factors are thoseoutside of company's direct control. Some of the external factors are: state of economy, governmentregulations, labor market, competitor's activities including mergers and acquisitions. Thus, the merger of twocompetitors is an external factor that should be considered in the development of a budget.

C. A change to a decentralized management system is an internal factor.

D. New product development is an internal factor.


When preparing the series of annual operating budgets, management usually starts the process with the

A. Cash budget.B. Sales budget.C. Capital budget.D. Balance sheet.

A. The cash budget is not a part of the operating budget. It is a part of the financial budget. The cash budget cannot beprepared until all of the operating budgets have been developed. See the correct answer for a complete explanation.

B. The sales budget is the first operating budget to be prepared.

C. The capital budget is not a part of the operating budget. It is a part of the financial budget. The capital budget is along-term budget and is prepared outside of the annual budgeting process. See the correct answer for a completeexplanation.

D. The balance sheet is not a part of the operating budget. It is a part of the financial budget. It can be prepared onlyafter all of the individual operating budgets have been prepared. See the correct answer for a complete explanation.


A manufacturing company has the opportunity to submit a bid for 20 units of a product on which it has alreadyproduced two 10-unit lots. The production manager believes that the learning experience observed on the first two lotswill continue for at least the next two lots. The direct labor required on the first two lots was as follows.

5,000 direct labor hours for the first lot of 10 units

3,000 additional direct labor hours for the second lot of 10 units

The learning rate experienced by the company on the first two lots of this product using the Cumulative Average-Time

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Learning Model is

A. 60.0%.B. 80.0%.C. 62.5%.D. 40.0%.

A. This is the learning rate using the Incremental Unit-Time Learning Model.

B.

The time required to produce the first lot was 5,000 direct labor hours. The total time required to produce thefirst two lots was 8,000 direct labor hours. If no learning had occurred, the total time required to produce thefirst two lots would have been 5,000 × 2, or 10,000 direct labor hours.

The actual time required divided by the time that would have been required if no learning had taken place isthe learning rate under the Cumulative Average-Time Learning Model. 8,000 ÷ 10,000 = 0.80, so the learningrate on the first two lots was 80%.

C. This is the amount of time required for the first lot divided by the total amount of time required for the first two lots.That is not the way to calculate the learning rate under either model.

D. This is the rate of decrease in the time required for the second lot. That is not the way to calculate the learning rateunder either model. Furthermore, when the Cumulative Average-Time Learning Model is being used, the learningcurve must be less than 100% and greater than 50%. A learning curve of 50% or less is not possible.


A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft drinks and the weather ishot, it will make $2,500; if the weather is cold, the profit will be $1,000. If the stand sells coffee and the weather is hot, itwill make $1,900; if the weather is cold, the profit will be $2,000. The probability of cold weather on a given day at this

time is 60%.

The expected payoff if the vendor has perfect information is

A. $3,900.B. $1,360.C. $2,200.D. $1,960.

A. This is the profit for selling coffee in hot weather ($1,900) plus the profit for selling coffee in cold weather ($2,000).This payoff is not possible, as the beverage stand can obtain only one profit payoff. Furthermore, the maximum profitthe beverage stand can obtain is $2,500. That would occur if the weather is hot and it sells soft drinks.

B. This is the expected payoff for selling soft drinks when the weather is cold multiplied by the probability of cold

weather of 0.60, plus the expected payoff for selling coffee when the weather is hot multiplied by the probability of hotweather of 0.40. However, if the vendor has perfect information, it would not sell soft drinks on a cold day, nor would itsell coffee on a hot day. It would do just the opposite.

C.

With perfect information about whether the weather will be hot or cold, the company would be able to choosein advance the correct drink to supply for each of the types of weather.

If the beverage stand knew in advance that the weather would be hot, it would supply soft drinks and make

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$2,500. If it knew in advance that the weather would be cold, it would supply coffee and make $2,000.

Therefore, given that for each type of weather, the company will choose the best supply alternative, theexpected payoff is the weighted average of the best payoff that can be achieved on a cold day and the bestpayoff that can be achieved on a hot day, with the probabilities of each weather condition as the weights.Since the probability of cold weather on a given day at this time is 60%, we know that the probability of hotweather is 40%. So the beverage stand's expected profit if it has perfect information is ($2,000 × 0.6) + ($2,500

× 0.4), which is $2,200.

D. This is expected payoff for selling coffee without perfect information, calculated as ($1,900 × 0.40) + ($2,000 × 0.60).


Brown Company estimates that monthly sales will be as follows.January $100,000February 150,000March 180,000

Historical trends indicate that 40% of sales are collected during the month of sale, 50% are collected in the monthfollowing the sale, and 10% are collected two months after the sale. Brown's accounts receivable balance as ofDecember 31 totals $80,000 ($72,000 from December's sales and $8,000 from November's sales.) The amount ofcash Brown can expect to collect during the month of January is

A. $76,800.B. $108,000C. $133,000D. $84,000

A. This answer correctly calculates the portion of January sales collected in January, but uses outstanding receivablebalances from November and December sales instead of November and December sales in calculating the collectionsexpected during January from sales that took place in those months. It is necessary to use the information given to

develop sales figures for November and December, since that data is not given but is needed. See the correct answerfor a full explanation.

B.

The December 31 accounts receivable balance of $80,000 includes $72,000 from December's sales. Therefore,$72,000 is 60% of December's sales, since 40% of sales are collected during the month the sale takes place.$72,000 divided by (1 − 0.40) = $120,000, which is the total sales for December.

The December 31 accounts receivable balance also includes $8,000 from November's sales. Since 10% ofsales are collected two months after the sale, December's year-end accounts receivable balance would haveincluded 10% of November's sales. Therefore, November's sales must have been $80,000.

Collections in January:50% of December sales of $120,000 $60,000

10% of November sales of $80,000* 8,000

40% of January sales of $100,000 40,000

Total cash collections in January $108,000

*Another way of determining the collections during January from November sales is to just assume that all ofthe outstanding receivables from November — $8,000 — will be collected in January, since the problem saysthat the final 10% of receivables are collected two months following the sale.

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C. This answer results from using January, February and March sales to calculate collections in January. Collections inJanuary will be from sales made during November, December and January. November and December sales figuresare not given, so it is necessary to use the information that is given to develop those sales figures. See correct answerfor complete information.

D. This answer results from assuming that 50% of the receivables from December sales that are in accountsreceivable will be collected in January. However, the problem tells us that 50% of sales are collected in the month

following the sale, not 50% of outstanding receivables. It is necessary to develop the sales figure for the month ofDecember using the information, because the December sales figure is not provided.

Question 152 - CMA 1291 H1 - Forecasting Techniques

A distinction between forecasting and planning

A. Is that forecasts are used in planning.B. Is not valid because they are synonyms.C. Arises because forecasting covers the short-term and planning does not.D. Is that forecasting is a management activity whereas planning is a technical activity.

A. Planning is the process of determining how to achieve the company's goals and objectives, or thequestions of what, how, when, where and who for the company's operations. This plan is then communicatedto all of the company to serve as a guide for future actions. A forecast is an attempt to determine the futureactivity levels or environment that the company will be operating in. Forecasts are used in the planningprocess as a basis for some of the decisions that need to be made.

B. Though these terms may often be used or thought of as synonyms, they are not. Planning is the process ofdetermining how to achieve the company's goals and objectives, or the questions of what, how, when, where and whofor the company's operations. This plan is then communicated to all of the company to serve as a guide for futureactions. A forecast is an attempt to determine the future activity levels or environment that the company will beoperating in.

C. Both planning and forecasting can be used in either a short-term or long-term time frame.

D. Forecasting is more of technical activity than planning because of the mathematical models that may be used in theforecasting process. In any case, planning is certainly a management activity.


Stan Berry is considering selling peanuts at the Keefer High School football games. The peanuts would cost $.50 perbag and could be sold for $1.50 per bag. No other costs would be incurred to sell the peanuts. All unsold bags can bereturned to the supplier for $.30 each. Berry estimated the demand for peanuts at each football game and constructedthe payoff table that follows.

Payoffs at each supply level:

Demand(bags)

Probabilityof Demand

20 30 40 50

20 .2 $20 $18 $16 $1430 .4 $20 $30 $28 $2640 .3 $20 $30 $40 $3850 .1 $20 $30 $40 $50

Expected value ofaction:

$20 $27.60$30.40 $29.60

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The optimum number of bags of peanuts to stock is

A. 50.B. 30.C. 20.D. 40.

A. The expected value of 50 bags of peanuts is $29.60, which is not the optimal expected value.

B. The expected value of 30 bags of peanuts is $27.60, which is not the optimal expected value.

C. The expected value of 20 bags of peanuts is $20.00, which is not the optimal expected value.

D.

Expected value is the criterion for selecting the best course of action. The highest possible expected value is$30.40, and it is related to stocking 40 bags of peanuts.

Question 154 - CIA 1194 III.60 - Probability

A company uses two major material inputs in its production. To prepare its manufacturing operations budget, thecompany has to project the cost changes of these material inputs. The cost changes are independent of one another.The purchasing department provides the following probabilities associated with projected cost changes:Cost IncreaseMaterial 1 Material 2

3% .3 .55% .5 .410% .2 .1

The probability of a 3% increase in the cost of both Material 1 and Material 2 is

A. 15 percent.B. 80 percent.C. 40 percent.D. 25 percent.

A. The probability of two events happening simultaneously is calculated by multiplying together theprobability of each item occurring. The probability of a 3% increase in the cost of both Material 1 and Material2 is 0.3 × 0.5 = 0.15 or 15%.

B. The probability of two events happening simultaneously is calculated by multiplying together the probability of eachitem occurring. This is the sum of the probabilities of 3% cost increases for both materials.

C. The probability of two events happening simultaneously is calculated by multiplying together the probability of eachitem occurring. This is the average of the probabilities of 3% cost increases for both materials.

D.

The probability of two events happening simultaneously is calculated by multiplying together the probability of eachitem occurring. This answer is not correct. See the correct answer for a complete explanation.

We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upper

Part 1 : 10/05/14 12:19:00




right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materialsbetter.


Ming Company has budgeted sales at 6,300 units for the next fiscal year and desires to have 590 good units on handat the end of that year. Beginning inventory is 470 units. Ming has found from past experience that 10% of all unitsproduced do not pass final inspection and must therefore be destroyed. How many units should Ming plan to producein the next fiscal year?

A. 7,133.B. 6,890.C. 7,062.D. 7,186.

A.

The formula for inventory is: Beginning Inventory + Units Produced (or Purchased) − Units Sold = Ending

Inventory. If you have any 3 of those numbers, you can calculate the 4th number. Here, we have beginninginventory, sold units, and ending inventory. We also know that 10% of all units produced are not usable.

Beginning inventory = 470Units sold = 6,300Ending inventory = 590

The calculation of good units to be produced can be accomplished with a simple linear equation, following theinventory formula above:

470 + X − 6,300 = 590X = 6,420

6,420 is the number of good units that are needed. However, the question asks how many units should beproduced, taking into consideration the fact that 10% of the units produced will be defective. The equation tocalculate how many units need to be produced in order to result in 6,420 good units after the bad units havebeen thrown away is:

.90X = 6,420X = 7,133

B. This covers the sales forecast as well as the desired ending inventory but forgets about the beginning inventory andalso the fact that 10% of production will not pass inspection. See the correct answer for a full explanation.

C. This answer results from incorrectly calculating the total production required in order to compensate for the 10% thatdo not pass final inspection. To adjust for the defective units, it is necessary to divide the number of good units neededby 0.90 instead of multiplying the number of good units needed by 1.10.

D. This calculation incorrectly assumes that all of the units to be sold as well as the required units in ending inventorywill need to be produced this year. However, 470 of those units are already complete. The first step is to determine thegood units that need to be produced, then adjust for the 10% that will be spoiled. In this calculation, the 10% spoilagewas factored into the equation prior to subtracting the beginning inventory. See the correct answer for a completeexplanation.

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Maker Distributors has a policy of maintaining inventory at 15% of the next month's forecasted sales. The cost ofMaker's merchandise averages 60% of the selling price. The inventory balance as of May 31 is $63,000, and theforecasted dollar sales for the last seven months of the year are as follows:June $700,000July 600,000

August 650,000September 800,000October 850,000November 900,000December 840,000

What is the budgeted dollar amount of Maker's purchases for July?

A. $355,500.B. $364,500.C. $360,000.D. $399,000.

A. This answer results from reversing the beginning and ending inventory balances in calculating the purchases.

B.

The ending inventory each month is to be 15% of the next month's forecasted sales. The cost of the inventorysold (cost of goods sold) averages 60% of the selling price. Therefore, July's ending inventory is forecasted tobe $650,000 (August sales) × 0.60 × 0.15, or $58,500. July's beginning inventory, which is the same as June'sending inventory, is forecasted to be $600,000 (July sales) × 0.60 × 0.15, or $54,000. The cost of the inventorysold during July is forecasted to be $600,000 (July sales) × 0.60, or $360,000.

The basic inventory formula is Beginning Inventory + Purchases/Production − Sold/Used = Ending Inventory.Thus, the formula to find Purchases for July is the following, letting P stand for Purchases:

$54,000 + P − $360,000 = $58,500.

Solving for P, we get P = $364,500.

C. This is 60% of the July forecasted sales. This does not take into accounrt the change in the inventory level from thebeginning of July to the end of July.

D.





Swan Company is a maker of men's slacks. The company would like to maintain 20,000 yeards of fabric in endinginventory. The beginning fabric inventory is expected to contain 25,000 yards. The expected yards of fabric needed for

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us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materialsbetter.

C.

The formula for calculating a forecasted amount using exponential smoothing is:

Forecasted Value = (alpha × current actual value) + ([1 − alpha ] × current forecasted value)

Using the forecasted and actual amounts given for the month of February, we can calculate the forecastedvalue for the month of March as follows:

Forecasted Value = (0.3 × 158) + (0.7 × 148)

Forecasted Value = 151

D. This is the actual demand in February, not the forecasted demand for March. The formula for calculating aforecasted amount using exponential smoothing is:

Forecasted Value = (alpha × current actual value) + ([1 − alpha ] × current forecasted value)


Monroe Products is preparing a cash forecast based on the following information.

Monthly sales: December $200,000; January $200,000; February $350,000; March $400,000.

All sales are on credit and collected the month following the sale.

Purchases are 60% of next month's sales and are paid for in the month of purchase.

Other monthly expenses are $25,000, including $5,000 of depreciation.

If the January beginning cash balance is $30,000, and Monroe is required to maintain a minimum cash balance of$10,000, how much short-term borrowing will be required at the end of February?

A. $80,000.B. $60,000.C. $75,000.D. $70,000.

A. This answer results from deducting other monthly expense as given in the problem ($25,000) from both January'sand February's cash flow, instead of the cash expense. The other monthly expenses include $5,000 of monthlydepreciation that is not a cash expense. Therefore, the other monthly expenses amount given in the problem needs tobe adjusted to include only cash expenses. See correct answer for a full explanation.

B. This is the amount that Monroe will need to borrow during the month of February. However, the question asks howmuch borrowing will be required at the end of February. In other words, what will be the outstanding balance ofshort-term borrowings outstanding as of the end of February? To determine that, it is necessary to calculate the cashflow and required borrowing for the month of January as well as for the month of February. See correct answer for afull explanation.

C. This answer results from deducting other monthly expense as given in the problem ($25,000) from either January'sor February's cash flow, instead of the cash expense. The other monthly expenses include $5,000 of monthlydepreciation that is not a cash expense. Therefore, the other monthly expenses amount given in the problem needs to

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be adjusted to include only cash expenses. See correct answer for a full explanation.

D. The company will need to borrow $10,000 at the end of January and another $60,000 at the end of February,for a total outstanding short-term borrowings of $70,000 as of the end of February.

The cash flow for January and February, including the short-term borrowings, is below. Note that thebeginning cash balance for February cannot be known until the ending cash balance for January has been

calculated, and therefore we must calculate the cash flow and ending cash for January before we cancalculate the cash flow and ending cash for February. January FebruaryBeginning cash $30,000 $10,000

+Collections[Dec. Sales]

+200,000[Jan. Sales]+200,000

− Purchases[Feb. Sales × 0.60]

− 210,000[Mar. Sales × 0.60]

− 240,000− Other cash expenses(depreciation excluded) − 20,000 − 20,000= Ending cash before borrowing/repaying loans

0 − 50,000

+/− Borrowed/(repaid) + 10,000 + 60,000

= Ending cash 10,000 10,000


The four factors that derive from a company's distinctive competencies and which create competitive advantage are

A. superior efficiency, quality, innovation, and customer responsiveness.B. employee productivity, capital productivity, product innovation and process innovation.C. continuous improvement, continuous learning, prior strategic commitments and absorptive capacity.D. the value (utility) customers place on the company's products, the price it charges for its products, the costs of

creating those products, and the profitability of the company.

A.

These are the four factors that create competitive advantage.

Efficiency is the relationship between inputs and outputs, and superior efficiency leads to lower costs whichleads to higher profitability and competitive advantage.

A product has superior quality when its customers consider that its attributes give them higher utility than dothe attributes of competing products.

Innovation in products and processes is perhaps the most important component of competitive advantage,because competition is driven by innovation.

Superior responsiveness to customers means the company does a better job than its competition ofidentifying customer needs and satisfying them.

B. Employee productivity and capital productivity are important components of efficiency. Product innovation andprocess innovation are the two types of innovation. However, these are not the four factors that create competitiveadvantage.

C. Continuous improvement and continuous learning are important ways to improve the four factors that createcompetitive advantage. Prior strategic commitments are commitments to specific ways of doing business that can limit

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a company's flexibility and ability to respond to changing circumstances. Absorptive capacity refers to the company'sability to make use of new knowledge. None of these are factors that create competitive advantage, however.

D. A company's profitability is derived from the value customers place on its products, the price that it charges for itsproducts, and the costs of creating those products. However, these are not the four factors that create competitiveadvantage.


The four factors that derive from a company's distinctive competencies and which create competitive advantage are

A. superior efficiency, quality, innovation, and customer responsiveness.B. employee productivity, capital productivity, product innovation and process innovation.C. continuous improvement, continuous learning, prior strategic commitments and absorptive capacity.D. the value (utility) customers place on the company's products, the price it charges for its products, the costs ofcreating those products, and the profitability of the company.

A.

These are the four factors that create competitive advantage.

Efficiency is the relationship between inputs and outputs, and superior efficiency leads to lower costs whichleads to higher profitability and competitive advantage.

A product has superior quality when its customers consider that its attributes give them higher utility than dothe attributes of competing products.

Innovation in products and processes is perhaps the most important component of competitive advantage,because competition is driven by innovation.

Superior responsiveness to customers means the company does a better job than its competition of

identifying customer needs and satisfying them.

B. Employee productivity and capital productivity are important components of efficiency. Product innovation andprocess innovation are the two types of innovation. However, these are not the four factors that create competitiveadvantage.

C. Continuous improvement and continuous learning are important ways to improve the four factors that createcompetitive advantage. Prior strategic commitments are commitments to specific ways of doing business that can limita company's flexibility and ability to respond to changing circumstances. Absorptive capacity refers to the company'sability to make use of new knowledge. None of these are factors that create competitive advantage, however.

D. A company's profitability is derived from the value customers place on its products, the price that it charges for itsproducts, and the costs of creating those products. However, these are not the four factors that create competitiveadvantage.


The Raymar Company is preparing its cash budget for the months of April and May. The firm has established a$200,000 line of credit with its bank at a 12% annual rate of interest on which borrowings for cash deficits must bemade in $10,000 increments. There is no outstanding balance on the line of credit loan on April 1. Principal repaymentsare to be made in any month in which there is a surplus of cash. Interest is to be paid monthly. If there are no

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outstanding balances on the loans, Raymar will invest any cash in excess of its desired end-of-month cash balance inU.S. Treasury bills. Raymar intends to maintain a minimum balance of $100,000 at the end of each month by eitherborrowing for deficits below the minimum balance or investing any excess cash. Monthly collection and disbursementpatterns are expected to be:

Collections. 50% of the current month's sales budget and 50% of the previous month's sales budget.

Accounts Payable Disbursements. 75% of the current month's accounts payable budget and 25% of theprevious month's accounts payable budget.

All other disbursements occur in the month in which they are budgeted.

Budget Information March April MaySales $40,000$50,000$100,000 Accounts payable 30,000 40,000 40,000Payroll 60,000 70,000 50,000Other disbursements 25,000 30,000 10,000

In May, Raymar will be required to

A. Repay $90,000 principal and pay $100 interest.B. Pay $900 interest.C. Borrow an additional $20,000 and pay $1,000 interest.D. Repay $20,000 principal and pay $1,000 interest.

A. Principal repayments are to be made in any month in which there is a surplus of cash. There was no cash surplus inMay so no principal would be repaid. Also the interest is not $100. See the correct answer for a complete explanation.

B. Interest was $1,000, not $900. Additional borrowings are needed as there is a cash deficit in May. See the correctanswer for a complete explanation.

C.

First, we need to determine the beginning cash balance for May and the amount of interest that has to be paidin May for April borrowings, since interest is paid monthly. To do this we need to determine if there were any

borrowings in April.

To determine what the April borrowings were, we need to first determine the cash collections for April: 50% ofApril sales and 50% of March sales (or $25,000 + $20,000 = $45,000) will be collected in April. Then, we need todetermine the amount paid for accounts payable in April: 75% of April A/P and 25% of March A/P (or $30,000 +$7,500 = $37,500) will be paid in April. Other disbursements are paid in the month they occur, and for Aprilthey are: $70,000 for payroll plus $30,000 for other disbursements, totaling $100,000.

Subtracting the amount of cash outflows from cash inflows we get a $92,500 negative net cash flow for themonth. We assume that April's beginning cash was $100,000. Therefore, the company's April ending cashbalance before any borrowings was $100,000 − $92,500, or $7,500.

The company needed to have $100,000 in cash at the end of April. Since borrowings for cash deficits must bemade in $10,000 increments, the company needed to borrow $100,000 to cover the $92,500 cash deficit so itcould end the month with at least $100,000 in cash. After borrowing $100,000, the April ending cash balancewas $107,500; but the extra $7,500 in the cash account is unavoidable because of the $10,000 incrementalborrowing requirement.

The company will need to pay $1,000 of interest on May 31 ($100,000 × [12% ÷ 12]) for the April borrowing.

Next, we need to determine the cash inflows and outflows for May as we did for April. Cash collections in Mayare 50% of the April and May sales (50% × $50,000) + (50% × $100,000) = $75,000. Accounts payable that will bepaid in May are 75% of May's AP and 25% of April's AP: ($40,000 × 75%) + ($40,000 × 25%) = $40,000. Other

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disbursements total $61,000 ($50,000 for payroll + $10,000 in other disbursements + $1,000 in interest forborrowings during April). Subtracting the total disbursements from the collections in May we get a $26,000negative cash flow ($75,000 − $40,000 − $61,000).

At the beginning of the month, the company had a cash balance of $107,500. $107,500 minus the $26,000negative net cash flow during May will result in a May ending cash balance before any borrowing of $81,500.But remember the company needs to end the month with a cash balance of $100,000. They are $18,500 short.

Since borrowings for cash deficits must be made in $10,000 increments, the company needs to borrow$20,000 to cover the $18,500 cash deficit for May and end the month with at least $100,000 in cash. In fact, theywill end the month of May with $101,500 in cash. ($107,500 + $75,000 - $40,000 - $61,000 + $20,000 = $101,500).

D. Principal repayments are to be made in any month in which there is a surplus of cash. There was no cash surplus inMay so no principal would be repaid. See the correct answer for a complete explanation.


Dawson Manufacturing developed the following multiple regression equation, utilizing many years of data, and uses itto model, or estimate, the cost of its product.Cost = FC + (a × L) + (b × M) Where: FC = fixed costs

L = Labor rate per hourM = Material cost per pound

Which one of the following changes would have the greatest impact on invalidating the results of this model?

A. A large drop in material costs as a result of purchasing the material from a foreign source.B. A significant change in labor productivity.C. A significant reduction in factory overheads, which are a component of fixed costs.D. Renegotiation of the union contract calling for much higher wage rates.

A. A large drop in material costs as a result of purchasing material from a foreign source would reduce M in the model,which would decrease the cost of the product. This would be consistent with the model and would not serve toinvalidate its results.

B.

The model is supposed to estimate the cost of the product. Therefore, the "a" in the formula does notrepresent actual labor hours used to produce the product. The "a" in the formula represents the standardnumber of hours allowed for production of the product.

If labor productivity were to decrease, the actual number of labor hours required to produce the productwould increase; and if labor productivity were to increase, the actual number of labor hours required woulddecrease. However, since the "a" represents the standard number of hours required to produce the actual

output, the "a" would not change because of a change in labor productivity. The estimated cost resulting fromthe model would be significantly different from the actual cost to produce the product.

This would have the greatest impact on invalidating the results of the model.

C. A significant reduction in factory overheads would reduce FC in the model, which would decrease the cost of theproduct. This would be consistent with the model and would not serve to invalidate its results.

D. Renegotiation of the union contract calling for much higher wage rates would increase the L in the model, whichwould increase the cost of the product. This would be consistent with the model and would not serve to invalidate its

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results.


CLT Company has three sales departments. Department A processes about 50% of CLT's sales, Department B about30%, and Department C about 20%. In the past, Departments A, B, and C had error rates of about 2%, 5%, and 2.5%,respectively. A random audit of the sales records yields a recording error of sufficient magnitude to distort thecompany's results. The probability that Department A is responsible for this error is

A. 17%B. 50%C. 2%D. 33%

A. The probability that Department C is responsible for the error is 17%.

B. The probability that Department B is responsible for the error is 50%.

C. This is the rate of error for the Department A.

D. The total error rate for CLT Company is equal to the sum of the error rates for each department: DepartmentA (50% × 2% = 1%); Department B (30% × 5% = 1.5%); Department C (20% × 2 0.5% = 0.5%), which is 3% intotal. The probability that the error occurred in Department A is Department A's error rate divided by the wholecompany's error rate, or 1% ÷ 3%, which is 33 1/3% or 0.33.


Which of the following is not a characteristic of a tactical plan:

A. It is quantitative in focus.B. It covers a period of time one year to five years.C. Top management is responsible for development and overall implementation.D. It relates to production, materials requirements, inventory, cash flows and income statements.

A. Quantitative in focus is a characteristic that describes a tactical plan, which explains "how to get there" or how toachieve the ultimate objectives of a strategic plan.

B. This is a characteristic that describes a tactical plan, which explains "how to get there" or how to achieve theultimate objectives of a strategic plan. Tactical plans cover an intermediate time period: less than a strategic plan butgreater than an operational plan.

C. Top management is not responsible for a tactical plan but rather for the development and overall

implementation of the strategic plan. Upper and middle management are responsible for the tactical plan.

D. This is a characteristic that describes a tactical plan, which explains "how to get there" or how to achieve theultimate objectives of a strategic plan.


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A systemized approach known as zero-base budgeting (ZBB)

A. Classifies budget requests by activity and estimates the benefits arising from each activity.B. Divides the activities of individual responsibility centers into a series of packages that are prioritized.C. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.D. Presents a statement of expectations for a period of time but does not present a firm commitment.

A. Activity-based budgeting, not zero-base budgeting, focuses on the budged cost of activities necessary to produceand sell products and services.

B.

Zero-based budgeting is the budgeting method in which the current year budget is prepared without anyreference to, or use of, the prior period's budget. This is quite different from a budget that is prepared bylooking at the current year's actual or budgeted amounts and simply adjusting them (usually increasing them)for expected changes in the coming year.

Though this method is more time consuming and difficult for all of the people involved, there are a number ofadvantages to the company as a result of using this method. Because the budget is built up from zero, eachmanager must justify all of the expenses in his or her department. Each component is evaluated from acost-benefit perspective and priorities are determined. Zero-based budgeting enables the company to identifyexpenses that are not value adding or that should be reduced due to some development in productionmethods or something similar.

C. This is a description of a static budget, not a zero-base budget. A static budget is a budget that is prepared for onlyone level of activity within the company. A zero-base budget may be a static budget, but it may also be a flexiblebudget.

D. Zero-based budgeting represents a firm commitment to the company just like any other budget.


The budgeting technique that is most likely to motivate managers is

A. Bottom-up budgeting.B. Top-down budgeting.C. Zero-base budgeting.D. Program budgeting and review technique.

A. Bottom-up budgeting is the budgeting technique that motivates lower-level managers the most. Thebudgeting process starts with departments at the lowest level in the organization. Managers and subordinatesset goals and objectives and translate those goals and objectives into quantitative budgets for theirresponsibility centers. Then the budgets are sent on to the next highest level, which does the same thing, andso forth. At the top the company's budget is developed by consolidating all of the lower-level budgets. Ofcourse, top management reviews the lower-level budgets as well as the consolidated budget that results from

them. If the company's consolidated budgeted results are not what top management wants to see, topmanagement may negotiate changes to the lower-level budgets as necessary to achieve the company'sobjectives. Employees are more likely to support budgets when they have participated in their preparation. Itgives them a feeling of ownership of the process and they will be more likely to support the budget'simplementation.

B. Top-down budgeting is less motivating for managers as according to this budgeting technique the plan is set bytop-management and lower level managers do not participate in preparing it.

C. Zero-based budgeting is a budget which is prepared ignoring the past periods. The budget is developed from "zero"

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and all expenses need to be justified for the current period. The use of this method by itself is not going to motivate ordemotivate managers.

D. Program budgets are formulated by objective rather than function. This type of budget by itself will not motivate ordemotivate managers.

Question 167 - CIA 593 III.64 - Forecasting Techniques

What coefficient of correlation results from the following data?X Y

1 10

2 8

3 6

4 4

5 2

A. Cannot be determined from the data given.

B. +1C. 0D. -1

A. A linear relationship between X and Y can be determined.

B. A perfectly inverse relationship exists, not a direct relationship.

C. The data represents a negative correlation. As X is increasing, Y is decreasing.

D. This data represents a perfect negative correlation. As X is increasing by 1, Y is decreasing by 2. Thus, thisis an inverse relationship, and r must be equal to −1.


DeBerg Company has developed the following sales projections for the calendar year.May $100,000June 120,000July 140,000 August 160,000September 150,000October 130,000

Normal cash collection experience has been that 50% of sales are collected during the month of sale and 45% in the

month following sale. The remaining 5% of sales is never collected. DeBerg's budgeted cash collections for the thirdcalendar quarter are

A. $450,000B. $422,500C. $414,000D. $427,500

A. This is the total sales for the third calendar quarter, not the cash collected.

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B. This is the budgeted collections for the periods from August through October. See the correct answer for a completeexplanation.

C.

The third calendar quarter is represented by July, August and September. In each of these months DeBerg'scollects 50% of that month's sales plus 45% of the previous month's sales as follows:

July: ($140,000 × 50%) + ($120,00 × 45%) = $124,000

August: ($160,000 × 50%) + ($140,000 × 45%) = $143,000

September: ($150,000 × 50%) + ($160,000 × 45%) = $147,000

In total, collections will be $124,000 + $143,000 + $147,000 = $414,000.

This question can also be solved by assuming that in the third quarter, the company collect 95% of July andAugust sales plus 45% of June sales and 50% of September sales.

D. This is the amount of cash collected from sales made in the third calendar quarter.


The Yummy Dog Bone Company is anticipating that a major supplier might experience a strike this year. Because ofthe nature of the product and emphasis on quality, extra production cannot be stored as finished goods inventory.When developing a contingency budget that would anticipate a raw material buildup, the two most significant items thatwill be affected are

A. Sales and ending inventory.B. Production volume and raw material.C. Raw material and cash flow.

D. Production and cash flow.

A. Ending inventory can not be affected because extra production cannot be stored as finished goods inventory.However, sales may decrease because of stock out if the company won't find another raw materials supplier.

B. Production volume can not be affected because extra production cannot be stored as finished goods inventory.

C. In this situation a contingency plan would consider acquisition of an additional amount of raw material tosupply production during the strike at its major supplier. However, purchase of more raw materials than isneeded for normal operations will require a cash outlay. Thus more cash will be tied up in raw materialsinventory, and the cash flow will be affected.

D. Production volume can not be affected because extra production cannot be stored as finished goods inventory.


Which one of the following may be considered an independent item in the preparation of the master budget?

A. Budgeted income statement.B. Ending inventory budget.C. Budgeted statement of financial position.

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D. Capital investment budget.

A. The budgeted income statement is a critical element of the master budget. It is one of the last budgets created fromthe operating budgets. The budgeted income statement is based on the sales budgets, expense budgets and otherelements of the master budget, so it is not an independent item in the preparation of the master budget.

B. The desired level of ending inventory not independent, as it is used in the development of the production budget.

C. The budgeted statement of financial position (balance sheet) is based on a number of elements of the masterbudget including the budgeted income statement, so it is not an independent item in the preparation of the masterbudget.

D. The capital budget is the budget in which all capital (property, plant and equipment) expenditures areplanned. This budget is not directly connected to the current period budgets and it is often prepared years inadvance so that the company can plan to obtain the necessary financing or accumulate the necessary cash tocarry out its capital expansion plans. The capital budget is often considered to be independent from themaster budget.


All of the following are disadvantages of authoritative budgeting as opposed to participatory budgeting, except that it

A. may result in a budget that is not possible to achieve.B. may limit the acceptance of proposed goals and objectives.C. reduces the communication between employees and management.D. reduces the time required for budgeting.

A. This is a true statement. An authoritative budget is one that is developed by senior management with no input fromlower level employees and managers. Without input from lower level employees and managers, a budget may result inan impractical budget that is not achievable, because it does not take into account existing limitations that seniormanagement may not be aware of.

B. This is a true statement. An authoritative budget is one that is developed by senior management with no input fromlower level employees and managers. Without any input into the budgeting process, lower level managers andemployees will not see the budget as their own. This may result in a lack of their acceptance of senior management'sproposed goals and objectives.

C. This is a true statement. An authoritative budget is one that is developed by senior management with no input fromlower level employees and managers. It reduces communication between employees and managers and betweenmiddle managers and senior management, since input from mid-level managers is neither sought nor desired by seniormanagement.

D. Authoritative budgeting is budgeting from the "top down." Senior management sets the budget andpresents it to mid-level managers as their targets to achieve. Mid-level managers have no input into thedevelopment of the budget. This does reduce the time required for budgeting, because communication

between senior management and mid-level management over budget targets is eliminated. Although areduction in time is not a disadvantage of authoritative budgeting, the advantage of reduced time has costs.Those costs are: (1) Without input from lower level managers, the budget developed by senior managementmay result in an impractical budget because it does not take into account any existing limitations that seniormanagement may not be aware of. (2) It reduces communication between employees and managers andbetween middle managers and senior management, since input from mid-level managers is neither sought nordesired by senior management. (3) Without any input into the budgeting process, lower level managers andemployees will not see the budget as their own. This may result in a lack of their acceptance of seniormanagement's proposed goals and objectives.

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Many companies use comprehensive budgeting in planning for the next year's activities. When both an operatingbudget and a financial budget are prepared, which one of the following is correct concerning the financial budget?

Included in the Financial Budget, respectively:Capital Budget, Master Budget Balance Sheet, Cash Budget

A. Yes, No, YesB. Yes, Yes, YesC. No, No, NoD. No, Yes, No

A. The financial budget includes the master budget balance sheet, the budgeted statement of cash flows, the cashbudget, and the capital budget. The balance sheet is an important part of the financial budget as it pulls everythingtogether at the end.

B. The financial budget includes the master budget balance sheet, the budgeted statement of cash flows, the

cash budget, and the capital budget.

C. The financial budget includes the master budget balance sheet, the budgeted statement of cash flows, the cashbudget, and the capital budget. The capital budget shows where/how large amounts of capital will be utilized. The cashbudget tracks the inflows and outflows of cash on a month-by-month (possibly even week-by-week or day-by-day)basis. The budgeted balance sheet shows how the entire budget is pulled together.

D. The financial budget includes the master budget balance sheet, the budgeted statement of cash flows, the cashbudget, and the capital budget. The capital budget is necessary as it demonstrates where large capital expenditureswill be made and how capital will be used. If capital expenditures for the coming year will affect the balance sheet,income statement and cash flows, these capital expenditures must be reflected in the budgeted balance sheet, incomestatement and cash flow statement, so the capital budget is required in order to develop these other budgets.


A firm's capital intensity ratio is

A. its total long-term debt plus equity divided by total assets.B. its common equity divided by total liabilities.C. its shareholders' equity divided by total assets.D. its assets that increase when sales increase divided by sales.

A. The capital intensity ratio is the amount of assets required per dollar of sales. The capital intensity ratio of a firmaffects its capital requirements. A company with a high assets-to-sales ratio will require more assets for a givenincrease in sales and therefore will have a greater need for external financing than a company with a lower

assets-to-sales ratio.

B. The capital intensity ratio is the amount of assets required per dollar of sales. The capital intensity ratio of a firmaffects its capital requirements. A company with a high assets-to-sales ratio will require more assets for a givenincrease in sales and therefore will have a greater need for external financing than a company with a lowerassets-to-sales ratio.

C. The capital intensity ratio is the amount of assets required per dollar of sales. The capital intensity ratio of a firmaffects its capital requirements. A company with a high assets-to-sales ratio will require more assets for a givenincrease in sales and therefore will have a greater need for external financing than a company with a lower

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assets-to-sales ratio.

D. The capital intensity ratio is the amount of assets required per dollar of sales. It is assets that increasewhen sales increase divided by sales. The capital intensity ratio of a firm affects its capital requirements. Acompany with a high assets-to-sales ratio will require more assets for a given increase in sales and thereforewill have a greater need for external financing than a company with a lower assets-to-sales ratio.


Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly'soperations are as follows:

Sales are budgeted at $220,000 for December year 1 and $200,000 for January year 2.




Other expected monthly expenses to be paid in cash are $22,600. Annual depreciation is $216,000.


Liabilities and Stockholders' Equity

Accounts payable $162,000Common stock 800,000Retained earnings 138,000Total liabilities and stockholders' equity $1,100,000

The budgeted cash collections for December year 1 are

A. $132,000.B. $203,600.C. $208,000.D. $212,000.

A. This is the amount of cash collected from December sales in December. See the correct answer for a complete

explanation.

B. This is the budgeted cash collections for January Year 2. See the correct answer for a complete explanation.

C. Cash collection of December sales in December is 60% of the sales level, or $132,000 ($220,000 × 60%).December cash collections also include some of the proceeds from November sales. Accounts receivable netof bad debt allowance are $76,000 as of November 30, which are going to be collected in their entirety inDecember. Thus, the total budgeted cash collections in December is $208,000 ($132,000 + $76,000).

D. This amount include the allowance for bad debt, which should not be considered. See the correct answer for a

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complete explanation.


Below are a year-end actual balance sheet for Year 1 and pro forma balance sheet and income statement for Year 2for the Grow 'n' Glow Manufacturing Company (000 omitted).BALANCE SHEET YEAR 1-ACTUAL BALANCE SHEET YR 2-PRO FORMA Assets AssetsCash $ 9,700 Cash $ 10,670 Accounts receivable 15,300 Accounts receivable 16,830Inventory (incl. $820 depr.) 18,500 Inventory (incl. $950 depr.) 20,350 Total current assets $ 43,500 Total current assets $ 47,850 Held-to-maturity securities $ 45,600 Held-to-maturity securities $ 45,600Net fixed assets 32,200 Net fixed assets 35,000 Total long-term assets $ 77,800 Total long-term assets $ 80,600

Total assets $121,300 Total assets $128,450 Liabilities Liabilities Accounts payable $ 3,000 Accounts payable $ 3,300Notes payable 10,000 Notes payable (incl. addtl. fds. needed) 13,738 Accrued liabilities 6,000 Accrued liabilities 6,600 Total current liabilities $ 19,000 Total current liabilities $ 23,638 Long-term debt 35,600 Long-term debt 35,600 Total liabilities $ 54,600 Total liabilities $ 59,238 Equity EquityCommon stock $ 10,000 Common stock $ 10,000 Additional paid-in capital 30,000 Additional paid-in capital 30,000Retained earnings 26,700 Retained earnings 29,212 Total equity $ 66,700 Total equity $ 69,212

Total liabilities & equity $121,300 Total liabilities & equity $128,450

INCOME STATEMENT YR 2-PRO FORMA

Net sales $110,000 COGS (incl. $3,200 depr.) 72,82 Gross profit $ 37,180

Selling expense 18,040 Gen & adm exp. (incl. $395 depr.) 12,320 EBIT $ 6,820 Net interest expense 1,396 EBT $ 5,424 Taxes @ 35% 1,898 Net income $ 3,526 Dividends 1,014 Addition to retained earnings $ 2,512

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On the pro forma Statement of Cash flows, what is the company's net cash flow used in investing activities?

A. $6,000B. $7,345C. $2,800D. $6,395

A. This answer results from failing to include the forecasted depreciation capitalized in inventory and the forecastedgeneral & administrative depreciation in the calculation of equipment purchased.

B. Net cash used in investing activities consists of equipment purchased. Beginning net fixed assets was$32,200. Total depreciation forecast for Year 2, including depreciation capitalized in inventory, is $4,545(COGS $3,200 + G&A $395 + $950 capitalized in inventory), so net fixed assets would have decreased by thatamount to $27,655 by the end of Year 2 if no additional fixed assets were purchased. Since the forecastedending balance of net fixed assets is $35,000, purchases of fixed assets on the pro forma statement of cashflows must be $7,345 ($35,000 − $27,655).

C. This is the difference between net fixed assets at the end of Year 2 and net fixed assets at the end of Year1/beginning of Year 2. This answer results from failing to adjust net fixed assets for depreciation forecasted to bebooked during Year 2.

D. This answer results from failing to include the forecasted depreciation capitalized in inventory in the calculation ofequipment purchased.


All of the following are considered operating budgets except the

A. Capital budget.B. Production budget.C. Sales budget.

D. Materials budget.

A. The capital budget is usually prepared separately from the other budgets. The capital budget concernscapital investments in plant, equipment, real-estate, etc. Management plans these type of investments inadvance to allocate or obtain enough resources to perform them.

B. The production budget is one of the operating budgets.

C. The sales budget is the first budget developed in the operating budget.

D. The materials budget is one of the operating budgets.


Brooke Company's management team is preparing a cash budget for the coming quarter. The following budgetedinformation is under review. January February MarchRevenue $700,000 $800,000 $500,000Inventory purchases 350,000 425,000 225,000Other expenses 150,000 175,000 175,000

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The company expects to collect 40% of its monthly sales in the month of sale and 60% in the following month. 50% ofinventory purchases are paid in the month of purchase and 50% in the following month. Payments for all otherexpenses are made in the month incurred.

Brooke forecasts the following account balances at the beginning of the quarter.Cash $200,000 Accounts receivable 300,000 Accounts payable (inventory) 400,000

Given the above information, the projected ending cash balance for February will be

A. $120,000.B. $712,500.C. $232,500.D. $500,000.

A.

This answer results from including a disbursement equal to 50% of March sales. The question asks for the cashbalance at the end of February, so March disbursements should not be included.

B.

This answer results from using 100% of February's sales in calculating February collections. Only 40% of February'ssales are collected during February.

C.

We need to calculate the collections and disbursements for the months of both January and February, sincethe question gives the beginning cash balance as of January 1 and asks for the ending cash balance at theend of February.Beginning cash balance, January 1 $200,000

January collections:

From beginning A/R1 300,000

From January sales - $700,000 × 0.40 280,000

January disbursements:

From beginning A/P2 (400,000)

From January purchases - $350,000 × 0.50 (175,000)

Other January expenses (150,000)

February collections:

From January sales - $700,000 × 0.60 420,000

From February sales - $800,000 × 0.40 320,000

February disbursements:

From January purchases - $350,000 × 0.50 (175,000)

From February purchases - $425,000 × 0.50 (212,500)

Other February expenses (175,000)

Ending cash balance, end of February $232,500

1100% collected since all accounts are collected in 2 months.2100% paid since all accounts are paid within 2 months.

D.

This is not the correct answer. Please see the correct answer for an explanation.We have been unable to determinehow to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can

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create a full explanation of why this answer choice is incorrect. Please send us an email [email protected]. Include the full Question ID number and the actual incorrect answer choice -- not itsletter, because that can change with every study session created. The Question ID number appears in the upper rightcorner of the ExamSuccess screen. Thank you in advance for helping us to make the HOCK study materials better.


Streeter Company produces microwave turntables. Sales for the next year are expected to be 65,000 units in the firstquarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter.Streeter maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to besold in the next quarter. However, due to a work stoppage, the finished goods inventory at the end of the first quarter is8,000 units less than it should be. How many units should Streeter produce in the second quarter?


A. This is the number of units Streeter should produce in the third quarter.

B. The second quarter's beginning inventory should have been 50% of the 72,000 units to be sold during thesecond quarter, or 36,000 units. However, it was 8,000 less than that, or 28,000 units.

The second quarter's ending inventory will be 50% of the 84,000 units to be sold during the third quarter, or42,000 units.

Units to be sold during the second quarter are given as 72,000.

The inventory equation is:

Beginning Inventory + Goods Manufactured – Goods Sold = Ending Inventory

Let X represent Goods Manufactured:

28,000 + X – 72,000 = 42,000

X = 86,000

C. This answer does not take into consideration the 8,000 units that the inventory at the end of the first quarter wasshort.

D. This is the sales for the second quarter increased by the number of units the inventory was short at the end of theprevious quarter. Beginning and ending inventory need to be taken into consideration. See correct answer for fullcalculation.


The Lions Club is planning to sell pretzels at a local football game and has estimated sales demand as follows.Sales demand8,000 10,000 12,000 15,000Probability 10% 40% 30% 20%

The cost of the pretzels varies with the quantity purchased as follows.

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Purchase quantity8,00010,00012,00015,000Cost per unit $1.25 $1.20 $1.15 $1.10

Any unsold pretzels would be donated to the local food bank. The calculated profits at the various sales demand levelsand purchase quantities are as follows.

Expected Profits at Various Purchase QuantityLevels

Sales Demand 8,000 10,000 12,000 15,0008,000 $6,000 $4,000 $ 2,200 $ (500)

10,000 6,000 8,000 6,200 3,50012,000 6,000 8,000 10,200 7,50015,000 6,000 8,000 10,200 13,500

Which of the following purchase quantities would you recommend to the Lions Club?

A. 12,000B. 10,000C. 8,000D. 15,000

A.

We need to find the expected profit at each purchase quantity level in order to determine the highest expectedprofit. The information on the cost of the pretzels at each purchase quantity is irrelevant, because the tablegives the expected profits at the various purchase quantity and sales demand levels, and profit has alreadybeen reduced by the cost of sales.

The probability of each level of sales demand, though, is relevant. That is used as the weighting in calculatingthe expected value of the profit at each purchase quantity level.

The expected profit for the purchase quantity level of 8,000 is $6,000 and needs no calculation, since theexpected profit is $6,000 at every level of sales demand.

The expected profit at a purchase quantity of 10,000 is (0.10 × $4,000) + (0.90 × $8,000) = $7,600.

At a purchase quantity of 12,000, the expected profit is (0.10 × $2,200) + (0.40 × $6,200) + (0.50 × $10,200) =$7,800.

At a purchase quantity of 15,000, the expected profit is (0.10 × [$500]) + (0.40 × $3,500) + (0.30 × $7,500) + (0.20× $13,500) = $6,300.

The highest expected profit is $7,800 at a purchase quantity of 12,000. So a purchase quantity of 12,000should be recommended.

B. This is the sales demand level that has the highest probability of occurring (40%); but this is not the purchasequantity that would result in the highest expected profit for the Lions Club. Therefore, it is not the purchase quantity thatshould be recommended.

C. The Lions Club would have a profit of $6,000 if they purchase 8,000 pretzels, regardless of what sales demand is.However, $6,000 is not the highest expected profit. Therefore, purchasing 8,000 pretzels would not be the bestrecommendation.

D. If the Lions Club purchases 15,000 pretzels and if sales demand is also 15,000 pretzels, their profit will be thehighest at this level ($13,500). However, the club has no guarantee that sales demand will be 15,000; so purchasing15,000 pretzels would not be the best recommendation.

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The use of budgetary slack does not allow the preparer to

A. Increase the probability of achieving budgeted performance.B. Project actual expenses.

C. Be flexible under unexpected circumstances.D. Use the budget to control subordinate performance.

A. Budgetary slack exists when revenues are understated or expenses are overstated. Thus, it is easy to attain abudget performance increasing budgeted profitability.

B. Budgetary slack exists when revenues are understated or expenses are overstated. The projected actual expensesare usually estimated by a manager, those expenses do not appear as budgeted expected expenses though. Theprojected actual expenses are usually overstated (budgetary slack is added) to be easily attainable.

C. Budgetary slack exists when revenues are understated or expenses are overstated. Thus, it allows a manager to bemore flexible under unexpected circumstances.

D. A budget can serve as a control tool. Actual performance results are compared with budgeted. The budgetshould set the performance standards at a high but attainable level. When a budget is easily achieved, it issaid to have budgetary slack in it. When budgetary slack exists, either revenues are understated or expensesare overstated, or both. This makes it difficult to properly evaluate the performance.


A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft drinks and the weather ishot, it will make $2,500; if the weather is cold, the profit will be $1,000. If the stand sells coffee and the weather is hot, itwill make $1,900; if the weather is cold, the profit will be $2,000. The probability of cold weather on a given day at thistime is 60%.

The expected payoff for selling coffee is

A. $3,900.B. $2,200.C. $1,960.D. $1,360.

A. This is not possible, as the maximum the beverage stand can obtain is $2,500 if it sells soft drinks when the weatheris hot.

B. This is the expected payoff for selling coffee when the weather is cold multiplied by the probability of cold weather of0.60, plus the expected payoff for selling soft drinks when the weather is hot multiplied by the probability of hot weatherof 0.40. That is not the expected payoff for selling coffee.

C.

The beverage stand can sell either soft drinks or coffee on any given day − not both. Since the question asksfor the expected payoff for selling coffee, the proprietor is asking for the answer to this question: "Assuming Itake coffee with me to sell today, what is my expected payoff for doing that?" Thus, the probability is 100%that coffee will be served.

To solve this problem we have to identify the expected payoff of selling coffee when we know the probabilitiesof the weather being hot and cold. That will be the weighted average of the expected payoffs for serving

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coffee, weighted according to the probabilities of cold weather and hot weather. So we will multiply eachpossible payoff for selling coffee by its corresponding probability.

If the stand sells coffee and the weather is hot, it will make $1,900, and the probability of hot weather is 40%(100% − 60% probability of cold weather). If the stand sells coffee and the weather is cold, it will make $2,000,and the probability of cold weather is 60%. Thus, the weighted average profit for selling coffee is ($1,900 ×0.40) + ($2,000 × 0.60), which is $1,960. And that is the expected payoff for selling coffee.

D. This is the expected payoff for selling soft drinks when the weather is cold multiplied by the probability of coldweather of 0.60, plus the expected payoff for selling coffee when the weather is hot multiplied by the probability of hotweather of 0.40. That is not the expected payoff for selling coffee.


The letter x in the standard regression equation is best described as a(n)

A. Dependent variable.B. Constant coefficient.C. Coefficient of determination.D. Independent variable.

A. In the standard regression equation, y represents the dependent variable.

B. The constant coefficient is represented by a letter that stands by itself, i.e., a letter without an x term next to it. Itrepresents the y intercept, because this is the value of y when x = 0.

C. The coefficient of determination is not a part of the standard regression equation at all. The coefficient ofdetermination is the percentage of the total amount of change in the dependent variable that can be explained bychanges in the independent variable.

D. In the standard regression equation x represents the independent variable.


Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table topsare manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly Departmenttakes a manufactured table top and attaches the four purchased table legs. It takes 20 minutes of labor to assemble atable. The company follows a policy of producing enough tables to ensure that 40% of next month's sales are in thefinished goods inventory. Rokat also purchases sufficient raw materials to ensure that raw materials inventory is 60%of the following month's scheduled production. Rokat's sales budget in units for the next quarter is as follows:

July 2,300

August 2,500September 2,100

Rokat's ending inventories in units for June 30 are

Finished goods 1,900Raw materials (legs) 4,000

Assume the required production for August and September is 1,600 and 1,800 units, respectively, and the July 31 rawmaterials inventory is 4,200 units. The number of table legs to be purchased in August is

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A. 6,520 legs.B. 9,400 legs.C. 2,200 legs.D. 6,400 legs.

A.

The basic equation for materials inventory is: Beginning Inventory + Units Purchased − Units Used = EndingInventory. Inventory at the end of each month (and thus the beginning of the next month) needs to be at least60% of the next month's planned usage. We already know the beginning inventory on August 1, because theJuly 31 ending inventory is given in the problem as 4,200 units. The ending inventory for August needs to be60% of September's planned usage of 1,800 tables × 4 legs, which is 4,320. The number of units to be usedduring the month of August will be the planned production of 1,600 × 4, or 6,400.

Therefore, the equation to solve is: 4,200 + P − 6,400 = 4,320.

Solving for P, we get P = 4,320 − 4,200 + 6,400 and P = 6,520.

B.

This answer results from including 100% of the September production requirement of raw materials in the Augustending inventory instead of only 60% of September's production requirement.

C. This answer does not include the units needed for ending inventory. See the correct answer for a completeexplanation.

D. This is the amount needed for production in August. See the correct answer for a complete explanation.


Refer to the profit payoff table below. Demand in Units 0 2 4 6

Probability of

Demand

Supply in Units 0.1 0.3 0 .4 0.20 $ 0 $ 0 $ 0 $ 02 (80) 40 40 404 (160) (40) 80 806 (240) (120) 0 120

The price one is willing to pay for perfect information is

A. $48.B. $68.C. $40.D. $104.

A. This is the expected profit with perfect information minus the expected profit from supplying 4 units, the demandlevel with the highest probability of occurring. See the correct answer for a complete explanation.

B. This is the amount of expected profit with perfect information. This is not the price one is willing to pay for the perfectinformation. See the correct answer for a complete explanation.

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C.

To determine the price that a company would pay for perfect information, we compare the maximum expectedprofit that the company could achieve with perfect information with the best expected profit that could beachieved if they had to choose one level when demand is not known.

With perfect information the company would be able to choose the correct level of supply for each of the

levels of demand. Therefore, given that for each level of demand the company will choose the best supplyalternative, the expected value is $68 [($0 × 0.1) + ($40 × 0.3) + ($80 × 0.4) + ($120 × 0.2)].

Without having perfect information, if the company provided a supply of 0 units, its expected profit would be0. If it supplied 2 units, the expected profit would be $28 [(−$80 × 0.1) + ($40 × 0.9)]. If it supplied 4 units, theexpected profit would be $20 [(−$160 × 0.1) + (−$40 × 0.3) + ($80 × 0.6)]. If it supplied 6 units, the expectedprofit would actually be a loss of $36 [(−$240 × 0.1) + (−$120 × 0.3) + ($120 × 0.2)]. So, without perfectinformation the best that the company can do is an expected profit of $28.

Since perfect information would provide an expected profit of $68 and the best the company can do withoutperfect information is $28, the company would pay $40 (the difference) for the perfect information.

D. This is the difference between the expected profit with perfect information and the expected loss at the supply level

of 6 units, the lowest expected payoff without perfect information. See the correct answer for a complete explanation.


All of the following are advantages of top-down budgeting as opposed to participatory budgeting, except that it:

A. Increases coordination of divisional objectives.B. Facilitates implementation of strategic plans.C. Reduces the time required for budgeting.D. May limit the acceptance of proposed goals and objectives.

A. This is an advantage of top-down budgeting. Frequently, departmental managers have blinders on and are unawareof what is happening in other areas of the company. Senior management has a better perspective of the big pictureand what will be necessary to achieve overall organizational objectives.

B. This is an advantage of top-town budgeting. Strategic plans are long-term in nature and require a good deal orcoordination in order to be successful. Senior management's job is to position each division and departmentappropriately to fulfill their role in the long term organizational plan. Top-down budgeting achieves this more readilythan bottom-up budgeting, because senior management has the required long-term perspective and lower levelmanagers do not.

C. This is an advantage of top-town budgeting. When the budget is dictated from above, departmental managers donot need to spend time putting together their plans and ideas for the future. Furthermore, there is no need for lowerlevel managers to make adjustments to the first draft of the budget, as is done with bottom up budgeting after seniormanagement has examined the first draft budgets of the lower level managers. The result is that less time is required

for the budgeting process.

D. This is not an advantage of top-down budgeting, although it is a true statement. When senior managementdetermines the budget without input from the departments being held to that budget, employees are lesslikely to feel they can / want to achieve the target. It wasn't their idea and no one listened to them.


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The frequency distribution of the demand for pretzels per game is presented as follows:Sales Volume Probability2,000 pretzels 0.103,000 pretzels 0.15

4,000 pretzels 0.205,000 pretzels 0.356,000 pretzels 0.20


The conditional profit (loss) per game of having 4,000 pretzels available but being able to sell 5,000 pretzels if they hadbeen available is

A. $4,025.B. $3,500.C. $2,800.D. $(1,225).

A.

It is impossible to sell more products that are supplied, so the conditional profit of having 4,000 pretzels and a demandof 5,000 is the same as having 4,000 pretzels available and a demand of 4,000.


B. This is the profit if 5,000 pretzels are available to sell and demand is 5,000 pretzels. It is impossible to sell moreproducts that are supplied, so the conditional profit of having 4,000 pretzels and a demand of 5,000 is the same ashaving 4,000 pretzels available and a demand of 4,000.

C.

The meaning of the word "conditional" in "conditional profit" is similar to the meaning of the word"conditional" in "conditional probability." The conditional probability of two events is the probability that thesecond event will occur when it is known that the first event has already occurred. Conditional profit isconditional because a certain amount of profit (or loss) is associated with each possible course of action,such as purchasing a certain amount of inventory and selling a certain amount of inventory.

In this problem, the first event is the purchase of 4,000 pretzels. So given that we know that 4,000 pretzelshave been purchased, what is the profit from that course of action if demand is 5,000 pretzels? In other words,

in this problem, there are actually two conditions that are known: (1) 4,000 pretzels are supplied, and (2)demand is 5,000 pretzels. Since the amount supplied is given and the amount demanded is given, thefrequency distribution of the demand for pretzels is irrelevant.

It is impossible to sell more products than are supplied. Furthermore, conditional profit does not take intoconsideration any opportunity loss of lost sales because of not being able to fulfill all that is demanded. Sothe conditional profit of having 4,000 pretzels and a demand of 5,000 is the same as having 4,000 pretzelsavailable and having a demand of 4,000. If 4,000 are sold at a price of $1.00 each and the cost is $0.30 each,the profit is ($1 − $0.30) × 4,000 = $2,800.

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D. It would not be possible to have a loss if they purchase 4,000 pretzels and have a demand for 5,000 pretzels. Thecost of each pretzel is less than the revenue received from selling it, they have no fixed costs to cover, and they will nothave any unsold pretzels.


The Booster Club at Blair College sells hot dogs at home basketball games. The group has a frequency distribution ofthe demand for hot dogs per game and plans to apply the expected value decision rule to determine the number of hotdogs to stock.

The expected monetary value of an act is the:

A. Sum of the products of the conditional profit (loss) for each event multiplied by the probability of each event'soccurrence.B. Sum of the conditional opportunity loss of each event times the probability of each event occurring.C. Conditional profit (loss) for the best event times the probability of each event's occurrence.D. Sum of the conditional profit (loss) for each event.

A. The expected value is the weighted average of the probable outcomes.

B. The expected value is the weighted average of the probable outcomes.

C. The expected value is the weighted average of the probable outcomes.

D. The expected value is the weighted average of the probable outcomes.


Budgeting problems where departmental managers are repeatedly achieving easy goals or failing to achievedemanding goals can be best minimized by establishing:

A. Participative budgeting where managers pursue objectives consistent with those set by top management.B. Better communication whereby managers discuss budget matters daily with their superiors.C. A policy that allows managers to build slack into the budget.D. Preventive controls.

A. This is correct. By allowing managers to participate in the budgeting process with the objectives of seniormanagement in mind, the managers can evaluate the department and find the most optimal, and realistic,means to achieve the targets.

B. Budget discussions on a daily basis are a bit excessive and not an efficient way to conduct business. Generallythere is a budget "season" where the development of the budget is the primary focus, and daily discussions are not

unusual. After budget season; however, the communication between managers and their superiors would likely notfocus solely on budget matters, although it would cover variances from the budget.

C. Building slack into a budget is not going to be in the organization’s best interest in the long run.

D. Enacting policies that "control" the budget process can result in resentment and ineffective efforts fromdepartmental management. This is not the best way to generate a realistically challenging budget.

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Manoli Gift Shop maintains a 35% gross profit margin percentage and carries an ending inventory balance each monthsufficient to support 30% of the next month's expected sales. Anticipated sales for the fourth quarter are as follows.October $42,000November 58,000December 74,000

What amount of goods should Manoli Gift Shop plan to purchase during the month of November?

A. $51,220.B. $62,800.C. $52,130.D. $40,820.

A. This answer results from using December's planned Cost of Goods Sold to calculate November's plannedpurchases. November's Cost of Goods Sold should be used in calculating November's purchases.

B. This answer results from using the amount of sales dollars to calculate the amount of purchase dollars neededduring the month. The sales dollar amount includes profit, as well as the cost of the sales. Only the cost of the sales isused when calculating the amount of purchases to be made and anything else having to do with inventory. Each salesamount should be reduced to the cost of the sales, which is 65% of the sales amount because the company maintainsa 35% gross profit margin.

C.



D.

Cost of goods sold figures are used in calculating the amount of purchases. Cost of goods sold are 65% ofsales for each month, since the company maintains a 35% gross profit margin (100% − 35% = 65%). COGS forOctober is therefore 65% of $42,000, or $27,300. COGS for November is 65% of $58,000, or $37,700. And COGSfor December is 65% of $74,000, or $48,100.

The company carries an ending inventory balance each month that is sufficient to support 30% of the nextmonth's expected sales (that is, 30% of the COGS of the next month's expected sales, which is 65% of the nextmonth's expected sales). Therefore, the ending inventory balance at the end of October will be 30% ofNovember's COGS of $37,700, or $11,310. This will also be the beginning inventory balance for the month ofNovember. The ending inventory balance for November will be 30% of December's COGS of $48,100, or$14,430.

The basic inventory formula is Beginning Inventory + Purchases − Cost of Goods Sold = Ending Inventory. Weknow beginning inventory for November ($11,310), COGS for November ($37,700) and ending inventory forNovember ($14,430), so we can calculate the Purchases for November. Letting P stand for Purchases, theformula is:

$11,310 + P − $37,700 = $14,430

Solving for P, we get P = $40,820.

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A company has budgeted sales for the upcoming quarter as follows: JanuaryFebruaryMarch

Units 15,000 18,00016,500

The ending finished goods inventory for each month equals 50% of the next month's budgeted sales. Additionally, 3pounds of raw materials are required for each finished unit produced. The ending raw materials inventory for eachmonth equals 200% of the next month's production requirements. If the raw materials cost $4.00 per pound and mustbe paid for in the month purchased, the budgeted raw materials purchases (in dollars) for January are:

A. $198,000B. $216,000C. $180,000D. $207,000

A. This is a dollar cost of materials required for January production ($4.00 × 3 × 16,500), not for purchases of materials.

B.

First, we need to determine the production requirements for January and February by using the formula forthe physical flow of finished goods: Beginning Inventory + Units Produced − Units Sold = Ending Inventory.

Beginning Inventory for January will be 50% of January's sales, or 0.50 × 15,000. Ending Inventory for Januarywill be 50% of February's sales, or 0.50 × 18,000. Therefore, the formula for January production is:

7,500 + Units Produced − 15,000 = 9,000Units Produced = 16,500

Beginning Inventory for February will be 50% of February's sales, already calculated as 9,000. EndingInventory for February will be 50% of March's sales, or 0.50 × 16,500. The formula for February production is:

9,000 + Units Produced − 18,000 = 8,250Units Produced = 17,250

We know that three pounds of raw materials are needed for each unit, and there were no work-in-processbalances in either month. Now, we can determine the beginning and ending inventory level of raw materialsfor January and the usage for January.

Beginning inventory for January is 99,000 lb. (16,500 × 3 × 200%). Ending inventory for January is 103,500 lb.(17,250 × 3 × 200%). The amount of raw materials used during January is the January production of 16,500 × 3pounds per unit, or 49,500 pounds.

Plugging these numbers into the formula of the physical flow of goods we will get the following:

99,000 + Purchases − 49,500 = 103,500Purchases = 54,000 pounds of raw material to be purchased in January

Multiplying this quantity by the price per pound of raw material we will get the dollar amount of purchases inJanuary: $216,000 ($4.00 × 54,000).

C. This is a dollar cost of materials required for January sales ($4.00 × 3 × 15,000).

D. This is a dollar cost of materials required for February production ($4.00 × 3 × 17,250).

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All of the following are advantages of the use of budgets in a management control system except that budgets:

A. Limit unauthorized expenditures.B. Promote communication and coordination within the organization.C. Provide performance criteria.D. Force management planning.

A. Even the most advanced and accurate budget cannot prevent unauthorized expenditures. This is controlledthrough management oversight, rather than the budgeting process.

B. Throughout the budget process the various departments within an organization will meet to plan for the next year.These meetings will foster cooperation, communication and familiarity which will carry over after budgeting season.

C. Budgets provide performance information, in that management can analyze what they thought would happen vs.what actually happened. From that point they can determine what factors were within their control and what wasoutside of their control and use this information for future budgets and operational decisions.

D. Forcing management to focus on the future and make appropriate plans for the organization's success is asignificant advantage of the use of budgets.


The method(s) that managers employ to attain one or more of the organization's goals can be defined as:

A. Capital investments.B. Strategy.C. Choosing the company's organizational structure.D. Determining the company's business model.

A. Capital investments are long-term investments made by a business for the purpose of increasing capacity andshareholder wealth. While they are an important part of a business's strategy, they are not the method that managersemploy to attain the organization's goals.

B. Management uses strategy (strategies) to attain the company's goals and objectives.

C. Choosing the company's organizational structure is strategic in nature but is not the method that managers employto attain the organization's goals.

D. A company's business model is its managers’ idea of how the set of strategies and capital investments that thecompany makes should fit together to generate above-average profitability and, at the same time, profit growth.

Determining the company's business model is strategic in nature but is not the method that managers employ to attainthe organization's goals.


Superflite expects April sales of its deluxe model airplane, the C-14, to be 402,000 units at $11 each. Each C-14requires three purchased components shown below.

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Purchase

CostNumber Needed

for each C-14 Unit A-9 $0.50 1

B-6 0.25 2D-28 1.00 3

Factory direct labor and variable overhead per unit of C-14 totals $3.00. Fixed factory overhead is $1.00 per unit at a

production level of 500,000 units. Superflite plans the following beginning and ending inventories for the month of Apriland uses standard absorption costing for valuing inventory.

Part No.Units at April 1

Units at April 30

C-14 12,000 10,000

A-9 21,000 9,000B-6 32,000 10,000

D-28 14,000 6,000

Assume Superflite plans to manufacture 400,000 units in April. The total April budget for all purchased componentsshould be

A. $1,600,000.

B. $1,608,500.C. $1,580,500.D. $1,596,500.

A. This answer is calculated using the units to be produced (400,000) only. It does not take into consideration thebeginning and ending inventories of the three raw materials to be used.

B.




C.

To solve these question we should use the formula for the physical flow of raw materials inventory tocalculate the amount to be purchased for each component (A-9, B-6 and D-28), then use the price of eachcomponent to calculate the total amount to be budgeted for April's production.

Beginning Inventory + Units Purchased − Units Used in Production = Ending Inventory

For A-9: one unit of A-9 is necessary for each unit of finished product. Plugging numbers for A-9 into the

formula we will get the following: 21,000 + Units Purchased − (400,000 × 1) = 9,000. Solving for UnitsPurchased, we get Units Purchased = 388,000. The cost to purchase 388,000 units of A-9 is $194,000 ($0.50 ×388,000).

For B-6: two units of B-6 are necessary for each unit of finished product. Plugging numbers for B-6 into theformula we will get the following: 32,000 + Units Purchased − (400,000 × 2) = 10,000. Solving for UnitsPurchased, we get Units Purchased = 778,000. The cost to purchase 778,000 units of B-6 is $194,500 ($0.25 ×778,000).

For D-28: three units of D-28 are necessary for each unit of finished product. Plugging numbers for D-28 into

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the formula we get the following: 14,000 + Units Purchased − (400,000 × 3) = 6,000. Solving for UnitsPurchased, we get Units Purchased = 1,192,000. The cost to purchase 1,192,000 units of D-28 is $1,192,000($1.00 × 1,192,000).

Adding the costs to purchase all of the components together, we get $1,580,500 ($194,000 + $194,500 +$1,192,000).

D.




The expected value of perfect information is the

A. Difference between the expected profit under certainty and the expected monetary value of the best act underuncertainty.B. Sum of the conditional profit (loss) for the best event of each act times the probability of each event occurring.C. Same as the expected profit under certainty.D. Difference between the expected profit under certainty and the expected opportunity loss.

A. The expected value of perfect information is the maximum amount one would pay to obtain the perfectinformation. It is calculated as the difference between the expected value under certainty and the expectedvalue without perfect information, that is, the expected value of the best action under uncertainty.

B.

A conditional profit (loss) table is one with, for example, supply across the top and demand down the side, withprobabilities given for each demand level. Each potential profit or loss at each potential supply and demand level isentered into the table. The sum of the conditional profit (loss) for the best act for each event (not the other wayaround) times the probability of each event occurring is the definition of the expected profit with perfect information.

The expected value of perfect information is the difference between the expected payoff under certainty (with perfectinformation) and the expected payoff without perfect information.

C. The expected value of perfect information is not the same as the expected profit under certainty. The expectedvalue of perfect information is the difference between the expected value under certainty (with perfect information) andthe expected value without perfect information.

D.

The expected profit under certainty is the expected profit with perfect information. An opportunity loss is the differencebetween the payoff for a decision made and the payoff that would have been received if the best decision had beenmade for the circumstances. An expected opportunity loss is derived from an opportunity loss table set up similar to apayoff table, using 0 as the opportunity loss corresponding to the best decision for each option and the amount of thecalculated loss as the opportunity loss corresponding to each of the other decisions for each option. The opportunitylosses are then weighted according to each one's probability, just as expected profits would be; and the expectedopportunity loss is calculated.

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The expected value of perfect information is the difference between the expected payoff under certainty (with perfectinformation) and the expected payoff without perfect information.


A simple two-state cost investigation model calls for a decision to investigate if the following inequality holds:

L(1 - P) > I + C(1 - P)

If:L = excess operating cost if out of controlP = probability that the process is in controlI = cost of investigationC = cost of correction if out of control

The critical probability that the process is in control is

A. I/(L − C) − 1.

B. (I + C)/L.C. Greater than I/C.D. 1 − [I/(L − C)].

A.


We have been unable to determine how to arrive at this incorrect answer choice. If you have arrived at it, please let usknow how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an emailat [email protected]. Include the full Question ID number and the actual incorrect answer choice -- notits letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materialsbetter.

B.



C.



D.

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This inequality would be used to decide whether it was cost-effective to perform an investigation to see if aprocess is out of control. If the cost of leaving the process out of control (L) is less than the cost ofinvestigating to see if it is out of control (I) and fixing it if it turns out to be out of control (C), then it is morebeneficial to leave it alone and not even investigate.

However, this question is more a test of your ability to simplify an algebraic formula than it is a test of your

ability to understand what the inequality is saying. Some algebraic formulas cannot be "solved" in the senseof finding the unique number that a particular variable stands for with the information you have. This is one ofthose problems. All you can do is simplify this inequality, so that is what you do to answer this question.

The problem states that P = the probability that the process is in control. Then, it asks what is the probabilitythat the process is in control. Therefore, to answer the question, you need to solve the inequality for thevariable P by simplifying it so that P is on one side of the equation all by itself.

Here is the way it works:

1. Change the inequality to an equation: L(1 − P) = I + C(1 − P)

2. Begin doing the same operations on both sides of the equation until you have the P isolated on one sideof the equation. In algebra, when you do the same thing to both sides of an equation, you have notchanged the equation. So you could do that forever, and your equation would still be saying the same

thing. There are certain other things in a term that you can re-state without changing the term, also. Thatis what you do here.

3. Subtract C(1-P) from both sides:L(1 − P) − C(1 − P) = I

4. Now you have two like terms on the left side. You can transform the left side of the equation from "L(1 −P) – C(1 − P)" to "(L − C)(1 − P)" without changing it:(L - C)(1 - P) = I

5. Divide both sides by (L − C):1 − P = [I / (L − C)]

6. Subtract 1 from both sides:−P = [I/(L − C)] − 1

7. Multiply both sides by −1 to change the negative P to a positive P:

P = −[I/(L − C) + 18. Rearrange the terms on the right side:

P = 1 − [I/(L − C)The left side of the equation is P, the probability that the process is in control; and the right side of theequation is the answer to the question.

To prove that this has not changed the equation, try using the following numbers for the variables:

L = $1,000P = 0.90C = $250

L(1 – P) = I + [C(1 − P)]

1,000(0.10) = 75 + (250 × 0.10)100 = 100

And:

P = 1 − [I/(L − C)]0.90 = 1 − [75/(1,000 − 250)]0.90 = 1 − (75/750)0.90 = 1 − 0.100.90 = 0.90

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Both equations are true.


A company is considering three alternative machines to produce a new product. The cost structures (unit variable costsplus avoidable fixed costs) for the three machines are shown as follows. The selling price is unaffected by the machineused.Single purpose machine $0.60x + $20,000Semi-automatic machine$0.40x + $50,000 Automatic machine $0.20x + $120,000

The demand for units of the new product is described by the following probability distribution.DemandProbability200,000 0.4300,000 0.3400,000 0.2500,000 0.1

Ignoring the time value of money, the expected cost of using the semi-automatic machine is

A. $170,000.B. $130,000.C. $250,000.D. $210,000.

A. Before we can determine the expected cost of using one of the machines, we first need to calculate theexpected demand. This is done by multiplying each of the possible demands by the probability of that demandoccurring and then adding the numbers together to calculate a weighted average, or expected value. Theexpected demand is 300,000 units, calculated as [(200,000 × 0.4) + (300,000 × 0.3) + (400,000 × 0.2) + (500,000 ×0.1)]. Now, putting the expected value of the demand of 300,000 into the formula for the semi-automatic

machine, we get an expected cost of $170,000 [(300,000 × $0.40) + $50,000].

B. $130,000 is the expected cost of using the semi-automatic machine if demand at the highest level of probability(demand of 200,000 units; probability 0.4) is used.

C. 250,000 is the expected cost of using the semi-automatic machine if demand at the probability level of 0.1 (500,000units) is used.

D. $210,000 is the expected cost of using the semi-automatic machine if demand at the probability level of 0.2(400,000 units) is used.


Which of the following is not a significant reason for planning in an organization?

A. Forcing managers to consider expected future trends and conditions.B. Enabling selection of personnel for open positions.C. Promoting coordination among operation units.D. Developing a basis for controlling operations.

A. Involving managers in considering future trends and conditions is a significant reason for planning in an organization.

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Taxes @ 35% 1,898 Net income $ 3,526 Dividends 1,014 Addition to retained earnings $ 2,512

On the pro forma Statement of Cash flows, what is the company's net cash flow from operating activities, using theindirect method?

A. $4,771B. $5,591C. $6,541D. $4.641

A. This answer results from adjusting both beginning and ending inventory for depreciation included in them. Onlyending inventory should be adjusted.

B.

Net cash flow from operating activities, using the indirect method, is:Net income $3,526

− Increase in accounts receivable (1,530)− Increase in inventory (900)

+ Depreciation expensed 3,595

+ Increase in accounts payable 300

+ Increase in accrued liabilities 600

Net cash flow from operating activities $5,591

The increase in inventory is calculated as: Ending inventory excluding depreciation ($19,400) minus beginninginventory including depreciation ($18,500).

C. This answer results from including all of the depreciation booked during the year as an increase to net income. Onlythe depreciation that was expensed should be added to net income.

D. This answer results from failing to adjust ending inventory for the depreciation included in it. Ending inventory shouldbe reduced by the amount of the depreciation included.


Simson Company's master budget shows straight-line depreciation on factory equipment of $258,000. The masterbudget was prepared at an annual production volume of 103,200 units of product. This production volume is expectedto occur uniformly throughout the year. During September, Simson produced 8,170 units of product, and the accountsreflected actual depreciation on factory machinery of $20,500. Simson controls manufacturing costs with a flexiblebudget. The flexible budget amount for depreciation on factory machinery for September would be

A. $20,425.B. $21,500.C. $19,475.D. $20,500.

A. Depreciation is a fixed cost and does not change with the level of production.

B. The flexible budget is a budget that is prepared for the actual level of activity achieved during the period.Only budgeted variable costs are adjusted in a flexible budget. Fixed costs are the same in the flexible budgetas they are in the static budget, because fixed costs remain the same regardless the level of activity. Since

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depreciation is a fixed cost, the amount of depreciation expense for the flexible budget is equal to thedepreciation expense for the static budget, or $21,500 (the total budgeted for the year of $258,000 ÷ 12).

C. Depreciation is a fixed cost and does not change with the level of production.

D. This is the actual amount of depreciation that was recorded during the month. The question asks for the flexiblebudget amount for depreciation, not the actual amount.


A computer store sells four computer models designated as P104, X104, A104 and S104. The store manager hasmade random number assignments to represent customer choices based on past sales data. The assignments are:ModelRandom NumbersP104 0-1X104 2-6 A104 7-8S104 9

The probability that a customer will select model P104 is

A. 50 percent.B. Some probability other than those given.C. 20 percent.D. 10 percent.

A. 50% is the probability that a customer will select X104.

B. The probability that a customer will select a P104 is given.

C. In the question 10 random numbers, 0 to 9, are used. 0 and 1 (2 numbers in total) represent customers whochoose a P104. There are 10 numbers in total. Therefore, the probability that a customer will select a P104 is 2

out of 10, or 2 ÷ 10, which is 20%.

D. 10% is the probability that S104 will be selected by a customer.


When sales volume is seasonal in nature, certain items in the budget must be coordinated. The three most significantitems to coordinate in budgeting seasonal sales volume are

A. Direct labor hours, work-in-process inventory, and sales volume.B. Raw material inventory, direct labor hours, and manufacturing overhead costs.

C. Production volume, finished goods inventory, and sales volume.D. Raw material inventory, work-in-process inventory, and production volume.

A. Direct labor hours, work-in-process inventory are elements within the production budget. See the correct answer fora complete explanation.

B. The sales budget is usually the first thing to determine in the budgeting process of any type of business including aseasonal business. See the correct answer for a complete explanation.

C. Budgets usually start with the development of the sales budget, and it is the most difficult budget to

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prepare. Production volume and finished goods inventory budgets are the next budgets to be prepared, andtheir development is based on the assumptions made in preparing the sales budget. When the business isseasonal in nature it is even more difficult to predict sales volume and subsequent budgets. Thus, for anytype of business including seasonal it is critical to coordinate production volume, finished goods inventory,and sales volume first of all.

D. The sales budget is usually the first thing to determine in the budgeting process of any type of business including a

seasonal business. See the correct answer for a complete explanation.


In the standard regression equation y = a + bx, the letter b is best described as a(n)

A. Dependent variable.B. Constant coefficient.C. Variable coefficient.D. Independent variable.

A. The dependent variable is represented by y in the equation given.

B. The constant coefficient is represented by a in the equation given. It represents the y intercept, because this is thevalue of y when x = 0.

C. In the standard regression as represented here, the b in the equation represents the variable coefficient. Itrepresents the amount of increase in y for each unit of increase in x, or the slope of the line.

D. The independent variable is represented by x in the equation given.


A company is simulating the actions of a government agency in which 50% of the time a recall of a product is required,40% of the time only notification of the buyer about a potential defect is required, and 10% of the time no action on itspart is required. Random numbers of 1 to 100 are being used. An appropriate assignment of random numbers for therecall category would be

A. 1-40.B. 61-100.C. 11-60.D. 40-90.

A. Since 50% of time a recall of a product is required, 50 of the numbers 1-100 need to be assigned to that alternative.The number of numbers in an interval is calculated as the highest number minus the lowest number plus 1. The

numbers 1 - 40 represent 40 random numbers, not 50.

B. Since 50% of time a recall of a product is required, 50 of the numbers 1-100 need to be assigned to that alternative.The number of numbers in an interval is calculated as the highest number minus the lowest number plus 1. Thenumbers 61 - 100 represent 40 random numbers, not 50.

C. Since 50% of time a recall of a product is required, 50 of the numbers 1-100 need to be assigned to thatalternative. The number of numbers in an interval is calculated as the highest number minus the lowestnumber plus 1. Numbers 11 - 60 represent 50 random numbers, and this is the only answer choice fromamong the given possibilities that contains 50 numbers in the interval.

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D. Since 50% of time a recall of a product is required, 50 of the numbers 1-100 need to be assigned to that alternative.The number of numbers in an interval is calculated as the highest number minus the lowest number plus 1. Thenumbers 40 - 90 represent 51 random numbers, not 50.


Tyler Company produces one product and budgeted 220,000 units for the month of August with the following budgetedmanufacturing costs. Total Costs Cost Per UnitVariable costs $1,408,000 $ 6.40Batch set-up cost 880,000 4.00Fixed costs 1,210,000 5.50

Total $3,498,000 $15.90

The variable cost per unit and the total fixed costs are unchanged within a production range of 200,000 to 300,000units per month. The total for the batch set-up cost in any month depends on the number of production batches thatTyler runs. A normal batch consists of 50,000 units unless production requires less volume. In the prior year, Tyler

experienced a mixture of monthly batch sizes of 42,000 units, 45,000 units, and 50,000 units. Tyler consistently plansproduction each month in order to minimize the number of batches. For the month of September, Tyler plans tomanufacture 260,000 units. What will be Tyler's total budgeted production costs for September?

A. $4,134,000B. $3,754,000.C. $3,974,000D. $3,930,000

A. This answer results from multiplying the total budgeted cost per unit for August ($15.90) by the 260,000 units to beproduced in September. Because the fixed costs will be constant for both months (fixed for the range of 200,000 to300,000 units), the total fixed cost in September should be the same as the total fixed cost in August. Also, the cost ofthe batch setups will differ on a per unit basis, because it is not possible to set up a fraction of a batch at a fraction ofthe batch setup cost. The batch setup cost is the same per batch regardless of how many units are in the batch, which

will cause a slight variation in the per unit cost from one month month to the next. See the correct answer for a fullexplanation.

B. The calculation of the variable and fixed costs is correct, but the cost used for setup cost in September is the sameas August's setup cost. Because the number of units produced increases from August to September, the number ofbatches will also increase and therefore the cost of batch setups will increase in total. During August, 220,000 ÷50,000, or 4.4 batches were planned. In September, 260,000 ÷ 50,000, or 5.2 batches were planned. Obviously, it isnot possible to set up a partial batch for a fraction of the cost of setting up a full batch. Therefore, the budgeted batchsetup cost for August would include 5 batch setups while the budgeted batch setup cost for September would include 6batch setups. The September batch setup cost should be calculated by dividing the August setup cost by 5 andmultiplying that by the 6 batches required in September.

C. This answer results from two errors: (1) adjusting the fixed costs for the increased level of production and (2)keeping the setup costs constant at $880,000. The problem tells us that fixed costs are unchanged within a production

range of 200,000 to 300,000 units per month, so fixed costs for September should remain at $1,210,000 for a volumeof 260,000 units. The batch setup cost will increase for September, as the additional units to be produced inSeptember will require an additional setup. Using 50,000 as the number of units per batch, we will need 4.4 batches in August (rounded up to 5 batches) and 5.2 batches in September (rounded up to 6 batches). The September batchsetup cost should be calculated by dividing the August setup cost by 5 and multiplying that by the 6 batches required inSeptember.

D.

The normal batch size is 50,000 units, and the company plans production to minimize the total number of

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batches. Therefore, in budgeting we will use 50,000 units per batch, not the lower amounts the company hashistorically produced in some months.

For September, 260,000 units are scheduled to be produced, which will require six batches (260,000 ÷ 50,000 =5.2). It is not possible to set up a fraction of a batch, so we round up to 6. To find the budgeted setup cost perbatch for September, we use the August amounts given in the problem. 220,000 units were budgeted forAugust at a total batch setup cost of $880,000. 220,000 ÷ 50,000 units per batch = 4.4 batches. So five batches

would have been set up, and the setup cost per batch budgeted in August was $880,000 ÷ 5, or $176,000 perbatch. Thus, the total batch setup cost for September will be budgeted at $176,000 × 6 batches, or $1,056,000.

Total budgeted costs for September are:

Variable cost: 260,000 units × $6.40 = $1,664,000.

Fixed cost: given in the problem as $1,210,000 for August when production was budgeted at 220,000 units.The problem says that the fixed costs are unchanged within a production range of 200,000 to 300,000, so theAugust fixed cost also applies to a production level of 260,000 units for September.

Setup cost is $1,056,000, as calculated above.

The total budgeted production cost for September is $1,664,000 + $1,210,000 + $1,056,000 = $3,930,000.


Helen Thomas, Amador Corporation's vice president of planning, has seen and heard it all. She has told the corporatecontroller that she is "....very upset with the degree of slack that veteran managers use when preparing their budgets."

Thomas has considered implementing some of the following activities during the budgeting process.

1. Develop the budgets by top management and issue them to lower-level operating units.

2. Study the actual revenues and expenses of previous periods in detail.

3. Have the budgets developed by operating units and accept them as submitted by a company-wide budgetcommittee.

4. Share the budgets with all employees as a means to reach company goals and objectives.

5. Use an iterative budgeting process that has several "rounds" of changes initiated by operating units and/orsenior managers.

Which one of these activities should Amador implement in order to best remedy Thomas's concerns, help eliminate theproblems experienced by Amador, and motivate personnel?

A. 2 and 3.B. 2, 4 and 5.C. 1 only.D. 2 and 4.

A. Option 2 is correct, but option 3 won't fix the problem of "slack" that Thomas is concerned about.

B. Options 2, 4 and 5 are the best way to eliminate slack through the rounds of changes and the review ofhistorical information. Option 4 will also help generate employee buy in and motivate them to help achieve theoverall corporate targets.

C. A budget developed by top management and issued to lower level units is unlikely to motivate employees.

D. Option 2 and option 4 will generate a budget and that has employee buy in, but it may not eliminate slack.

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Which one of the following management considerations does the company usually address first in strategic planning?

A. Structure of the organization.B. Outsourcing.C. Overall objectives of the company.D. Recent annual budgets.

A. The structure of the organization is not the first consideration addressed in the strategic planning process.

B. Outsourcing is not directly related to the strategic planning process.

C. The company must determine its overall objectives before anything else can be set.

D. The review of recent annual budgets is not the first consideration addressed in the strategic planning process.


A budget manual, which enhances the operation of a budget system, is most likely to include

A. Employee hiring policies.B. Distribution instructions for budget schedules.C. Documentation of the accounting system software.D. A chart of accounts.

A. Employee hiring policies should be included in the personnel manual, and they are not necessary for budgetpreparation.

B. A budget manual details the budget process. One of the areas that must be included in the budget manualis the communication and distribution process. As one budget is completed it must be sent to all thedepartments whose budgets are based on that already completed budget.

C. Documentation of the accounting system software is not needed for budget preparation and is not included in thebudget manual.

D. A chart of accounts is included in the accounting manual, not the budgeting manual.


Jordan Auto has developed the following production plan:Month

January 10,000February 8,000March 9,000 April 12,000

Each unit contains 3 pounds of raw material. The desired raw material ending inventory each month is 120% of thenext month's production, plus 500 pounds. (The beginning inventory meets this requirement.) Jordan has developed

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the following direct labor standards for production of these units: Department 1Department 2Hours per unit 2.0 0.5Hourly rate $6.75 $12.00

Jordan Auto's total budgeted direct labor dollars for February usage should be

A. $156,000B. $210,600C. $175,500D. $165,750

A. The production level for February is going to be 8,000 units. Each unit requires $13.50 ($6.75 per hour × 2.0hours) labor dollars in Department 1 and $6.00 ($12.00 per hour × 0.5 hours) labor dollars in Department 2. Intotal each unit requires $19.50 labor dollars. For February's production of 8,000 units, the total budgeted directlabor dollars should be $156,000 ($19.50 × 8,000).

B. This would be the total budgeted direct labor dollars for a production of 10,800 units; but February's budgetedproduction is 8,000 units.

C. This is the amount for March. See the correct answer for a complete explanation.

D. This would be the total budgeted direct labor dollars for a production of 8,500 units; but February's budgetedproduction is 8,000 units.


Birch Corporation has the following historical pattern on its credit sales.

70% collected in month of sale

15% collected in the first month after sale

10% collected in the second month after sale4% collected in the third month after sale

1% uncollectible

The sales on open account have been budgeted for the first 6 months of the year are as follows:

MonthSales On

Open AccountJanuary $70,000February 90,000March 100,000 April 120,000May 100,000June 90,000

The estimated total cash collections during April from accounts receivable would be

A. $108,000B. $110,800C. $118,800D. $84,000

A. This answer results from omitting collections from sales that are expected to be collected in the third month after thesale. That is 4% of January sales that will be collected in April.

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B.

Using the cash collection pattern that refers to the credit sales we can estimate how much cash is collectedfrom accounts receivable during April:

$120,000 × 70% = $84,000 (from April credit sales)

$100,000 × 15% = $15,000 (from March credit sales)$90,000 × 10% = $9,000 (from February credit sales)$70,000 × 4% = $2,800 (from January credit sales)

Adding all these numbers together we will get $110,800 of cash collected in April from credit sales.

C. This is 99% of the budgeted April sales. Not all sales are collected in the same month as the sale is made.

D. This is the cash collected from April sales only. See the correct answer for a complete explanation.


An organization is said to have a "competitive advantage" over its industry rivals when:

A. It spends more money on advertising than its competitors do.B. The profitability of the company is greater than that of the average profitability for all other organizations in itsindustry.C. It can distribute its product more quickly than other industry competitors.D. Its distribution channels are wider than others in its industry.

A. The amount of money spent on advertising is not directly related to competitive advantage.

B. A company is said to have competitive advantage when it is more profitable than the average company inits industry. Profitability does not create competitive advantage, though. It is the other way around.Competitive advantage is required in order to have high profitability. Thus, in order to increase profitabilityand sustain profit growth, managers need to formulate strategies that will give their company a competitiveadvantage.

C. While it may be important for the company to quickly distribute its product, this is not directly related to competitiveadvantage.

D. Distribution channels are not directly related to competitive advantage.


An organization is said to have a "competitive advantage" over its industry rivals when:

A. It spends more money on advertising than its competitors do.B. The profitability of the company is greater than that of the average profitability for all other organizations in itsindustry.C. It can distribute its product more quickly than other industry competitors.D. Its distribution channels are wider than others in its industry.

A. The amount of money spent on advertising is not directly related to competitive advantage.

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B. A company is said to have competitive advantage when it is more profitable than the average company inits industry. Profitability does not create competitive advantage, though. It is the other way around.Competitive advantage is required in order to have high profitability. Thus, in order to increase profitabilityand sustain profit growth, managers need to formulate strategies that will give their company a competitiveadvantage.

C. While it may be important for the company to quickly distribute its product, this is not directly related to competitive

advantage.

D. Distribution channels are not directly related to competitive advantage.

Question 211 - CMA 692 H9 - Strategic Planning

Strategy is a broad term that usually means the selection of overall objectives. Strategic analysis ordinarily excludesthe

A. Forms of organizational structure that would best serve the entity.B. Trends that will affect the entity's markets.C. Best ways to invest in research, design, production, distribution, marketing, and administrative activities.D. Target product mix and production schedule to be maintained during the year.

A. Creating the correct internal structure for the company that will enable the fulfillment of the company's long-termstrategic objectives is a critical strategic decision.

B. Market trends are strategic in nature and would be included in strategic analysis.

C. Strategic analysis is focused on the long-term and looks at the strengths, weaknesses, opportunities and threatsthat the company will face in the future. Research, design, production methods and the other listed items will beincluded in the strategic analysis.

D. Strategic analysis is focused on the long-term and looks at the strengths, weaknesses, opportunities and

threats that the company will face in the future. The production schedule for the year is not a strategic item asit is a short-term issue. This production plan would be more of an operational budget or plan.


There are many different budget techniques or processes that business organizations can employ. One of thesetechniques or processes is zero-base budgeting, which is:

A. Budgeting for cash inflows and outflows to time investments and borrowings in a way to maintain a bank accountwith a minimum balance.B. Developing budgeted costs from clear-cut measured relationships between inputs and outputs.

C. Using the prior year's budget as a base year and adjusting it based on the experiences of the prior year and theexpectations for the coming year.D. Budgeting from the ground up as though the budget process were being initiated for the first time.

A. This is not the definition of zero-based budgeting. This describes cash management.

B. This is not the definition of zero-based budgeting.

C. This is not the definition of zero-based budgeting. This is a description of incremental budgeting.

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D. Zero-based budgeting is the budgeting method in which the current year budget is prepared without anyreference to, or use of, the prior period's budget. Within zero-based budgeting all of the activities that adepartment undertakes are identified and then prioritized. This is the manner in which costs are justified andsupported. Also, because the manager needs to examine every single expenditure and activity within thedepartment, he is more likely to develop an alternative and, hopefully cheaper, method of accomplishing thesame thing.


Ward Corporation's current year-end sales totaled $240 million and its ending cash balance was $20 million. Wardanticipates its sales for the upcoming year will be $260 million. On average, 10% of a year's sales will be collectedduring the following year. Assume Ward has no uncollectIble accounts. Ward also anticipates cash expenses of $240million and depreciation of $5 million. During the next year, Ward intends to spend $30 million cash for capitalimprovements. If Ward's policy is to have a minimum of $10 million cash available at the beginning of each year, itsbudgeted cash flow projections indicate that it will need outside financing of

A. $0.B. $26 million.C. $7 million.D. $2 million.

A.

Ward will need some outside financing.


B.

This answer results from omitting the collections of the current year's sales expected to be received during next year inthe calculation of next year's ending cash balance. Ten percent of the current year's sales will be received during thenext year.

C. This answer results from including depreciation in the calculations. Depreciation is a non-cash expense, so it doesnot affect cash.

D.

Ward will need $2 million in outside financing, as follows (all amounts are in millions): Beginning cash (given) $ 20

+10% of current year's sales: 240 × 0.10 24

+90% of next year's sales: 260 × 0.90 234

−Cash expenses (given) (240)

−Capital improvements (given) (30)

Ending cash before financing $ 8

$2 million in outside financing will be needed in order to end the year with a cash balance of $10 million.

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Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's Statement ofFinancial Position for the year ended November 30, is as follows:

Super DriveStatement of Financial Position

November 30

Assets Cash $ 52,000 Accounts receivable, net. 150,000Inventory 315,000Property, plant and equipment 1,000,000Total assets $1,517,000

Liabilities and Equity Accounts payable $ 175,000Common stock 900,000Retained earnings 442,000

Total liabilities and shareholders equity $1,517,000

Additional information regarding Super Drive's operations include the following:

Sales are budgeted at $520,000 for December and $500,000 for January of the next year.


80% of the disk drive components are purchased in the month prior to the month of sale, and 20% arepurchased in the month of sale. Purchased components are 40% of the cost of goods sold.

Payment for the components is made in the month following the purchase.

Cost of goods sold is 80% of sales.

The projected balance in accounts payable on December 31 is

A. $416,000B. $166,400C. $326,400D. $161,280

A. This is the cost of goods sold in December ($520,000 × 0.80). See the correct answer for a complete explanation.

B. This is the cost of components in cost of goods sold in December ($520,000 × 0.80 × 0.40 = $166,400). Thebalance in accounts payable at December 31 will be equal to the amount of purchases made during December, sinceall outstanding payables at November 30 will have been paid before the end of December. See the correct answer fora complete explanation.

C.

This answer represents the total components needed for January sales ($160,000) plus the total components neededfor December sales ($166,400). The balance in accounts payable at December 31 will be equal to the amount ofpurchases made during December, since all outstanding payables at November 30 will have been paid before the endof December. Only 80% of the components needed for January sales will have been purchased during December, andonly 20% of the components needed for December sales will have been purchased during December.

D.

Purchases made in December will affect the end of December balance of accounts payable, as all paymentsare made in the month following purchase. Purchases made in November (and the November 30 accounts

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payable balance) will not have an effect on December 31 accounts payable, as they will have been fully paidduring December. Thus, we need to determine the amount of purchases to be made in December.

Purchased components are 40% of the cost of goods sold and cost of goods sold is 80% of sales. Purchasesmade in December will be 80% of the components needed for January sales, and 20% of the componentsneeded for December sales.

The components needed for January sales will be 40% of 80% of January sales, or $500,000 × 0.80 × 0.40 =$160,000. The purchases made in December of components for January sales will be 80% of that, or $128,000.

The components needed for December sales will be 40% of 80% of December sales, or $520,000 × 0.80 × 0.40 =$166,400. The purchases made in December of components for December sales will be 20% of that, or $33,280.Adding these two numbers together we get the projected balance in Accounts Payable for December of$161,280 ($128,000 + $33,280).


Martin Fabricating uses a cumulative average-time learning curve model to monitor labor costs. Data regarding tworecently completed batches of a part that is used in tractor-trailer rigs is as follows.Batch

Number Number of Units

Cumulative AverageHours Per Unit

1 50 202 50 16

If the same rate of learning continues for the next several batches produced, which of the following best describes (1)the type (i.e., degree) of learning curve that the firm is expeeriencing and (2) the average hours per unit for unitsincluded in the 201-400 range of units produced (i.e., the last 200 units)?

A. Learning curve - 80%; average hours per unit for units 201-400 - 7.68 hours.B. Learning curve - 20%; average hours per unit for units 201-400 - 10.24 hours.C. Learning curve - 80%; average hours per unit for units 201-400 - 10.24 hours.

D. Learning curve - 20%; average hours per unit for units 201-400 - 3.84 hours.

A.

The time required for the first batch of 50 units was 20 hours × 50 units, or 1,000 hours. If no learning hadtaken place, the second batch of 50 would also have taken 1,000 hours and thus the first two batches wouldhave required 2,000 hours. However, we are told that the cumulative average hours per unit after the secondbatch (the average time per unit for all 100 units produced in the first two batches) was 16 hours per unit.Therefore, the cumulative total time required for the first 100 units was 16 × 100 = 1,600 hours. Instead ofrequiring 2,000 hours to produce 100 units, it took 1,600 hours. The degree of the learning curve the firm isexperiencing is 1,600 ÷ 2,000 = 0.80 or 80%.

If no learning took place during the 3rd and 4th batches of 50, the first four batches would require 1,600 hours

× 2, or 3,200 to produce. However, with the firm's 80% learning curve, the cumulative total time required toproduce batches 1 through 4 will be 3,200 × 0.80, or 2,560 hours.

If no learning took place during the 5th through eighth batches of 50, eight batches would require 2,560hours × 2, or 5,120 hours. However, with the firm's 80% learning curve, the cumulative total time required toproduce batches 1 through 8 will be 5,120 × 0.80, or 4,096 hours.

Since the time required to produce batches 1 through 4 will be 2,560 hours and the time required to producebatches 1 through 8 will be 4,096 hours, the number of hours required to produce batches 5 through 8 (200units) will be 4,096 hours − 2,560 hours, or 1,536 hours.

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The average hours per unit for units 201-400 (the last 200 units) will be 1,536 hours ÷ 200 units = $7.68 perunit.

B.


We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the screen. Thank you in advance for helping us to make your HOCK study materials better.

C.

This answer results from calculating the average hours per unit for units 201-400 by multiplying the cumulative totalnumber of hours to produce the first four batches by the learning rate to find the number of hours required for batches5 through 8, then dividing the result by the number of units in batches 5 through 8 to find the average number of hoursrequired per unit for the last four batches.

The number of hours required for batches 5 through 8 is not calculated correctly. To calculate the number of hoursrequired for batches 5 through 8, find the total number of hours required for all eight batches, then subtract the totalnumber of hours required for batches 1 through 4 from that number. The difference will be the number of hoursrequired for batches 5 through 8.

D.


We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the screen. Thank you in advance for helping us to make your HOCK study materials better.


All types of organizations can benefit from budgeting. A major difference between governmental budgeting andbusiness budgeting is that

A. Governmental budgeting usually represents a legal limit on proposed expenditures.B. Business budgeting can be used to measure progress in achieving company objectives, whereas governmentalbudgeting cannot be used to measure progress in achieving objectives.C. Governmental budgeting is usually done on a zero-base.D. Business budgeting is required by the SEC.

A. Governmental budgets differ from business budgets because a governmental budget represents the legalamount that the government can spend. In order to spend more than the budgeting amount, legislation mustbe passed by the government to allow the additional spending.

B. Governmental budgeting can also be used to measure progress in achieving objectives.

C. Zero-base budgeting does not need to be used, and is rarely used, in governmental budgeting.

D. The SEC (Securities Exchange Commission) does not require businesses to budget.

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Profitability is derived from three basic factors. Which of the following is not one of those?

A. The amount of value placed on the company's products or services by the customer.B. Research and development that is highly innovative.C. The costs of creating the company's products or services.D. The price that the company charges for its products and services.

A. The value customers place on a company's products or services is one of the three critical factors that affect thecompany's profitability.

B. Through research and development (R&D), companies research knowledge for creating new or improvingexisting products, services or processes. Ultimately, this may have a long-term impact on the company'ssuccess. However, this is not one of the three basic factors from which the company's profitability is derived.

C. The costs of creating the company's products or services is one of the three critical factors that affect the company'sprofitability.

D. The price charged for a company's product or service is one of the three critical factors that affect the company'sprofitability.


A profitable firm that is experiencing rapid sales growth will find that its need for external financing will

A. increase, because of its need for additional investment in working capital and fixed assets to support the increasedsales.

B. decrease, because more inventory will be sold and the decrease in inventory will generate additional cash.C. decrease, because the higher sales will lead to higher profits, and the added profits will provide more cash.D. increase, because in order to increase sales, the firm must decrease its prices, which will lead to decreased profitsand decreased cash.

A. The higher the firm's rate of growth in sales, the greater will be its need for additional financing. When salesincrease, firms usually need to purchase more assets to support the increased level of sales. More inventorywill need to be purchased, and additional equipment will be needed to expand manufacturing. Additionalemployees will be required to operate the new equipment and also to make and process the additional salesand to provide customer service after the sale. Some of the required funding can be provided by increases inprofits and increases in accounts payable and accruals (called "spontaneous liabilities"); but not all of therequired funding can be provided in that way. The company will need to raise additional external financingeither in the form of borrowed funds or in the form of new equity.

B. While it is true that more inventory will be sold when sales increase, more inventory will also need to bemanufactured or purchased, not only to replace the inventory that has been sold but also to have enough inventory onhand to support the increased sales. So the increased cash generated by increased inventory sales will be offset by theneed to acquire more inventory.

C. Higher sales may lead to higher profits; but increased cash from higher profits is not the only effect the higher saleswill have on cash.

D. A firm in a high-growth stage does not necessarily need to decrease its prices in order to keep sales growing, sothis is an incorrect assumption.

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Esplanade Company has the following historical pattern for its credit sales:

70% collected in month of sale15% collected in the first month after sale

10% collected in the second month after sale

4% collected in the third month after sale

1% uncollectible

The sales on open account have been budgeted for the last 6 months of the year as shown below.July $60,000 August 70,000September 80,000October 90,000November 100,000

December 85,000

The estimated total cash collections during October from accounts receivable would be

A. $84,400.B. $21,400.C. $86,700.D. $63,000.

A.

Cash collections in October represent cash collections from sales made in October as well as collections fromsales made in previous months according to the cash collection schedule, as follows:

October sales × 0.70 = $90,000 × 0.70 = $63,000

September sales × 0.15 = $80,000 × 0.15 = $12,000

August sales × 0.10 = $70,000 × 0.10 = $7,000

July sales × 0.04 = $60,000 × 0.04 = $2,400

Total collections = $63,000 + $12,000 + $7,000 + $2,400 = $84,400

B. This amount does not include cash collected in October from October's sales but only the collections from July, August and September sales collected in October.

C. This is amount of total cash collected in December. See the correct answer for a complete explanation.

D. This is amount of cash collected in October from October sales. See the correct answer for a complete explanation.


Automite Company is an automobile replacement parts dealer in a large metropolitan community. Automite is

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preparing its sales forecast for the coming year. Data regarding both Automite's and industry sales of replacementparts as well as both the used and new automobile sales in the community for the last 10 years have beenaccumulated. If Automite wants to determine if there is a historical trend in the growth of its sales as well as the growthof industry sales of replacement parts, the company would employ

A. Statistical sampling.B. Queuing theory.

C. Simulation techniques.D. Time series analysis.

A. Statistical sampling is used to calculate the condition of a population based on a sample from that population.

B. Queuing theory is the process of determining the most efficient and effective way to move people or goods througha line in the most economical manner, keeping waiting times to a minimum.

C. Simulation is a model that uses mathematical expressions and logical relationships to compute the value of theoutputs. It is designed to model a real situation or system using controllable or probabilistic inputs.

D. Time series analysis is used to measure the changes in the quantity of something over a period of time.Time series analysis would be an appropriate technique to use as it involves past experience.


The operating budget process usually begins with the

A. Income statement.B. Financial budget.C. Balance sheet.D. Sales budget.

A. The pro forma income statement is a part of the financial budget, not the operating budget.

B. The financial budget is neither an operating budget nor a part of the operating budget.

C. The pro forma balance sheet is a part of the financial budget, not the operating budget.

D. The sales budget is a part of operating budget and is usually the first budget to be prepared in thebudgeting process. It is therefore the foundation of the operating budget.


The balance sheet and income statement of the Grow 'n' Glow Manufacturing Company for the past year are as follows

(000 omitted):BALANCE SHEET Assets LiabilitiesCash $ 9,700 Accounts payable $ 3,000 Accounts receivable 15,300 Notes payable 10,000Inventory 18,500 Accrued liabilities 6,000Total current assets $ 43,500 Total current liabil ities $ 27,900 Held-to-maturity securities $ 45,600 Long-term debt $ 35,600Net fixed assets 32,200 Total liabilities $ 54,600

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Total long-term assets $ 77,800Equity

Total assets $121,300 Common stock $ 10,000 Additional paid-in capital 30,000 Retained earnings 26,700 Total equity $ 66,700

Total liabilities & equity $121,300 INCOME STATEMENTNet sales $100,000Cost of goods sold 66,200Gross profit $ 33,800

Selling expense $ 16,400General & admin. expense 11,200Operating income $ 6,200

Net interest expense 1,200

Net income before tax $ 5,000Taxes @ 35% 1,750Net income $ 3,250

The company paid dividends during the past year of $975. During the past year, fixed assets were being used at 85%of capacity. In all other respects, the company was operating at full capacity.

The company's dividend policy is that dividends will grow at a rate of 4% per year. The past year's interest rate on debtwas 5% on short-term debt and 7% on long-term debt. The held-to-maturity securities earn 4% return and are notexpected to change next year.

Sales for next year are projected to increase at the rate of 15%. Using the Forecasted Financial Statement approach,how much additional financing will the company need next year? For the interest expense calculations, use thebeginning balance of outstanding loans and an interest rate that is 0.5% higher than the past year's interest rates.

(Hint: Since the company is operating at 100% of capacity in all respects except for fixed assets, and sinceheld-to-maturity securities are not expected to change, all incomes and expenses and all assets except forheld-to-maturity securities and fixed assets will increase by the same amount for the next year. To determine whetherfixed assets will increase and if so, by how much, determine how much sales could increase without requiringadditional fixed asset purchases and then compare that with forecasted sales for next year.)

A. $2,462B. $5,175C. $455D. $1,448

A.

To construct a pro forma balance sheet and income statement in order to determine the amount of externalfinancing that will be needed next year, we begin with the sales forecast and forecast the income statement.For each line item on the income statement with the exception of net interest expense, we use the same ratioto forecasted sales as in the past year. (Note: You can also calculate these amounts by multiplying the pastyear's amounts by 1.15.)PRO FORMA INCOME STATEMENT

Net sales $100,000 × 1.15 $115,000

Cost of goods sold $115,000 × 0.662 76,130


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Selling expense $115,000 × 0.164 18,860

General & admin. expense $115,000 × 0.112 12,880

EBIT $ 7,130

Net interest expense 1,396(see Note 1)

EBT $ 5,734

Taxes @ 35% 2,007Net income $ 3,727

Minus: dividends $975 × 1.04 1,014

Addition to retained earnings $ 2,713

Note 1: Net interest expense = (10,000 × 0.055) + (35,600 × 0.075) − (45,600 × 0.04) = 1,396

The next step is to forecast the balance sheet. Held-to-maturity securities, notes payable, long-term debt,common stock and additional paid-in capital will be the same as last year. The company's fixed assets arepresently being used at 85% of their capacity to generate sales of $100,000. If they were being used at 100% oftheir capacity, sales would be $100,000 ÷ 0.85, which is $117,647. Therefore, since sales are forecasted togrow to $115,000 and that is less than $117,647, no new fixed assets will be required and net fixed assets willalso be the same as last year. Cash, accounts receivable, inventory, accounts payable and accrued liabilities

will be the same percentage of forecasted sales as they were of actual sales. Retained earnings will be lastyear's amount plus the addition to retained earnings calculated above.PRO FORMA BALANCE SHEET

Assets Liabilities

Cash ($115,000 × 0.097) $ 11,155 A/P ($115,000 × 0.03) $ 3,450

A/R ($115,000 × 0.153) 17,595 Notes payable 10,000

Inv ($115,000 × 0.185) 21,275 Accr liab ($115,000 × 0.06) 6,900

Total current assets $ 50,025 Total current liabilities $ 20,350

Held-to-maturity securities $ 45,600 Long-term debt $ 35,600

Net fixed assets 32,200 Total liabilities $ 55,950

Total long-term assets $77,800

Equity

Total assets $127,825 Common stock $ 10,000 Additional paid-in capital 30,000

Ret earnings ($26,700 + $2,713) 29,413

Total equity $ 69,413

Total liabilities & equity $125,363

Additional funds needed $ 2,462

The additional funds needed of $2,462 is the difference between total assets of $127,825 and total liabilities &equity of $125,363.

B. This answer results from not including the addition to retained earnings in the equity section of the pro formabalance sheet.

C. This answer results from not deducting taxes from net income in calculating the addition to retained earnings on thepro forma balance sheet.

D. This answer results from using an addition to retained earnings equal to the full amount of the net income on the proforma balance sheet. However, the addition to retained earnings should be net income minus dividends to be paid.

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Data regarding Rombus Company's budget are shown below.Planned sales 4,000 unitsMaterial cost $2.50 per poundDirect labor 3 hours per unitDirect labor rate $7 per hour

Finished goods beginning inventory 900 unitsFinished goods ending inventory 600 unitsDirect materials beginning inventory 4,300 unitsDirect materials ending inventory 4,500 unitsMaterials used per unit 6 pounds

Rombus Company's production budget will show total units to be produced of

A. 4,300B. 3,700C. 4,600D. 4,000

A. This answer results from reversing the beginning and ending finished goods inventories in the calculation.

B.

The basic inventory formula, which can be used to solve almost any inventory problem, is

Beginning Inventory + Produced/Purchased − Sold/Used = Ending Inventory

Whenever you have three of the four numbers, you can always find the fourth number.

In this question, we have the number of units in beginning finished goods inventory, the number of units inthe ending finished goods inventory, and the number of units to be sold. So the formula to solve for thenumber of units to be produced (P) is:

900 + P − 4,000 = 600

Solving for P, we get P = 3,700.

C. This is the number of units to be sold plus the number of units in ending finished goods inventory. The beginningfinished goods inventory must also be a part of the calculation.

D. This is the number of units to be sold. It does not take into account the amount of change in finished goodsinventory from the beginning of the year to the end of the year.



November

Year 1(Actual)

December Year 1

(Budget)

JanuaryYear 2


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Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% arecollected in the month of sale and the remainder in the month following the sale. Purchases of inventory are equal tonext month's sales and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in themonth of purchase, and the remainder are paid in the month following the purchase.

Noskey Corporation's budgeted total cash payments in December Year 1 for inventory purchases are

A. $283,500B. $168,000C. $220,500D. $405,000

A. In December the cash payments will be for 25% of the purchases made in December and for 75% of thepurchase made in November. December purchases are for the budgeted January sales and are equal to$168,000 ($240,000 total January sales × 70% COGS). Thus, 25% of the December purchases is $42,000($168,000 × 25%). November purchases were for the December sales and are equal to $322,000 ($460,000 totalDecember sales × 70% COGS). Thus, 75% of November purchases is $241,500 ($322,000 × 75%). Adding thesetwo cash payments together, we get a total cash payment in December of $283,500 ($42,000 + $241,500).

B. This is the amount of purchases in December (of which only 25% are actually paid in December). See the correctanswer for a complete explanation.

C. This answer is calculated based on credit sales only, and not total sales. See the correct answer for a completeexplanation.

D. This is purchases valued at the sales price, not the cost of goods sold (70% of purchased price). See the correctanswer for a complete explanation.


According to the BCG Growth-Share Matrix, all of the following are included in product life-cycle strategies except:

A. Aggressive pricing to increase market share quickly.B. "Milking" the product.C. Superior responsiveness to customers.D. Increase investment in the product to maximize market share.

A.

Aggressive pricing to increase market share quickly is a product life-cycle strategy used for a product classified as a"question mark" in the BCG Growth-Share Matrix. A question mark is a product that has a low share of the market butthe industry it is in is growing rapidly, so potential for growth exists. A question mark requires extensive analysis todetermine whether it is worthy of the additional investment that would be required to increase its market share more,however.

B.

"Milking" the product is a product life-cycle strategy used for a "cash cow" in the BCG Growth-Share Matrix. A cashcow is a market leader in an industry with a low market growth rate. Because the industry is slow growing, the productdoes not warrant additional investment. However, the product continues to generate more cash than it consums, so itshould be "milked" to extract its profits.

C.

Responsiveness to customers is not a product life cycle strategy but rather one of the four factors that derive

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from a company's distinctive competencies and which create competitive advantage. (The four factors aresuperior efficiency, superior quality, superior innovation and superior customer responsiveness). All of theother answer choices are product life-cycle strategies.

D.

Maximizing market share is a product life-cycle strategy used for a "star" in the BCG Growth-Share Matrix. A star is a

product with a high share of the market in an industry that is growing rapidly. Increasing investment in the productincludes continuously improving product quality and adding new product features and models. Market penetrationpricing is usually used. Prices are lowered at appropriate times to attract more business, and an intensive distributionchannel is developed.


The budget that is usually the most difficult to forecast is the

A. Manufacturing overhead budget.B. Production budget.

C. Expense budget.D. Sales budget.

A. The preparation of the manufacturing overhead budget is fairly straight-forward after the production budget hasbeen prepared, because it is based on the production budget.

B. The production budget is based on the sales budget, and once the sales budget has been prepared and endinginventory objectives determined, the production budget is relatively easy to prepare.

C. There is no such thing as an "expense budget." General and administrative expenses are budgeted as part of theoperating budget, and they are based upon management's plans for the coming year. Selling expenses are also a partof the operating budget, and they are based on the sales budget.

D. The sales budget is usually the first budget to be prepared, and it influences all other budgets in the masterbudget. The volume of sales and level of sales revenue are difficult to forecast, as many external factors caninfluence this budget. The sales budget is based on a number of assumptions about the changingenvironment such as competitors' activities, consumer tastes and demand, prices, the general economy,government regulations, and many other factors that are outside the control of the company. Therefore, thesales budget is very difficult to develop.


In order to analyze sales as a function of advertising expenses, the sales manager of Smith Company developed asimple regression model. The model included the following equation, which was based on 32 monthly observations of

sales and advertising expenses with a related coefficient of determination of .90.S=$10,000 + $2.50AS=Sales A=Advertising expenses

If Smith Company's advertising expenses in one month amounted to $1,000, the related point estimate of sales wouldbe

A. $11,250.B. $12,500.

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C. $12,250.D. $2,500.

A. This is ($2.50 × 100) plus advertising expenses plus $10,000; but that is not the regression model for estimatingsales.

B.

Using the model given, we can simply plug the amount given for advertising expense into it to determine thesales estimate, as follows:

S = $10,000 + $2.50A

S = $10,000 + ($2.50 × $1,000)

S = $12,500

C. This is ($2.50 × 100) plus (2 × advertising expenses) plus $10,000; but that is not the regression model forestimating sales.

D. This is $2.50 multiplied by the advertising expense; but that is not the regression model for estimating sales.

Question 228 - 3B2 CMA - Planning and Budgeting Concepts

Flexible budgets

A. Are budgets that project costs based on anticipated future improvements.B. Accommodate changes in activity levels.C. Provide for external factors affecting company profitability.D. Are used to evaluate capacity use.

A. Flexible budget are not used to project costs based on future improvements.

B. A flexible budget is a budget prepared for the actual level of output. Thus, flexible budgets accommodateschanges in activity levels because the budget is prepared for whatever the actual level of production is.

C. A flexible budget is a budget that is prepared for the actual level of output.

D. Flexible budgets are not developed to evaluate the use of capacity.

Question 229 - HOCK CMA ES001 - Forecasting Techniques

Forsythe Company began using exponential smoothing to prepare its monthly forecasts in January. Below are theforecasted amounts for February through April.

Actual Forecasted

January 40,500,000 ---

February41,700,000 40,500,000

March43,500,000 40,860,000

April45,700,000 41,652,000

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What was Forsythe Company using as alpha (α ) in preparing these forecasts?

A. 0.1B. 0.3C. 0.4D. 0.2

A.

0.1 is not the alpha being used.

The formula for exponential smoothing is:

(α × Last Month's Actual) + ([1 − α ] × Last Month's Exponential Smoothing Forecast) = This Month's Forecast

In this problem, α is the unknown. The α being used can be calculated using the above formula. Use either the figuresgiven for February as the "last month" actual and forecasted amounts and the forecast given for March as the "thismonth's forecast" or the figures given for March as the "last month" actual and forecasted amounts and the forecastgiven for April as the "this month's forecast" amount in the equation. Then solve the equation for α .

B.

That is correct.



In this problem, α is the unknown. Using February as the "last month" and March as "this month," the formulato be solved for α would be:

(α × 41,700) + ([1 − α ] × 40,500) = 40,860

Solving for α :

41,700α + 40,500 − 40,500α = 40,8601200α + 40,500 = 40,8601200α = 360α = 0.3

C.




In this problem, α is the unknown. The α being used can be calculated using the above formula. Use either the figuresgiven for February as the "last month" actual and forecasted amounts and the forecast given for March as the "thismonth's forecast" or the figures given for March as the "last month" actual and forecasted amounts and the forecastgiven for April as the "this month's forecast" amount in the equation. Then solve the equation for α .

D.


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In this problem, α is the unknown. The α being used can be calculated using the above formula. Use either the figuresgiven for February as the "last month" actual and forecasted amounts and the forecast given for March as the "thismonth's forecast" or the figures given for March as the "last month" actual and forecasted amounts and the forecast

given for April as the "this month's forecast" amount in the equation. Then solve the equation for α .


RedRock Company uses flexible budgeting for cost control. RedRock produced 10,800 units of product duringOctober, incurring indirect materials costs of $13,000. Its master budget for the year reflected indirect materials costsof $180,000 at a production volume of 144,000 units. A flexible budget for October production would reflect indirectmaterials costs of

A. $13,500.B. $13,975.

C. $11,700.D. $13,000.

A. Indirect materials costs are variable costs. Therefore, the total cost of indirect materials fluctuates with thelevel of production. According to the master budget, the per unit cost of indirect material is $1.25 ($180,000 ÷144,000). Therefore, given an actual production of 10,800 units, the flexible budget costs for indirect materialin October would be $13,500 ($1.25 × 10,800).

B.



C. This answer results from dividing the actual direct materials cost incurred during October ($13,000) by the budgetedmonthly production level of $12,000 (144,000 ÷ 12), then multiplying the result by the 10,800 actual production levelachieved. Since this calculation began with actual incurred cost, it cannot be the flexible budget amount.

D. This is the actual indirect materials cost. Indirect materials costs are variable costs. Therefore, the total cost ofindirect materials fluctuates with the level of production. See the correct answer for a complete explanation.


Rock Industries has four divisions. In the quest to develop a more achievable budget for the coming year, the chiefexecutive officer has elected to develop the company's budget by using a decentralized bottom-up budget approach.Chip Jones is production manager in one of the divisions. Jones’ involvement in the budget process this year willprobably:

A. Require development of a production budget that is forwarded to the Budget Department.

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B. Require development of a production budget based on the prior year’s manufacturing activity.C. Require development of a production budget after receiving the division’s projected sales forecast.D. Be negligible.

A. This is incorrect. Jones will develop a production budget that is forwarded to the Budget Department; however, firsthe will have to have an idea of how much to produce. This will come from the sales forecast.

B. While prior year activity is one place to start, it does not include the sales forecast for the upcoming year oradjustments for changes in costs or processes.

C. Jones will develop a budget for his production department after determining how much is expected to besold. The production budget will take into account what is to be sold as well as cushions for extra sales andprovisions for ending finished goods.

D. In a bottom up budget, the department managers will have a significant role in budget development.


Refer to the profit payoff table below. Demand in Units 0 2 4 6 Probability of Demand

Supply in Units 0.1 0.3 0.4 0.20 $ 0 $ 0 $ 0 $ 02 (80) 40 40 404 (160) (40) 80 806 (240) (120) 0 120

The expected profit when supply equals 4 units, is

A. $20B. $(10)C. $(40)D. $80

A. To calculate the expected profit when supply is equal to 4, we need to multiply each of the possible profitsat each level of demand by the probability that that demand level will occur and add the results together. Thisgives us an expected profit of $20 [(−$160 × 0.1) + (−$40 × 0.3) + ($80 × 0.4) + ($80 × 0.2)].

B. This is not the expected profit when supply equals 4 units. This is the unweighted average of the possible profitswhen the supply equals 4 units. The expected value is a weighted average, weighted according to the probability ofeach possible profit occurring.

C. This is not the expected profit when supply equals 4 units. This is the total of the possible profits when the supply

equals 4 units. The expected value is a weighted average, weighted according to the probability of each possible profitoccurring.

D. This is not the expected profit when supply equals 4 units. This is the profit when the supply equals 4 units anddemand equals 4 or 6 units.


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Projected monthly sales of Wallstead Corporation for January, February, March and April are as follows.January $300,000February 340,000March 370,000 April 390,000

The company bills each month's sales on the last day of the month.

Receivables are booked gross and credit terms of sale are: 2/10, n/30.50% of the billings are collected within the discount period, 30% are collected by the end of the month, 15% arecollected by the end of the second month, and 5% become uncollectible.

Budgeted cash collections for Wallstead company during April would be

A. $347,000.B. $343,300.C. $349,300D. $353,000.

A. This answer does not take into consideration the fact that 50% of March's sales will be collected within the discountperiod and will be subject to a 2% discount. See correct answer for a complete calculation.

B.

Collections during April will consist of 50% of March sales that are collected from April 1 through April 10within 10 days of billing at 98% of their balance (with the 2% discount for prompt payment); 30% of Marchsales that are collected during the remainder of April at 100% of their balance (no discount); and 15% ofFebruary sales collected during April at 100% of the balance (no discount).

Therefore, April collections will be:50% of March sales of $370,000 × 0.98 $181,300

30% of March sales of $370,000 111,000

15% of February sales of $340,000 51,000

April collections $343,300

C. Collections during April will consist of 50% of March sales collected within 10 days (April 1 through April 10) at 98%of their balance, 30% of March sales collected during the remainder of April, and 15% of February sales collectedduring April. This answer results from multiplying 30% by the April sales amount instead of by the March sales amount.See the correct answer for a complete explanation.

D.


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Cooper Company's management team is preparing a cash budget for the coming quarter. The following budgetedinformation is under review

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January February MarchRevenue $700,000$800,000$500,000Inventory purchases 350,000 425,000 225,000Other Expenses 150,000 175,000 175,000

The company expects to collect 40% of its monthly sales in the month of sale and 60% in the following month. 50% ofinventory purchases are paid in the month of purchase, and the other 50% in the following month. All payments for

other expenses are made in the month incurred.

Cooper forecasts the following account balances at the beginning of the quarter.Cash $100,000 Accounts receivable 300,000 Accounts payable (Inventory) 500,000

Given the above information, the projected change in cash during the coming quarter will be

A. $412,500.B. $ -0-C. $112,500.D. $300,000.

A. This answer results from assuming that all the sales made during March are collected during the quarter. Thecompany expects to collect 40% of its monthly sales in the month of the sale and 60% in the following month.Therefore, only 40% of March sales will be collected during the quarter.

B. This answer results from assuming that all the purchases made during March are paid for during the quarter. Theproblem says that 50% of inventory purchases are paid in the month of purchase, and the other 50% are paid in thefollowing month. Therefore, only 50% of March purchases will be paid for during the quarter.

C.

Since accounts receivable and accounts payable are settled within 2 months each, there is no need to worryabout breaking down the receivables and payables from January and February into the actual months thecash is received and paid.

This question asks for the amount of change in cash from the beginning of the quarter to the end of thequarter. We can start with the beginning cash balance and use the activity to calculate the ending cashbalance and then take the difference, or we can ignore beginning and ending cash balances and just sum theactivity, since the question asks only for the amount of change. We will use the use the second method.

Receipts:

Accounts receivable at the beginning of the quarter will all be received during the quarter, since 40% arecollected in the month of sale and 60% are collected in the following month: +$300,000

Sales made during January and February will all be collected during the quarter, for the same reason:+$1,500,000

40% of sales made during March will be collected during the quarter: +$200,000

Disbursements:

Accounts payable for inventory at the beginning of the quarter will all be paid during the quarter, since50% of inventory purchases are paid in the month of purchase and the other 50% in the followingmonth: −$500,000

Inventory purchased during January and February will all be paid for during the quarter, for the samereason: −$775,000

50% of inventory purchased during March will be paid for during the quarter: −$112,500

All of the other expenses for January, February and March will be paid for during the quarter, since

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other expenses are paid in the month incurred: −$500,000

Net change in cash: + $300,000 + $1,500,000 + $200,000 − $500,000 − $775,000 − $112,500 − $500,000 =+$112,500

D.

This answer results from assuming that all the sales made during March are collected during the quarter, and all thepurchases made during March are paid for during the quarter. The company expects to collect 40% of its monthlysales in the month of the sale and 60% in the following month; and it pays for 50% of inventory purchases in the monthof purchase while the other 50% are paid in the following month. Therefore, only 40% of March sales will be collectedduring the quarter and only 50% of March purchases will be paid for during the quarter.


The Jung Corporation's budget calls for the following production:

Qtr 1 : 45,000 units

Qtr 2 : 38,000 unitsQtr 3 : 34,000 unitsQtr 4 : 48,000 units

Each unit of product requires three pounds of direct material. The company's policy is to begin each quarter with aninventory of direct materials equal to 30% of that quarter's direct material requirements. Budgeted direct materialspurchases for the third quarter would be

A. 38,200 pounds.B. 30,600 pounds.C. 114,600 pounds.D. 43,200 pounds.

A. This answer results from assuming that each unit of finished product requires only one unit of raw materials. Eachunit of finished product requires three units of raw materials.

B. This is the amount of beginning inventory. See the correct answer for a complete explanation.

C.

This is a basic question of units needed in a period, but it is about the number of units of the raw materialsthat are needed. There are 3 units of raw materials in a finished unit. The amount needed in the third quarteritself is 102,000 units of raw materials (3 × 34,000 finished units). In addition, the ending inventory is 30% ofthe next quarter's needs. This is 43,200 units of raw materials (48,000 finished units × 3 × 0.3). The beginninginventory was 30% of the current quarter's needs or 30,600 (102,000 × 0.3).

Beginning Inventory + Purchases − Amount Used = Ending Inventory

30,600 + Purchases − 102,000 = 43,200Purchases = 114,600

A total of 114,600 units of raw materials need to be purchased this period.

D. This is the ending inventory amount. See the correct answer for a complete explanation.

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Michael Porter's Five Forces Model helps managers to analyze forces that shape competition within an industry inorder to identify opportunities and threats in their industry environments. Which of the following forces is not one of theFive Forces?

A. The bargaining power of competitors.B. The bargaining power of suppliers.C. The closeness of substitutes to a company's products.D. Risk of entry by potential competitors.

A. Bargaining power of competitors is not one of the forces that shape competition for a company within anindustry.

B.

Bargaining power of suppliers is one of the forces that shape competition for a company within an industry. If suppliershave the ability to raise the prices of inputs such as materials or direct labor (i.e., labor unions), that is a strongcompetitive force and represents a threat. If suppliers have little ability to raise input prices, that is a weak competitiveforce and represents an opportunity.

C.

The closeness of product substitutes is one of the forces that shape competition for a company within an industry. Ifthere are close substitutes for the company's product, this limits the prices that the company can charge and that is athreat. If there are few or no close substitutes, then a company can raise its prices without being concerned that itscustomers may switch to a substitute, so that is an opportunity.

D. Risk of entry by potential competitors is one of the forces that shape competition for a company within an industry. Ifsignificant barriers to entry exist, such as high costs, economies of scale or regulatory requirements, this will constitutea weak competitive force and an opportunity for companies already established in the industry, because a newcompetitor would not have the volume necessary to enable it to compete against the established businesses in theindustry. If entry barriers are low, this would be a strong competitive force and a threat for established companies.



The frequency distribution of the demand for pretzels per game is presented as follows:Sales Volume Probability2,000 pretzels .103,000 pretzels .154,000 pretzels .205,000 pretzels .35

6,000 pretzels .20

The pretzels are sold for $1.00 each, and the cost per pretzel is $.30. Any unsold pretzels are discarded because theywill be stale before the next home game.

The estimated demand for pretzels at the next home football game using an expected value approach is

A. 4,400 pretzels.B. Some amount other than those given.C. 4,000 pretzels.D. 5,000 pretzels.

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A. To solve the problem we should multiply each possible sales volume by its corresponding probability tofind the weighted average, which is the expected value. It is calculated as follows: (2,000 × 0.10) + (3,000 ×0.15) + (4,000 × 0.20) + (5,000 × 0.35) + (6,000 × 0.20) = 4,400.

B. The correct answer is given. See the correct answer for a complete explanation.

C. 4,000 pretzels is an average with equal weight given to each outcome and therefore is not calculated using theexpected value approach.

D. 5,000 pretzels is calculated using the deterministic approach, using the most likely outcome or the sales volumecorresponding with the highest probability level of 35%. This is not the expected value approach.


ANNCO sells products on account, and experiences the following collection schedule.In the month of sale 10%In the month after sale 60%In the second month after sale30%

At December 31, ANNCO reports accounts receivable of $211,500. Of that amount, $162,000 is due from Decembersales, and $49,500 from November sales. ANNCO is budgeting $170,000 of sales for January. If so, what amount ofcash should be collected in January?

A. $174,500.B. $129,050.C. $211,500.D. $228,500.

A.

Collections during January will include the following:The $162,000 outstanding at December 31 from December sales represents 90% of December sales,since 10% of sales are collected during the month of sale. Therefore, December sales were $162,000 ÷0.90, or $180,000. 60% of that, or $108,000, will be collected during January.

The $49,500 outstanding at December 31 from November sales will all be collected during January,since January is the second month after the sale.

10% of January sales of $170,000, or $17,000, will be collected during January.

The total collected during January will be $108,000 from December sales plus $49,500 from November salesplus $17,000 from January sales, for a total of $174,500.

B. This is 60% of the $162,000 in receivables remaining from December plus 30% of the $49,500 in receivablesremaining from November plus 10% of January sales of $170,000. The amount collected during January from

December sales will be 60% of December sales, not 60% of the receivables remaining from December sales. And theamount collected during January from November sales will be 30% of November sales, not 30% of the receivablesremaining from November sales. Using the informaiton given in the problem, calculate what November sales were andwhat December sales were.

C. This is the amount of the receivables at December 31. That is not the same as the amount that will be collectedduring January, because (1) not all of those receivables will be collected during January; and (2) some of thecollections during January will come from sales made in January.

D. This is the $211,500 of receivables outstanding at December 31 plus 10% of the sales made during January. The

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amount of receivables outstanding at December 31 will not all be collected during January.


Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budgetschedule that would provide the necessary input data for the direct labor budget would be the

A. Production budget.B. Sales forecast.C. Schedule of cash receipts and disbursements.D. Raw materials purchases budget.

A. Once the sales budget has been developed, it provides information with which to prepare the productionbudget. The production budget determines how muchof the product will be produced. Thus, it providesinformation to prepare the direct labor, direct materials and manufacturing overhead budgets.

B. Sales forecast will give information to determine the level of production. However, it does not provide directinformation to prepare the direct labor budget.

C. The cash budget is the last budget in the master budget, and the direct labor budget must be prepared before thecash budget can be prepared.

D. The raw materials purchases budget does not provide information for the direct labor budget preparation.


Berol Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 5% permonth. The desired monthly ending inventory in units of finished product is 80% of the next month's estimated sales.There are 150,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of directmaterials at a cost of $1.20 per pound. There are 800,000 pounds of direct materials in inventory on June 30.

Berol Company's production requirement in units of finished product for the 3-month period ending September 30 is


A. This is the expected sales for the next three months. See the correct answer for a complete explanation.

B.

This is not the correct answer. Please see the correct answer for a complete explanation.We have been unable todetermine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it sowe can create a full explanation of why this answer choice is incorrect. Please send us an email [email protected]. Include the full Question ID number and the actual incorrect answer choice -- not itsletter, because that can change with every study session created. The Question ID number appears in the upper rightcorner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.

C. This answer results from using 231,525 units as the September 30 ending inventory. 231,525 units is the number ofunits the company expects to sell in October according to the expected growth rate. However, the desired monthlyending inventory is 80% of the next month's estimated sales, not 100% of the next month's estimated sales.

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D.

This question covers a three month period beginning July 1 and ending September 30. Beginning inventory inJuly is 150,000 finished units. The desired monthly ending inventory in units of finished product is 80% of thenext month's estimated sales. According to the expected sales growth rate, the company plans to sell 210,000units (200,000 × 105%) in August, 220,500 units (210,000 × 105%) in September and 231,525 units (220,500 ×105%) in October. Thus, ending inventory in September will need to be 185,220 units (231,525 × 80%). During

July, August and September sales are forecasted to be 630,500 units (200,000 + 210,000 + 220,500). Now wecan calculate the number of units that need to be produced:

Beginning Inventory + Units Produced − Units Sold = Ending Inventory

150,000 + Units Produced − 630,500 = 185,220.

Solving for Units Produced,

Units Produced = 665,720.


In developing the budget for the next year, which one of the following approaches would produce the greatest amountof positive motivation and goal congruence?

A. Have the divisional and senior management jointly develop goals and the divisional manager develop theimplementation plan.B. Have senior management develop the overall goals and permit the divisional manager to determine how these goalswill be met.C. Have the divisional and senior management jointly develop goals and objectives while constructing the corporation'soverall plan of operation.D. Permit the divisional manager to develop the goal for the division that in the manager's view will generate thegreatest amount of profits.

A. With open communication between the division manager and senior management all of the options can bediscussed and a mutually acceptable budget can be developed. Once this budget is developed, theimplementation is best left to the division manager because the division manager understands the process,employees, and environment better than senior management can, as senior management is not activelyinvolved in the day to day operations.

B. When senior management develops goals they can miss opportunities or issues known by the division manager.Rarely does one entity fully understand everything that happens with other entities. Communication is essential.

C. Senior management should prepare the corporation's overall plan prior to budget development. The corporate planis likely to be longer term and include elements both external and non-financial that a budget does not address.

D. While the manager may view his budget for the division as generating the most profit, generally he/she is unaware

of what is going on elsewhere within the organization. Without this knowledge, the division manager may be headed ina different direction than what is necessary for organization wide success.


Superior Industries' sales budget shows quarterly sales for the next year as follows:Quarter Units

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1 10,0002 8,0003 12,0004 14,000

Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter'ssales. Budgeted production for the second quarter of the next year would be:


A.

To solve this question, we use the formula for the physical flow of goods:


Beginning inventory for the second quarter is 20% of the second quarter sales, or 1,600 units (8,000 × 0.20).

The ending inventory for the second quarter is 20% of the third quarter sales, or 2,400 units (12,000 × 0.20).Plugging numbers into the formula we will get the following:

1,600 + Units Produced − 8,000 = 2,400

Solving for Units Produced, we get Units Produced = 8,800.

B.

This answer results from using the formula for the physical flow of inventory incorrectly.The correct formula is


To get this answer, units sold are added and units produced are subtracted. Instead, the number of units produced (the

unknown) should be added to beginning inventory and the number of units sold should be subtracted.

C.

This answer results from calculating the beginning inventory as 2,000 units. The beginning inventory is budgeted as20% of sales of 8,000 units, which is 1,600 units.

D. This is the sales level for the second quarter. It does not take into consideration the beginning and endinginventories. See the correct answer for a complete explanation.


The goals and objectives upon which an annual profit plan is most effectively based are

A. A combination of financial, quantitative, and qualitative measures.B. Qualitative measures of organizational activity such as product innovation leadership, product quality levels, andproduct safety.C. Quantitative measures such as growth in unit sales, number of employees, and manufacturing capacity.D. Financial measures such as net income, return on investment, and earnings per share.

A. An annual profit plan should be based on a combination of financial, quantitative and qualitative measures.

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The development of goals and objectives is the first step in the planning process. Top management mustestablish the major goals and objectives, set priorities and communicate these priorities to the people withinthe organization. Lower levels of the organization bear a part of the responsibility for the overallorganizational goals and objectives, which become subunits' goals and objectives. However, specificdepartments' goals and objectives may conflict with other departments' goals and objectives. For example, agoal of an increase in market size may conflict with a goal of profitability of sales. Thus, profit plans should bebased on multiple measures.

B. An annual profit plan should be based on a combination of financial, quantitative, qualitative measures. This answerincludes only qualitative measures.

C. An annual profit plan should be based on a combination of financial, quantitative, qualitative measures. This answerincludes only quantitative measures.

D. An annual profit plan should be based on a combination of financial, quantitative, qualitative measures. This answerincludes only financial measures.


A company is considering three alternative machines to produce a new product. The cost structures (unit variable costsplus avoidable fixed costs) for the three machines are shown as follows. The selling price is unaffected by the machineused.Single purpose machine $0.60x + $20,000Semi-automatic machine$0.40x + $50,000 Automatic machine $0.20x + $120,000

The demand for units of the new product is described by the following probability distribution.DemandProbability200,000 0.4300,000 0.3400,000 0.2

500,000 0.1

Using the expected value criterion,

A. The automatic machine has the lowest expected cost.B. The automatic machine should be used because of the high expected demand.C. The semi-automatic machine should be used because it has the lowest expected cost.D. The single purpose machine should be used because of the low expected demand.

A. The expected demand is 300,000 units [(200,000 × 0.4) + (300,000 × 0.3) + (400,000 × 0.2) + (500,000 × 0.1)]. Theautomatic machine has an expected cost of $180,000 [(300,000 × $0.20) + $120,000], which is not the lowest expectedcost.

B. The expected demand is 300,000 units [(200,000 × 0.4) + (300,000 × 0.3) + (400,000 × 0.2) + (500,000 × 0.1)]. Theautomatic machine has an expected cost of $180,000 [(300,000 × $0.20) + $120,000], which is not the lowest expectedcost.

C. The expected demand is 300,000 units [(200,000 × 0.4) + (300,000 × 0.3) + (400,000 × 0.2) + (500,000 × 0.1)].This question requires us to determine the cost of all of the machines at a level of 300,000 units. For thesemi-automatic machine, we get an expected cost of $170,000 [(300,000 × $0.40) + $50,000]. The singlepurpose machine has an expected cost of $200,000 [(300,000 × $0.60) + $20,000] and the automatic machinehas an expected cost of $180,000 [(300,000 × $0.20) + $120,000]. The semi-automatic machine has the lowestexpected cost and therefore should be used.

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D. The expected demand is 300,000 units [(200,000 × 0.4) + (300,000 × 0.3) + (400,000 × 0.2) + (500,000 × 0.1)]. Thesingle purpose machine has an expected cost of $200,000 [(300,000 × $0.60) + $20,000], which is not the lowestexpected cost.


Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with 60% collected in the month ofsale and 40% collected in the following month. A schedule of cash collections for January through March of the comingyear reveals the following receipts for the period. Cash Receipts JanuaryFebruary MarchDecember receivables $32,000From January sales 54,000 $36,000From February sales 66,000$44,000From March sales 72,000

Other information includes the following:

Inventories are maintained at 30% of the following month's sales.Tidwell desires to keep a minimum cash balance of $15,000. Total payments in January are expected to be$106,500, which excludes $12,000 of depreciation expense. Any required borrowings are in multiples of $1,000.

The December 31 balance sheet for the preceding year revealed a cash balance of $24,900.

Ignoring income taxes, the financing needed in January to maintain the firm's minimum cash balance is

A. $8,000.B. $10,600.C. $23,000.D. $11,000.

A.


We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please letus know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us anemail at [email protected]. Include the full Question ID number and the actual incorrect answer choice --not its letter, because that can change with every study session created. The Question ID number appears in the upperright corner of the ExamSuccess screen. Thank you in advance for helping us to make the HOCK study materialsbetter.

B. All borrowings must be in multiples of $1,000, so the company cannot borrow $10,600.

C. This answer results from including the depreciation expense in the calculation. Depreciation is a non-cashtransaction, so depreciation expense cannot affect the cash balance.

D. Beginning cash is $24,900; January receipts total $86,000 ($32,000 + $54,000); and January cashdisbursements are $106,500. Before financing, then, the company’s cash balance at the end of January is$24,900 + $86,000 − $106,500 = $4,400. The company wants to keep a minimum cash balance of $15,000; so atthe end of January, cash is short by $15,000 − $4,400, which equals $10,600. However, all borrowings must bein multiples of $1,000, so Tidwell cannot borrow $10,600. They must round up to the next thousand, which is$11,000.

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When the organization develops a plan or plans to prepare for future, often unpredictable events, it is called:

A. Short-term business planning.B. Contingency planning.

C. Long-term business planning.D. Capital budgeting.

A. Short-term business plans encompass tactics for achieving short-term objectives and operational elements that willcontribute to the achievement of long-term strategic goals.

B. Contingency planning, or scenario planning, considers alternatives that enable the company to respondquickly and capably to future, external, generally unpredictable events.

C. Long-term (strategic) business plans define the corporate mission and address the long-term objectives of theorganization.

D. Capital budgeting involves analyzing a proposed capital investment project to determine whether the investment willincrease shareholder value.

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