THEORIES:

1. A system that classifies budget requests by activity and estimates the benefits
arising from each activity:
A. Incremental budgeting system.
B. Static budgeting system.
C. Program planning and budgeting system.
D. Participative system.

2. A budgeting process in which information is constantly updated to provide a glance

at a future twelve-month plans is referred to as:
A. Continuous budgeting
B. Participative budgeting
C. On-going budgeting
D. Joint budgeting

3. A type of budget plan that is updated monthly or quarterly and where one month or
quarter is dropped, another is added is called:
A. Master budget
B. Operating and financial budget
C. Continuous budget
D. Zero-base budget

4. A systematized approach known as zero-based budgeting:

A. Classifies the budget by the prior year’s activity and estimates the benefits arising
from each activity
B. Begins with either the current level of spending or projected whichever is lower.
C. Presents planned activities for a period of time but does not present a firm
commitment
D. Divides the activities of individual responsibility centers into a series of packages
that are prioritized

5. Which of the following statements is TRUE?

A. Under zero-based budgeting, a manager is required to start at zero budget levels
each period, as if the programs involved were being initiated for the first time.
B. The primary purpose of the cash budget is to show the expected cash balance at
the end of the budget period.
C. Budget data are generally prepared by top management and distributed downward
in an organization.
D. The budget committee is responsible for preparing detailed budget figures for an
organization.

6. Which of the following statements about zero-based budgeting is incorrect?

A. All activities in the company are organized into break-up units called packages.
B. All costs have to be justified every budgeting period.
C. The process is not time consuming since justification of costs can be done as a
routine matter.
D. Zero-based budgeting includes variable costs only.

7. The difference between an individual's submitted budget projection and his or her
best estimate of the item being projected is an example of
A. padding the budget
B. adhering to zero-based budgeting assumptions
C. creating budgetary slack
 D. being incongruent with participative budgeting

8. A budget built from the ground up each year rather than by simply adding a
percentage increase to last year’s numbers is called a
A. Static budget
B. Zero-based budget
C. Flexible budget
D. Master budget

9. A continuous budget
A. Is a budget that is revised monthly or quarterly.
B. Is a medium term plan that consists of more than 2 years’ projections.
C. Is appropriate only for use of a not-for-profit entity.
D. Works best for an entity that can reliably forecast events a year or more into the
future.

10. A budget that includes costs for the actual number of units produced is called a:
A. Master budget
B. Summary cash budget
C. Static budget
D. Flexible budget

11. A budget that is established at the beginning of the period and not adjusted for
different levels of actual sales activity is called a:
A. Nonfinancial budget
B. Flexible budget
C. Static budget
D. Zero-based budget

12. A static budget is not appropriate in evaluating a manager's effectiveness if a

company has
A. Substantial fixed costs
B. Substantial variable costs
C. Planned activity levels that match actual activity levels
D. No variable costs
13. Using the concept of “expected value” in sales forecasting means that the sales
forecast to be used is
A. Developed using the indicator method
B. The sum of the sales expected by individual managers
C. Based on expected selling prices of the products
D. Based on probabilities

14. In preparing a cash budget, which of the following is normally the starting point for
projecting cash requirements?
A. Fixed assets
B. Sales
C. Accounts receivable
D. Inventories

15. Budgeting expenditures by purpose is called

A. Program budgeting
B. Line budgeting
C. Zero-based budgeting
 D. Flexible budgeting

16. The method of budgeting which adds one month’s budget to the end of the plan
when the current month’s budget is dropped from the plan refers to
A. Long-term budget
B. Operations budget
C. Incremental budget
D. Continuous budget

17. “Incremental budgeting” refers to

A. Line-by-line approval of expenditures
B. Setting the budget allowances based on prior year expenditures
C. Requiring top management approval of increases in budgets
D. Using incremental revenues and costs in budgeting

18. Which of the following is a contemporary approach to budgeting?

A. Incremental approach
B. Zero-based approach
C. Baseline approach
D. All of the given choices

19. Budget slack is a condition in which

A. Demand is low at various times of the year
B. Excess machine capacity exists in some areas of the plant
C. There is an intentional overestimate of expenses or an underestimate of
revenues
D. Managers grant favored employees extra time-off

20. The usual starting point when developing a sales forecast is

A. The production budget
B. The cash budget
C. Last year’s level of sales
D. Competitor budget information

21. Budgetary slack occurs when:

A. Costs are estimated too high and sales are estimated too high
B. Costs are estimated too high but sales are estimated too low
C. Costs are estimated too low but sales are estimated too high
D. Costs are estimated too low and sales are estimated too low

22. Which of the following is not a consideration in the preparation of a sales budget or
sales forecast?
A. General economic trends
B. Anticipated marketing or advertising plans
C. Issuance of the current year’s financial statements
D. Anticipated price changes in both purchasing costs and sales prices

23. A common starting point in the budgeting process is

A. Expected future net income.
B. Past performance.
C. The total market size.
D. A clean slate, with no expectations.

24. Which of the following statements is incorrect regarding sales forecasting?

 A. It may involve the use of elaborate planning models and regression analysis
B. It may rely heavily on the intuition and opinions of managers
C. Other budgets are rarely affected by errors in sales forecasts
D. The usual starting point is last year’s level of sales
25. Flexible budgeting is a reporting system wherein the
A. Budget standards may be adjusted at management’s discretion.
B. Planned level of activity is adjusted to the actual level of activity before the
performance report is prepared.
C. Reporting dates vary according to the managerial levels of the users.
D. Packages of activities vary from period to period.

26. The basic difference between a master budget and a flexible budget is that a:
A. Flexible budget considers only variable costs but a master budget considers all
costs.
B. Flexible budget allows management latitude in meeting goals whereas a master
budget is based on a fixed standard.
C. Master budget is for an entire production facility but a flexible budget is applicable
to single department only.
D. Master budget is based on one specific level of production and a flexible budget
can be prepared for any production level within a relevant range

PROBLEMS:

1. Montalbo Company’s sales budget shows the following expected sales for the following
year:

Quarter Units
First 120,000
Second 160,000
Third 90,000
Fourth 110,000
Total 480,000

The inventory at December 31 of the prior year was budgeted at 36,000 units. The
quantity of finished goods inventory at the end of each quarter is to equal 30% of
the next quarter’s budgeted unit sales.
How many units should be produced during the first quarter?
A. 48,000
B. 96,000
C. 132,000
D. 144,000

2. Violin Company manufactures a single product. It keeps its inventory of finished

goods at twice the coming month’s budgeted sales and inventory of raw materials at
150% of the coming month’s budgeted production requirements. Each unit of product
requires two pounds of materials. The production budgets in units consist of the
following:.

May 1,000
June 1,200
July 1,300
August 1,600
 Raw material purchases in June would be
A. 2,600 pounds
B. 1,800 pounds
C. 2,400 pounds
D. 2,700 pounds

3. Michael Cage Manufacturing Company sells birdhouses. The company has prepared
the following forecast for the third quarter of 2010:

July 5,000 units

August 6,000 units
September 10,000 units

Inventory of finished goods in June 30, 2010 is budgeted at 1,000 units.

Management would like the desired quantity of finished goods inventory at the end
of each month to equal 20 percent of next month’s budgeted sales. October’s
projected sales are 12,000 units.

Each completed unit of finished product requires 3 square feet of cedar at a cost of
P15 per square foot.

The company has determined that it needs 10 percent of next month’s raw material
needs on hand at the end of each month.

The cost of the direct material that should be purchased in August is:
A. P329,400
B. P306,000
C. P214,800
D. P322,200

4. Shoeline Company manufactures a single product. It keeps its inventory of finished

goods at 75% of the coming month’s budgeted sales. It also keeps its inventory of raw
materials at 50% of the coming month’s budgeted production requirement. Each unit of
product requires two pounds of materials. The production budget in units: May, 1,000;
June, 1,200; July, 1,300; august, 1,600. Raw material purchases in July would be
A. 1,525 pounds
B. 2,900 pounds
C. 2,550 pounds
D. 3,050 pounds

5. Sampras Company budgets its sales of its only product for the coming year at
300,000 units. Production of one unit of product requires three pounds of Material Q
and 2 pounds of Material L. Inventory units at the beginning of the year are:

Actual, Jan. 1 Budgeted, Dec 31

Finished goods 60,000
Material Q 80,000 60, 500000
Material L 88,000 96,000

How many pounds of Material Q is Sampras Company planning to buy during the
coming year?
A. 850,000
B. 890,000
 C. 862,000
D. 908,000

6. Clover Company desires an ending inventory of P140,000. It expects sales of

P800,000 and has a beginning inventory of P130,000. Cost of sales is 65% of sales.
Budgeted purchases are
A. P 530,000
B. P 790,000
C. P 810,000
D. P1,070,000

7. Caress Co. has projected its sales to be P600,000 in January, P750,000 in February,
and P800,000 in March. Caress wants to have 50% of next month’s sales needs on
hand at the end of each month. If Caress has an average gross profit of 40%, what
are the February purchases?
A. P465,000
B. P310,000
C. P775,000
D. P428,000
8. Coach Company budgeted purchases of P100,000. Cost of sales was P120,000 and
the desired ending inventory was P42,000. The beginning inventory was
A. P20,000
B. P32,000
C. P42,000
D. P62,000

9. German Company sells a single product. Budgeted sales for the year are anticipated
to be 640,000 units. The estimated beginning and ending finished goods inventory
are 108,000 and 90,000, respectively. A production of one unit requires the
following materials:

Material LL 0.50 lb. @ P0.60

Material MM 1.00 lb. @ P1.70
Material NN 1.20 lb. @ P1.00

What are the respective peso amounts of each material to be used in production
during the year?

Material LL Material MM Material NN

A. P181,200 P1,026,800 P724,800
B. P181,200 P1,026,800 P746,400
C. P186,600 P1,057,400 P746,400
D. P186,600 P1,057,400 P724,800

10. The payment schedule of purchases made on account is: 60% during the month of
purchase, 30% in the following month, and 10% in the subsequent month. Total
credit purchases were P200,000 in May, and P100,000 in June. Total payments on
credit purchases were P140,000 in June. What were the credit purchases in the
month of April?
A. P200,000
B. P100,000
C. P145,000
D. P215,000
11. Star Company prepares its budgets on annual basis. The following beginning and
ending inventory unit levels are planned for the fiscal year of June 1, 2009 through
May 31, 2010.

June 1, 2009 May 31, 2010

Raw material* 40,000 50,000
Work-in-process 10,000 10,000
Finished goods 80,000 50,000

*Two (2) units of raw material are needed to produce each unit of finished product.

If 500,000 finished units were to be manufactured during the 2009-2010 fiscal year
by Star Company, the units of raw material needed to be purchased would be
A. 1,000,000 units
B. 1,010,000 units
C. 1,020,000 units
D. 990,000 units

12. If there were 30,000 pounds of raw material on hand on January 1, 60,000 pounds
are desired for inventory at December 31, and 180,000 pounds are required for
annual production, how many pounds of raw material should be purchased during the
year?
A. 150,000 pounds
B. 240,000 pounds
C. 120,000 pounds
D. 210,000 pounds

13. If the required direct materials purchases are 8,000 pounds and the direct materials
required for production is three times the direct materials purchases, and the
beginning direct materials are three and a half times the direct materials purchases,
what are the desired ending direct material in pounds?
A. 20,000
B. 4,000
C. 12,000
D. 32,000

14. Florida Company plans to sell 400,000 units of finished product in July and
anticipates a growth rate in sales of 5% per month. The desired monthly ending
inventory in units of finished product is 80% of the next month’s estimated sales.

There are 300,000 finished units in the inventory on June 30. Each unit of finished
product requires four pounds of direct materials at a cost of P2.50 per pound. There
are 800,000 pounds of direct materials in the inventory on June 30.

How many units should be produced for the three-month period ending September
30?
A. 1,260,000
B. 1,328,000
C. 1,331,440
D. 1,424,050

15. Lopez Company has a collection schedule of 60% during the month of sales, 15% the
following month, and 15% subsequently. The total credit sales in the current month
 of September were P80,000 and total collections in September were P57,000. What
were the credit sales in July?
A. P90,000
B. P30,000
C. P45,000
D. P32,000

16. Selerum Company has P299,000 in accounts receivable on January 1, 2006.

Budgeted sales for January are P860,000. Selerum expects to sell 20% of its
merchandise for cash. Of the remaining sales, 75% are expected to be collected in
the month of sale and the remainder the following month.

The January cash collections from sales are:

A. P815,000
B. P691,000
C. P471,000
D. P987,000

17. Mariner Company sells bolts of fabric to retailers for P8,000 per bolt. The
company’s accountant has prepared the following sales forecast (in bolts) for the
first quarter of 2010:
January 600 bolts
February 1,000 bolts
March 700 bolts

Historically, the cash collection of sales has been as follows: 60 percent in the
month of sale, 30 percent in the month following the sale, and 9 percent in the
second month following the sale.

Cash receipts for March are expected to be:

A. P6,192,000
B. P8,216,000
C. P3,360,000
D. P5,784,000

18. Barat Company began its operations on January 1 of the current year. Budgeted
sales for the first quarter are P240,000, P300,000, and P420,000, respectively, for
January, February and March. Barat Company expects 20% of its sales on cash and
the remainder on account. Of the sales on account, 70% are expected to be
collected in the month of sale, 25% in the month following the sale, and the
remainder in the following month.

How much should Barat receive from sales in March?

A. P304,800
B. P294,000
C. P388,800
D. P295,200

19. Leda Company has the following sales forecasts for the selected three-month period
in 2010:

Month Sales
April P 12,000
May 7,000
 June 8,000

Seventy percent of sales are collected in the month of the sale, and the remainder is
collected in the following month.

Accounts receivable balance (April 1, 2010) P10,000

Cash balance (April 1, 2010) 5,000

Minimum cash balance is P5,000. Cash can be borrowed in P1,000 increments from
the local bank (assume no interest charges).

How much cash would be collected in June from sales?

A. P 7,700
B. P 8,500
C. P 8,000
D. P10,000

20. Alona Company expects its June sales to be P300,000, which is 25% higher than its
May sales. Purchases were P200,000 in May and are expected to be P240,000 in
June. All sales are on credit and are collected as follows: 80% in the month of the
sale and 20% in the following month. All payments in the month of sales are given
2% discount. Sixty percent of purchases are paid in the month of purchase to take
advantage of purchase term of 1/10, n/40. The remaining amount is paid in the
following month. The beginning cash balance on June 1 is P20,000. The ending cash
balance on June 30 would be:
A. P64,160
B. P73,000
C. P80,640
D. P85,440

21. The Avenida Company has the following historical pattern on its credit sales.
70 percent collected in month of sale
15 percent collected in the first month after sale
10 percent collected in the second month after sale
4 percent collected in the third month after sale
2 percent uncollectible

The sales on open account have been budgeted for the last six months of 2010 are
shown below:
July P 60,000
August 70,000
September 80,000
October 90,000
November 100,000
December 85,000
The estimated total cash collections during the fourth calendar quarter from sales
made on open account during the fourth calendar quarter would be
A. P172,500
B. P230,000
C. P265,400
D. P251,400
22. Cascades Company, a merchandising firm, is preparing its master budget and has
gathered the following data to help budget cash disbursements:
 Budgeted data:
Cost of goods sold P1,680,000
Desired decrease in inventories 70,000
Desired decrease in Accounts Payable 150,000

All of the accounts payables are for inventory purchases and all inventory items are
purchased on account. What are the estimated cash disbursements for inventories
for the budget period?

A. P1,460,000
B. P1,600,000
C. P1,900,000
D. P1,760,000

23. The El Espanol Company had the following budgeted sales for the first half of the
current year:

Cash Sales Credit Sales

January P70,000 P340,000
February 50,000 190,000
March 40,000 135,000
April 35,000 120,000
May 45,000 160,000
June 40,000 140,000

The company is in the process of preparing a cash budget and must determine the
expected cash collections by month. To this end, the following information has been
assembled:
Collections on sales: 60% in month of sale
30% in month following sale
10% in second month following sale

The accounts receivable balance on January 1 of the current year was P70,000, of
which P50,000 represents uncollected December sales and P20,000 represents
uncollected November sales.

The total cash collected by El Espanol Company during the month of January would be:
A. P410,000
B. P254,000
C. P344,000
D. P331,500

24. Ironman Company is preparing its cash budget for the month ending November 30.
The following information pertains to Ironman’s past collection experience from its
credit sales:

Current month’s sales 12%

Prior month’s sales 75%
Sales two months prior to current month 6%
Sales three months prior to current 4%
month
Cash discounts (2/30, net/90) 2%
 Doubtful accounts 1%
Credit sales:
November – estimated P2,000,000
October 1,800,000
September 1,600,000
August 1,900,000

How much is the estimated credit to Accounts Receivable as a result of collections

expected during November?
A. P1,730,200
B. P1,757,200
C. P1,762,000
D. P1,802,000

25. Lazaro Company will open a new store on January 1. Based on experience from its
other retail outlets, Lazaro is making the following sales projections:
Cash Sales Credit Sales
January P600,000 P400,000
February 300,000 500,000
March 400,000 600,000
April 400,000 800,000

Lazaro estimates that 70% of the credit sales will be collected in the month following
the month of the sale, with the balance collected in the second month following the
sale. Based on these data, the balance in accounts receivable on January 31 will be
increased by:
A. P400,000
B. P280,000
C. P120,000
D. P580,000