OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
Multiple Choice
1. LO 7.1 Which of the following is not a part of budgeting?
A. planning
B. finding bottlenecks
C. providing performance evaluations
D. preventing net operating losses
Solution
D
2. LO 7.1 Which of the following is an operating budget?
A. cash budget
B. production budget
C. tax budget
D. capital budget
Solution
B
3. LO 7.1 Which of the following is a finance budget?
A. cash budget
B. production budget
C. direct materials purchasing budget
D. tax budget
Solution
A
4. LO 7.1 Which approach is most likely to result in employee buy-in to the budget?
A. top-down approach
B. bottom-up approach
C. total participation approach
D. basing the budget on the prior year
Solution
B
5. LO 7.1 Which approach requires management to justify all its expenditures?
A. bottom-up approach
B. zero-based budgeting
C. master budgeting
D. capital allocation budgeting
Solution
B
6. LO 7.1 Which of the following is true in a bottom-up budgeting approach?
A. Every expense needs to be justified.
B. Supervisors tell departments their budget amount and the departments are free to work
within those amounts.
C. Departments budget their needs however they see fit.
D. Departments determine their needs and relate them to the overall goals.
Page 1 of 46
,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
Solution
D
7. LO 7.1 The most common budget is prepared for a ________.
A. week
B. month
C. quarter
D. year
Solution
D
8. LO 7.2 Which of the operating budgets is prepared first?
A. production budget
B. sales budget
C. cash received budget
D. cash payments budget
Solution
B
9. LO 7.2 The direct materials budget is prepared using which budget’s information?
A. cash payments budget
B. cash receipts budget
C. production budget
D. raw materials budget
Solution
C
10. LO 7.2 Which of the following is not an operating budget?
A. sales budget
B. production budget
C. direct labor budget
D. cash budget
Solution
D
11. LO 7.2 Which of the following statements is not correct?
A. The sales budget is computed by multiplying estimated sales by the sales price.
B. The production budget begins with the sales estimated for each period.
C. The direct materials budget begins with the sales estimated for each period.
D. The sales budget is typically the first budget prepared.
Solution
C
12. LO 7.2 The units required in production each period are computed by which of the following
methods?
A. adding budgeted sales to the desired ending inventory and subtracting beginning
inventory
B. adding beginning inventory, budgeted sales, and desired ending inventory
C. adding beginning inventory to budgeted sales and subtracting desired ending inventory
D. adding budgeted sales to the beginning inventory and subtracting the desired ending
inventory
Solution
Page 2 of 46
,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
A
13. LO 7.3 The cash budget is part of which category of budgets?
A. sales budget
B. cash payments budget
C. financial budget
D. operating budget
Solution
C
14. LO 7.3 Which is not a section of the cash budget?
A. cash receipts
B. cash disbursements
C. allowance for uncollectible accounts
D. financing needs
Solution
C
15. LO 7.3 Which budget is the starting point in preparing financial budgets?
A. the budgeted income statement
B. the budgeted balance sheet
C. the capital expense budget
D. the cash receipts budget
Solution
C
16. LO 7.3 Which of the following includes only financial budgets?
A. capital asset budget, budgeted income statement, sales budget
B. production budget, capital asset budget, budgeted balance sheet
C. cash budget, budgeted balance sheet, capital asset budget
D. budgeted income statement, direct material purchases budget, cash budget
Solution
C
17. LO 7.4 Which budget evaluates the results of operations at the actual level of activity?
A. capital budget
B. cash budget
C. flexible budget
D. static budget
Solution
C
18. LO 7.4 What is the main difference between static and flexible budgets?
A. The fixed manufacturing overhead is adjusted for units sold in the flexible budget.
B. The variable manufacturing overhead is adjusted in the static budget.
C. There is no difference between the budgets.
D. The variable costs are adjusted in a flexible budget.
Solution
D
Questions
Page 3 of 46
, OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
1. LO 7.1 What is a budget and what are the different types of budgets?
Solution
A budget is a written financial plan for a set period, which is typically a year. There are several
different types of budgets including the master budget, operating budget, financial budget,
flexible budget, and operating budget.
2. LO 7.1 What is the difference between budgeting and long-range planning?
Solution
Budgeting is a day-to-day way to manage the money and plan for necessary expenses. A
financial plan involves a strategic plan to move a company from where it is currently to where it
needs to be to meet its goals.
3. LO 7.1 What are the advantages and disadvantages of the bottom-up budgeting approach?
Solution
This approach begins at the lowest levels of management. These managers know the details
involved with their departments. This allows for more accurate budget estimates when
management understands how their department contributes to the company’s goals.
Disadvantages include that this type of budgeting takes time, which leads to more labor costs,
and when management doesn’t fully understand how it contributes to the company goals, the
budget may support the department and not the company.
4. LO 7.1 Why might a rolling budget require more management participation than an annual
budget?
Solution
A rolling budget adds a month’s budget to the end of the prior budget, so there is always a full-
year plan in place. While it can be more accurate since management can adjust the future plans
as the assumptions change, it requires more of management’s time and attention, which may take
them away from other tasks.
5. LO 7.2 What information is necessary for the operating budgets?
Solution
Operating budgets plan the primary operations of the business and need accurate information in
order to provide accurate planning. Assumptions such as sales in units, sales price, desired
ending inventory in units, manufacturing costs per unit, which include direct material needed per
unit, desired direct materials ending inventory, amount of direct labor hours and rate, and the
overhead required for production and managing the company.
6. LO 7.2 What operating budget exists for manufacturing but not for a retail company?
Solution
The manufacturing budget needs a production budget, but a retail organization does not produce
anything and does not need this budget.
7. LO 7.3 What is the process for developing a budgeted balance sheet?
Solution
The budgeted income statement includes the estimated revenue and expenses for the company.
Using historical data on cash collections helps plan when the cash will be received and is used to
develop the cash collections schedule. The company applies its payment policies on its purchases
and other items requiring cash expenditures. This creates the cash payments schedule.
Information from the cash collections schedule, cash payments schedule, and the capital expense
budget are combined to develop the cash budget. The information from the cash budget and the
ending balance sheet from the preceding year are used to develop the budgeted balance sheet.
8. LO 7.3 Which of the financial budgets is the most important? Why?
Page 4 of 46
Chapter 7: Budgeting
Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
Multiple Choice
1. LO 7.1 Which of the following is not a part of budgeting?
A. planning
B. finding bottlenecks
C. providing performance evaluations
D. preventing net operating losses
Solution
D
2. LO 7.1 Which of the following is an operating budget?
A. cash budget
B. production budget
C. tax budget
D. capital budget
Solution
B
3. LO 7.1 Which of the following is a finance budget?
A. cash budget
B. production budget
C. direct materials purchasing budget
D. tax budget
Solution
A
4. LO 7.1 Which approach is most likely to result in employee buy-in to the budget?
A. top-down approach
B. bottom-up approach
C. total participation approach
D. basing the budget on the prior year
Solution
B
5. LO 7.1 Which approach requires management to justify all its expenditures?
A. bottom-up approach
B. zero-based budgeting
C. master budgeting
D. capital allocation budgeting
Solution
B
6. LO 7.1 Which of the following is true in a bottom-up budgeting approach?
A. Every expense needs to be justified.
B. Supervisors tell departments their budget amount and the departments are free to work
within those amounts.
C. Departments budget their needs however they see fit.
D. Departments determine their needs and relate them to the overall goals.
Page 1 of 46
,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
Solution
D
7. LO 7.1 The most common budget is prepared for a ________.
A. week
B. month
C. quarter
D. year
Solution
D
8. LO 7.2 Which of the operating budgets is prepared first?
A. production budget
B. sales budget
C. cash received budget
D. cash payments budget
Solution
B
9. LO 7.2 The direct materials budget is prepared using which budget’s information?
A. cash payments budget
B. cash receipts budget
C. production budget
D. raw materials budget
Solution
C
10. LO 7.2 Which of the following is not an operating budget?
A. sales budget
B. production budget
C. direct labor budget
D. cash budget
Solution
D
11. LO 7.2 Which of the following statements is not correct?
A. The sales budget is computed by multiplying estimated sales by the sales price.
B. The production budget begins with the sales estimated for each period.
C. The direct materials budget begins with the sales estimated for each period.
D. The sales budget is typically the first budget prepared.
Solution
C
12. LO 7.2 The units required in production each period are computed by which of the following
methods?
A. adding budgeted sales to the desired ending inventory and subtracting beginning
inventory
B. adding beginning inventory, budgeted sales, and desired ending inventory
C. adding beginning inventory to budgeted sales and subtracting desired ending inventory
D. adding budgeted sales to the beginning inventory and subtracting the desired ending
inventory
Solution
Page 2 of 46
,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
A
13. LO 7.3 The cash budget is part of which category of budgets?
A. sales budget
B. cash payments budget
C. financial budget
D. operating budget
Solution
C
14. LO 7.3 Which is not a section of the cash budget?
A. cash receipts
B. cash disbursements
C. allowance for uncollectible accounts
D. financing needs
Solution
C
15. LO 7.3 Which budget is the starting point in preparing financial budgets?
A. the budgeted income statement
B. the budgeted balance sheet
C. the capital expense budget
D. the cash receipts budget
Solution
C
16. LO 7.3 Which of the following includes only financial budgets?
A. capital asset budget, budgeted income statement, sales budget
B. production budget, capital asset budget, budgeted balance sheet
C. cash budget, budgeted balance sheet, capital asset budget
D. budgeted income statement, direct material purchases budget, cash budget
Solution
C
17. LO 7.4 Which budget evaluates the results of operations at the actual level of activity?
A. capital budget
B. cash budget
C. flexible budget
D. static budget
Solution
C
18. LO 7.4 What is the main difference between static and flexible budgets?
A. The fixed manufacturing overhead is adjusted for units sold in the flexible budget.
B. The variable manufacturing overhead is adjusted in the static budget.
C. There is no difference between the budgets.
D. The variable costs are adjusted in a flexible budget.
Solution
D
Questions
Page 3 of 46
, OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 7: Budgeting
1. LO 7.1 What is a budget and what are the different types of budgets?
Solution
A budget is a written financial plan for a set period, which is typically a year. There are several
different types of budgets including the master budget, operating budget, financial budget,
flexible budget, and operating budget.
2. LO 7.1 What is the difference between budgeting and long-range planning?
Solution
Budgeting is a day-to-day way to manage the money and plan for necessary expenses. A
financial plan involves a strategic plan to move a company from where it is currently to where it
needs to be to meet its goals.
3. LO 7.1 What are the advantages and disadvantages of the bottom-up budgeting approach?
Solution
This approach begins at the lowest levels of management. These managers know the details
involved with their departments. This allows for more accurate budget estimates when
management understands how their department contributes to the company’s goals.
Disadvantages include that this type of budgeting takes time, which leads to more labor costs,
and when management doesn’t fully understand how it contributes to the company goals, the
budget may support the department and not the company.
4. LO 7.1 Why might a rolling budget require more management participation than an annual
budget?
Solution
A rolling budget adds a month’s budget to the end of the prior budget, so there is always a full-
year plan in place. While it can be more accurate since management can adjust the future plans
as the assumptions change, it requires more of management’s time and attention, which may take
them away from other tasks.
5. LO 7.2 What information is necessary for the operating budgets?
Solution
Operating budgets plan the primary operations of the business and need accurate information in
order to provide accurate planning. Assumptions such as sales in units, sales price, desired
ending inventory in units, manufacturing costs per unit, which include direct material needed per
unit, desired direct materials ending inventory, amount of direct labor hours and rate, and the
overhead required for production and managing the company.
6. LO 7.2 What operating budget exists for manufacturing but not for a retail company?
Solution
The manufacturing budget needs a production budget, but a retail organization does not produce
anything and does not need this budget.
7. LO 7.3 What is the process for developing a budgeted balance sheet?
Solution
The budgeted income statement includes the estimated revenue and expenses for the company.
Using historical data on cash collections helps plan when the cash will be received and is used to
develop the cash collections schedule. The company applies its payment policies on its purchases
and other items requiring cash expenditures. This creates the cash payments schedule.
Information from the cash collections schedule, cash payments schedule, and the capital expense
budget are combined to develop the cash budget. The information from the cash budget and the
ending balance sheet from the preceding year are used to develop the budgeted balance sheet.
8. LO 7.3 Which of the financial budgets is the most important? Why?
Page 4 of 46
