Part 1 : 10/11/10 14:58:40

Question 1 - CMA 1296 H7 - Budget Methodologies

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

Estimated Type of
Month
Monthly Sales Monthly Sale
January $600,000
February 650,000
March 700,000 All Months:
Cash sales 20%
April 625,000 Credit sales 80%
May 720,000
June 800,000

Collection Pattern for Credit Sales

Month of sale 30%

One month following sale 40%
Second month following sale 25%

Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventory equal
to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the month following 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 are incurred
uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is paid quarterly in
January, April, July, and October. Property taxes are paid twice a year in April and October.

Annual Fixed Operating Costs

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

The amount for cost of goods sold that will appear on Karmee Company's budgeted income statement for the month of
February will be

A. $195,000
B. $254,000
C. $272,000
D. $260,000

A. This answer is incorrect. See the correct answer for a complete explanation.

B. This answer is incorrect. See the correct answer for a complete explanation.

C. This answer is incorrect. See the correct answer for a complete explanation.

D. The sales are estimated to be $650,000 in February and the cost of goods sold averages 40% of the sales
value. Thus, the cost of goods sold in February is $260,000 ($650,000 × 40%).

(c) HOCK international, page 1

 Part 1 : 10/11/10 14:58:40

Question 2 - CMA 691 3-2 - Planning and Budgeting Concepts

Each organization plans and budgets its operations for slightly different reasons. Which one of the following is not a
significant reason for planning and budgeting?

A. Providing a basis for controlling operations.

B. Forcing managers to consider expected future trends and conditions.
C. Checking progress toward the objectives of the organization.
D. Ensuring profitable operations.

A. Providing a basis for controlling operations is a reason for developing plans and budgets.

B. Forcing managers to consider expected future trends and conditions is a reason for developing plans and budgets.

C. Checking progress toward the objectives of the organization is a reason for developing plans and budgets.

D. 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
profitable operations.

Question 3 - CMA 1293 3-11 - Budget Methodologies

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.

Purchase Number Needed

Cost for each C-14 Unit
A-9 $0.50 1
B-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 a
production level of 500,000 units. Superflite plans the following beginning and ending inventories for the month of April
and uses standard absorption costing for valuing inventory.

Units at Units at
Part No.
April 1 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 should
be

A. 388,000 units.
B. 379,000 units.
C. 412,000 units.
D. 402,000 units.

A.

(c) HOCK international, page 2

 Part 1 : 10/11/10 14:58:40

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 for
production will be the same as the number of units to be produced: 400,000. The number of units in beginning
and 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.

B. This number does not take ending inventory level into consideration. See the correct answer for a complete
explanation.

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

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

Question 4 - IMA 08-P2-27 - Planning and Budgeting Concepts

Pavilion Inc. has implemented a budget process that begins with the analysis of current practices to find improvements
and determine changes needed to attain improvements. Then budgets are based on the improved practices or
procedures resulting in budget figures that are lower than the previous period. The firm expects to be able to
manufacture its product or render its service at a lower cost. The decrease in the budget amounts are the consequence
of doing the same activity more efficiently and with higher quality and is not the result of arbitrary cuts. The budget
process described is referred to as:

A. Activity-based budgeting.
B. Kaizen budgeting.
C. Standard cost budgeting.
D. Zero-based budgeting.

A. Activity-based budgeting is similar in concept to activity-based costing. Activities that drive the costs are identified, a
budgeted 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 focuses on activities but not necessarily on
improvement of performance.

B. Kaizen is a Japanese term for continuous improvement. When applied to the budgeting process, the
philosophy of kaizen leads to expected continuous improvements in the production process. A budget
developed on the kaizen philosophy will take into account these expected improvements.

C. Standard cost budgeting uses standard costs and a flexible budget that can be adjusted to reflect actual production.
However, standard cost budgeting looks more at expected costs rather than improvement of activities and improvement
of related costs.

D. Zero-based budgeting is a budgeting method in which the budget is prepared without any reference to, or use of, the
current period's budget and the likely operating results for the current period. Zero based budgeting does not refer to or
use current practices, but starts all over. The budget described here starts by looking at the current practices and then at
ways to improve current practices and lower current costs.

(c) HOCK international, page 3

 Part 1 : 10/11/10 14:58:40

Question 5 - CMA 1295 H8 - Planning and Budgeting Concepts

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

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

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

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

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

D. A budget manual details the budgeting process.

Question 6 - CMA 691 3-27 - Planning and Budgeting Concepts

A controllable expense

A. Is an expected future expense that will be different under various alternatives.

B. Is an expense whose actual amount will not normally differ from the standard (budget) amount.
C. Is one that is directly influenced at a given level of managerial authority within a given time period.
D. Is an expense that will remain semivariable in total over the relevant range in a given time period.

A. This is the definition of an incremental (differential) cost.

B. Any cost can differ from the standard (budget) amount and usually does.

C. A controllable expense is an expense that is directly influenced at a given level of managerial authority within
a given time period. Therefore, that manager is able to control this expense because he or she has the authority
to make decisions about how the money will be spent.

D. This is the definition of a semivariable cost.

Question 7 - CIA 1192 IV-19 - Budget Methodologies

There are many different budget techniques or processes that business organizations can employ. One of these
techniques 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 account with
a minimum balance.
B. Budgeting from the ground up as though the budget process were being initiated for the first time.
C. Using the prior year's budget as a base year and adjusting it based on the experiences of the prior year and the
expectations for the coming year.
D. Developing budgeted costs from clear-cut measured relationships between inputs and outputs.

A. This answer is incorrect. See the correct answer for a complete explanation.

(c) HOCK international, page 4

 Part 1 : 10/11/10 14:58:40

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. Within zero-based budgeting all of the activities that a
department undertakes are identified and then prioritized. This is the manner in which costs are justified and
supported. Also, because the manager needs to examine every single expenditure and activity within the
department, he is more likely to develop an alternative and, hopefully cheaper, method of accomplishing the
same thing.

C. This refers to incremental budgeting.

D. This answer is incorrect. See the correct answer for a complete explanation.

Question 8 - CMA 691 3-15 - Budget Methodologies

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. Direct labor budget.
C. Cost of goods sold budget.
D. Cash budget.

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

B. The direct labor budget is part of the production budget, which is part of the operating budget. The production budget
is developed after the sales budget, but it is not the last budget to be prepared.

C. The cost of goods sold budget is produced after the production budget. It is a part of the operating budget but it is not
the last budget to be prepared.

D. The cash budget is the last budget to be prepared because all other budgets are inputs to it.

Question 9 - IMA 08-P2-07 - Planning and Budgeting Concepts

In developing the budget for the next year, which one of the following approaches would produce the greatest amount of
positive motivation and goal congruence?

A. Permit the divisional manager to develop the goal for the division that in the manager's view will generate the greatest
amount of profits.
B. Have the divisional and senior management jointly develop goals and objectives while constructing the corporation's
overall plan of operation.
C. Have the divisional and senior management jointly develop goals and the divisional manager develop the
implementation plan.
D. Have senior management develop the overall goals and permit the divisional manager to determine how these goals
will be met.

A. 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 in a
different direction than what is necessary for organization wide success.

B. Senior management should prepare the corporation's overall plan prior to budget development. The corporate plan is
likely to be longer term and include elements both external and non-financial that a budget does not address.

(c) HOCK international, page 5

 Part 1 : 10/11/10 14:58:40

C. With open communication between the division manager and senior management all of the options can be
discussed and a mutually acceptable budget can be developed. Once this budget is developed, the
implementation 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 actively
involved in the day to day operations.

D. 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.

Question 10 - CIA 1190 IV-17 - Budget Methodologies

The master budget

A. Reflects controllable costs only.

B. Shows forecasted and actual results.
C. Can be used to determine manufacturing cost variances.
D. Contains the operating budget.

A. The master budget is prepared for one level of output and made before or at the start of the budgeting period. The
master budget represents what revenues and costs are planned to be for the budgeted period. It includes all applicable
costs including costs that are not controllable by individual managers.

B. The master budget is prepared for one level of output and made before or at the start of the budgeting period. The
master budget represents what revenues and costs are planned to be for the budgeted period. Master budget do not
include actual results.

C. The master budget is prepared for one level of output and made before or at the start of the budgeting period. The
master budget represents what revenues and costs are planned to be for the budgeted period. To determine
manufacturing cost variances the actual results and flexible budget data have to be used.

D. The master budget is the composition of pro forma of balance sheet, cash budget, statement of cash flow
and the capital budget. Income statement which is the last budget of operating budget which is an input for
balance sheet. Thus, the master budget contains operating budget.

Question 11 - CMA 691 H1 - Planning and Budgeting Concepts

Kallert Manufacturing currently uses the company's budget only as a planning tool. The company decided that it would
be beneficial to also use budgets for control purposes. In order to implement this change, the management accountant
must

A. Develop forecasting procedures.

B. Appoint a budget director.
C. Organize a budget committee.
D. Synchronize the budgeting and accounting system with the organizational structure.

A. The existing budget process should have forecasting procedures already in place.

B. Because the company already has a budget, there should already be a budget director.

C. Because the company already has a budget, there should already be a budget committee.

D. In order to use the budget as both a planning and control tool, the budgeting and accounting systems need

(c) HOCK international, page 6

 Part 1 : 10/11/10 14:58:40

to be synchronized. The responsibility centers used for budgeting need to be the same as the responsibility
centers used for accounting; the chart of accounts used for budgeting need to be the same as the chart of
accounts used for accounting; and so forth. This enables management to compare the budget with the actual
levels of activity, revenues and expenditures and calculate variances.

Question 12 - IMA 08-P2-30 - Planning and Budgeting Concepts

The type of budget system that projects costs based on future improvements rather than current practices and methods
is called:

A. Flexible budgeting.
B. Kaizen budgeting.
C. Zero-based budgeting.
D. Activity-based budgeting.

A. A flexible budget is a budget with amounts that are adjusted to the actual level of activity that has occurred. With a
flexible budget, actual incomes and expenses can be better compared with budgeted incomes and expenses, thus
providing the user with variances that are devoid of volume variance issues. However, a flexible budget is not created
based on future anticipated improvements.

B. Kaizen is a Japanese term for continuous improvement. When applied to the budgeting process, the
philosophy of kaizen leads to expected continuous improvements in the production process. A budget
developed on the kaizen philosophy will take into account these expected improvements.

C. Zero-based budgeting is a budgeting method in which the budget is prepared without any reference to, or use of, the
current period’s budget and the likely operating results for the current period. In zero based budgeting the manager must
start from scratch and justify all incomes and expenses proposed. Future improvements may or may not be included in a
zero-based budget but they are not included in it as a matter of course.

D. Activity-based budgeting is similar in concept to activity-based costing. Activities that drive the costs are identified, a
budgeted 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 focuses on activities but not necessarily on
improvement of performance.

Question 13 - CMA 1294 H5 - Budget Methodologies

When sales volume is seasonal in nature, certain items in the budget must be coordinated. The three most significant
items to coordinate in budgeting seasonal sales volume are

A. Raw material inventory, direct labor hours, and manufacturing overhead costs.
B. Raw material inventory, work-in-process inventory, and production volume.
C. Production volume, finished goods inventory, and sales volume.
D. Direct labor hours, work-in-process inventory, and sales volume.

A. 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.

B. 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.

C. Budgets usually start with the development of the sales budget, and it is the most difficult budget to prepare.
Production volume and finished goods inventory budgets are the next budgets to be prepared, and their

(c) HOCK international, page 7

 Part 1 : 10/11/10 14:58:40

development is based on the assumptions made in preparing the sales budget. When the business is seasonal
in nature it is even more difficult to predict sales volume and subsequent budgets. Thus, for any type of
business including seasonal it is critical to coordinate production volume, finished goods inventory, and sales
volume first of all.

D. Direct labor hours, work-in-process inventory are elements within the production budget. See the correct answer for a
complete explanation.

Question 14 - CMA 1295 H2 - Budget Methodologies

Based on past experience, a company has developed the following budget formula for estimating its shipping expenses.
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 following
schedule:

Plan Actual
Sales orders 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales $120,000 $144,000
Total pounds shipped 9,600 12,300

The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for
shipping costs for the purpose of performance evaluation would be

A. $20,680
B. $22,150
C. $20,800
D. $20,920

A. This answer uses the number of orders instead of the number of pounds 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 is and
that the actual shipping was 12,300 pounds. Putting this into the formula, we get: $16,000 + ($.50 × 12,300) =
$22,150.

C. This answer uses the planned number of pounds to be shipped. See the correct answer for a complete explanation.

D. This answer uses the number of shipments instead of the number of pounds shipped. See the correct answer for a
complete explanation.

Question 15 - CMA 1291 3-23 - Budget Methodologies

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

November December January

(c) HOCK international, page 8

 Part 1 : 10/11/10 14:58:40

Year 1 Year 1 Year 2

(Actual) (Budget) (Budget)
Cash sales $80,000 $100,000 $60,000
Credit sales 240,000 360,000 180,000
Total 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 to
next month's sales and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in the month
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. $136,800
B. $228,000
C. $84,000
D. $91,200

A. This is the cash collection of November sales in November. See the correct answer for a complete explanation.

B. This is the estimated credit sales made in November minus the uncollectible amount of November credit sales. See
the correct answer for a complete explanation.

C. This represents 35% of the November credit sales. See the correct answer for a complete explanation.

D. 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 the
collectible November credit sales will be collected in December. This is $91,200 ($228,000 × 40%).

Question 16 - IMA 08-P2-36 - Budget Methodologies

Netco's sales budget for the coming year is as follows.

Item Volume in Units Sales Prices Sales Revenue

1 200,000 $50 $10,000,000
2 150,000 $10 1,500,000
3 300,000 $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 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 simultaneously causing
sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item 1, total sales revenue will decrease by

A. $750,000
B. $1,050,000
C. $850,000
D. $550,000

A. This answer results from not calculating the reduced sales of Product 2. The problem states that Product 2 is a
complement 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 proportionately
equal amount.

(c) HOCK international, page 9

 Part 1 : 10/11/10 14:58:40

B.

To solve this, work out a revised budgeted revenue figure, compare it with the original budgeted revenue as
given in the problem, and the difference is the answer, as follows:
Product Quantity Price Revenue
1 (200,000 * .80) ($50 * 1.1) $ 8,800,000
2 (150,000 * .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

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

D. This answer is incorrect. See the correct answer for an explanation.

Question 17 - CIA 1193 IV-14 - Budget Methodologies

A municipal government requires each department supervisor to submit an annual budget request stating the specific
goals of the department and listing a series of "decision packages" relating to each goal. Each decision package
describes a set of desired activities, the benefits of these activities, and the potential consequences of not performing the
activities. Funds are allocated based on the estimated costs and benefits of each package. This is an example of

A. A static budget.
B. Zero-base budgeting.
C. Incremental budgeting.
D. An imposed budget.

A. A static budget is a budget that is prepared for only one level of activity.

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. Within zero-based budgeting all of the activities that a
department undertakes are identified and then prioritized. This is the manner in which costs are justified and
supported. Also, because the manager needs to examine every single expenditure and activity within the
department, he is more likely to develop an alternative and, hopefully cheaper, method of accomplishing the
same thing.

C. Incremental budgeting is based on the prior period's budget.

D. An imposed budget is budget that is prepared by top management without the participation of lower level
management.

Question 18 - CMA 692 3-9 - Planning and Budgeting Concepts

The preparation of a comprehensive master budget culminates with the preparation of the

A. Strategic budget.
B. Production budget.

(c) HOCK international, page 10

 Part 1 : 10/11/10 14:58:40

C. Cash management and working capital budget.

D. Capital investment budget.

A.

The master budget is an annual budget. The quantitative effect of strategic plans, which are long-term plans for periods
of more than five years, must be integrated into the annual budgeting process, as well as into the capital budgeting
process. As such, strategic planning precedes the development of the annual budget.

B. The production budget is a part of the operating budget. The operating budget is part of the master budget. The
master budget is a comprehensive expression of management's operating and financial plans for a future time period
(usually a year) that is summarized in a set of budgeted financial statements. It embraces the impact of both operating
and financing decisions.

C. The cash management and working capital budgets are the last budgets prepared. This is because they are
dependent upon all of the other budgets since the production budget, advertising budget, overhead budget, and
so on all have a cash component that is reflected in the cash budget and the working capital budget. The cash
budget and working capital budgets are therefore prepared last, because all of the other budgets contribute to
them.

D. The capital investment budget is a long-term budget that is outside of the normal, annual budgeting process. The
effect of budgeted current period expenditures for capital assets will need to be taken into account in the development of
the master budget, since they will affect the balance sheet, income statement, and cash flows. However, the capital
invesstment budget is not the final budget prepared in preparation of the comprehensive master budget.

Question 19 - CMA 1295 H7 - Planning and Budgeting Concepts

When budgets are used to evaluate performance and to set limits on spending, the process will often result in
departments adding something "extra" to ensure the budgets will be met. This "extra" is

A. Continuous budgeting.
B. Management by objectives.
C. Strategic planning.
D. Budgetary slack.

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

B. Management by objectives is a management approach that increases the amount of self-direction that employees
have. In MBO, a manager and his or her workers are responsible for agreeing upon their objectives and the methods to
be 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 the
organization. Some plans may extend up to 20 years. Strategic planning is directional, rather than operational. This
means it focuses on where we want to go instead of specifically how we are going to get there.

D. 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.

Question 20 - IMA 08-P2-29 - Planning and Budgeting Concepts

(c) HOCK international, page 11

 Part 1 : 10/11/10 14:58:40

Kaizen budgeting is a budgeting approach that:

A. Projects expenses from the ground up, as though the budget were being prepared for the first time.
B. Projects costs on the basis of future improvements rather than current practices and methods.
C. Focuses on the costs of activities necessary to produce and sell products and services.
D. Adjusts costs to the actual level of output achieved or expected to be achieved during the budget period.

A. This is zero based budgeting, not kaizen budgeting.

B. Kaizen is a Japanese term for continuous improvement. When applied to the budgeting process, the
philosophy of kaizen leads to expected continuous improvements in the production process. A budget
developed on the kaizen philosophy will take into account these expected improvements.

C. This is activity based costing, not kaizen budgeting.

D. This is a flexible budget, not kaizen budgeting.

Question 21 - CMA 1287 4-29 - Budget Methodologies

The Jung Corporation's budget calls for the following production:

Qtr 1 : 45,000 units

Qtr 2 : 38,000 units
Qtr 3 : 34,000 units
Qtr 4 : 48,000 units

Each unit of product requires three pounds of direct material. The company's policy is to begin each quarter with an
inventory of direct materials equal to 30% of that quarter's direct material requirements. Budgeted direct materials
purchases for the third quarter would be

A. 38,200 pounds.
B. 30,600 pounds.
C. 43,200 pounds.
D. 114,600 pounds.

A. This answer is incorrect. See the correct answer for a complete explanation.

B. This is the amount of beginning inventory. See the correct answer for a complete explanation.

C. This is the ending inventory amount. See the correct answer for a complete explanation.

D.

This is a basic question of units needed in a period, but it is about the number of units of the raw materials that
are needed. There are 3 units of raw materials in a finished unit. The amount needed in the third quarter itself is
102,000 units of raw materials (3 * 34,000 finished units). In addition, the ending inventory is 30% of the next
quarter's needs. This is 43,200 units of raw materials (48,000 finished units * 3 * .3). The beginning inventory
was 30% of the current quarter's needs or 30,600 (102,000 * .3).

Beginning Inventory + Purchases − Amount Used = Ending Inventory

30,600 + Purchases − 102,000 = 43,200

Purchases = 114,600

A total of 114,600 units of raw materials need to be purchased this period.

(c) HOCK international, page 12

 Part 1 : 10/11/10 14:58:40

Question 22 - IMA 08-P2-13 - Budget Methodologies

Budgeting problems where departmental managers are repeatedly achieving easy goals or failing to achieve demanding
goals can be best minimized by establishing:

A. A policy that allows managers to build slack into the budget.

B. Better communication whereby managers discuss budget matters daily with their superiors.
C. Preventive controls.
D. Participative budgeting where managers pursue objectives consistent with those set by top management.

A. Building slack into a budget is not going to be in the organization’s best interest in the long run.

B. Budget discussions on a daily basis are a bit excessive and not an efficient way to conduct business. Generally there
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 not focus solely
on budget matters, although it would cover variances from the budget.

C. Enacting policies that "control" the budget process can result in resentment and ineffective efforts from departmental
management. This is not the best way to generate a realistically challenging budget.

D. This is correct. By allowing managers to participate in the budgeting process with the objectives of senior
management in mind, the managers can evaluate the department and find the most optimal, and realistic, means
to achieve the targets.

Question 23 - CMA 1296 H1 - Planning and Budgeting Concepts

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. Monitoring profitable operations.
C. Promoting coordination among operating units.
D. Developing a basis for controlling operations.

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

B. Monitoring is a control function, and not a planning function. Though monitoring is very important to the
company, it is not a reason for planning.

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

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

Question 24 - HOCK CMA P3A H3 - Planning and Budgeting Concepts

A company's mission statement is, above all, intended to define:

(c) HOCK international, page 13

 Part 1 : 10/11/10 14:58:40

A. The specific actions that the company should take.

B. Why the company exists.
C. The company's profit objectives.
D. The weaknesses of the firm.

A. The actions the company might take based on its strengths and weaknesses, along with its profit objectives, can be a
result of the mission statement and the strategic planning process, but they are not what the mission statement defines.

B. The mission statement defines why the company exists and also prioritizes and communicates the
company's overall objectives.

C. The company's profit objectives can be a result of the mission statement and the strategic planning process, but they
are not what the mission statement defines.

D. 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.

Question 25 - CMA 1283 4-25 - Budget Methodologies

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.

Below is Kelly Company's statement of financial position at November 30, year 1.

Assets
Cash $22,000
Accounts receivable
76,000
(net of $4,000 allowance for uncollectible accounts)
Inventory 132,000
Property, plant, and equipment (net of $680,000 accumulated deprecation) 870,000
Total assets $1,100,000
Liabilities and Stockholders' Equity
Accounts payable $162,000
Common stock 800,000
Retained earnings 138,000
Total liabilities and stockholders' equity $1,100,000

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

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

(c) HOCK international, page 14

 Part 1 : 10/11/10 14:58:40

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

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

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

The cost of inventory sold during the period is December sales of $220,000 × .75, which is $165,000.

Therefore, the ending inventory as of December 31 is:

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

Question 26 - CIA 1188 IV-51 - Planning and Budgeting Concepts

Budgets are a necessary component of financial decision making because they help provide a(n)

A. Automatic corrective mechanism for errors.

B. Means to use all the firm's resources.
C. Efficient allocation of resources.
D. Means to check managerial discretion.

A. Budgets do not provide an automatic corrective mechanism for errors.

B. Budgets help to provide effective and efficient use of recourses, not just the basic usage use of all resources.

C. Budget is a realistic plan for the future expressed in quantitative terms. Budget serves as planning, control,
evaluation tool. As such, the use of budget helps to allocate resources efficiently.

D. Budgets are not used check managerial discretion.

Question 27 - CMA 1292 H4 - Budget Methodologies

A budget manual, which enhances the operation of a budget system, is most likely to include

A. Distribution instructions for budget schedules.

(c) HOCK international, page 15

 Part 1 : 10/11/10 14:58:40

B. Documentation of the accounting system software.

C. A chart of accounts.
D. Employee hiring policies.

A. A budget manual details the budget process. One of the areas that must be included in the budget manual is
the communication and distribution process. As one budget is completed it must be sent to all the departments
whose budgets are based on that already completed budget.

B. Documentation of the accounting system software is not needed for budget preparation and is not included in the
budget manual.

C. A chart of accounts is included in the accounting manual, not the budgeting manual.

D. Employee hiring policies should be included in the personnel manual, and they are not necessary for budget
preparation.

Question 28 - CMA 1291 3-22 - Budget Methodologies

A systemized approach known as zero-base budgeting (ZBB)

A. Presents a statement of expectations for a period of time but does not present a firm commitment.
B. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
C. Divides the activities of individual responsibility centers into a series of packages that are prioritized.
D. Classifies budget requests by activity and estimates the benefits arising from each activity.

A. Zero-based budgeting represents a firm commitment to the company just like any other budget.

B. This is a description of a static budget, not a zero-base budget. A static budget is a budget that is prepared for only
one level of activity within the company. A zero-base budget may be a static budget, but it may also be a flexible budget.

C.

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. This is quite different from a budget that is prepared by
looking 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 of
advantages to the company as a result of using this method. Because the budget is built up from zero, each
manager must justify all of the expenses in his or her department. Each component is evaluated from a
cost-benefit perspective and priorities are determined. Zero-based budgeting enables the company to identify
expenses that are not value adding or that should be reduced due to some development in production methods
or something similar.

D. Activity-based budgeting, not zero-base budgeting, focuses on the budged cost of activities necessary to produce and
sell products and services.

Question 29 - CMA 692 H2 - Budget Methodologies

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

(c) HOCK international, page 16

 Part 1 : 10/11/10 14:58:40

July 1 June 30
Raw material* 40,000 50,000
Work-in-process 10,000 20,000
Finished 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 manufacture
during the year is

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

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

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

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

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 and
ending inventory plans.

Question 30 - CMA 1290 3-16 - Planning and Budgeting Concepts

All of the following are characteristics of the strategic planning process except the

A. Analysis of external economic factors.

B. Emphasis on the long run.
C. Analysis and review of departmental budgets.
D. Review of the attributes and behavior of the organization's competition.

A. In strategic planning external economic factors are examined because this is part of the wider environment, or
macroenvironment, in which the company operates. Economic factors such as inflation and the labor market are factors
that will affect the industry and the firm. The primary purpose of analyzing the external operating environment is to
identify opportunities as well as threats that can affect the company in its pursuit of its mission.

B. Strategic plans are broad, general, long-term plans, usually for 5 years or longer. They are developed from the
company's mission statement and so they are focused on long-term goals and objectives.

C. Strategic planning is long-term planning that looks at how the company is going to achieve its goals and
objectives over a period of usually 5 years or longer. This type of planning is neither detailed nor focused on
specific financial targets, but instead looks at the strategies as well as the objectives and goals of the company
by examining both internal and external factors that affect the company. Analysis and review of departmental
budgets is not a strategic planning concern, since it is a short-term operational concern.

D. In strategic planning external factors, such as competition, are examined because this is part of the environment in
which the company will be operating. Therefore, it is part of the long-term, strategic planning process.

(c) HOCK international, page 17

 Part 1 : 10/11/10 14:58:40

Question 31 - CMA 1290 3-13 - Planning and Budgeting Concepts

Budgetary slack can best be described as

A. A plug number used to achieve a pre-set level of operating income.

B. The elimination of certain expenses to enhance budgeted income.
C. The planned underestimation of budgeted expenses.
D. The planned overestimation of budgeted expenses.

A. Budgetary slack is not a plug number.

B. Budgetary slack exists when revenues are understated or expenses are overstated. This is done in order to make it
easy for the department, company or individual to meet the budget. The elimination of certain items is not budgetary
slack, as it is rather making the budget appear better than the actual results will be.

C. Budgetary slack exists when revenues are understated or expenses are overstated.

D. 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 to which makes it difficult to properly evaluate the
performance.

Question 32 - CMA 692 3-25 - Budget Methodologies

Berol Company plans to sell 200,000 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 150,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of direct
materials 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. 638,000 units.
B. 665,720 units.
C. 712,025 units.
D. 630,500 units.

A. This answer is incorrect. See the correct answer for a complete explanation.

B.

This question covers a three month period beginning July 1 and ending September 30. Beginning inventory in
July is 150,000 finished units. The desired monthly ending inventory in units of finished product is 80% of the
next month's estimated sales. According to the expected sales growth rate, the company plans to sell 210,000
units (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 we can
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.

(c) HOCK international, page 18

 Part 1 : 10/11/10 14:58:40

C. This answer is incorrect. See the correct answer for a complete explanation.

D. This is the expected sales for the next three months. See the correct answer for a complete explanation.

Question 33 - CMA 691 3-11 - Budget Methodologies

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

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

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

B. 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.

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

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

Question 34 - CMA 1289 4-8 - Budget Methodologies

The foundation of a profit plan is the

A. Cost and expense budget.

B. Capital budget.
C. Production plan.
D. Sales forecast.

A. Cost and expense budgets can not be calculated until the sales level is estimated.

B. The capital budget is the budget in which all capital (property, plant and equipment) expenditures are planned. This
budget is not directly connected to all of the current period budgets and it is often prepared years in advance so that the
company is able to obtain the necessary financing or accumulate the necessary cash to carry out its capital expansion
plans.

C. The production plan can not be calculated until the sales level is estimated.

D. The sales forecast is usually the first forecast to be prepared in the budgeting process. After the sales level
has been determined, the production budget and expense budget are prepared. Only after all of these other
budgets are done can profits be estimated.

(c) HOCK international, page 19

 Part 1 : 10/11/10 14:58:40

Question 35 - CMA 1294 3-19 - Budget Methodologies

Superior Industries' sales budget shows quarterly sales for the next year as follows:

Quarter Units
1 10,000
2 8,000
3 12,000
4 14,000

Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's sales.
Budgeted production for the second quarter of the next year would be

A. 8,400 units.
B. 7,200 units.
C. 8,800 units.
D. 8,000 units.

A. This answer is incorrect. See the correct answer for a complete explanation.

B. This answer is incorrect. See the correct answer for a complete explanation.

C.

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

Beginning Inventory + Units Produced − Units Sold = Ending Inventory

Beginning inventory for the second quarter is 20% of the second quarter sales, or 1,600 units. The ending
inventory for the second quarter is 20% if the third quarter sales, or 2,400 units. 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.

D. This is the sales level of second quarter. See the correct answer for a complete explanation.

Question 36 - CMA 1289 4-25 - Budget Methodologies

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 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:

Sales On
Month
Open Account
January $70,000

(c) HOCK international, page 20

 Part 1 : 10/11/10 14:58:40

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

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

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

A. This answer is incorrect. See the correct answer for a complete explanation.

B. This answer is incorrect. See the correct answer for a complete explanation.

C.

April, May and June are the months of the second quarter. The projected cash collection in the second quarter
during the second quarter are:

70% of these three months' estimated credit sales,

15% of credit sales made during April and May
10% of credit sales made during May

Mathematically, this looks as follows: 70% × ($120,000 + $100,000 +$90,000) + 15% × ($120,000 + $100,000) +
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 results
together.

D. This is the amount of projected total sales in the second quarter, not the cash collection.

Question 37 - CMA 1296 H12 - Budget Methodologies

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

Month Sales in Units

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

Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are
purchased 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 to
manufacture 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 in alternate months (i.e.,

(c) HOCK international, page 21

 Part 1 : 10/11/10 14:58:40

even-numbered months). This allows Daffy to allocate limited manufacturing resources to other products as needed
during the even-numbered months.

The unit production budget for toy rabbits for January is

A. 16,500 units.
B. 54,000 units.
C. 45,000 units.
D. 14,500 units.

A. This is the budgeted production for February.

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

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

D. This is the budgeted production for April.

Question 38 - IMA 08-P2-08 - Budget Methodologies

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

A. Communication between departments.

B. Goal congruence.
C. Coordination between departments.
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, and
this will be true with a participatory budgeting process as much as with any other type of budgeting process.

Question 39 - CIA 590 IV-14 - Planning and Budgeting Concepts

One of the primary advantages of budgeting is that it

A. Bases the profit plan on estimates.

B. Is continually adapted to fit changing circumstances.
C. Does not take the place of management and administration.
D. Requires departmental managers to make plans in conjunction with the plans of other interdependent departments.

A. One of the disadvantages of budgeting is that it bases the profit plan on estimates.

B. One of the disadvantages of budgeting is that it is continually adapted to fit changing circumstances.

C. One of the primary advantages of budgeting is that it does take the place of management and administration.

(c) HOCK international, page 22

 Part 1 : 10/11/10 14:58:40

D. 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 one organizational
budget. Thus, one of the primary advantages of budgeting is that it requires departmental managers to make
plans in conjunction with the plans of other interdependent departments, thus promoting coordination and
communication among organization units and activities.

Question 40 - CMA 1296 H6 - Budget Methodologies

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

Estimated Type of
Month
Monthly Sales Monthly Sale
January $600,000
February 650,000
March 700,000 All Months:
Cash sales 20%
April 625,000 Credit sales 80%
May 720,000
June 800,000

Collection Pattern for Credit Sales

Month of sale 30%

One month following sale 40%
Second month following sale 25%

Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventory equal
to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the month following 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 are incurred
uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is paid quarterly in
January, April, July, and October. Property taxes are paid twice a year in April and October.

Annual Fixed Operating Costs

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

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

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

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

(c) HOCK international, page 23

 Part 1 : 10/11/10 14:58:40

B. Operating expenses other that COGS paid in the month of April are: 10% of March's sales, the advertising
monthly payment, monthly salaries, the quarterly insurance payment and the property tax payment made twice
a year. Depreciation is not a cash expense and is therefore not included in calculation. The disbursements are:
$70,000 for variable operating expenses (March sales of $700,000 × 10%), $60,000 for advertising ($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.

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

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

(c) HOCK international, page 24