MAS 06 Budgeting With Probability Analysis

MAS 06 Budgeting With Probability Analysis
  • MAS 06 Budgeting With Probability Analysis

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 6


C.P. Lee  E.S Arañas  K.L. Manuel

MAS-06: BUDGETING WITH PROBABILITY ANALYSIS BUDGET – is a realistic quantitative plan useful for planning and controlling company expenses, cash flows and earnings for a specific period. The term budgeting refers to the process of coming up with budgets. BUDGET PERIOD

The length of time for which a budget is to be prepared and implemented


Key management personnel responsible for drafting the budget manual, and coordinating/approving budgets submitted by managers.


A written description on how to prepare budgets that includes a planning calendar and distribution instructions for budget schedules.


A process wherein budgets are prepared by top management with little or no inputs from operating personnel (i.e., imposed budgeting)


A process wherein budgets are developed through joint decisions by top management and operating personnel (i.e., consensus budgeting)


A process of starting over each budget and justifying each budgeted item as if the programs involved were being proposed for the first time every period


An incremental budget that adds the current period and drops the older period to maintain a constant budget period of usually 12 months.


A process that assumes continuous improvement of products and/or processes so that budgets are not based on existing system but on changes to be made.


A process that applies mostly Activity-Based Costing (ABC) principles and procedures to come up with budgets A process wherein a product’s revenues and expenses are budgeted over its entire life cycle from R&D to production to marketing to customer service. A long-term budget based on the identifications of action plans to achieve company goals and, ultimately, its mission.


A practice of underestimating revenues or overestimating costs to make budget targets easily achievable in order to project a seemingly “good” performance.

STATIC BUDGET (Fixed Budget)

A budget prepared for a single level of activity that does not change even when actual activity differs from planned activity.

FLEXIBLE BUDGET (Variable Budget)

A budget that adjusts revenues and costs when actual activity differs from the planned activity stated in the fixed budget.

MASTER BUDGET (Pro-Forma Budget) (Comprehensive Budget)

A static budget that is based on the comprehensive plan for the overall activities of a company. The major components of a master budget are:  OPERATING budget – sales forecast, sales budget, production budget, inventory budget, CGS budget, selling & administrative expense budget  FINANCIAL budget – cash budget, working capital budget, capital expenditures budget*, pro-forma balance sheet, pro-forma statement of cash flows * The capital expenditures budget, prepared mainly for the acquisition and maintenance of long-term assets, may be shown as a separate major component of the master budget, alongside operating and financial budgets. Forced Planning  Coordination  Communication  Motivation  Efficient Allocation of Resources  Progress Check  Benchmark for Performance Evaluation


PROBABILITY ANALYSIS  PROBABILITY is a mathematical expression of doubt or assurance about the occurrence of a chance event.  The probability of a particular event ranges from 0 (never) to 1 (always).  A probability of 0 means the event cannot occur; a probability of 1 means the event is certain to occur.  PROBABILITY ANALYSIS is commonly used in planning to determine the likelihood of a specific event occurring when several outcomes are possible in order to reduce the level of uncertainty in decision making  EXPECTED VALUE uses probabilities as weights in computing the average or mean of possible outcomes.  JOINT PROBABILITY, determined by multiplying the probability of the first event by the conditional probability of the second event, is the probability of an event occurring given that another event has already occurred.  Decision-making under CERTAINTY: for each decision alternative, there is only one event with 100% chance.  Decision-making under conditions of RISK: the probability distribution of possible future events is known.  Decision-making under conditions of UNCERTAINTY: each decision alternative has several possible outcomes and the probability distribution of possible future events is not known and must be determined subjectively.  DECISION TREE is a diagram that shows decision alternatives and the possible outcomes of each decision along with their associated expected values and probabilities.  DECISION (Pay-off) TABLE shows the decision, outcomes with their probabilities and the monetary values of all possible decision-outcome combinations.  PERFECT INFORMATION is the knowledge that a future event will occur with certainty.  EXPECTED VALUE (EV) of PERFECT INFORMATION is the difference between expected value with perfect information (i.e., best results given perfect information) and expected value without perfect information. EV of Perfect Information = EV with Perfect Information – EV without Perfect Information

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0915-2303213 



1. Production & Inventory Budget DMD Company has budgeted sales at P 100,000 and expects a profit of 10% of the sales. Expenses are estimated as follows: selling = 10% of sales; administrative = 15% of sales. Labor is expected to be 40% of the total manufacturing costs. Factory overhead is to be applied at 75% of direct labor costs. Inventories are to be as follows: January 1 December 31 Materials Work-in-process Finished goods

P 4,000 2,500 5,000

P 1,500 7,500 10,000

REQUIRED: Determine the budgeted amount for: A) Cost of goods sold C) Factory overhead B) Total manufacturing cost D) Materials purchases 2. Sales & Accounts Receivable Budget Past collections experienced by BJS Company indicate that 60% of the sales billed in a month are collected during the month of sales, 30% are collected in the following month, and 10% are collected in the second following month. The following are the projected sales for next year: January P 480,000 February P 420,000 March P 500,000 April P 550,000 May P 600,000 REQUIRED: Determine the following: A) Budgeted collections during the month of B) Budgeted collections during the month of C) Projected accounts receivable balance on D) Projected accounts receivable balance on

March. May. April 1. June 1.

3. Merchandise Purchases Budget CIT Merchandising has budgeted the following sales for the 2 nd quarter of 2021: April P 123,500 May 156,000 June 208,000 Other budgeted estimates are:  All merchandises are to sell at its invoice cost plus 30% mark-up.  Beginning inventories of each month are budgeted at 40% of that particular month’s projected cost of goods sold. REQUIRED: Determine the projected amount for: A) Merchandise purchases in April. B) Merchandise purchases in May. 4. Pro-forma Statement of Cash Flows Sugbu Company presents these data to be used as basis for the pro-forma Statement of Cash Flows. 1) Customer sales receipts for P 870,000 2) Purchase of machinery and equipment for P 125,000 cash. 3) Settlement of income taxes of P 110,000 4) Sale of investment securities for P 500,000. 5) Payment of dividends of P 600,000. 6) Receipt of rentals of P 105,000. 7) Issuance of 500 shares of common stock for P 250,000. 8) Payment of P 100,000 due to suppliers and payroll to employees. 9) Purchase of land for plant site for P 550,000 cash that was borrowed from a bank. 10) Payment of P 450,000 for treasury shares. REQUIRED: Determine the projected amounts of the following: A) Net cash provided by operating activities C) Net cash used in financing activities B) Net cash used in investing activities D) Net cash increase or decrease 5. Expected Value SDA Company prepared the following probability distribution describing the relative likelihood of monthly sales volume levels and related profit (loss) for its lone product that sells for P 50 per unit: Sales volume Probability Profit (Loss) 5,000 10% (P 70,000) 12,000 20% 10,000 18,000 40% 60,000 24,000 20% 100,000 30,000 10% 140,000 REQUIRED: Using the expected value approach, A) How much is the budgeted sales for the month? B) What is the expected value of the monthly profit?

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6. Indifference Point under Probability Analysis Eloy Company plans to introduce a new product that requires an initial cash investment of P 440. If the product becomes successful, the net cash inflow is forecasted at P 800. However, if the product becomes a failure, net cash inflow is estimated at P 200. REQUIRED: A) If the success rate is 70%, what is the value of act “to invest?” B) What probability-percentages should be assigned to the events ‘success’ and ‘failure’ to be indifferent between the two actions “to invest” and “not to invest?” 7. Joint Probability CGH Company has three sales departments, each contributing the following percentages of total sales: clothing, 50%; grocery, 30%; and hardware, 20%. Each department has had the following average annual damaged goods rates: clothing, 2%; grocery, 10%; and hardware, 5%. A random corporate audit has found a weekly damaged goods rate of sufficient magnitude to alarm CGH’s management. REQUIRED: Determine the probability in percentage that the damage occurred in the: A) Clothing department B) Grocery department C) Hardware department 8. Decision Tree A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will yield 100,000 bottles of wine, netting P 2 per bottle. If the wine maker waits for four weeks and weather turns cold (probability: 20%), the yield will be cut in half but net P 3 per bottle. If the weather does not turn cold, the yield depends on rain. With rain (probability: 50%), a full yield netting P 4 per bottle will result. Without rain, there will still be a full 100,000-bottle yield, but the net amount will be P 3 per bottle only. REQUIRED: Determine the optimal expected value.



D LATER (4 weeks)


): __________________




): __________________


): _____________________

9. Decision (Payoff) Table ESA Dealers, Inc. is contemplating on how many units of cars to order to meet the customer demands for the month based on the following projection: Demand Probability 0 unit 10% 1 unit 50% 2 units 40% The profit for each unit sold is P 200,000 while the carrying cost for each unit of unsold car is P 50,000. REQUIRED: How many units of cars should ESA order and why?

Decision Alternative Stock 0 unit Stock 1 unit Stock 2 units

States of Nature (based on demand) 0 unit (10%) 1 unit (50%) 2 units (40%)

Expected Value

10. Perfect Information Assume that ESA Dealers in No. 9 would maximize profits if the company were able to obtain additional information that can determine exactly what all potential customers intended to do for this month (i.e., ESA has perfect information). REQUIRED: A) What is the expected value with perfect information? B) What is the expected value of perfect information? C) What maximum amount is ESA willing to pay for the additional information?

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WRAP-UP EXERCISES 1. In a typical planning process, which of the following would be completed last? a. Vision and mission c. Tactical goals b. Strategic objectives d. Operational plans 2. In the budgeting process, top management a. Should only be involved in the approval process b. Needs to be involved, including using the budget process to communicate goals c. Lacks the detailed knowledge of the daily operations and should limit their involvement d. Need to separate the budgeting process and business planning process into two separate processes 3. Coordinating the preparation of budget is the responsibility assigned to which of the following? a. Top management c. Accounting department b. Budget committee d. Lower levels of management 4. Which is an advantage of authoritative budgeting over participative budgeting? a. Longer time cycle in the budgeting process b. Stronger commitment from lower level of management c. Greater flow of information from bottom to top management d. More emphasis on strategic plans and avoidance of budgetary slacks 5. The master budget usually begins with the a. Production budget c. Financial budget b. Operating budget d. Sales forecast 6. The production budget process usually begins with the a. Sales budget c. Direct materials budget b. Direct labor budget d. Manufacturing overhead budget 7. Which of these budgets is usually prepared first? a. Production budget c. Cash disbursements budget b. Materials purchases budget d. Cash budget 8. All of the following are considered operating budgets, EXCEPT a. Cash budget c. Purchases budget b. Sales budget d. Production budget 9. Which of the following budgets is based on many other master budget components? a. Direct labor budget c. Sales budget b. Overhead budget d. Cash budget 10. Biden Inc. has projected sales to be P 260,000 in June, P 270,000 in July and P 300,000 in August. Biden collects 30% of a month’s sales in the month of sale, 50% in the month following the sale, and 20% in the second month following the sale. What is the accounts receivable balance on August 31? a. P 90,000 c. P 264,000 b. P 210,000 d. Some other number 11. Dems Inc. has projected sales: February, P 10,000; March, P 9,000; April, P 8,000; May, P 10,000; and June, P 11,000. Dems has 30% cash sales and 70% sales on account. Accounts are collected 40% in the month following the sale and 55% collected the second month. What would be the total cash receipts in May? a. P 3,000 c. P 8,705 b. P 8,150 d. Some other number 12. Donald Company has the following historical pattern on its credit sales: 70% collected in the 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 last six months of 2021 are shown below: July P 60,000 August 70,000 September 80,000 October 90,000 November 100,000 December 85,000 What would be the estimated total cash collections during the fourth calendar quarter from sales made on open account within the fourth calendar quarter? a. P 172,500 c. P 251,400 b. P 230,000 d. P 265,400 13. Nevada Company manufactures a single product. The company keeps inventory of raw materials at 50% of the coming month’s budgeted production. Each unit of product requires 3 pounds of materials. The production budget is (in units): May, 1,000; June, 1,200; July, 1,300; August, 1,600. Determine the raw materials purchases in July. a. 1,450 pounds c. b. 2,400 pounds d.

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3,900 pounds Some other number



14. Trump Company has budgeted sales of 24,000 finished units for the forthcoming 6-month period. It takes 4 lbs. of direct materials to make one finished unit. Given the following: Finished Units Direct Materials (pounds) Beginning inventory 14,000 44,000 Target ending inventory 12,000 48,000 How many pounds of direct materials should be budgeted for purchase during the 6-month period? a. 88,000 c. 96,000 b. 92,000 d. 100,000 15. GOP Co. has projected sales to be P 60,000 in January, P 75,000 in February, and P 80,000 in March. GOP wants to have 25% of next month’s sales needs on hand at the end of a month. If GOP has an average gross profit of 40%, what are the February purchases? a. P 30,500 c. P 46,250 b. P 45,750 d. P 76,250 16. Red Co. is preparing its cash budget for the next month based on the following projections: Sales P 1,500,000 Gross Profit Rate 25% Decrease in Inventories P 70,000 Decrease in Accounts Payable for Inventories P 120,000 What will be the estimated cash disbursements for inventories? a. P 935,000 c. P 1,055,000 b. P 1,050,000 d. P 1,175,000 17. Blue Company has prepared the flexible budget formula for production costs: costs = 340,000 + 9X, where X is the number of units produced. Blue produced 20,000 units at a total cost of P 490,000. What is the variance of actual costs from budgeted costs (i.e., budget variance)? a. P 150,000 favorable c. P 30,000 unfavorable b. P 30,000 favorable d. P 90,000 unfavorable 18. The use of standard costs in the budgeting process signifies that an organization has most likely implemented a a. Capital budget c. Zero-based budget b. Flexible budget d. Static budget SELF-TEST QUESTIONS – with suggested answers (Sources: CMA/CIA/RPCPA/AICPA/Various test banks) D


2. A 3. A


4. 5.


Which of the following is NOT an advantage of budgeting? a. It requires managers to state their objectives. b. It facilitates control by permitting comparisons of budgeted and actual results. c. It facilitates performance evaluation by comparing budgets with actual results. d. It provides a check-up device that allows managers to keep close tabs on their subordinates. Budgets are a necessary component of financial decision making because they provide a (n) a. Efficient allocation of resources c. Means to check managerial discretion b. Means to use all the firm’s resources d. Automatic corrective mechanism for errors In an organization that plans by using comprehensive budgeting, the master budget is a. A compilation of all the separate operational and financial budget schedules of the organization b. The booklet containing budget guidelines, policies and forms to use in the budgeting process c. The current budget updated for operations for part of the current year d. A budget for a non-profit entity after it is approved by the appropriate authoritative body The sales budget is classified as a. A financial budget c. An operating budget b. A flexible budget d. A program budget 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 c. Based on expected selling prices of the products d. Based on probabilities Ohio Company developed the following sales forecasts and associated probabilities.

Sales Forecast P P P P

B 7. D

600,000 650,000 700,000 800,000

Probability 10% 50% 35% 5%

What is the expected value of sales? a. P 650,000 c. P 667,500 b. P 670,000 d. P 800,000 Which of the following equations can be used to budget purchases? (BI = Beginning inventory, EI = ending inventory desired, CGS = Budgeted cost of goods sold) a. Budgeted purchases = CGS + BI – EI c. Budgeted purchases = CGS + EI + BI b. Budgeted purchases = CGS + BI d. Budgeted purchases = CGS + EI – BI

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Week No. 6: BUDGETING with PROBABILITY ANALYSIS 8. C 9. D 10. B 11.

D 12.

B 13.

C 14.

B 15.

D 16. B

17. D 18.


Colorado Company desires an ending inventory of P 60,000. It expects sales of P 120,000 and has a beginning inventory of P 40,000. Cost of sales is 60% of sales. Budgeted purchases are a. P 60,000 c. P 92,000 b. P 72,000 d. P 132,000 Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that would provide the necessary input data for the direct labor budget would be the a. Sales forecast c. Schedule of cash receipts and disbursements b. Raw materials purchases budget d. Production budget South Dakota Company budgets sales of 22,000 units for January, 30,000 for February. The budgeted beginning inventory for January 1 was 7,000 units. South Dakota desires an ending inventory equal to one-half of the following month’s sales needs. What is the budgeted production for January? a. 37,000 units c. 26,000 units b. 30,000 units d. 14,000 units New Mexico Company plans to sell 24,000 units of Product A in July and 30,000 units in August. Sales of Product A during June were 25,000 units. Past experience has shown that end-of-month inventory must equal 3,000 units plus 30% of the next month’s sales. On June 30, this requirement was met. Based on these data, how many units of Product A must be produced during the month of July? a. 28,800 c. 24,000 b. 22,200 d. 25,800 Florida keeps its inventory of finished goods at 75% of the coming month’s budgeted sales and inventory of raw materials at 50% of the coming month’s budgeted production needs. Each unit of product requires 2 pounds of materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. What would be the raw material purchases in June? a. 1,525 pounds c. 2,800 pounds b. 2,500 pounds d. 3,050 pounds New Jersey Co. is budgeting sales of 53,000 units of product A1 for 2021. The manufacture of one unit of A1 requires 4 kilos of chemical Z5. During 2021, New Jersey plans to reduce the inventory of Z5 by 50,000 kilos and increase the finished goods inventory of A1 by 6,000 units. There is no work-in-process inventory. How many kilos of Z5 is New Jersey budgeting to purchase in 2021? a. 138,000 c. 186,000 b. 162,000 d. 238,000 Washington Company has the following 2021 budget data: Beginning finished goods inventory 40,000 units Sales 70,000 units Ending finished goods inventory 30,000 units Direct materials P 10 per unit Direct labor P 20 per unit Variable factory overhead P 5 per unit Fixed factory overhead P 80,000 What are the 2021 total budgeted production costs? a. P 2,100,000 c. P 2,240,000 b. P 2,180,000 d. P 2,320,000 Montana Company’s budget contains the following information: Units Beginning finished goods inventory 85 Beginning work-in-process in equivalent units 10 Desired ending finished goods inventory 100 Desired ending work-in-process in equivalent units 40 Projected sales 1,800 How many equivalent units should Montana plan to produce? a. 1565 c. 1815 b. 1800 d. 1845 The information contained in a cost of goods manufactured budget most directly relates to the a. Materials used, direct labor, overhead applied, and ending work-in-process b. Materials used, direct labor, overhead applied, and work-in-process inventories budgets c. Materials used, direct labor, overhead applied, and work-in-process inventories, and finished goods inventories budgets d. Materials used, direct labor, overhead applied, and finished goods inventories budgets Maine Co. makes payments for purchases 30% during the month of purchase and the remainder the following month. April purchases are projected to be P 80,000; May purchases will be P 120,000. What will be the cash payments on account for May? a. P 36,000 c. P 84,000 b. P 54,000 d. P 92,000 Nebraska Company, a merchandising firm, is preparing its master budget and has gathered the following data to help budget cash disbursements: Cost of goods sold P 1,680,000 Desired decrease in inventories 70,000 Desired decrease in accounts payable 150,000 All of the accounts payables are for inventory purchases and all inventories are purchased on account. What are the estimated cash disbursements for inventories for the budget period? a. P 1,460,000 c. P 1,900,000 b. P 1,600,000 d. P 1,760,000

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Items 19 and 20 are based on the following information Operational budgets are used for planning and controlling its business activities. Data regarding a company’s sales for the last 6 months of the year and its projected collection patterns are shown below: Forecasted sales July P 775,000 August 750,000 September 825,000 October 800,000 November 850,000 December 900,000 Types of sales Cash sales Credit sales

19. C 20. B 21.


22. 23.

D 24. C 25. B



27. D

20% 80%

Collection Pattern for Credit Sales In the month of sale 40% In the first month following the sale 57% Uncollectible 3% The cost of merchandise averages 40% of its selling price. The company’s policy is to maintain an inventory equal to 25% of the next month’s forecasted sales. The inventory balance at cost is P 80,000 as of June 30. The budgeted cost of the company’s purchases for the month of August would be a. P 302,500 c. P 307,500 b. P 305,000 d. P 318,750 The company’s total cash receipts from sales and collections on account that would be budgeted for the month of September would be a. P 757,500 c. P 793,800 b. P 771,000 d. P 856,500 Alabama Consortium is constructing a corporate planning model. Cash sales are 30% of the company’s sales, with the remainder subject to the following collection pattern: One month after sale 60% Two months after sale 30% Three months after sale 8% Uncollectible 2% If Sn is defined as total sales in month ‘n,’ which one of the following expressions correctly describes Alabama’s collection on account in any given month? a. 0.6 S n-1 + 0.3 S n-2 + 0.08 S n-3 c. 0.42 S n-1 + 0.21 S n-2 + 0.056 S n-3 b. 0.42 S n+1 + 0.21 S n+2 + 0.056 S n+3 d. 0.6 S n-1 + 0.3 S n-2 + 0.08 S n-3 – 0.02 S The cash receipts budget includes a. Funded depreciation c. Extinguishment of debt b. Operating supplies d. Loan proceeds The Pennsylvania Company is preparing its cash budget for the month of May. The following information is available concerning its accounts receivable: Estimated credit sales for May P 200,000 Actual credit sales for April 150,000 Estimated collections in May for credit sales in May 20% Estimated collections in May for credit sales in April 70% Estimated collections in May for credit sales prior to April P 12,000 Estimated write-offs in May for uncollectible credit sales 8,000 Estimated provision for bad debts in May for credit sales in May 7,000 What are the estimated cash receipts from accounts receivable collections in May? a. P 142,000 c. P 150,000 b. P 149,000 d. P 157,000 Which one of the following budgets is the last item to be prepared under a normal budget preparation process? a. Direct labor budget c. Cash budget b. Cost of goods sold budget d. Manufacturing overhead budget The cash budget should help to ensure a. That enough cash is on hand at all times to satisfy maximum cash requirements b. Sufficient liquidity without an excess amount of idle cash c. That cash dividends can be paid every quarter d. That sufficient cash is available to pay salaries, even if it means borrowing the money The cash budget for 2021 would be affected in some way by all of the following, except a. A cash dividend declared in 2020 for payment in 2021. b. A cash dividend declared in 2021 for payment in 2022. c. Interest expense on loans taken out and repaid during 2021. d. The sales forecast for the first month in 2022. A company has prepared a cash budget for January through June of 2021. Which of the following, discovered in February 2021, is LEAST likely to require revising the cash budget? a. February sales are lower than budgeted. b. The interest rate on short-term borrowing is higher than budgeted. c. The company increased from 10% to 20% the down payment it requires from customers. d. The company changed inventory methods from LIFO to FIFO.

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28. The last pro forma statement prepared under a typical budgeting process is the a. Income statement c. Statement of cash flows b. Statement of cost of goods sold d. Statement of manufacturing costs 29. In the preparation of a cash budget with clear-cut information on sources and uses of funds, all of the following would classified as a cash flow under investing activities, EXCEPT: a. Collection of a loan from subsidiary c. Sale of plant assets b. Purchase of a patent from an inventor d. Dividends received on stock investment 30. In the preparation of a cash budget with clear-cut information on sources and uses of funds, all of the following would classified as a cash flow under financing activities, EXCEPT: a. The conversion of the company’s own preferred stock into common stock b. The declaration and payment of a cash dividend on the company’s own common stock c. The repayment of principal on a mortgage d. The sale of the company’s own preferred stock for cash 31. North Carolina projects the following activities related to its financial operations: a. Issuance of shares of company’s own common stock: P 170,000 b. Dividends to be paid to the company’s own shareholders: P 7,000 c. Dividends to be received from investments in other companies’ shares: P 4,000 d. Interest to be paid on the company’s own bonds: P 11,000 e. Repayment of principal on the company’s own bonds: P 40,000 f. Proceeds from sale of the company’s used equipment: P 23,000 In cash financial budget, the net cash used by financing activities should be projected to be a. P 375,000 c. P 112,000 b. P 123,000 d. P 19,000 32. The budget that describes the long-term position, goals, and objectives of an entity is the a. Capital budget c. Cash management budget b. Operating budget d. Strategic budget 33. The budgeting process should be one that motivates managers and employees to work toward organizational goals. Which one of the following is LEAST likely to motivate managers? a. Participation by subordinates in the budgetary process b. Having top management set budget levels c. Use of management by exception d. Holding subordinates accountable for the items they control 34. Comparing actual results with a budget based on achieved (actual) volume is possible with the use of a a. Monthly budget c. Rolling budget b. Master budget d. Flexible budget 35. Which one of the following budgeting methodologies would be most appropriate for a firm facing a significant level of uncertainty in unit sales volumes next year? a. Static budgeting c. Top-down budgeting b. Flexible budgeting d. Life-cycle budgeting 36. A flexible budget is a. One that can be changed whenever a manager so desires. b. Adjusted to reflect expected costs at the actual level of activity. c. One that uses the formula ‘total cost = cost per unit x units produced’ d. The same as a continuous budget. 37. Which of the following is a difference between a static budget and a flexible budget? a. A flexible budget includes only variable costs; a static budget includes only fixed costs. b. A flexible budget includes all costs; a static budget includes only fixed costs. c. A flexible budget gives allowances for different levels of activity while a static budget does not. d. None of the above. 38. A company has developed the budget formula below for estimating its shipping expenses. Shipments have historically averaged 12 pounds per shipment. Shipping costs = P 18,000 + (P 0.60 x pounds shipped) The planned and actual activity regarding orders and shipments for the month are given in the following schedule: Plan Actual Sales orders 800 780 Shipments 800 820 Units shipped 8,000 9,000 Sales P 120,000 P 144,000 Total pounds shipped 9,600 12,500 The actual shipping costs for the month amounted to P 21,000. What should be the appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation? a. P 18,000 c. P 23,760 b. P 18,492 d. P 25,500 39. The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the a. Production volume variance c. Sales volume variance b. Flexible budget variance d. Standard cost variance 40. ‘Kaizen’ budgeting refers to the budgeting process where a. The budget is based on only one level of activity b. The budget is based on many levels of activity so that budget may be adjusted based on actual activity c. The budget is based not on the existing system, but on changes or improvements that are to be made d. A product’s revenues and expenses are estimated over its entire life cycle (i.e., from R&D phase to customer support phase)

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41. The budget method that maintains a constant twelve month planning horizon by adding a new month on the end as the current month is completed is called a. An operating budget c. A continuous budget b. A capital budget d. A master budget 42. A company that uses zero-based budgeting has a. An expense budget of zero. b. Zero as the starting point of budgeting the coming year’s expenses. c. A zero variance between budgeted and actual performance. d. An assumed sales level of zero. 43. A decision maker is operating in an environment wherein all the facts surrounding a decision are known exactly, & each alternative is associated only with one possible outcome. The environment is known as: a. Certainty c. Uncertainty b. Risk d. Conflict Items 44 and 45 are based on the following information A store sells four computer models designated as P100, A200, R300, and T400. The store manager has made random number assignments to represent customer choices based on past sales data. The assignments are: Model Random Numbers P100 0-1 A200 2-6 R300 7-8 T400 9 44. What is the probability that a customer will select model P100? a. 10% c. 50% b. 20% d. Cannot be determined from given information SOLUTION: 2 {0,1} out of 10 {0,1,2,3,4,5,6,7,8,9} = 20% 45. In running a simulation of the computer demand, the following numbers are drawn in sequence: 2, 8 and 6. The simulation indicates that the third customer will purchase a. Model P100 c. Model R300 b. Model A200 d. Model T400 46. A quantitative technique useful in projecting a firm’s sales and profits is the a. Probability distribution theory c. Learning curves b. Gantt chart d. Queuing theory 47. Expected value in decision analysis is a. A standard deviation using the probabilities as weights. b. An arithmetic mean using the probabilities as weights. c. A standard deviation divided by the coefficient of variation. d. A measure of the difference between best possible outcome and outcome of the original decision 48. The term ‘expected value’ refers to the a. Value which would be assigned to a variable if problem were to be treated in a deterministic manner b. Most likely single outcome selected from among a number of possible alternatives c. Tails of a normal probability distribution d. Mean value of a variable Items 49 to 51 are based on the following information A group of kids sells sweet candies at a basketball game. The candies are sold for P 1.00 each, and the cost per candy is P 0.30. Any unsold candies are discarded because they will be stale before the next basketball game. The frequency distribution of the demand for candies per basketball game is: Unit sales volume Probability 2,000 candies 0.10 3,000 candies 0.15 4,000 candies 0.20 5,000 candies 0.35 6,000 candies 0.20 49. What is the estimated demand for candies at the next game using an expected value approach? a. 4,000 candies c. 5,000 candies b. 4,400 candies d. 6,000 candies 50. What is the estimated demand for candies at the next game using a deterministic approach (highest probability)? a. 4,000 candies c. 5,000 candies b. 4,400 candies d. 6,000 candies 51. The conditional profit per game of having 4,000 candies available but only selling 3,000 candies is a. P 1,800 c. P 2,800 b. P 2,100 d. P 4,000 SOLUTION: 3,000 (1.00) – 4,000 (0.3) 52. Raspberry Enterprises, distributor of compact disks (CDs), is developing its budgeted cost of goods sold for 2021. Raspberry has developed the following range of sales estimates and associated probabilities: Sales estimate Probability P 60,000 25% 85,000 40% 100,000 35% The cost of goods sold averages 80% of sales. What is 2021’s expected value of cost of goods sold? a. P 67,200 c. P 84,000 b. P 68,000 d. P 85,000

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53. The Pineapple Company produces its product in batches of 100 units. The units each batch are then tested. The results from testing the most recent 200 batches are shown below: Units Failed per Batch Number of Batches 0 50 1 40 2 40 3 30 4 40 Total 200 What is the expected value of the number of failed units per batch? a. 0 c. 2.00 b. 1.85 d. 13.33 54. Cherry Distributors has decided to increase its daily muffin purchases of 100 boxes. A box of muffins costs P 2.00 and sells for P 3.00 through regular stores. Any boxes not sold through regular store are sold through thrift store for P 1.00. Cherry assigns the following probabilities to selling additional boxes: Additional sales Probability 60 60% 100 40% What is the expected value of Cherry’s decision to buy 100 additional boxes of muffins? a. P 28 c. P 52 b. P 40 d. P 68 SOLUTION: 60 (60%) + 100 (40%) = 76 Expected value of 100 boxes: [76 (3 – 2)] + [24 (1 – 2)] Items 55 and 56 are based on the following information The probabilities shown in the table represent the estimate of sales for a new product: Sales (unit) Probability 0 – 200 15% 201 – 400 45% 401 – 600 25% 601 – 800 15% 55. What is the probability of selling between 201 and 600 units of the product? a. 0% c. 25% b. 11.25% d. 70% 56. What is the best estimate of the expected sales of the new product? (Hint: compute average of range) a. 380 c. 480 b. 400 d. 800 57. Mango Company uses two major inputs in its production. To prepare its manufacturing operations budget, the company has to project the cost changes of these material inputs. The cost changes are independent of one another. The purchasing department provides the following probabilities associated with projected cost changes: Cost Change Material 1 Material 2 3% increase 30% 50% 5% increase 50% 40% 10% increase 20% 10% What is the probability of a 3% increase in the cost of both Material 1 and Material 2? a. 15% c. 80% b. 40% d. 20% 58. It is used for situations involving a sequence of events with several possible outcomes associated with each event. a. Network analysis c. Queuing theory b. Decision tree analysis d. Linear programming 59. A contractor has been invited to submit a bid on a large and complicated construction project. The preparation of the bid proposal will cost about P 20,000. Management feels that if the company bids low, enough to result in a net profit of P 50,000, there would be a 60% chance of getting the job. If the company bids high, enough to result in a P 100,000 net profit, the chance of getting the contract would be only 20%. What should the company do? a. Bid low, enough to allow for P 50,000 profit since the expected value of payoff is P 22,000 b. Bid high, enough to allow for a P 100,000 profit since the expected value of payoff is P 4,000 c. Bid high, enough to allow for a P 100,000 profit since the expected value of payoff is P 20,000 d. Make no bid. Items 60 to 62 are based on the following information A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft drinks and the weather is hot, it will make P 2,500; if the weather is cold, the profit will be P 1,000. If the stand sells coffee and the weather is hot, it will make P 1,900; if the weather is cold, the profit will be P 2,000. The probability of cold weather on a given day at this time is 60%. 60. What is the expected payoff for selling coffee? a. P 1,360 c. P 2,200 b. P 1,960 d. P 3,900 61. What is the expected payoff if the vendor has perfect information? a. P 1,360 c. P 2,200 b. P 1,960 d. P 3,900 62. Considering only the information given, if the probability of hot weather given a hot weather forecast is 50%, then how much would the vendor be willing to pay for the forecast? a. P 300 c. P 600 b. P 500 d. P 1,000 SOLUTION: 50% (2,500 – 1,900)

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