ICAEW BIP · Chapter 7
Preparing functional and cash budgets MCQs with Answers
10 multiple-choice questions on Preparing functional and cash budgets for ICAEW BIP Business Insight and Performance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Budgeted sales of a product are 18,000 units in quarter 1 and 20,000 units in quarter 2. Opening finished goods inventory for quarter 1 is 2,400 units, and closing inventory each quarter is to be 15% of the following quarter's budgeted sales. What is the production budget for quarter 1?
- A) 17,400 units
- B) 18,600 units
- C) 18,300 units
- D) 21,000 units
Show answer & explanation
Answer: B) 18,600 units
Closing inventory = 15% x 20,000 = 3,000 units. Production = sales + closing inventory - opening inventory = 18,000 + 3,000 - 2,400 = 18,600 units.
Question 2
A company plans to produce 18,600 units in a quarter. Each unit uses 3 kg of material M, which costs £4.20 per kg. Opening inventory of material M is 6,000 kg and closing inventory is to be 7,500 kg. What is the material purchases budget for the quarter, in £?
- A) £228,060
- B) £84,420
- C) £240,660
- D) £234,360
Show answer & explanation
Answer: C) £240,660
Material usage = 18,600 units x 3 kg = 55,800 kg. Purchases = usage + closing inventory - opening inventory = 55,800 + 7,500 - 6,000 = 57,300 kg. Cost = 57,300 kg x £4.20 = £240,660.
Question 3
A company plans to produce 18,600 units, each needing 0.75 hours of productive labour time. Idle time is expected to be 10% of hours paid. Labour is paid £15 per hour. What is the labour cost budget?
- A) £209,250
- B) £188,325
- C) £230,175
- D) £232,500
Show answer & explanation
Answer: D) £232,500
Productive hours needed = 18,600 x 0.75 = 13,950 hours. Because idle time is 10% of hours paid, productive hours are 90% of hours paid. Hours paid = 13,950 / 0.9 = 15,500. Labour cost = 15,500 x £15 = £232,500. Adding 10% to productive hours (£230,175) understates the cost because the percentage is based on hours paid.
Question 4
Budgeted sales are January £80,000, February £90,000 and March £100,000. Customers pay as follows: 20% in the month of sale, receiving a 2% discount for prompt payment 50% in the month after sale 28% in the second month after sale 2% are irrecoverable debts What are the budgeted cash receipts for March?
- A) £87,000
- B) £88,680
- C) £88,600
- D) £87,400
Show answer & explanation
Answer: A) £87,000
March sales: £100,000 x 20% x 98% = £19,600. February sales: £90,000 x 50% = £45,000. January sales: £80,000 x 28% = £22,400. Total receipts = £87,000. Irrecoverable debts are never received, and the discount reduces the cash collected from March's cash sales.
Question 5
Which of the following items would NOT appear in a cash budget?
- A) Proceeds from the sale of an old machine
- B) Depreciation of non-current assets
- C) Payment of corporation tax
- D) Repayment of a bank loan
Show answer & explanation
Answer: B) Depreciation of non-current assets
A cash budget includes only cash inflows and outflows. Depreciation is an accounting adjustment that spreads the cost of an asset over its life and involves no cash movement. Sale proceeds, tax payments and loan repayments are all cash flows.
Question 6
Each unit of product F contains 4 kg of material after processing. During processing, 20% of the material input is lost as wastage. Budgeted production is 6,000 units. What is the budgeted material usage?
- A) 19,200 kg
- B) 28,800 kg
- C) 30,000 kg
- D) 24,000 kg
Show answer & explanation
Answer: C) 30,000 kg
Because wastage is 20% of input, the 4 kg in each finished unit is 80% of the input. Input per unit = 4 / 0.8 = 5 kg. Budgeted usage = 6,000 x 5 kg = 30,000 kg.
Question 7
Budgeted purchases on credit are April £60,000, May £72,000 and June £66,000. The company pays 40% of purchases in the month of purchase, taking a 3% early settlement discount, and the remaining 60% in the following month. What are the budgeted payments to suppliers in June?
- A) £61,608
- B) £67,536
- C) £69,600
- D) £68,808
Show answer & explanation
Answer: D) £68,808
June purchases paid in June: £66,000 x 40% x 97% = £25,608. May purchases paid in June: £72,000 x 60% = £43,200. Total June payments = £68,808.
Question 8
Which of the following together make up the master budget?
- A) All functional budgets, before they are approved by the budget committee
- B) The budgeted statement of profit or loss, budgeted statement of financial position and cash budget
- C) The capital expenditure budget and the budget manual
- D) The sales budget, production budget and materials usage budget
Show answer & explanation
Answer: B) The budgeted statement of profit or loss, budgeted statement of financial position and cash budget
The master budget is the summary of all the functional budgets. It usually consists of the budgeted statement of profit or loss, the budgeted statement of financial position and the cash budget. Functional budgets such as the sales and production budgets feed into it.
Question 9
A company's working capital data are: Inventory holding period 45 days Trade receivables collection period 38 days Trade payables payment period 30 days What is the company's cash operating cycle?
- A) 113 days
- B) 37 days
- C) 23 days
- D) 53 days
Show answer & explanation
Answer: D) 53 days
Cash operating cycle = inventory holding period + receivables collection period - payables payment period = 45 + 38 - 30 = 53 days. Credit from suppliers shortens the period for which the business must finance its working capital, so the payables period is deducted, not added (adding it gives 113 days). A longer cycle means more cash is tied up in working capital.
Question 10
A company's budgeted bank balance at the start of a month is an overdraft of £12,000. Budgeted cash receipts for the month are £87,000 and budgeted cash payments are £81,500. What is the budgeted closing bank balance?
- A) Overdraft of £17,500
- B) Balance in hand of £17,500
- C) Overdraft of £6,500
- D) Balance in hand of £6,500
Show answer & explanation
Answer: C) Overdraft of £6,500
Closing balance = opening balance + receipts - payments = -£12,000 + £87,000 - £81,500 = -£6,500. The negative balance means an overdraft of £6,500. Treating the opening overdraft as a positive balance gives the wrong answer of £17,500.