Question

True/False

Please write T if the statement is true or F if the statement is false:

____1. The contribution format income statement can be expressed in the following equation: Profit = (Sales – Variable expenses) – Fixed expenses.          

____2. The CM ratio can also be calculated by dividing the contribution margin per unit by the selling price per unit.     

_____3.    Margin of safety in dollars = Total sales - Break-even sales       

_____4.   The margin of safety cannot be expressed in terms of the number of units sold .

_____5.    If variable expenses are 70% of sales, CM ratio is half of it or 35%.    

_____6.   A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period.           

_____7.   One advantage of budgeting is that it can uncover potential bottlenecks.    

_____8.    A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at the top level.        

_____9.    Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above.           

____10.   The production budget must be adequate to meet budgeted sales and to provide for

                   the desired ending inventory.                              

____11.   Performance evaluation is difficult when actual activity differs from the planned level of activity.                                                             

____12.   Flexible budget cannot show costs that should have been incurred at the actual level of
activity.                                                                

___13. Flexible budgets improve performance evaluation.                            

___14. Favorable variance occurs when actual revenue is greater than budgeted revenue.    

___15. The differences between the master budget amounts and the flexible budget amounts are called master budget variances.                     

Answer 1

1. True, Profit = (Sales – Variable expenses) – Fixed expenses.Here (Sales- variable cost) = contribution and (contribution- Fixed cost) = profit.

2. True, The CM ratio can also be calculated by dividing the contribution margin per unit by the selling price per unit.

3. Margin of safety in dollars = Total sales - Break-even Sales.Margin of safety is the sales over and above break even sales.

4. It is False that The margin of safety cannot be expressed in terms of the number of units sold.

The margin of safety can be expressed in term of number of units sold, where Margin of safety in units = Current sales units – Breakeven point Sales units

5. It is False that If variable expenses are 70% of sales, CM ratio is half of it or 35%.

Contribution= Sales-variable cost

If variable cost is 70%, contribution is 30%.

6.True, A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period.A budget provides an estimate of revenue and expenditure over a period of time and helps in making important business decisions.

7.True ,One advantage of budgeting is that it can uncover potential bottlenecks.

In budgeting it is well known that when production process is going to increase or decrease and when more or less resources will be required.So budgeting helps knowing bottle neck in advance.

8. It is False that a self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at the top level.

Participative budget is a budget that is prepared with the full cooperation and participation of managers at the lower level.Top level management is involved in all kinds of budget.

9. True, Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above.

When goals are self imposed employees can relate to it quite easily and everyone sets their goals according to their own calibre and capacity.

10. True, The production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory.

However production budget can be less provided organisation have some opening inventory but it should never be less than Sales+ ending inventory.

11. True, Performance evaluation is difficult when actual activity differs from the planned level of activity.

12. It is false that a Flexible budget cannot show costs that should have been incurred at the actual level of activity.

Flexible budget can show costs incurred at any level of activity whether actual, planned or estimated.

13. True, Flexible budgets improve performance this is because flexible budget can calculate related costs at any level of actual activity which helps in performance evaluation at actual level of activity.

14. True, Favorable variance occurs when actual revenue is greater than budgeted. Favourable variance means positive change.When the actual revenue will be higher than budgeted it will be favourable for organization.

15. It is False that The differences between the master budget amounts and the flexible budget amounts are called master budget variances.

The differences between the master budget amounts and the actual amounts are called master budget variances.