Question

Which of the following statements is false with respect to the selling and administrative expense budget? Multiple Choice It includes depreciation expense even though it is not a cash flow. It estimates the cash disbursements for selling and administrative expenses that appear in the cash budget. It includes estimated variable and fixed selling and administrative expenses. It impacts the budgeted cost of goods sold reported on the income statement.

Answer 1

The answer is - "It impacts the budgeted cost of goods sold reported on the income statement."
This statement is false with respect to the selling and administrative expense budget.

Explanation:
Selling expenses are related to the sales estimates made by the company. The selling expense may vary in accordance with the forecasted units to be sold. Administrative expenses are related to the personnel, office and depreciation affairs of the company. It doesn't have any relation with the budgeted unit sales. Administrative expenses include utility expenses, salaries and wages expenses, insurance expenses, rent expenses, depreciation expenses, etc. Therefore, selling and distribution expenses doesn't impact the cost of goods sold. Cost of goods sold only includes the product cost, means, the cost incurred for producing the product. Therefore, selling and administrative expenses doesn't make any impact on the budgeted cost of goods sold reported on the income statement. Selling and administrative expenses are reported on the income statement as a seperate head of expense. It excludes as a part of cost of goods sold.

Depreciation expense is a part of administrative expense. Therefore, it includes in the selling and administrative expenses budget even if it is not a cash flow. The selling and administrative expenses budget estimates the cash disbursements for selling and administrative expenses that appear in the cash budget after deducting the non cash expense for depreciation. The selling and administrative expenses budget includes both variable as well as fixed selling and administrative expenses. For example, sales commissions are variable, which may vary in accordance with the sales volume and rent expense is fixed, which may not vary in accordance with the change in the sales volume.