Budgeting Flashcards
Which of the following are considered to be objectives of budgeting?
1) Authorisation
2) Expansion
3) Performance evaluation
4) Resource allocation
A - 4 only
B - 1, 2, and 4 only
C - 1, 3 and 4 only
D - 1, 2, and 3 only
C - 1, 3 and 4 only
Which of the following is not one of the main purposes of a budget?
A - To compel planning
B - To communicate targets to the managers responsible for achieving the budget
C - To inform shareholders of performance in meeting targets
D - To establish a system of control by comparing budgeted and actual results
C - To inform shareholders of performance in meeting targets
Budgets are prepared for internal use and are not usually communicated to shareholders.
Which two of the following statements relating to budgets are correct?
A - A budget covers periods longer than one year and is used for strategic planning
B - The budget committee coordinates the preparation and administration of budgets.
C - The budget committee is responsible for the preparation of functional budgets
D - A budget manual will contain instructions governing the preparation of budgets.
E - A budget is usually prepared by the shareholders of a company.
B - The budget committee coordinates the preparation and administration of budgets.
D - A budget manual will contain instructions governing the preparation of budgets.
When preparing the master budget, which of the following tasks would normally be carried out first?
A - Calculate the overhead absorption rate
B - Establish the organisation’s long-term objectives
C - Identify the principal budget factor
D - Prepare the sales budget
B - Establish the organisation’s long-term objectives
Which three of the following are steps in the preparation of a budget?
A - Arrange overdraft facilities
B - Identify the principal budget factor
C - Prepare a budgeted income statement
D - Budget the resources for production
E - Complete the audit of the prior year’s results
B - Identify the principal budget factor
C - Prepare a budgeted income statement
D - Budget the resources for production
Which of the following is a principal budget factor?
A - The highest value item of cost
B - A factor which limits the activities of an undertaking
C - A factor common to all budget centres
D - A factor controllable by the manager of the budget centre
B - A factor which limits the activities of an undertaking
Which of the following could be principal budget factors?
1 - Sales Demand
2 - Machine capacity
3 - Key raw materials
4 - Cash flow
A - 1 and 2 only
B - 1, 2, 3 and 4
C - 1, 2 and, 3
D - 1, 2 and 4
B - 1, 2, 3 and 4
Sales demand is usually the principal budget factor. However, the identification of a principal budget
factor depends on what factor limits the organisation’s activities and so is the limiting factor.
All of the factors listed could therefore be the principal budget factor in certain circumstances
Which of the following is not a functional budget?
A - Purchases budget
B - Cash budget
C - Sales budget
D - Marketing cost budget
B - Cash budget
Part of the overall master budget
For a company that does not have any production resource limitations, which of the following sets out the correct sequence for budget preparation?
A - Production budget, finished goods inventory budget, sales budget, then materials usage budget
B - Sales budget, finished goods inventory budget, production budget, then materials usage budget
C - Sales budget, production budget, finished goods inventory budget, then materials usage budget
D - Sales budget, finished goods inventory budget, materials usage budget, then production budget
B - Sales budget, finished goods inventory budget, production budget, then materials usage budget
Sales would be the principal budget factor (as there are no production resource limitations) and so
this is the first budget to be prepared.
Inventory adjustments in the finished goods inventory budget indicate the production requirements for the production budget. Once the level of production is known, the materials usage budget can be prepared.
Which two of the statements below correctly complete the following sentence?
The master budget:
A - will include a budgeted balance sheet and a budgeted income statement prepared on the accruals basis
B - will include a cash budget
C - is usually prepared before the functional budgets
D - details the timetable for the preparation of the various budgets
E - includes the instructions for the completion of the budget forms and the responsibilities of the personnel involved
A - will include a budgeted balance sheet and a budgeted income statement prepared on the accruals basis
B - will include a cash budget
The master budget consists of a budgeted balance sheet, a budgeted income statement and a cash
budget. It is prepared from the information in the functional budgets, and is therefore the last to be
prepared.
Instructions for the preparation of the budgets will be contained in the budget manual.
A budget timetable is drawn up at the start of the budgetary process, and is not included in the
master budget
Which of the following expressions is correct?
A - Opening inventory + sales – closing inventory = production (in units)
B - Opening inventory + sales + closing inventory = production (in units)
C - Closing inventory + sales – opening inventory = production (in units)
D - Closing inventory – sales – opening inventory = production (in units)
C - Closing inventory + sales – opening inventory = production (in units)
A company is preparing its production budget for product Z for the forthcoming year
Budgeted sales of product Z are 1,500 units. Opening inventory is 120 units and the company wants to reduce inventories at the end of the year by 10%
The budgeted number of units of product Z to be produced is:
A - 1,392
B - 1,488
C - 1,500
D - 1,512
B - 1,488
Budgeted sales 1,500
Less inventory reduction (120 × 10%) (12)
———–
Budgeted production 1,488
Research Ltd purchases a chemical and refines it before onward sale. Budgeted sales of the refined chemical are as follows:
Litres:
January 40,000
February 50,000
March 30,000
1) The target month-end inventory of unrefined chemical is 30% of the chemical needed for the following month’s budgeted production.
2) The targeted month-end inventory of refined chemical is 30% of next month’s budgeted sales
Calculate the budgeted purchases of unrefined chemical for January:
A - 56,200 litres
B - 49,750 litres
C - 48,250 litres
D - 43,400 litres
D - 43,400 litres
Closing inventory of refined:
(30% of next month’s sales)
Dec: 12,000
Jan: 15,000
Feb: 9,000
Sales for the month:
Jan: 40,000
Feb: 50,000
Less opening inventory of refined:
Jan: (12,000)
Feb: (15,000)
—-
Jan: 55,000 - 12,000 = 43,000
Feb: 59,000 - 15,000 = 44,000
Closing inventory of unrefined:
(30% of next month’s requirements of refined)
Dec: 12,900
Jan: 13,200
Total production requirement:
Jan: 43,000 + 13,200
Less opening inventory: (12,900)
—–
Budgeted purchases 43,300
When preparing a material purchases budget, which of the following is the quantity to be purchased?
A - Materials required for production – opening inventory of materials – closing inventory of materials
B - Materials required for production – opening inventory of materials + closing inventory of materials
C - Opening inventory of materials + closing inventory of materials – materials required for production
D - Opening inventory of materials – materials required for production – closing inventory of materials
B - Materials required for production – opening inventory of materials + closing inventory of materials
Barlow plc manufactures two products, Vip and Bip. It intends to produce 2,000 units of each product in the next year to meet the sales budget.
Each Vip requires 2 kg of material Z and 1 kg of material Y and each Bip requires 3 kg of material Z and 4 kg of material Y
At present there are 200 kg of Z and 500 kg of Y in inventory
Barlow plc intends to increase the inventory levels of these materials by the end of the year to 600 kg of Z and 800 kg of Y
Material Z costs £4 per kg and material Y costs £5 per kg
What is the total materials purchases for the next year?
A - £86,900
B - £90,000
C - £93,100
D - £96,400
C - £93,100
Material Z: per kg
Vip 2,000 x 2kg of Z = 4,000
Bip 2,000 x 3kg of Z = 6,000
—-
Total usage = 10,000
Increase in inventory = 400
—-
Materials purchase budget = 10,400
Cost per kg £4
10,400 x 4 = £41,600
Material Y:
Vip 2,000 x 1kg of Y = 2,000
Bip 2,000 x 4kg of Y = 8,000
—-
Total usage = 10,000
Increase in inventory = 300
———
Materials purchase budget = 10,300
Cost per kg = £5
—–
10,300 x £5 = £51,500
Total materials purchases = £41,600 + 51,500 =
£93,100
A retailing company makes a gross profit of 25% on sales. The company plans to increase inventory by 10% in June. The budgeted sales revenue for June is £25,000. Opening inventory on 1 June is valued at £5,000
What are the budgeted inventory purchases for June?
A - £18,250
B - £19,125
C - £19,250
D - £25,500
C - £19,250
Cost of sales for June (£25,000 × 0.75) = 18,750
Increase in inventory (£5,000 × 0.10) = 500
———–
Budgeted inventory purchases = 19,250
Budgeted sales of X for December are 18,000 units. At the end of the production process for X, 10% of production units are scrapped as defective. Opening inventories of X for December are budgeted to be 15,000 units and closing inventories will be 11,400 units. All inventories of finished goods must have successfully passed the quality control check.
The production budget for X for December, in units, is:
A - 12,960
B - 14,400
C - 15,840
D - 16,000
D - 16,000
Budgeted sales =18,000
Budgeted reduction in finished goods = (3,600)
———
Budgeted production of completed units 14,400
Allowance for defective units (10% of output = 1/9 of input) = 1,600
——–
Production budget 16,000
The quantity of material in the material purchases budget is greater than the quantity of material in the material usage budget.
Which of the following statements can be inferred from this situation?
A - Wastage of material occurs in the production process.
B - Finished goods inventories are budgeted to increase.
C - Raw materials inventories are budgeted to increase
D - Raw materials inventories are budgeted to decrease
C - Raw materials inventories are budgeted to increase
Once the material usage budget has been prepared, based on the budgeted production volume,
the usage is adjusted for the budgeted change in materials inventories in order to determine the
required budgeted purchases. If purchases exceed production requirements this means that raw material inventories are being increased
George has been asked by his bank to produce a budgeted income statement for the six months ending on 31 March 20X4
He forecasts that monthly sales will be £3,000 for October, £4,500 for each of November and December and £5,000 per month from January 20X4 onwards.
Selling price is fixed to generate a margin on sales of 33 1/3 %
Overhead expenses (excluding depreciation) are estimated at £800 per month
He plans to purchase non-current assets on 1 October costing £5,000, which will be paid for at the end of December and are expected to have a five-year life, at the end of which they will possess a nil residual value
The budgeted net profit for the six months ending 31 March 20X4 is:
A - £3,200
B - £3,700
C - £3,950
D - £8,200
B - £3,700
Sales (3,000 + (2 × 4,500) + (3 × 5,000)) 27,000
Cost of sales (2/3 × £27,000) (18,000)
———
Gross profit 9,000
Running expenses (6 × £800) 4,800
Depreciation (£5,000 × 20% × 6/12) 500
——-
(5,300)
Net profit 3,700
At the beginning of March 20X2, a company has an opening balance of £60,000 on its receivables ledger. Sales of £160,000 have been budgeted for March and it is budgeted that 60% of these will be settled in March after a cash discount of 2.5%
If 23% of the opening receivables are still outstanding at the end of March, what will be the budgeted receivables figure at that date?
A - £76,200
B - £77,800
C - £80,200
D - £110,200
B - £77,800
23% of opening receivables 13,800
40% of March sales 64,000
———-
77,800
Note that an adjustment does not have to be made for the settlement discount in this case as the
question states that 60% of the sales will be settled, rather than that 60% of the gross invoice value
will be received
A retailing company budgets to maintain inventories at the end of each month which are sufficient to meet the budgeted sales requirements for the following month. Two months’ credit will be received from suppliers of inventory.
Budgeted sales, which earn a gross profit margin of 20% of sales value, are as follows:
January 28,300
February 26,100
March 33,800
April 30,690
The budgeted balance sheet as at the end of March will show a payables balance of:
A - £47,920
B - £51,592
C - £59,900
D - £64,490
B - £51,592
Payables balance at end of March = February and March purchases
The purchases for each month are equal to the sales requirement for the following month.
Payables balance at end of March = March and April cost of sales
= £(33,800 + 30,690) × 0.8
= £51,592
A company’s master budget contains the following budgeted income statement.
Sales revenue (5,000 units) = 120,000
Variable materials cost = 24,000
Variable labour cost = 32,500
Variable overhead =13,000
Fixed overhead = 41,000
————
110,500
Budgeted net profit 9,500
The company’s management are considering a change in the materials specification. This would reduce the materials cost per unit by 10%. The reduced product quality would necessitate a 2% reduction in the selling price and the sales volume would fall by 5%.
The revised budgeted net profit for the period would be:
A - £3,620
B - £6,975
C - £9,025
D - £9,375
B - £6,975
Sales revenue £120,000 × 0.98 × 0.95 = 111,720
Variable materials cost £24,000 × 0.9 × 0.95 = 20,520
Variable labour cost £32,500 × 0.95 = 30,875
Variable overhead £13,000 × 0.95 =12,350
Fixed overhead 41,000
————–
(104,745)
————
Budgeted net profit 6,975
Which two of the following statements are correct?
A - A forecast and a budget are essentially the same thing.
B - A budget must be quantified if it is to be useful for planning and control purposes.
C - A budget provides the basic unit rates to be used in the preparation of standards for control purposes.
D - The sales budget must always be prepared first
E - An organisation’s long term plan provides the framework within which an annual budget is set.
B - A budget must be quantified if it is to be useful for planning and control purposes.
E - An organisation’s long term plan provides the framework within which an annual budget is set.
A company has recorded the following costs over the last six months.
Month: 1 Cost: 74,000 Units produced: 3,000
Month: 2 Cost: 72,750 Units produced: 1,750
Month: 3 Cost: 73,250 Units produced: 2,000
Month: 4 Cost: 75,000 Units produced: 2,500
Month: 5 Cost: 69,500 Units produced: 1,500
Month: 6 Cost: 72,750 Units produced: 2,000
Using the high-low method, which of the following represents the total cost equation?
A - Total cost = 61,250 + (1.25 × quantity)
B - Total cost = 65,000 + (3 × quantity)
C - Total cost = 65,000 + (1.25 × quantity)
D - Total cost = 61,250 + (3 × quantity)
B - Total cost = 65,000 + (3 × quantity)
Highest production: 3,000 units at £74,000
Lowest production: 1,500 units at £69,500
3,000 - 1,500 = 1,500 units
74,00 - 69,500 = 4,500
Variable cost per unit = £4,500/1,500 = £3 per unit
Total cost = fixed cost + (£3 × quantity)
£74,000 = fixed cost + (£3 × 3,000)
Fixed cost = £74,000 – £9,000
= £65,000
A company has recorded the following costs over the last four months.
Month: 1 Cost: 21,995 Units produced: 1,050
Month: 2 Cost: 19,540 Units produced: 1,090
Month: 3 Cost: 19,000 Units produced: 750
Month: 4 Cost: 17,200 Units produced: 700
Using the high-low method, the expected cost of producing 950 units is:
A - £17,030
B - £18,700
C - £20,625
D - £23,343
B - £18,700
Highest output: 1,090 units
Less lowest output: (700)
—-
390 units
Cost of highest output: 19,540
Less lowest output; (17,200)
—
2,340
Variable cost per unit = £2,340/390 = £6
Fixed cost at a production level of 1,090 units = £19,540 – (1,090 × £6) = £13,000
(Note that the fixed cost will be the same if calculated at the lowest production level, but not if production levels other than the ones used in the calculation of variable cost are used.)
Variable cost (950 × £6) 5,700
Fixed cost 13,000
———-
18,700
The following estimates of possible sales revenue and cost behaviour for a one-year period relate to one of AB Company’s products:
60% Activity Level:
Sales and production (units) = 36,000
Sales revenue = £432,000
Production costs
Variable and fixed: £366,000
Sales dist. and admin costs: vari and fix = £126,000
100%
Sales and production (units) = 60,000
Sales revenue = £720,000
Production costs
Variable and fixed: £510,000
Sales dist. and admin costs: vari and fix = £150,000
The budgeted level of activity for the current year is 60,000 units, and fixed costs are incurred evenly
throughout the year.
There was no inventory of the product at the start of the first quarter, in which 16,500 units were made and 13,500 units were sold. Actual fixed costs were the same as budgeted.
AB Company uses absorption costing. You may assume that sales revenue and variable costs per unit are as budgeted
What is the value of the fixed production costs that were absorbed by the product in the first
quarter?
A - £33,750
B - £37,500
C - £41,250
D - £66,000
C - £41,250
Production costs:
Fixed plus variable
60,000 = £510,000
vs
36,000 = £366,000
——
144,000 difference
Sales costs:
60,000 = £150,000
36,000 = 126,000
—-
24,000
Costs for 24,000 units (60-36) = £144,000 production, £24,000 sales
Variable costs per unit =
144,000/24,000 = £6 production and £1 sales
Production:
Total costs of 60,000 units
= 510,000
Less variable costs: 60,000 x £6 = (360,000)
—
Fixed costs: 150,000
Sales
Total costs of 60,000 units
= 150,000
Less variable costs: 60,000 x £1 = (60,000)
—-
Fixed costs = 90,000
The rate of absorption of fixed production overheads will therefore be £150,000/60,000 = £2.50 per
unit.
The fixed production overhead absorbed by the product would be 16,500 units produced × £2.50 =
£41,250
The following data have been extracted from the budget working papers of BL Ltd.
Production volume:
1,000 £/unit
Variable materials: 4.00
Variable labour: 3.50
Production overhead 1: 6.00
Production overhead 2: 4.00
2,000 £/unit
Variable materials: 4.00
Variable labour: 3.50
Production overhead 1: 4.20
Production overhead 2: 2.00
The total fixed cost and variable cost per unit is:
A - Total fixed cost: £3,600; Variable cost per unit: £9.90
B - Total fixed cost: £4,000; Variable cost per unit: £11.70
C - Total fixed cost: £7,600; Variable cost per unit: £7.50
D - Total fixed cost: £7,600; Variable cost per unit: £9.90
D - Total fixed cost: £7,600; Variable cost per unit: £9.90
Department 1:
Total production overhead cost for 1,000 = 1,000 × £6 = 6,000
Total production overhead cost for 2,000 = 2,000 × £4.20 = 8,400
—————–
Increase in units = 1,000 and increase in price between the 2 = 2,400
Variable overhead cost per unit = £2.40 (2,400/1,000)
Fixed overhead cost = £6,000 – (1,000 × £2.40)
= £3,600
Department 2:
Total production overhead cost for 1,000 = 1,000 × £4 = 4,000
Total production overhead cost for 2,000 = 2,000 × £2 = 4,000
The production overhead cost in department 2 is wholly fixed
Variable cost per unit:
Variable materials £4.00
Variable labour £3.50
Production overhead 1 £3,600 fixed cost and £2.40 variable cost per unit
Production overhead 2 total fixed cost £4,000
Total fixed cost = £3,600 + 4,000 = £7,600
Variable = 4 + 3.50 + 2.40 = 9.90
Which two of the following are underlying assumptions of forecasts made using regression analysis?
A - A curvilinear relationship exists between the two variables
B - The value of one variable can be predicted or estimated from the value of one other variable
C - A perfect linear relationship between the two variables
D - What has happened in the past will provide a reliable guide to the future
B - The value of one variable can be predicted or estimated from the value of one other variable
D - What has happened in the past will provide a reliable guide to the future
A company’s weekly costs (£C) were plotted against production level (P) for the last 50 weeks and a regression line calculated to be C = 100 + 20P.
Which of the following statements about the breakdown of weekly costs is true?
A - Fixed costs are £100. Variable costs per unit are £20
B - Fixed costs are £20. Variable costs per unit are £100
C - Fixed costs are £20. Variable costs per unit are £5
D - Fixed costs are £100. Variable costs per unit are £4
A - Fixed costs are £100. Variable costs per unit are £20
If C = 100 + 20P, then fixed costs are the constant, £100, and variable costs are £20 per unit
Which two of the following statements are correct?
A - Positive correlation means that low values of one variable are associated with low values of the other, and high values of one variable are associated with high values of the other.
B - Positive correlation means that low values of one variable are associated with high values of the other, and high values of one variable are associated with low values of the other
C - Negative correlation means that low values of one variable are associated with low values of the other, and high values of one variable are associated with high values of the other.
D - Negative correlation means that low values of one variable are associated with high values of the other, and high values of one variable are associated with low values of the other
A - Positive correlation means that low values of one variable are associated with low values of the other, and high values of one variable are associated with high values of the other.
D - Negative correlation means that low values of one variable are associated with high values of the other, and high values of one variable are associated with low values of the other
Positive correlation means that both variables move together from low to high. Negative correlation
means that as one variable increases, the other decreases
The correlation coefficient between two variables, x and y, is +0.72
The proportion of variation in y that is explained by variation in x is (to two decimal places).
A - 0.52
B - 0.72
C - 0.85
D - 1.44
A - 0.52
The coefficient of determination, r 2 , measures the proportion of the total variation in the value of one variable that can be explained by variations in the value of the other variable.
r^2 = 0.72^2 = 0.52
Therefore, only just over half of the variation in one variable can be explained by variation in the other
Which two of the following statements are correct?
A - The coefficient of determination must always fall between 0 and +1
B - The correlation coefficient must always fall between –1 and +1
C - An advantage of the high-low method of cost estimation is that it takes into account the full range of available data
D - A cost estimate produced using the high-low method can be used to reliably predict the cost for any level of activity
A - The coefficient of determination must always fall between 0 and +1
B - The correlation coefficient must always fall between –1 and +1
The correlation coefficient (r) can take any value from –1 (perfect negative correlation) to +1 (perfect
positive correlation).
The coefficient of determination (r2 ) must therefore lie between 0 and +1.
A major disadvantage of the high-low method is that it does not take into account the full range of
available data. Only two pairs of historical cost data are used in the cost estimation.
A cost estimate produced using the high-low method cannot be used to reliably predict the cost for any level of activity. It can reasonably be used to estimate a cost within the range of activity covered
by the data available.
The correlation coefficient between advertising expenditure and sales revenue is calculated to be 0.85
Which of the following statements is true?
A - There is a weak relationship between advertising expenditure and sales revenue
B - 85% of the variation in sales revenue can be explained by the corresponding variation in advertising expenditure.
C - 72% of the variation in sales revenue can be explained by the corresponding variation in advertising expenditure
D - Sales revenue will increase by 85% more than advertising expenditure will increase
C - 72% of the variation in sales revenue can be explained by the corresponding variation in advertising expenditure
Correlation coefficient, r = 0.85
Coefficient of determination, r^2 = 0.85^2 = 0.72
The coefficient of determination tells us that 72% of the variation in sales revenue can be explained by the corresponding variation in advertising expenditure
The linear relationship between advertising in thousands of pounds (X) and sales in tens of thousands of pounds (Y) is given by Y = 5 + 2X.
Which two of the following statements are correct?
A - For every £1,000 spent on advertising, sales revenue increases by £50,000 on average.
B - When nothing is spent on advertising the average level of sales is £50,000
C - For every £1,000 spent on advertising, sales revenue increases by £20,000 on average
D - When nothing is spent on advertising, the average level of sales is £20,000
B - When nothing is spent on advertising the average level of sales is £50,000
C - For every £1,000 spent on advertising, sales revenue increases by £20,000 on average
When nothing is spent on advertising, X = 0.
Y = 5 + (2 × 0) = 5
Therefore, sales revenue is £5 × 10,000 = £50,000 on average.
If £1,000 extra is spent on advertising, then sales increase by 20 × £1,000.
Therefore, the increase in sales revenue when an extra £1,000 is spent on advertising is £20,000 (2 ×
£10,000).
Which of the following is the best description of a ‘top-down’ budgeting process?
A - The process starts with sales, then progresses to production, materials usage and other functional budgets
B - Top management prepare a budget with little or no input from operating personnel
C - A series of budgets is prepared, from the most optimistic performance down to the most pessimistic
D - The top-level budget is non-financial, but more detailed budgets are progressively in more financial terms
B - Top management prepare a budget with little or no input from operating personnel
A ‘top-down’ budgeting process is an imposed style of budgeting. This style of budgeting has its
advantages, but it can cause motivational problems
Which two of the following are advantages of a ‘bottom-up’ style of budgeting?
A - Increase operational managers’ commitment to organisational objectives
B - Enhance the coordination between the plans and objectives of divisions
C - Reduce the incidence of budgetary slack
D - Based on information from employees most familiar with day to day activities
E - Decrease the period of time taken to prepare the budgets
A - Increase operational managers’ commitment to organisational objectives
D - Based on information from employees most familiar with day to day activities
A ‘bottom-up’ style of budgeting is a participative approach where lower-level managers are involved in preparing their own budgets. This tends to increase their commitment to the budget and to the overall objectives. It also means that budgets are likely to be more accurate and realistic because managers who are undertaking tasks on a daily basis will have greater knowledge about what is achievable.
Since each division is preparing its own budget, a participative process can be more time consuming
and it can be more difficult to coordinate the divisions’ activities than if centrally-prepared budgets are imposed on the divisions.
Budgetary slack is unnecessary expenditure built into the budget. If managers are involved in
preparing their own budgets, they may be tempted to build in slack to give some protection against underperformance.
Which of the following are criticisms of incremental budgeting?
1) It is time consuming because it involves starting each budget from scratch
2) It encourages slack
3) It includes past inefficiencies as cost levels are not scrutinised
4) It encourages wasteful spending
A - 1 and 2
B - 1, 2 and 3
C - 2, 3, and 4
D - 3 and 4
C - 2, 3, and 4
Starting each budget from scratch is not a criticism of incremental budgeting as this is a feature of zero-based budgeting
Which of the following best describes incremental budgeting?
A - Increments of expenditure are compared with the expected benefits to be received
B - Budgeted capacity is increased in increments until it is just sufficient to satisfy budgeted production requirements
C - The budget for each period is based on the current year’s results, modified for changes in activity levels.
D - The budget is updated in regular increments, by adding the budget for a further accounting period when the earliest accounting period has expired
C - The budget for each period is based on the current year’s results, modified for changes in activity levels.
Increments of expenditure are compared with the expected benefits to be received in a zero-based
budgeting system, not in an incremental budgeting system.
The regular updating of the budget by adding the budget for a further accounting period occurs
with a system of rolling budgets.
Which two of the following are characteristics of rolling budgets?
A - Each item of expenditure has to be justified in its entirety in order to be included in the next year’s budget
B - A new accounting period, such as a month or a quarter, is added as each old one expires
C - The budget is more realistic and certain as there is a short period between the preparation of budgets
D - Updates to the fixed annual budget are made only when they are foreseeable
B - A new accounting period, such as a month or a quarter, is added as each old one expires
C - The budget is more realistic and certain as there is a short period between the preparation of budgets
The other characteristics relate to annual budgets and zero-based budgets (where each item of
expenditure has to be justified from scratch)
Which of the following best describes ‘zero-based budgeting’?
A - A budget method where an attempt is made to make expenditure under each cost heading as close to zero as possible.
B - A method of budgeting whereby all activities are re-evaluated each time a budget is formulated
C - A method of budgeting where the sum of costs and revenues for each budget centre equals zero
D - A method of budgeting that distinguishes fixed and variable cost behaviour with respect to changes in output and the budget is designed to change appropriately with such fluctuations
B - A method of budgeting whereby all activities are re-evaluated each time a budget is formulated
Zero-based budgeting builds up a budget from scratch. It rejects the assumption that this year’s
activities will continue at the same level next year
Three separate newly-formed companies are currently designing their budgetary planning and control systems
Company A will manufacture a wide range of products of varying flexibility. Some of the products will be mass produced, others will be low volume. The degree of non-production support required for each product differs widely
Company B will manufacture a single product and has employed a specialist to manage each of its production and non-production activities
Company C will manufacture a small range of diverse products and the cost and revenue
responsibilities will differ for each product
Indicate which budget structure would be most appropriate for each organisation.
Product based budget:
A - Company A
B - Company B
C - Company C
Responsibility based budget:
D - Company A
E - Company B
F - Company C
Activity-based budget:
G - Company A
H - Company B
I - Company C
C - Company C
A product-based budget is most appropriate for company C because a separate budget would be
prepared for each of the diverse products
E - Company B
Within company B, each specialist manager will have their own budget and will be responsible for
the achievement of that budget
G - Company A
The use of an activity-based budget by company A will ensure that the non-production costs are
planned and controlled more accurately through the identification of appropriate cost drivers. The use of non-volume related cost-drivers should also help with more accurate planning and control of production costs, where low volume products might cause a disproportionate amount of cost
Which two of the following statements about budgeting are correct?
A - A forecast is an attempt to predict what will happen
B - A budget is a plan of what is intended to happen
C - All budgets are prepared in financial terms
D - The master budget consists of a budgeted income statement and a budgeted balance sheet
E - A flexible budget adjusts both fixed and variable costs for the level of activity.
A - A forecast is an attempt to predict what will happen
B - A budget is a plan of what is intended to happen
A forecast is a prediction by management of the expected outcome whereas a budget represents a
set of targets of what management intend to happen. A budget is usually set just once a year whereas forecasts and re-forecasts can be carried out much more frequently
A firm that uses zero-based budgeting for its overheads has
A - zero as the starting point for budgeting the coming year’s overheads
B - a zero variance between budgeted and actual overhead
C - an assumed sales level of zero as the starting point for budgeting the coming year’s overheads
D - an overhead budget of zero
A - zero as the starting point for budgeting the coming year’s overheads
Zero-based budgeting, by its very definition, starts from zero and is built upwards
The high-low method of cost estimation is useful for:
A - calculating the budgeted cost for the actual activity
B - calculating the highest and lowest costs in the budget period
C - measuring the actual cost for the budgeted activity
D - predicting the range of costs expected in the budget period
A - calculating the budgeted cost for the actual activity
An extract from next year’s budget for a manufacturing company is shown below.
Closing inventory of raw materials:
Month 3: £22,000
Month 4: £12,000
The manufacturing cost of production is £116,000 in both Month 3 and Month 4. Materials costs represent 40% of manufacturing cost
The budgeted material purchases for Month 4 are:
A - £36,400
B - £42,400
C - £46,400
D - £56,400
A - £36,400
Month 4 materials cost included within cost of sales is £116,000 × 40% = £46,400. Inventory of
materials are budgeted to reduce from £22,000 to £12,000 and therefore budgeted materials
purchased in the month would be (£46,400 + £12,000 – £22,000) = £36,400
You are given the following budgeted cost information for Verlaine plc for January.
Sales: £120,000
Unit selling price: £2
Gross profit: 30% margin on sales
Opening inventory: 6,000 units
You are given the following budgeted cost information for Verlaine plc for January.
Sales: £120,000
Unit selling price: £2
Gross profit: 30% margin on sales
Opening inventory: 6,000 units
Sales volumes are increasing at 20% per month and company policy is to maintain 10% of next
month’s sales volume as closing inventory
The budgeted cost of production for January is:
A - £84,000
B - £85,680
C - £120,000
D - £122,400
B - £85,680
As sales are increasing at 20% per month the expected sales for February are £120,000 × 120% = £144,000.
As the gross margin is 30% on sales the cost of sales for February is expected to be £144,000 × 70% = £100,800.
The company policy is to maintain closing inventory at 10% of the expected next month’s sales. The
closing inventory for January is therefore £10,080. The cost of a unit is £2 × 70% = £1.40, meaning the closing inventory for January is £10,080/£1.40 = 7,200 units.
The budgeted cost of production for January would therefore need to cover January sales
(£120,000/£2 per unit = 60,000 units) plus an increase in inventory from 6,000 to 7,200 units, ie, a
total of 61,200 units. This is a cost of 61,200 × £1.40 = £85,680
Which of the following statements about big data is/are correct?
1) Big data is often out of date before it can be used.
2) Big data is only relevant for short term decisions
3) Big data can be used to predict consumer preferences
A - 1, 2, and 3
B - 1 and 2
C - 3 only
D - 2 and 3
C - 3 only
Big data is relevant to long term as well as short-term decision making and it is updated in real time so is not out of date. It is often used to predict consumer preferences successfully
Fashn Ltd runs a chain of fashion retail stores. A key element of its commercial success comes from being able to identify customer trends, and responding to them, more quickly than its competitors.
Which two of the following are potential sources of big data for Fashn Ltd?
A - Online video clips of clothes being shared by customers
B - Daily transactions records from stores
C - Inventory records from the chain’s central warehouse
D - Keywords from conversations about fashion on social media
E - The number, and level, of discounts Fashn Ltd has to offer on its products
A - Online video clips of clothes being shared by customers
D - Keywords from conversations about fashion on social media
What are the four ‘V’s associated with big data?
A - Volume, velocity, visibility, veracity
B - Variability, volume, verification, veracity
C - Volume, velocity, variety, veracity
D - Velocity, visibility, variety, variability
C - Volume, velocity, variety, veracity
Teecee Ltd operates a chain of coffee shops. It has an interactive website where customers can leave feedback, and has recently introduced a customer loyalty card that is swiped at the till whenever a purchase is made. Teecee is keen to make use of this new data
Which two of the following are suitable uses of the data that is collected from Teecee’s website and its customer loyalty cards?
A - Understanding individual customer preferences
B - Updating inventory records
C - Analysing the take-up of targeted promotions
D - Rewarding branch managers for the achievement of sales targets
A - Understanding individual customer preferences
C - Analysing the take-up of targeted promotions
The number of specialist data analytics firms has risen in recent years with the increase in the collection of big data.
Which two of the following explain this?
A - Privacy concerns mean that it is prudent to give data to analytics firms who are better able to protect it
B - Cybersecurity risks can be avoided by the use of data specialists
C - There is a lack of employees within the organisation with appropriate data analytics skills
D - Big data is often incorrect and data analysts are quicker to detect errors and inaccuracies
E - Traditional data management systems cannot readily process unstructured data
C - There is a lack of employees within the organisation with appropriate data analytics skills
E - Traditional data management systems cannot readily process unstructured data
Which two of the following are Beyond Budgeting principles?
A - Targets should be cascaded from management downwards
B - Resources should be made available when needed throughout the year
C - Management processes should be organised around the calendar year
D - Each employee’s job should be connected with customer needs
B - Resources should be made available when needed throughout the year
D - Each employee’s job should be connected with customer needs
Option B relates to the management process principle ‘Resource allocation’. Option D relates to the leadership principle ‘Customers’
Which of the following statements about modern budgeting is/are correct?
1) Better forecasting leads to better business decision making
2) Machine learning predictions improve as more data is added
3) Beyond budgeting principles suggest businesses should inspire people via short-term financial
A - 1, 2, and 3
B - 1 and 2
C - 3 only
D - 2 and 3 only
Which of the following statements about modern budgeting is/are correct?
1) Better forecasting leads to better business decision making
2) Machine learning predictions improve as more data is added
3) Beyond budgeting principles suggest businesses should inspire people via short-term financial targets
A - 1, 2, and 3
B - 1 and 2
C - 3 only
D - 2 and 3 only
B - 1 and 2
The beyond budgeting leadership principle ‘purpose’ suggests that people should be inspired by noble causes; not around short-term financial targets
Traditional budgeting methods are known to have problems in the modern business environment.
Indicate which solution would be most appropriate for each problem:
Traditional methods are inflexible
A - Big data analytics
B - Rolling budgets
C - Use of machine learning
Forecasts are inaccurate
D - Big data analytics
E - Rolling budgets
F - Use of machine learning
Businesses have lost sight of what is important to customers
G - Big data analytics
H - Rolling budgets
I - Use of machine learning
B - Rolling budgets
Rolling budgets are particularly useful during times of uncertainty when businesses need to be
flexible.
F - Use of machine learning
Machine learning can be used to obtain more accurate forecasts (and more accurate forecasts lead to more informed decision making).
G - Big data analytics
Big data analytics can be used to provide insight into customer preferences
There is a constant, flat trend in the sales of Product HH. Using time series analysis, the quarterly seasonal variations are as follows:
Seasonal variation compared with trend
Quarter 1: +50%
Quarter 2: +50%
Quarter 3: -50%
Quarter 4: -50%
Sales for Quarter 2 were 330 units
What are the predicted sales for Quarter 3, to the nearest whole unit?
A - 165 units
B - 220 units
C - 110 units
D - 440 units
C - 110 units
TS = T × S
Quarter 2: T × 150% = 330
T = 330 ÷ 1.5 = 220
Quarter 3 SV = –50%
predicted sales = 220 × 50% = 110
What is the reason for seasonally adjusting the data in a time series?
A - To calculate moving averages
B - To estimate the seasonal variations
C - To remove the cyclical variation
D - To find the trend
D - To find the trend
Seasonally adjusting data removes the seasonal element, leaving the underlying trend value
Product 43X is produced by Factory A in the south of the country and Factory B in the north of the country. They each produce 5,000 units a month. The main production machine in the South is older than the one in the North. The last 12 months’ data shows that the South consistently produces 25% more faulty Product 43Xs per month than the North.
Which of the following statements is true?
A - The cause of the faulty products is the age of the machine.
B - There is a correlation between the number of faulty products and the machine used
C - A confounding variable could not be the cause of the greater fault level.
D - The reason for the higher number of faulty products in the south could be pure chance.
B - There is a correlation between the number of faulty products and the machine used
Arnutt Ltd’s sales volume (Y) shows a trend described by the linear regression equation Y = 560 + 9X where X is the month number (with January 20X1 being month 1). The seasonal variation for April is 104% of the trend
What are the forecast sales for April in 20X2 (to the nearest whole unit)?
A - 677
B - 704
C - 732
D - 620
C - 732
January 20X1 to December 20X1 are months 1 to 12. April in 20X2 is month 16
Y = 560 + 9X
Y = 560 + (9 × 16) = 704. This is the trend.
Forecast sales = trend × seasonal variation = 704 × 1.04 = 732
Which of the following are necessary if forecasts obtained from a multiplicative time series analysis are to be reliable?
1) The trend must neither be increasing, nor decreasing.
2) There must be no unforeseen events
3) The pattern of seasonal variation must continue as it has in the past
A - 3 only
B - 2 and 3 only
C - 1, 2, and 3
D - 1 only
B - 2 and 3 only
Provided that the multiplicative method is used, it is fine for the trend to be increasing or decreasing
Which of the following statements is true?
A - Correlation occurring by chance is more likely to occur with a large data set
B - If there is correlation then there must be causation
C - Two variables may be correlated because of a confounding variable
D - Low levels of correlation are useful for making predictions.
C - Two variables may be correlated because of a confounding variable
Correlation between two variables does not necessarily mean that a change in one variable causes a change in the other variable. There could be a third variable, called a confounding variable, that
causes both to change
TiMo Ltd has been monitoring the number of product defects for 18 months and has collected a substantial amount of data. It has established that there is a coefficient of determination of 90% between material cost and the number of product defects.
Which two of the following statements are true?
A - The coefficient of determination proves that variations in material cost cause variations in the number of defects
B - Any correlation between material cost and the number of defects is likely to be because of chance
C - If there is causation between material cost and the number of defects then there is also correlation
D - There is a strong correlation between the cost of materials and the number of defects.
C - If there is causation between material cost and the number of defects then there is also correlation
D - There is a strong correlation between the cost of materials and the number of defects.
The first statement is false because correlation does not prove a causal link.
Correlation may occur by pure chance and this is more likely to happen with a small set of data
If there is a cause and effect relationship, there must be correlation and therefore the third statement
is true.
In order to save time on design work, Great Adverts Ltd, an advertising agency, invested in a new automated design system. This system enabled copywriters for adverts to design and format copy at
the same time, leaving the separate design team free to focus on larger and more complex projects.
The system was expensive to install and took a few years to implement, but was ready to test at the
end of 20X8. At this point, three copywriters were trained to use the system and tested it with a new
advertising campaign. Two of the copywriters found that it took more time than usual to complete
the work for a project of this size, whilst the third reported no change. Management concluded that the new system successfully saved time for the design team without impacting the time that most copywriters would spend on their projects. All copywriters were trained to use the system by the end
of 20X8.
Great Adverts Ltd is beginning to budget its copywriter time for 20X9 and management believes the copywriters will take the same time for an average project as they did in 20X8
Which of the following statements is/are true?
1) Zero-based budgeting can be used to help avoid anchoring
2) Based on the data available, management is displaying confirmation bias
3) The new system caused the two copywriters to take longer than usual to complete their work.
A - 1, 2, and 3
B - 1 and 2 only
C - 3 only
D - 1 only
B - 1 and 2 only
There is very little data here (just three individual tests) and so it is difficult to draw any conclusions.
However, based on this small data set, it would appear that management is displaying confirmation bias; although two out of three copywriters took longer, management is focusing on the positive result from the copywriter who took the same amount of time. Management is ignoring the data that disagrees with its belief.
Anchoring refers to being ‘stuck’ on last year’s numbers and so ZBB can be used to help avoid this.
There isn’t enough data to confirm correlation or causation between the two variables (use of new system and time taken). Even if there were correlation, the relationship might not be causal. There could be a third, omitted variable, such as each copywriter’s computer memory size, which affects the time taken
Hollivy Ltd introduced a store loyalty card and analysed all sales data after a year. It noticed that the loyalty card holders spent, on average, five times more per week than non-loyalty card holders. It
concluded that the loyalty card scheme was a success and budgeted to spend 25% more next year
on persuading customers to sign up for a loyalty card.
Which of the following areas would not require more thought and professional scepticism?
A - The data set
B - The conclusion
C - The data analysis
D - The additional budget spend
A - The data set
The data set is fine because they covered all sales during the year (ie, the whole population)
Sparrk Ltd uses artificial intelligence (AI) to help prepare sales budgets for its divisions in regions across the country
Which two of the following can help reduce data bias in the AI system?
A - Using training data from all areas of the country
B - Monitoring performance of the system against real data
C - Including all data outliers in the model.
D - Using a single member of staff to create the AI rules for consistency
A - Using training data from all areas of the country
B - Monitoring performance of the system against real data
Monkie Ltd compared its advertising spend with its sales volumes for last year. It incorrectly concluded that sales volumes are down because the advertising campaign was poor and sacked the marketing director. It failed to account for the new competitor on the market that has lower sales prices and higher-quality similar products
Which two types of bias could explain this?
A - Self-selection
B - Confirmation
C - Survivorship
D - Omitted Variable
B - Confirmation
D - Omitted Variable
The competitor is likely to have influenced the sales volume and yet this variable has been omitted
If Monkie Ltd believed that the marketing director was failing before last year, then the latest results could have created a confirmation bias where people only see data that confirms their beliefs
Which of the following statements is true?
A - Omitted variable bias occurs when people ignore data that disagrees with their beliefs.
B - Survivorship bias occurs when the people are influenced by the way data is presented.
C - Graphs can be manipulated to introduce bias
D - Results produced using artificial intelligence are free from bias
C - Graphs can be manipulated to introduce bias
The axes on graphs can be manipulated or data can be omitted from the graph.
The first option refers to confirmation bias.
The second option refers to cognitive bias
