sec b Roles of Budgets and the Budgeting Process Flashcards
1All of the following are advantages of the use of budgets in a management control system except that
budgets
A. Force management planning.
B. Provide performance criteria.
C. Promote communication and coordination within the organization.
D. Limit unauthorized expenditures.
Answer (D) is correct.
Budgets serve many roles. They force management to plan ahead, communicate organizational goals
throughout the organization, and provide criteria for future performance evaluations.
2In the budgeting and planning process for a firm, which one of the following should be completed
first?
A. Sales budget.
B. Financial budget.
C. Cost management plan.
D. Strategic plan.
Answer (D) is correct.
An organization must complete its strategic plan before any specific budgeting can begin. The strategic
plan lays out the means by which a firm expects to fulfill its stated mission.
3Which one of the following best describes the role of top management in the budgeting process? Top
management
A. Should be involved only in the approval process.
B. Lacks the detailed knowledge of the daily operations and should limit their involvement.
C. Needs to be involved, including using the budget process to communicate goals.
D. Needs to separate the budgeting process and the business planning process into two separate processes.
Answer (C) is correct.
Among other things, the budget is a tool by which management can communicate goals to lower-level
employees. It is also a tool for motivating employees to reach those goals. For the budget to function in these communication and motivating roles, top management must be involved in the process. This
involvement does not extend to dictating the exact numerical contents of the budget since top
management lacks a detailed knowledge of daily operations.
4Which one of the following is usually not cited as being an advantage of a formal budgetary process?
A. Forces management to evaluate the reasonableness of assumptions used and goals identified in the
budgetary process.
B. Ensures improved cost control within the organization and prevents inefficiencies.
C. Provides a formal benchmark to be used for feedback and performance evaluation.
D. Serves as a coordination and communication device between management and subordinates.
Answer (B) is correct.
A budget is a realistic plan for the future expressed in quantitative terms. It is useful for planning,
control, motivation, communication, and achieving goal congruence. As a planning tool, a budget
forces management to evaluate the reasonableness of assumptions used and goals identified in the
budgetary process. As a control tool, the budget provides a formal benchmark to be used for feedback
and performance evaluation. As a communication tool, a budget serves to coordinate activities between
management and subordinates and provides management with a means of dealing with uncertainty.
Despite its advantages, a budget neither ensures improved cost control nor prevents inefficiencies.
5The major objectives of any budget system are to
A. Define responsibility centers, provide a framework for performance evaluation, and promote
communication and coordination among organization segments.
B. Define responsibility centers, facilitate the fixing of blame for missed budget predictions, and ensure goal
congruence between superiors and subordinates.
C. Foster the planning of operations, provide a framework for performance evaluation, and promote
communication and coordination among organization segments.
D. Foster the planning of operations, facilitate the fixing of blame for missed budget predictions, and ensure
goal congruence between superiors and subordinates
Answer (C) is correct.
A budget is a realistic plan for the future expressed in quantitative terms. The process of budgeting
forces a company to establish goals, determine the resources necessary to achieve those goals, and
anticipate future difficulties in their achievement. A budget is also a control tool because it establishes
standards and facilitates comparison of actual and budgeted performance. Because a budget establishes
standards and accountability, it motivates good performance by highlighting the work of effective
managers. Moreover, the nature of the budgeting process fosters communication of goals to company
subunits and coordination of their efforts. Budgeting activities by entities within the company must be
coordinated because they are interdependent. Thus, the sales budget is a necessary input to the
formulation of the production budget. In turn, production requirements must be known before
purchases and expense budgets can be developed, and all other budgets must be completed before
preparation of the cash budget.
6One of the primary advantages of budgeting is that it
A. Does not take the place of management and administration.
B. Bases the profit plan on estimates.
C. Is continually adapted to fit changing circumstances.
D. Requires departmental managers to make plans in conjunction with the plans of other interdependent
departments.
Answer (D) is correct.
A budget promotes goal congruence within a company. Departments must coordinate their activities
with other interdependent departments in planning and developing the budget.
7A budget helps a company control costs by setting cost guidelines. However, a budget also performs
the function(s) of
A. Planning.
B. Motivating.
C. Communicating.
D. All of the answers are correct.
Answer (D) is correct.
A budget is a realistic plan for the future expressed in quantitative terms. It is a planning tool that
establishes goals and permits a company to anticipate problems and to plan for decisions. A budget can
be a motivator, especially if it sets reasonable standards, has some flexibility, and was prepared with
the participation of those affected. A budget is a communication tool because it informs employees
about the goals the company is striving to attain and thus enhances goal congruence. A budget is also a
means of coordinating the company’s various activities. The company’s overall budget consists of
many smaller budgets.
8An improperly executed budget process might have the effect(s) of
A. Disregard of overall company goals.
B. Inflated budget requests.
C. Meeting short-term but not long-term goals.
D. All of the answers are correct.
Answer (D) is correct.
Lack of goal congruence can result when attaining a subunit’s budgetary goal results in disregard of
overall company goals. Subunit managers may inflate their budget requests to provide operating
leeway and then engage in unnecessary spending to avoid future budget cuts. A budget may encourage
exclusive concentration on meeting short-term standards at the expense of long-term considerations. A
manager fearful of not meeting the budget targets may improperly manipulate allocation of expenses.
The manager seeking to stay within the budget may disregard employee morale and poor working
conditions. Interunit resentment may develop as a result of competition for scarce funds.
9Ineffective budget control systems are characterized by
A. Use of budgets as a planning but not a control tool.
B. Use of budgets for harassment of individuals rather than motivation.
C. Lack of timely feedback in the use of the budget.
D. All of the answers are correct.
Answer (D) is correct.
Ineffective budget control systems are characterized by each of the items noted. The use of budgets for
planning only is a problem that must be resolved through the education process. Management must be
educated to use the budget documents for control, not just planning. Management must learn that
budgets can motivate and help individuals achieve professional growth as well as the goals of the firm.
Ignoring budgets obviously contributes to the ineffectiveness of the budget system. Finally, feedback
must be timely or lower management and employees will soon recognize that budget feedback is so
late it provides no information, making the budget a worthless device.
10Which of the following statements regarding budgets is false?
A. Budgets present organizational plans in a formal, logical, and integrated manner.
B. Budgets are used only as a planning function.
C. Budgets may be developed for cash flows or labor usage.
D. A budget is a plan that contains a quantitative statement of expected results
Answer (B) is correct.
Budget formulation is a planning function; however, budgets are also useful control devices. Budgets
provide a basis for control of performance through comparisons of actual with budgeted data. They
permit analysis of variations from plans and signal the need for corrective managerial action
11A planning calendar in budgeting is the
A. Calendar period covered by the budget.
B. Schedule of activities for the development and adoption of the budget.
C. Calendar period covered by the annual budget and the long-range plan.
D. Sales forecast by months in the annual budget period.
Answer (B) is correct.
The budget planning calendar is the schedule of activities for the development and adoption of the
budget. It should include a list of dates indicating when specific information is to be provided by each
information source to others. The preparation of a master budget usually takes several months. For
instance, many firms start the budget for the next calendar year some time in September in hopes of
having it completed by December 1. Because all of the individual departmental budgets are based on
forecasts prepared by others and the budgets of other departments, it is essential to have a planning
calendar to ensure the proper integration of the entire process.
12A budget manual, which enhances the operation of a budget system, is most likely to include
A. A chart of accounts.
B. Distribution instructions for budget schedules.
C. Employee hiring policies.
D. Documentation of the accounting system software.
Answer (B) is correct.
A budget manual describes how a budget is to be prepared. Items usually included in a budget manual
are a planning calendar and distribution instructions for all budget schedules. Distribution instructions
are important because, once a schedule is prepared, other departments within the organization will use
the schedule to prepare their own budgets. Without distribution instructions, someone who needs a
particular schedule may be overlooked.
13Which one of the following is not an advantage of a participatory budgeting process?
A. Coordination between departments.
B. Communication between departments.
C. Goal congruence.
D. Control of uncertainties.
Answer (D) is correct.
Uncertainties can be prepared for, but they cannot be subjected to human control through any budget
process.
14In developing the budget for the next year, which one of the following approaches would produce
the greatest amount of positive motivation and goal congruence?
A. Permit the divisional manager to develop the goal for the division that in the manager’s view will
generate the greatest amount of profits.
B. Have senior management develop the overall goals and permit the divisional manager to determine how
these goals will be met.
C. Have the divisional and senior management jointly develop goals and objectives while constructing the
corporation’s overall plan of operation.
D. Have the divisional and senior management jointly develop goals and the divisional manager develop the
implementation plan
Answer (D) is correct.
Joint development of goals is more conducive to motivation, as is allowing divisional managers to
develop the implementation plan. Goal congruence is enhanced when senior management is involved
in the budgeting process along with division managers.
15Which one of the following statements concerning approaches for the budget development process
is correct?
A. The top-down approach to budgeting will ensure adherence to strategic organizational goals.
B. To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed
even if the sales forecast upon which they are based proves to be wrong in the middle of the fiscal year.
C. With the information technology available, the role of budgets as an organizational communication
device has declined.
D. Since department managers have the most detailed knowledge about organizational operations, they
should use this information as the building blocks of the operating budget.
Answer (D) is correct.
Since department managers have the most detailed knowledge about organizational operations, they
should use this information as the building blocks of the operating budget.
16When developing a budget, an external factor to consider in the planning process is
A. A change to a decentralized management system.
B. The implementation of a new bonus program.
C. New product development.
D. The merger of two competitors
Answer (D) is correct.
Several planning assumptions should be made at the beginning of the budget process. Some of these
assumptions are internal factors; others are external to the company. External factors include general
economic conditions and their expected trend, governmental regulatory measures, the labor market in
the locale of the company’s facilities, and activities of competitors, including the effects of mergers.
17The primary role of the budget director and the budgeting department is to
A. Settle disputes among operating executives during the development of the annual operating plan.
B. Develop the annual profit plan by selecting the alternatives to be adopted from the suggestions submitted
by the various operating segments.
C. Justify the budget to the executive committee of the board of directors.
D. Compile the budget and manage the budget process.
Answer (D) is correct.
The budget department is responsible for compiling the budget and managing the budget process. The
budget director and department are not responsible for actually developing the estimates on which the
budget is based. This role is performed by those to whom the resulting budget will be applicable. The
budget director has staff, not line, authority. (S)he has a technical and advisory role. The final decisionmaking
responsibility rests with line management.