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Budgeting Theories

Budgeting (Theories)
Multiple Choice Questions
1. Which of the following advantages does a budget mostly provide?
A. Coordination is increased.
B. Planning is emphasized.
C. Communication is continuous.
D. Comparison of actual versus budgeted data.
2. A budget plan for annual fixed costs that arises from top management decisions
directly reflecting corporate policy.
A. Flexible budget.
C. Discretionary budget.
B. Static budget.
D. Program budget.
3. Flexible budgeting is a reporting system wherein the
A. Budget standards may be adjusted at management’s discretion.
B. Planned level of activity is adjusted to the actual level of activity before the
performance report is prepared.
C. Reporting dates vary according to the managerial levels of the users.
D. Packages of activities vary from period to period.
4. A series of budgets for varying levels of activity is a
A. Variable cost budget.
C. Master budget.
B. Flexible budget.
D. Zero-based budget.
5. The procedure for setting profit objectives in which management specifies a given
rate of return that it seeks to realize in the long run by means of planning toward that
end is the
A. a priori method
C. pragmatic method
B. theoretical method
D. ad hoc method
6. A common starting point in the budgeting process is
A. expected future net income
C. to motivate the sales force
B. past performance
D. a clean slate, with no expectations
7. Operating budgets are
A. a forecast of expected operating expenses.
B. a forecast of operating expenses and related revenues.
C. a forecast of units of production.
D. concerned with the income-generating activities of a firm.
8. What is the proper preparation sequencing of the following budgets?
1. Budgeted Balance Sheet
2. Sales Budget
3. Selling and Administrative Budget
4. Budgeted Income Statement
A. 1, 2, 3, 4
C. 2, 3, 4, 1
B 2, 3, 1, 4
D. 2, 4, 1, 3
9. In estimating the sales volume for a master budget, which of the following techniques
may be used to improve the projections?
A. Brainstorming.
B. Statistical analysis.
C. Estimating from previous sales volume.
D. All of these are useful.
10. Using the concept of ‘expected value” in sales forecasting means that the sales
forecast to be used is
A. developed using the indicator method
B. the sum of the sales expected by individual managers
C. based on expected selling prices of the products
D. based on probabilities
11. Several sales forecasts are available from different sources and the managers have
good ideas about their likelihoods. This situation call for the use of
A. the expected value concept
C. indicator methods
B. historical analysis
D. a scatter diagram
12. An overly optimistic sales budget may result in
A. increases in selling prices late in the year.
B. insufficient inventories.
C. increased sales during the year.
D. excessive inventories.
13. Which of the following budgets provides the data for the preparation of the direct
labor cost budget?
A. Direct materials purchase budget. C.
Sales budget.
B. Cash budget.
Production budget.
14. The increased use of automation and less use of the work force in companies has
caused a trend towards an increase in
A. both variable and fixed costs.
B. fixed costs and a decrease in variable costs.
C. variable costs and a decrease in fixed costs.
D. variable costs and no change in fixed costs.
15. Recognition of the many uncertainties in budgeting is exemplified by companies
A. forecasting sales
B. establishing minimum required cash balances
C. forecasting only fixed costs
D. omitting expected dividend payments from budgeted disbursements
16. The ideal financial planning process would be
A. top-down planning.
B. bottom-up planning.
C. a combination of top-down and bottom-up planning.
D. None of the above
17. Which of the following statements is True?
A. Under zero-based budgeting, a manager is required to start at zero budget levels
each period, as if the programs involved were being initiated for the first time.
B. The primary purpose of the cash budget is to show the expected cash balance at
the end of the budget period.
C. Budget data are generally prepared by top management and distributed downward
in an organization.
D. The budget committee is responsible for preparing detailed budget figures in an
18. Which of the following is a valid statement?
A. Responsibility budget identifies revenue and costs with the individual responsible
for their incurrence.
B. The best way to establish budget figures is to use last year’s actual cost and activity
data as this year’s budget estimates.
C. A sales budget and a sales forecast are the same thing.
D. The primary purpose of the cash budget is to show the expected cash balance at
the end of the budget period.
19. A system that classifies budget requests by activity and estimates the benefits
arising from each activity:
A. Incremental budgeting system.
B. Static budgeting system.
C. Program planning and budgeting system.
D. Participative system.
20. A budget that identifies revenues and costs with an individual controlling their
incurrence is
A. Master budget
C. Product budget
B. Responsibility budget
D. None of the above
21. The difference between an individual's submitted budget projection and his or her
best estimate of the item being projected is an example of
A. padding the budget
B. adhering to zero-based budgeting assumptions
C. creating budgetary slack
D. being incongruent with participative budgeting
22. Budget slack is a condition in which
A. Demand is low at various times of the year
B. Excess machine capacity exists in some areas of the plant
C. There is an intentional overestimate of expenses or an underestimate of
D. Managers grant favored employees extra time-off
23. Which of the following is a difference between a static budget and a flexible budget?
A. A flexible budget includes only variable costs; a static budget includes only fixed
B. A flexible budget includes all costs, a static budget includes only fixed costs.
C. A flexible budget gives different allowances for different levels of activity, a static
budget does not.
D. There is no difference between the two.
24. A system that classifies budget requests by activity and estimates the benefits
arising from each activity:
A. Incremental budgeting system.
B. Static budgeting system.
C. Program planning and budgeting system.
D. Participative system.
25. Which of the following statements about Zero-based budgeting is incorrect?
A. All activities in the company are organized into break-up units called packages.
B. All costs must be justified every budgeting period.
C. The process is not time consuming since justification of costs can be done as a
routine matter.
D. Zero-based budgeting includes variable costs only.
26. Zero-base budgeting requires managers to
A. Justify expenditures that are increases over the prior period’s budgeted amount.
B. Justify all expenditures, not just increases over last year’s amount.
C. Maintain a full-year budget intact at all times.
D. Maintain a budget with zero increases over the prior period.
27. Zero-based budgeting:
A. involves the review of changes made to an organization’s original budget.
B. does not provide a summary of annual projections.
C. involves the review of each cost component from a cost/benefit perspective.
D. emphasizes the relationship of effort to projected annual revenues.
28. A systematized approach known as zero-based budgeting:
A. Classifies the budget by the prior year’s activity and estimates the benefits arising
from each activity.
B. Commence with either the current level of spending or projected whichever is
C. Presents planned activities for a period of time but does not present a firm
D. Divides the activities of individual responsibility centers into a series of packages
that are prioritized.
29.The process of developing budget estimates by requiring all levels of management
to estimate sales, production, and other operating data as though operations were
being initiated for the first time is referred to as:
A. Forecasting.
C. Continuous budgeting.
B. Zero-based budgeting.
D. Program budgeting.
30. Which of the following is a contemporary approach to budgeting?
A. incremental approach
C. baseline approach
B. zero-based approach
both a and b are true