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Question 1
1.B.1.d
aq.swot.007_0720
LOS: 1.B.1.d
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 1
Which of the following is not an example of an internal factor in SWOT analysis?
Your Answer
Physical assets
Human skills
Correct
Customer demographics
Reputation and Brand
Rationale
 Physical assets
This is an example of an internal factor in SWOT analysis.
Rationale
 Human skills
This is an example of an internal factor in SWOT analysis.
Rationale
 Customer demographics
This is not an example of an internal factor in SWOT analysis. It is an external factor that could be considered as an opportunity or a threat for the
organization.
Rationale
 Reputation and Brand
This is an example of an internal factor in SWOT analysis.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.1.a
1B1-W001
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 3
How is strategic planning different from strategy formulation?
Correct
Strategic planning addresses how to implement business strategies, whereas strategy formulation results in new strategies.
Strategy formulation develops designs to implement strategies and achieve the goals, whereas strategic planning creates strategies and defines
goals.
Your Answer
Strategy formulation identifies the opportunities and threats in the short term, whereas strategic planning continually reevaluates strategies based
on perceived long-term opportunities and threats.
Strategy formulation typically identifies external opportunities, limitations, and threats, whereas strategic planning identifies internal factors, such as
organizational strengths, weaknesses, and competitive advantages.
Rationale
 Strategic planning addresses how to implement business strategies, whereas strategy formulation results in new strategies.
In practice, strategy formulation and strategic planning overlap quite a bit. But the two processes have important conceptual differences. On a
fundamental level, strategy formulation results in new strategies, and strategic planning addresses how to implement the strategies.
Rationale
 Strategy formulation develops designs to implement strategies and achieve the goals, whereas strategic planning creates strategies
and defines goals.
This answer is incorrect. This answer mixes up strategic planning and strategy formulation. Strategy formulation does not develop designs to
implement strategies and achieve goals. Strategic planning does not create strategies and define goals.
Rationale
 Strategy formulation identifies the opportunities and threats in the short term, whereas strategic planning continually reevaluates
strategies based on perceived long-term opportunities and threats.
This answer is incorrect. Strategic planning is typically a systematic process with a timetable and some measure of prescribed procedures. Ideally,
strategies are reevaluated continually based on perceived opportunities and threats.
Rationale
 Strategy formulation typically identifies external opportunities, limitations, and threats, whereas strategic planning identifies internal
factors, such as organizational strengths, weaknesses, and competitive advantages.
This answer is incorrect. Regardless of the overlap or variances in terms and processes, strategy formulation and strategic planning both address:
External factors—recognition of organizational opportunities, limitations, and threats.
Internal factors—recognition of organizational strengths, weaknesses, and competitive advantages.
Question 3
1.B.1.d
1B1-W014
LOS: 1.B.1.d
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following components is assessed in an internal capability analysis of an organization?
Correct
Resources
Export
Stakeholder demands
Your Answer
Accounting practices
Rationale
 Resources
Internal capability analysis helps to ensure that the organization has the resources, skills, and processes to reach its strategic and tactical goals.
Rationale
 Export
This answer is incorrect. Export is not a component assessed in an internal capability analysis of an organization.
Rationale
 Stakeholder demands
This answer is incorrect. Stakeholder demands is not a component assessed in an internal capability analysis of an organization.
Rationale
 Accounting practices
This answer is incorrect. Accounting practices is not a component assessed in an internal capability analysis of an organization.
Question 4
1.B.1.b
tb.swot.011_1805
LOS: 1.B.1.b
Lesson Reference: Strategy and SWOT
Difficulty: hard
Bloom Code: 4
Which of the following statements concerning strategic planning is correct?
Correct
A company selling paint likely uses a longer time frame for strategic planning than does a company selling women's clothing.
Your Answer
A company selling paint and a company selling women's clothing both likely use a 3-year time frame for strategic planning.
A company selling paint likely uses a shorter time frame for strategic planning than does a company selling women's clothing.
A company selling paint may use a longer or shorter time frame for strategic planning than does a company selling women's clothing, depending on
management's preferences.
Rationale
 A company selling paint likely uses a longer time frame for strategic planning than does a company selling women's clothing.
The appropriate time frame to use for strategic planning varies depending on factors such as the intensity of competition and how quickly products
and services change. Organizations facing less intense competition and selling products and services that change less quickly typically use longer
time frames for strategic planning than do other organizations. A company selling paint likely faces less competition and less rapid product
changes than does a company selling women's clothing. As a result, the company selling paint likely uses a longer time frame for strategic planning;
therefore, this is the correct answer.
Rationale
 A company selling paint and a company selling women's clothing both likely use a 3-year time frame for strategic planning.
A company selling paint likely faces less competition and less rapid product changes than does a company selling women's clothing. As a result, the
companies will likely use a different time frame for strategic planning; therefore, this is an incorrect answer.
Rationale
 A company selling paint likely uses a shorter time frame for strategic planning than does a company selling women's clothing.
A company selling paint likely faces less competition and less rapid product changes than does a company selling women's clothing. As a result, the
company selling paint likely uses a longer time frame for strategic planning, not a shorter time frame; therefore, this is an incorrect answer.
Rationale
 A company selling paint may use a longer or shorter time frame for strategic planning than does a company selling women's clothing,
depending on management's preferences.
A company selling paint likely faces less competition and less rapid product changes than does a company selling women's clothing. As a result, the
companies will likely use a different time frame for strategic planning. Management's preferences are not likely to impact this decision; therefore,
this is an incorrect answer.
Question 5
1.B.1.a
aq.swot.010_0720
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
When using SWOT in designing strategy, which of the following describes an S-T strategy?
Correct
Identify how to use our strengths to reduce exposure to threats.
Your Answer
Pursue opportunities that are a good fit to our strengths.
Overcome our weaknesses to pursue available opportunities.
Establish a plan to prevent threats from exploiting our weaknesses.
Rationale
 Identify how to use our strengths to reduce exposure to threats.
This is the description of an S-T strategy as it focuses on internal strengths to combat external threats.
Rationale
 Pursue opportunities that are a good fit to our strengths.
This is the description of an S-O strategy. This strategy appropriately considers strengths; however, it must also consider threats.
Rationale
 Overcome our weaknesses to pursue available opportunities.
This is the description of a W-O strategy.
Rationale
 Establish a plan to prevent threats from exploiting our weaknesses.
This is the description of a W-T strategy. This strategy appropriately considers threats; however, it must also consider strengths.
Question 6
1.B.1.d
1B1-W017
LOS: 1.B.1.d
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Metis Corp., a large software services company, has benefited in the past from having a strong, centralized leadership. The top management makes
decisions and sets goals for the entire organization and tasks mid- and low-level managers with implementing these in Metis's teams. Which of the
following, if true, indicates that a centralized leadership is now more likely to be a weakness than a strength for Metis?
Metis's top management now consists almost entirely of engineers who have worked for Metis for a long time and have a high degree of expertise in
the services the company offers.
Your Answer
Metis recently won its first contract to provide software services to the U.S. government.
Correct
Metis recently changed its business to focus more on product development, and its teams of product developers cherish creative freedom and
autonomy.
Metis's offices are located primarily in countries where organizational hierarchies are respected.
Rationale
 Metis's top management now consists almost entirely of engineers who have worked for Metis for a long time and have a high degree of
expertise in the services the company offers.
This answer is incorrect. When the management of a company has a high level of expertise in its business, there is a greater chance that a
centralized leadership will be effective.
Rationale
 Metis recently won its first contract to provide software services to the U.S. government.
This answer is incorrect. A centralized leadership is beneficial in landing and managing large projects.
Rationale
 Metis recently changed its business to focus more on product development, and its teams of product developers cherish creative
freedom and autonomy.
A centralized leadership is less effective when teams cherish creative freedom and autonomy.
Rationale
 Metis's offices are located primarily in countries where organizational hierarchies are respected.
This answer is incorrect. If Metis's offices are located primarily in countries where organizational hierarchies are respected, then a centralized
leadership will be a strength.
Question 7
1.B.1.b
aq.swot.004_1802
LOS: 1.B.1.b
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following is the appropriate time frame for a strategic plan?
Always short-term
Commonly short-term but it depends on the industry
Correct
Commonly long-term but it depends on the industry
Always long-term
Rationale
 Always short-term
This answer is incorrect. Depending on the industry, strategic plans are sometimes shorter in term compared to other industries. However, strategic
plans are not always short-term.
Rationale
 Commonly short-term but it depends on the industry
Strategic plans are not commonly short-term, but can be depending on the industry.
Rationale
 Commonly long-term but it depends on the industry
Strategic plans are more commonly long-term, but depending on the industry, sometimes strategic plans are shorter in term.
Rationale
 Always long-term
This answer is incorrect. Depending on the industry, strategic plans are sometimes shorter in term compared to other industries. Therefore,
strategic plans are not always long-term.
Question 8
1.B.1.c
tb.swot.013_1805
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Which of the following is not an external factor that should be analyzed during the strategic planning process?
A new administration's attitude toward anti-trust regulation
Correct
The ability of a company's manufacturing equipment to handle an increase in volume from expanding into a new geographic region
Your Answer
The availability of high-speed wireless access on customers’ ability to access your product
A company acquiring your largest competitor and investing money in the company
Rationale
 A new administration's attitude toward anti-trust regulation
One type of external factor is legal and regulatory issues. Legal and regulatory issues can have a positive impact on the organization (opportunity)
or a negative impact on the organization (threat). A new administration's attitude toward anti-trust regulation is an example of a legal or regulatory
issue that can impact an organization; therefore, this is an incorrect answer.
Rationale
 The ability of a company's manufacturing equipment to handle an increase in volume from expanding into a new geographic region
An organization needs to analyze external factors that could have an impact on its ability to achieve its goals and objectives as part of the strategic
planning process. These external factors can create opportunities or threats to the organization. While the ability of a company's manufacturing
equipment to handle an increase in volume from expanding into a new geographic region likely impacts the company's ability to achieve its goals
and objectives, this is an internal factor, not an external factor; therefore, this is the correct answer.
Rationale
 The availability of high-speed wireless access on customers’ ability to access your product
One type of external factor is technological changes. Technological changes can have a positive impact on the organization (opportunity) or a
negative impact on the organization (threat). The availability of high-speed wireless access is an example of a technological change that can impact
an organization; therefore, this is an incorrect answer.
Rationale
 A company acquiring your largest competitor and investing money in the company
One type of external factor is changes in competition. Changes in competition can have a positive impact on the organization (opportunity) or a
negative impact on the organization (threat). A company acquiring your largest competitor and investing money in the company is an example of a
change in competition that can impact an organization; therefore, this is an incorrect answer.
Question 9
1.B.1.c
tb.swot.001_1805
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
A country's political environment will likely affect which of the following?
Correct
Long-range planning but not budgeting
Budgeting but not long-range planning
Both budgeting and long-range planning
Your Answer
Neither budgeting, nor long-range planning
Rationale
 Long-range planning but not budgeting
Long-range planning requires a company to consider factors that will likely impact the company over the long term, while budgeting typically
covers periods of one year or less. A country's political environment includes items such as regulatory action and taxes. These items are likely to
impact long-range decisions more than short-run decisions. The political environment will likely affect long-range planning but not budgeting;
therefore, this is the correct answer.
Rationale
 Budgeting but not long-range planning
A country's political environment includes items such as regulatory action and taxes. These items are likely to impact long-range decisions more
than short-run decisions. Therefore, this is an incorrect answer.
Rationale
 Both budgeting and long-range planning
A country's political environment includes items such as regulatory action and taxes. These items are likely to impact long-range decisions more
than short-run decisions. Therefore, this is an incorrect answer.
Rationale
 Neither budgeting, nor long-range planning
A country's political environment includes items such as regulatory action and taxes. These items are likely to impact long-range decisions more
than short-run decisions. The political environment will affect businesses; therefore, this is an incorrect answer.
Question 10
1.B.1.c
cma11.p1.t1.me.0028_0820
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
During the strategic planning process, which one of the following is an external factor to be analyzed?
*Source: Retired ICMA CMA Exam Questions.
Organizational culture
Correct
Societal culture
Employee morale
Organizational structure
Rationale
 Organizational culture
This is not the correct answer. Organizational culture would be an internal factor to be analyzed during the strategic planning process, not an
external factor.
Rationale
 Societal culture
Societal culture would be an external factor that should be analyzed during the strategic planning process.
Rationale
 Employee morale
This answer is incorrect. Employee morale would not be an external factor. It is an internal factor that should be analyzed during the strategic
planning process.
Rationale
 Organizational structure
This answer is incorrect. Organizational structure is an internal factor, not an external factor, that should be analyzed during the strategic planning
process.
Question 11
1.B.1.c
aq.swot.009_0720
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 1
Which of the following is not an example of an external factor in SWOT analysis?
The economy
Correct
Financial resources
Your Answer
Future technology trends
Competitive forces
Rationale
 The economy
This is an example of an external factor in SWOT analysis.
Rationale
 Financial resources
This is not an example of an external factor in SWOT analysis. It is an internal factor that could be considered as a strength or a weakness for the
organization.
Rationale
 Future technology trends
This is an example of an external factor in SWOT analysis.
Rationale
 Competitive forces
This is an example of an external factor in SWOT analysis.
Question 12
1.B.1.a
aq.swot.001_1802
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 3
Which of the following correctly describes strategy?
Strategy is the short-term planning and work of the organization. Strategy work is not the day-to-day operations work of the organization, but
strategy does guide that daily work in the organization. Strategy provides a framework and feedback mechanism to evaluate the short-term effects of
daily work on the future of the organization.
Strategy is the long-term planning and work of the organization. Strategy work is the day-to-day operations work of the organization, guiding that
daily work in the organization. Strategy provides a framework and feedback mechanism to evaluate the long-term effects of daily work on the future
of the organization.
Your Answer
Strategy is the short-term planning and work of the organization. Strategy work is the day-to-day operations work of the organization, guiding that
daily work in the organization. Strategy provides a framework and feedback mechanism to evaluate the short-term effects of daily work on the future
of the organization.
Correct
Strategy is the long-term planning and work of the organization. Strategy work is not the day-to-day operations work of the organization, but strategy
does guide that daily work in the organization. Strategy provides a framework and feedback mechanism to evaluate the long-term effects of daily
work on the future of the organization.
Rationale
 Strategy is the short-term planning and work of the organization. Strategy work is not the day-to-day operations work of the
organization, but strategy does guide that daily work in the organization. Strategy provides a framework and feedback mechanism to
evaluate the short-term effects of daily work on the future of the organization.
Think about the time frame of strategy.
Rationale
 Strategy is the long-term planning and work of the organization. Strategy work is the day-to-day operations work of the organization,
guiding that daily work in the organization. Strategy provides a framework and feedback mechanism to evaluate the long-term effects of
daily work on the future of the organization.
Think about what strategy work is.
Rationale
 Strategy is the short-term planning and work of the organization. Strategy work is the day-to-day operations work of the organization,
guiding that daily work in the organization. Strategy provides a framework and feedback mechanism to evaluate the short-term effects of
daily work on the future of the organization.
Think about the time frame of strategy. Think about what strategy work is.
Rationale
 Strategy is the long-term planning and work of the organization. Strategy work is not the day-to-day operations work of the
organization, but strategy does guide that daily work in the organization. Strategy provides a framework and feedback mechanism to
evaluate the long-term effects of daily work on the future of the organization.
This correctly describes strategy.
Question 13
1.B.1.c
tb.swot.002_1805
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Which of the following will likely affect budgeting but not long-range planning?
A presidential election
Correct
A spike in sales at Christmas
Your Answer
Speculation that a new small company will be a major competitor in three years
Plans to expand production in two years
Rationale
 A presidential election
When preparing budgets, a company needs to consider factors likely to impact the company over the next year or less. When a company makes
long-range plans, it needs to consider factors likely to impact the company over the long run. A presidential election would likely impact the
company over a long period of time as the election could change the regulatory and tax environment. In addition, an election is not likely to have an
immediate impact on the company; therefore, this is an incorrect answer.
Rationale
 A spike in sales at Christmas
Since budgets typically cover periods of one year or less, a company needs to take into consideration factors likely to impact the company over the
next year or less when preparing budgets. When a company makes long-range plans, it needs to take into consideration factors likely to impact the
company over the long run. A spike in sales at Christmas would impact the company over a short period of time but not over a longer period of
time. That means it would likely affect budgeting and not long-range planning. Therefore, this is the correct answer.
Rationale
 Speculation that a new small company will be a major competitor in three years
When preparing budgets, a company needs to consider factors likely to impact the company over the next year or less. Speculation that a new
company will be a major competitor in three years is not likely to have an immediate impact on the company and affect the budgeting process;
therefore, this is an incorrect answer.
Rationale
 Plans to expand production in two years
Budgets typically cover periods of one year or less. Plans to expand production in two years will not likely have an immediate impact on the
company and the company's budget. Therefore, this is an incorrect answer.
Question 14
1.B.1.a
tb.swot.006_1805
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning vision statements and mission statements is correct?
A vision statement is the same thing as a mission statement.
A vision statement provides a clear statement about how the organization will work toward achieving its mission while a mission statement expresses
an organization's success in terms of its contribution to society.
Your Answer
A vision statement results from an organization's strategic planning process but a mission statement does not.
Correct
A vision statement expresses an organization's success in terms of its contribution to society while a mission statement provides a clear statement
about how the organization will work toward achieving its vision.
Rationale
 A vision statement is the same thing as a mission statement.
A vision statement is not the same thing as a mission statement; therefore, this is an incorrect answer.
Rationale
 A vision statement provides a clear statement about how the organization will work toward achieving its mission while a mission
statement expresses an organization's success in terms of its contribution to society.
A vision statement does not provide a clear statement about how the organization will work toward achieving its mission. In addition, a mission
statement does not express an organization's success in terms of its contribution to society. Therefore, this is an incorrect answer.
Rationale
 A vision statement results from an organization's strategic planning process but a mission statement does not.
While they are different, both a vision statement and a mission statement result from an organization's strategic planning process; therefore, this is
an incorrect answer.
Rationale
 A vision statement expresses an organization's success in terms of its contribution to society while a mission statement provides a clear
statement about how the organization will work toward achieving its vision.
A vision statement expresses an organization's success in terms of its contribution to society while a mission statement provides a clear statement
about how the organization will work toward achieving its vision. They are related to each other but not the same things; therefore, this is the
correct answer.
Question 15
1.B.1.d
aq.swot.008_0720
LOS: 1.B.1.d
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
The top management of Juno, Inc., a manufacturer of cell phones and laptops, is in the process of conducting a SWOT (strengths, weaknesses,
opportunities, and threats) analysis of its business. Andrew Hudson, a vice president of the company, lists the company's cutting-edge research and
development division as a strength as it helps the company design premium products of high quality. However, Melanie Harris, the marketing manager,
believes that its research and development division is now a weakness rather than a strength. Which of the following, if true, best supports Melanie's
argument?
Juno operates in a legal environment where strict regulations are in place to protect intellectual property rights.
Your Answer
Juno's cell phones and laptops continue to generate high profit margins.
Correct
Due to an economic slump, Juno's target consumers are becoming increasingly price sensitive.
The bulk of Juno's business comes from consumers who are identified as early adopters of technology.
Rationale
 Juno operates in a legal environment where strict regulations are in place to protect intellectual property rights.
This would not support Melanie's argument as cutting-edge research and development will be protected under these regulations.
Rationale
 Juno's cell phones and laptops continue to generate high profit margins.
This would not support Melanie's argument as high profit margins on products allows for investment in cutting-edge research and development.
Rationale
 Due to an economic slump, Juno's target consumers are becoming increasingly price sensitive.
If consumers' focus is on price and not on quality, Juno's investment in research and development in premium product design is probably wasted.
In fact, the premium price will likely drive customers away.
Rationale
 The bulk of Juno's business comes from consumers who are identified as early adopters of technology.
This would not support Melanie's argument as research and development must be performed to maintain Juno's particular consumer base.
Question 16
1.B.1.b
aq.swot.005_1802
LOS: 1.B.1.b
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
The CEO of Chroma, Inc., a large multinational company, believes that the company should prepare strategic plans at least once a year. However, the
company's president believes that strategic plans should not be changed frequently and should be prepared only every three years. Which of the
following types of organization structures for Chroma would support the CEO's position on the time frame of strategic plans for Chroma?
Chroma is in the business of publishing a trade magazine for the woodworking machinery industry in Colorado.
Correct
Chroma is a leading provider of cutting-edge communication technology and functions in a fast-moving and highly competitive market.
Your Answer
Chroma is the only seller of antique Asian musical instruments on the West Coast.
Chroma's business comes primarily from the long-term contracts it has with the U.S. government to carry out construction projects.
Rationale
 Chroma is in the business of publishing a trade magazine for the woodworking machinery industry in Colorado.
Organizations prepare strategic plans at different intervals depending on the industry, the level of competition (e.g., new entrants), and how fast
products or services change. Products do not change quickly in the woodworking machinery industry.
Rationale
 Chroma is a leading provider of cutting-edge communication technology and functions in a fast-moving and highly competitive market.
Organizations prepare strategic plans at different intervals depending on the industry, the level of competition (e.g., new entrants), and how fast
products or services change. If Chroma is a provider of cutting-edge communication technology in a fast-moving competitive market, it will need to
revise and prepare strategic plans at relatively short intervals.
Rationale
 Chroma is the only seller of antique Asian musical instruments on the West Coast.
Organizations prepare strategic plans at different intervals depending on the industry, the level of competition (e.g., new entrants), and how fast
products or services change. There is no competition in the market of antique Asian musical instruments on the West Coast, which means there is
little pressure on Chroma to quickly adjust and evolve its strategy.
Rationale
 Chroma's business comes primarily from the long-term contracts it has with the U.S. government to carry out construction projects.
Organizations prepare strategic plans at different intervals depending on the industry, the level of competition (e.g., new entrants), and how fast
products or services change. Because these contracts are long term, a strategic plan does not need to be prepared each year.
Question 17
1.B.1.d
tb.swot.015_1805
LOS: 1.B.1.d
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Which of the following is not an internal factor that should be analyzed during the strategic planning process?
Correct
A new administration's attitude toward anti-trust regulation
The ability of a company's manufacturing equipment to handle an increase in volume from expanding into a new geographic region
Your Answer
The ability of a company to fund an expansion with operating cash flow
The ability of a tax return company to prepare returns that are error-free and on-time
Rationale
 A new administration's attitude toward anti-trust regulation
An organization needs to analyze internal factors that could have an impact on its ability to achieve its goals and objectives as part of the strategic
planning process. These internal factors help ensure the organization has the resources, skills, and processes in place to achieve its goals and
objectives. Internal factors can be strengths or weaknesses of the organization. While a new administration's attitude toward anti-trust regulation
likely impacts the company's ability to achieve its goals and objectives, this is an external factor, not an internal factor; therefore, this is the correct
answer.
Rationale
 The ability of a company's manufacturing equipment to handle an increase in volume from expanding into a new geographic region
Internal factors help ensure the organization has the resources, skills, and processes in place to achieve its goals and objectives. The ability of a
company's manufacturing equipment to handle an increase in volume from expanding into a new geographic region addresses this; therefore, this
is an incorrect answer.
Rationale
 The ability of a company to fund an expansion with operating cash flow
Internal factors help ensure the organization has the resources, skills, and processes in place to achieve its goals and objectives. The ability of a
company to fund an expansion with operating cash flow addresses this; therefore, this is an incorrect answer.
Rationale
 The ability of a tax return company to prepare returns that are error-free and on-time
Internal factors help ensure the organization has the resources, skills, and processes in place to achieve its goals and objectives. The ability of a tax
return company to prepare returns that are error-free and on-time addresses this; therefore, this is an incorrect answer.
Question 18
1.B.1.c
1B1-W009
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Wishing-Well Inc., a chain of small convenience stores in Atlanta, Georgia, has just opened a store in a rapidly developing suburb to the north of the city.
The marketing manager of Wishing-Well believes that the suburb is a lucrative market, as the area has several expensive homes and offices but does not
have any other convenience stores or supermarkets. Which of the following is likely to neutralize the opportunity offered by the new market?
Wishing-Well is well known for its unique offerings of local produce and organic food.
Your Answer
The suburb has well-regarded public and private schools.
Correct
Abundant retail space is available for low rates in the suburb.
Wishing-Well has a popular rewards program for its regular customers.
Rationale
 Wishing-Well is well known for its unique offerings of local produce and organic food.
This answer is incorrect. A highly differentiated product line will reduce the threat from new entrants.
Rationale
 The suburb has well-regarded public and private schools.
This answer is incorrect. The presence of well-regarded schools in the area will attract more people to the suburb and expand Wishing-Well's
market.
Rationale
 Abundant retail space is available for low rates in the suburb.
Inexpensive and abundant retail space will lower entry barriers for new entrants, posing a threat to Wishing-Well's business.
Rationale
 Wishing-Well has a popular rewards program for its regular customers.
This answer is incorrect. A good rewards program is more likely to persuade customers to be loyal to Wishing-Well and will help it maintain market
share.
Question 19
1.B.1.a
1A1-LS14
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 1
Which of the following best describes the long-term goals and objectives of an entity?
Sales forecast.
Master budget.
Correct
Strategic plans.
Your Answer
Capital expenditure plan.
Rationale
 Sales forecast.
This answer is incorrect. The sales forecast does not describe the long-term goals and objectives of an entity, but what sales the company believes
it can obtain in the short term.
Rationale
 Master budget.
This answer is incorrect. The master budget does not describe the long-term goals and objectives of an entity, but shows what revenue and costs
must be obtained in the short term to accomplish the strategic plans.
Rationale
 Strategic plans.
The strategic planning process is part of the long-term planning of the firm that focuses on the long-term goals and objectives of a firm. During this
process, the strengths and weaknesses of the firm are addressed and utilized to develop a strategy to improve the firm.
Rationale
 Capital expenditure plan.
This answer is incorrect. The capital expenditure plan does not describe the long-term goals and objectives of an entity, but shows what capital
investments must be made in the short term to accomplish the strategic plans.
Question 20
1.B.1.c
tb.swot.012_1805
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Which of the following is an external factor that should be analyzed during the strategic planning process?
Correct
A company acquiring your largest competitor and investing money in the company
The ability of a manufacturing company to reduce waste such that selling prices can be reduced
Your Answer
The ability of R&D personnel to develop a new product
The ability of a company to fund an expansion with operating cash flow
Rationale
 A company acquiring your largest competitor and investing money in the company
An organization needs to analyze external factors that could have an impact on its ability to achieve its goals and objectives as part of the strategic
planning process. These external factors can create opportunities or threats to the organization. One type of external factor is changes in
competition. Changes in competition can have a positive impact on the organization (opportunity) or a negative impact on the organization
(threat). A company acquiring your largest competitor and investing money in the company is an example of a change in competition that can
impact an organization; therefore, this is the correct answer.
Rationale
 The ability of a manufacturing company to reduce waste such that selling prices can be reduced
While the ability of a manufacturing company to reduce waste such that selling prices can be reduced can impact an organization, this is an internal
factor, not an external factor. Therefore, this is an incorrect answer.
Rationale
 The ability of R&D personnel to develop a new product
While the ability of R&D personnel to develop a new product can impact an organization, this is an internal factor, not an external factor. Therefore,
this is an incorrect answer.
Rationale
 The ability of a company to fund an expansion with operating cash flow
While the ability of a company to fund an expansion with operating cash flow can impact an organization, this is an internal factor, not an external
factor. Therefore, this is an incorrect answer.
Question 21
1.B.1.c
tb.swot.014_1805
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Which of the following is not an external factor that should be analyzed during the strategic planning process?
A greater number of political leaders calling for an increase in tariffs on imported goods
Correct
The ability of workers to operate a new generation of manufacturing equipment
A reduction in expected economic growth in markets where a company operates
A major competitor going out of business
Rationale
 A greater number of political leaders calling for an increase in tariffs on imported goods
One type of external factor is legal and regulatory issues. Legal and regulatory issues can have a positive impact on the organization (opportunity)
or a negative impact on the organization (threat). A greater number of political leaders calling for an increase in tariffs on imported goods is an
example of a legal or regulatory issue that can impact an organization. Therefore, this is an incorrect answer.
Rationale
 The ability of workers to operate a new generation of manufacturing equipment
An organization needs to analyze external factors that could have an impact on its ability to achieve its goals and objectives as part of the strategic
planning process. These external factors can create opportunities or threats to the organization. While the ability of workers to operate a new
generation of manufacturing equipment likely impacts the company's ability to achieve its goals and objectives, this is an internal factor, not an
external factor; therefore, this is the correct answer.
Rationale
 A reduction in expected economic growth in markets where a company operates
One type of external factor is market forces and industry trends. Market forces and industry trends can have a positive impact on the organization
(opportunity) or a negative impact on the organization (threat). A reduction in expected economic growth in markets where a company operates is
an example of market forces and industry trends that can impact an organization; therefore, this is an incorrect answer.
Rationale
 A major competitor going out of business
One type of external factor is changes in competition. Changes in competition can have a positive impact on the organization (opportunity) or a
negative impact on the organization (threat). A major competitor going out of business is an example of a change in competition that can impact an
organization; therefore, this is an incorrect answer.
Question 22
1.B.1.a
tb.swot.003_1805
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning strategic planning is not true?
Correct
An organization's vision and mission flow from its strategic plan.
An organization's long-term goals are typically laid out in its strategic plan.
Your Answer
To help achieve its long-term goals an organization typically establishes milestones in its strategic plan.
An organization's strategic plan takes into consideration its industry, competitors, and environment.
Rationale
 An organization's vision and mission flow from its strategic plan.
An organization's strategic plan is a long-term plan that it uses to help it achieve its long-term goals and mission. It is based on its vision and
mission. This means the strategic plan flows from its vision and mission, not the other way around; therefore, this is the correct answer.
Rationale
 An organization's long-term goals are typically laid out in its strategic plan.
One use of the strategic plan is to articulate and lay out the organization's long-term goals; therefore, this is an incorrect answer.
Rationale
 To help achieve its long-term goals an organization typically establishes milestones in its strategic plan.
An organization's strategic plan is a long-term plan that it uses to help it achieve its long-term goals and mission. It typically establishes milestones
in the strategic plan to help measure progress toward achieving these long-term goals; therefore, this is an incorrect answer.
Rationale
 An organization's strategic plan takes into consideration its industry, competitors, and environment.
An organization's strategic plan is a long-term plan that it uses to help it achieve its long-term goals and mission. Because its industry, competitors,
and environment can all impact its ability to achieve its goals, these factors need to be factored into its strategic plan; therefore, this is an incorrect
answer.
Question 23
1.B.1.d
tb.swot.017_1805
LOS: 1.B.1.d
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Which of the following is an internal factor that should be analyzed during the strategic planning process?
A greater number of political leaders calling for an increase in tariffs on imported goods
Your Answer
The availability of high-speed wireless access on customers’ ability to access your product
A major competitor going out of business
Correct
The ability of a tax return company to prepare returns that are error-free and on-time
Rationale
 A greater number of political leaders calling for an increase in tariffs on imported goods
While a greater number of political leaders calling for an increase in tariffs on imported goods likely impacts the company's ability to achieve its
goals and objectives, this is an external factor, not an internal factor; therefore, this is an incorrect answer.
Rationale
 The availability of high-speed wireless access on customers’ ability to access your product
While the availability of high-speed wireless access on customers’ ability to access your product likely impacts the company's ability to achieve its
goals and objectives, this is an external factor, not an internal factor; therefore, this is an incorrect answer.
Rationale
 A major competitor going out of business
While a major competitor going out of business likely impacts the company's ability to achieve its goals and objectives, this is an external factor,
not an internal factor; therefore, this is an incorrect answer.
Rationale
 The ability of a tax return company to prepare returns that are error-free and on-time
An organization needs to analyze internal factors that could have an impact on its ability to achieve its goals and objectives as part of the strategic
planning process. These internal factors help ensure the organization has the resources, skills, and processes in place to achieve its goals and
objectives. Internal factors can be strengths or weaknesses of the organization. The ability of a tax return company to prepare returns that are
error-free and on-time represents an internal factor that should be analyzed during the strategic planning process; therefore, this is the correct
answer.
Question 24
1.B.1.a
aq.swot.002_1802
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 3
Which of the following correctly describes vision statement and mission statement, respectively?
Your Answer
The mission statement describes what the organization intends to be or become and answers the question, “Who are we?” The mission statement
guides subsequently the development of the vision statement. The vision statement describes what the organization is committed to do or how it will
act and answers the question, “What do we do?”
Correct
The vision statement describes what the organization intends to be or become and answers the question, “Who are we?” The vision statement guides
subsequently the development of the mission statement. The mission statement describes what the organization is committed to do or how it will act
and answers the question, “What do we do?”
The vision statement describes what the organization intends to be or become and answers the question, “What do we do?” The vision statement
guides subsequently the development of the mission statement. The mission statement describes what the organization is committed to do or how it
will act and answers the question, “Who are we?”
The mission statement describes what the organization is committed to do or how it will act and answers the question, “Who are we?” The mission
statement guides subsequently the development of the vision statement. The vision statement describes what the organization intends to be or
become and answers the question, “What do we do?”
Rationale
 The mission statement describes what the organization intends to be or become and answers the question, “Who are we?” The mission
statement guides subsequently the development of the vision statement. The vision statement describes what the organization is
committed to do or how it will act and answers the question, “What do we do?”
This option mixes up the description for vision statement and mission statement. Think about what the mission statement and vision statement
describe. Think about what questions the vision statement and mission statement answer. Think about which statement guides the other.
Rationale
 The vision statement describes what the organization intends to be or become and answers the question, “Who are we?” The vision
statement guides subsequently the development of the mission statement. The mission statement describes what the organization is
committed to do or how it will act and answers the question, “What do we do?”
This option correctly describes the vision statement and mission statement.
Rationale
 The vision statement describes what the organization intends to be or become and answers the question, “What do we do?” The vision
statement guides subsequently the development of the mission statement. The mission statement describes what the organization is
committed to do or how it will act and answers the question, “Who are we?”
Think about what questions the vision statement and mission statement answer.
Rationale
 The mission statement describes what the organization is committed to do or how it will act and answers the question, “Who are we?”
The mission statement guides subsequently the development of the vision statement. The vision statement describes what the
organization intends to be or become and answers the question, “What do we do?”
Think about what the mission statement and vision statement describe. Think about which statement guides the other.
Question 25
1.B.1.a
tb.swot.005_1805
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 2
Which of the following statements concerning strategy levels is correct?
Functional-level strategies address what businesses a company should compete in.
Corporate-level strategies address areas such as marketing, operations, and R&D.
Correct
Competitive-level strategies address how an individual business unit creates value in its industry.
The outcomes should be identical for the various levels of strategy in an organization.
Rationale
 Functional-level strategies address what businesses a company should compete in.
Corporate-level strategies, not functional-level strategies, address what businesses a company should compete in; therefore, this is an incorrect
answer.
Rationale
 Corporate-level strategies address areas such as marketing, operations, and R&D.
Functional-level strategies, not corporate-level strategies, address areas such as marketing, operations, and R&D; therefore, this is an incorrect
answer.
Rationale
 Competitive-level strategies address how an individual business unit creates value in its industry.
Companies develop strategies at multiple levels. They can be developed at the corporate, competitive, and functional levels. Strategies at the
competitive level involve plans and objectives for an individual business unit. For example, competitive-level strategies address how an individual
business unit creates value in its industry. Therefore, this is the correct answer.
Rationale
 The outcomes should be identical for the various levels of strategy in an organization.
While the strategies at different levels need to be aligned with each other, they will have different outcomes, not identical outcomes, since they
involve different aspects of an organization; therefore, this is an incorrect answer.
Question 26
1.B.1.a
AICPA.08211325BEC.V.A
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following steps in the strategic planning process should be completed first?
Translate objectives into goals.
Your Answer
Determine actions to achieve goals.
Develop performance measures.
Correct
Create a mission statement.
Rationale
 Translate objectives into goals.
This answer is incorrect. Translating objectives into goals is not the first step to be completed in the strategic planning process.
Rationale
 Determine actions to achieve goals.
This answer is incorrect. Determining actions to achieve goals is not the first step to be completed in the strategic planning process.
Rationale
 Develop performance measures.
This answer is incorrect. Developing performance measures is not the first step to be completed in the strategic planning process.
Rationale
 Create a mission statement.
The creation of the mission statement, the purpose of the organization, is the first step in the strategic planning process. All strategies should be
directly derived from and consistent with the mission statement.
Question 27
1.B.1.c
MQ2904
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following statements properly defines “environmental scanning”?
A form of benchmarking for companies that need to determine the best location for achieving a competitive advantage by leveraging unique
resources
Correct
A process in which an organization continuously gathers and evaluates information that could impact its ability to compete
A process of seeking competitive ways to achieve sustainability by seeking to enhance products, processes, labor, and other resources as a way to
acquire distinctive competencies
A strategy of constantly looking for ways to achieve a competitive advantage by finding new ways of exploiting their distinctive competencies
Rationale
 A form of benchmarking for companies that need to determine the best location for achieving a competitive advantage by leveraging
unique resources
This answer is incorrect. Environmental scanning is not a benchmarking process for choosing a location.
Rationale
 A process in which an organization continuously gathers and evaluates information that could impact its ability to compete
Environmental scanning is a process in which an organization continuously gathers and evaluates information that could impact its ability to
compete.
Rationale
 A process of seeking competitive ways to achieve sustainability by seeking to enhance products, processes, labor, and other resources
as a way to acquire distinctive competencies
This answer is incorrect. Environmental scanning is not a sustainability approach to acquire distinctive competencies.
Rationale
 A strategy of constantly looking for ways to achieve a competitive advantage by finding new ways of exploiting their distinctive
competencies
This answer is incorrect. Environmental scanning, although it may be a helpful approach, is not a strategy, per se.
Question 28
1.B.1.a
tb.swot.007_1805
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 2
Which of the following statements concerning vision statements is not correct?
Correct
An organization's vision statement is based on its mission statement.
A vision statement expresses an organization's success in terms of its contribution to society.
Your Answer
A vision statement results from an organization's strategic-planning process.
A vision statement guides an organization as it works toward future success and achievement.
Rationale
 An organization's vision statement is based on its mission statement.
A vision statement expresses an organization's success in terms of its contribution to society while a mission statement provides a clear statement
about how the organization will work toward achieving its vision. This means an organization's mission statement is based on its vision statement,
not the other way around; therefore, this is the correct answer.
Rationale
 A vision statement expresses an organization's success in terms of its contribution to society.
A vision statement does express an organization's success in terms of its contribution to society; therefore, this is an incorrect answer.
Rationale
 A vision statement results from an organization's strategic-planning process.
A vision statement results from an organization's strategic-planning process along with its mission, goals, and objectives; therefore, this is an
incorrect answer.
Rationale
 A vision statement guides an organization as it works toward future success and achievement.
A vision statement provides a “guiding image” of the organization's future success and achievement; therefore, this is an incorrect answer.
Question 29
1.B.1.b
tb.swot.010_1805
LOS: 1.B.1.b
Lesson Reference: Strategy and SWOT
Difficulty: hard
Bloom Code: 4
Which of the following statements concerning strategic planning is correct?
A company selling electronic products to consumers may use a longer or shorter time frame for strategic planning than does a company selling
baseballs, depending on management's preferences.
A company selling electronic products to consumers and a company selling baseballs both likely use a 5-year time frame for strategic planning.
Your Answer
A company selling electronic products to consumers likely uses a longer time frame for strategic planning than does a company selling baseballs.
Correct
A company selling electronic products to consumers likely uses a shorter time frame for strategic planning than does a company selling baseballs.
Rationale
 A company selling electronic products to consumers may use a longer or shorter time frame for strategic planning than does a company
selling baseballs, depending on management's preferences.
A company selling electronic products to consumers likely faces more competition and more rapid product changes than does a company selling
baseballs. As a result, the companies will likely use a different time frame for strategic planning. Management's preferences are not likely to impact
this decision; therefore, this is an incorrect answer.
Rationale
 A company selling electronic products to consumers and a company selling baseballs both likely use a 5-year time frame for strategic
planning.
A company selling electronic products to consumers likely faces more competition and more rapid product changes than does a company selling
baseballs. As a result, the companies will likely use a different time frame for strategic planning; therefore, this is an incorrect answer.
Rationale
 A company selling electronic products to consumers likely uses a longer time frame for strategic planning than does a company selling
baseballs.
A company selling electronic products to consumers likely faces more competition and more rapid product changes than does a company selling
baseballs. As a result, the company selling electronic products to consumers likely uses a shorter time frame for strategic planning, not a longer
time frame; therefore, this is an incorrect answer.
Rationale
 A company selling electronic products to consumers likely uses a shorter time frame for strategic planning than does a company selling
baseballs.
The appropriate time frame to use for strategic planning varies depending on factors such as the intensity of competition and how quickly products
and services change. Organizations facing more intense competition and selling products and services that change more quickly typically use
shorter time frames for strategic planning than do other organizations. A company selling electronic products to consumers likely faces more
competition and more rapid product changes than does a company selling baseballs. As a result, the company selling electronic products to
consumers likely uses a shorter time frame for strategic planning; therefore, this is the correct answer.
Question 30
1.B.1.a
tb.swot.008_1805
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 2
Which of the following statements concerning mission statements is not correct?
An organization's mission statement is based on its vision statement.
Correct
A mission statement expresses an organization's success in terms of its contribution to society.
Your Answer
A mission statement should answer the question “Why are we in business?”
A mission statement results from an organization's strategic planning process.
Rationale
 An organization's mission statement is based on its vision statement.
An organization's mission statement is based on its vision statement; therefore, this is an incorrect answer.
Rationale
 A mission statement expresses an organization's success in terms of its contribution to society.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. A vision statement, not a mission
statement, expresses an organization's success in terms of its contribution to society; therefore, this is the correct answer.
Rationale
 A mission statement should answer the question “Why are we in business?”
A mission statement expresses an organization's business position and what it is trying to do for its customers. In doing this, it answers the
question, “Why are we in business?” Therefore, this is an incorrect answer.
Rationale
 A mission statement results from an organization's strategic planning process.
A mission statement results from an organization's strategic planning process along with its vision, goals, and objectives; therefore, this is an
incorrect answer.
Question 31
1.B.1.a
aq.swot.003_1802
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following correctly orders the steps in the Strategic Planning Process?
Vision and Mission, Environmental Scanning, Strategy Implementation, Strategy Design, Evaluation and Control
Environmental Scanning, Vision and Mission, Strategy Design, Strategy Implementation, Evaluation and Control
Your Answer
Vision and Mission, Environmental Scanning, Strategy Design, Evaluation and Control, Strategy Implementation
Correct
Vision and Mission, Environmental Scanning, Strategy Design, Strategy Implementation, Evaluation and Control
Rationale
 Vision and Mission, Environmental Scanning, Strategy Implementation, Strategy Design, Evaluation and Control
Think about the order of Strategy Implementation and Strategy Design.
Rationale
 Environmental Scanning, Vision and Mission, Strategy Design, Strategy Implementation, Evaluation and Control
Think about the order of Environmental Scanning and Vision and Mission.
Rationale
 Vision and Mission, Environmental Scanning, Strategy Design, Evaluation and Control, Strategy Implementation
Think about the order of Evaluation and Control and Strategy Implementation.
Rationale
 Vision and Mission, Environmental Scanning, Strategy Design, Strategy Implementation, Evaluation and Control
This correctly orders the Strategic Planning Process.
Question 32
1.B.1.c
aq.swot.006_0720
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following is not one of the aspects or features of an organization's environment?
Correct
Companies in the same geographical region that will never be customers or competitors
Suppliers and other stakeholders who may partner with the organization, including local governments and community groups
The world in which the organization operates, which involves economic trends, government and legal mandates, and demographic factors
Your Answer
The organization's internal structure, comprising employees, physical assets, financial resources, intellectual property, etc.
Rationale
 Companies in the same geographical region that will never be customers or competitors
This is not one of the aspects or features of an organization's environment. Geographic proximity is not nearly as important in the organization's
environment as are customers and competitors.
Rationale
 Suppliers and other stakeholders who may partner with the organization, including local governments and community groups
This is one of the aspects or features of an organization's environment.
Rationale
 The world in which the organization operates, which involves economic trends, government and legal mandates, and demographic
factors
This is one of the aspects or features of an organization's environment.
Rationale
 The organization's internal structure, comprising employees, physical assets, financial resources, intellectual property, etc.
This is one of the aspects or features of an organization's environment.
Question 33
1.B.1.a
tb.swot.004_1805
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 1
Which of the following is not a level at which companies develop strategies?
Functional
Correct
Mission
Corporate
Your Answer
Competitive
Rationale
 Functional
Strategies at the functional level involve plans and objectives within a business. For example, functional-level strategies can be established for
areas such as marketing, operations, and R&D. This is an incorrect answer.
Rationale
 Mission
Companies develop strategies at multiple levels. They can be developed at the corporate, competitive, and functional levels. Strategies are not set
at the “mission” level because there is no such thing as the “mission” level; therefore, this is the correct answer.
Rationale
 Corporate
Strategies at the corporate level involve plans and objectives for multiple business units within the company. For example, corporate-level
strategies focus on allocating resources among a company's business units. This is an incorrect answer.
Rationale
 Competitive
Strategies at the competitive level involve plans and objectives for an individual business unit. For example, competitive-level strategies focus on
how an individual business unit creates value in its industry. This is an incorrect answer.
Question 34
1.B.1.c
1B1-W018
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: hard
Bloom Code: 5
Enscribe Inc. is a small firm that provides specialized, industry-oriented articles and features to medical publications. Founded and run by a team of
physicians, Enscribe is a highly respected vendor in the market and has a dominant market share. However, the firm's market currently is undergoing a
rapid expansion owing to a proliferation of online medical Websites. The chief executive officer of Enscribe—Dr. Elliot—sees this as a massive opportunity
for the firm. However, the chief editor—Dr. Cruz—believes that this development is a threat. Which of the following, if true, would strengthen Dr. Cruz's
conclusion?
Correct
The firm has always struggled to find good-quality new hires.
The medical publishing industry has high entry barriers that discourage new entrants.
Your Answer
The firm has been identified as a cash cow in a BCG Growth Matrix developed by its parent firm.
The firm lists organizational learning as one of its strengths.
Rationale
 The firm has always struggled to find good-quality new hires.
If the firm has struggled to find good new hires, it probably will find it difficult to scale up its team to meet burgeoning market demand. This will
convert the opportunity into a threat as Enscribe is likely to lose market share to new entrants.
Rationale
 The medical publishing industry has high entry barriers that discourage new entrants.
This answer is incorrect. High entry barriers to the market will discourage new entrants, thus turning the expanding market into an opportunity for
the incumbent firm.
Rationale
 The firm has been identified as a cash cow in a BCG Growth Matrix developed by its parent firm.
This answer is incorrect. If the firm has been identified as a cash cow, it probably generates enough cash to fund its expansion to meet the demands
of a growing market.
Rationale
 The firm lists organizational learning as one of its strengths.
This answer is incorrect. Organizational learning will help the company keep its dominant market share in a growing market.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.1.g
aq.gen.strat.003_0720
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 2
Which of the following is not a characteristic of a successful strategic plan?
The strategic plan compels managers to align their own planning and decision making with the longer-term goals and strategy of the organization.
Your Answer
The strategic plan improves communication and aids coordination among managers by helping them align their goals with the overall strategy.
Correct
The process of building the strategic plan should be exclusive to the organization's executive leadership.
Performance evaluation and incentive compensation can be tied clearly to the strategic plan.
Rationale
 The strategic plan compels managers to align their own planning and decision making with the longer-term goals and strategy of the
organization.
This is actually a characteristic of a successful strategic plan.
Rationale
 The strategic plan improves communication and aids coordination among managers by helping them align their goals with the overall
strategy.
This is actually a characteristic of a successful strategic plan.
Rationale
 The process of building the strategic plan should be exclusive to the organization's executive leadership.
This is not a characteristic of a successful strategic plan. The process of building the strategic plan should be inclusive across the organization to
help managers and employees feel collective ownership.
Rationale
 Performance evaluation and incentive compensation can be tied clearly to the strategic plan.
This is actually a characteristic of a successful strategic plan.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.1.f
tb.gen.strat.007_1805
LOS: 1.B.1.f
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
Which of the following statements is not correct concerning operational planning (master budget)?
Having an operational plan (master budget) that is consistent with an organization's strategic plan increases the likelihood of achieving long-term
goals.
Correct
Having an operational plan (master budget) that is consistent with an organization's strategic plan is not necessary since the strategic plan deals with
long-term goals and the operational plan deals with short-term objectives.
An operational plan (master budget) should be designed to achieve short-term objectives.
An operational plan (master budget) is based on short-term tactics.
Rationale
 Having an operational plan (master budget) that is consistent with an organization's strategic plan increases the likelihood of achieving
long-term goals.
An organization's operational plan (master budget) should support the achievement of short-term objectives. Assuming short-term objectives are
consistent with long-term goals, having an operational plan that is consistent with long-term goals increases the likelihood that long-term goals
will be achieved as achieving short-term objectives should lead to achieving long-term goals; therefore, this is an incorrect answer.
Rationale
 Having an operational plan (master budget) that is consistent with an organization's strategic plan is not necessary since the strategic
plan deals with long-term goals and the operational plan deals with short-term objectives.
Short-term objectives and long-term goals should both flow from an organization's strategic plan. An organization's operational plan (master
budget) should support the achievement of short-term objectives. Assuming short-term objectives are consistent with long-term goals, having an
operational plan that is consistent with long-term goals increases the likelihood that long-term goals will be achieved because achieving short-term
objectives should lead to achieving long-term goals; therefore, this is the correct answer.
Rationale
 An operational plan (master budget) should be designed to achieve short-term objectives.
An operational plan (master budget) covers a time period of one year or less. That is also the time period covered by short-term objectives, which
means an operational plan (master budget) should be designed to achieve short-term objectives; therefore, this is an incorrect answer.
Rationale
 An operational plan (master budget) is based on short-term tactics.
An operational plan (master budget) covers a time period of one year or less. That is also the time period covered by short-term objectives, which
means an operational plan (master budget) is based on short-term tactics; therefore, this is an incorrect answer.
Question 3
1.B.1.h
tb.gen.strat.016_1805
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Which of the following correctly describes an example of following the differentiation strategy?
A company heavily invests in R&D to develop more efficient manufacturing techniques.
Correct
A company heavily invests in R&D to develop products with features competitors’ products do not have.
Your Answer
A company heavily invests in R&D to develop a more efficient product packaging process.
A company heavily invests in R&D to enable it to produce a product that appeals to a particular industry segment only.
Rationale
 A company heavily invests in R&D to develop more efficient manufacturing techniques.
A company investing heavily in R&D to develop more efficient manufacturing techniques is following a cost leadership strategy, not a differentiation
strategy, as the goal is to enable it to sell products at the lowest price in the industry; therefore, this is an incorrect answer.
Rationale
 A company heavily invests in R&D to develop products with features competitors’ products do not have.
One generic strategy an organization can follow is differentiation. Organizations using this strategy work to develop products and services that are
better than or different from competitors’ products (for example, higher quality or with additional features not available elsewhere). A company
investing heavily in R&D to develop products with features competitors’ products do not have is following a differentiation strategy since it focuses
on making its product different from competitors’ products; therefore, this is the correct answer.
Rationale
 A company heavily invests in R&D to develop a more efficient product packaging process.
A company investing heavily in R&D to develop a more efficient product packaging process is following a cost leadership strategy, not a
differentiation strategy, as the goal is to enable it to sell products at the lowest price in the industry; therefore, this is an incorrect answer.
Rationale
 A company heavily invests in R&D to enable it to produce a product that appeals to a particular industry segment only.
A company investing heavily in R&D to enable it to produce a product that appeals to a particular industry segment only is following a focus
strategy, not a differentiation strategy, as the goal is to focus on selling in one particular industry segment; therefore, this is an incorrect answer.
Question 4
1.B.1.e
tb.gen.strat.005_1805
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: hard
Bloom Code: 4
Which of the following statements concerning a clothing store's mission is correct?
Correct
It can help it make a decision whether to open stores in five additional states.
It can help it make a decision whether to upgrade its single-light store sign to a multi-color store sign.
Your Answer
It can help it make a decision whether to place some slow-selling merchandise on sale.
It can help it make a decision whether to run advertisements on local television stations to promote extra Christmas hours.
Rationale
 It can help it make a decision whether to open stores in five additional states.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to diversify the business, to add or eliminate product lines, or to enter new markets.
This decision involves the clothing store entering new markets; therefore, this is the correct answer.
Rationale
 It can help it make a decision whether to upgrade its single-light store sign to a multi-color store sign.
A mission statement can be helpful in formulating long-term business decisions as it provides a clear statement about how the organization will
work toward achieving its vision. A decision whether to upgrade its single-light store sign to a multi-color store sign is an operational or day-to-day
issue, not a long-term business issue; therefore, this is an incorrect answer.
Rationale
 It can help it make a decision whether to place some slow-selling merchandise on sale.
A mission statement can be helpful in formulating long-term business decisions as it provides a clear statement about how the organization will
work toward achieving its vision. A decision whether to place some slow-selling merchandise on sale is an operational or day-to-day issue, not a
long-term business issue; therefore, this is an incorrect answer.
Rationale
 It can help it make a decision whether to run advertisements on local television stations to promote extra Christmas hours.
A mission statement can be helpful in formulating long-term business decisions as it provides a clear statement about how the organization will
work toward achieving its vision. A decision concerning whether to run advertisements on local television stations to promote extra Christmas
hours is an operational or day-to-day issue, not a long-term business objective; therefore, this is an incorrect answer.
Question 5
1.B.1.e
tb.gen.strat.002_1805
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: hard
Bloom Code: 4
Which of the following statements concerning an organization's mission is not correct?
An organization's mission statement can help it make a decision to diversify its product lines.
An organization's mission statement can help it make a decision to add a new product line.
Your Answer
An organization's mission statement can help it make a decision to enter a new market.
Correct
An organization's mission statement can help it make a decision on which supplier to use.
Rationale
 An organization's mission statement can help it make a decision to diversify its product lines.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to diversify the business; therefore, this is an incorrect answer.
Rationale
 An organization's mission statement can help it make a decision to add a new product line.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to add or eliminate product lines; therefore, this is an incorrect answer.
Rationale
 An organization's mission statement can help it make a decision to enter a new market.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to enter new markets; therefore, this is an incorrect answer.
Rationale
 An organization's mission statement can help it make a decision on which supplier to use.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to diversify the business, to add or eliminate product lines, or to enter new markets. A
decision concerning which supplier to use is an operational or day-to-day issue, not a long-term business objective; therefore, this is the correct
answer.
Question 6
1.B.1.g
tb.gen.strat.011_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Realistic
Measurable
Your Answer
Achievable
Correct
Temporary
Rationale
 Realistic
One aspect of a SMART objective is that the objective be realistic. If an objective is not realistic then the organization is not likely to achieve it. That
would mean the organization is unlikely to achieve its goals; therefore, this is an incorrect answer.
Rationale
 Measurable
One aspect of a SMART objective is that the objective be measurable. If an objective is not measurable then it will not be possible to assess whether
the objective is proceeding as planned or whether the objective has been met; therefore, this is an incorrect answer.
Rationale
 Achievable
One aspect of a SMART objective is that the objective be achievable. If an objective is not achievable then individuals may lose the motivation to
work toward achieving the objective. This would make it difficult to achieve goals; therefore, this is an incorrect answer.
Rationale
 Temporary
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be timely, not temporary. If an
objective is not timely than it will not likely be performed in time to help achieve an organization's goals. A temporary objective is an objective that
is performed for a limited period of time only. While some useful objectives can be temporary, not all temporary objectives are likely to be
temporary; therefore, this is the correct answer.
Question 7
1.B.1.g
tb.gen.strat.013_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Correct
Moving
Specific
Your Answer
Achievable
Timely
Rationale
 Moving
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be measurable, not moving. If an
objective is not measurable then it will not be possible to assess whether the objective is proceeding as planned or whether the objective has been
met. A moving objective would be an objective that changes regularly. That is not useful because the desired performance would always be
changing (moving); therefore, this is the correct answer.
Rationale
 Specific
One aspect of a SMART objective is that the objective be specific, not secondary. If an objective is not specific then it can be difficult to develop
measures for it. This would make it difficult to measure progress toward achieving the objective; therefore, this is an incorrect answer.
Rationale
 Achievable
One aspect of a SMART objective is that the objective be achievable. If an objective is not achievable then individuals may lose the motivation to
work toward achieving the objective. This would make it difficult to achieve goals; therefore, this is an incorrect answer.
Rationale
 Timely
One aspect of a SMART objective is that the objective be timely. If an objective is not timely then it will not likely be performed in time to help
achieve an organization's goals; therefore, this is an incorrect answer.
Question 8
1.B.1.h
aq.gen.strat.006_0720
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
From its facility in North Carolina, TMC Corporation manufactures and sells a small electric car under the brand name of Quinoa. Quinoa is the first and
only electric car of its kind in the market and is a bestseller owing to its low price. Which of the following is a threat that is most likely to reduce the
competitive advantage Quinoa has due to its low price?
The price of gasoline increases sharply.
Your Answer
The government places import restrictions on electric cars and other vehicles.
New environmental regulations are imposed on fossil fuel–based vehicles.
Correct
The government withdraws the subsidies it had extended to the electric car segment.
Rationale
 The price of gasoline increases sharply.
The price of gasoline increasing sharply will improve the competitive advantage of the Quinoa.
Rationale
 The government places import restrictions on electric cars and other vehicles.
TMC produces the Quinoa in the United States and will not be subject to the import restrictions. In fact, the Quinoa will have a competitive
advantage over electric cars and other vehicles being imported by competitors.
Rationale
 New environmental regulations are imposed on fossil fuel–based vehicles.
New environmental regulations imposed on fossil fuel-based vehicles will improve the competitive advantage of the Quinoa.
Rationale
 The government withdraws the subsidies it had extended to the electric car segment.
The withdrawal of government subsidies extended to the electric car segment is likely to increase costs (either cost to produce or cost to purchase)
and reduce Quinoa's competitive advantage.
Question 9
1.B.1.g
aq.gen.strat.004_0720
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 2
Which of the following is not a characteristic of a successful strategic plan?
The strategic plan is based on realities in the environment (both external and internal).
Correct
The strategic plan should be created in such a way that it does not need to be reviewed and updated periodically.
Your Answer
The strategic plan is based on a clear statement of the organization's vision and mission.
The strategic plan serves as a reference point for decision-making in the organization.
Rationale
 The strategic plan is based on realities in the environment (both external and internal).
This is actually a characteristic of a successful strategic plan.
Rationale
 The strategic plan should be created in such a way that it does not need to be reviewed and updated periodically.
This is not a characteristic of a successful strategic plan. Successful strategic plans are not perfect, and need to be reviewed and updated
periodically as the organization's environment shifts and managers learn better how to compete successfully.
Rationale
 The strategic plan is based on a clear statement of the organization's vision and mission.
This is actually a characteristic of a successful strategic plan.
Rationale
 The strategic plan serves as a reference point for decision-making in the organization.
This is actually a characteristic of a successful strategic plan.
Question 10
1.B.1.h
aq.gen.strat.008_0720
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
Which of the following strategies focuses on a differentiation competitive advantage in a narrow (segmented) competitive scope?
Cost leadership strategy
Correct
Focus strategy (differentiation)
Differentiation strategy
Your Answer
Focus strategy (lower cost)
Rationale
 Cost leadership strategy
Incorrect. A cost leadership strategy focuses on a lower cost competitive advantage in a broad (industry) competitive scope.
Rationale
 Focus strategy (differentiation)
Correct. A differentiation focus strategy focuses on a differentiation competitive advantage in a narrow (segmented) competitive scope.
Rationale
 Differentiation strategy
Incorrect. A differentiation strategy focuses on a differentiation competitive advantage in a broad (industry) competitive scope.
Rationale
 Focus strategy (lower cost)
Incorrect. A lower-cost focus strategy focuses on a lower-cost competitive advantage in a narrow (segmented) competitive scope.
Question 11
1.B.1.g
tb.gen.strat.008_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning a successful strategic plan is not correct?
A successful strategic plan helps an organization achieve its long-term goals and objectives.
A successful strategic plan has well-defined goals consistent with the organization's mission.
A successful strategic plan includes objectives that provide the details or actions needed to achieve goals.
Correct
A successful strategic plan includes goals that provide the details or actions needed to achieve objectives.
Rationale
 A successful strategic plan helps an organization achieve its long-term goals and objectives.
A strategic plan is a long-term plan that flows from an organization's vision and mission. It is used to increase the likelihood that the vision and
mission will be achieved. As such, it should be designed to help an organization implement its long-term goals and objectives; therefore, this is an
incorrect answer.
Rationale
 A successful strategic plan has well-defined goals consistent with the organization's mission.
A strategic plan is a long-term plan that flows from an organization's vision and mission. It is used to increase the likelihood that the vision and
mission will be achieved. Goals need to be well-defined; otherwise, it will be difficult to measure success. Also, the goals in the strategic plan need
to be consistent with the mission since the strategic plan helps increase the likelihood that the mission will be achieved; therefore, this is an
incorrect answer.
Rationale
 A successful strategic plan includes objectives that provide the details or actions needed to achieve goals.
A strategic plan is a long-term plan that flows from an organization's vision and mission. It is used to increase the likelihood that the vision and
mission will be achieved. A strategic plan should include goals and objectives. Goals are typically general guidelines of what the organization hopes
to achieve while objectives provide the details or actions needed to support goals; therefore, this is an incorrect answer.
Rationale
 A successful strategic plan includes goals that provide the details or actions needed to achieve objectives.
A strategic plan is a long-term plan that flows from an organization's vision and mission. It is used to increase the likelihood that the vision and
mission will be achieved. A strategic plan should include goals and objectives. Goals are typically general guidelines of what the organization hopes
to achieve, while objectives provide the details or actions needed to support goals. Goals are not designed to achieve objectives; therefore, this is
the correct answer.
Question 12
1.B.1.e
1B1-W013
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
How can stakeholder analysis be linked to strategic planning?
Stakeholder analysis helps an organization identify the capabilities to be gained.
Stakeholder analysis describes an organization's migration to international operations.
Insights gained from stakeholder analysis evolve into an organizational technology strategy.
Correct
Stakeholder analysis helps an organization frame its corporate social responsibility.
Rationale
 Stakeholder analysis helps an organization identify the capabilities to be gained.
This answer is incorrect. Internal capability analysis helps an organization ensure that it has the resources, skills, and processes to reach its
strategic and tactical goals.
Rationale
 Stakeholder analysis describes an organization's migration to international operations.
This answer is incorrect. An organization's migration to international operations is described by globalization.
Rationale
 Insights gained from stakeholder analysis evolve into an organizational technology strategy.
This answer is incorrect. Stakeholder analysis contributes little to framing an organizational technology strategy.
Rationale
 Stakeholder analysis helps an organization frame its corporate social responsibility.
Stakeholder analysis helps an organization frame its corporate social responsibility. It identifies the role good citizenship plays in a business.
Question 13
1.B.1.g
1A1-LS04
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Which of the following would effectively commit responsibility center managers to the company strategy in a top-down environment?
Correct
The CEO sends a memo to each manager with specific instructions on forming their budgets.
The CEO sends a completed budget to each manager for review.
Your Answer
The CEO interviews managers and key employees to determine what they feel the responsibility center's priorities should be.
The CEO waits for budgets to be submitted and then reviews each for fit with strategy.
Rationale
 The CEO sends a memo to each manager with specific instructions on forming their budgets.
In a top-down environment, a budget proposal is the initial step in a budgeting process, and before managers make a preliminary budget, the CEO
sends a directive or memo to each manager explaining what the corporate strategy is so they can create their budgets with this in mind.
Rationale
 The CEO sends a completed budget to each manager for review.
This answer is incorrect. If the CEO sends a completed budget to each manager for review, that action will not effectively commit responsibility
center managers to the company strategy, as managers will feel they had no input on the budget and will, therefore, not feel ownership of the
company strategy.
Rationale
 The CEO interviews managers and key employees to determine what they feel the responsibility center's priorities should be.
This answer is incorrect. If the CEO interviews managers and key employees to determine what they feel the responsibility center's priorities should
be, that action will create a bottom-up environment instead of a top-down environment.
Rationale
 The CEO waits for budgets to be submitted and then reviews each for fit with strategy.
This answer is incorrect. If the CEO waits for budgets to be submitted and then reviews each for fit with strategy, that action will create a bottom-up
environment instead of a top-down environment.
Question 14
1.B.1.f
aq.gen.strat.002_0720
LOS: 1.B.1.f
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Short-term objectives, tactics for achieving these objectives, and operational planning (master budget) must be congruent with what? Choose the best
answer.
The organization's external environmental factors
The organization's internal environmental factors
Your Answer
The organization's performance evaluation and incentive compensation factors
Correct
The organization's strategic plan and long-term strategic goals
Rationale
 The organization's external environmental factors
While the external environmental factors play a role, short-term objectives, tactics for achieving these objectives, and operational planning (master
budget) depend on more than environmental factors.
Rationale
 The organization's internal environmental factors
While the internal environmental factors play a role, short-term objectives, tactics for achieving these objectives, and operational planning (master
budget) depend on more than environmental factors.
Rationale
 The organization's performance evaluation and incentive compensation factors
Short-term objectives, tactics for achieving these objectives, and operational planning (master budget) are not a result of performance evaluation
and incentive compensation factors. Rather, objective and tactics are used to design performance evaluation and incentive compensation.
Rationale
 The organization's strategic plan and long-term strategic goals
Short-term objectives, tactics for achieving these objectives, and operational planning (master budget) must be congruent with the strategic plan
and contribute to the achievement of long-term strategic goals. The external and internal environmental factors will have an influence on the
strategic plan and long-term strategic goals. Performance evaluation and incentive compensation factors are then based on the the organization's
strategic objectives and tactics.
Question 15
1.B.1.g
tb.gen.strat.009_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Specific
Measurable
Correct
Accurate
Realistic
Rationale
 Specific
One aspect of a SMART objective is that the objective be specific. If an objective is not specific then it can be difficult to develop measures for it. This
would make it difficult to measure progress toward achieving the objective; therefore, this is an incorrect answer.
Rationale
 Measurable
One aspect of a SMART objective is that the objective be measurable. If an objective is not measurable then it will not be possible to assess whether
the objective is proceeding as planned or whether the objective has been met; therefore, this is an incorrect answer.
Rationale
 Accurate
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be achievable, not accurate. If an
objective is not achievable then individuals may lose the motivation to work toward achieving the objective. This would make it difficult to achieve
goals. While the measure of an objective can be accurate, the objective itself cannot be accurate; therefore, this is the correct answer.
Rationale
 Realistic
One aspect of a SMART objective is that the objective be realistic. If an objective is not realistic then the organization is not likely to achieve it. That
would mean the organization is unlikely to achieve its goals; therefore, this is an incorrect answer.
Question 16
1.B.1.g
1B1-W025
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: hard
Bloom Code: 5
The management of Mateo Inc., a manufacturer of printer cartridges, has set the following tactical goal for its marketing department: "To increase
product sales by 15% this year." In order to help achieve this goal, Ravi, a team lead in the marketing department, has formulated the following
supporting objective for his team: "Every member in the team must sell more units in the next four quarters than he or she did in the last four quarters."
As Ravi's manager, what advice would you give Ravi to make the objective more effective?
Your Answer
Clearly state the consequences of not achieving the target.
Provide a clear timeline for performing the required action.
Make the target more measurable.
Correct
Specify a clear, quantitative target.
Rationale
 Clearly state the consequences of not achieving the target.
This answer is incorrect. It is not necessary for an objective to clearly state the consequences of not achieving the target for it to be more effective.
Rationale
 Provide a clear timeline for performing the required action.
This answer is incorrect. The objective given has a clear timeline for performing the required action: “in the next four quarters.”
Rationale
 Make the target more measurable.
This answer is incorrect. The objective given is measurable: the number of units sold.
Rationale
 Specify a clear, quantitative target.
Objectives should be specific, measurable, attainable, realistic, and timely. The objective given here is measurable, attainable, realistic, and timely,
but it is not specific about the level of performance.
Question 17
1.B.1.h
MQ2907
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 2
Which of the following would be a valid definition of product differentiation?
Competing on the basis of a product being cheaper than the competition
Your Answer
Competing on the basis of a product being more popular than the competition
Correct
Competing on the basis of a product being better than the competition
Competing on the basis of a product being similar to the competition
Rationale
 Competing on the basis of a product being cheaper than the competition
This answer is incorrect. Competing on the basis of a product being cheaper than the competition is not product differentiation, it is price
differentiation.
Rationale
 Competing on the basis of a product being more popular than the competition
This answer is incorrect. Competing on the basis of a product being more popular than the competition is not product differentiation, as a product
differentiation strategy might not result in a more popular product.
Rationale
 Competing on the basis of a product being better than the competition
Product differentiation is competing on the basis of a product being better than the competition.
Rationale
 Competing on the basis of a product being similar to the competition
This answer is incorrect. Competing on the basis of a product being similar to the competition is not product differentiation, it is imitating the
competition.
Question 18
1.B.1.h
aq.gen.strat.007_0720
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: hard
Bloom Code: 5
Which of the following correctly describes a cost leadership strategy in the framework of Porter's generic strategies?
Correct
The strategy focuses on the organization's ability to sell a high volume of lower-cost products or services. In order to be able to implement this
strategy, the organization should have high levels of productivity and efficiency, as well as access to extensive distribution resources. Additional
factors affecting the successful implementation of this strategy include proprietary production technology, control of low-cost production inputs (raw
materials, labor, etc.), and access to low-cost financial capital.
The strategy focuses on the organization's ability to sell a high volume of lower-cost products or services. In order to be able to implement this
strategy, the organization should have high levels of productivity and efficiency, as well as access to extensive distribution resources. In order to
support this strategy, the organization must foster continued product innovation and improvement through investment in research and
development, and must effectively market the innovation of the product to maintain the brand.
The strategy focuses on products or services with unique features or benefits to the customer. In general, these products inspire higher levels of brand
loyalty in customers, making them less sensitive to price differences among products. Additional factors affecting the successful implementation of
this strategy include proprietary production technology, control of low-cost production inputs (raw materials, labor, etc.), and access to low-cost
financial capital.
The strategy focuses on products or services with unique features or benefits to the customer. In general, these products inspire higher levels of brand
loyalty in customers, making them less sensitive to price differences among products. In order to support this strategy, the organization must foster
continued product innovation and improvement through investment in research and development, and must effectively market the product to
maintain the brand.
Rationale
 The strategy focuses on the organization's ability to sell a high volume of lower-cost products or services. In order to be able to
implement this strategy, the organization should have high levels of productivity and efficiency, as well as access to extensive distribution
resources. Additional factors affecting the successful implementation of this strategy include proprietary production technology, control
of low-cost production inputs (raw materials, labor, etc.), and access to low-cost financial capital.
This statement correctly describes a cost leadership strategy in the framework of Porter's generic strategies.
Rationale
 The strategy focuses on the organization's ability to sell a high volume of lower-cost products or services. In order to be able to
implement this strategy, the organization should have high levels of productivity and efficiency, as well as access to extensive distribution
resources. In order to support this strategy, the organization must foster continued product innovation and improvement through
investment in research and development, and must effectively market the innovation of the product to maintain the brand.
This statement partially describes a cost leadership strategy in the framework of Porter's generic strategies. However, instead of product
innovation, improvement, and marketing, this strategy requires proprietary technology, control of costs, and access to low-cost capital.
Rationale
 The strategy focuses on products or services with unique features or benefits to the customer. In general, these products inspire higher
levels of brand loyalty in customers, making them less sensitive to price differences among products. Additional factors affecting the
successful implementation of this strategy include proprietary production technology, control of low-cost production inputs (raw
materials, labor, etc.), and access to low-cost financial capital.
This statement partially describes a cost leadership strategy in the framework of Porter's generic strategies. However, instead of offering unique
features, this strategy focuses on selling a high volume of lower-cost products or services.
Rationale
 The strategy focuses on products or services with unique features or benefits to the customer. In general, these products inspire higher
levels of brand loyalty in customers, making them less sensitive to price differences among products. In order to support this strategy, the
organization must foster continued product innovation and improvement through investment in research and development, and must
effectively market the product to maintain the brand.
This is an accurate definition of a differentiation strategy, not a cost leadership strategy.
Question 19
1.B.1.g
tb.gen.strat.012_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Realistic
Correct
Secondary
Achievable
Timely
Rationale
 Realistic
One aspect of a SMART objective is that the objective be realistic. If an objective is not realistic then the organization is not likely to achieve it. That
would mean the organization is unlikely to achieve its goals; therefore, this is an incorrect answer.
Rationale
 Secondary
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be specific, not secondary. A
secondary objective is an objective that has a lower priority than a primary objective. While an organization can have some secondary objectives,
they are not likely to be a part of a strategic plan since secondary objectives are not likely to be related to achieving its vision and mission;
therefore, this is the correct answer.
Rationale
 Achievable
One aspect of a SMART objective is that the objective be achievable. If an objective is not achievable then individuals may lose the motivation to
work toward achieving the objective. This would make it difficult to achieve goals; therefore, this is an incorrect answer.
Rationale
 Timely
A strategic plan is a long-term plan that flows from an organization's vision and mission. One aspect of a SMART objective is that the objective be
timely. If an objective is not timely then it will not likely be performed in time to help achieve an organization's goals; therefore, this is an incorrect
answer.
Question 20
1.B.1.e
tb.gen.strat.004_1805
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: hard
Bloom Code: 4
Which of the following statements concerning an automobile dealership's mission is correct?
Correct
It can help it make a decision whether to stop selling new cars and only sell used cars.
Your Answer
It can help it make a decision whether to offer free snacks to people test-driving a car.
It can help it make a decision whether to hire an additional salesperson.
It can help it make a decision whether to send its sales staff to a 2-hour seminar on selling more effectively.
Rationale
 It can help it make a decision whether to stop selling new cars and only sell used cars.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to diversify the business, to add or eliminate product lines, or to enter new markets.
This decision involves the dealership eliminating a product line; therefore, this is the correct answer.
Rationale
 It can help it make a decision whether to offer free snacks to people test-driving a car.
A mission statement can be helpful in formulating long-term business decisions because it provides a clear statement about how the organization
will work toward achieving its vision. A decision whether to offer free snacks to people test-driving a car is an operational or day-to-day issue, not a
long-term business issue; therefore, this is an incorrect answer.
Rationale
 It can help it make a decision whether to hire an additional salesperson.
A mission statement can be helpful in formulating long-term business decisions as it provides a clear statement about how the organization will
work toward achieving its vision. A decision whether to hire an additional salesperson is an operational or day-to-day issue, not a long-term
business issue; therefore, this is an incorrect answer.
Rationale
 It can help it make a decision whether to send its sales staff to a 2-hour seminar on selling more effectively.
A mission statement can be helpful in formulating long-term business decisions as it provides a clear statement about how the organization will
work toward achieving its vision. A decision whether to send its sales-staff to a 2-hour seminar on selling more effectively is an operational or dayto-day issue, not a long-term business objective; therefore, this is an incorrect answer.
Question 21
1.B.1.h
tb.gen.strat.017_1805
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Which of the following correctly describes an example of following the differentiation strategy?
A company focuses its advertisements on how its product costs less than similar products sold by competitors.
Correct
A company focuses its advertisements on how its product is higher quality than similar products sold by competitors.
A company chooses not to advertise its product as a way to cut costs.
Your Answer
A company focuses its advertisements on how it sells products in one industry segment and is therefore an expert in that segment.
Rationale
 A company focuses its advertisements on how its product costs less than similar products sold by competitors.
A company focusing in its advertisements on how its product costs less than similar products sold by competitors following a cost leadership
strategy, not a differentiation strategy, as it emphasizes selling a similar product at a lower price than competitors charge; therefore, this is an
incorrect answer.
Rationale
 A company focuses its advertisements on how its product is higher quality than similar products sold by competitors.
One generic strategy an organization can follow is differentiation. Organizations using this strategy work to develop products and services that are
better than or different from competitors’ products (for example, higher quality or with additional features not available elsewhere). A company
focusing its advertisements on how its product is higher quality than similar products sold by competitors is following a differentiation strategy
since it emphasizes how its product is superior to competitors’ products; therefore, this is the correct answer.
Rationale
 A company chooses not to advertise its product as a way to cut costs.
A company choosing not to advertise its product as a way to cut costs is following a cost leadership strategy, not a differentiation strategy, as
cutting costs will help enable it to sell products at the lowest price in the industry; therefore, this is an incorrect answer.
Rationale
 A company focuses its advertisements on how it sells products in one industry segment and is therefore an expert in that segment.
A company focusing its advertisements on how it sells products in one industry segment and is therefore an expert in that segment is following a
focus strategy, not a differentiation strategy, as the goal is to focus on selling in one particular industry segment; therefore, this is an incorrect
answer.
Question 22
1.B.1.e
cma11.p1.t1.me.0025_0820
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
Which one of the following describes what an organization wants to accomplish and leads to the formulation of long-term business objectives?
*Source: Retired ICMA CMA Exam Questions.
Values
Strategy
Your Answer
Competency
Correct
Mission statement
Rationale
 Values
This answer is incorrect. An organization's values are the organization's principles, beliefs, or philosophy, not what an organization wants to
accomplish and the formulation of long-term objectives.
Rationale
 Strategy
This answer is incorrect. An organization's strategy would include the courses of action the organization will take to achieve its mission or what the
organization want to accomplish and formulation of its long-term business objectives.
Rationale
 Competency
This answer is incorrect. Competency is the ability to successfully achieve goals or objectives or the capability to accomplish a task effectively, not
what an organization wants to accomplish or the formulation of long-term objectives.
Rationale
 Mission statement
An organization's mission statement will include what an organization wants to accomplish and leads to the formulation of long-term business
objectives.
Question 23
1.B.1.h
cma11.p1.t1.me.0018_0820
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 2
A company has developed and implemented a wireless charging feature into one of its flashlights. No other competitor in the marketplace currently
offers this feature. In a marketing research study, the vast majority of consumers indicated that they would pay a premium for this feature. Which one of
the following is the best strategy to bring this product to the market?
*Source: Retired ICMA CMA Exam Questions.
Porter's cost strategy
Porter's focus strategy
Correct
Porter's differentiation strategy
Porter's segmentation strategy
Rationale
 Porter's cost strategy
This answer is incorrect. The wireless charging feature represents a unique aspect of the product, not a cost reduction initiative. As such, the
product should not be brought to market using Porter's cost strategy.
Rationale
 Porter's focus strategy
This answer is incorrect. The wireless charging feature represents a unique aspect of the product that appeals to a majority of flashlight customers,
not to a particular niche market. Because of this, the product should not be brought to market using a focus strategy.
Rationale
 Porter's differentiation strategy
The wireless charging feature makes the product unique and more attractive to customers. Therefore, it should be brought to market using a
differentiation strategy.
Rationale
 Porter's segmentation strategy
This answer is incorrect. The wireless charging feature is appealing to the vast majority of customers. Thus, it would be ineffective to target the
product to only a narrow segment of the market.
Question 24
1.B.1.h
tb.gen.strat.018_1805
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Which of the following correctly describes an example of following the focus strategy?
A company hires experts in lean manufacturing to help improve production efficiency.
A company hires research scientists to enable it to develop products that are higher quality than competitors’ products.
A company hires research scientists to enable it to develop product features not available in competitors’ products.
Correct
A company hires research scientists with industry expertise to enable it to produce a product with features attractive to one industry segment.
Rationale
 A company hires experts in lean manufacturing to help improve production efficiency.
A company hiring experts in lean manufacturing to help improve production efficiency is following a cost leadership strategy, not a focus strategy,
as the goal is to reduce costs; therefore, this is an incorrect answer.
Rationale
 A company hires research scientists to enable it to develop products that are higher quality than competitors’ products.
A company hiring research scientists to enable it to develop products that are higher quality than competitors’ products is following a
differentiation strategy, not a focus strategy, as the goal is to differentiate its products from competitors’ products; therefore, this is an incorrect
answer.
Rationale
 A company hires research scientists to enable it to develop product features not available in competitors’ products.
A company hiring research scientists to enable it to develop product features not available in competitors’ products is following a differentiation
strategy, not a focus strategy, as the goal is to differentiate its products from competitors’ products; therefore, this is an incorrect answer.
Rationale
 A company hires research scientists with industry expertise to enable it to produce a product with features attractive to one industry
segment.
Organizations using a focus strategy limit their attention to one particular industry segment. A company hiring research scientists with industry
expertise to enable it to produce a product with features attractive to one industry segment is following the focus strategy since the new features
are unlikely to be valued in any other industry; therefore, this is the correct answer.
Question 25
1.B.1.h
tb.gen.strat.014_1805
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Which of the following correctly describes an example of following the cost leadership strategy?
Correct
A company invests in automated manufacturing equipment to reduce production costs.
A company invests in automated manufacturing equipment to enable it to produce products that are higher quality than competitors’ products.
A company invests in automated manufacturing equipment to enable it to produce a product with features not available in competitors’ products.
Your Answer
A company invests in automated manufacturing equipment to enable it to produce a product that appeals to a particular industry segment only.
Rationale
 A company invests in automated manufacturing equipment to reduce production costs.
One generic strategy an organization can follow is cost leadership. Organizations using this strategy work to reduce costs as much as possible to be
able to charge lower prices than competitors for similar products and services. A company investing in automated manufacturing equipment to
reduce total production costs is likely following a cost leadership strategy since lower production costs will enable the company to charge lower
prices than competitors for similar products; therefore, this is the correct answer.
Rationale
 A company invests in automated manufacturing equipment to enable it to produce products that are higher quality than competitors’
products.
A company investing in automated manufacturing equipment to enable it to produce products that are higher quality than competitors’ products is
following a differentiation strategy, not a cost leadership strategy, as the goal is to differentiate its products from competitors’ products; therefore,
this is an incorrect answer.
Rationale
 A company invests in automated manufacturing equipment to enable it to produce a product with features not available in competitors’
products.
A company investing in automated manufacturing equipment to enable it to produce a product with features not available in competitors’
products is following a differentiation strategy, not a cost leadership strategy, as the goal is to differentiate its products from competitors’
products; therefore, this is an incorrect answer.
Rationale
 A company invests in automated manufacturing equipment to enable it to produce a product that appeals to a particular industry
segment only.
A company investing in automated manufacturing equipment to enable it to produce a product that appeals to a particular industry segment only
is following a focus strategy, not a cost leadership strategy, as the goal is to focus on selling in one particular industry segment; therefore, this is an
incorrect answer.
Question 26
1.B.1.h
aq.gen.strat.009_1802
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
In which of the following settings is the threat of decreased profits most likely to be the highest owing to rivalry among existing competitors?
Correct
Rivalry between the top fast-food restaurant chains in a market
Rivalry between the established market leader in discount superstores and small convenience stores
Rivalry between a company known for its innovative, cutting-edge technology and a company that sells cheap, basic technology
Your Answer
Rivalry between leading satellite television companies where customers who sign up get hardware that is compatible only with that service provider
Rationale
 Rivalry between the top fast-food restaurant chains in a market
Fast-food restaurant chains usually have little product or service differentiation, and customers often focus on price in such markets. Plus,
antagonism may run deep between top competitors, and instability often results as firms may be prone to fight and retaliate.
Rationale
 Rivalry between the established market leader in discount superstores and small convenience stores
There is product differentiation between discount superstores and small convenience stores. The threat of decreased profits owing to rivalry
among existing competitors is not highest in this example.
Rationale
 Rivalry between a company known for its innovative, cutting-edge technology and a company that sells cheap, basic technology
There is product differentiation between innovative technology companies and basic technology companies. The threat of decreased profits owing
to rivalry among existing competitors is not highest in this example.
Rationale
 Rivalry between leading satellite television companies where customers who sign up get hardware that is compatible only with that
service provider
There is product differentiation between satellite television companies as hardware is only compatible with the specific service provider. The threat
of decreased profits owing to rivalry among existing competitors is not highest in this example.
Question 27
1.B.1.e
tb.gen.strat.001_1805
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 2
Which of the following is a characteristic of long-range planning?
It focuses on achieving goals such as meeting annual profit objectives.
It is prepared for periods not exceeding one year.
Correct
It is used to review progress rather than as a basis for control.
Your Answer
More detail is presented than in a budget.
Rationale
 It focuses on achieving goals such as meeting annual profit objectives.
Annual profit objectives are included in budgets, not long-range plans; therefore, this is an incorrect answer.
Rationale
 It is prepared for periods not exceeding one year.
Budgets are typically prepared for one-year periods or less. Unlike budgets, long-range plans are prepared for periods exceeding one year;
therefore, this is an incorrect answer.
Rationale
 It is used to review progress rather than as a basis for control.
Long-range plans lack the detail of a budget so they are not used as a basis for control; rather, they are used to assess the progress made toward
achieving long-range goals. This is the correct answer.
Rationale
 More detail is presented than in a budget.
Long-range plans typically include less detail than budgets since budgets address specific operational goals and objectives. Therefore, this is an
incorrect answer.
Question 28
1.B.1.e
tb.gen.strat.003_1805
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: hard
Bloom Code: 4
Which of the following statements concerning an accounting firm's mission is correct?
Correct
It can help it make a decision whether to diversify from providing only cost analysis services to also offering IT system installations.
It can help it make a decision whether to use a different software package to handle client billings.
Your Answer
It can help it make a decision whether to set up a line of credit.
It can help it make a decision whether to sponsor a local sports team.
Rationale
 It can help it make a decision whether to diversify from providing only cost analysis services to also offering IT system installations.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to diversify the business, to add or eliminate product lines, or to enter new markets.
This decision involves the accounting firm diversifying its offerings, which is a long-term issue; therefore, this is the correct answer.
Rationale
 It can help it make a decision whether to use a different software package to handle client billings.
A mission statement can be helpful in formulating long-term business objectives because it provides a clear statement about how the organization
will work toward achieving its vision. A decision whether to use a different software package to handle client billings is an operational or day-to-day
issue, not a long-term business issue; therefore, this is an incorrect answer.
Rationale
 It can help it make a decision whether to set up a line of credit.
A mission statement can be helpful in formulating long-term business objectives because it provides a clear statement about how the organization
will work toward achieving its vision. A decision whether to set up a line of credit is an operational or day-to-day issue, not a long-term business
issue; therefore, this is an incorrect answer.
Rationale
 It can help it make a decision whether to sponsor a local sports team.
A mission statement can be helpful in formulating long-term business objectives as it provides a clear statement about how the organization will
work toward achieving its vision. A decision whether to sponsor a local sports team is an operational or day-to-day issue, not a long-term business
issue; therefore, this is an incorrect answer.
Question 29
1.B.1.e
aq.gen.strat.001_0720
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
An organization's long-term business objectives (such as business diversification, the addition or deletion of product lines, or the penetration of new
markets) are derived from what?
The objectives and plans of company executives
The objectives and plans of company managers
Correct
The mission and vision of the organization
The mission and vision of competitors
Rationale
 The objectives and plans of company executives
While the objectives and plans of company executives may align with many long-term business objectives of the organization, this is not the best
explanation of where plans are derived.
Rationale
 The objectives and plans of company managers
While the objectives and plans of company managers may align with many long-term business objectives of the organization, this is not the best
explanation of where plans are derived.
Rationale
 The mission and vision of the organization
Long-term business objectives such as business diversification, the addition or deletion of product lines, or the penetration of new markets are
derived from the mission and vision of the organization.
Rationale
 The mission and vision of competitors
While it is good to analyze what competitors are doing, the long-term business objectives of the organization are better derived from somewhere
else.
Question 30
1.B.1.h
tb.gen.strat.020_1809
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
Which of the following does not correctly describe an example of following the cost leadership strategy?
A company invests in automated manufacturing equipment to reduce production costs.
A company sends all its employees to training to improve their skills so they become more efficient and reduce total operating costs.
A company heavily invests in R&D to develop more efficient manufacturing techniques.
Correct
A company hires research scientists with industry expertise to enable it to produce a product with features attractive to one industry segment.
Rationale
 A company invests in automated manufacturing equipment to reduce production costs.
Incorrect. A company investing in automated manufacturing equipment to reduce total production costs is likely following a cost leadership
strategy since lower production costs will enable the company to charge lower prices than competitors for similar products.
Rationale
 A company sends all its employees to training to improve their skills so they become more efficient and reduce total operating costs.
Incorrect. A company sending all its employees to training to improve their skills so they become more efficient and reduce total operating costs is
likely following a cost leadership strategy since lower operating costs will enable the company to charge lower prices than competitors for similar
products.
Rationale
 A company heavily invests in R&D to develop more efficient manufacturing techniques.
Incorrect. A company investing heavily in R&D to develop more efficient manufacturing techniques is likely following a cost leadership strategy as
the goal is to enable it to sell products at the lowest price in the industry.
Rationale
 A company hires research scientists with industry expertise to enable it to produce a product with features attractive to one industry
segment.
Correct. One generic strategy an organization can follow is cost leadership. Organizations using this strategy work to reduce costs as much as
possible to be able to charge lower prices than competitors for similar products and services. A company hiring research scientists with industry
expertise to enable it to produce a product with features attractive to one industry segment is likely following the focus strategy, not cost
leadership strategy, since the new features are unlikely to be valued in any other industry.
Question 31
1.B.1.h
tb.gen.strat.022_1809
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
All of the following correctly describes an example of following the focus strategy except:
A company drops products in all industry segments but one.
A company invests in automated manufacturing equipment to enable it to produce a product that appeals to a particular industry segment only.
Your Answer
A company sends all its employees to training to improve their skills to enable it to produce a product that appeals to a particular industry segment
only.
Correct
A company sends all its employees to training to improve their skills to enable it to produce a product with features not available in competitors’
products.
Rationale
 A company drops products in all industry segments but one.
Incorrect. A company dropping products in all industry segments but one is likely following the focus strategy since the company will focus on
selling products in only one industry segment.
Rationale
 A company invests in automated manufacturing equipment to enable it to produce a product that appeals to a particular industry
segment only.
Incorrect. A company investing in automated manufacturing equipment to enable it to produce a product that appeals to a particular industry
segment only is likely following the focus strategy as the goal is to focus on selling in one particular industry segment.
Rationale
 A company sends all its employees to training to improve their skills to enable it to produce a product that appeals to a particular
industry segment only.
Incorrect. A company sending its employees to training to improve their skills to enable it to produce a product that appeals to a particular industry
segment only is likely following a focus strategy as the goal is to focus on selling in one particular industry segment.
Rationale
 A company sends all its employees to training to improve their skills to enable it to produce a product with features not available in
competitors’ products.
Correct. One generic strategy an organization can follow is a focus strategy. Organizations using this strategy limit their attention to one particular
industry segment. A company sending its employees to training to improve their skills to enable it to produce a product with features not available
in competitors’ products is likely following a differentiation strategy, not a focus strategy, as the goal is to differentiate its products from
competitors’ products.
Question 32
1.B.1.h
tb.gen.strat.019_1805
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Which of the following correctly describes an example of following the focus strategy?
A company drops one product as a way to reduce total costs.
A company drops products that are relatively low quality while retaining products that are relatively high quality.
Your Answer
A company drops products that contain similar features to competitors’ products while retaining products that contain features not available in
competitors’ products.
Correct
A company drops products in all industry segments but one.
Rationale
 A company drops one product as a way to reduce total costs.
A company dropping one product as a way to reduce total costs is following a cost leadership strategy, not a focus strategy, as the goal is to reduce
total costs; therefore, this is an incorrect answer.
Rationale
 A company drops products that are relatively low quality while retaining products that are relatively high quality.
A company dropping products that are relatively low quality while retaining products that are relatively high quality is following a differentiation
strategy, not a focus strategy, as the goal is to differentiate all its products from competitors’ products in terms of quality; therefore, this is an
incorrect answer.
Rationale
 A company drops products that contain similar features to competitors’ products while retaining products that contain features not
available in competitors’ products.
A company dropping products that contain similar features to competitors’ products while retaining products that contain features not available in
competitors’ products is following a differentiation strategy, not a focus strategy, as the goal is to differentiate all its products from competitors’
products in terms of unique features; therefore, this is an incorrect answer.
Rationale
 A company drops products in all industry segments but one.
Organizations using a focus strategy limit their attention to one particular industry segment. A company dropping products in all industry segments
but one is following the focus strategy since the company will now focus on selling products in only one industry segment; therefore, this is the
correct answer.
Question 33
1.B.1.g
tb.gen.strat.010_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Specific
Your Answer
Measurable
Timely
Correct
Routine
Rationale
 Specific
One aspect of a SMART objective is that the objective be specific. If an objective is not specific then it can be difficult to develop measures for it. This
would make it difficult to measure progress toward achieving the objective; therefore, this is an incorrect answer.
Rationale
 Measurable
One aspect of a SMART objective is that the objective be measurable. If an objective is not measurable then it will not be possible to assess whether
the objective is proceeding as planned or whether the objective has been met; therefore, this is an incorrect answer.
Rationale
 Timely
One aspect of a SMART objective is that the objective be timely. If an objective is not timely then it will not likely be performed in time to help
achieve an organization's goals; therefore, this is an incorrect answer.
Rationale
 Routine
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be realistic, not routine. If an
objective is not realistic then the organization is not likely to achieve it, which would mean the organization is unlikely to achieve its goals. A routine
objective is an objective that is performed on a regular (perhaps daily) basis. An objective does not need to be routine to be effective; therefore, this
is the correct answer.
Question 34
1.B.1.e
MQ2901
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Organizations have a number of strategies in place at any given time (e.g., personnel strategy, operations strategy, and marketing strategy). What is
common to all of these strategies?
Correct
All of these strategies derive from the overall organizational strategy and mission statement.
These strategies are all relevant to specific segments of the overall organization.
Your Answer
These strategies are determined independently by the segment managers.
These individual strategies are all established by organizational department heads.
Rationale
 All of these strategies derive from the overall organizational strategy and mission statement.
All strategies derive from the overall organizational strategy and mission statement.
Rationale
 These strategies are all relevant to specific segments of the overall organization.
This answer is incorrect. These strategies are not relevant to specific segments, but relevant to many segments of the overall organization.
Rationale
 These strategies are determined independently by the segment managers.
This answer is incorrect. Strategies are not determined at the segment level or independently by segment managers.
Rationale
 These individual strategies are all established by organizational department heads.
This answer is incorrect. Strategies are determined at top levels of the organization, not at the department level.
Question 35
1.B.1.h
MQ2903
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Which of the following two organizational strategy types compete with each other on a head-to-head basis?
Cost leadership vs. product differentiation
Cost leadership vs. market segmentation
Correct
Product differentiation vs. product differentiation
Your Answer
Quick response vs. product differentiation
Rationale
 Cost leadership vs. product differentiation
This answer is incorrect. Companies using a cost leadership approach would not typically compete head to head with a company pursuing a
product differentiation approach.
Rationale
 Cost leadership vs. market segmentation
This answer is incorrect. Companies using a cost leadership approach would not typically compete head to head with a company pursuing a market
segmentation approach.
Rationale
 Product differentiation vs. product differentiation
Companies try to compete against the same organizational strategy type. In this case, both companies are pursuing a product differentiation
strategy.
Rationale
 Quick response vs. product differentiation
This answer is incorrect. Companies using a quick response approach would not typically compete head to head with a company pursuing a
product differentiation approach.
Question 36
1.B.1.f
1B1-W002
LOS: 1.B.1.f
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 2
Which of the following is true of a functional strategy?
It defines an organization's values, expressed in financial and nonfinancial terms.
Correct
It defines activities and processes to help the organization maximize its competitive position.
Your Answer
It determines how organizational resources will be allocated among the firm's businesses.
It centers on identifying and building key resources.
Rationale
 It defines an organization's values, expressed in financial and nonfinancial terms.
This answer is incorrect. Corporate strategy, not functional strategy, defines the organization's values, expressed in financial and nonfinancial
terms.
Rationale
 It defines activities and processes to help the organization maximize its competitive position.
Functional strategy defines activities and processes to help the organization maximize its competitive position.
Rationale
 It determines how organizational resources will be allocated among the firm's businesses.
This answer is incorrect. Corporate strategy, not functional strategy, determines how organizational resources will be allocated among the firm's
businesses.
Rationale
 It centers on identifying and building key resources.
This answer is incorrect. Corporate strategy, not functional strategy, centers on identifying and building key resources.
Question 37
1.B.1.h
aq.gen.strat.005_1802
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
A cost leadership strategy, in addition to focusing on the company's ability to sell a large volume of low-cost products, is often aided by all of the
following characteristics except:
Advanced production technology.
Access to low-cost production inputs (raw materials, labor, etc.).
Correct
More highly desirable product features.
Access to low-cost capital.
Rationale
 Advanced production technology.
Advanced production technology contributes to the success of a cost leadership strategy.
Rationale
 Access to low-cost production inputs (raw materials, labor, etc.).
Access to low-cost production inputs (raw materials, labor, etc.) contributes to the success of a cost leadership strategy.
Rationale
 More highly desirable product features.
Having more highly desirable product features is a characteristic of a differentiation strategy, not a cost leadership strategy.
Rationale
 Access to low-cost capital.
Access to low-cost capital contributes to the success of a cost leadership strategy.
Question 38
1.B.1.h
tb.gen.strat.021_1809
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
All of the following correctly describes an example of following the differentiation strategy except:
A company heavily invests in R&D to develop products with features competitors’ products do not have.
A company focuses in its advertisements on how its product is higher quality than similar products sold by competitors.
A company drops products that contain similar features to competitors’ products while retaining products that contain features not available in
competitors’ products.
Correct
A company heavily invests in R&D to develop a more efficient product packaging process.
Rationale
 A company heavily invests in R&D to develop products with features competitors’ products do not have.
Incorrect. A company investing heavily in R&D to develop products with features competitors’ products do not have is likely following a
differentiation strategy since it focuses on making its product different from competitors’ products.
Rationale
 A company focuses in its advertisements on how its product is higher quality than similar products sold by competitors.
Incorrect. A company focusing in its advertisements on how its product is higher quality than similar products sold by competitors is likely following
a differentiation strategy since it emphasizes how its product is superior to competitors’ products.
Rationale
 A company drops products that contain similar features to competitors’ products while retaining products that contain features not
available in competitors’ products.
Incorrect. A company dropping products that contain similar features to competitors’ products while retaining products that contain features not
available in competitors’ products is likely following a differentiation strategy since the goal is to differentiate all its products from competitors’
products in terms of unique features.
Rationale
 A company heavily invests in R&D to develop a more efficient product packaging process.
Correct. One generic strategy an organization can follow is differentiation. Organizations using this strategy work to develop products and services
that are better than or different from competitors’ products (for example, higher quality or with additional features not available elsewhere). A
company investing heavily in R&D to develop a more efficient product packaging process is likely following a cost leadership strategy, not a
differentiation strategy, since the goal is to enable it to sell products at the lowest price in the industry.
Question 39
1.B.1.h
tb.gen.strat.015_1805
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Which of the following correctly describes an example of following the cost leadership strategy?
Correct
A company sends all its employees to training to improve their skills so they become more efficient and reduce total operating costs.
A company sends all its employees to training to improve their skills to enable it to produce products that are higher quality than competitors’
products.
A company sends all its employees to training to improve their skills to enable it to produce a product with features not available in competitors’
products.
Your Answer
A company sends all its employees to training to improve their skills to enable it to produce a product that appeals to a particular industry segment
only.
Rationale
 A company sends all its employees to training to improve their skills so they become more efficient and reduce total operating costs.
One generic strategy an organization can follow is cost leadership. Organizations using this strategy work to reduce costs as much as possible to be
able to charge lower prices than competitors for similar products and services. A company sending all its employees to training to improve their
skills so they become more efficient and reduce total operating costs is likely following a cost leadership strategy since lower operating costs will
enable the company to charge lower prices than competitors for similar products; therefore, this is the correct answer.
Rationale
 A company sends all its employees to training to improve their skills to enable it to produce products that are higher quality than
competitors’ products.
A company sending its employees to training to improve their skills to enable it to produce products that are higher quality than competitors’
products is following a differentiation strategy, not a cost leadership strategy, as the goal is to differentiate its products from competitors’
products; therefore, this is an incorrect answer.
Rationale
 A company sends all its employees to training to improve their skills to enable it to produce a product with features not available in
competitors’ products.
A company sending its employees to training to improve their skills to enable it to produce a product with features not available in competitors’
products is following a differentiation strategy, not a cost leadership strategy, as the goal is to differentiate its products from competitors’
products; therefore, this is an incorrect answer.
Rationale
 A company sends all its employees to training to improve their skills to enable it to produce a product that appeals to a particular
industry segment only.
A company sending its employees to training to improve their skills to enable it to produce a product that appeals to a particular industry segment
only is following a focus strategy, not a cost leadership strategy, as the goal is to focus on selling in one particular industry segment; therefore, this
is an incorrect answer.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.1.i
aq.spec.tools.003_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
Which of the following describes a Star business line in the BCG Growth-Share Matrix?
By holding a small share of a fast-growing market, these products or services have a lot of potential to do well, but have yet to actually deliver strong
results. Organizations usually design explore strategies for this kind of business.
Your Answer
Products, services, or business units that have a large share of an established (slower growing) market. These business lines require little investment
and can generate a lot of cash that can be used in other business units. Organizations usually design harvest strategies for these kinds of business.
Correct
The business line holds a high share of a fast-growing market. The organization typically needs to spend significant resources in order to maintain its
share of this market. Organizations usually design invest strategies for this kind of business.
An undesirable business holding a small share of a market that isn't growing. This business may not require much cash to maintain, but there is often
significant capital resources and valuable management attention tied up in these businesses. Unless there is an important purpose to remain in this
market, organizations usually design divest strategies for this kind of business.
Rationale
 By holding a small share of a fast-growing market, these products or services have a lot of potential to do well, but have yet to actually
deliver strong results. Organizations usually design explore strategies for this kind of business.
Incorrect. This describes a Question Mark in the BCG Growth-Share Matrix.
Rationale
 Products, services, or business units that have a large share of an established (slower growing) market. These business lines require
little investment and can generate a lot of cash that can be used in other business units. Organizations usually design harvest strategies for
these kinds of business.
Incorrect. This describes a Cash Cow in the BCG Growth-Share Matrix.
Rationale
 The business line holds a high share of a fast-growing market. The organization typically needs to spend significant resources in order
to maintain its share of this market. Organizations usually design invest strategies for this kind of business.
Correct. This describes a Star in the BCG Growth-Share Matrix.
Rationale
 An undesirable business holding a small share of a market that isn't growing. This business may not require much cash to maintain, but
there is often significant capital resources and valuable management attention tied up in these businesses. Unless there is an important
purpose to remain in this market, organizations usually design divest strategies for this kind of business.
Incorrect. This describes a Dog in the BCG Growth-Share Matrix.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.1.i
1B1-W010
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Alturo Technologies is a manufacturer of machines used in the automotive industry. Most of its business comes from three automotive manufacturers
that are located in neighboring counties. During a board meeting to revise and prepare a new strategy, one board member expressed concern that the
buyers' bargaining power is very high as the company has only a handful of buyers. What would you, as a board member of the company, say to your
colleague to reassure him/her that buyers' bargaining power is not a threat to the business?
The owners of two of the three companies that buy Alturo's products used to be top executives at Alturo.
The buyers are aware of how critical their business is to Alturo's survival.
Correct
Alturo's products are very expensive to install, and only spare parts manufactured by the company can be used in its machines.
Several other manufacturers offer products similar to Alturo's products.
Rationale
 The owners of two of the three companies that buy Alturo's products used to be top executives at Alturo.
This answer is incorrect. Buyers gain bargaining leverage when they have insider knowledge about the seller.
Rationale
 The buyers are aware of how critical their business is to Alturo's survival.
This answer is incorrect. Buyers gain bargaining leverage when they know that the supplier needs their business to maintain profitability.
Rationale
 Alturo's products are very expensive to install, and only spare parts manufactured by the company can be used in its machines.
Bargaining power of buyers is reduced when the switching costs are high, as is the case here.
Rationale
 Several other manufacturers offer products similar to Alturo's products.
This answer is incorrect. Customers may change suppliers if there is little product or service differentiation.
Question 3
1.B.1.i
tb.spec.tools.010_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Which of the following statements is not correct concerning contingency planning (sometimes known as continuity or sustainability planning) as it is
used in strategic planning?
Contingency planning cannot cover every possible scenario an organization could encounter.
Contingency planning can help an organization prepare to effectively respond to relatively unlikely risks that could have catastrophic results for the
organization.
Your Answer
Contingency planning is a part of risk management.
Correct
Contingency planning can help an organization prepare to effectively respond to likely risks that could have catastrophic results for the organization.
Rationale
 Contingency planning cannot cover every possible scenario an organization could encounter.
Contingency planning is not designed to consider every possible scenario. Rather, it is designed to consider events that could be catastrophic for
the organization; therefore, this is an incorrect answer.
Rationale
 Contingency planning can help an organization prepare to effectively respond to relatively unlikely risks that could have catastrophic
results for the organization.
Contingency planning helps organizations respond effectively to unplanned events. While relatively unlikely, these risks could be catastrophic for
the organization if they do occur; therefore, this is an incorrect answer.
Rationale
 Contingency planning is a part of risk management.
Contingency planning helps organizations respond effectively to unplanned events. Planning for these contingencies is a part of an organization's
risk management process; therefore, this is an incorrect answer.
Rationale
 Contingency planning can help an organization prepare to effectively respond to likely risks that could have catastrophic results for the
organization.
Contingency planning helps organizations respond effectively to unplanned events. Since they are used to plan for unplanned events, these events
by definition are unlikely to occur, not likely to occur; therefore, this is the correct answer.
Question 4
1.B.1.i
spec.tools.tb.015_0120
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
After leading the market for the past decade, the growth of product ABC is slowing down. In this stage of its life cycle, the product is still generating
significant amounts of cash flows that cover the company’s investment into new product innovations. According to the BCG Growth-Share Matrix,
product ABC is most likely an example of a:
*Source: Retired ICMA CMA Exam Questions.
star.
Correct
cash cow.
question mark.
dog.
Rationale
 star.
This answer is incorrect. Stars have high relative market share and a high market growth rate.
Rationale
 cash cow.
The BCG Growth-Share Matrix is a tool that can be used to classify a firm’s products or services based on relative market share (high or low) and
market growth rate (high or low). A cash cow is a product with high relative market share and low market growth rate. As a result, it is a product
that generates a significant amount of cash without the need to reinvest in the product. The cash can be used to invest in other products with
higher growth potential. This describes Product ABC.
Rationale
 question mark.
This answer is incorrect. Question marks have low relative market share and a high market growth rate.
Rationale
 dog.
This answer is incorrect. Dogs have low relative market share and a low market growth rate.
Question 5
1.B.1.i
1B1-W006
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
Which of the following situations will most likely enhance a buyer's bargaining leverage?
Correct
Ability to purchase an upstream supplier
Larger supplier compared to the buyer
Your Answer
Buyer's inability to stockpile inventory
Analysis of cost alternatives of smaller identical items
Rationale
 Ability to purchase an upstream supplier
Ability of buyers to backward-integrate will enhance their bargaining leverage. Current prices and/or other terms can make such an alternative
more attractive than continuing to buy externally.
Rationale
 Larger supplier compared to the buyer
This answer is incorrect. A larger supplier can have leverage and an advantage over a small, dispersed customer base. This situation does not
enhance a buyer's bargaining leverage.
Rationale
 Buyer's inability to stockpile inventory
This answer is incorrect. If a buyer cannot stockpile inventory, this does not enhance a buyer's bargaining leverage.
Rationale
 Analysis of cost alternatives of smaller identical items
This answer is incorrect. Analysis of cost alternatives of smaller identical items is an indicator of price sensitivity. This does not provide any
bargaining leverage to buyers.
Question 6
1.B.1.i
1B1-W012
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
Steve Electronics is a leading manufacturer of cell phones. Its close competitor, Sidney Tim Inc., has introduced a new model with a modified version of
the latest operating system. Which of the following is the most likely effect of the step taken by the competitor?
Buyers' bargaining leverage over both companies will increase.
Steve Electronics' costs to produce products will decrease due to economies of scale.
Correct
The profit margin of Steve Electronics will decline.
Steve Electronics will be able to retain its existing customers.
Rationale
 Buyers' bargaining leverage over both companies will increase.
This answer is incorrect. There are many different buyers in the market for cell phones, and it is unlikely that they can come together to put
collective pressure on either of these companies. Further, just because one company introduces a new phone model does not mean that buyers will
have more bargaining leverage over both companies.
Rationale
 Steve Electronics' costs to produce products will decrease due to economies of scale.
This answer is incorrect. Steve Electronics' cost to produce products will remain the same if they continue to produce their current phone model. If
they attempt to produce the new phone model, the cost to produce products will most likely increase.
Rationale
 The profit margin of Steve Electronics will decline.
Because of the introduction of the new phone model by Sidney Tim Inc., Steve Electronics will have to drop the price on its older phone model in an
attempt to retain market share. This will lower prices while the costs remain the same, decreasing profit margin.
Rationale
 Steve Electronics will be able to retain its existing customers.
This answer is incorrect. Due to the introduction of the new phone model, some of the existing customers of Steve Electronics will most likely switch
to the product of Sidney Tim Inc.
Question 7
1.B.1.i
cma11.p1.t1.me.0024_0820
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Analyzing a company's technological capabilities, employee skills, and sales team performance will provide
*Source: Retired ICMA CMA Exam Questions.
external factors that identify the company's strengths and threats.
internal factors that identify the company's strengths and opportunities.
Your Answer
external factors that identify the company's strengths and weaknesses.
Correct
internal factors that identify the company's strengths and weaknesses.
Rationale
 external factors that identify the company's strengths and threats.
This answer is incorrect. External factors identify the company's opportunities and threats, not a company's strengths and threats. A company's
technological capabilities, employee skills, and sales team performance would be internal factors.
Rationale
 internal factors that identify the company's strengths and opportunities.
This answer is incorrect. Although a company's technological capabilities, employee skills, and sales team performances are internal factors,
internal factors identify a company's strengths and weaknesses, not strengths and opportunities.
Rationale
 external factors that identify the company's strengths and weaknesses.
This answer is incorrect. It is internal factors, not external factors, that identify the company's strengths and weaknesses.
Rationale
 internal factors that identify the company's strengths and weaknesses.
Analyzing a company's technological capabilities, employee skills, and sales team performances would provide internal factors that identify the
company's strengths and weaknesses.
Question 8
1.B.1.i
MQ2906
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
Intensity of competition is usually influenced by all of the following except:
Correct
the organizational mission statement.
the number and diversity of competitors in the market.
the existence of barriers to exit.
Your Answer
the growth rate of the market.
Rationale
 the organizational mission statement.
Intensity of competition is influenced by the number and diversity of competitors in the market, the existence of barriers to exit, and the growth
rate of the market. It is not influenced by the organization's mission statement.
Rationale
 the number and diversity of competitors in the market.
This answer is incorrect. Intensity of competition is influenced by the number and diversity of competitors in the market.
Rationale
 the existence of barriers to exit.
This answer is incorrect. Intensity of competition is influenced by the existence of barriers to exit.
Rationale
 the growth rate of the market.
This answer is incorrect. Intensity of competition is influenced by the growth rate of the market.
Question 9
1.B.1.i
tb.spec.tools.002_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Which of the following statements is true concerning Porter's Five Forces Industry Analysis?
Correct
Porter's Five Forces Industry Analysis is used to better understand the threats posed by an organization's competitors, customers, and suppliers.
Porter's Five Forces Industry Analysis is used to better understand the threats posed by an organization's competitors and customers, but not its
suppliers.
Your Answer
Porter's Five Forces Industry Analysis is used to better understand the threats posed by an organization's competitors and suppliers, but not its
customers.
Porter's Five Forces Industry Analysis is used to better understand the threats posed by an organization's customers and suppliers, but not its
competitors.
Rationale
 Porter's Five Forces Industry Analysis is used to better understand the threats posed by an organization's competitors, customers, and
suppliers.
Porter's Five Forces Industry Analysis considers the threat of new entrants coming into the marketplace, the threat of substitute products or
services being introduced into the marketplace, the threat of rivalry among competitors, the threat from the bargaining power of customers, and
the threat from the bargaining power of suppliers. These forces combined take into consideration the threat posed by an organization's
competitors, customers, and suppliers; therefore, this is the correct answer.
Rationale
 Porter's Five Forces Industry Analysis is used to better understand the threats posed by an organization's competitors and customers,
but not its suppliers.
These five forces combined do help an organization better understand its suppliers; therefore, this is an incorrect answer.
Rationale
 Porter's Five Forces Industry Analysis is used to better understand the threats posed by an organization's competitors and suppliers,
but not its customers.
These five forces combined do help an organization better understand its customers; therefore, this is an incorrect answer.
Rationale
 Porter's Five Forces Industry Analysis is used to better understand the threats posed by an organization's customers and suppliers, but
not its competitors.
These five forces combined do help an organization better understand its competitors; therefore, this is an incorrect answer.
Question 10
1.B.1.i
MQ2905
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
Although not limited to these, what major areas are usually examined when conducting environmental scanning?
Sustainability, economic, and social sources
Regulatory, cultural, and social sources
Your Answer
Social, economic, and regulatory sources
Correct
Sustainability, economic, and regulatory sources
Rationale
 Sustainability, economic, and social sources
This answer is incorrect. Sustainability and economic sources are major areas usually examined when conducting environmental scanning. Social
sources are not usually included.
Rationale
 Regulatory, cultural, and social sources
This answer is incorrect. Regulatory sources is a major area usually examined when conducting environmental scanning. Cultural and social
sources are not usually included.
Rationale
 Social, economic, and regulatory sources
This answer is incorrect. Economic and regulatory sources are major areas usually examined when conducting environmental scanning. Social
sources are not usually included.
Rationale
 Sustainability, economic, and regulatory sources
Primary areas usually examined when conducting environmental scanning include sustainability, economic, and regulatory.
Question 11
1.B.1.i
tb.spec.tools.001_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning SWOT analysis is correct?
Correct
Strengths and weaknesses are internal to an organization while opportunities and threats are external to an organization.
Your Answer
Strengths and weaknesses are external to an organization while opportunities and threats are internal to an organization.
Strengths, weaknesses, opportunities, and threats are external to an organization.
Strengths, weaknesses, opportunities, and threats are internal to an organization.
Rationale
 Strengths and weaknesses are internal to an organization while opportunities and threats are external to an organization.
SWOT analysis is a tool used in the strategic planning process. It involves taking into consideration an organization's strengths and weaknesses and
the opportunities and threats facing the organization. Strengths and weaknesses are internal to the organization as they are specific to that
organization. In addition, opportunities and threats are external to the organization as they are related to the industry as a whole and not to an
individual organization; therefore, this is the correct answer.
Rationale
 Strengths and weaknesses are external to an organization while opportunities and threats are internal to an organization.
Strengths and weaknesses are not external to the organization. In addition, opportunities and threats are not internal to the organization;
therefore, this is an incorrect answer.
Rationale
 Strengths, weaknesses, opportunities, and threats are external to an organization.
Opportunities and threats are external to the organization as they are related to the industry as a whole and not to an individual organization;
however, strengths and weaknesses are not external as they are specific to that organization. Therefore, this is an incorrect answer.
Rationale
 Strengths, weaknesses, opportunities, and threats are internal to an organization.
Strengths and weaknesses are internal to the organization as they are specific to that organization; however, opportunities and threats are not
internal, as they are related to the industry as a whole and not to an individual organization. Therefore, this is an incorrect answer.
Question 12
1.B.1.i
aq.spec.tools.004_1802
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Which of the following correctly lists all the factors of PESTLE analysis?
Politics, Economy, Social, Technology, Legal, External
Correct
Politics, Economy, Social, Technology, Legal, Environmental
Your Answer
Politics, Economy, Social, Threats, Legal, Environmental
Politics, Economy, Skill, Technology, Legal, Environmental
Rationale
 Politics, Economy, Social, Technology, Legal, External
This does not correctly list all the factors of PESTLE analysis. Instead of External, consider another factor that is a part of PESTLE.
Rationale
 Politics, Economy, Social, Technology, Legal, Environmental
This correctly lists all the factors of PESTLE analysis.
Rationale
 Politics, Economy, Social, Threats, Legal, Environmental
This does not correctly list all the factors of PESTLE analysis. Instead of Threats, consider another factor that is a part of PESTLE.
Rationale
 Politics, Economy, Skill, Technology, Legal, Environmental
This does not correctly list all the factors of PESTLE analysis. Instead of Skill, consider another factor that is a part of PESTLE.
Question 13
1.B.1.i
aq.spec.tools.002_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: hard
Bloom Code: 5
Infinity Enterprises, a large organization with seven business units, recently prepared a BCG Growth-Share Matrix to evaluate whether it has a balanced
portfolio of businesses. Upon analysis, its three large business units were identified as stars, two medium-size business units were identified as question
marks, and one small business unit each was identified as a cash cow and as a dog. Which of the following is a conclusion you can draw upon evaluating
the data?
The company needs to set up more business units that operate in high-growth markets.
Correct
The company is probably facing a shortage of funds to fuel its growth.
Your Answer
The company should hold onto the business unit identified as a dog in order to maintain a balanced portfolio of businesses.
The company is probably generating excess cash that can be used to start new business units.
Rationale
 The company needs to set up more business units that operate in high-growth markets.
The three large business units identified as stars and two medium-size business units identified as question marks operate in high-growth markets,
which are typically cash drain enterprises. To have a balanced portfolio of businesses, Infinity Enterprises actually needs to strengthen and mature
one or more business units as a large shareholder in a stable growth market.
Rationale
 The company is probably facing a shortage of funds to fuel its growth.
Most of Infinity's business units are either stars or question marks. These operate in high-growth markets and require cash inputs to grow, which
usually are provided by cash cows and sometimes by dogs. Since Infinity has only two small business units in these two quadrants, the company is
likely to be facing a cash crunch.
Rationale
 The company should hold onto the business unit identified as a dog in order to maintain a balanced portfolio of businesses.
The company should work to sell off the business unit identified as a dog. Even though this business is small and not using much cash in a lowgrowth market, it probably represents significant assets and requires management attention that is better focused on the stars or question marks.
Rationale
 The company is probably generating excess cash that can be used to start new business units.
Most of Infinity's business units are either stars or question marks. These operate in high-growth markets and require cash inputs to grow, which
usually are provided by cash cow businesses. Think about what this means for their cash flow.
Question 14
1.B.1.i
1B1-W021
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Rainer Enterprises has conducted a SWOT (strengths, weaknesses, opportunities, and threats) analysis to determine its business strategy. After studying
the weighted average of the results of the analysis, one of the partners, Miranda Swift, believes that the firm should invest in exploiting market
attractiveness instead of focusing on building business strength. Which of the following data, if true, suggests that Swift's conclusion is flawed?
Correct
The calculated weighted average for market attractiveness is 4.8 and the calculated weighted average for business strength is 1.9.
Your Answer
The calculated weighted average for market attractiveness is 4.2 and the calculated weighted average for business strength is 4.5.
Market profitability was assigned the highest weight and was rated 1 on a scale of 1 to 5.
Market size was assigned the highest weight and was rated 1 on a scale of 1 to 5.
Rationale
 The calculated weighted average for market attractiveness is 4.8 and the calculated weighted average for business strength is 1.9.
Because the highly attractive market presumably will entice others to enter, planning strategies to build on the lower business strength (rather than
attempting to exploit higher market attractiveness) would be the most beneficial plan.
Rationale
 The calculated weighted average for market attractiveness is 4.2 and the calculated weighted average for business strength is 4.5.
This answer is incorrect. Since market attractiveness and business strength are both high, the company can attempt to exploit market
attractiveness.
Rationale
 Market profitability was assigned the highest weight and was rated 1 on a scale of 1 to 5.
This answer is incorrect. Market profitability appears to be low, so it may not be worthwhile to invest in developing it.
Rationale
 Market size was assigned the highest weight and was rated 1 on a scale of 1 to 5.
This answer is incorrect. Market size appears to be low, so it may not be worthwhile to invest in developing it.
Question 15
1.B.1.i
AICPA.08211326BEC.V.A
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
SWOT analysis includes considerations of what four strategic dimensions?
Synergies, willingness, openness, and targets
Strengths, weaknesses, opportunities, and targets
Your Answer
Synergies, weaknesses, openness, and threats
Correct
Strengths, weaknesses, opportunities, and threats
Rationale
 Synergies, willingness, openness, and targets
This answer is incorrect. Synergies, willingness, openness, and targets are none of the four strategic dimensions of SWOT analysis.
Rationale
 Strengths, weaknesses, opportunities, and targets
This answer is incorrect. Strengths, weaknesses, and opportunities are three of the four strategic dimensions of SWOT analysis. Targets, however, is
not.
Rationale
 Synergies, weaknesses, openness, and threats
This answer is incorrect. Weaknesses and threats are two of the four strategic dimensions of SWOT analysis. Synergies and openness, however, are
not.
Rationale
 Strengths, weaknesses, opportunities, and threats
SWOT analysis is a process of environmental scanning involving an analysis and assessment of the dimensions of strengths, weaknesses,
opportunities, and threats.
Question 16
1.B.1.i
tb.spec.tools.013_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning a “dog” on the Boston Consulting Group (BCG) Growth Share Matrix is correct?
A “dog” is a product or service with a high cash generating capability and a low growth rate.
A “dog” is a product or service with a high cash generating capability and a high growth rate.
Your Answer
A “dog” is a product or service with a low cash generating capability and a high growth rate.
Correct
A “dog” is a product or service with a low cash generating capability and a low growth rate.
Rationale
 A “dog” is a product or service with a high cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “cash cow” is a product or service with a high cash generating capability and a low growth rate not a “dog”;
therefore, this is an incorrect answer.
Rationale
 A “dog” is a product or service with a high cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “star” is a product or service with a high cash generating capability and a high growth rate not a “dog”;
therefore, this is an incorrect answer.
Rationale
 A “dog” is a product or service with a low cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “question mark” has a low cash generating capability and a high growth rate not a “dog”; therefore, this is an
incorrect answer.
Rationale
 A “dog” is a product or service with a low cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “dog” is a product or service that currently generates relatively little cash and that cash is not expected to
grow significantly in the future. As such, a “dog” is a product or service with a low cash generating capability and a low growth rate. It is not a very
attractive product or service; therefore, this is the correct answer.
Question 17
1.B.1.i
aq.spec.tools.005_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
Which of the following is not one of Porter's Five Forces?
Correct
Threat of Regulation
Your Answer
Threat of Substitute Products
Intensity of Competition
Threat of New Entrants
Rationale
 Threat of Regulation
Correct. This is not one of Porter's Five Forces.
Rationale
 Threat of Substitute Products
This is in fact one of Porter's Five Forces.
Rationale
 Intensity of Competition
This is in fact one of Porter's Five Forces.
Rationale
 Threat of New Entrants
This is in fact one of Porter's Five Forces.
Question 18
1.B.1.i
1B1-W024
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Umbra Inc., a business unit of ANB Inc., manufactures widgets. On its BCG Growth-Share Matrix, ANB has identified Umbra as a cash cow. The market for
Umbra recently has started growing rapidly, converting it into a high-growth market. Given the changed market conditions, in which of the following
situations will Umbra eventually turn into a question mark on the BCG Growth-Share Matrix?
If Umbra operates in a market with high entry barriers
Correct
If Umbra is not able to expand its production capacity
If Umbra invests its excess cash in meeting additional demand
If ANB decides to sell off all business units identified as dogs
Rationale
 If Umbra operates in a market with high entry barriers
This answer is incorrect. If Umbra operates in a market with high entry barriers, new entrants will find it difficult to enter the market, and the
incumbent (Umbra) will find it easier to retain market share.
Rationale
 If Umbra is not able to expand its production capacity
If Umbra is not able to expand its production capacity, it will be unable to capitalize on the opportunity offered by an expanding market. Its market
share in the high-growth market will eventually dwindle, and it will turn into a question mark on ANB's growth-share matrix.
Rationale
 If Umbra invests its excess cash in meeting additional demand
This answer is incorrect. If Umbra invests its excess cash in meeting additional demand, it increases the likelihood that Umbra will be successful at
maintaining its dominant market share.
Rationale
 If ANB decides to sell off all business units identified as dogs
This answer is incorrect. This is irrelevant. If anything, selling off dogs will free up funds that can be invested in growing Umbra's business.
Question 19
1.B.1.i
tb.spec.tools.008_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Which of the following statements is not correct concerning scenario planning (also called scenario thinking or scenario analysis) as it is used in strategic
planning?
Scenario planning can be used to model the expected impact of plausible alternative trends on an organization.
Your Answer
Scenario planning can be used to help an organization develop a flexible strategic plan.
Scenario planning can be used to help discover ways to deal with opportunities and threats in its external environment.
Correct
Scenario planning can be used to help discover ways to deal with strengths and weaknesses in its internal environment.
Rationale
 Scenario planning can be used to model the expected impact of plausible alternative trends on an organization.
Organizations can use scenario planning to attempt to simulate the impact of alterative trends (such as social, technical, economic, environmental,
educational, political, and aesthetic) on its performance; therefore, this is an incorrect answer.
Rationale
 Scenario planning can be used to help an organization develop a flexible strategic plan.
Organizations can use scenario planning to aid in building a flexible strategic plan; therefore, this is an incorrect answer.
Rationale
 Scenario planning can be used to help discover ways to deal with opportunities and threats in its external environment.
Scenario planning is often used as part of an organization's strategic planning process. Organizations can use scenario planning to help the
organization identify opportunities and threats; therefore, this is an incorrect answer.
Rationale
 Scenario planning can be used to help discover ways to deal with strengths and weaknesses in its internal environment.
Scenario planning is often used as part of an organization's strategic planning process. Organizations use this technique to attempt to simulate the
impact of alterative trends (such as social, technical, economic, environmental, educational, political, and aesthetic) on its performance. This can
help the organization identify opportunities and threats as well as aid in building in flexibility to address these trends. It is not well-suited for
addressing internal environmental factors like organizational strengths and weaknesses; therefore, this is the correct answer.
Question 20
1.B.1.i
1B1-W005
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Identify the threat imposed on an incumbent by the entry of new competitors in the market.
Heavy start-up losses and near-cost pricing.
Correct
Increased cost in order to compete against new entrant.
Economies of scale.
Product differentiation.
Rationale
 Heavy start-up losses and near-cost pricing.
This answer is incorrect. New entrants often incur heavy start-up losses and near-cost pricing in order to gain experience. These are not threats to
incumbents but are entry barriers to new entrants that provide cost advantages to incumbents.
Rationale
 Increased cost in order to compete against new entrant.
A new player in a marketplace generally brings with it new capacity and resources. The profitability for an incumbent in the marketplace may be
reduced if its sales prices are bid down or its product costs are increased in order to compete against a new entrant.
Rationale
 Economies of scale.
This answer is incorrect. Economies of scale are defined as a decline in the unit costs as the volume per period increases. These are not threats to
incumbents but are entry barriers to new entrants that provide cost advantages to the incumbents.
Rationale
 Product differentiation.
This answer is incorrect. Product differentiation refers to the brand identification and existing customer loyalties an entrant must overcome. These
are not threats to incumbents but are entry barriers to new entrants that provide cost advantages to the incumbents.
Question 21
1.B.1.i
tb.spec.tools.014_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning a “question mark” on the Boston Consulting Group (BCG) Growth Share Matrix is correct?
A “question mark” is a product or service with a high cash generating capability and a low growth rate.
A “question mark” is a product or service with a high cash generating capability and a high growth rate.
Correct
A “question mark” is a product or service with a low cash generating capability and a high growth rate.
A “question mark” is a product or service with a low cash generating capability and a low growth rate.
Rationale
 A “question mark” is a product or service with a high cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “cash cow” is a product or service with a high cash generating capability and a low growth rate not a
“question mark”; therefore, this is an incorrect answer.
Rationale
 A “question mark” is a product or service with a high cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “star” is a product or service with a high cash generating capability and a high growth rate not a “question
mark”; therefore, this is an incorrect answer.
Rationale
 A “question mark” is a product or service with a low cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “question mark” is a product or service that currently generates relatively little cash but the cash is expected
to grow significantly in the future. As such, a “question mark” is a product or service with a low cash generating capability and a high growth rate.
The future is in question for this product or service. Therefore, this is the correct answer.
Rationale
 A “question mark” is a product or service with a low cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “dog” is a product or service with a low cash generating capability and a low growth rate not a “question
mark”; therefore, this is an incorrect answer.
Question 22
1.B.1.i
1B1-W015
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Which of the following best describes the function of SWOT analysis?
It defines how a firm competes and sets forth the general direction an organization plans to follow to achieve its goals.
It is a guiding image of future success and achievement articulated in terms of an organization's contribution to society.
Correct
It provides a framework to identify a variety of elements that will help or hinder an organization's progress in the environment in which it operates.
It identifies all technologies that impact an organization.
Rationale
 It defines how a firm competes and sets forth the general direction an organization plans to follow to achieve its goals.
This answer is incorrect. Strategy defines how a firm competes and sets forth the general direction an organization plans to follow to achieve its
goals, not SWOT analysis.
Rationale
 It is a guiding image of future success and achievement articulated in terms of an organization's contribution to society.
This answer is incorrect. The guiding image of future success and achievement articulated in terms of an organization's contribution to society is a
vision statement, not SWOT analysis.
Rationale
 It provides a framework to identify a variety of elements that will help or hinder an organization's progress in the environment in which
it operates.
SWOT (or S.W.O.T.) is the acronym for strengths, weaknesses, opportunities, and threats. SWOT analysis provides a framework to identify a variety
of elements that will help or hinder an organization's progress in the environment in which it operates.
Rationale
 It identifies all technologies that impact an organization.
This answer is incorrect. A technology assessment identifies all technologies that impact an organization, not SWOT analysis.
Question 23
1.B.1.i
cma11.p1.t1.me.0020_0820
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
A company is the leading company in the premium bottled water industry. Its growth is driven mainly by the negative health publicity on carbonated soft
drinks and other sweetened beverages. Extensive inventory and distribution infrastructure is needed to compete in this industry. The company's main
packaging materials can be sourced either locally or easily imported from overseas. With its 60% market share, the company is able to influence prices
and competitive activity. The second biggest competitor holds 20% market share, while the remaining 20% is shared by many small companies.
Supermarkets and other grocery retailers are the largest customer segment, accounting for approximately 45% of sales. The supermarkets and grocery
retailers are driving volume growth and are undergoing consolidation into larger supermarket conglomerates. Using Porter's 5 Forces, which one of the
following statements best reflects the industry environment?
*Source: Retired ICMA CMA Exam Questions.
Low profitability but can increase due to increasing power of buyers
Your Answer
Low profitability due to low threat of substitutes and new entrants
Correct
High profitability but can decrease due to increasing power of buyers
High profitability due to high power of buyers and sellers
Rationale
 Low profitability but can increase due to increasing power of buyers
This answer is incorrect. The increasing power of buyers would result in a decrease of profitability, not an increase in profitability. This is an
example of high profitability but can decrease due to the increasing power of buyers.
Rationale
 Low profitability due to low threat of substitutes and new entrants
This answer is incorrect. A low threat of substitutes and new entrants would increase profitability.
Rationale
 High profitability but can decrease due to increasing power of buyers
This is the correct answer. The higher the bargaining power of buyers, the more they are able to exert pressure on the industry to force prices down.
Rationale
 High profitability due to high power of buyers and sellers
This answer is incorrect. High power of buyers would lead to lower profitability. The higher the bargaining power of buyers, the more they are able
to exert pressure on the industry to force prices down.
Question 24
1.B.1.i
aq.spec.tools.009_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Romero Roman, Inc., a leading manufacturer of cars, has two product lines: small family cars and luxury cars. According to the BCG Growth-Share Matrix,
in which quadrant would small family cars likely be classified for Romero Roman?
Correct
Cash Cows
Dogs
Your Answer
Stars
Question Marks
Rationale
 Cash Cows
The Cash Cow quadrant includes those business units or product lines that have high market share in a slow-growing industry. Romero Roman is a
leading manufacturer of cars, and small family cars should have a higher demand than executive cars. Further, the automobile market is a mature
industry with slow growth. Hence, family cars would likely be classified in the Cash Cow quadrant for this company.
Rationale
 Dogs
The Dog quadrant includes those business units or product lines that have a small share of a market in a slow-growing industry. Since Romero
Roman is a leading manufacturer of cars, this indicates that it has a high share of the small family car market.
Rationale
 Stars
The Star quadrant includes those business units or product lines that have a high share of a market in a fast-growing industry. The automobile
industry is a mature industry with slow growth.
Rationale
 Question Marks
The Question Mark quadrant includes those business units or product lines that have a small share of a market in a fast-growing industry. The
automobile industry is a slow-growth industry, and Romero Roman, as a leading manufacturer of cars, would have a large share of this market.
Question 25
1.B.1.i
tb.spec.tools.007_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Which of the following statements is true concerning PEST analysis as it is used in strategic planning?
Correct
PEST analysis involves assessing an organization's political and regulatory environment, economic environment, social and cultural environment,
and its technological environment.
PEST analysis involves assessing an organization's political and regulatory environment, economic environment, social and cultural environment,
and its training environment.
Your Answer
PEST analysis involves assessing an organization's production environment, economic environment, social and cultural environment, and its
technological environment.
PEST analysis involves assessing an organization's political and regulatory environment, economic environment, supplier environment, and its
technological environment.
Rationale
 PEST analysis involves assessing an organization's political and regulatory environment, economic environment, social and cultural
environment, and its technological environment.
PEST analysis is used to help assess opportunities and threats in an organization's environment as part of the strategic planning process. It involves
assessing an organization's political and regulatory environment, economic environment, social and cultural environment, and its technological
environment. The political and regulatory environment considers the impact of government regulatory action on the organization, the economic
environment considers the impact of macroeconomic factors such as inflation and interest rates on the organization, the social and cultural
environment considers social trends such as demographics on the organization, and technological analysis considers the impact of changes in
technology on the organization. Therefore, this is the correct answer.
Rationale
 PEST analysis involves assessing an organization's political and regulatory environment, economic environment, social and cultural
environment, and its training environment.
PEST analysis does not involve assessing an organization's training environment as a separate component; therefore, this is an incorrect answer.
Rationale
 PEST analysis involves assessing an organization's production environment, economic environment, social and cultural environment,
and its technological environment.
PEST analysis does not involve assessing an organization's production environment as a separate component; therefore, this is an incorrect
answer.
Rationale
 PEST analysis involves assessing an organization's political and regulatory environment, economic environment, supplier environment,
and its technological environment.
PEST analysis does not involve assessing an organization's supplier environment as a separate component; therefore, this is an incorrect answer.
Question 26
1.B.1.i
aq.spec.tools.008_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
Elliott Enterprises is engaged in the construction of roads. The company falls under OSHA (Occupational Safety and Health Administration) regulations
that require it to design accident prevention policies and processes for its employees. According to PESTLE analysis, how does this regulatory
requirement affect the organization's strategy?
It will force the organization to be environmentally accountable.
Your Answer
It will restrict the marketing campaigns of the organization.
It will affect the technological innovations planned by the organization.
Correct
It will affect the human resource practices followed by the organization.
Rationale
 It will force the organization to be environmentally accountable.
In performing PESTLE analysis to analyze external factors, the above related issue would not be classified as Environment.
Rationale
 It will restrict the marketing campaigns of the organization.
The above related issue does not have an impact on the marketing campaigns of the organization. Further, marketing issues are an internal factor
for the company. PESTLE analysis is focused on external factors.
Rationale
 It will affect the technological innovations planned by the organization.
In performing PESTLE analysis to analyze external factors, the above related issue would not be classified as Technology.
Rationale
 It will affect the human resource practices followed by the organization.
In performing PESTLE analysis to analyze external factors, the above related issue would be classified as Legal. Providing accident prevention
policies to employees falls under the human resource practices followed by an organization. Therefore, in this case, the strategy of Elliott
Enterprises regarding the legality of human resources should be affected.
Question 27
1.B.1.i
aq.spec.tools.007_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
What type of analysis is the following definition describing?
Developing alternative strategies in order to be prepared for unexpected conditions or outcomes, which can minimize the negative effect of
surprising events, as well as optimize opportunities that may unexpectedly present themselves.
Scenario analysis
Your Answer
Competitive analysis
Correct
Contingency planning
SWOT analysis
Rationale
 Scenario analysis
Incorrect. Scenario analysis helps companies consider the complexities of an uncertain business environment with many factors that interact with
each other. By carefully modeling how different scenarios might interact to impact the organization's market and business, managers can do better
planning of its actual strategy.
Rationale
 Competitive analysis
Incorrect. Competitive analysis involves assessing the nature of competition in the market based on four key aspects of current and potential
competitors: (1) competitors’ objectives, (2) competitors’ assumptions, (3) competitors’ capabilities, and (4) competitors’ strategies.
Rationale
 Contingency planning
Contingency planning often follows scenario analysis. Contingency planning involves developing alternative strategies in order to be prepared for
unexpected conditions or outcomes. Good contingency planning can minimize the negative effect of surprising events, as well as optimize
opportunities that may present themselves.
Rationale
 SWOT analysis
Incorrect. SWOT is a tool that can be used for both environmental scanning and designing strategy. SWOT analysis stands for Strengths,
Weaknesses, Opportunities, and Threats.
Question 28
1.B.1.i
1B1-W019
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: hard
Bloom Code: 5
Tamara Inc. is the market leader in desktop manufacturing. The company's success is driven by its highly skilled product development team, which has
been creating pathbreaking designs that are sold at a premium price. However, the demand for desktops is declining as mobile technology is becoming
increasingly popular. In order to address this threat, Tamara's managers have conducted a SWOT (strengths, weaknesses, opportunities, and threats)
analysis and have decided to use an SO (strengths and opportunities) strategy. Which of the following is a possible course of action under this strategy?
Your Answer
Increase the cost of Tamara's products to further differentiate its products from those of the competition.
Reduce the cost of Tamara's products to levels lower than those of laptops and tablets.
Enhance the company's brand image through promotions to lure customers back to desktops.
Correct
Use the company's product development team to create innovative new mobile technology.
Rationale
 Increase the cost of Tamara's products to further differentiate its products from those of the competition.
This answer is incorrect. This strategy attempts to counter the threat posed by mobile technologies by using differentiation, which is not an SO
(strengths or opportunities) strategy.
Rationale
 Reduce the cost of Tamara's products to levels lower than those of laptops and tablets.
This answer is incorrect. This strategy attempts to counter the threat posed by mobile technologies by mitigating a weakness—the relatively higher
price of its products—which is not an SO (strengths or opportunities) strategy.
Rationale
 Enhance the company's brand image through promotions to lure customers back to desktops.
This answer is incorrect. This strategy attempts to counter the threat of a shrinking market by improving Tamara's brand image, which is not an SO
(strengths or opportunities) strategy.
Rationale
 Use the company's product development team to create innovative new mobile technology.
This strategy uses one of Tamara's strengths—its product development team—to take advantage of the opportunity presented by the growing
popularity of mobile technologies.
Question 29
1.B.1.i
cma11.p1.t1.me.0031_0820
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
Products that are identified in the BCG Growth-Share Matrix as cash cows possess relatively
*Source: Retired ICMA CMA Exam Questions.
Correct
high market share in a low-growth market.
low market share in a high-growth market.
Your Answer
high market share in a high-growth market.
low market share in a low-growth market.
Rationale
 high market share in a low-growth market.
A cash cow has high market share in a low-growth market.
Rationale
 low market share in a high-growth market.
This answer is incorrect. A question mark has low market share in a high-growth market.
Rationale
 high market share in a high-growth market.
This answer is incorrect. A star has high market share in a high-growth market.
Rationale
 low market share in a low-growth market.
This answer is incorrect. A dog has low market share in a low-growth market.
Question 30
1.B.1.i
1B1-W007
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Which of the following industries faces the least threat of competition and profitability harm from the entry of a new competitor?
Correct
Automobile industry
Your Answer
Apparel industry
Restaurant chain industry
Online shopping industry
Rationale
 Automobile industry
Among the listed industries, it is difficult for a new entrant to establish business in the automobile industry.
Rationale
 Apparel industry
This answer is incorrect. Compared to the other industries listed, the apparel industry is not the industry that faces the least threat of competition
and profitability harm from the entry of a new competitor.
Rationale
 Restaurant chain industry
This answer is incorrect. Compared to the other industries listed, the restaurant chain industry is not the industry that faces the least threat of
competition and profitability harm from the entry of a new competitor.
Rationale
 Online shopping industry
This answer is incorrect. Compared to the other industries listed, the online shopping industry is not the industry that faces the least threat of
competition and profitability harm from the entry of a new competitor.
Question 31
1.B.1.i
aq.spec.tools.001_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Bespoke Designs is a small store that sells custom-tailored formal clothes for men in a town in upstate New York. The company has been doing good
business since its inception five years ago and is the first choice of discerning clients in the area. The owners of the company have approached an
investor to help fund Bespoke's growth. The investor is impressed with the company's products but is worried that since Bespoke's market is attractive,
new entrants will soon flood the market and reduce the profitability of the business. Using Porter's Five Forces, which of the following facts can
Bespoke's management use to convince the investor that the threat of new competitors is low?
The company's offerings are premium products that earn high margins.
Many potential competitors in the area employ tailors who were once employed at Bespoke.
Your Answer
The company's products are on par with those offered by premium clothing brands stocked in malls in the town.
Correct
The company is owned and operated by designers who are famous for their deep understanding of customer preferences and their distinctive style.
Rationale
 The company's offerings are premium products that earn high margins.
Based on Porter's Five Forces, in this situation the Threat of New Entrants is higher. New competitors who offer premium products are incentivized
by high margins to enter the market.
Rationale
 Many potential competitors in the area employ tailors who were once employed at Bespoke.
Using Porter's Five Forces, in this situation the Threat of Substitute Products is higher. Competitors have access to the expertise and secrets of
former Bespoke employees.
Rationale
 The company's products are on par with those offered by premium clothing brands stocked in malls in the town.
Using Porter's Five Forces, in this situation the Threat of Substitute Products is higher. Because products are on par with those offered by premium
clothing brands, this increases the risk of customers buying competitors’ products.
Rationale
 The company is owned and operated by designers who are famous for their deep understanding of customer preferences and their
distinctive style.
Using Porter's Five Forces, in this situation the Threat of New Entrants is lower. When incumbents have high levels of experience and
product/service differentiation, the entry barriers to the market are raised.
Question 32
1.B.1.i
tb.spec.tools.009_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Which of the following statements is not correct concerning competitive analysis (sometimes known as competitor analysis) as it is used in strategic
planning?
Competitive analysis can help an organization understand its actual competition, not who it thinks is its competition.
Competitive analysis can help an organization identify new customers.
Your Answer
Competitive analysis involves getting as complete a picture as possible about competitors.
Correct
An industry leader is not likely to benefit from competitive analysis.
Rationale
 Competitive analysis can help an organization understand its actual competition, not who it thinks is its competition.
Organizations use competitive analysis to understand who its competition really is, not who it thinks is its competition; therefore, this is an
incorrect answer.
Rationale
 Competitive analysis can help an organization identify new customers.
Organizations sometimes identify new customers through this technique as they learn that competitors are not satisfying certain segments of the
market as well as they thought; therefore, this is an incorrect answer.
Rationale
 Competitive analysis involves getting as complete a picture as possible about competitors.
Competitive analysis involves getting a complete understanding of its competitors’ history, product and service offerings, financial condition,
operational strategies, facilities, and personnel. A cursory understanding of its competition is not likely to yield many benefits for an organization;
therefore, this is an incorrect answer.
Rationale
 An industry leader is not likely to benefit from competitive analysis.
Competitive analysis is often used as part of an organization's strategic planning process. This technique involves getting a complete
understanding of its competitors’ history, product and service offerings, financial condition, operational strategies, facilities, and personnel. All
firms can benefit from this type of analysis. For example, an industry leader can use this technique to learn how close its competitors are coming to
matching its products or services; therefore, this is the correct answer.
Question 33
1.B.1.i
tb.spec.tools.012_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning a “star” on the Boston Consulting Group (BCG) Growth Share Matrix is correct?
A “star” is a product or service with a high cash generating capability and a low growth rate.
Correct
A “star” is a product or service with a high cash generating capability and a high growth rate.
Your Answer
A “star” is a product or service with a low cash generating capability and a high growth rate.
A “star” is a product or service with a low cash generating capability and a low growth rate.
Rationale
 A “star” is a product or service with a high cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “cash cow” is a product or service with a high cash generating capability and a low growth rate not a “star”;
therefore, this is an incorrect answer.
Rationale
 A “star” is a product or service with a high cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “star” is a product or service that currently generates significant cash and that cash is expected to grow
significantly in the future. As such, a “star” is a product or service with a high cash generating capability and a high growth rate; therefore, this is the
correct answer.
Rationale
 A “star” is a product or service with a low cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “question mark” has a low cash generating capability and a high growth rate not a “star”; therefore, this is an
incorrect answer.
Rationale
 A “star” is a product or service with a low cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “dog” has a low cash generating capability and a low growth rate not a “star”; therefore, this is an incorrect
answer.
Question 34
1.B.1.i
tb.spec.tools.011_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning a “cash cow” on the Boston Consulting Group (BCG) Growth Share Matrix is correct?
Correct
A “cash cow” is a product or service with a high cash generating capability and a low growth rate.
A “cash cow” is a product or service with a high cash generating capability and a high growth rate.
Your Answer
A “cash cow” is a product or service with a low cash generating capability and a high growth rate.
A “cash cow” is a product or service with a low cash generating capability and a low growth rate.
Rationale
 A “cash cow” is a product or service with a high cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “cash cow” is a product or service that generates significant cash that can be “milked” to fund growth in other
areas. As such, a “cash cow” is a product or service with a high cash generating capability and a low growth rate; therefore, this is the correct
answer.
Rationale
 A “cash cow” is a product or service with a high cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “star” has a high cash generating capability and a high growth rate not a “cash cow”; therefore, this is an
incorrect answer.
Rationale
 A “cash cow” is a product or service with a low cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “question mark” has a low cash generating capability and a high growth rate not a “cash cow”; therefore, this
is an incorrect answer.
Rationale
 A “cash cow” is a product or service with a low cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “dog” has a low cash generating capability and a low growth rate not a “cash cow”; therefore, this is an
incorrect answer.
Question 35
1.B.1.i
tb.spec.tools.003_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Which of the following statements is true concerning situational analysis as it is used in strategic planning?
Situational analysis is used to analyze an organization's internal environment but not its external environment.
Situational analysis is used to analyze an organization's external environment but not its internal environment.
Correct
Situational analysis is used to analyze an organization's external and internal environment.
Situational analysis is used to analyze a specific situation affecting an organization.
Rationale
 Situational analysis is used to analyze an organization's internal environment but not its external environment.
Situational analysis techniques can help an organization analyze its external environment; therefore, this is an incorrect answer.
Rationale
 Situational analysis is used to analyze an organization's external environment but not its internal environment.
Situational analysis techniques can help an organization analyze its internal environments. Therefore, this is an incorrect answer.
Rationale
 Situational analysis is used to analyze an organization's external and internal environment.
Situational analysis, based on scenario analysis and contingency planning, helps an organization analyze both its internal and external
environments. Situational analysis can employ specific tools such as SWOT analysis, Porter's Five Forces analysis, and PESTLE analysis. Therefore,
this is the correct answer.
Rationale
 Situational analysis is used to analyze a specific situation affecting an organization.
Situational analysis is not designed to analyze a specific situation as the techniques are broader than just one specific situation; therefore, this is an
incorrect answer.
Question 36
1.B.1.i
MQ2902
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Which of the following items, in part, reflects the competitive intensity of an organization's industry?
Quick response strategies
Correct
Threats from new entrants and substitutes
Your Answer
Product differentiation
Cost leadership
Rationale
 Quick response strategies
This answer is incorrect. Rather than reflecting competitive intensity, quick response strategies focus on either being the first to bring a product to
market or on providing quick delivery of the product to the customer.
Rationale
 Threats from new entrants and substitutes
Threats from new entrants and substitute products affect the ability of new companies to enter the market.
Rationale
 Product differentiation
This answer is incorrect. Rather than reflecting competitive intensity, product differentiation is one of the major organizational strategies that
competes on the basis of providing a better or more desirable product than the competition.
Rationale
 Cost leadership
This answer is incorrect. Rather than reflecting competitive intensity, cost leadership is one of the major organizational strategies that competes on
the basis of selling a high volume of low-cost products.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.2.e
aq.si.bud.006_0720
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following is not a characteristic of successful budgeting?
The budget has a good balance of firmness and flexibility.
Your Answer
The results of every budgeting cycle should be assessed and that insight should inform and improve the next budgeting cycle.
Everyone in the organization understands and commits to the budget.
Correct
The budget should not establish expectations of performance. This should be determined by team leaders and individual employees.
Rationale
 The budget has a good balance of firmness and flexibility.
This is actually a characteristic of successful budgeting.
Rationale
 The results of every budgeting cycle should be assessed and that insight should inform and improve the next budgeting cycle.
This is actually a characteristic of successful budgeting.
Rationale
 Everyone in the organization understands and commits to the budget.
This is actually a characteristic of successful budgeting.
Rationale
 The budget should not establish expectations of performance. This should be determined by team leaders and individual employees.
A good budget must be both firm and flexible. Employees, departments, and divisions should be able to depend on a budget that makes firm
commitments on resources that will be available, and that firmly establishes expectations on performance.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.2.d
tb.si.bud.020_1805
LOS: 1.B.2.d
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning budgeting is not correct?
Organizations can measure actual results relative to short-term goals established in budgets to gauge performance toward achieving those goals.
Your Answer
Organizations can measure actual results relative to long-term goals established in budgets to gauge performance toward achieving those goals.
A variance represents the difference between actual performance and budgeted performance.
Correct
Variance analysis is appropriate at the end of an accounting period to assess performance but not appropriate during an accounting period to assess
performance.
Rationale
 Organizations can measure actual results relative to short-term goals established in budgets to gauge performance toward achieving
those goals.
Budgets express quantitatively how an organization plans to achieve its short-term and long-term goals. An organization can compare actual
results relative to these goals to gauge performance toward achieving these goals. This process is useful for short-term and long-term goals;
therefore, this is an incorrect answer.
Rationale
 Organizations can measure actual results relative to long-term goals established in budgets to gauge performance toward achieving
those goals.
Budgets express quantitatively how an organization plans to achieve its short-term and long-term goals. An organization can compare actual
results relative to these goals to gauge performance toward achieving these goals. This process is useful for short-term and long-term goals;
therefore, this is an incorrect answer.
Rationale
 A variance represents the difference between actual performance and budgeted performance.
Budgets express quantitatively how an organization plans to achieve its short-term and long-term goals. An organization can compare actual
results relative to these goals to gauge performance toward achieving these goals. The difference between actual performance and budgeted
performance is known as a variance; therefore, this is an incorrect answer.
Rationale
 Variance analysis is appropriate at the end of an accounting period to assess performance but not appropriate during an accounting
period to assess performance.
Budgets express quantitatively how an organization plans to achieve its short-term and long-term goals. An organization can compare actual
results relative to these goals to gauge performance toward achieving these goals. The difference between actual performance and budgeted
performance is known as a variance. Information on variances can be used at the end of an accounting period and during an accounting period to
make adjustments to processes. In fact, making changes during a period is preferable to waiting until the end of a period to make changes as it is
too late to improve performance for that period once the period is over; therefore, this is the correct answer.
Question 3
1.B.2.a
1B2-AT21
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following refers to a quantitative expression of proposed management actions for a set period of time?
Correct
Budgets.
Cost of goods manufactured statements.
Cost of goods sold statements.
Your Answer
Financial statements.
Rationale
 Budgets.
A budget is a plan, expressed in financial terms, and is for a set period of time.
Rationale
 Cost of goods manufactured statements.
This answer is incorrect. Cost of goods manufactured statements are not quantitative expressions of proposed management actions for a set period
of time, but are actual results over a period of time.
Rationale
 Cost of goods sold statements.
This answer is incorrect. Cost of goods sold statements are not quantitative expressions of proposed management actions for a set period of time,
but are actual results over a period of time.
Rationale
 Financial statements.
This answer is incorrect. Financial statements are not quantitative expressions of proposed management actions for a set period of time, but are
actual results at a certain time or over a period of time.
Question 4
1.B.2.e
1C1-AT01
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
Richmond Enterprises is reviewing its policies and procedures in an effort to enhance goal congruence throughout the organization. The processes that
are most likely to encourage this behavior are:
cost-based transfer pricing, imposed budgeting, and activity-based costing.
participatory budgeting, reciprocal cost allocation, and management-by-objective performance evaluation.
Correct
management-by-objective performance (MBO) evaluation and participatory budgeting.
reciprocal cost allocation, zero-base budgeting, and standard costing.
Rationale
 cost-based transfer pricing, imposed budgeting, and activity-based costing.
This answer is incorrect. The processes that are most likely to encourage goal congruence throughout the organization are not cost-based transfer
pricing, imposed budgeting, and activity-based costing.
Rationale
 participatory budgeting, reciprocal cost allocation, and management-by-objective performance evaluation.
This answer is incorrect. The processes that are most likely to encourage goal congruence throughout the organization does not include one of the
following: participatory budgeting, reciprocal cost allocation, and management-by-objective performance evaluation.
Rationale
 management-by-objective performance (MBO) evaluation and participatory budgeting.
Goal congruence is enhanced by lower management participation in budgeting and by MBO. MBO identifies managers' areas of responsibility and
ties performance measurements to the areas. It pushes responsibilities for meeting goals and objectives down to the lowest possible management
levels and encourages participation.
Rationale
 reciprocal cost allocation, zero-base budgeting, and standard costing.
This answer is incorrect. The processes that are most likely to encourage goal congruence throughout the organization are not reciprocal cost
allocation, zero-base budgeting, and standard costing.
Question 5
1.B.2.b
tb.si.bud.027_1809
LOS: 1.B.2.b
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 4
Which of the following statements concerning economic and industry conditions and the planning process is correct?
Correct
Economic conditions and industry conditions are both important factors for an organization to consider in its planning process.
Economic conditions are an important factor for an organization to consider in its planning process but industry conditions are not.
Your Answer
Industry conditions are an important factor for an organization to consider in its planning process but economic conditions are not.
Neither economic conditions nor industry conditions are important.
Rationale
 Economic conditions and industry conditions are both important factors for an organization to consider in its planning process.
Correct. Economic conditions and industry conditions are related to each other. Economic conditions such as the state of the economy should be
taken into consideration during an organization's planning process as these conditions are likely to impact the organization's ability to achieve its
goals and objectives. In addition, industry conditions such as the organization's competitive position should be taken into consideration during an
organization's planning process as these conditions are likely to impact the organization's ability to achieve its goals and objectives.
Rationale
 Economic conditions are an important factor for an organization to consider in its planning process but industry conditions are not.
Incorrect. Industry conditions such as the organization's competitive position should also be taken into consideration during an organization's
planning process as these conditions are likely to impact the organization's ability to achieve its goals and objectives. Not considering them likely
reduces the quality of plans and objectives.
Rationale
 Industry conditions are an important factor for an organization to consider in its planning process but economic conditions are not.
Incorrect. Economic conditions such as the state of the economy should also be taken into consideration during an organization's planning process
as these conditions are likely to impact the organization's ability to achieve its goals and objectives. Not considering them likely reduces the quality
of plans and objectives.
Rationale
 Neither economic conditions nor industry conditions are important.
Incorrect. Economic and industry conditions should also be taken into consideration during an organization's planning process as these conditions
are likely to impact the organization's ability to achieve its goals and objectives. Not considering both of these conditions likely reduces the quality
of plans and objectives.
Question 6
1.B.2.e
tb.si.bud.016_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: hard
Bloom Code: 4
Jeremy is the CFO of a growing company. When the company was smaller, Jeremy developed the master budget on his own with input from the CEO.
Now that the company is larger, he feels that both he and the CEO are too far removed from the day-to-day operations to accurately develop a budget.
What would you suggest to help Jeremy develop an effective budget?
The company should allow lower-level managers to develop the budget without input from the CFO and CEO.
Correct
The company should develop a budget committee to receive input from department managers for their own portion of the budget.
The CFO and CEO should continue to develop the budget but include budgetary slack since they do not keep up with day-to-day activities.
The CFO and CEO should use long-range planning rather than budgeting to develop company goals because that is more effective for larger
companies.
Rationale
 The company should allow lower-level managers to develop the budget without input from the CFO and CEO.
A company can allow lower-level managers to develop their own budgets since they have the necessary information about their activities and
operations to develop effective budgets; however, allowing lower-level managers to develop their own budgets without any input from the CFO and
CEO increases the likelihood that the budgets will include budgetary slack. Therefore, this is an incorrect answer.
Rationale
 The company should develop a budget committee to receive input from department managers for their own portion of the budget.
In smaller companies the CFO and CEO often are able to develop budgets effectively since they can be “close” to day-to-day operations. That is not
often the case as an organization grows. To get this information a company can form a budget committee comprising managers from each
department as well as top executives. This committee receives input from department managers concerning its activities and operations and then
develops budgets for the departments based on this information. The input the budget committee receives increases the likelihood that the budget
will be effective. Therefore, this is the correct answer.
Rationale
 The CFO and CEO should continue to develop the budget but include budgetary slack since they do not keep up with day-to-day
activities.
Budgetary slack is when intentional underestimates of revenues or overestimates of expenses are included in budgets in order to increase the
likelihood that budget figures will be achieved. This is not beneficial to an organization as it may result in insufficient resources being on-hand or a
reduction in employee motivation to achieve organizational goals. Having the CFO and CEO develop a budget with budgetary slack since they are
not up on day-to-day activities is not a good idea. Therefore, this is an incorrect answer.
Rationale
 The CFO and CEO should use long-range planning rather than budgeting to develop company goals because that is more effective for
larger companies.
Long-range planning is not more effective than budgeting for developing goals for organizations of any size as long-range planning is better
designed to identify appropriate strategies. Budgeting can still help a larger organization develop goals, they just need to adjust their budgeting
processes. Therefore, this is an incorrect answer.
Question 7
1.B.2.e
tb.si.bud.013_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 3
As an accountant, you were asked to collect financial data for the past three years from the sales, production, research, and marketing departments.
Based on this information, at what point is the company in its budgeting process?
In the middle
At the end
Correct
At the beginning
At the comparative stage.
Rationale
 In the middle
To build an accurate and useful budget requires information from all aspects of an organization's operations. This information is not likely to be
useful in the middle of the process as the middle of the process involves taking basic assumptions and building budgets for each area based on
expectations developed from those basic assumptions. Therefore, this is an incorrect answer.
Rationale
 At the end
To build an accurate and useful budget requires information from all aspects of an organization's operations. This information is not likely to be
useful at the end of the process as the end of the process involves taking budgets from individual areas and integrating them into one overall
master budget. Therefore, this is an incorrect answer.
Rationale
 At the beginning
To build an accurate and useful budget requires information from all aspects of an organization's operations. This information is most useful at the
beginning of the budgeting process as it will be used to establish basic assumptions that will form the budget's foundation. Collecting financial
data for the past three years from the sales, production, research, and marketing departments should yield information that can be used at the
beginning of the budget process to establish basic assumptions that will form the budget's foundation. Therefore, this is the correct answer.
Rationale
 At the comparative stage.
To build an accurate and useful budget requires information from all aspects of an organization's operations. This information is not likely to be
useful at the comparative stage of the process as the comparative stage involves comparing actual results to budgeted results. Therefore, this is an
incorrect answer.
Question 8
1.B.2.c
cma11.p1.t1.me.0043_0820
LOS: 1.B.2.c
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which one of the following is not a benefit of budgeting?
It facilitates the coordination of activities.
Your Answer
It provides definite objectives for evaluating performance.
Correct
It provides assurance that the company will achieve its objectives.
It requires all levels of management to plan ahead on a recurring basis.
Rationale
 It facilitates the coordination of activities.
This answer is incorrect. Budgeting facilitates the coordination of company activities by including all plans in one place.
Rationale
 It provides definite objectives for evaluating performance.
This answer is incorrect. Budgeting provides definite objectives for evaluating performance such as budgeted revenues and budgeted expenses.
Rationale
 It provides assurance that the company will achieve its objectives.
Budgeting facilitates the coordination of company activities, it defines objectives for evaluating performance, and it requires management to plan
ahead. It does not provide assurance that the company will achieve its objectives.
Rationale
 It requires all levels of management to plan ahead on a recurring basis.
This answer is incorrect. Budgeting requires all levels of management to plan ahead on a recurring basis as budgets are a quantitative expression of
a company's plans.
Question 9
1.B.2.c
aq.si.bud.004_1802
LOS: 1.B.2.c
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Identify which of the following statements is most accurate in regard to budgeting and strategy implementation:
Your Answer
Budgeting is entirely focused on long-term objectives. Long-term objectives and processes must be constantly evaluated and adjusted to ensure
alignment with the overall strategy.
Budgeting is entirely focused on short-term objectives, and is not involved in long-term objectives. Short-term objectives and processes must be
constantly evaluated and adjusted to ensure alignment with the overall strategy.
Correct
Budgeting is focused on short-term objectives. Short-term objectives and processes must be constantly evaluated and adjusted to ensure alignment
with long-term objectives and the organization's overall strategy.
Budgeting does not support short-term weekly objectives. Budgeting is more focused on annual operating objectives.
Rationale
 Budgeting is entirely focused on long-term objectives. Long-term objectives and processes must be constantly evaluated and adjusted
to ensure alignment with the overall strategy.
While budgeting does support long-term objectives, when operating a budget, performance is achieved by focusing on short-run operations
(weekly or monthly), and working forward to achieve more long-run objectives in the quarterly and annual budgets.
Rationale
 Budgeting is entirely focused on short-term objectives, and is not involved in long-term objectives. Short-term objectives and processes
must be constantly evaluated and adjusted to ensure alignment with the overall strategy.
While focusing more on short-term objectives, budgeting still supports long-term objectives.
Rationale
 Budgeting is focused on short-term objectives. Short-term objectives and processes must be constantly evaluated and adjusted to
ensure alignment with long-term objectives and the organization's overall strategy.
This statement is true.
Rationale
 Budgeting does not support short-term weekly objectives. Budgeting is more focused on annual operating objectives.
When operating a budget, performance is achieved by focusing on short-run operations (weekly, monthly, and annually), and working forward to
achieve more long-run objectives in the organization's strategy.
Question 10
1.B.2.a
tb.si.bud.001_1805
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 3
Budgets are a management tool used to do which of the following?
Maximize the company's stock price.
Your Answer
Maximize incentives paid out to employees and managers.
Minimize the company's costs.
Correct
Plan and control the direction of a company's operations.
Rationale
 Maximize the company's stock price.
While a budget can help improve a company's performance, there are factors other than budgets that impact a company's stock price. Therefore,
this is an incorrect answer.
Rationale
 Maximize incentives paid out to employees and managers.
While a budget can be used to determine the extent of incentives paid out to employees and managers, they are not used to maximize those
incentives. Therefore, this is an incorrect answer.
Rationale
 Minimize the company's costs.
While a budget can be used to manage costs, that is different from minimizing costs. Sometimes it is necessary to incur costs in order to take
advantage of an opportunity. Therefore, this is an incorrect answer.
Rationale
 Plan and control the direction of a company's operations.
A company uses budgets to allocate resources to different areas of the company, ensure that sufficient resources are available, signal strategic
priorities, and establish performance expectations. Budgets enable a company to plan and control the direction of the company's operations.
Therefore, this is the correct answer.
Question 11
1.B.2.r
tb.si.bud.025_1805
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: hard
Bloom Code: 5
Pearl River Rafting Company is a service company that takes customers on white water rafting and canoe trips. They employ eight full-time guides, three
part-time store employees, and two full-time managers. On average, the company books 18 white-water rafting trips each week; however, a new
university has opened nearby, and they now average 25 white-water rafting trips each week. How will this affect their direct labor budget?
Correct
Their direct labor budget will increase, which means they will likely need to hire more guides.
Your Answer
Their direct labor budget will increase, which means they will likely need to hire more managers.
Their direct labor budget will decrease, which means they will need to lay off a store employee.
Their direct labor budget will not be affected.
Rationale
 Their direct labor budget will increase, which means they will likely need to hire more guides.
Direct labor is a variable cost, meaning that the total amount budgeted for direct labor changes in direct proportion to changes in expected volume.
As the number of rafting trips per week increases, more direct labor will be needed. This means the direct labor budget will increase and more
guides likely will need to be hired. Therefore, this is the correct answer.
Rationale
 Their direct labor budget will increase, which means they will likely need to hire more managers.
Direct labor is a variable cost, meaning that the total amount budgeted for direct labor changes in direct proportion to changes in expected volume.
As the number of rafting trips per week increases, more direct labor will be needed. This means the direct labor budget will increase; however, more
managers will not likely need to be hired as managerial salaries are fixed, not variable. Therefore, this is an incorrect answer.
Rationale
 Their direct labor budget will decrease, which means they will need to lay off a store employee.
As the number of rafting trips per week increases, more direct labor will be needed. This means the direct labor budget will increase, not decrease.
In addition, no store employees will need to be laid off. Therefore, this is an incorrect answer.
Rationale
 Their direct labor budget will not be affected.
Direct labor is a variable cost, meaning that the total amount budgeted for direct labor changes in direct proportion to changes in expected volume.
As the number of rafting trips per week increases, more direct labor will be needed. This means the direct labor budget will increase, not remain
unaffected. Therefore, this is an incorrect answer.
Question 12
1.B.2.e
tb.si.bud.005_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
If a company planned on creating a more realistic budget, which approach could it follow?
Top-down approach
Incremental approach
Strategic approach
Correct
Bottom-up approach
Rationale
 Top-down approach
A top-down approach to budgeting means the higher levels of a company (the top) create budgets that are then distributed to the lower levels of
the company to be implemented. Since upper management is not likely to have the most realistic information about operations and the industry,
this is most likely not the best approach to create a more realistic budget. Therefore, this is an incorrect answer.
Rationale
 Incremental approach
In the incremental approach to budgeting, the starting point for the budget is the previous year's budget. These amounts are then adjusted by a
given percentage amount. The percentage change is the “incremental” amount. Since budgeted figures are based at least partially on prior year
amounts, they may not be the most realistic values as they are not based on current information. Therefore, this is an incorrect answer.
Rationale
 Strategic approach
While making sure a budget is consistent with a company's strategy is important, a strategic plan is not likely to be detailed enough to provide the
information needed to prepare a realistic budget. Therefore, this is an incorrect answer.
Rationale
 Bottom-up approach
To create a realistic budget, a company needs to have realistic information about its operations and industry. The best source for this information is
likely the people heavily involved in the day-to-day operations. A bottom-up approach to budgeting means information from the lower levels of a
company, the bottom, is shared with higher levels, the top. This is the approach most likely to create a more realistic budget. Therefore, this is the
correct answer.
Question 13
1.B.2.r
tb.si.bud.010_1805
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 5
Rowan Catering is a service company that employs 12 full-time chefs and 150 part-time servers. The company frequently caters 50 parties each week in a
large metro area; however, with the downturn in the economy, they have only been averaging 28 parties per week. How will this affect their direct labor
budget?
Their direct labor budget will increase because they will be paying employees who have no work to do.
Your Answer
Their direct labor budget will not be affected.
Their direct labor budget will increase, which means they will have to increase their prices to pay their employees adequately.
Correct
Their direct labor budget will decrease, which means they will likely need to lay off some employees.
Rationale
 Their direct labor budget will increase because they will be paying employees who have no work to do.
Because direct labor is a variable cost, the direct labor budget will decrease if the amount of work decreases, not increase. Therefore, this is an
incorrect answer.
Rationale
 Their direct labor budget will not be affected.
Because direct labor is a variable cost, the direct labor budget can change based on demands. The direct labor budget will not be unaffected if the
amount of work decreases therefore, this is an incorrect answer.
Rationale
 Their direct labor budget will increase, which means they will have to increase their prices to pay their employees adequately.
Direct labor is a variable cost, so Rowan Catering can adjust the amount budgeted for direct labor. As the number of parties per week decreases,
less direct labor will be needed. This means the direct labor budget will decrease, not increase. Therefore, this is an incorrect answer.
Rationale
 Their direct labor budget will decrease, which means they will likely need to lay off some employees.
Direct labor is a variable cost, meaning that the total amount budgeted for direct labor changes in direct proportion to changes in expected volume.
As the number of parties per week decreases, less direct labor will be needed. This means the direct labor budget will decrease and some
employees will likely need to be laid off. Therefore, this is the correct answer.
Question 14
1.B.2.e
1B2-AT06
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
National Telephone has been forced by competition to drastically cut operating costs, which has resulted in a change from static budgeting to flexible
budgeting. Which one of the following steps will not help National Telephone gain maximum acceptance of the proposed budgeting system?
Correct
Implementing the change quickly.
Increasing communication with employees about the reasons for the change and the potential benefits that will result from it.
Your Answer
Focusing departmental reports only on items that are under managers' control.
Demonstrating top management support for the change.
Rationale
 Implementing the change quickly.
Quick implementation will not allow management and employees the time needed to "get on board" and accept (or "buy into") the new system.
Rationale
 Increasing communication with employees about the reasons for the change and the potential benefits that will result from it.
This answer is incorrect. Increasing communication with employees about the reasons for the change and the potential benefits that will result
from it will help National Telephone gain maximum acceptance of the proposed budgeting system.
Rationale
 Focusing departmental reports only on items that are under managers' control.
This answer is incorrect. Focusing departmental reports only on items that are under managers' control will help National Telephone gain
maximum acceptance of the proposed budgeting system.
Rationale
 Demonstrating top management support for the change.
This answer is incorrect. Demonstrating top management support for the change will help National Telephone gain maximum acceptance of the
proposed budgeting system.
Question 15
1.B.2.e
1B5-LS23
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following is not a quality of a direct labor budget?
A direct labor budget can smooth out production over the year to keep work force size consistent.
A direct labor budget allows firms with unions to notify the union before changes are needed.
Correct
A direct labor budget can be broken down into fixed and variable direct labor.
Your Answer
A direct labor budget can be broken down by categories such as semiskilled, unskilled, and skilled.
Rationale
 A direct labor budget can smooth out production over the year to keep work force size consistent.
This answer is incorrect. Smoothing out production over the year to keep work force size consistent is a quality of a direct labor budget.
Rationale
 A direct labor budget allows firms with unions to notify the union before changes are needed.
This answer is incorrect. Allowing firms with unions to notify the union before changes are needed is a quality of a direct labor budget.
Rationale
 A direct labor budget can be broken down into fixed and variable direct labor.
Direct labor budgets are not broken down into fixed and variable direct labor because all direct labor is variable.
Rationale
 A direct labor budget can be broken down by categories such as semiskilled, unskilled, and skilled.
This answer is incorrect. Breaking down labor into categories such as semiskilled, unskilled, and skilled is a quality of a direct labor budget.
Question 16
1.B.2.c
tb.si.bud.011_1805
LOS: 1.B.2.c
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 3
A regional sales manager noticed a decrease in sales over the previous month. The manager meets with the managerial accounting team, and based on
their analysis of the data, the manager makes adjustments in several stores. The following month, regional sales are again meeting expectations. This is
an example of how managerial accounting helps managers do which of the following?
Correct
Fulfill their responsibility to control the company's activities
Your Answer
Ensure the company is in compliance with GAAP
Fulfill their responsibility to plan the company's objectives
Prepare the company's income statements and tax returns
Rationale
 Fulfill their responsibility to control the company's activities
Controlling a company's activities entails determining whether a company's actual performance is consistent with its budgeted performance.
Analyzing data and adjusting performance based on the analysis is one example of how managerial accounting helps managers control a
company's activities. Therefore, this is the correct answer.
Rationale
 Ensure the company is in compliance with GAAP
Ensuring a company is complying with GAAP is not related to analyzing data and making adjustments to performance based on the analysis.
Therefore, this is an incorrect answer.
Rationale
 Fulfill their responsibility to plan the company's objectives
Fulfilling management's responsibility to plan a company's objectives is not related to analyzing data and adjusting performance based on the
analysis. Therefore, this is an incorrect answer.
Rationale
 Prepare the company's income statements and tax returns
Preparing income statements and tax returns are not related to analyzing data and adjusting performance based on the analysis. Therefore, this is
an incorrect answer.
Question 17
1.B.2.r
1B2-AT18
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
All types of organizations can benefit from budgeting. A major difference between governmental budgeting and business budgeting is that:
business budgeting is required by the SEC.
Correct
governmental budgeting usually represents a legal limit on proposed expenditures.
Your Answer
business budgeting can be used to measure progress in achieving company objectives whereas governmental budgeting cannot be used to measure
progress in achieving objectives.
governmental budgeting is usually done on a zero-base.
Rationale
 business budgeting is required by the SEC.
This answer is incorrect. Business budgeting is not required by the SEC.
Rationale
 governmental budgeting usually represents a legal limit on proposed expenditures.
In governmental bodies, expenditures are based upon legislative appropriations. These appropriations create legal limits on expenditures.
Rationale
 business budgeting can be used to measure progress in achieving company objectives whereas governmental budgeting cannot be used
to measure progress in achieving objectives.
This answer is incorrect. Governmental budgeting can also be used to measure progress in achieving objectives.
Rationale
 governmental budgeting is usually done on a zero-base.
This answer is incorrect. Governmental budgeting is not always done on a zero-base.
Question 18
1.B.2.a
1B2-LS30
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
During a planning process, which of the following activities would be completed last?
Tactical goals.
Correct
Operational plans.
Strategic objectives.
Your Answer
Vision and mission.
Rationale
 Tactical goals.
This answer is incorrect. Tactical goals would not be completed last during a planning process.
Rationale
 Operational plans.
The logical order for the activities listed is 1) vision and mission, 2) strategic objectives, 3) tactical goals, and 4) operational plans. An operational
plan formulates specific goals for each SBU, with detailed revenue and expense budgets.
Rationale
 Strategic objectives.
This answer is incorrect. Strategic objectives would not be completed last during a planning process.
Rationale
 Vision and mission.
This answer is incorrect. Vision and mission would not be completed last during a planning process.
Question 19
1.B.2.e
1B2-AT20
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
Which one of the following is generally not cited as being an advantage of a formal budgetary process?
It provides management with a means of dealing with uncertainty.
It serves as a coordination and communication device between management and subordinates.
It forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary process.
Correct
It ensures improved cost control within the organization and prevents inefficiencies.
Rationale
 It provides management with a means of dealing with uncertainty.
This answer is incorrect. Providing management with a means of dealing with uncertainty is an advantage of a formal budgetary process.
Rationale
 It serves as a coordination and communication device between management and subordinates.
This answer is incorrect. Serving as a coordination and communication device between management and subordinates is an advantage of a formal
budgetary process.
Rationale
 It forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary process.
This answer is incorrect. Forcing management to evaluate the reasonableness of assumptions used and goals identified in the budgetary process is
an advantage of a formal budgetary process.
Rationale
 It ensures improved cost control within the organization and prevents inefficiencies.
A formal budgetary process does not ensure improved cost control within the organization nor does it necessarily prevent inefficiencies. The formal
process is merely a tool that moves the organization in the directions of improved cost control and efficiency.
Question 20
1.B.2.e
tb.si.bud.007_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Budgets are:
Closely associated with the management function of directing
Correct
A deterrent to waste
Voted on and approved by shareholders
Your Answer
A guarantee for accomplishing the profit objective
Rationale
 Closely associated with the management function of directing
Budgets are a way for companies to plan and control their operations. The management function of directing involves instructing employees and
overseeing their behavior to ensure goals are met. While budgets provide goals, they are more closely related to the management function of
planning, not directing. Therefore, this is an incorrect answer.
Rationale
 A deterrent to waste
Budgets can provide many benefits to an organization. One benefit is to establish expectations and limits for spending. By establishing limits on
spending, the likelihood of wasteful spending is decreased. Therefore, this is the correct answer.
Rationale
 Voted on and approved by shareholders
Budgets are typically developed by management and ultimately approved by a company's board of directors. Shareholders do not vote on and
approve budgets since they are not a part of day-to-day management; therefore, this is an incorrect answer.
Rationale
 A guarantee for accomplishing the profit objective
While budgets can be used to establish financial goals and monitor performance relative to those goals, the planning process itself does not
guarantee that a company will achieve those objectives. Therefore, this is an incorrect answer.
Question 21
1.B.2.a
tb.si.bud.002_1805
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
When a firm makes adjustments to its strategic plan, the firm will do which of the following?
Correct
It will also need to make adjustments to its budget, because the budget shows how the firm's resources will be operationalized in an attempt to
implement the strategic plan.
It will not need to make adjustments to its budget, because the budget is essentially an operating plan and therefore unrelated to the strategic plan.
Your Answer
It will also need to make adjustments to its budget, because the strategic plan affects a firm's cash flows even though it has no direct bearing on the
firm's operations.
It will not need to make adjustments to its budget, because the strategic plan affects only a firm's operations and not its cash flows.
Rationale
 It will also need to make adjustments to its budget, because the budget shows how the firm's resources will be operationalized in an
attempt to implement the strategic plan.
One use of a budget is to show how an organization will use its resources to implement its strategic plan. If an organization adjusts its strategic
plan, its budget will also need to be modified so that resources are shifted toward the new strategic priorities. Therefore, this is the correct answer.
Rationale
 It will not need to make adjustments to its budget, because the budget is essentially an operating plan and therefore unrelated to the
strategic plan.
While a budget is an operating plan, operating plans need to be consistent with strategic plans. Therefore, this is an incorrect answer.
Rationale
 It will also need to make adjustments to its budget, because the strategic plan affects a firm's cash flows even though it has no direct
bearing on the firm's operations.
If an organization adjusts its strategic plan, the changes will likely affect cash flow and impact operations. Strategic plans have a direct bearing on
the firm's operations; therefore, this is an incorrect answer.
Rationale
 It will not need to make adjustments to its budget, because the strategic plan affects only a firm's operations and not its cash flows.
If an organization adjusts its strategic plan, these changes are likely to affect operations as well as cash flows. Because budgets are related to
operations and cash flow, the firm's budget will also need to be modified in response to changes in a strategic plan. Therefore, this is an incorrect
answer.
Question 22
1.B.2.r
tb.si.bud.026_1809
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning the role of budgets in monitoring and controlling expenditures to meet strategic objectives is true?
Correct
If an organization's budget is aligned with its strategic objectives, monitoring and controlling expenditures will help the organization achieve its
objectives.
If an organization's budget is not aligned with its strategic objectives, monitoring and controlling expenditures will help the organization achieve its
objectives.
Your Answer
If an organization's budget is aligned with its strategic objectives, monitoring and controlling expenditures will not help the organization achieve its
objectives.
If an organization's budget is aligned with its strategic objectives, not monitoring and controlling expenditures will help the organization achieve its
objectives.
Rationale
 If an organization's budget is aligned with its strategic objectives, monitoring and controlling expenditures will help the organization
achieve its objectives.
Correct. Aligning an organization's budget to its strategic objectives is a best practice that organizations should follow. This alignment helps
increase the likelihood of achieving strategic objectives as actions that will lead to achieving these objectives will most likely receive adequate
funding. Monitoring and controlling these expenditures will likely increase the probability of achieving these objectives since the monitoring and
controlling will ensure the funds are spent on the actions.
Rationale
 If an organization's budget is not aligned with its strategic objectives, monitoring and controlling expenditures will help the
organization achieve its objectives.
Incorrect. If alignment is not present, monitoring and controlling expenditures will not likely help achieve objectives since the spending may not be
related to the objectives.
Rationale
 If an organization's budget is aligned with its strategic objectives, monitoring and controlling expenditures will not help the
organization achieve its objectives.
Incorrect. Aligning an organization's budget to its strategic objectives is a best practice that organizations should follow. This alignment helps
increase the likelihood of achieving strategic objectives as actions that will lead to achieving these objectives will most likely receive adequate
funding. However, monitoring and controlling these expenditures will likely increase the probability of achieving these objectives since the
monitoring and controlling will ensure the funds are spent on the actions.
Rationale
 If an organization's budget is aligned with its strategic objectives, not monitoring and controlling expenditures will help the
organization achieve its objectives.
Incorrect. Aligning an organization's budget to its strategic objectives is a best practice that organizations should follow. This alignment helps
increase the likelihood of achieving strategic objectives as actions that will lead to achieving these objectives will most likely receive adequate
funding. Not monitoring and controlling these expenditures will likely not increase the probability of achieving these objectives since there will be
no way to ensure funds are spent to achieve the objectives.
Question 23
1.B.2.b
tb.si.bud.018_1805
LOS: 1.B.2.b
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning economic and industry conditions and the planning process is correct?
Correct
Managers should take economic conditions and industry conditions into consideration when developing plans and objectives.
Managers should take economic conditions but not industry conditions into consideration when developing plans and objectives.
Your Answer
Managers should take industry conditions but not economic conditions into consideration when developing plans and objectives.
Managers should not take economic conditions or industry conditions into consideration when developing plans and objectives.
Rationale
 Managers should take economic conditions and industry conditions into consideration when developing plans and objectives.
Economic conditions and industry conditions are related to each other. Economic conditions such as the state of the economy should be taken into
consideration during an organization's planning process as these conditions are likely to impact the organization's ability to achieve its goals and
objectives. In addition, industry conditions such as the organization's competitive position should be taken into consideration during an
organization's planning process as these conditions are likely to impact the organization's ability to achieve its goals and objectives. Therefore, this
is the correct answer.
Rationale
 Managers should take economic conditions but not industry conditions into consideration when developing plans and objectives.
Economic conditions such as the state of the economy should be taken into consideration during an organization's planning process as these
conditions are likely to impact the organization's ability to achieve its goals and objectives. Industry conditions should also be taken into
consideration during an organization's planning process as not considering them likely reduces the quality of plans and objectives; therefore, this is
an incorrect answer.
Rationale
 Managers should take industry conditions but not economic conditions into consideration when developing plans and objectives.
Industry conditions such as the organization's competitive position should be taken into consideration during an organization's planning process
as these conditions are likely to impact the organization's ability to achieve its goals and objectives. Economic conditions should also be taken into
consideration during an organization's planning process as not considering them likely reduces the quality of plans and objectives; therefore, this is
an incorrect answer.
Rationale
 Managers should not take economic conditions or industry conditions into consideration when developing plans and objectives.
Economic conditions and industry conditions are related to each other. Not considering these conditions likely reduces the quality of plans and
objectives; therefore, this is an incorrect answer.
Question 24
1.B.2.e
tb.si.bud.008_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following is most likely to result in a budget that will closely represent the company's actual cash flow?
A budget that is the same as the previous period's budget.
A budget that is identical to a competitor's budget
Correct
A budget based on research and analysis
Your Answer
A budget that is developed solely by company executives
Rationale
 A budget that is the same as the previous period's budget.
To create a realistic budget that will closely represent the company's actual cash flow, a company needs to have realistic information about its
opportunities, operations, and industry. As these factors are likely to change from one period to another, using the same budget as was used during
the previous period is unlikely to result in a budget that closely represents its actual cash flow. Therefore, this is an incorrect answer.
Rationale
 A budget that is identical to a competitor's budget
Because a company's opportunities and operations are likely to be different for every company in an industry, using the same budget as a
competitor is unlikely to result in a budget that closely represents its actual cash flow. Therefore, this is an incorrect answer.
Rationale
 A budget based on research and analysis
To create a realistic budget that will closely represent the company's actual cash flow, a company needs to have realistic information about its
opportunities, operations, and industry. Conducting research and analysis is the most likely way to obtain this information. Therefore, this is the
correct answer.
Rationale
 A budget that is developed solely by company executives
In order to create a realistic budget, a company needs to have realistic information about its opportunities, operations, and industry. The best
source for this information is likely to come from the people heavily involved in the company's day-to-day operations. A top-down approach to
budgeting means the higher levels of a company (company executives) create budgets that are then distributed to the lower levels of the company
to be implemented. Since upper management is not likely to have the most realistic information about operations and the industry, this approach
is unlikely to result in a budget that closely represents its actual cash flow. Therefore, this is an incorrect answer.
Question 25
1.B.2.a
aq.si.bud.002_0720
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following is not involved in the budget performance evaluation process of an organization?
Using the insight gained to inform the planning stage for the next operational cycle
Analyzing results to understand why objectives were met or not
Rewarding performance
Correct
Resources are committed for the next operational cycle
Rationale
 Using the insight gained to inform the planning stage for the next operational cycle
This is a part of the budget performance evaluation process.
Rationale
 Analyzing results to understand why objectives were met or not
This is a part of the budget performance evaluation process.
Rationale
 Rewarding performance
This is a part of the budget performance evaluation process.
Rationale
 Resources are committed for the next operational cycle
Correct. This is not a part of the budget performance evaluation process. This step will take place in the planning process of the next operational
cycle.
Question 26
1.B.2.e
tb.si.bud.015_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: hard
Bloom Code: 4
Madison is the CEO of a large company. He has always produced the master budget with the help of the CFO. As his company has grown, his employees
and managers seem more resistant to adhering to the budget. What would you suggest to help Madison's company have an effective budget?
Correct
Madison should employ a bottom-to-top approach in planning the budget.
Madison should use research and analysis to help plan the budget.
Madison should prepare a continuous budget rather than a static budget.
Your Answer
Madison should begin his budget planning with the most recent sales forecasts.
Rationale
 Madison should employ a bottom-to-top approach in planning the budget.
A bottom-to-top approach to planning a budget is one in which all levels of an organization take part in developing a budget, not just the top levels.
One advantage of this process over a top-to-bottom process is that employees and managers are more likely to “buy into” the budget and adhere
to it because they were involved in developing the budget. Since employees and managers are not involved in developing a budget in a top-tobottom process, they may be less likely to “buy into” the budget and adhere to it. Therefore, this is the correct answer.
Rationale
 Madison should use research and analysis to help plan the budget.
Research and analysis should always be used to plan a budget as it can improve the assumptions used to develop the budget. However, research
and analysis alone are not likely to improve employee and manager “buy in” if those groups are not involved in developing the budget.
Participation in developing the budget is needed to improve “buy in.” Therefore, this is an incorrect answer.
Rationale
 Madison should prepare a continuous budget rather than a static budget.
A continuous budget is generally an improvement over a static budget as assumptions are updated more frequently with continuous budgeting.
However, continuous budgeting alone is not likely to improve employee and manager “buy in” if those groups are not involved in developing the
budget. Participation in developing the budget is needed to improve “buy in.” Therefore, this is an incorrect answer.
Rationale
 Madison should begin his budget planning with the most recent sales forecasts.
The most recent sales forecasts should always be used to plan a budget as the sales forecasts drives all the other budgets. However, using the most
recent sales forecasts alone is not likely to improve employee and manager “buy in” if those groups are not involved in developing the budget.
Participation in developing the budget is needed to improve “buy in.” Therefore, this is an incorrect answer.
Question 27
1.B.2.d
tb.si.bud.021_1805
LOS: 1.B.2.d
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following is not an example of using budgets to measure performance against established goals?
Comparing actual sales revenue in the current year to budgeted sales revenue for the current year
Correct
Comparing actual sales revenue in the current year to actual sales revenue for the previous year
Comparing actual material costs in the current year to budgeted material costs for the current year
Your Answer
Comparing actual labor costs in the current year to budgeted labor costs for the current year
Rationale
 Comparing actual sales revenue in the current year to budgeted sales revenue for the current year
Comparing actual sales revenue in the current year to budgeted sales revenue for the current year is an example of using budgets to measure
performance against established goals because budgeted sales revenue for the current year is a goal established in the budget; therefore, this is an
incorrect answer.
Rationale
 Comparing actual sales revenue in the current year to actual sales revenue for the previous year
Budgets express quantitatively how an organization plans to achieve its short-term and long-term goals. An organization can compare actual
results relative to these goals to gauge performance toward achieving these goals. Comparing actual sales revenue in the current year to actual
sales revenue for the previous year is not an example of using budgets to measure performance against established goals because actual sales
revenue for the previous year is not a goal established in the budget; therefore, this is the correct answer.
Rationale
 Comparing actual material costs in the current year to budgeted material costs for the current year
Comparing actual material costs in the current year to budgeted material costs for the current year is an example of using budgets to measure
performance against established goals because budgeted material costs for the current year is a goal established in the budget; therefore, this is an
incorrect answer.
Rationale
 Comparing actual labor costs in the current year to budgeted labor costs for the current year
Comparing actual labor costs in the current year to budgeted labor costs for the current year is an example of using budgets to measure
performance against established goals because budgeted labor costs for the current year is a goal established in the budget; therefore, this is an
incorrect answer.
Question 28
1.B.2.b
1B2-W025
LOS: 1.B.2.b
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: hard
Bloom Code: 5
Francisco Corp. is in the business of manufacturing plastic bottles. In the current quarter, $100,000 was provided for materials procurement and 10,000
bottles were produced against a budgeted production of 8,500 bottles. However, the extra production of 1,500 bottles had to be sold immediately at a
price lower than the market price. Identify the most likely flaw in the budget prepared by Francisco Corp. which led to a sale at lower prices.
The sale price was overestimated.
Correct
The storage capacity required was underestimated.
Your Answer
The funds allocated were not adequate.
The production capacity was underestimated.
Rationale
 The sale price was overestimated.
This answer is incorrect. It is unlikely that the sales price was overestimated as the company was able to sell 8,500 bottles at the market price and
only had to sell 1,500 bottles at a lower price.
Rationale
 The storage capacity required was underestimated.
Due to a lack of storage space, the extra production of bottles had to be sold immediately at a lower price.
Rationale
 The funds allocated were not adequate.
This answer is incorrect. The funds allocated were adequate as the actual production was more than the estimated production.
Rationale
 The production capacity was underestimated.
This answer is incorrect. Although the production capacity was underestimated, it most likely did not lead to the sale of 1,500 bottles at a lower
price.
Question 29
1.B.2.c
tb.si.bud.028_1809
LOS: 1.B.2.c
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning budgeting is not correct?
Short-term budgets can be useful in helping to meet long-term strategic objectives even though they involve different time periods.
Short-term budgets can be useful in helping to meet long-term strategic objectives since short-term goals can be thought of as milestones toward
achieving long-term strategic objectives.
Short-term budgets are useful in helping to meet long-term strategic objectives even though short-term budgets are related to operational tactics,
not strategic objectives.
Correct
Short-term budgets can be useful in helping to meet long-term strategic objectives since short-term goals are typically the same things as long-term
strategic objectives.
Rationale
 Short-term budgets can be useful in helping to meet long-term strategic objectives even though they involve different time periods.
Incorrect. Short-term budgets should be based on short-term plans that will enable the organization to achieve long-term objectives. In this way, a
short-term budget can be useful in helping to meet long-term strategic objectives.
Rationale
 Short-term budgets can be useful in helping to meet long-term strategic objectives since short-term goals can be thought of as
milestones toward achieving long-term strategic objectives.
Incorrect. Short-term goals can be thought of as milestones toward achieving long-term strategic objectives. In this way, a short-term budget can
be useful in helping to meet long-term strategic objectives.
Rationale
 Short-term budgets are useful in helping to meet long-term strategic objectives even though short-term budgets are related to
operational tactics, not strategic objectives.
Incorrect. Short-term budgets typically involve operational tactics, not strategic objectives. They are still related despite this difference as shortterm budgets should be based on operational tactics that will enable the organization to achieve long-term objectives. In this way, a short-term
budget can be useful in helping to meet long-term strategic objectives.
Rationale
 Short-term budgets can be useful in helping to meet long-term strategic objectives since short-term goals are typically the same things
as long-term strategic objectives.
Correct. Short-term budgets typically involve operational tactics, not strategic objectives. Implementing operational tactics should enable the
organization to achieve long-term objectives. While short-term goals are related to strategic objectives, they are not the same things.
Question 30
1.B.2.r
1B2-W003
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following best describes the function of strategic analysis?
Successful strategic analysis is possible with the help of effective budgets as the actual capacity of an organization can be determined by the
variances from budgets.
Strategic analysis is the basis for short-term planning, whereas for long-term planning, the expertise of management personnel is required for
development of budgets.
Correct
Strategy addresses the objectives of an organization and evaluates the risks of alternative strategies.
Your Answer
Strategic analysis calculates the impact of events that led to failure of a budget.
Rationale
 Successful strategic analysis is possible with the help of effective budgets as the actual capacity of an organization can be determined
by the variances from budgets.
This answer is incorrect. “Successful strategic analysis is possible with the help of effective budgets,” does not best describe the function of
strategic analysis, as strategic analysis is a prerequisite for budget development.
Rationale
 Strategic analysis is the basis for short-term planning, whereas for long-term planning, the expertise of management personnel is
required for development of budgets.
This answer is incorrect. “Strategic analysis is the basis for short-term planning, whereas for long-term planning, the expertise of management
personnel is required for development of budgets,” does not best describe the function of strategic analysis. Strategic analysis is the basis for both
long-term and short-term planning.
Rationale
 Strategy addresses the objectives of an organization and evaluates the risks of alternative strategies.
Strategy addresses the objectives of the organization and evaluates the risks of alternative strategies.
Rationale
 Strategic analysis calculates the impact of events that led to failure of a budget.
This answer is incorrect. “Strategic analysis calculates the impact of events that led to failure of a budget,” does not best describe the function of
strategic analysis. Strategic analysis considers the impact of events on an organization and those impacts are incorporated while determining the
required flexibility in a budget.
Question 31
1.B.2.c
tb.si.bud.012_1805
LOS: 1.B.2.c
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 3
A managerial accounting team is working with a production manager to determine the cause of unexpected production delays. Based on the analysis,
the manager is able to revise the production process, thus avoiding future delays. This is an example of how managerial accounting does which of the
following?
Ensures compliance with GAAP
Correct
Helps a manager control the company
Helps the company meet legal requirements
Your Answer
Assists with financial reporting
Rationale
 Ensures compliance with GAAP
Ensuring a company is in compliance with GAAP is not related to analyzing data and revising a production process based on the analysis. Therefore,
this is an incorrect answer.
Rationale
 Helps a manager control the company
Controlling a company's activities entails determining whether a company's actual performance is consistent with its budgeted performance.
Analyzing data and revising a production process based on the analysis is one example of how managerial accounting helps managers control a
company's activities. Therefore, this is the correct answer.
Rationale
 Helps the company meet legal requirements
Helping a company meet legal requirements is not related to analyzing data and revising a production process based on the analysis. Therefore,
this is an incorrect answer.
Rationale
 Assists with financial reporting
Preparing financial reports is not related to analyzing data and revising a production process based on the analysis. Therefore, this is an incorrect
answer.
Question 32
1.B.2.r
aq.si.bud.001_0720
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
What are the defining aspects of controlling operational processes in the context of planning, controlling, and evaluating operations in the organization?
Controlling operational processes requires that (1) expectations are established and incentivized, (2) results are gathered and reported, (3) variances
from the budget are computed, and (4) performance is rewarded.
Correct
Controlling operational processes requires that (1) expectations are established and incentivized, (2) results are gathered and reported, and (3)
variances from the budget are computed.
Your Answer
Controlling operational processes requires that (1) performance is rewarded, (2) results are analyzed to understand why objectives were met or not,
and (3) insight gained is used to inform the planning stage of the upcoming operational cycle.
Controlling operational processes requires that (1) the strategy is defined into operational objectives, (2) performance measures are set, and (3)
resources are committed.
Rationale
 Controlling operational processes requires that (1) expectations are established and incentivized, (2) results are gathered and reported,
(3) variances from the budget are computed, and (4) performance is rewarded.
This answer is incorrect. Performance is rewarded in the evaluating process, not the controlling process.
Rationale
 Controlling operational processes requires that (1) expectations are established and incentivized, (2) results are gathered and reported,
and (3) variances from the budget are computed.
This statement correctly describes the role that budgeting plays in controlling operational processes to meet strategic objectives.
Rationale
 Controlling operational processes requires that (1) performance is rewarded, (2) results are analyzed to understand why objectives
were met or not, and (3) insight gained is used to inform the planning stage of the upcoming operational cycle.
This answer is incorrect. Evaluating the operations, not controlling operational processes, requires that performance is rewarded, results are
analyzed to understand why objectives were met or not, and insight gained is used to inform the planning stage of the upcoming operational cycle.
Rationale
 Controlling operational processes requires that (1) the strategy is defined into operational objectives, (2) performance measures are
set, and (3) resources are committed.
This answer is incorrect. Operational planning, not controlling operational processes, is where the strategy is defined into operational objectives,
performance measures are set, and resources are committed.
Question 33
1.B.2.c
tb.si.bud.019_1805
LOS: 1.B.2.c
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning budgeting is correct?
Short-term budgets are not useful in helping to meet long-term strategic objectives since they involve different time periods.
Correct
Short-term budgets can be useful in helping to meet long-term strategic objectives since short-term goals can be thought of as milestones toward
achieving long-term strategic objectives.
Short-term budgets are not useful in helping to meet long-term strategic objectives since short-term budgets are related to operational tactics, not
strategic objectives.
Your Answer
Short-term budgets can be useful in helping to meet long-term strategic objectives since short-term goals are typically the same things as long-term
strategic objectives.
Rationale
 Short-term budgets are not useful in helping to meet long-term strategic objectives since they involve different time periods.
Despite the different time periods they cover, they are still related. Short-term budgets are useful in helping to meet long-term strategic objectives;
therefore, this is an incorrect answer.
Rationale
 Short-term budgets can be useful in helping to meet long-term strategic objectives since short-term goals can be thought of as
milestones toward achieving long-term strategic objectives.
Short-term budgets typically cover time periods of one year or less, while strategic objectives typically cover time periods greater than one year.
They are still related despite the different time periods they cover as short-term budgets should be based on short-term plans that will enable the
organization to achieve long-term objectives. The short-term goals can be thought of as milestones toward achieving long-term strategic
objectives; therefore, this is the correct answer.
Rationale
 Short-term budgets are not useful in helping to meet long-term strategic objectives since short-term budgets are related to operational
tactics, not strategic objectives.
Short-term budgets typically involve operational tactics, not strategic objectives. They are still related despite this difference; therefore, this is an
incorrect answer.
Rationale
 Short-term budgets can be useful in helping to meet long-term strategic objectives since short-term goals are typically the same things
as long-term strategic objectives.
While short-term goals are related to strategic objectives, they are not the same things; therefore, this is an incorrect answer.
Question 34
1.B.2.a
si.bud.tb.028_0120
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 2
The major objectives of budgeting are to:
*Source: Retired ICMA CMA Exam Questions.
Correct
foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among the
organization’s segments.
foster the planning of operations, facilitate the identification of blame for missed budget predictions, and ensure goal congruence between superiors
and subordinates.
Your Answer
define responsibility centers, provide a framework for performance evaluation, and promote communication and coordination among the
organization’s segments.
define responsibility centers, facilitate the identification of blame for missed budget predictions, and ensure goal congruence between superiors and
subordinates.
Rationale
 foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination
among the organization’s segments.
Budgets have many uses. Since budgets are based on plans, preparing budgets fosters the planning of operations. Since budgeted figures can be
used as performance goals, preparing budgets provides a framework for performance evaluation. Budgeting can promote communication and
coordination among segments because the segments share their plans and goals in budgets.
Rationale
 foster the planning of operations, facilitate the identification of blame for missed budget predictions, and ensure goal congruence
between superiors and subordinates.
This answer is incorrect. Budgets are not designed to identify blame for missed budget predictions.
Rationale
 define responsibility centers, provide a framework for performance evaluation, and promote communication and coordination among
the organization’s segments.
This answer is incorrect. Budgets are not used to define responsibility centers.
Rationale
 define responsibility centers, facilitate the identification of blame for missed budget predictions, and ensure goal congruence between
superiors and subordinates.
This answer is incorrect. Budgets are not used to define responsibility centers or to identify blame for missed budget predictions.
Question 35
1.B.2.d
tb.si.bud.022_1805
LOS: 1.B.2.d
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following is not an example of using budgets to measure performance against established goals?
Comparing actual units produced in the current year to budgeted units produced for the current year
Correct
Comparing actual units produced in the current year to actual units produced for the previous year
Comparing actual hours worked in the current year to budgeted hours worked for the current year
Your Answer
Comparing actual warranty costs in the current year to budgeted warranty costs for the current year
Rationale
 Comparing actual units produced in the current year to budgeted units produced for the current year
Comparing actual units produced in the current year to budgeted units produced for the current year is an example of using budgets to measure
performance against established goals because budgeted units produced for the current year is a goal established in the budget; therefore, this is
an incorrect answer.
Rationale
 Comparing actual units produced in the current year to actual units produced for the previous year
Budgets express quantitatively how an organization plans to achieve its short-term and long-term goals. An organization can compare actual
results relative to these goals to gauge performance toward achieving these goals. Comparing actual units produced in the current year to actual
units produced for the previous year is not an example of using budgets to measure performance against established goals because actual units
produced for the previous year is not a goal established in the budget; therefore, this is the correct answer.
Rationale
 Comparing actual hours worked in the current year to budgeted hours worked for the current year
Comparing actual hours worked in the current year to budgeted hours worked for the current year is an example of using budgets to measure
performance against established goals because budgeted hours worked for the current year is a goal established in the budget; therefore, this is an
incorrect answer.
Rationale
 Comparing actual warranty costs in the current year to budgeted warranty costs for the current year
Comparing actual warranty costs in the current year to budgeted warranty costs for the current year is an example of using budgets to measure
performance against established goals because budgeted warranty costs for the current year is a goal established in the budget; therefore, this is
an incorrect answer.
Question 36
1.B.2.c
1B2-W007
LOS: 1.B.2.c
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
How is strategic analysis related to budget development?
Strategic analysis establishes targets for all departments and lists the methods to achieve them.
Strategic analysis provides a detailed and precise estimate about the future which helps an organization accurately determine resource requirements.
Correct
Strategic analysis matches the capabilities of an organization with available marketplace opportunities to determine the goals of objectives for a
particular period.
Your Answer
Strategic analysis determines the overall financial requirements of an organization and also helps to procure funds at a lower cost.
Rationale
 Strategic analysis establishes targets for all departments and lists the methods to achieve them.
This answer is incorrect. Strategic analysis helps an organization in identifying potential opportunities and its objectives. It does not establish
departmental targets or list methods to achieve targets.
Rationale
 Strategic analysis provides a detailed and precise estimate about the future which helps an organization accurately determine resource
requirements.
This answer is incorrect. Strategic analysis cannot provide a detailed and precise picture of future conditions.
Rationale
 Strategic analysis matches the capabilities of an organization with available marketplace opportunities to determine the goals of
objectives for a particular period.
A prerequisite for budget development is a strategic analysis that matches an entity's capabilities with available marketplace opportunities.
Strategy addresses the objectives of the organization; locates potential markets; considers the impact of events, competitors, and the economy;
addresses the structure of the organization; and evaluates the risks of alternative strategies.
Rationale
 Strategic analysis determines the overall financial requirements of an organization and also helps to procure funds at a lower cost.
This answer is incorrect. Strategic analysis helps an organization in identifying cheaper financing opportunities but it does not identify the overall
financial requirement of an organization in particular.
Question 37
1.B.2.a
tb.si.bud.003_1805
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Why is budgetary planning useful for an organization?
It enables the organization to meet its projected earnings every quarter.
Correct
It enables the organization to recognize opportunities for growth and expansion and identify how to best use its resources.
It results in the lowest levels of inventory in the industry.
Your Answer
It expands its access to equity markets at low cost.
Rationale
 It enables the organization to meet its projected earnings every quarter.
While budgetary planning can be used to establish earnings targets and to monitor performance relative to those targets, the planning process
itself does not enable an organization to meet those targets as the company's operating activities are also involved. Therefore, this is an incorrect
answer.
Rationale
 It enables the organization to recognize opportunities for growth and expansion and identify how to best use its resources.
Budgetary planning can provide an organization with many benefits. In general, budgeting can help an organization implement its strategic plan,
plan its operations, and ensure that adequate cash is available. More specifically, benefits include helping an organization identify the best uses of
limited resources and identify opportunities for growth and expansion. Therefore, this is the correct answer.
Rationale
 It results in the lowest levels of inventory in the industry.
While budgetary planning can be used to establish inventory targets, the planning process itself does not enable an organization to meet those
targets. Meeting inventory target levels also involves operating activities; therefore, this is an incorrect answer.
Rationale
 It expands its access to equity markets at low cost.
While budgetary planning can be used to establish performance targets that can be used to expand access to equity markets and identify funding
needs, the planning process itself does not enable an organization to access equity markets. Therefore, this is an incorrect answer.
Question 38
1.B.2.b
1B2-LS38
LOS: 1.B.2.b
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Cerawell Products Company is a ceramics manufacturer that is facing several challenges in its operations due to economic and industry conditions. The
company is currently preparing its annual plan and budget. Which one of the following is subject to the least control by the management of Cerawell in
the current fiscal year?
* Source: ICMA CMA® Retired Exam Questions.
Experienced employees have decided to terminate their employment with Cerawell and go to work for the competition.
Correct
A competitor has achieved an unexpected technological breakthrough that has given them a significant quality advantage, and has caused Cerawell
to lose market share.
Vendors have asked that the contract price for the goods they supply to Cerawell be renegotiated and adjusted for inflation.
Your Answer
A new machine that was purchased this year has not helped reduce Cerawell's unfavorable labor efficiency variances.
Rationale
 Experienced employees have decided to terminate their employment with Cerawell and go to work for the competition.
This answer is incorrect. Experienced employees deciding to terminate their employment with Cerawell and go to work for the competition,
compared to another option listed, is more controllable by the management of Cerawell.
Rationale
 A competitor has achieved an unexpected technological breakthrough that has given them a significant quality advantage, and has
caused Cerawell to lose market share.
When an analysis takes place in the preparation of the annual plan and budget, the organization needs to analyze those factors that they can
control to plan and budget for future events. In this case, a competitor achieving an unexpected technological breakthrough that has given them a
significant quality advantage, and has caused Cerawell to lose market share is something beyond Cerawell's control. However, they can prioritize
certain areas of their business operations to overcome those obstacles presented by this technological breakthrough by the competition.
Rationale
 Vendors have asked that the contract price for the goods they supply to Cerawell be renegotiated and adjusted for inflation.
This answer is incorrect. Vendors asking that the contract price for the goods they supply to Cerawell be renegotiated and adjusted for inflation,
compared to another option listed, is more controllable by the management of Cerawell.
Rationale
 A new machine that was purchased this year has not helped reduce Cerawell's unfavorable labor efficiency variances.
This answer is incorrect. A new machine purchased this year failing to reduce Cerawell's unfavorable labor efficiency variances, compared to
another option listed, is more controllable by the management of Cerawell.
Question 39
1.B.2.b
aq.si.bud.003_0720
LOS: 1.B.2.b
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
In which of the following situations is it not appropriate to adjust the budget?
The government passes new regulation causing a substantial increase in the cost to produce the company's highest selling good.
During the course of the year, several new competitors entered the market and gained a substantial market share.
Correct
A production department has been much less efficient this year compared to prior years.
A new invention makes it possible to produce the company's highest selling good in a third of the time that it used to take.
Rationale
 The government passes new regulation causing a substantial increase in the cost to produce the company's highest selling good.
This is an appropriate reason to adjust the budget. When conditions in the organization's setting make a significant shift, the budget should likely
respond. Remember that the PESTLE analysis tool (politics, economy, social, technology, legal, and environment) represents different conditions
that can affect the budget.
Rationale
 During the course of the year, several new competitors entered the market and gained a substantial market share.
This is an appropriate reason to adjust the budget. When conditions in the competitive environment shift, a change to the budget is necessary.
Porter's Five Forces provides a useful tool for assessing competitive conditions. These forces include the power of customers and suppliers, the
threat of new entrants and substitute products, and the intensity of competition in the industry.
Rationale
 A production department has been much less efficient this year compared to prior years.
Correct. This is not an appropriate reason to adjust the budget. Employees, departments, and divisions should be able to depend on a budget that
firmly establishes expectations on performance.
Rationale
 A new invention makes it possible to produce the company's highest selling good in a third of the time that it used to take.
This is an appropriate reason to adjust the budget. When conditions in the organization's setting make a significant shift, the budget should likely
respond. Remember that the PESTLE analysis tool (politics, economy, social, technology, legal, and environment) represents different conditions
that can affect the budget.
Question 40
1.B.2.r
1B2-LS40
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
All of the following are advantages of the use of budgets in a management control system except that budgets:
* Source: Retired ICMA CMA Exam Questions.
provide performance criteria.
Your Answer
force management planning.
Correct
limit unauthorized expenditures.
promote communication and coordination within the organization.
Rationale
 provide performance criteria.
This answer is incorrect. Providing performance criteria is an advantage of using budgets in a management control system.
Rationale
 force management planning.
This answer is incorrect. Forcing management planning is an advantage of using budgets in a management control system.
Rationale
 limit unauthorized expenditures.
Advantages of management control systems include the forcing of management to plan, providing performance criteria, and the promotion of
communications and coordination within the organization.
Rationale
 promote communication and coordination within the organization.
This answer is incorrect. Promoting communication and coordination within the organization is an advantage of using budgets in a management
control system.
Question 41
1.B.2.d
tb.si.bud.023_1805
LOS: 1.B.2.d
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following is not an example of using budgets to measure performance against established goals?
Comparing actual travel costs in the current year to budgeted travel costs for the current year
Correct
Comparing actual sales revenue in the current year to a competitor's actual sales revenue for the current year
Comparing actual administrative costs in the current year to budgeted administrative costs for the current year
Comparing actual material purchases in the current year to budgeted material purchases for the current year
Rationale
 Comparing actual travel costs in the current year to budgeted travel costs for the current year
Comparing actual travel costs in the current year to budgeted travel costs for the current year is an example of using budgets to measure
performance against established goals because budgeted travel costs for the current year is a goal established in the budget; therefore, this is an
incorrect answer.
Rationale
 Comparing actual sales revenue in the current year to a competitor's actual sales revenue for the current year
Budgets express quantitatively how an organization plans to achieve its short-term and long-term goals. An organization can compare actual
results relative to these goals to gauge performance toward achieving these goals. Comparing actual sales revenue in the current year to a
competitor's actual sales revenue for the current year is not an example of using budgets to measure performance against established goals
because a competitor's actual sales revenue for the current year is not a goal established in the budget; therefore, this is the correct answer.
Rationale
 Comparing actual administrative costs in the current year to budgeted administrative costs for the current year
Comparing actual administrative costs in the current year to budgeted administrative costs for the current year is an example of using budgets to
measure performance against established goals because budgeted administrative costs for the current year is a goal established in the budget;
therefore, this is an incorrect answer.
Rationale
 Comparing actual material purchases in the current year to budgeted material purchases for the current year
Comparing actual material purchases in the current year to budgeted material purchases for the current year is an example of using budgets to
measure performance against established goals because budgeted material purchases for the current year is a goal established in the budget;
therefore, this is an incorrect answer.
Question 42
1.B.2.a
aq.si.bud.005_0720
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
In the context of planning, controlling, and evaluating operations in the organization, which of the following statements reflects specifically the function
of planning process?
Correct
It provides insight into better ways to achieve goals that have already been established.
It promotes communication and coordination of efforts within an organization.
It compares the actual results for a period to the budgeted results for the period.
Your Answer
It allows the organization to communicate its goals to everyone in an organization.
Rationale
 It provides insight into better ways to achieve goals that have already been established.
The planning process may generate new ideas for an organization's direction, or it may provide insight into better ways to achieve goals that have
already been established.
Rationale
 It promotes communication and coordination of efforts within an organization.
This statement reflects the function of the budgeting process overall.
Rationale
 It compares the actual results for a period to the budgeted results for the period.
This statement reflects the function of the evaluating process, not the planning process.
Rationale
 It allows the organization to communicate its goals to everyone in an organization.
This statement reflects the function of the budgeting process overall.
Question 43
1.B.2.d
tb.si.bud.024_1805
LOS: 1.B.2.d
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following is an example of using budgets to measure performance against established goals?
Correct
Comparing actual travel costs in the current year to budgeted travel costs for the current year
Comparing actual sales revenue in the current year to a competitor's actual sales revenue for the current year
Your Answer
Comparing actual units produced in the current year to actual units produced for the previous year
Comparing actual sales revenue in the current year to actual sales revenue for the previous year
Rationale
 Comparing actual travel costs in the current year to budgeted travel costs for the current year
Budgets express quantitatively how an organization plans to achieve its short-term and long-term goals. An organization can compare actual
results relative to these goals to gauge performance toward achieving these goals. Comparing actual travel costs in the current year to budgeted
travel costs for the current year is an example of using budgets to measure performance against established goals because budgeted travel costs
for the current year is a goal established in the budget; therefore, this is the correct answer.
Rationale
 Comparing actual sales revenue in the current year to a competitor's actual sales revenue for the current year
Comparing actual sales revenue in the current year to a competitor's actual sales revenue for the current year is not an example of using budgets to
measure performance against established goals because a competitor's actual sales revenue for the current year is not a goal established in the
budget; therefore, this is an incorrect answer.
Rationale
 Comparing actual units produced in the current year to actual units produced for the previous year
Comparing actual units produced in the current year to actual units produced for the previous year is not an example of using budgets to measure
performance against established goals because actual units produced for the previous year is not a goal established in the budget; therefore, this is
an incorrect answer.
Rationale
 Comparing actual sales revenue in the current year to actual sales revenue for the previous year
Comparing actual sales revenue in the current year to actual sales revenue for the previous year is not an example of using budgets to measure
performance against established goals because actual sales revenue for the previous year is not a goal established in the budget; therefore, this is
an incorrect answer.
Question 44
1.B.2.a
1B2-AT05
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 1
The process of creating a formal plan and translating goals into a quantitative format is:
process costing.
Correct
budgeting.
activity-based costing.
job order costing.
Rationale
 process costing.
This answer is incorrect. Process costing is a method for collecting and assigning manufacturing costs to units produced.
Rationale
 budgeting.
A budget is a plan expressed in dollar terms.
Rationale
 activity-based costing.
This answer is incorrect. Activity-based costing is a method of assigning costs based on the actual amount of a certain activity.
Rationale
 job order costing.
This answer is incorrect. Job order costing is a method of assigning manufacturing costs to batches of products.
Question 45
1.B.2.e
tb.si.bud.014_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 3
Michael was asked to collect the financial data from all the different departments so that top management could determine if they met their goals. At
what point is the company in its budgeting process?
In the middle of the budgeting process.
Your Answer
At the end of the budgeting process.
At the beginning of the budgeting process.
Correct
At the end of the budget period.
Rationale
 In the middle of the budgeting process.
The middle of the budgeting process involves taking basic assumptions and building budgets for each area based on expectations developed from
those basic assumptions. Therefore, this is an incorrect answer.
Rationale
 At the end of the budgeting process.
The end of the budget period is different from the end of the budgeting process as the end of the budgeting process involves taking budgets from
individual areas and integrating them into one overall master budget. The budgeting process ends before actual performance begins. Therefore,
this is an incorrect answer.
Rationale
 At the beginning of the budgeting process.
The beginning of the budgeting process involves establishing basic assumptions that will form the budget's foundation. Therefore, this is an
incorrect answer.
Rationale
 At the end of the budget period.
Collecting financial data from all the different departments so that top management could determine if they met their goals is done at the end of a
budget period as actual performance is not known until the period is over. This is an example of management performing control activities.
Therefore, this is the correct answer.
Question 46
1.B.2.e
aq.si.bud.007_0720
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following is not a characteristic of successful budgeting?
The budget represents forecasts of external and internal factors.
Correct
The budget should guide the strategy of the company.
The budget clearly connects to and supports the organization's strategy.
The budget should be motivating for everyone in the organization.
Rationale
 The budget represents forecasts of external and internal factors.
This is actually a characteristic of successful budgeting.
Rationale
 The budget should guide the strategy of the company.
Spending money and investing resources represents the organization's strategy. Effective budgeting should focus on spending and investing that
clearly ties to the organization's strategic objectives. Budgeting is the natural translation of strategy into quantifiable terms. Budgeting does not
guide the strategy of the company, but represents the strategy of the company.
Rationale
 The budget clearly connects to and supports the organization's strategy.
This is actually a characteristic of successful budgeting.
Rationale
 The budget should be motivating for everyone in the organization.
This is actually a characteristic of successful budgeting.
Question 47
1.B.2.d
cma11.p1.t1.me.0044_0820
LOS: 1.B.2.d
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
Alpha company has a new product for sale on the market in Year 1. Sales were poor for Year 1. The budgeting process has begun for the following year,
which requires your input. Sales forecasts for Year 2, based on Year 1 sales, would result in the following:
The budget would be set too high, with high expectations for the sales team.
Your Answer
The budget would be set too high, with low expectations for the sales team.
The budget would be set too low, with high expectations for the sales team.
Correct
The budget would be set too low, with low expectations for the sales team.
Rationale
 The budget would be set too high, with high expectations for the sales team.
This answer is incorrect. The prior-year sales were poor. Therefore, using such results in the sales forecast sets the budget too low. Employing prioryear results as the following year's budget provides no expectation for improvement.
Rationale
 The budget would be set too high, with low expectations for the sales team.
This answer is incorrect. The prior-year sales were poor. Therefore, using such results in the sales forecast sets the budget too low. Employing prior
year-results as the following year's budget provides no expectation for improvement.
Rationale
 The budget would be set too low, with high expectations for the sales team.
This answer is incorrect. Employing prior-year results as the following year's budget provides no expectation for improvement.
Rationale
 The budget would be set too low, with low expectations for the sales team.
Employing prior year results as the following year's budget provides no expectation for improvement. Another reason for not using historical results
as a budget is that past performance is not always indicative of future results. A budget process attempts to predict and account for future changes,
both positive and negative. Relying only on raw historical data leads to a sense that the past year must always be the benchmark. This eliminates
expectations that the sales force might increase sales and also sets the tone for an unmotivated sales team without reasonably high goals.
Question 48
1.B.2.e
tb.si.bud.009_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
A budget that is based on research and analysis will likely result in a budget that has which characteristic?
It has too much budgetary slack.
Lower-level management believes it contains unreachable goals.
Your Answer
It can predict market returns.
Correct
It closely represents the company's actual cash flow.
Rationale
 It has too much budgetary slack.
Conducting research and analysis will most likely yield realistic information about a company's opportunities, operations, and industry. Basing a
budget on realistic information concerning possible performance should reduce budgetary slack, not increase it, since slack often arises when there
is uncertainty about future performance. Therefore, this is an incorrect answer.
Rationale
 Lower-level management believes it contains unreachable goals.
Conducting research and analysis will most likely yield realistic information about a company's opportunities, operations, and industry. Basing a
budget on realistic information concerning possible performance should give lower-level management the confidence that goals are reachable.
Therefore, this is an incorrect answer.
Rationale
 It can predict market returns.
Conducting research and analysis will most likely yield realistic information about a company's opportunities, operations, and industry. However,
market returns are impacted by factors other than a budget's accuracy. Therefore, this is an incorrect answer.
Rationale
 It closely represents the company's actual cash flow.
Conducting research and analysis will most likely yield realistic information about a company's opportunities, operations, and industry. Basing a
budget on realistic information will likely result in a budget that closely represents the company's actual cash flow. Therefore, this is the correct
answer.
Question 49
1.B.2.e
1B4-LS14
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 3
All of the following are criticisms of the traditional budgeting process except that it:
* Source: Retired ICMA CMA Exam Questions.
Correct
incorporates non-financial measures as well as financial measures into its output.
makes across-the-board cuts when early budget iterations show that planned expenses are too high.
Your Answer
overemphasizes a fixed time horizon such as one year.
is not used until the end of the budget period to evaluate performance.
Rationale
 incorporates non-financial measures as well as financial measures into its output.
Many of the criticisms of the traditional budgeting process include: making across-the-board cuts when early budget iterations show that planned
expenses are too high; overemphasizing a fixed time horizon such as one year; and is not used until the end of the budget period to evaluate
performance. Traditional budgeting does not use non-financial measures.
Rationale
 makes across-the-board cuts when early budget iterations show that planned expenses are too high.
This answer is incorrect. “Makes across-the-board cuts when early budget iterations show that planned expenses are too high,” is a criticism of the
traditional budgeting process.
Rationale
 overemphasizes a fixed time horizon such as one year.
This answer is incorrect. “Overemphasizes a fixed time horizon such as one year,” is a criticism of the traditional budgeting process.
Rationale
 is not used until the end of the budget period to evaluate performance.
This answer is incorrect. “Is not used until the end of the budget period to evaluate performance,” is a criticism of the traditional budgeting process.
Question 50
1.B.2.e
tb.si.bud.006_1805
LOS: 1.B.2.e
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
As compared to a bottom-up budget, a top-down budget is ________.
Correct
less likely to be realistic
more likely to be realistic
less likely to employ an incremental approach
Your Answer
more likely to employ an incremental approach
Rationale
 less likely to be realistic
A company needs to have realistic information about its operations and industry to create a realistic budget. The best source for this information is
likely the people heavily involved in the company's day-to-day operations. A bottom-up approach to budgeting means information from lower
levels of a company, the bottom, is shared with higher levels, the top. In a top-down approach, the higher levels of a company create budgets that
are then distributed to the lower levels of the company to be implemented. Since upper management is not likely to have the most realistic
information about operations and the industry, a top-down approach is less likely than a bottom-up approach to create a more realistic budget.
Therefore, this is the correct answer.
Rationale
 more likely to be realistic
In order to create a realistic budget, a company needs to have realistic information about its operations and industry. Since upper management is
not likely to have the most realistic information about operations and the industry, a top-down approach is not more likely than a bottom-up
approach to create a more realistic budget. Therefore, this is an incorrect answer.
Rationale
 less likely to employ an incremental approach
In the incremental approach to budgeting, the starting point for the budget is the previous year's budget. These amounts are then adjusted by a
given percentage amount. The percentage change is the “incremental” amount. The use of the incremental approach is independent of whether a
company uses a top-down approach or bottom-up approach to budgeting. Therefore, this is an incorrect answer.
Rationale
 more likely to employ an incremental approach
In the incremental approach to budgeting, the starting point for the budget is the previous year's budget. These amounts are then adjusted by a
given percentage amount. The percentage change is the “incremental” amount. The use of the incremental approach is independent of whether a
company uses a top-down approach or bottom-up approach to budgeting. Therefore, this is an incorrect answer.
Question 51
1.B.2.r
1B2-AT16
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: medium
Bloom Code: 4
Kallert Manufacturing currently uses the company's budget only as a planning tool. Management has decided that it would be beneficial to also use
budgets for control purposes. In order to implement this change, the management accountant must:
Correct
synchronize the budgeting and accounting system with the organizational structure.
organize a budget committee.
Your Answer
develop forecasting procedures.
appoint a budget director.
Rationale
 synchronize the budgeting and accounting system with the organizational structure.
Control is the process of monitoring the actions of those responsible for executing the plan, measuring the actions against the plan, and making the
necessary corrections to the actions and/or the plan. Synchronizing the budgeting and accounting system with the organizational structure would
allow management to use budgets for control purposes.
Rationale
 organize a budget committee.
This answer is incorrect. Organizing a budget committee would not help management use the budgets for control purposes.
Rationale
 develop forecasting procedures.
This answer is incorrect. Developing forecasting procedures would not help management use the budgets for control purposes.
Rationale
 appoint a budget director.
This answer is incorrect. Appointing a budget director would not help management use the budgets for control purposes.
Question 52
1.B.2.r
aq.si.bud.008_0720
LOS: 1.B.2.r
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: hard
Bloom Code: 5
The board of directors of Edith Research Group has prepared the budget for the next quarter and decided to review the company's performance after
each quarter. At the end of the first quarter, the variances of actual performance from the budgets were examined and the reasons for the variances were
recorded. The company also collected feedback from the employees on improvements for the budget. Identify the flaw, if any, in the budget cycle of
Edith Research Group.
The company is not revising the plans according to the feedback of employees.
Correct
The company is not taking corrective actions to reduce the variance.
The budget is not used by the company to test current results against expectations.
There are no flaws in the given budget.
Rationale
 The company is not revising the plans according to the feedback of employees.
The company does not have to revise the plans according to the feedback of the employees unless company management feels the feedback is
beneficial to the company.
Rationale
 The company is not taking corrective actions to reduce the variance.
In a budget cycle, when variance from a budget is discovered, it should be examined and corrective actions should be taken when possible.
Rationale
 The budget is not used by the company to test current results against expectations.
The calculation of variances of actual performance from the budgets is the company testing current results against expectations.
Rationale
 There are no flaws in the given budget.
There is an action that is missing from the budget cycle.
Question 53
1.B.2.a
1B2-LS31
LOS: 1.B.2.a
Lesson Reference: Strategy Implementation and Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following is not a main reason for budgeting:
improving communications within the organization.
Correct
micromanaging an organization.
effective evaluation of its employees.
Your Answer
monitoring progress of an organization.
Rationale
 improving communications within the organization.
This answer is incorrect. Improving communications within the organization is a main reason for budgeting.
Rationale
 micromanaging an organization.
There are four main reasons a company creates a budget: planning (examining the future), improving communications and coordination of efforts
in the organization, monitoring the progress of the organization in meeting its goals, and evaluation of key players and their performance in
relation to the budget.
Rationale
 effective evaluation of its employees.
This answer is incorrect. Effective evaluation of employees is a main reason for budgeting.
Rationale
 monitoring progress of an organization.
This answer is incorrect. Monitoring progress of an organization is a main reason for budgeting.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.2.g
tb.bud.proc.017_1805
LOS: 1.B.2.g
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which of the following is an example of a cost that is not controllable with respect to a product-line manager?
Advertising expenditures that are made at the product-line level
Sales commissions
Correct
Advertising expenditure that are made at the organizational level for all products sold by the company
Training expenditures that are approved quarterly
Rationale
 Advertising expenditures that are made at the product-line level
Since the product-line manager decides on advertising expenditures, this cost is controllable by the product-line manager; therefore, this is an
incorrect answer.
Rationale
 Sales commissions
Since variable costs vary based on volume, managers or other decision-makers can control the amount spent by changing the volume of activity.
This means they are controllable costs; therefore, this is an incorrect answer.
Rationale
 Advertising expenditure that are made at the organizational level for all products sold by the company
Decision-makers can decide how much to spend on controllable items. Since the product-line manager does not decide on advertising
expenditures, this cost is not controllable by the product-line manager; therefore, this is the correct answer.
Rationale
 Training expenditures that are approved quarterly
Since the product-line manager decides on training expenditures, this cost is controllable by the product-line manager; therefore, this is an
incorrect answer.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.2.l
aq.bud.proc.010_0720
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
Under which of the following circumstances can a budget be considered a pressure or blame device rather than a planning, communication, and
coordinating tool?
Correct
When it includes technically incorrect or unrealistic targets.
When it is viewed as an internal control device.
Your Answer
When the budget is prepared with as much speed as possible.
When executive leadership fully endorses the budget.
Rationale
 When it includes technically incorrect or unrealistic targets.
A budget must contain technically correct and reasonably accurate numbers and facts. If the targets set in the budget are irrelevant or unrealistic,
employees may not strive to achieve them. In those situations, the budget can be considered as a pressure or blame device.
Rationale
 When it is viewed as an internal control device.
Budgeting, when viewed as an internal control device, is not necessarily seen as a pressure or blame device rather than a planning, communication,
and coordinating tool.
Rationale
 When the budget is prepared with as much speed as possible.
While it's important to manage the time and resources invested in budgeting processes, budgets that are put together so quickly that employees
have little input can result in a pressure or blame device rather than a planning, communication, and coordinating tool.
Rationale
 When executive leadership fully endorses the budget.
Budgets that are endorsed by executive leadership is not necessarily viewed as a pressure or blame device rather than a planning, communication,
and coordinating tool.
Question 3
1.B.2.l
tb.bud.proc.027_1805
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 2
Which of the following statements concerning best practices in budgeting is correct?
The authoritative (or top-down) approach is a best practice for budgeting.
The participative (or bottom-up) approach is a best practice for budgeting.
Correct
A blend of the authoritative (or top-down) approach and the participative (or bottom-up) approach is a best practice for budgeting.
Under some circumstances the authoritative (or top-down) approach is a best practice for budgeting and under some circumstances the participative
(or bottom-up) approach is a best practice for budgeting.
Rationale
 The authoritative (or top-down) approach is a best practice for budgeting.
One approach to budgeting is the authoritative (or top-down) approach. In this approach, budgets are essentially determined exclusively by top
management and are then communicated to lower levels for implementation. Individuals at lower levels of the organization do not provide input
into the preparation of the budget in this approach. While there are some advantages to this approach (for example, it is relatively fast, budgets are
more likely to be consistent with the strategic vision of the organization, and budgetary slack is less likely to be a part of the budget), the lack of
input can result in a low-quality budget since lower-level people typically understand the environment better than top management. In addition,
this process often results in a lack of buy-in from people at lower levels because of the lack of input and involvement. As a result, this approach is
not a best practice to budgeting; therefore, this is an incorrect answer.
Rationale
 The participative (or bottom-up) approach is a best practice for budgeting.
One approach to budgeting is the participative (or bottom-up) approach. In this approach, budgets are determined through robust dialogue among
all relevant parties from all levels. While there are some advantages to this approach (for example, budgets are often more accurate and people
tend to buy into them more because of all the input and dialogue), the process tends to be much longer and budgetary slack is more likely to be a
part of the budget. As a result, this approach is not a best practice to budgeting; therefore, this is an incorrect answer.
Rationale
 A blend of the authoritative (or top-down) approach and the participative (or bottom-up) approach is a best practice for budgeting.
One approach to budgeting is the authoritative (or top-down) approach and another is the participative (or bottom-up) approach. While both
approaches have strengths, they also both have weaknesses. A best practice process blends the best parts from both approaches. For example, top
management informs lower-level managers about the strategic direction the company is taking, and then lower-level managers develop the first
draft of the budget. The budget is then iteratively revised through discussions among people at all levels. After the budget is agreed upon, top
management reviews and approves the budget. This approach blends elements of both approaches; therefore, this is the correct answer.
Rationale
 Under some circumstances the authoritative (or top-down) approach is a best practice for budgeting and under some circumstances the
participative (or bottom-up) approach is a best practice for budgeting.
One approach to budgeting is the authoritative (or top-down) approach and another is the participative (or bottom-up) approach. While both
approaches have strengths, they also both have weaknesses. These weaknesses occur regardless of circumstances. This means that there are no
circumstances where either approach is a best practice; therefore, this is an incorrect answer.
Question 4
1.B.2.i
1B5-AT14
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which one of the following best describes tactical profit plans?
Broad, long-term, broad responsibilities, qualitative.
Detailed, short-term, broad responsibilities, qualitative.
Your Answer
Broad, short-term, responsibilities at all levels, quantitative.
Correct
Detailed, short-term, responsibilities at all levels, quantitative.
Rationale
 Broad, long-term, broad responsibilities, qualitative.
This answer is incorrect. This answer does not best describe tactical profit plans, as tactical profit plans do not have any of the listed characteristics.
Rationale
 Detailed, short-term, broad responsibilities, qualitative.
This answer is incorrect. This answer does not best describe tactical profit plans, as two of the listed characteristics are inaccurate.
Rationale
 Broad, short-term, responsibilities at all levels, quantitative.
This answer is incorrect. This answer does not best describe tactical profit plans, as one of the listed characteristics is inaccurate.
Rationale
 Detailed, short-term, responsibilities at all levels, quantitative.
Tactical profit plans or budgets should have the following characteristics: Detailed, short-term, assigned responsibilities at all levels, and
quantified.
Question 5
1.B.2.f
1B2-AT15
LOS: 1.B.2.f
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Each organization plans and budgets its operations for slightly different reasons. Which one of the following is not a significant reason for planning?
promoting coordination among operating units.
providing a basis for controlling operations.
Your Answer
forcing managers to consider expected future trends and conditions.
Correct
ensuring profitable operations.
Rationale
 promoting coordination among operating units.
This answer is incorrect. Promoting coordination among operating units is a significant reason for planning.
Rationale
 providing a basis for controlling operations.
This answer is incorrect. Providing a basis for controlling operations is a significant reason for planning.
Rationale
 forcing managers to consider expected future trends and conditions.
This answer is incorrect. Forcing managers to consider expected future trends and conditions is a significant reason for planning.
Rationale
 ensuring profitable operations.
Planning does not ensure profitable operations. It is merely a tool to move in the direction of improved profitability. As Wharton Professor Emeritus
Russell Ackoff once said, “If you fail to plan, plan to fail.”
Question 6
1.B.2.i
tb.bud.proc.001_1805
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which of the following companies is likely to have the longest budget period?
Correct
A company that makes passenger airplanes
A company that makes cars and trucks
A company that makes bicycles and scooters
Your Answer
A company that makes tennis shoes
Rationale
 A company that makes passenger airplanes
A company's budget period is tied to its operating cycle (the time it takes to produce and sell inventory and collect receivables). A company with a
longer operating cycle would have a longer budget period. Since a company making passenger airplanes has the longest operating cycle of any of
these companies, it likely has the longest budget period. Therefore, this is the correct answer.
Rationale
 A company that makes cars and trucks
A company's budget period is tied to its operating cycle (the time it takes to produce and sell inventory and collect receivables). A company with a
longer operating cycle would have a longer budget period. Since a company that makes cars and trucks does not have the longest operating cycle
of the options listed, this company likely does not have the longest budget period. Therefore, this is an incorrect answer.
Rationale
 A company that makes bicycles and scooters
A company's budget period is tied to its operating cycle (the time it takes to produce and sell inventory and collect receivables). A company with a
longer operating cycle would have a longer budget period. Since a company that makes bicycles and scooters does not have the longest operating
cycle of the options listed, this company likely does not have the longest budget period. Therefore, this is an incorrect answer.
Rationale
 A company that makes tennis shoes
A company's budget period is tied to its operating cycle (the time it takes to produce and sell inventory and collect receivables). A company with a
longer operating cycle would have a longer budget period. Since a company that makes tennis shoes does not have the longest operating cycle of
the options listed, this company likely does not have the longest budget period. Therefore, this is an incorrect answer.
Question 7
1.B.2.l
tb.bud.proc.031_1805
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which of the following is not a step in an ideal budget process?
The budget draft is revised in an iterative process based on discussion between participants at different management levels.
Budget participants outside of top management prepare an initial budget draft.
Your Answer
The initial budget draft is submitted to the next management level up for review and input.
Correct
Line managers approve the final budget.
Rationale
 The budget draft is revised in an iterative process based on discussion between participants at different management levels.
In the ideal approach, the initial budget draft is revised in an iterative process based on discussion between participants at different management
levels. The “back and forth” discussion is likely to improve the budget as participants at different levels likely have different areas of expertise.
Bringing together these diverse experiences likely improves the budget; therefore, this is an incorrect answer.
Rationale
 Budget participants outside of top management prepare an initial budget draft.
In the ideal approach, the initial budget draft is prepared by budget participants outside of top management as these individuals likely have the
best information concerning the area's activities and environment. This results in the most accurate initial draft; therefore, this is an incorrect
answer.
Rationale
 The initial budget draft is submitted to the next management level up for review and input.
In the ideal approach, the initial budget draft is reviewed by the next level of management. While the next management level up may not possess
the same level of information concerning the area's activities, they can provide a “fresh look” at the budget that the preparers cannot provide and
can review the budget to ensure it is consistent with the strategic direction of the organization. This review is likely to improve the budget;
therefore, this is an incorrect answer.
Rationale
 Line managers approve the final budget.
An ideal budget process blends ideas from an authoritative (top-down) approach with ideas from a participative (bottom-up) approach. In the ideal
approach, the initial budget draft is revised in an iterative process based on discussion between participants at different management levels. Once
this process is complete, top management, not line managers, reviews the budget and approves it. Top management approving the budget likely
improves it because top management is in the best position to ensure it is consistent with the strategic direction of the company. Line managers
lack this perspective; therefore, this is the correct answer.
Question 8
1.B.2.k
1B2-W012
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
"A higher authority, other than the team that developed a budget, must review and approve the budget." How does this contribute to a successful
budget?
Correct
Higher authorities will be able to identify flaws and discrepancies in a budget.
Higher authorities are able to enforce a budget more effectively.
Your Answer
A budget authorized by higher authorities is considered more realistic by employees.
A budget authorized by higher authorities contains technically correct and reasonably accurate estimates.
Rationale
 Higher authorities will be able to identify flaws and discrepancies in a budget.
Higher authorities are in a better position to identify flaws and discrepancies in a budget. They are also capable of identifying unrealistic goals and
targets set in the budget. Moreover, they also vouch for the adequacy of the targets. Managers sometimes set low targets which are easily
attainable in order to meet performance standards. However, this affects organizational goals in the long run.
Rationale
 Higher authorities are able to enforce a budget more effectively.
This answer is incorrect. Authorization of budget by higher authorities does not guarantee that it will be enforced effectively and efficiently.
Rationale
 A budget authorized by higher authorities is considered more realistic by employees.
This answer is incorrect. If the budget includes unrealistic goals and targets, the employees will not strive to achieve them irrespective of the fact
that they have been approved by the higher authorities.
Rationale
 A budget authorized by higher authorities contains technically correct and reasonably accurate estimates.
This answer is incorrect. A budget authorized by higher authorities does not guarantee technically correct and reasonably accurate numbers and
facts. It can also include unrealistic targets and goals. Thus budgets authorized by higher authorities are not always successful budgets.
Question 9
1.B.2.f
aq.bud.proc.001_1802
LOS: 1.B.2.f
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
How does the budgeting process facilitate communication among organizational units?
The budgeting process has nothing to do with communication among organization units.
Your Answer
The smaller and more simple the organization, the more crucial it is to develop clear budgets to support communication and coordination. Budgets
help divisions know what resources they can expect to receive, but not what deliverables they are expected to provide.
Correct
The bigger and more complex the organization, the more crucial it is to develop clear budgets to support communication and coordination. Budgets
help divisions know what resources they can expect to receive, and what deliverables they are expected to provide.
The bigger and more complex the organization, the more crucial it is to develop clear budgets to support communication and coordination. Budgets
help divisions know what resources they can expect to receive, but not what deliverables they are expected to provide.
Rationale
 The budgeting process has nothing to do with communication among organization units.
Budgeting should be one of the key tools in the organization to facilitate communication and coordination between individuals and divisions within
the organization.
Rationale
 The smaller and more simple the organization, the more crucial it is to develop clear budgets to support communication and
coordination. Budgets help divisions know what resources they can expect to receive, but not what deliverables they are expected to
provide.
Clear budgets that support communication and coordination are increasingly more important in bigger and more complex organizations.
Rationale
 The bigger and more complex the organization, the more crucial it is to develop clear budgets to support communication and
coordination. Budgets help divisions know what resources they can expect to receive, and what deliverables they are expected to provide.
This statement describes how the budgeting process facilitates communication among organizational units.
Rationale
 The bigger and more complex the organization, the more crucial it is to develop clear budgets to support communication and
coordination. Budgets help divisions know what resources they can expect to receive, but not what deliverables they are expected to
provide.
Budgets also help divisions know what deliverables they are expected to provide.
Question 10
1.B.2.i
1B2-W006
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Under which of the following circumstances will relying on historical costs provide faulty results?
Correct
When historical data does not take into account the impact of new technologies.
Your Answer
When historical data does not perpetuate past inefficiencies.
When historical data is approved by the budget committee.
When historical data does not account for inflation.
Rationale
 When historical data does not take into account the impact of new technologies.
Historical data can perpetuate past inefficiencies or fail to take into account the impact of new technologies. Therefore, relying on historical data
for determining costs is not always feasible.
Rationale
 When historical data does not perpetuate past inefficiencies.
This answer is incorrect. Historical data can perpetuate past inefficiencies. However when it does not include past inefficiencies, using it will
provide more accurate results.
Rationale
 When historical data is approved by the budget committee.
This answer is incorrect. Historical data approved by the budget committee is less likely to have errors and inconsistencies. Therefore, relying on it
will not provide faulty results.
Rationale
 When historical data does not account for inflation.
This answer is incorrect. Historical data does not account for inflation by nature. Hence, it cannot contribute to faulty results.
Question 11
1.B.2.l
tb.bud.proc.032_1805
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Sotelo Restaurants produced a one-year budget. At the end of the year, top managers and executives were disappointed to find that they had spent 8%
more than they had planned without a compensating increase in sales. What is the most likely reason for this?
Correct
Lower-level managers felt the budget was unfair.
The budget was not enforced by the accounting team.
Your Answer
The budget was not based on sales forecasts.
Lower-level managers felt that they could exceed the goals set by executives.
Rationale
 Lower-level managers felt the budget was unfair.
It appears that Sotelo's budget was not followed very closely. This indicates that the budget was not accepted by lower-level managers, likely
because they felt it was unfair. When lower-level managers believe a budget is unfair, they are less likely to respect spending limits established by
the budget. This results in spending in excess of planned spending without a compensating increase in sales. Therefore, this is the correct answer.
Rationale
 The budget was not enforced by the accounting team.
It appears that Sotelo's budget was not followed very closely. It is typically not the accounting team's responsibility to enforce budget spending
limits; rather, it is the responsibility of department management to enforce the limits. Therefore, this is an incorrect answer.
Rationale
 The budget was not based on sales forecasts.
It also appears the budget was based on sales forecasts, but it was not followed very closely. The reason for this is that spending was higher than
expected even though sales were not higher than expected. If the budget was not based on sales forecasts, then it would not be appropriate to link
spending increases to sales. This is an incorrect answer.
Rationale
 Lower-level managers felt that they could exceed the goals set by executives.
It appears that lower-level managers did not believe they could exceed the goals set by executives. The reason for this is that spending was higher
than expected even though sales were as expected, which indicates that goals were not exceeded. Therefore, this is an incorrect answer.
Question 12
1.B.2.g
aq.bud.proc.002_0720
LOS: 1.B.2.g
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which costs should managers be held responsible for and evaluated on their ability to manage?
All costs because managers should be responsible to help accurately plan all costs.
Your Answer
Only variable costs because these costs vary with the amount of units produced.
Only critical costs because these are the most important costs to the organization.
Correct
Only controllable costs; otherwise, managers may have incentive to build budgetary slack into cost estimates.
Rationale
 All costs because managers should be responsible to help accurately plan all costs.
While it is true that managers should be responsible to help accurately plan all costs, they should not be evaluated based on all costs.
Rationale
 Only variable costs because these costs vary with the amount of units produced.
Variable costs might encompass all costs a manager should be held responsible for; however, there may be other types of costs that managers
should be responsible to manage.
Rationale
 Only critical costs because these are the most important costs to the organization.
While many costs are important to the organization, this term does not accurately describe the costs that managers should be held responsible for.
Rationale
 Only controllable costs; otherwise, managers may have incentive to build budgetary slack into cost estimates.
Successful budgeting requires accurate estimates of costs, which managers help provide. However, some planned costs are not controllable (e.g.,
property taxes, certain salaries, etc.). Managers should be responsible to help accurately plan (i.e., forecast) all costs, but their performance should
be evaluated only on costs they can control. When managers are held responsible for costs they cannot control, the incentive is strong to
overestimate costs in order to build slack into these cost estimates. Budgetary slack provides cushion for the manager in the event uncontrollable
costs are higher. However, budgetary slack reduces the accuracy and usefulness of budget plans for the whole organization.
Question 13
1.B.2.i
tb.bud.proc.002_1805
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which of the following companies is likely to have the shortest budget period?
A company that makes furniture
Correct
A company that makes bath towels
Your Answer
A company that makes houses
A company that makes corporate office buildings
Rationale
 A company that makes furniture
A company's budget period is tied to its operating cycle (the time it takes to produce and sell inventory and collect receivables). A company with a
shorter operating cycle would have a shorter budget period. Since a company that makes furniture does not have the shortest operating cycle of
options listed, this company likely does not have the shortest budget period. Therefore, this is an incorrect answer.
Rationale
 A company that makes bath towels
A company's budget period is tied to its operating cycle (the time it takes to produce and sell inventory and collect receivables). A company with a
shorter operating cycle would have a shorter budget period. Since a company making bath towels has the shortest operating cycle of any of these
companies, it likely has the shortest budget period. Therefore, this is the correct answer.
Rationale
 A company that makes houses
A company's budget period is tied to its operating cycle (the time it takes to produce and sell inventory and collect receivables). A company with a
shorter operating cycle would have a shorter budget period. Since a company that builds houses has a long operating cycle, this company likely
does not have the shortest budget period. Therefore, this is an incorrect answer.
Rationale
 A company that makes corporate office buildings
A company's budget period is tied to its operating cycle (the time it takes to produce and sell inventory and collect receivables). A company with a
shorter operating cycle would have a shorter budget period. Since a company that builds corporate office buildings has a long operating cycle, this
company likely does not have the shortest budget period. Therefore, this is an incorrect answer.
Question 14
1.B.2.f
tb.bud.proc.011_1805
LOS: 1.B.2.f
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning the budgeting process is not correct?
Coordination of activities is an important part of the budgeting process.
Communication between organizational units is an important part of the budgeting process.
Correct
Each unit within an organization should prepare its budget independent of other units.
Each unit within an organization should communicate its plans to other units within the organization.
Rationale
 Coordination of activities is an important part of the budgeting process.
Since plans in one area may impact the plans in another area (for example, one product uses the product of another area), it is important that
different areas coordinate their activities and plans; therefore, this is an incorrect answer.
Rationale
 Communication between organizational units is an important part of the budgeting process.
It is important that different areas communicate with each other so that they can coordinate their activities; therefore, this is an incorrect answer.
Rationale
 Each unit within an organization should prepare its budget independent of other units.
Budgeting involves setting plans for all areas of the organization. Since plans in one area may impact the plans in another area (for example, one
product uses the product of another area), it is important that different areas communicate their plans so that they can coordinate their activities.
Each area preparing its budget independent of other units makes it difficult for the areas to coordinate their activities; therefore, this is the correct
answer.
Rationale
 Each unit within an organization should communicate its plans to other units within the organization.
It is important that different areas communicate their plans so that they can coordinate their activities; therefore, this is an incorrect answer.
Question 15
1.B.2.l
tb.bud.proc.030_1805
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which of the following is not a step in an ideal budget process?
Top management defines strategic direction for budget participants.
Budget participants outside of top management prepare an initial budget draft.
Correct
The initial budget draft is submitted for final review and approval.
Top management approves the final budget.
Rationale
 Top management defines strategic direction for budget participants.
In the ideal approach, top management defines the strategic direction for budget participants. This likely improves the budget because top
management has a “big picture” view of the organization's strategic direction; therefore, this is an incorrect answer.
Rationale
 Budget participants outside of top management prepare an initial budget draft.
In the ideal approach, the initial budget draft is prepared by budget participants outside of top management as these individuals likely have the
best information concerning the area's activities and environment. This results in the most accurate initial draft; therefore, this is an incorrect
answer.
Rationale
 The initial budget draft is submitted for final review and approval.
An ideal budget process blends ideas from an authoritative (top-down) approach with ideas from a participative (bottom-up) approach. In the ideal
approach, the initial budget draft is reviewed by the next level of management, not immediately submitted for final review and approval. Having
the next level of management provide a “fresh look” at the initial draft is likely to improve the budget as they may have insights the initial drafters
do not have. Immediately submitting the initial draft for final approval will make this improvement impossible; therefore, this is the correct answer.
Rationale
 Top management approves the final budget.
In the ideal approach, the initial budget draft is revised in an iterative process based on discussion between participants at different management
levels. Once this process is complete, top management reviews the budget and approves it. This step likely improves the budget because top
management is in the best position to ensure the budget is consistent with the strategic direction of the company; therefore, this is an incorrect
answer.
Question 16
1.B.2.k
1B2-LS19
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which one of the following items would most likely cause the planning and budgeting system to fail? The lack of:
*Source: Retired ICMA CMA Exam Questions.
input from several levels of management.
Correct
top management support.
historical financial data.
adherence to rigid budgets during the year
Rationale
 input from several levels of management.
This answer is incorrect. The planning and budgeting system can continue without the input from several levels of management.
Rationale
 top management support.
Receiving support from top management in an organization is an integral, if not the most important part of the planning and budgeting process. As
top management has responsibility of the overall strategic planning and budgeting of the organization, attaining the support and approval of top
management is of utmost importance.
Rationale
 historical financial data.
This answer is incorrect. The planning and budgeting system can continue without historical financial data.
Rationale
 adherence to rigid budgets during the year
This answer is incorrect. The planning and budgeting system can continue without adherence to rigid budgets during the year.
Question 17
1.B.2.j
aq.bud.proc.005_1802
LOS: 1.B.2.j
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which of the following correctly orders the budgeting process?
Form Budget Committee, Submit Budget Proposals, Negotiate Budget Proposals, Establish Budget Guidelines, Review & Approve the Final Budget
Your Answer
Establish Budget Guidelines, Form Budget Committee, Negotiate Budget Proposals, Submit Budget Proposals, Review & Approve the Final Budget
Establish Budget Guidelines, Form Budget Committee, Submit Budget Proposals, Negotiate Budget Proposals, Review & Approve the Final Budget
Correct
Form Budget Committee, Establish Budget Guidelines, Submit Budget Proposals, Negotiate Budget Proposals, Review & Approve the Final Budget
Rationale
 Form Budget Committee, Submit Budget Proposals, Negotiate Budget Proposals, Establish Budget Guidelines, Review & Approve the
Final Budget
Budget proposals are submitted prior to negotiation.
Rationale
 Establish Budget Guidelines, Form Budget Committee, Negotiate Budget Proposals, Submit Budget Proposals, Review & Approve the
Final Budget
A budget committee is formed prior to establishing budget guidelines. Budget proposals are submitted prior to negotiation.
Rationale
 Establish Budget Guidelines, Form Budget Committee, Submit Budget Proposals, Negotiate Budget Proposals, Review & Approve the
Final Budget
A budget committee is formed prior to establishing budget guidelines.
Rationale
 Form Budget Committee, Establish Budget Guidelines, Submit Budget Proposals, Negotiate Budget Proposals, Review & Approve the
Final Budget
This is the correct order of the budgeting process.
Question 18
1.B.2.g
tb.bud.proc.016_1805
LOS: 1.B.2.g
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which of the following is not correct concerning controllable costs?
Another name for a controllable cost is a discretionary cost.
Correct
A manager should be evaluated based on uncontrollable costs.
Your Answer
A cost is controllable if a manager or other decision-maker can change the amount spent on the item in a short period of time.
Variable costs are typically controllable costs.
Rationale
 Another name for a controllable cost is a discretionary cost.
Decision-makers can decide how much to spend on these items, which means the costs are discretionary; therefore, this is an incorrect answer.
Rationale
 A manager should be evaluated based on uncontrollable costs.
Since decision-makers cannot decide how much to spend on uncontrollable items, they should not be evaluated based on them; rather, they
should be evaluated based on controllable costs. Therefore, this is the correct answer.
Rationale
 A cost is controllable if a manager or other decision-maker can change the amount spent on the item in a short period of time.
Decision-makers can decide how much to spend on controllable items. A manager or other decision-maker can change the amount spent on the
item in a short period of time. This means that costs that can be changed in a short period of time are controllable costs; therefore, this is an
incorrect answer.
Rationale
 Variable costs are typically controllable costs.
Since variable costs vary based on volume, managers or other decision-makers can control the amount spent by changing the volume of activity.
This means they are controllable costs; therefore, this is an incorrect answer.
Question 19
1.B.2.i
cma11.p1.t1.me.0016_0820
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
A continuous budget is one that
*Source: Retired ICMA CMA Exam Questions.
is adjusted throughout the period for changing environmental factors.
Correct
is available for a specified future period by adding a period to the period that just ended.
Your Answer
is created after the organization has been operating for at least one period.
uses the prior period's actual results as the current period's budget.
Rationale
 is adjusted throughout the period for changing environmental factors.
This answer is incorrect. Although a continuous budget may be adjusted for changing environmental factors, it is always available for a specified
future period by adding a period to the period that just ended.
Rationale
 is available for a specified future period by adding a period to the period that just ended.
A continuous budget, also known as a rolling budget or a rolling forecast, is always available for a specified future period by adding a period
(month, quarter, or year) to the period that just ended.
Rationale
 is created after the organization has been operating for at least one period.
This answer is incorrect. A continuous budget can be created before an organization has been operational. It is defined as a budget that is always
available for a specified future period by adding a period to the period that just ended.
Rationale
 uses the prior period's actual results as the current period's budget.
This answer is incorrect. A “continuous budget” is defined as a budget that is always available for a specified future period by adding a period to the
period that just ended.
Question 20
1.B.2.g
tb.bud.proc.004_1805
LOS: 1.B.2.g
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
In comparing the production budget to the actual production costs, the CFO found that production's expenses were 14% higher than expected. Because
they were able to compare actual to budgeted financial numbers, the CFO and the production manager worked out a way to reduce production
expenses. In this situation, the budget served as which of the following?
Motivator for production personnel
Way to plan ahead for production expenses
Correct
Early warning sign of problems
Substitute for proper management
Rationale
 Motivator for production personnel
Budgets provide estimates of expected revenues and expenses. One benefit of having these estimates is that they can be used as goals to motivate
performance. An example of using the budget to motivate production personnel would be paying bonuses if production expense estimates are
achieved. The budget in this situation is not being used to motivate performance; therefore, this is an incorrect answer.
Rationale
 Way to plan ahead for production expenses
Budgets provide estimates of expected revenues and expenses. One benefit of having these estimates is that they can be used to plan ahead to
ensure adequate resources are on hand to pay expenses. An example of using the budget in this way would be establishing a line of credit just in
case expected cash inflows are not enough to cover expected cash outflows. The budget in this situation is not being used as a way to plan ahead
for production expenses; therefore, this is an incorrect answer.
Rationale
 Early warning sign of problems
Budgets provide estimates of expected revenues and expenses. One benefit of having these estimates is that actual results can be compared to the
estimates to see if the company is meeting expectations. If expectations are not being met, steps can be taken early in the period to correct
performance. Without the estimates, current performance cannot be placed into context. In this way, the budget provides an early warning sign of
problems. Comparing actual production expenses to budgeted expenses is an example of using the budget as an early warning sign of problems.
Therefore, this is the correct answer.
Rationale
 Substitute for proper management
Budgets provide estimates of expected revenues and expenses. They are never a substitute for proper management. Therefore, this is an incorrect
answer.
Question 21
1.B.2.j
tb.bud.proc.007_1805
LOS: 1.B.2.j
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
For the past three years, Apex Industries has employed top-down budgeting. Throughout that entire period, the firm's budgeted costs and revenues have
differed significantly from its actual numbers. Apex's CEO believes the best way to remedy this issue is to switch to bottom-up budgeting, and he asks
your opinion of his idea. What is your best response?
“I'm not sure if that's a good idea. Bottom-up budgeting actually decreases a budget's likelihood of accuracy in that it encourages managers to pad
their estimates. Furthermore, bottom-up budgeting is usually more time consuming than top-down budgeting.”
Correct
“Bottom-up budgeting will likely produce more accurate numbers, but only if you take care to ensure that the firm's lower-level managers are not
manipulating their forecasts to make their performance look better than it really is. Also, it's important to remember that bottom-up budgeting is
usually more time consuming than top-down budgeting.”
“Bottom-up budgeting offers several benefits in that it takes less time than top-down budgeting and is more likely to ensure that lower-level
managers are committed to meeting their budgeted numbers. However, there is no evidence indicating that bottom-up budgets are any more
accurate than top-down budgets.”
“That sounds like a great plan. As compared to top-down budgeting, bottom-up budgeting is more accurate, more likely to produce high levels of
managerial commitment, and far less time consuming.”
Rationale
 “I'm not sure if that's a good idea. Bottom-up budgeting actually decreases a budget's likelihood of accuracy in that it encourages
managers to pad their estimates. Furthermore, bottom-up budgeting is usually more time consuming than top-down budgeting.”
Although it is true that this budgeting approach takes a fair amount of time and resources to get information from lower-level managers and lowerlevel managers have an opportunity to add budget slack, experience indicates that bottom-up budgeting generally produces more accurate
budgets than does top-down budgeting. Therefore, this is an incorrect answer.
Rationale
 “Bottom-up budgeting will likely produce more accurate numbers, but only if you take care to ensure that the firm's lower-level
managers are not manipulating their forecasts to make their performance look better than it really is. Also, it's important to remember
that bottom-up budgeting is usually more time consuming than top-down budgeting.”
One advantage of a bottom-up approach is that lower-level managers typically have “better” information about operations than upper-level
managers. This better information will hopefully lead to a more accurate budget. Another advantage is that employees and managers are more
likely to “buy into” the budget and adhere to it because they were involved in developing it. A couple of disadvantages to this budgeting approach
are that it takes a fair amount of time and resources to get this information and lower-level managers have an opportunity to add budget slack to
the budget. If done properly, bottom-up budgeting generally produces more accurate budgets than does top-down budgeting. Therefore, this is the
correct answer.
Rationale
 “Bottom-up budgeting offers several benefits in that it takes less time than top-down budgeting and is more likely to ensure that lowerlevel managers are committed to meeting their budgeted numbers. However, there is no evidence indicating that bottom-up budgets are
any more accurate than top-down budgets.”
One advantage of this process over a top-down approach is that employees and managers are more likely to “buy into” the budget and adhere to it
because they were involved in developing it; however, it generally takes more time than the top-down approach as it takes a fair amount of time to
get information from lower-level managers. If done properly, experience indicates that bottom-up budgeting generally produces more accurate
budgets than does top-down budgeting because of the information provided by lower-level managers. Therefore, this is an incorrect answer.
Rationale
 “That sounds like a great plan. As compared to top-down budgeting, bottom-up budgeting is more accurate, more likely to produce high
levels of managerial commitment, and far less time consuming.”
This approach typically leads to a more accurate budget with higher levels of managerial commitment because lower-level managers typically have
“better” information about operations than upper-level managers and employees and managers are more likely to “buy into” the budget and
adhere to it because they were involved in its development. However, the bottom-up approach generally takes more time than the top-down
approach as it takes a fair amount of time to get information from lower-level managers. Therefore, this is an incorrect answer.
Question 22
1.B.2.f
tb.bud.proc.015_1805
LOS: 1.B.2.f
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which of the following is an example of the budgeting process facilitating communication and coordination of organizational activities?
Correct
The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the director of financial aid.
The manager of a product line shares its budget to increase output by 15% with the entire department.
Your Answer
The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the dean of another business college.
The director of new car sales at a car dealership shares its plan to increase sales by 20% with the local chamber of commerce.
Rationale
 The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the director of financial aid.
Budgeting involves setting plans for all areas of the organization. Since plans in one area may impact the plans in another area, it is important that
different areas coordinate their activities and plans. The dean of the business college sharing its plan to increase undergraduate enrollment by 10%
with the director of financial aid is an example of the budgeting process facilitating communication and coordination of organizational activities
since increasing undergraduate enrollment in the business college is likely to impact the use of financial aid; therefore, this is the correct answer.
Rationale
 The manager of a product line shares its budget to increase output by 15% with the entire department.
This is not an example of the budgeting process facilitating communication and coordination of organizational activities since sharing the budget
with the department does not involve communicating or coordinating with another area within the organization; therefore, this is an incorrect
answer.
Rationale
 The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the dean of another business
college.
This is not an example of the budgeting process facilitating communication and coordination of organizational activities since sharing the budget
with the dean of another college does not involve communicating or coordinating with another area within the organization; therefore, this is an
incorrect answer.
Rationale
 The director of new car sales at a car dealership shares its plan to increase sales by 20% with the local chamber of commerce.
This is not an example of the budgeting process facilitating communication and coordination of organizational activities since sharing the budget
with the local chamber of commerce does not involve communicating or coordinating with another area within the organization; therefore, this is
an incorrect answer.
Question 23
1.B.2.k
tb.bud.proc.024_1805
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning top management's role in successful budgeting is not correct?
Top management needs to make sure all levels of an organization understand and support a finalized budget for it to be successful.
Top management is ultimately responsible for budgets.
Correct
Top management needs to prepare budgets for them to be successful.
Your Answer
A budget not endorsed by top management is less likely to be followed by line managers than a budget endorsed by top management.
Rationale
 Top management needs to make sure all levels of an organization understand and support a finalized budget for it to be successful.
Top management needs to make sure all levels of an organization understand and support a finalized budget; otherwise, it will not be followed or
successful; therefore, this is an incorrect answer.
Rationale
 Top management is ultimately responsible for budgets.
Top management is ultimately responsible for its organization's budgets since it is ultimately responsible for all activities within the organization;
therefore, this is an incorrect answer.
Rationale
 Top management needs to prepare budgets for them to be successful.
Top management is ultimately responsible for its organization's budgets; however, this does not mean that top management should prepare
budgets. Line managers are likely to know more about their operations than top managers know; therefore, this is the correct answer.
Rationale
 A budget not endorsed by top management is less likely to be followed by line managers than a budget endorsed by top management.
If top management does not endorse the budget, then line managers are likely to conclude that top managers do not consider the budget to be
legitimate or important. If this happens, they are less likely to follow it; therefore, this is an incorrect answer.
Question 24
1.B.2.k
tb.bud.proc.026_1805
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning successful budgeting is not correct?
Top management needs to make sure all levels of an organization understand and support a finalized budget for it to be successful.
Even though line managers typically have more input into budgets than top management has, top management is ultimately responsible for budgets.
Correct
Budgets created by top management are likely to be more successful than budgets created by line managers.
Your Answer
A budget endorsed by top management is more likely to be followed by line managers than a budget not endorsed by top management.
Rationale
 Top management needs to make sure all levels of an organization understand and support a finalized budget for it to be successful.
One way to increase the likelihood for a successful budget is for top management to get input and support for the budget from all levels of the
organization. Greater input and support makes a budget more accurate and therefore more successful; therefore, this is an incorrect answer.
Rationale
 Even though line managers typically have more input into budgets than top management has, top management is ultimately
responsible for budgets.
Top management is ultimately responsible for its organization's budgets since it is ultimately responsible for all activities within the organization.
Even though line managers have more input into budgets because of their knowledge and expertise, top management is still ultimately responsible
for them; therefore, this is an incorrect answer.
Rationale
 Budgets created by top management are likely to be more successful than budgets created by line managers.
Top management is ultimately responsible for its organization's budgets. However, this does not mean that top management should prepare
budgets. This is because line managers are likely to know more about their operations than top managers know; therefore, this is the correct
answer.
Rationale
 A budget endorsed by top management is more likely to be followed by line managers than a budget not endorsed by top management.
If top management endorses the budget, then line managers are likely to conclude that top managers consider the budget to be legitimate and
important. If this happens, they are more likely to follow it; therefore, this is an incorrect answer.
Question 25
1.B.2.k
tb.bud.proc.008_1805
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
Coordinating the preparation of the budget is the responsibility assigned to which of the following?
Accounting department
Top management
Correct
Budget committee
Your Answer
Lower levels of management
Rationale
 Accounting department
An organization's accounting department typically provides information to be used to prepare the budgets; however, the accounting department is
only one provider of inputs. Preparing a budget involves analyzing operational information that usually comes from outside the accounting
department. Therefore, this is an incorrect answer.
Rationale
 Top management
An organization's top management is typically involved in preparing and reviewing budgets; however, the preparation process is coordinated top
management as there is just too much information involved for top management to coordinate the process on its own. Therefore, this is an
incorrect answer.
Rationale
 Budget committee
Many organizations form a budget committee to coordinate the preparation of its budget. This committee typically comprises managers from each
department as well as top organization executives. This committee receives input from department managers concerning its activities and
operations and then develops budgets for the departments based on this information. Therefore, this is the correct answer.
Rationale
 Lower levels of management
An organization's lower management levels are typically involved in preparing budgets for their areas (especially when a bottom-up approach is
used); however, lower management would not coordinate the process. Therefore, this is an incorrect answer.
Question 26
1.B.2.k
aq.bud.proc.006_0720
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
This type of budgeting takes less time and resources and doesn't exhaust the employees as much, but the budget may have blind spots and may be
resisted by the employees.
What kind of budgeting approach does the above definition describe?
Bottom-up, authoritative budgeting approach
Correct
Top-down, authoritative budgeting approach
Your Answer
Top-down, participating budgeting approach
Bottom-up, participating budgeting approach
Rationale
 Bottom-up, authoritative budgeting approach
The above definition does not describe a bottom-up budgeting approach.
Rationale
 Top-down, authoritative budgeting approach
The above definition describes a top-down or authoritative budgeting approach.
Rationale
 Top-down, participating budgeting approach
The above definition does not describe a participating budgeting approach.
Rationale
 Bottom-up, participating budgeting approach
The above definition does not describe a bottom-up, participating budgeting approach.
Question 27
1.B.2.g
1B2-LS26
LOS: 1.B.2.g
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Upper management has a morale problem with middle management. Many middle managers are getting poor performance appraisals, but these
managers don't feel that they are to blame. Which of the following could best help this company out of their situation?
Base the performance appraisals only on variable costs.
Correct
Separate uncontrollable costs from controllable costs and judge managers only on the latter.
Your Answer
Separate product costs from period costs and judge managers only on the former.
Replace managers who get poor performance appraisals.
Rationale
 Base the performance appraisals only on variable costs.
This answer is incorrect. The performance appraisals should not be based on variable costs only, as managers have control over some fixed costs.
Rationale
 Separate uncontrollable costs from controllable costs and judge managers only on the latter.
Holding managers accountable for uncontrollable costs can be unmotivating. However, controllable costs, are useful for performance evaluations
and budgeting because managers perceive these as fair. Some fixed costs are controllable costs.
Rationale
 Separate product costs from period costs and judge managers only on the former.
This answer is incorrect. The performance appraisals should not be based on product costs only, as managers have control over some period costs.
Rationale
 Replace managers who get poor performance appraisals.
This answer is incorrect. Before replacing managers, ensure that performance appraisals are determined based on factors managers can control.
Question 28
1.B.2.l
1B4-AT03
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
The starting point for creating a master budget for a proprietary secretarial school would be:
estimating salaries of the instructors.
preparing the student recruiting budget.
Your Answer
preparing a capital expenditure budget.
Correct
forecasting enrollment.
Rationale
 estimating salaries of the instructors.
This answer is incorrect. The starting point for creating a master budget for a proprietary secretarial school is not estimating salaries of the
instructors.
Rationale
 preparing the student recruiting budget.
This answer is incorrect. The starting point for creating a master budget for a proprietary secretarial school is not preparing the student recruiting
budget.
Rationale
 preparing a capital expenditure budget.
This answer is incorrect. The starting point for creating a master budget for a proprietary secretarial school is not preparing a capital expenditure
budget.
Rationale
 forecasting enrollment.
The master budget always begins with the forecast of sales. Tuition from students is the revenue source in a proprietary school.
Question 29
1.B.2.l
tb.bud.proc.029_1805
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which of the following is not a step in an ideal budget process?
Top management defines strategic direction for budget participants.
Correct
Top management prepares an initial budget draft.
Your Answer
The initial budget draft is submitted to the next management level up for review and input.
Top management approves the final budget.
Rationale
 Top management defines strategic direction for budget participants.
In the ideal approach, top management defines the strategic direction for budget participants. This likely improves the budget because top
management has a “big picture” view of the organization's strategic direction; therefore, this is an incorrect answer.
Rationale
 Top management prepares an initial budget draft.
An ideal budget process blends ideas from an authoritative (top-down) approach with ideas from a participative (bottom-up) approach. In the ideal
approach, the initial budget draft is prepared by budget participants outside of top management, not by top management, as individuals outside of
top management likely have the best information concerning the area's activities and environment. Having top management prepare the initial
draft likely results in a relatively low quality draft; therefore, this is the correct answer.
Rationale
 The initial budget draft is submitted to the next management level up for review and input.
In the ideal approach, the initial budget draft is reviewed by the next level of management. While the next management level up may not possess
the same level of information concerning the area's activities, they can provide a “fresh look” at the budget that the preparers cannot provide and
can review the budget to ensure it is consistent with the strategic direction of the organization. This review is likely to improve the budget;
therefore, this is an incorrect answer.
Rationale
 Top management approves the final budget.
In the ideal approach, the initial budget draft is revised in an iterative process based on discussion between participants at different management
levels. Once this process is complete, top management reviews the budget and approves it. This step likely improves the budget because top
management is in the best position to ensure the budget is consistent with the strategic direction of the company; therefore, this is an incorrect
answer.
Question 30
1.B.2.g
bud.proc.tb.034_0120
LOS: 1.B.2.g
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
Controllable costs for responsibility accounting purposes are those costs that are directly influenced by which of the following?
Correct
A specific manager within a specific period of time
Your Answer
A change in activity
Production volume
Sales volume
Rationale
 A specific manager within a specific period of time
A responsibility accounting system is designed to facilitate the preparation of performance reports based on the items (cost, revenue, profit, and
investment) that managers are responsible for. A cost is considered controllable for responsibility accounting purposes if the cost can be directly
influenced by a given manager within a given period of time.
Rationale
 A change in activity
This answer is incorrect. Costs that are directly influenced by a change in activity are variable costs, not controllable costs for responsibility
accounting purposes.
Rationale
 Production volume
This answer is incorrect. Costs that are directly influenced by a change in production volume are variable costs, not controllable costs for
responsibility accounting purposes.
Rationale
 Sales volume
This answer is incorrect. Costs that are directly influenced by a change in sales volume are variable costs, not controllable costs for responsibility
accounting purposes.
Question 31
1.B.2.f
tb.bud.proc.012_1805
LOS: 1.B.2.f
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which of the following is not an example of the budgeting process facilitating communication and coordination of organizational activities?
The manager of a product line shares its budget to increase output by 15% with the manager of the shipping department.
Your Answer
The manager of a product line shares its budget to increase output by 15% with the manager of the quality control department.
The manager of a product line shares its budget to increase output by 15% with the manager of the human resources department.
Correct
The manager of a product line shares its budget to increase output by 15% with the entire department.
Rationale
 The manager of a product line shares its budget to increase output by 15% with the manager of the shipping department.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing output in this
department is likely to impact the shipping department; therefore, this is an incorrect answer.
Rationale
 The manager of a product line shares its budget to increase output by 15% with the manager of the quality control department.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing output in this
department is likely to impact the quality control department; therefore, this is an incorrect answer.
Rationale
 The manager of a product line shares its budget to increase output by 15% with the manager of the human resources department.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing output in this
department is likely to impact the human resources department; therefore, this is an incorrect answer.
Rationale
 The manager of a product line shares its budget to increase output by 15% with the entire department.
Budgeting involves setting plans for all areas of the organization. Since plans in one area may impact the plans in another area, it is important that
different areas coordinate their activities and plans. The manager of a product line sharing its budget to increase output by 15% with the entire
department is not an example of the budgeting process facilitating communication and coordination of organizational activities since sharing the
budget with the department does not involve communicating or coordinating with another area within the organization; therefore, this is the
correct answer.
Question 32
1.B.2.f
tb.bud.proc.014_1805
LOS: 1.B.2.f
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which of the following is not an example of the budgeting process facilitating communication and coordination of organizational activities?
The director of new car sales at a car dealership shares its plan to increase sales by 20% with the director of customer financing at the dealership.
Your Answer
The director of new car sales at a car dealership shares its plan to increase sales by 20% with the director of the service department at the dealership.
The director of new car sales at a car dealership shares its plan to increase sales by 20% with the director of marketing at the dealership.
Correct
The director of new car sales at a car dealership shares its plan to increase sales by 20% with the local chamber of commerce.
Rationale
 The director of new car sales at a car dealership shares its plan to increase sales by 20% with the director of customer financing at the
dealership.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing new car sales
is likely to impact the need for customer financing; therefore, this is an incorrect answer.
Rationale
 The director of new car sales at a car dealership shares its plan to increase sales by 20% with the director of the service department at
the dealership.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing new car sales
is likely to impact the use of the service department. Therefore, this is an incorrect answer.
Rationale
 The director of new car sales at a car dealership shares its plan to increase sales by 20% with the director of marketing at the
dealership.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing new car sales
is likely to require assistance from the marketing department; therefore, this is an incorrect answer.
Rationale
 The director of new car sales at a car dealership shares its plan to increase sales by 20% with the local chamber of commerce.
Budgeting involves setting plans for all areas of the organization. Since plans in one area may impact the plans in another area, it is important that
different areas coordinate their activities and plans. The director of new car sales sharing its plan to increase sales by 20% with local chamber of
commerce is not an example of the budgeting process facilitating communication and coordination of organizational activities since sharing the
budget with the local chamber of commerce does not involve communicating or coordinating with another area within the organization; therefore,
this is the correct answer.
Question 33
1.B.2.j
1B2-LS42
LOS: 1.B.2.j
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which one of the following statements concerning approaches for the budget development process is correct?
*Source: Retired ICMA CMA Exam Questions.
Your Answer
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.
With the information technology available, the role of budgets as an organizational communication device has declined.
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.
The authoritative approach to budgeting discourages strict adherence to strategic organizational goals.
Rationale
 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.
This answer is incorrect. Keeping budgeted goals fixed even if the sales forecast upon which they are based proves to be wrong is not a correct
statement about the budget development process.
Rationale
 With the information technology available, the role of budgets as an organizational communication device has declined.
This answer is incorrect. The role of budgets as an organizational communication device declining because of available information technology is
not a correct statement about the budget development process.
Rationale
 Since department managers have the most detailed knowledge about organizational operations, they should use this information as
the building blocks of the operating budget.
In the development of the operating budget, it is important that the department managers have a primary impact on the operating budgets as they
have the most knowledge necessary to make an informed decision of the resources necessary to operate the department effectively.
Rationale
 The authoritative approach to budgeting discourages strict adherence to strategic organizational goals.
This answer is incorrect. The authoritative approach to budgeting discourages strict adherence to strategic organizational goals is not a correct
statement about the budget development process.
Question 34
1.B.2.j
aq.bud.proc.009_0720
LOS: 1.B.2.j
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
Identify the contribution of employees who have expertise in critical products or processes in the preparation of participative budgets.
They are responsible for budget preparation and review of results.
They are responsible for communication of organizational goals to the operational level.
Your Answer
They help in identification and elimination of discrepancies between various budgets.
Correct
They aid in having a detailed understanding of the costs of a particular area.
Rationale
 They are responsible for budget preparation and review of results.
Process experts are nonmanagerial employees and, therefore, do not prepare or review the results of the budget.
Rationale
 They are responsible for communication of organizational goals to the operational level.
Process experts are nonmanagerial employees. They are not responsible for communication of organization goals to the operational level.
Rationale
 They help in identification and elimination of discrepancies between various budgets.
Process experts are nonmanagerial employees and, therefore, do not help in identification and elimination of discrepancies between various
budgets.
Rationale
 They aid in having a detailed understanding of the costs of a particular area.
When participative budgeting is used, certain key nonmanagerial employees are often added to the team. Team participants tend to be those who
have a detailed understanding of the costs for a particular area, especially those areas that are extremely complex or variable. Such participants
will not only bring more focus to a budget but can also help the division or team take ownership of the budget, which increases its likelihood of
being followed at the operational level.
Question 35
1.B.2.g
tb.bud.proc.005_1805
LOS: 1.B.2.g
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
It was nearing the end of the budgetary quarter, and the sales manager realized that his sales team had only reached 90% of the company's projected
sales for the quarter. He met with his sales staff to brainstorm ideas to boost sales over the next few days, and with the cooperation of his team they met
their sales goals. In this situation, the budget served as which of the following?
Early warning sign of problems
Your Answer
Way to plan ahead for sales promotions
Way to coordinate activities between departments
Correct
Motivator for sales personnel
Rationale
 Early warning sign of problems
Comparing actual sales to projected sales near the end of a quarter and then taking steps to boost sales to achieve the goals is not an example of
using the budget as an early warning sign of problems. An example of using the budget as an early warning sign of problems would be comparing
actual sales to projected sales in the first two weeks of a quarter. Therefore, this is an incorrect answer.
Rationale
 Way to plan ahead for sales promotions
Comparing actual sales to projected sales near the end of a quarter and then taking steps to boost sales to achieve the goals is not an example of a
way to plan ahead for sales promotions. An example of using the budget in this way would be to analyze expected sales patterns and plan
promotions for when sales are expected to drop. Therefore, this is an incorrect answer.
Rationale
 Way to coordinate activities between departments
Comparing actual sales to projected sales near the end of a quarter and then taking steps to boost sales to achieve the goals is not an example of
using the budget as a way to coordinate activities between departments as taking steps to increase sales likely only involves the sales departments.
An example of using the budget in this would be if the sales department and production department worked together to ensure products are
produced in time for sales to be made. Therefore, this is an incorrect answer.
Rationale
 Motivator for sales personnel
Budgets provide estimates of expected revenues and expenses. One benefit of having these estimates is that they can be used as goals to motivate
performance. The budgeted figures can be used to establish bonuses that will be paid if goals are achieved. Comparing actual sales to projected
sales near the end of a quarter and then taking steps to boost sales to achieve the goals is an example of using the budget as a motivator for sales
personnel. Therefore, this is the correct answer.
Question 36
1.B.2.h
tb.bud.proc.033_1809
LOS: 1.B.2.h
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 4
Which of the following statements concerning budgeting is correct?
Basing a budget on the organization's strategy makes it more difficult for the organization to allocate limited resources efficiently.
Basing a budget on the prior year's budget makes it more likely that the organization will allocate limited resources efficiently.
Correct
The budgeting process can be used to efficiently allocate organizational resources.
The budgeting process is an important process since organizations typically have unlimited resources.
Rationale
 Basing a budget on the organization's strategy makes it more difficult for the organization to allocate limited resources efficiently.
Incorrect. An organization's strategy lays out the path it plans to take to achieve its goals. Basing a budget on the strategy increases the likelihood
that important initiatives will receive adequate funding. If this occurs, then it will be easier, not harder, for the organization to allocate limited
resources efficiently.
Rationale
 Basing a budget on the prior year's budget makes it more likely that the organization will allocate limited resources efficiently.
Incorrect. Basing a budget on the prior year's budget is a relatively easy way to budget since much of the work has already been done. However,
this is not likely to result in an efficient allocation of resources since what should be funded in one year may be different from what should be
funded in another year. As a result, the organization is less likely to allocate limited resources efficiently, not more likely.
Rationale
 The budgeting process can be used to efficiently allocate organizational resources.
Correct. An organization's strategy lays out the path it plans to take to achieve its goals. If the budget is based on this strategy, then the
organization will be making the best use of its limited resources.
Rationale
 The budgeting process is an important process since organizations typically have unlimited resources.
Incorrect. An organization cannot typically fund all possible initiatives because it has a finite or limited amount of resources, not unlimited
resources.
Question 37
1.B.2.i
tb.bud.proc.022_1805
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning budgeting timeframes is correct?
A capital budget typically covers a shorter period of time than an operational budget typically covers.
A capital budget and an operational budget typically cover a similar period of time.
Correct
A capital budget typically covers a longer period of time than an operational budget typically covers.
Your Answer
Sometimes a capital budget covers a longer period of time than an operational budget covers and sometimes a capital budget covers a shorter period
of time than an operational budget covers.
Rationale
 A capital budget typically covers a shorter period of time than an operational budget typically covers.
A capital budget typically does not cover a shorter period of time than an operational budget covers; therefore, this is an incorrect answer.
Rationale
 A capital budget and an operational budget typically cover a similar period of time.
Budgets cover different timeframes based on what type of activities the budget focuses on. Capital budgets and operational budgets focus on
different activities. This means a capital budget and an operational budget typically cover different periods of time; therefore, this is an incorrect
answer.
Rationale
 A capital budget typically covers a longer period of time than an operational budget typically covers.
Budgets cover different timeframes based on what type of activities the budget focuses on. Capital budgets focus on long-term plans. As a result,
they typically cover five to ten years of activity. Operational budgets focus on short-term plans in response to current operating conditions. As a
result, they typically cover one year or less of activity. This means a capital budget typically covers a longer period of time than an operational
budget covers; therefore, this is the correct answer.
Rationale
 Sometimes a capital budget covers a longer period of time than an operational budget covers and sometimes a capital budget covers a
shorter period of time than an operational budget covers.
Budgets cover different timeframes based on what type of activities the budget focuses on. Capital budgets and operational budgets focus on
different activities so one will typically cover a longer time period than the other; therefore, this is an incorrect answer.
Question 38
1.B.2.g
tb.bud.proc.018_1805
LOS: 1.B.2.g
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which of the following is an example of a cost that is not controllable with respect to a production manager?
Maintenance workers hired by the production manager who work exclusively at the manufacturing facility
The salary of supervisors hired by the production manager to oversee second and third shift operations
Your Answer
Rent on the manufacturing facility that is negotiated annually by the production manager
Correct
Maintenance workers hired by the head of facilities and who are assigned to different areas of the company by the head of facilities
Rationale
 Maintenance workers hired by the production manager who work exclusively at the manufacturing facility
Since the maintenance workers are hired by the production manager and work exclusively at the manufacturing facility, this cost is controllable by
the production manager; therefore, this is an incorrect answer.
Rationale
 The salary of supervisors hired by the production manager to oversee second and third shift operations
Since the supervisors are hired by the production manager, this cost is controllable by the production manager; therefore, this is an incorrect
answer
Rationale
 Rent on the manufacturing facility that is negotiated annually by the production manager
Since the rent is negotiated annually by the production manager, this cost is controllable by the production manager; therefore, this is an incorrect
answer.
Rationale
 Maintenance workers hired by the head of facilities and who are assigned to different areas of the company by the head of facilities
Decision-makers can decide how much to spend on controllable items. Since the production manager does not hire the maintenance workers or
control how many work at the manufacturing facility, this cost is not controllable by the production manager; therefore, this is the correct answer.
Question 39
1.B.2.k
1B2-AT10
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which one of the following is the most important factor in a successful budgeting effort?
Reliable forecasts and trend analysis.
Correct
Top management support.
Your Answer
Experienced analysts.
Integrated budget software.
Rationale
 Reliable forecasts and trend analysis.
This answer is incorrect. Having reliable forecasts and trend analysis is not the most important factor to a successful budgeting effort.
Rationale
 Top management support.
Top managers determine and significantly influence how budgets are perceived in their companies. Top management initiates the planning and
budgeting process and approves policies and procedures regulating it, which makes its support a crucial success factor for the budgeting process.
Rationale
 Experienced analysts.
This answer is incorrect. Having experienced analysts is not the most important factor to a successful budgeting effort.
Rationale
 Integrated budget software.
This answer is incorrect. Having integrated budget software is not the most important factor to a successful budgeting effort.
Question 40
1.B.2.k
tb.bud.proc.025_1805
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning successful budgeting is correct?
If top management understands and supports a finalized budget, it does not matter whether lower-level managers understand and support it.
Your Answer
Since line managers typically have more input into budgets than top management has, line managers are ultimately responsible for budgets.
Budgets created by top management are likely to be more successful than budgets created by line managers.
Correct
A budget endorsed by top management is more likely to be followed by line managers than a budget not endorsed by top management.
Rationale
 If top management understands and supports a finalized budget, it does not matter whether lower-level managers understand and
support it.
Lower-level managers are responsible for implementing the budget. If they do not understand or support the budget, they are less likely to be able
to successfully implement it; therefore, this is an incorrect answer.
Rationale
 Since line managers typically have more input into budgets than top management has, line managers are ultimately responsible for
budgets.
Top management is ultimately responsible for its organization's budgets since it is ultimately responsible for all activities within the organization.
Even though line managers have more input into budgets, top management is still ultimately responsible for them; therefore, this is an incorrect
answer.
Rationale
 Budgets created by top management are likely to be more successful than budgets created by line managers.
Line managers are likely to know more about their operations than top managers know so budgets created by top management are not likely to be
more successful than budgets created by line managers; therefore, this is an incorrect answer.
Rationale
 A budget endorsed by top management is more likely to be followed by line managers than a budget not endorsed by top management.
Top management is ultimately responsible for its organization's budgets. If top management endorses the budget, then line managers are likely to
conclude that top managers consider the budget to be legitimate and important. If this happens, they are more likely to follow it; therefore, this is
the correct answer.
Question 41
1.B.2.l
aq.bud.proc.007_0720
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which of the following is not a best practice guideline for the budget process?
Reduce budget complexity and budget cycle time so the budget does not disrupt the organization's core activities.
Link the budget to strategy so resources are allocated correctly.
Correct
Develop flexible budgets so the budget does not have to accommodate change.
Establish budget targets based on realistic expectations and based on stretch goals to balance planning and motivation purposes.
Rationale
 Reduce budget complexity and budget cycle time so the budget does not disrupt the organization's core activities.
This is a best practice guideline for the budget process.
Rationale
 Link the budget to strategy so resources are allocated correctly.
This is a best practice guideline for the budget process.
Rationale
 Develop flexible budgets so the budget does not have to accommodate change.
This does not describe a best practice guideline for the budget process. Flexible budgets are actually built to accommodate change.
Rationale
 Establish budget targets based on realistic expectations and based on stretch goals to balance planning and motivation purposes.
This is a best practice guideline for the budget process.
Question 42
1.B.2.h
aq.bud.proc.003_0720
LOS: 1.B.2.h
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
How does the budget affect the allocation of organization resources?
Your Answer
Spending money and positioning assets are not carried out in the day-to-day decisions taking place during the organization's period of operations.
Therefore, these decisions are not affected by the budget.
Correct
Spending money and positioning assets is carried out in the day-to-day decisions taking place during the organization's period of operations. These
decisions are planned, controlled, and evaluated as a core aspect of budgeting.
Spending money and positioning assets is carried out by management infrequently. These decisions are planned, controlled, and evaluated as a core
aspect of budgeting.
The budget does not affect the allocation of organization resources.
Rationale
 Spending money and positioning assets are not carried out in the day-to-day decisions taking place during the organization's period of
operations. Therefore, these decisions are not affected by the budget.
The process of allocating organization resources is planned, controlled, and evaluated as a core aspect of budgeting.
Rationale
 Spending money and positioning assets is carried out in the day-to-day decisions taking place during the organization's period of
operations. These decisions are planned, controlled, and evaluated as a core aspect of budgeting.
This correctly describes how the allocation of organizational resources is affected by the budget.
Rationale
 Spending money and positioning assets is carried out by management infrequently. These decisions are planned, controlled, and
evaluated as a core aspect of budgeting.
Spending money and positioning assets is actually carried out in the day-to-day decisions taking place during the organization's period of
operations.
Rationale
 The budget does not affect the allocation of organization resources.
The decision of allocating resources is planned, controlled, and evaluated as a core aspect of budgeting.
Question 43
1.B.2.l
1B2-CQ04
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
Which of the following is the correct order of the budgeting process?
Correct
Proposal, negotiation, review and approval, revision.
Negotiation, revision, review and approval, proposal.
Your Answer
Proposal, review and approval, negotiation, revision.
Negotiation, proposal, review and approval, revision.
Rationale
 Proposal, negotiation, review and approval, revision.
The steps that responsibility centers typically take in preparing their budgets include: the initial budget proposal aligned with the company's
strategic plan, budget negotiation with a supervisor or the budget committee, review and approval up the chain of command, and revision where
company practice dictates.
Rationale
 Negotiation, revision, review and approval, proposal.
This answer is incorrect. This answer mixes up the negotiation, revision, and proposal steps.
Rationale
 Proposal, review and approval, negotiation, revision.
This answer is incorrect. This answer mixes up the negotiation, review, and approval steps.
Rationale
 Negotiation, proposal, review and approval, revision.
This answer is incorrect. This answer mixes up the negotiation and proposal steps.
Question 44
1.B.2.f
tb.bud.proc.013_1805
LOS: 1.B.2.f
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Which of the following is not an example of the budgeting process facilitating communication and coordination of organizational activities?
Your Answer
The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the director of undergraduate housing.
The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the director of undergraduate advising.
The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the director of information technology.
Correct
The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the dean of another business college.
Rationale
 The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the director of undergraduate
housing.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing
undergraduate enrollment in the business college is likely to impact the need for undergraduate housing; therefore, this is an incorrect answer.
Rationale
 The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the director of undergraduate
advising.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing
undergraduate enrollment in the business college is likely to impact the need for undergraduate advising; therefore, this is an incorrect answer.
Rationale
 The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the director of information
technology.
This is an example of the budgeting process facilitating communication and coordination of organizational activities since increasing
undergraduate enrollment in the business college is likely to impact the need for information technology; therefore, this is an incorrect answer.
Rationale
 The dean of the business college shares its plan to increase undergraduate enrollment by 10% with the dean of another business
college.
Budgeting involves setting plans for all areas of the organization. Since plans in one area may impact the plans in another area, it is important that
different areas coordinate their activities and plans. The dean of the business college sharing its plan to increase undergraduate enrollment by 10%
with the dean of another business college is not an example of the budgeting process facilitating communication and coordination of
organizational activities since sharing the budget with the dean of another college does not involve communicating or coordinating with another
area within the organization; therefore, this is the correct answer.
Question 45
1.B.2.j
aq.bud.proc.008_0720
LOS: 1.B.2.j
Lesson Reference: The Budgeting Process
Difficulty: hard
Bloom Code: 5
Which of the following will likely result from eliminating the ability of SBU (strategic business unit) managers to negotiate changes made by the budget
committee in the final review and approval step of the budget process?
The budget process will take longer to complete.
Correct
The budget will be rigid and will be perceived as a pressure device by the employees.
Your Answer
The budget will contain more reasonably attainable standards rather than ideal standards.
SBU managers will feel more ownership in the final budget.
Rationale
 The budget process will take longer to complete.
By eliminating a negotiation step from the budget process, the budget committee will save some time and resources required to complete the final
budget. However, the committee may reduce some important qualities desired in the final budget that successfully moves the organization forward
to achieve its strategy.
Rationale
 The budget will be rigid and will be perceived as a pressure device by the employees.
Correct. The budget will likely be perceived as a rigid pressure device across the organization if there is no opportunity for SBU managers to
negotiate on revisions made by the budget committee.
Rationale
 The budget will contain more reasonably attainable standards rather than ideal standards.
It is likely that the budget will not contain more reasonably attainable standards. If the budget committee can make revisions to the budgets
submitted by SBU managers without any negotiation, then it is likely that some performance standards that managers feel are reasonably
attainable will be exchanged for standards more “ideal” to the organization's strategy.
Rationale
 SBU managers will feel more ownership in the final budget.
This is not necessarily true. It is possible that SBU managers may submit budgets that the budget committee finds acceptable. However, if
managers know that they do not have the opportunity to renegotiate based on the priorities of both SBU and the overall organization, they will feel
less ownership in the final budget.
Question 46
1.B.2.j
tb.bud.proc.006_1805
LOS: 1.B.2.j
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
Eliciting information from lower-level operating managers and their subordinates with the help of a bottom-up budgeting process is which of the
following?
Correct
A costly but beneficial exercise
Usually not worth the extra cost involved
Your Answer
An effective way to eliminate incentive payments
Effective only for small organizations
Rationale
 A costly but beneficial exercise
A bottom-up approach to planning a budget is one in which all levels of an organization take part in developing a budget, not just the top levels.
One advantage of this process is that lower-level managers typically have “better” information about operations than upper-level managers. This
better information will hopefully lead to a more accurate budget. Another advantage of this process over a top-down process is that employees and
managers are more likely to “buy into” the budget and adhere to it because they were involved in its development. One disadvantage though is that
it takes a fair amount of time and resources to get this information. This is typically a beneficial exercise; therefore, this is the correct answer.
Rationale
 Usually not worth the extra cost involved
This bottom-up approach to planning a budget is typically a useful exercise for companies even with the additional cost that comes with it;
therefore, this is an incorrect answer.
Rationale
 An effective way to eliminate incentive payments
One advantage of this process over a top-down process is that employees and managers are more likely to “buy into” the budget and adhere to it
because they were involved in its development. This greater motivation tends to make it more likely that incentive payments will be made, not less
likely. Therefore, this is an incorrect answer.
Rationale
 Effective only for small organizations
This budgeting process is effective in organizations of all sizes. In fact, it is often more effective for large organizations because it is much more
difficult for upper management to have enough information about all the various departments to use a top-down approach to budgeting.
Therefore, this is an incorrect answer.
Question 47
1.B.2.h
tb.bud.proc.020_1805
LOS: 1.B.2.h
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning budgeting is not correct?
Basing a budget on the organization's strategy helps the organization to allocate limited resources efficiently.
Correct
Basing a budget on the prior year's budget helps the organization to allocate limited resources efficiently.
If done properly, the budgeting process can be used to efficiently allocate organizational resources.
Your Answer
The budgeting process is an important process since organizations typically have a finite number of resources.
Rationale
 Basing a budget on the organization's strategy helps the organization to allocate limited resources efficiently.
An organization's strategy lays out the path it plans to take to achieve its goals. Basing a budget on the strategy increases the likelihood that
important initiatives will receive adequate funding; therefore, this is an incorrect answer.
Rationale
 Basing a budget on the prior year's budget helps the organization to allocate limited resources efficiently.
Basing a budget on the prior year's budget is a relatively easy way to budget since much of the work has already been done. However, this is not
likely to result in an efficient allocation of resources since what should be funded in one year may be different from what should be funded in
another year; therefore, this is the correct answer.
Rationale
 If done properly, the budgeting process can be used to efficiently allocate organizational resources.
An organization's strategy lays out the path it plans to take to achieve its goals. If the budget is based on this strategy, then the organization will be
making the best use of its limited resources; therefore, this is an incorrect answer.
Rationale
 The budgeting process is an important process since organizations typically have a finite number of resources.
An organization's strategy lays out the path it plans to take to achieve its goals. Basing a budget on the strategy increases the likelihood that
important initiatives will receive adequate funding. This is important since an organization cannot typically fund all possible initiatives because it
has a limited number of resources; therefore, this is an incorrect answer.
Question 48
1.B.2.i
tb.bud.proc.021_1805
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning budgeting timeframes is correct?
A capital budget typically covers one year or less of activity and an operational budget typically covers from five to ten years of activity.
Correct
A capital budget typically covers from five to ten years of activity and an operational budget typically covers one year or less of activity.
Your Answer
A capital budget and an operational budget typically cover from five to ten years of activity.
A capital budget and an operational budget typically cover one year or less of activity.
Rationale
 A capital budget typically covers one year or less of activity and an operational budget typically covers from five to ten years of activity.
Capital budgets focus on long-term plans, so they typically don't cover one year or less of activity. Operational budgets focus on short-term plans in
response to current operating conditions, so they will not typically cover five to ten years of activity. Therefore, this is an incorrect answer.
Rationale
 A capital budget typically covers from five to ten years of activity and an operational budget typically covers one year or less of activity.
Budgets cover different timeframes based on what type of activities the budget focuses on. Capital budgets focus on long-term plans. As a result,
they typically cover five to ten years of activity. In addition, operational budgets focus on short-term plans in response to current operating
conditions. As a result, they typically cover one year or less of activity. Therefore, this is the correct answer.
Rationale
 A capital budget and an operational budget typically cover from five to ten years of activity.
Budgets cover different timeframes based on what type of activities the budget focuses on. The capital budget and the operational budget will not
both cover five to ten years of activity; therefore, this is an incorrect answer.
Rationale
 A capital budget and an operational budget typically cover one year or less of activity.
Budgets cover different timeframes based on what type of activities the budget focuses on. The capital budget and the operational budget will not
both cover one year or less of activity; therefore, this is an incorrect answer.
Question 49
1.B.2.l
1B2-LS35
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
Which of the following is not a step in the budgeting process?
Budget Negotiation.
Correct
Budget Standard.
Budget Review and Approval.
Your Answer
Budget Proposal.
Rationale
 Budget Negotiation.
This answer is incorrect. Budget negotiation is a step in the budgeting process.
Rationale
 Budget Standard.
The steps that responsibility centers take in preparing their budgets include: the initial budget proposal, budget negotiation, review and approval,
and revision.
Rationale
 Budget Review and Approval.
This answer is incorrect. Budget review and approval is a step in the budgeting process.
Rationale
 Budget Proposal.
This answer is incorrect. Budget proposal is a step in the budgeting process.
Question 50
1.B.2.k
1B2-AT12
LOS: 1.B.2.k
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 2
Which one of the following best describes the role of top management in the budgeting process? Top management:
should only be involved in the approval process.
Correct
needs to be involved, including using the budget process to communicate goals.
Your Answer
needs to separate the budgeting process and the business planning process into two separate processes.
lacks the detailed knowledge of the daily operations and should limit their involvement.
Rationale
 should only be involved in the approval process.
This answer is incorrect. “Top management should only be involved in the approval process,” does not best describe the role of top management in
the budgeting process.
Rationale
 needs to be involved, including using the budget process to communicate goals.
Top management is ultimately responsible for the organization's budget. To exercise this responsibility, top managements ensures that all level of
management understand and support the budgeting process and its relationship to control and performance measurement.
Rationale
 needs to separate the budgeting process and the business planning process into two separate processes.
This answer is incorrect. “Top management needs to separate the budgeting process and the business planning process into two separate
processes,” does not best describe the role of top management in the budgeting process.
Rationale
 lacks the detailed knowledge of the daily operations and should limit their involvement.
This answer is incorrect. “Top management lacks the detailed knowledge of the daily operations and should limit their involvement,” does not best
describe the role of top management in the budgeting process.
Question 51
1.B.2.j
tb.bud.proc.010_1805
LOS: 1.B.2.j
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
In order to assure better management acceptance, the flow of input data for budgeting should begin in which area?
Accounting department
Correct
Lower levels of management
Your Answer
Top management
Budget committee
Rationale
 Accounting department
The accounting department's involvement in the budgeting process is to take information from operating units and then use that information to
prepare the budget. It is not the initial source of data used to develop the budget; therefore, this is an incorrect answer.
Rationale
 Lower levels of management
A bottom-up approach to planning a budget is one in which all levels of an organization take part in developing a budget, not just the top levels.
Lower-level managers provide the initial data that is used to prepare the budget to higher-level managers in this approach. One advantage of this
process over a top-down process is that employees and managers are more likely to “buy into” and accept the budget and adhere to it because
they were involved in developing the budget. Therefore, this is the correct answer.
Rationale
 Top management
In the top-down approach upper management sets the budget with little to no input from lower levels of the organization. Top management
provides the initial data and virtually all the information that is used to prepare the budget under this approach. This approach typically results in
weaker “buy in” and acceptance of the budget relative to other approaches because of the lack of involvement by those who will be implementing
the budget. Therefore, this is an incorrect answer.
Rationale
 Budget committee
A company can form a budget committee comprising managers from each department as well as top executives to help manage the budgeting
process. This committee receives input from department managers concerning its activities and operations and then develops budgets for the
departments based on this information. It is not the initial source of data used to prepare the budget; therefore, this is an incorrect answer.
Question 52
1.B.2.i
aq.bud.proc.004_0720
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: hard
Bloom Code: 5
Which of the following statements correctly describes the time frame for building and achieving a budget?
Correct
Beginning with the three-to-five-year focus of the strategy plan, budgets are typically designed by working backwards from the strategy to design oneto-three-year targets, followed by quarterly targets, monthly targets, and weekly targets. When operating with the budget, performance is achieved
by focusing on short-run operations (weekly or monthly), and working forward to achieve more long-run objectives in the quarterly and annual
budgets.
Your Answer
Beginning with the three-to-five-year focus of the strategy plan, budgets are typically designed by working backwards from the strategy to design oneto-three-year targets, followed by quarterly targets, monthly targets, and weekly targets. When operating with the budget, performance is achieved
by focusing on long-run operations (quarterly or yearly), and working backwards to achieve more short-run objectives in the weekly and monthly
budgets.
Beginning with the weekly or monthly focus of the strategy plan, budgets are typically designed by working forwards from the strategy to design
weekly targets, monthly targets, quarterly targets, and one-year targets. When operating with the budget, performance is achieved by focusing on
long-run operations (quarterly or yearly), and working backwards to achieve more short-run objectives in the weekly and monthly budgets.
Beginning with the weekly or monthly focus of the strategy plan, budgets are typically designed by working forwards from the strategy to design
weekly targets, monthly targets, quarterly targets, and one-year targets. When operating with the budget, performance is achieved by focusing on
short-run operations (weekly or monthly), and working forwards to achieve more long-run objectives in the quarterly and annual budgets.
Rationale
 Beginning with the three-to-five-year focus of the strategy plan, budgets are typically designed by working backwards from the
strategy to design one-to-three-year targets, followed by quarterly targets, monthly targets, and weekly targets. When operating with the
budget, performance is achieved by focusing on short-run operations (weekly or monthly), and working forward to achieve more long-run
objectives in the quarterly and annual budgets.
This statement correctly describes the time frame for building and achieving a budget.
Rationale
 Beginning with the three-to-five-year focus of the strategy plan, budgets are typically designed by working backwards from the
strategy to design one-to-three-year targets, followed by quarterly targets, monthly targets, and weekly targets. When operating with the
budget, performance is achieved by focusing on long-run operations (quarterly or yearly), and working backwards to achieve more shortrun objectives in the weekly and monthly budgets.
This statement is partially correct. Budgets are built working backwards from the long-run view. However, budgets are not achieved by working
backwards from the long-run view.
Rationale
 Beginning with the weekly or monthly focus of the strategy plan, budgets are typically designed by working forwards from the strategy
to design weekly targets, monthly targets, quarterly targets, and one-year targets. When operating with the budget, performance is
achieved by focusing on long-run operations (quarterly or yearly), and working backwards to achieve more short-run objectives in the
weekly and monthly budgets.
Budgets are neither built working forwards from the short-run view, nor achieved by working backwards from the long-run view.
Rationale
 Beginning with the weekly or monthly focus of the strategy plan, budgets are typically designed by working forwards from the strategy
to design weekly targets, monthly targets, quarterly targets, and one-year targets. When operating with the budget, performance is
achieved by focusing on short-run operations (weekly or monthly), and working forwards to achieve more long-run objectives in the
quarterly and annual budgets.
This statement is partially correct. Budgets are achieved working forwards from the short-run view. However, budgets are not built working
forwards from the short-run view.
Question 53
1.B.2.i
1B5-LS19
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 3
When presenting a production budget aggregated to the quarterly level, which of the following is true?
Correct
Sales are totaled for the three months, but ending inventory counts only the last month and beginning inventory counts only the first month.
Sales, beginning, and ending inventories are not totaled, but the last month's data is used for the quarterly totals.
Sales are totaled, and beginning and ending inventories are averaged across the quarter.
Your Answer
Sales, beginning, and ending inventories are totaled for each of the three months.
Rationale
 Sales are totaled for the three months, but ending inventory counts only the last month and beginning inventory counts only the first
month.
The sales totals are summed for the quarter, but beginning inventory for the quarter is the same as the beginning inventory for the first month while
ending inventory for the quarter is the ending inventory for the last month of the quarter.
Rationale
 Sales, beginning, and ending inventories are not totaled, but the last month's data is used for the quarterly totals.
This answer is incorrect. When presenting a production budget aggregated to the quarterly level, more than just the last month's data is used.
Rationale
 Sales are totaled, and beginning and ending inventories are averaged across the quarter.
This answer is incorrect. When presenting a production budget aggregated at the quarterly level, sales and beginning and ending inventories are
not averaged across the quarter.
Rationale
 Sales, beginning, and ending inventories are totaled for each of the three months.
This answer is incorrect. When presenting a production budget aggregated at the quarterly level, beginning and ending inventory are not totaled for
each of the three months.
Question 54
1.B.2.l
tb.bud.proc.028_1805
LOS: 1.B.2.l
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
Which of the following is not a step in an ideal budget process?
Correct
Line managers define strategic direction for budget participants.
Your Answer
Budget participants outside of top management prepare an initial budget draft.
The initial budget draft is submitted to the next management level up for review and input.
The budget draft is revised in an iterative process based on discussion between participants at different management levels.
Rationale
 Line managers define strategic direction for budget participants.
An ideal budget process blends ideas from an authoritative (top-down) approach with ideas from a participative (bottom-up) approach. In the ideal
approach, top management, not line managers, defines the strategic direction for budget participants. Line managers are unlikely to have the “big
picture” view that top management has, resulting in an incomplete view of the organization's strategic direction; therefore, this is the correct
answer.
Rationale
 Budget participants outside of top management prepare an initial budget draft.
In the ideal approach, the initial budget draft is prepared by budget participants outside of top management as these individuals likely have the
best information concerning the area's activities and environment. This results in the most accurate initial draft; therefore, this is an incorrect
answer.
Rationale
 The initial budget draft is submitted to the next management level up for review and input.
In the ideal approach, the initial budget draft is reviewed by the next level of management. While the next management level up may not possess
the same level of information concerning the area's activities, they can provide a “fresh look” at the budget that the preparers cannot provide and
can review the budget to ensure it is consistent with the strategic direction of the organization. This review is likely to improve the budget;
therefore, this is an incorrect answer.
Rationale
 The budget draft is revised in an iterative process based on discussion between participants at different management levels.
In the ideal approach, the initial budget draft is revised in an iterative process based on discussion between participants at different management
levels. The “back and forth” discussion is likely to improve the budget as participants at different levels likely have different areas of expertise.
Bringing together these diverse experiences likely improves the budget; therefore, this is an incorrect answer.
Question 55
1.B.2.i
tb.bud.proc.023_1805
LOS: 1.B.2.i
Lesson Reference: The Budgeting Process
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning budgeting timeframes is not correct?
Your Answer
A capital budget typically covers from five to ten years of activity and an operational budget typically covers one year or less of activity.
Correct
A capital budget typically covers one year or less of activity and an operational budget typically covers from five to ten years of activity.
An operational budget typically covers a shorter period of time than a capital budget typically covers.
Budgets cover different timeframes based on what type of activities the budget focuses on.
Rationale
 A capital budget typically covers from five to ten years of activity and an operational budget typically covers one year or less of activity.
Capital budgets focus on long-term plans. As a result, they typically cover five to ten years of activity. Operational budgets focus on short-term
plans in response to current operating conditions. As a result, they typically cover one year or less of activity. Therefore, this is an incorrect answer.
Rationale
 A capital budget typically covers one year or less of activity and an operational budget typically covers from five to ten years of activity.
Budgets cover different timeframes based on what type of activities the budget focuses on. Capital budgets focus on long-term plans. As a result,
they typically cover five to ten years of activity, not one year or less of activity. Operational budgets focus on short-term plans in response to current
operating conditions. As a result, they typically cover one year or less of activity, not five to ten years of activity. Therefore, this is the correct
answer.
Rationale
 An operational budget typically covers a shorter period of time than a capital budget typically covers.
Budgets cover different timeframes based on what type of activities the budget focuses on. Operational budgets focus on short-term plans in
response to current operating conditions and capital budgets focus on long-term plans. This means an operational budget typically covers a
shorter period of time than a capital budget covers. Therefore, this is an incorrect answer.
Rationale
 Budgets cover different timeframes based on what type of activities the budget focuses on.
Different types of budgets cover different timeframes based on what type of activities the budget focuses on. Therefore, this is an incorrect answer.
Question 56
1.B.2.j
tb.bud.proc.003_1805
LOS: 1.B.2.j
Lesson Reference: The Budgeting Process
Difficulty: medium
Bloom Code: 4
A company that uses the top-down approach rather than a participative process will feel the impact of its budgeting process mostly in which form?
Greater commitment of operating managers to the final budget
Your Answer
Longer time cycle required to prepare the budget
Correct
Lack of commitment of operating managers to the final budget
Greater flow of information from the bottom to the top
Rationale
 Greater commitment of operating managers to the final budget
A top-down approach to budgeting means the higher levels of a company (company executives) create budgets that are then distributed to the
lower levels of the company to be implemented. Since operating managers have little involvement in creating a budget under a top-down
approach, they are less likely to be committed to the budget created under this approach than to a budget created in a participative process.
Therefore, this is an incorrect answer.
Rationale
 Longer time cycle required to prepare the budget
Less debate and discussion is involved in a top-down budget approach so a budget created under this approach takes less time to create, not more
time. Therefore, this is an incorrect answer.
Rationale
 Lack of commitment of operating managers to the final budget
A top-down approach to budgeting means the higher levels of a company (company executives) create budgets that are then distributed to the
lower levels of the company to be implemented. A participative budget process is one where operating managers are involved with creating the
budget. Since operating managers have little involvement in creating a budget in a top-down approach, they are less likely to be committed to the
budget created under this approach than to a budget created in a participative process. Therefore, this is the correct answer.
Rationale
 Greater flow of information from the bottom to the top
Very little information flows from the bottom to the top under a top-down approach as company executives do not rely on input from lower levels
to create the budget. Therefore, this is an incorrect answer.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.2.p
tb.bud.stand.021_1809
LOS: 1.B.2.p
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning establishing standards is true?
Using historical data to establish standards is typically more difficult than using activity analysis to establish them.
Using historical data to establish standards is typically more expensive than using activity analysis to establish them.
Correct
Using historical data to establish standards is typically less accurate than using activity analysis to establish them.
Your Answer
Using historical data to establish standards is typically more time-consuming than using activity analysis to establish them.
Rationale
 Using historical data to establish standards is typically more difficult than using activity analysis to establish them.
Incorrect. Using historical data involves analyzing past (historical) data to determine the average time and cost needed to perform an activity.
These averages are the basis for standards. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed
to perform an activity. Since using historical data to determine standards relies on existing data, it is less difficult, not more difficult, than using
activity analysis.
Rationale
 Using historical data to establish standards is typically more expensive than using activity analysis to establish them.
Incorrect. Using historical data involves analyzing past (historical) data to determine the average time and cost needed to perform an activity.
These averages are the basis for standards. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed
to perform an activity. Since using historical data to determine standards relies on existing data, it is less expensive, not more expensive, than using
activity analysis.
Rationale
 Using historical data to establish standards is typically less accurate than using activity analysis to establish them.
Correct. Using historical data involves analyzing past (historical) data to determine the average time and cost needed to perform an activity. These
averages are the basis for standards. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed to
perform an activity. Historical data may not be reliable in establishing standards as current operating conditions may differ from the conditions
that existed when the data were collected. Activity analysis uses more recent information. Because of this, using historical data is typically less
accurate than activity analysis.
Rationale
 Using historical data to establish standards is typically more time-consuming than using activity analysis to establish them.
Incorrect. Using historical data involves analyzing past (historical) data to determine the average time and cost needed to perform an activity.
These averages are the basis for standards. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed
to perform an activity. Since using historical data to determine standards relies on existing data, it is less time-consuming, not more timeconsuming, than using activity analysis.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.2.s
1B2-AT11
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
When budgets are used for performance evaluation and to set limits on spending, the process will often result in departments adding something "extra"
to ensure the budgets will be met. This "extra" is called:
tactical planning.
Correct
budgetary slack.
management by objectives.
Your Answer
continuous budgeting.
Rationale
 tactical planning.
This answer is incorrect. The “extra” that departments add to ensure the budgets will be met is not called tactical planning.
Rationale
 budgetary slack.
An extra cushion built into the budget to protect against the unexpected is called budget slack. It involves over-budgeting (or padding) expenses
and under-budgeting revenues to make the budget targets easier to meet.
Rationale
 management by objectives.
This answer is incorrect. The “extra” that departments add to ensure the budgets will be met is not called management by objectives.
Rationale
 continuous budgeting.
This answer is incorrect. The “extra” that departments add to ensure the budgets will be met is not called continuous budgeting.
Question 3
1.B.2.p
tb.bud.stand.024_1809
LOS: 1.B.2.p
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning establishing standards is true?
Correct
Historical data analysis involves analyzing past performance data to determine the average time needed to perform the activity.
Historical data analysis involves analyzing the steps in a process to determine the average time needed to perform the activity.
Your Answer
Historical data analysis uses techniques such as engineering analysis and time-and-motion studies to establish standards.
One problem with historical data analysis is that it is a very time-consuming technique.
Rationale
 Historical data analysis involves analyzing past performance data to determine the average time needed to perform the activity.
Correct. In historical data analysis, past performance data is used to determine the average time needed to perform an activity. These averages are
the basis for standards.
Rationale
 Historical data analysis involves analyzing the steps in a process to determine the average time needed to perform the activity.
Incorrect. Activity analysis, not historical data analysis, involves analyzing the activities themselves to determine the resources and steps needed to
perform an activity.
Rationale
 Historical data analysis uses techniques such as engineering analysis and time-and-motion studies to establish standards.
Incorrect. Activity analysis, not historical data analysis, uses techniques such as engineering analysis and time-and-motion studies to establish
standards.
Rationale
 One problem with historical data analysis is that it is a very time-consuming technique.
Incorrect. While historical data analysis uses existing data to establish standards, activity analysis requires new data. This means that activity
analysis, not historical data analysis, is a very time-consuming technique.
Question 4
1.B.2.n
aq.bud.stand.003_1802
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
The executives for Ana Huff, Inc. developed and proposed a budget for the current year. The budget assumes that there will be no work delays,
interruptions, waste, or machine breakdown. Which type of standard is being prepared?
Participative standard
Reasonably attainable standards
Your Answer
Participative ideal standard
Correct
Authoritative ideal standard
Rationale
 Participative standard
Participative standards will incorporate more of the lower-level managers’ knowledge and experience. Since the executives are developing and
proposing the budget without considering that there may be work delays, etc., this is likely not a participative standard.
Rationale
 Reasonably attainable standards
Attainable standards are based on more reasonable expectations. Since the budget does not allow work delays, interruptions, waste, or machine
breakdown, this is not a reasonably attainable standard.
Rationale
 Participative ideal standard
Participative standards will incorporate more of the lower-level managers’ knowledge and experience. Since the executives are developing and
proposing the budget without considering that there may be work delays, etc., this is likely not a participative standard.
Rationale
 Authoritative ideal standard
Authoritative standards are determined solely by top management and ideal standards allow for no work delays, interruptions, waste, or machine
breakdown. Since the executives are developing and proposing the budget without considering that there may be work delays, etc., this is an
authoritative ideal standard.
Question 5
1.B.2.l
tb.bud.stand.028_1809
LOS: 1.B.2.l
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
All of the following statements concerning the use of “standards” are correct except:
Standards represent an expected or targeted level of performance.
Your Answer
Standards involve the expected amount of inputs needed to complete an activity and the expected price of inputs in the activity.
Correct
Standards can be used to evaluate performance but not to predict costs.
Standards can change from one period to the next.
Rationale
 Standards represent an expected or targeted level of performance.
Incorrect. Standards based on expected performance can result in the most accurate forecasts while standards based on targeted performance can
provide motivation to achieve targets.
Rationale
 Standards involve the expected amount of inputs needed to complete an activity and the expected price of inputs in the activity.
Incorrect. Standards do involve the expected amount of a resource needed to complete an activity as well as the expected price of inputs in the
activity.
Rationale
 Standards can be used to evaluate performance but not to predict costs.
Correct. Standards are useful in the budgeting process as they represent an expected or targeted level of performance. They can be used to
evaluate performance as one can compare the actual amount of an input used to the amount “allowed” to be used based on standards. However,
they can also be used to predict the quantity and cost of inputs needed for various levels of activity.
Rationale
 Standards can change from one period to the next.
Incorrect. Standards should be updated periodically to reflect changes in conditions. For example, new technology may reduce the amount of time
needed to complete an activity.
Question 6
1.B.2.s
tb.bud.stand.002_1805
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Connie G. is a manager with Bricks and More Company. Connie receives a bonus based on beating the budget. For the coming year, Connie believes
revenues will be $250,000 and expenses will be $140,000. To build in budgetary slack, Connie will most likely budget for which of the following?
Your Answer
$260,000 of revenue
$130,000 of expenses
Correct
$150,000 of expenses
$120,000 of income
Rationale
 $260,000 of revenue
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $260,000 in revenue, the company
budgets for $120,000 in net income rather than $110,000 in net income ($250,000 − $140,000). It is more difficult to achieve net income of $120,000
than net income of $110,000. Therefore, this is an incorrect answer.
Rationale
 $130,000 of expenses
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $130,000 in expenses, the company
budgets for $120,000 in net income rather than $110,000 in net income ($250,000 − $140,000). It is more difficult to achieve net income of $120,000
than net income of $110,000. Therefore, this is an incorrect answer.
Rationale
 $150,000 of expenses
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. This could lead to goal incongruence since the manager's
incentive to “beat the budget” conflicts with the organization's goal of developing a budget based on realistic expectations. It can be accomplished
by budgeting for less revenue than expected or more expenses than expected. In both cases budgeted net income will be lower than expected net
income. This increases the chances of achieving the actual expected net income. By budgeting for $150,000 in expenses, the company budgets for
$100,000 in net income rather than $110,000 in net income ($250,000 − $140,000). It is easier to achieve net income of $100,000 than net income of
$110,000. Therefore, this is the correct answer.
Rationale
 $120,000 of income
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $120,000 in net income, it is not
increasing the odds of achieving the actual targeted net income since it is more difficult to achieve net income of $120,000 than net income of
$110,000 ($250,000 − $140,000). Therefore, this is an incorrect answer.
Question 7
1.B.2.s
tb.bud.stand.003_1805
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Joan K. is a manager with Steel Works Inc. Joan would love to beat the budget this year. She believes that revenues for the coming year will be $200,000
and expenses will be $120,000. To build in budgetary slack, Joan is least likely to budget for which of the following?
Your Answer
$130,000 of expenses
$190,000 of revenue
$70,000 of income
Correct
$110,000 of expenses
Rationale
 $130,000 of expenses
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $130,000 in expenses, the company
budgets for $70,000 in net income rather than $80,000 in net income ($200,000 − $120,000). It is easier to achieve net income of $70,000 than net
income of $80,000. Therefore, this is an incorrect answer.
Rationale
 $190,000 of revenue
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $190,000 in revenue, the company
budgets for $70,000 in net income rather than $80,000 in net income ($200,000 − $120,000). It is easier to achieve net income of $70,000 than net
income of $80,000. Therefore, this is an incorrect answer.
Rationale
 $70,000 of income
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $70,000 in net income, it is increasing
the odds of achieving the actual targeted net income since it is easier to achieve net income of $70,000 than net income of $80,000 ($200,000 −
$120,000). Therefore, this is an incorrect answer.
Rationale
 $110,000 of expenses
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. It can be accomplished by budgeting for less revenue
than expected or more expenses than expected. In both cases budgeted net income will be lower than expected net income, which increases the
chances of achieving the actual expected net income. By budgeting for $110,000 in expenses, the company budgets for $90,000 in net income rather
than $80,000 in net income ($200,000 − $120,000). It is more difficult to achieve net income of $90,000 than net income of $80,000. Therefore, this is
the correct answer.
Question 8
1.B.2.s
tb.bud.stand.004_1805
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Which of the following managers is building budgetary slack into the budget?
Correct
Sally C. believes expenses will be $340,000 next year and she budgets $350,000 because that's the amount that was budgeted for this year.
Kirk H. believes next year revenues will be $560,000 and he budgets $570,000 hoping to encourage his sales staff to excel.
Eric R. believes that next year expenses will be $125,000 and he budgets $123,000 anticipating some efficiencies.
Karen J. believes revenues will be $410,000 next year and she budgets $413,000 because she hopes to earn a bonus.
Rationale
 Sally C. believes expenses will be $340,000 next year and she budgets $350,000 because that's the amount that was budgeted for this
year.
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $350,000 in expenses rather than
$340,000, the odds of achieving the actual targeted net income increase because it is easier to achieve expenses of $350,000 than expenses of
$340,000. Therefore, this is the correct answer.
Rationale
 Kirk H. believes next year revenues will be $560,000 and he budgets $570,000 hoping to encourage his sales staff to excel.
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $570,000 in revenues rather than
$560,000 in revenues, the odds of achieving the actual targeted net income decrease because it is harder to achieve revenues of $570,000 than
revenues of $560,000. Therefore, this is an incorrect answer.
Rationale
 Eric R. believes that next year expenses will be $125,000 and he budgets $123,000 anticipating some efficiencies.
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $123,000 in expenses rather than
$125,000 in expenses, the odds of achieving the actual targeted net income decrease because it is harder to achieve expenses of $123,000 than
expenses of $125,000. Therefore, this is an incorrect answer.
Rationale
 Karen J. believes revenues will be $410,000 next year and she budgets $413,000 because she hopes to earn a bonus.
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $413,000 in revenues rather than
$410,000 in revenues, the odds of achieving the actual targeted net income decrease because it is harder to achieve revenues of $413,000 than
revenues of $410,000. Therefore, this is an incorrect answer.
Question 9
1.B.2.o
aq.bud.stand.004_0720
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Thomas Corp is developing a standard cost sheet to specify the standard price and standard quantity of direct material used to build a single widget.
Which of the following includes the proper steps to be taken in developing the standard quantity of direct material used to build a single widget?
Your Answer
Identify the standard content of direct material in the finished unit, adjust for abnormal scrap, adjust for quality rejects, and adjust for downtime.
Correct
Identify the standard content of direct material in the finished unit, adjust for normal scrap, and adjust for quality rejects.
Identify the standard content of direct material in the finished unit, adjust for abnormal scrap, and adjust for quality rejects.
Identify the standard content of direct material in the finished unit, adjust for normal scrap, adjust for quality rejects, and adjust for down time.
Rationale
 Identify the standard content of direct material in the finished unit, adjust for abnormal scrap, adjust for quality rejects, and adjust for
downtime.
The proper steps to be taken in developing the standard quantity of direct material used to build a single widget do not include adjusting for
abnormal scrap or adjusting for downtime (as this is considered in the standard quantity of direct labor).
Rationale
 Identify the standard content of direct material in the finished unit, adjust for normal scrap, and adjust for quality rejects.
These are the proper steps to be taken in developing the standard quantity of direct material used to build a single widget.
Rationale
 Identify the standard content of direct material in the finished unit, adjust for abnormal scrap, and adjust for quality rejects.
The proper steps to be taken in developing the standard quantity of direct material used to build a single widget do not include adjusting for
abnormal scrap.
Rationale
 Identify the standard content of direct material in the finished unit, adjust for normal scrap, adjust for quality rejects, and adjust for
down time.
The proper steps to be taken in developing the standard quantity of direct material used to build a single widget do not include adjusting for
downtime (as this is considered in the standard quantity of direct labor).
Question 10
1.B.2.p
tb.bud.stand.022_1809
LOS: 1.B.2.p
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning establishing standards is true?
Correct
Using activity analysis to establish standards is typically more difficult than using historical data to establish them.
Using activity analysis to establish standards is typically less expensive than using historical data to establish them.
Using activity analysis to establish standards is typically less accurate than using historical data to establish them.
Using activity analysis to establish standards is typically less time-consuming than using historical data to establish them.
Rationale
 Using activity analysis to establish standards is typically more difficult than using historical data to establish them.
Correct. Using historical data involves analyzing past (historical) data to determine the average time and cost needed to perform an activity. These
averages are the basis for standards. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed to
perform an activity. Since activity analysis requires new information while using historical data relies on existing data, activity analysis is more
difficult than using historical data.
Rationale
 Using activity analysis to establish standards is typically less expensive than using historical data to establish them.
Incorrect. Using historical data involves analyzing past (historical) data to determine the average time and cost needed to perform an activity.
These averages are the basis for standards. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed
to perform an activity. Since activity analysis requires new information while using historical data relies on existing data, activity analysis is more
expensive than using historical data.
Rationale
 Using activity analysis to establish standards is typically less accurate than using historical data to establish them.
Incorrect. Using historical data involves analyzing past (historical) data to determine the average time and cost needed to perform an activity.
These averages are the basis for standards. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed
to perform an activity. Activity analysis uses updated information to establish standards. Historical data may not be reliable in establishing
standards as current operating conditions may differ from the conditions that existed when the data were collected. Because of this, using activity
analysis is typically more accurate than using historical data.
Rationale
 Using activity analysis to establish standards is typically less time-consuming than using historical data to establish them.
Incorrect. Using historical data involves analyzing past (historical) data to determine the average time and cost needed to perform an activity.
These averages are the basis for standards. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed
to perform an activity. Since activity analysis requires new information while using historical data relies on existing data, activity analysis is more
time-consuming than using historical data.
Question 11
1.B.2.o
1B2-W018
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: hard
Bloom Code: 5
The top management of Travis Corp. is preparing the budget for the following year. Travis Corp. used the production target of another company engaged
in a similar business as a benchmark to set daily production targets for their laborers. However, after reviewing the labor efficiency at the end of the first
quarter, management discovered that the variance from the budget regarding the daily production targets is very high. Which of the following actions, if
taken during the budget preparation process, would have eliminated the possibility of a high budget variance?
Your Answer
The market expectation about the product should have been estimated.
Correct
The relevance of the benchmark should have been tested.
The company should not have relied on the historical data.
The resource allocation should have been appropriate.
Rationale
 The market expectation about the product should have been estimated.
This answer is incorrect. The market expectation about the product is not related to the efficiency of laborers.
Rationale
 The relevance of the benchmark should have been tested.
Good benchmarks can lead a company toward continuous improvement. However, a poor benchmark can yield significant negative results. Here,
the top management did not verify the presence of the conditions which led to the production level in the company used as benchmark.
Rationale
 The company should not have relied on the historical data.
This answer is incorrect. In this case, the high variance does not result from relying on historical data.
Rationale
 The resource allocation should have been appropriate.
This answer is incorrect. In this case, the high variance does not result from inappropriate resource allocation.
Question 12
1.B.2.p
1B2-W004
LOS: 1.B.2.p
Lesson Reference: Building Budget Standards
Difficulty: hard
Bloom Code: 6
A management representative of Drake Edwards Inc. discusses with the supervisor of its Tool A manufacturing unit to determine a reasonable per unit
production time for the preparation of the production budget for the next year. The supervisor brings forward the following points:
1) The rate of production during the first 2 hours of work is low due to the time taken to adjust with the furnace temperature.
2) The average time taken to produce 1 unit of Tool A is 30 minutes.
3) The company has a policy of granting a lunch break of 1 hour.
The management representative fixes a target of 15 units of Tool A per day per worker. Assuming the company operates 8 hours per day, evaluate the
effect of the target set by the representative.
Your Answer
The number of defective units will increase.
The average training cost will decrease.
Correct
The budget will have higher negative variance from actual.
The employee turnover will decrease.
Rationale
 The number of defective units will increase.
This answer is incorrect. No information is given to provide a clear indication of the increase or decrease in the number of defective units as a result
of the target set by the management representative.
Rationale
 The average training cost will decrease.
This answer is incorrect. It cannot be concluded from the information provided that the training cost will decrease or increase as a result of the
target set by the management representative.
Rationale
 The budget will have higher negative variance from actual.
The target set by the management representative is unrealistic. The actual daily production will be lower than the targets. Therefore, the negative
variance will be higher implying that the workers are not meeting their targets.
Rationale
 The employee turnover will decrease.
This answer is incorrect. Based on the information provided, employee turnover will most likely increase instead of decrease.
Question 13
1.B.2.p
1B2-CQ03
LOS: 1.B.2.p
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
This year, a company reports poor sales because of a new and inexperienced sales force. If this year's sales data is used to set next year's sales budget,
which of the following would be the most likely result?
The budget would be set too low, and the sales force would be less motivated to achieve those goals.
The budget would be set too high, and the sales force would be less motivated to achieve those goals.
The budget would be set too high, and the sales force would be motivated to achieve those goals.
Correct
The budget would be set too low, and the sales force would be less motivated to surpass those goals.
Rationale
 The budget would be set too low, and the sales force would be less motivated to achieve those goals.
This answer is incorrect. It is true that the budget would be set too low; however, the sales force would have motivation to at least achieve the goals
set based on this year's sales data.
Rationale
 The budget would be set too high, and the sales force would be less motivated to achieve those goals.
This answer is incorrect. The budget would not be set too high. Additionally, the sales force would have motivation to at least achieve the goals set
based on this year's sales data.
Rationale
 The budget would be set too high, and the sales force would be motivated to achieve those goals.
This answer is incorrect. The budget would not be set too high. However, it is true that the sales force would have motivation to at least achieve the
goals set based on this year's sales data.
Rationale
 The budget would be set too low, and the sales force would be less motivated to surpass those goals.
Employing prior year results as the following year's budget provides no expectation for improvement. Another reason for not using historical results
as a budget is that past performance is not always indicative of future results. A budget process attempts to predict and account for future changes,
both positive and negative. Relying only on raw historical data leads to a sense that the past year must always be the benchmark.
Question 14
1.B.2.n
tb.bud.stand.015_1809
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
Which of the following is correct concerning authoritative standards?
Employees tend to accept and adopt authoritative standards more than participative standards.
Correct
Authoritative standards tend to be established more quickly than participative standards.
Authoritative standards tend to improve employee motivation more than participative standards.
Your Answer
Authoritative standards tend to be less closely matched to company goals than participative standards.
Rationale
 Employees tend to accept and adopt authoritative standards more than participative standards.
Incorrect. Authoritative standards are determined exclusively by management. Because they are not included in the standard-setting process,
employees do not tend to accept and adopt authoritative standards more than participative standards.
Rationale
 Authoritative standards tend to be established more quickly than participative standards.
Correct. Authoritative standards are determined exclusively by management. Because there is no discussion beyond top management ranks when
the authoritative process is used, standards tend to be established more quickly in the authoritative approach.
Rationale
 Authoritative standards tend to improve employee motivation more than participative standards.
Incorrect. Authoritative standards are determined exclusively by management. Because they are not included in the standard-setting process,
authoritative standards do not tend to improve employee motivation more than participative standards.
Rationale
 Authoritative standards tend to be less closely matched to company goals than participative standards.
Incorrect. Authoritative standards are determined exclusively by management. Because top management is likely to have the best insight into how
standards track company goals, standards tend to more closely match company goals in the authoritative approach.
Question 15
1.B.2.s
1B2-LS25
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
A company is having trouble with its budgeting process. Top management sets budgets, but line managers often fail to meet their budgets or continue to
make decisions that run counter to the budgets. Which of the following would not explain these circumstances?
Incentives are not provided to line managers.
Feedback is seldom given to line managers.
Correct
Budgetary slack is built into the line budget.
Line managers are accountable for both controllable and noncontrollable costs.
Rationale
 Incentives are not provided to line managers.
This answer is incorrect. If incentives are not provided to line managers, this would explain why line managers often fail to meet their budgets or
continue to make decisions that run counter to the budgets.
Rationale
 Feedback is seldom given to line managers.
This answer is incorrect. If feedback is seldom given to line managers, this would explain why line managers often fail to meet their budgets or
continue to make decisions that run counter to the budgets.
Rationale
 Budgetary slack is built into the line budget.
Good budgetary systems would provide incentives to managers who manage their controllable costs well. In addition, good budgetary systems
provide feedback regularly. If the firm's budget had slack built in, managers should be able to meet the budget.
Rationale
 Line managers are accountable for both controllable and noncontrollable costs.
This answer is incorrect. If line managers are accountable for both controllable and noncontrollable costs, this would explain why line managers
often fail to meet their budgets or continue to make decisions that run counter to the budgets.
Question 16
1.B.2.o
1B2-W019
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
The personnel manager of Martin Power Inc. does not consider equipment downtime and worker breaks during the determination of standard costs for
direct labor. Evaluate the effect of the manager's action.
Correct
The labor efficiency variance will be higher.
The labor rate variance will be higher.
Your Answer
The number of defective units will increase.
The quality of products will improve.
Rationale
 The labor efficiency variance will be higher.
Labor usage standards should consider normally expected equipment downtime and worker breaks that slow the production process. If these
factors are not considered, the actual level of performance will be lower than the expected level leading to higher labor efficiency variance.
Rationale
 The labor rate variance will be higher.
This answer is incorrect. Equipment downtime and worker breaks do not affect the wages paid to laborers.
Rationale
 The number of defective units will increase.
This answer is incorrect. Equipment downtime and worker breaks do not affect the number of defective units.
Rationale
 The quality of products will improve.
This answer is incorrect. Equipment downtime and worker breaks do not affect the quality of products.
Question 17
1.B.2.o
tb.bud.stand.019_1809
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
All of the following are factors that an organization should consider when establishing direct materials standards except:
Quality.
Quantity.
Your Answer
Price.
Correct
Time.
Rationale
 Quality.
Incorrect. One factor to take into consideration when determining direct materials standards is the quality of material needed. Higher-quality
materials typically cost more than lower-quality materials.
Rationale
 Quantity.
Incorrect. One factor to take into consideration when determining direct materials standards is the quantity of material needed for each unit of
output. In addition to the material actually needed to build the product, standards should take into consideration things like waste and spoilage.
Rationale
 Price.
Incorrect. One factor to take into consideration when determining direct materials standards is the price to be paid for the materials. This is usually
set by analyzing quotes from possible vendors.
Rationale
 Time.
Correct. Direct materials standards are used to estimate the quantity of material to be purchased and used as well as the dollar value of material to
be purchased and used during a period. These standards are based on the quality of material needed, the quantity of material needed, and the
purchase price of the materials. The time needed to produce the product impacts direct labor standards, not direct materials standards.
Question 18
1.B.2.o
aq.bud.stand.007_0720
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: hard
Bloom Code: 6
The production manager of Gibson Systems has considered the following for the determination of standard costs for direct materials:
The standard is developed on the basis of production facilities, quality of the product, costs of manufacturing, and the equipment to be used.
The standard does not allow for losses, spoilage, scrap, and waste normally expected in the production process.
The price is set after considering historical costs and also includes supply chain costs.
Evaluate the validity of the given standard as an attainable standard.
Your Answer
The given standard is not valid as it considers the supply chain costs for the determination of price.
Correct
The given standard is not valid because it does not allow for losses, spoilage, scrap, and waste normally expected in the production process.
The given standard is valid as it considers production facilities, quality of the product, costs of manufacturing, and the equipment to be used.
The given standard is valid as the prices are set after considering supply chain costs.
Rationale
 The given standard is not valid as it considers the supply chain costs for the determination of price.
Supply chain costs are valid in the determination of the standard price.
Rationale
 The given standard is not valid because it does not allow for losses, spoilage, scrap, and waste normally expected in the production
process.
The attainable standard costs for direct materials are developed on the basis of the production facilities, the quality of the product, the costs of
manufacturing, and the equipment to be used. Direct material usage standards should allow for losses, spoilage, scrap, and waste normally
expected in the production process. A price is set as a combination of all prior work done, including quality, quantity, and supply chain costs.
Rationale
 The given standard is valid as it considers production facilities, quality of the product, costs of manufacturing, and the equipment to be
used.
While this statement is true, there is another reason the given standard is not valid.
Rationale
 The given standard is valid as the prices are set after considering supply chain costs.
While this statement is true, there is another reason the given standard is not valid.
Question 19
1.B.2.n
tb.bud.stand.016_1809
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
Which of the following is correct concerning participative standards?
Employees tend to resent participative standards more than authoritative standards.
Participative standards tend to be established more quickly than authoritative standards.
Correct
Participative standards tend to be less closely matched to company goals than authoritative standards.
Your Answer
Participative standards tend to improve employee motivation less than authoritative standards.
Rationale
 Employees tend to resent participative standards more than authoritative standards.
Incorrect. Participative standards are determined through dialogue and discussion between management and all groups that will implement the
standards. Because they are included in the standard-setting process, employees tend to accept and adopt participative standards, not resent
them.
Rationale
 Participative standards tend to be established more quickly than authoritative standards.
Incorrect. Participative standards are determined through dialogue and discussion between management and all groups that will implement the
standards. Because there is extensive discussion when the participative process is used, standards tend to be established less quickly in the
participative approach, not more quickly.
Rationale
 Participative standards tend to be less closely matched to company goals than authoritative standards.
Correct. Participative standards are determined through dialogue and discussion between management and all groups that will implement the
standards. People outside of top management are less likely to understand how standards track company goals. Because of the involvement of
people with less understanding of this relationship, participative standards tend to less closely match company goals.
Rationale
 Participative standards tend to improve employee motivation less than authoritative standards.
Incorrect. Participative standards are determined through dialogue and discussion between management and all groups that will implement the
standards. Because they are included in the standard-setting process, participative standards tend to improve employee motivation more than
authoritative standards.
Question 20
1.B.2.m
tb.bud.stand.014_1809
LOS: 1.B.2.m
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 2
All of the following statements concerning budget standards are correct except:
One weakness of using ideal standards to create budgets is that they can lead to frustration and a lack of motivation because they are seen as
impossible to achieve.
One weakness of using ideal standards to create budgets is that they sometimes represent unrealistic expectations.
Your Answer
One weakness of using currently attainable standards to create budgets is that extraordinary effort is often not needed to reach them.
Correct
One weakness of using currently attainable standards to create budgets is that employees are not involved in determining them.
Rationale
 One weakness of using ideal standards to create budgets is that they can lead to frustration and a lack of motivation because they are
seen as impossible to achieve.
Incorrect. Ideal standards can only be achieved under perfect conditions. The fact that perfect conditions are needed to achieve these often leads
to frustration and a lack of motivation as workers realize that no amount of effort will be successful.
Rationale
 One weakness of using ideal standards to create budgets is that they sometimes represent unrealistic expectations.
Incorrect. Ideal standards can only be achieved under perfect conditions. The fact that perfect conditions are needed to achieve these means that
any budget based on them is unlikely to be achieved.
Rationale
 One weakness of using currently attainable standards to create budgets is that extraordinary effort is often not needed to reach them.
Incorrect. Currently attainable standards can be achieved by properly trained employees working at a normal pace. The fact that they can be
achieved without extraordinary effort is a weakness as employees may not work as hard as if the goals were not so easily achieved.
Rationale
 One weakness of using currently attainable standards to create budgets is that employees are not involved in determining them.
Correct. Employees are not involved in setting authoritative standards. However, they may be involved in setting currently attainable standards.
Question 21
1.B.2.l
1B5-AT01
LOS: 1.B.2.l
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Maximilian Computer Company uses a comprehensive budgeting system in planning its annual operations. Which of the following best describes the
information needed in order to determine the budgeted cost of circuit boards to be purchased for use in building its laptop computer? Assume one
circuit board is used in each laptop.
Correct
Begin with budgeted laptop production in units, add the desired ending inventory of circuit boards, deduct the expected beginning inventory of
circuit boards, and multiply the resulting amount by the budgeted purchase cost per circuit board.
Your Answer
Begin with budgeted laptop sales in units, deduct the desired ending inventory of circuit boards, add the expected beginning inventory of circuit
boards, and multiply the resulting amount by the purchase cost per circuit board.
Begin with budgeted laptop production in units, add the desired ending inventory of circuit boards, add the expected beginning inventory of circuit
boards, and multiply the resulting amount by the budgeted purchase cost per circuit board.
Begin with budgeted laptop sales in units, add the desired ending inventory of circuit boards, deduct the expected beginning inventory of circuit
boards, and multiply the resulting amount by the budgeted purchase cost per circuit board.
Rationale
 Begin with budgeted laptop production in units, add the desired ending inventory of circuit boards, deduct the expected beginning
inventory of circuit boards, and multiply the resulting amount by the budgeted purchase cost per circuit board.
To determine the budgeted cost of circuit boards, the number of units to be produced should be adjusted by the change in inventory and then
multiplied by the budgeted purchase cost.
Rationale
 Begin with budgeted laptop sales in units, deduct the desired ending inventory of circuit boards, add the expected beginning inventory
of circuit boards, and multiply the resulting amount by the purchase cost per circuit board.
This answer is incorrect. In order to determine the budgeted cost of circuit boards to be purchased for use in building its laptop computer,
Maximilian Computer Company should use production information not sales information. Additionally, Maximilian must correctly adjust for
beginning and ending inventory.
Rationale
 Begin with budgeted laptop production in units, add the desired ending inventory of circuit boards, add the expected beginning
inventory of circuit boards, and multiply the resulting amount by the budgeted purchase cost per circuit board.
This answer is incorrect. In order to determine the budgeted cost of circuit boards to be purchased for use in building its laptop computer,
Maximilian Computer Company must correctly adjust for beginning and ending inventory.
Rationale
 Begin with budgeted laptop sales in units, add the desired ending inventory of circuit boards, deduct the expected beginning inventory
of circuit boards, and multiply the resulting amount by the budgeted purchase cost per circuit board.
This answer is incorrect. In order to determine the budgeted cost of circuit boards to be purchased for use in building its laptop computer,
Maximilian Computer Company should use production information not sales information.
Question 22
1.B.2.m
tb.bud.stand.013_1809
LOS: 1.B.2.m
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
All of the following statements are examples of a currently attainable standard except:
Correct
A company assumes that no material will be wasted when estimating the material needed to build a product.
A company takes expected employee break times into consideration when estimating the time needed to perform a task.
Your Answer
A company takes expected material waste into consideration when estimating the material needed to build a product.
A company takes expected preventative maintenance into account when estimating production for a year.
Rationale
 A company assumes that no material will be wasted when estimating the material needed to build a product.
Correct. Currently attainable standards are sometimes called reasonably attainable standards as they can be achieved under normal operating
conditions. Assuming no material will be wasted when estimating the material needed to build a product is an example of an ideal standard
because no waste during production is an example of perfect operating conditions.
Rationale
 A company takes expected employee break times into consideration when estimating the time needed to perform a task.
Incorrect. Currently attainable standards are sometimes called reasonably attainable standards as they can be achieved under normal operating
conditions. One example of normal operating conditions is that employees work at a normal pace by taking breaks from time to time.
Rationale
 A company takes expected material waste into consideration when estimating the material needed to build a product.
Incorrect. Currently attainable standards are sometimes called reasonably attainable standards as they can be achieved under normal operating
conditions. One example of normal operating conditions is that some material gets wasted in the production process.
Rationale
 A company takes expected preventative maintenance into account when estimating production for a year.
Incorrect. Currently attainable standards are sometimes called reasonably attainable standards as they can be achieved under normal operating
conditions. One example of normal operating conditions is that machines need to be taken off-line for preventative maintenance from time to time
to keep them operating properly.
Question 23
1.B.2.l
tb.bud.stand.007_1805
LOS: 1.B.2.l
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Which of the following is not an example of a standard that can be used in budgeting?
A company expects that it will take 45 minutes to process an invoice.
Correct
A company pays its employees $22 per hour.
A company expects it will pay its employees $20 per hour.
Your Answer
A company expects it will cost $15 to process an invoice.
Rationale
 A company expects that it will take 45 minutes to process an invoice.
A company expecting to take 45 minutes to process an invoice is an example of a standard as it can be used to predict processing costs to include in
a budget; therefore, this is an incorrect answer.
Rationale
 A company pays its employees $22 per hour.
“Standards” are useful in the budgeting process as they represent expected or targeted level of performance. They can be used to predict the
amount of an input needed for an expected level of activity (for example, the time needed to complete a task or the amount of materials needed to
complete a unit of output as well as the expected cost of that resource (for example, the cost per hour of labor or the cost per pound of material). A
company paying its employees $22 per hour is not an example of a standard as it represents actual cost, not budgeted costs; therefore, this is the
correct answer.
Rationale
 A company expects it will pay its employees $20 per hour.
A company expecting to pay its employees $20 per hour is an example of a standard as it can be used to predict labor costs to include in a budget;
therefore, this is an incorrect answer.
Rationale
 A company expects it will cost $15 to process an invoice.
A company expecting to pay $15 to process an invoice is an example of a standard as it can be used to predict processing costs to include in a
budget; therefore, this is an incorrect answer.
Question 24
1.B.2.o
aq.bud.stand.005_0720
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Thomas Corp is developing a standard cost sheet to specify the standard price and standard quantity of direct material used to build a single widget.
Which of the following includes the proper steps to be taken in developing the standard price for a standard amount of direct material?
Correct
The price of a standard amount of direct material, adjust for costs of receiving the direct material, and adjust for the costs of preparing the direct
material for production.
Your Answer
The price of a standard amount of direct material, adjust for costs of receiving the direct material, adjust for the costs of preparing the direct material
for production, and adjust for the hourly direct labor costs of assembling the widget.
The price of a standard amount of direct material and adjust for the costs of preparing the direct material for production.
The price of a standard amount of direct material, adjust for the costs of preparing the direct material for production, and adjust for the hourly direct
labor costs of assembling the widget.
Rationale
 The price of a standard amount of direct material, adjust for costs of receiving the direct material, and adjust for the costs of preparing
the direct material for production.
These are the proper steps to be taken in developing the standard price of a standard amount of direct material.
Rationale
 The price of a standard amount of direct material, adjust for costs of receiving the direct material, adjust for the costs of preparing the
direct material for production, and adjust for the hourly direct labor costs of assembling the widget.
The proper steps to be taken in developing the standard price of a standard amount of direct material do not include adjusting for the hourly direct
labor costs of assembling the widget (as this is considered in the standard quantity of direct labor).
Rationale
 The price of a standard amount of direct material and adjust for the costs of preparing the direct material for production.
The proper steps to be taken in developing the standard price of a standard amount of direct material also include adjusting for costs of receiving
the direct material.
Rationale
 The price of a standard amount of direct material, adjust for the costs of preparing the direct material for production, and adjust for the
hourly direct labor costs of assembling the widget.
The proper steps to be taken in developing the standard price of a standard amount of direct material do not include adjusting for the hourly direct
labor costs of assembling the widget (as this is considered in the standard quantity of direct labor), but do include adjusting for costs of receiving
the direct material.
Question 25
1.B.2.m
tb.bud.stand.010_1809
LOS: 1.B.2.m
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
All of the following statements concerning “ideal standards” are correct except:
Ideal standards assume no delays or stoppages for machine breakdowns.
Ideal standards assume employees work at peak efficiency at all times.
Ideal standards are also called theoretical standards.
Correct
Ideal standards are expected to be achieved most of the time.
Rationale
 Ideal standards assume no delays or stoppages for machine breakdowns.
Incorrect. Ideal standards can only be achieved under perfect conditions. One example of perfect conditions is that there are no delays or
stoppages for machine breakdowns.
Rationale
 Ideal standards assume employees work at peak efficiency at all times.
Incorrect. Ideal standards can only be achieved under perfect conditions. One example of perfect conditions is that employees are the most skilled
and work at peak efficiency at all times.
Rationale
 Ideal standards are also called theoretical standards.
Incorrect. Ideal standards are sometimes called theoretical standards as they can only be achieved under perfect (or theoretical) conditions.
Rationale
 Ideal standards are expected to be achieved most of the time.
Correct. An organization can use ideal standards or currently attainable standards to develop budgets. Currently attainable standards, not ideal
standards, are expected to be achieved most of the time. Ideal standards are expected to be achieved only under the best possible circumstances,
meaning they are unlikely to be achieved at all.
Question 26
1.B.2.s
aq.bud.stand.009_0720
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
How does budget slack affect the master budget?
Budget slack hinders ease of communication of organizational goals.
Presence of budget slack can lead to decreased commitment from the employees.
Correct
Cumulative budget slack at each sublevel can result in an inaccurate master budget.
Your Answer
Strategic goals do not receive priority in the budgetary process due to existence of budget slack.
Rationale
 Budget slack hinders ease of communication of organizational goals.
Budget slack does not affect the ease of communication of organizational goals.
Rationale
 Presence of budget slack can lead to decreased commitment from the employees.
Budget slack might lead to decreased commitment from the employees, as budget slack is built-in freedom to fail. However, this does not explain
the impact of budget slack on the master budget.
Rationale
 Cumulative budget slack at each sublevel can result in an inaccurate master budget.
Budget slack occurs when budgeted performance differs from actual performance because managers tend to build in some extra money for their
budget to deal with the unexpected. Budget slack is built-in freedom to fail, and cumulative budget slack at each sublevel can result in a very
inaccurate master budget.
Rationale
 Strategic goals do not receive priority in the budgetary process due to existence of budget slack.
Budget slack might lead to strategic goals not receiving priority as the presence of budgetary slack shows there is not goal congruence. However,
this does not explain the impact of budget slack on the master budget.
Question 27
1.B.2.m
1B2-W017
LOS: 1.B.2.m
Lesson Reference: Building Budget Standards
Difficulty: hard
Bloom Code: 6
A company's management representative consults the production manager to set the standards for the upcoming quarter. The manager gives him the
following information:
1. The defective unit rate per worker per day is 2 out of 10 units.
2. The actual daily production is 10 units per worker.
3. The production department operates for 40 hours in a week with workers working 8 hours each day.
The management representative includes the following in the quarterly budget:
1. Monthly production target per worker is 200 units with nil defective units.
2. The defective unit rate per worker per day is nil.
The board of directors disapproved the budget stating it to be unattainable.
Under which of the following situations can the given budget be achieved?
The budget can be achieved if the production manager only allows for deviation caused by abnormal and uncontrollable reasons.
Your Answer
The budget can be achieved if the production department operates 45 hours in a week.
The budget can be achieved if the production manager allows for normal work delays, spoilage, waste, employee rest periods, and machine
downtime.
Correct
The budget can be achieved by the most efficient and skilled workers at their best efficiency all of the time.
Rationale
 The budget can be achieved if the production manager only allows for deviation caused by abnormal and uncontrollable reasons.
This answer is incorrect. This budget does not account for deviations caused by abnormal and uncontrollable reasons, and it cannot be achieved if
they occur.
Rationale
 The budget can be achieved if the production department operates 45 hours in a week.
This answer is incorrect. The production department will not be able to achieve the budget even if it operates for 45 hours in a week.
Rationale
 The budget can be achieved if the production manager allows for normal work delays, spoilage, waste, employee rest periods, and
machine downtime.
This answer is incorrect. The budget does not account for normal work delays, spoilage, waste, employee rest periods, and machine downtime, and
it cannot be achieved if they occur.
Rationale
 The budget can be achieved by the most efficient and skilled workers at their best efficiency all of the time.
Ideal standards allow for no work delays, interruptions, waste, or machine breakdowns. It requires a level of effort that can be attained only by the
most skilled and efficient employees working at their best efficiency all of the time.
Question 28
1.B.2.l
1B2-W005
LOS: 1.B.2.l
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
“Good benchmarks can lead a company towards continuous improvement.” Under which of the following circumstances can benchmarking most likely
lead to negative results?
Adhering to benchmarks demotivates employees, thereby affecting their productivity.
Correct
Using data from a new and high-growth industry to benchmark goals in a manufacturing industry.
Benchmarking involves a lot of costs which make the budgeting process less cost effective.
Your Answer
Using benchmarks which allow for flexibility in results provide managers with room for adjusting their output.
Rationale
 Adhering to benchmarks demotivates employees, thereby affecting their productivity.
This answer is incorrect. Benchmarking is followed by an organization as a whole and not solely by employees. Therefore, it does not affect their
performance.
Rationale
 Using data from a new and high-growth industry to benchmark goals in a manufacturing industry.
Good benchmarks can lead a company toward continuous improvement. Benchmarking a new and high-growth industry will overestimate targets
and goals. Such an industry will have highly volatile data compared to a manufacturing company.
Rationale
 Benchmarking involves a lot of costs which make the budgeting process less cost effective.
This answer is incorrect. Benchmarking is an integral process of budget development. If used effectively, it can lead a company toward continuous
improvement.
Rationale
 Using benchmarks which allow for flexibility in results provide managers with room for adjusting their output.
This answer is incorrect. Benchmarks should allow for a certain level of flexibility in results as the conditions present in the organization used as a
benchmark may not be present in other organizations.
Question 29
1.B.2.o
tb.bud.stand.020_1809
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
All of the following are factors that an organization should consider when establishing direct labor standards except:
Quality.
Correct
Spoilage.
Your Answer
Price.
Time.
Rationale
 Quality.
Incorrect. One factor to take into consideration when determining direct labor standards is the quality of workers needed. Higher-quality workers
typically cost more than lower-quality workers.
Rationale
 Spoilage.
Correct. Direct labor standards are used to estimate the quantity of labor to hire as well as the dollar value of wages to be paid during a period.
These standards are based on the quality of employees needed, the time needed to produce one unit of output, and the wage rate to be paid.
Expected spoilage impacts direct materials standards, not direct labor standards.
Rationale
 Price.
Incorrect. One factor to take into consideration when determining direct labor standards is the price to be paid to workers (wage rate). This is
usually set by analyzing wage rates for the geographic regions where employees will be located.
Rationale
 Time.
Incorrect. One factor to take into consideration when determining direct labor standards is the time needed to produce one unit of output. In
addition to the labor actually needed to build the product standards should take into consideration things like employee breaks and downtime.
Question 30
1.B.2.n
tb.bud.stand.009_1805
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Which of the following represents the flow of budget data under participative budgeting?
Vice President of Production to Plant Manager to Department Manager
President to Plant Manager to Department Manager
Correct
Department Manager to Plant Manager to Vice President of Production
Department Manager to Vice President of Production to Plant Manager
Rationale
 Vice President of Production to Plant Manager to Department Manager
This scenario does not represent the correct flow of budget data under participative budgeting as both a plant manager and department manager
are lower-level mangers than the Vice President of Production; therefore, this is an incorrect answer.
Rationale
 President to Plant Manager to Department Manager
This scenario does not represent the correct flow of budget data under participative budgeting as both the plant manager and department
manager are lower-level managers than the President; therefore, this is an incorrect answer.
Rationale
 Department Manager to Plant Manager to Vice President of Production
A participative budget process is one where operating managers are involved with creating the budget. Lower-level managers provide information
to upper-level managers that is then used to prepare the budget. Since a department manager is at a lower managerial level than a plant manager,
the department manager will provide budget data to the plant manager under a participative budgeting process. In addition, since a plant manager
is at a lower managerial level to the vice president of production, the plant manager will provide budget data to the vice president of production
under a participative budgeting process. Therefore, this is the correct answer.
Rationale
 Department Manager to Vice President of Production to Plant Manager
This scenario does not represent the correct flow of budget data under participative budgeting as a plant manager is a lower-level manager than
the vice president of production. Therefore, this is an incorrect answer.
Question 31
1.B.2.n
1B2-LS32
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
Which one of the following is an attribute of an authoritative approach to budgeting:
Communication of product perspective to management
Budget slack built into the budget
Correct
Incorporation of strategic goals into budgets
Your Answer
Expertise leads to informed budget decisions
Rationale
 Communication of product perspective to management
This answer is incorrect. Communication of product perspective to management is not an attribute of an authoritative approach to budgeting.
Rationale
 Budget slack built into the budget
This answer is incorrect. Budget slack built into the budget is not an attribute of an authoritative approach to budgeting.
Rationale
 Incorporation of strategic goals into budgets
In an authoritative budget (top-down budget), top management sets everything from strategic goals down to the individual items of the budget for
each department and expects lower managers and employees to adhere to the budget and meet the goals.
Rationale
 Expertise leads to informed budget decisions
This answer is incorrect. Expertise leading to informed budget decisions is not always an attribute of an authoritative approach to budgeting.
Question 32
1.B.2.q
tb.bud.stand.025_1809
LOS: 1.B.2.q
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning revising budgets in response to significant new information is true?
An organization should not allow revisions to budgets in response to significant new information as revisions make it harder to monitor and assess
performance.
An organization should allow revisions to budgets in response to significant new information as revisions make it easier to achieve budgeted targets.
Correct
An organization should allow revisions to budgets in response to significant new information as budgets built on invalid assumptions are not helpful
or useful.
An organization should not allow revisions to budgets in response to significant new information as managers who make faulty assumptions should
be held accountable for these mistakes.
Rationale
 An organization should not allow revisions to budgets in response to significant new information as revisions make it harder to monitor
and assess performance.
Incorrect. Budgets are only as valid as the assumptions used to create them. If significant new information is learned after a budget has been
created, the original budget is not really useful to monitor and assess performance. While revising estimates adds complexity to performance
evaluation, the additional complexity is likely worth the increased validity resulting from revising the budget.
Rationale
 An organization should allow revisions to budgets in response to significant new information as revisions make it easier to achieve
budgeted targets.
Incorrect. While revising estimates likely increases the accuracy of the budget, making it easier to achieve budgeted targets is not a valid reason for
making the revisions.
Rationale
 An organization should allow revisions to budgets in response to significant new information as budgets built on invalid assumptions
are not helpful or useful.
Correct. Budgets are only as valid as the assumptions used to create them. If significant new information is learned after a budget has been created,
the original budget is not really useful to monitor and assess performance. While revising estimates adds complexity to performance evaluation,
the additional complexity is likely worth the increased validity resulting from a more accurate revised budget.
Rationale
 An organization should not allow revisions to budgets in response to significant new information as managers who make faulty
assumptions should be held accountable for these mistakes.
Incorrect. Budgets are only as valid as the assumptions used to create them. If significant new information is learned after a budget has been
created, the original budget is not really useful to monitor and assess performance. Continuing to rely on a budget based on information everyone
knows is inaccurate is not a smart business decision. There are other ways to hold managers accountable for flawed estimates.
Question 33
1.B.2.n
tb.bud.stand.017_1809
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
All of the following statements concerning participative standards are correct except:
Correct
Participative standards tend to improve employee motivation less than authoritative standards.
Employees tend to accept and adopt participative standards more than authoritative standards.
Your Answer
Participative standards tend to be established less quickly than authoritative standards.
Participative standards tend to be less closely matched to company goals than authoritative standards.
Rationale
 Participative standards tend to improve employee motivation less than authoritative standards.
Correct. Participative standards are determined through dialogue and discussion between management and all groups that will implement the
standards. Because they are included in the standard-setting process, participative standards tend to improve employee motivation more than
authoritative standards.
Rationale
 Employees tend to accept and adopt participative standards more than authoritative standards.
Incorrect. Participative standards are determined through dialogue and discussion between management and all groups that will implement the
standards. Because they are included in the standard-setting process, employees tend to accept and adopt participative standards more than
authoritative standards.
Rationale
 Participative standards tend to be established less quickly than authoritative standards.
Incorrect. Participative standards are determined through dialogue and discussion between management and all groups that will implement the
standards. Because there is more discussion beyond top management ranks when the participative process is used, standards tend to be
established less quickly in the participative approach.
Rationale
 Participative standards tend to be less closely matched to company goals than authoritative standards.
Incorrect. Participative standards are determined through dialogue and discussion between management and all groups that will implement the
standards. People outside of top management are less likely to understand how standards track company goals. Because of the involvement of
people with less understanding of this relationship, participative standards tend to less closely match company goals.
Question 34
1.B.2.m
aq.bud.stand.002_0720
LOS: 1.B.2.m
Lesson Reference: Building Budget Standards
Difficulty: hard
Bloom Code: 5
The representative for the company's budgeting committee consults the production manager to set the standards for the upcoming quarter. Allowing for
normal work delays, spoilage, waste, employee rest periods, and machine downtime, the average defect rate is 2 out of 10 units per worker per day. In
addition, the manager provides the following information:
The average daily production is 10 total units per worker.
The production department operates for eight hours per day, five days a week.
The company assumes four work weeks per month.
The quarterly budget submitted by the budgeting committee assumes the monthly production target per worker to be 200 acceptable units (without
defects).
The board of directors disapproved the budget, stating it to be unattainable.
Under which of the following situations can the given budget be achieved?
Your Answer
The budget can be achieved if the production department is able to reduce the defect rate to 1 out of 10 units per day.
The budget can be achieved if the production department operates 45 hours in a week.
The budget can be achieved if the production manager allows for normal work delays, spoilage, waste, employee rest periods, and machine
downtime.
Correct
The budget can only be achieved with an ideal production standard provided by the most efficient and skilled workers at their best efficiency all of the
time.
Rationale
 The budget can be achieved if the production department is able to reduce the defect rate to 1 out of 10 units per day.
A new defect rate of 10% means that the average worker completes 9 acceptable units per day. This works out to 45 acceptable units per week for
the average worker, resulting in 45 acceptable units × 4 weeks in a month = 180 units < 200 units.
Rationale
 The budget can be achieved if the production department operates 45 hours in a week.
At the current 20% defect rate, the average worker completes 8 acceptable units per day (or one acceptable unit per hour). This works out to 40
acceptable units per week for the average worker. If the production department operates 45 hours in a week, that works out to an additional 5
acceptable units per week. This works out to (40 units + 5 units) × 4 weeks in a month = 180 units < 200 units.
Rationale
 The budget can be achieved if the production manager allows for normal work delays, spoilage, waste, employee rest periods, and
machine downtime.
If the production manager allows for normal work delays, spoilage, waste, employee rest periods, and machine downtime, there will not be enough
units produced to achieve the monthly production target of 200 units.
Rationale
 The budget can only be achieved with an ideal production standard provided by the most efficient and skilled workers at their best
efficiency all of the time.
Ideal standards allow for no work delays, interruptions, waste, or machine breakdown, which should result in a 0% defect rate. This standard
requires a level of effort that can be attained only by the most skilled and efficient employees working at their best efficiency all of the time. 10 units
per day × 5 days a week × 4 weeks = 200 units.
Question 35
1.B.2.m
tb.bud.stand.012_1809
LOS: 1.B.2.m
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
All of the following statements are examples of an ideal standard except:
A company assumes machines will run 24 hours a day for 7 days a week when forecasting annual production.
Correct
A company assumes machines will run 14 hours a day for 5 days a week when forecasting annual production.
A company assumes all workers are highly skilled and perform at peak efficiency at all times when forecasting annual production.
Your Answer
A company assumes there will be no waste when forecasting annual production.
Rationale
 A company assumes machines will run 24 hours a day for 7 days a week when forecasting annual production.
Incorrect. Ideal standards are sometimes called theoretical standards as they can only be achieved under perfect (or theoretical) conditions. One
example of perfect or theoretical conditions is assuming machines will constantly run without stoppages for preventative maintenance, employee
breaks, or weekends and holidays.
Rationale
 A company assumes machines will run 14 hours a day for 5 days a week when forecasting annual production.
Correct. Ideal standards are sometimes called theoretical standards as they can only be achieved under perfect (or theoretical) conditions.
Assuming production will not occur on weekends and that machines will operate less than 100% of the time is an example of a currently attainable
standard because currently attainable standards assume normal operating conditions.
Rationale
 A company assumes all workers are highly skilled and perform at peak efficiency at all times when forecasting annual production.
Incorrect. Ideal standards are sometimes called theoretical standards as they can only be achieved under perfect (or theoretical) conditions. One
example of perfect or theoretical conditions is assuming all workers are highly skilled and that they always perform at peak efficiency.
Rationale
 A company assumes there will be no waste when forecasting annual production.
Incorrect. Ideal standards are sometimes called theoretical standards as they can only be achieved under perfect (or theoretical) conditions. One
example of perfect or theoretical conditions is assuming there will be no waste in the production process.
Question 36
1.B.2.l
aq.bud.stand.001_0720
LOS: 1.B.2.l
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
Murphy Harvey, Inc. has completed one year of operations. For the upcoming year, the board of directors has prepared a budget planning its course of
actions throughout the year. However, the company's CFO is of the opinion that cost standards will not accurately predict future costs. Which of the
following conditions will most likely justify the CFO's view?
Correct
If raw materials will not be available at the prices estimated in the budget.
There is no way to justify the CFO's view. Budgets, if prepared correctly, accurately predict costs all the time.
Your Answer
If the company plans to make an investment in a new equipment.
If there is a negative change in expected sales.
Rationale
 If raw materials will not be available at the prices estimated in the budget.
If resources are available at a price higher than the price estimated in the budget, the company will incur more costs than estimated.
Rationale
 There is no way to justify the CFO's view. Budgets, if prepared correctly, accurately predict costs all the time.
The CFO, as the top executive in the budget process, certainly may have insight or perspective that can impact standard costs used in the budget.
Rationale
 If the company plans to make an investment in a new equipment.
If the company is planning on making an investment in a new equipment, this fact should already be included in the standard setting process for
costs.
Rationale
 If there is a negative change in expected sales.
If there is a negative change in sales, this does not necessarily affect the standard costs.
Question 37
1.B.2.s
cma11.p1.t1.me.0022_0820
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 1
A company uses participative budgeting. In order to more easily meet budgetary goals, the controller underestimates the amount of revenue and
overestimates fixed selling and administrative expenses. This is an example of
*Source: Retired ICMA CMA Exam Questions.
flexible budgeting.
Correct
budgetary slack.
zero-based budgeting.
Your Answer
budgetary variance.
Rationale
 flexible budgeting.
This answer is incorrect. Flexible budgeting is a budget developed using budgeted revenues and budgeted costs based on the actual output in the
budgeted period.
Rationale
 budgetary slack.
Budgetary slack occurs when a company utilizes a participative budgeting process and the managers involved set easily attainable targets for
themselves and their business entities. This can happen for a number of reasons, including job security or meeting goals for bonuses if performance
is tied to the achievement of budgeted numbers.
Rationale
 zero-based budgeting.
This answer is incorrect. Zero-based budgeting is a method of budgeting in which all expenses must be justified for each new period.
Rationale
 budgetary variance.
This answer is incorrect. Budgetary variance is the difference between actual results and budgeted results or expected results.
Question 38
1.B.2.o
1B2-W020
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
Which of the following factors affect the standard costs for direct labor?
Supply chain costs.
Product quality.
Correct
Nature of the manufacturing process.
Your Answer
Product's targeted market niche.
Rationale
 Supply chain costs.
This answer is incorrect. Supply chain costs will not affect the standard costs for direct labor.
Rationale
 Product quality.
This answer is incorrect. Product quality will not affect the standard costs for direct labor.
Rationale
 Nature of the manufacturing process.
Product complexity, personnel skill levels, the type and condition of equipment, and the nature of the manufacturing process will affect the direct
labor costs.
Rationale
 Product's targeted market niche.
This answer is incorrect. The product's targeted market niche will not affect the standard costs for direct labor.
Question 39
1.B.2.l
tb.bud.stand.006_1805
LOS: 1.B.2.l
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning the use of “standards” is correct?
“Standards” can be used to predict costs but not to evaluate performance.
“Standards” can be used to evaluate performance but not to predict costs.
Your Answer
“Standards” cannot be used to predict costs or to evaluate performance.
Correct
“Standards” can be used to predict costs and to evaluate performance.
Rationale
 “Standards” can be used to predict costs but not to evaluate performance.
“Standards” can be used to predict the quantity and cost of inputs needed for various levels of activity. They can also be used to evaluate
performance as one can compare the actual amount of an input used to the amount “allowed” to be used based on standards; therefore, this is an
incorrect answer.
Rationale
 “Standards” can be used to evaluate performance but not to predict costs.
“Standards” can be used to evaluate performance as one can compare the actual amount of an input used to the amount “allowed” to be used
based on standards. They can also be used to predict the quantity and cost of inputs needed for various levels of activity; therefore, this is an
incorrect answer.
Rationale
 “Standards” cannot be used to predict costs or to evaluate performance.
“Standards” can be used to predict the quantity and cost of inputs needed for various levels of activity. In addition, they can be used to evaluate
performance as one can compare the actual amount of an input used to the amount “allowed” to be used based on standards; therefore, this is an
incorrect answer.
Rationale
 “Standards” can be used to predict costs and to evaluate performance.
“Standards” are useful in the budgeting process as they represent expected or targeted level of performance. They can be used to predict the
quantity and cost of inputs needed for various levels of activity. In addition, they can be used to evaluate performance as one can compare the
actual amount of an input used to the amount “allowed” to be used based on standards. Therefore, this is the correct answer.
Question 40
1.B.2.n
1B2-LS41
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
In developing the budget for the next year, which one of the following approaches would most likely result in a successful budget with the greatest
amount of positive motivation and goal congruence?
*Source: Retired ICMA CMA Exam Questions.
Have senior management develop the overall goals and permit the divisional manager to determine how these goals will be met.
Correct
Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan.
Have the divisional and senior management jointly develop goals and objectives while constructing the corporation's overall plan of operation.
Permit the divisional manager to develop the goal for the division that in the manager's view will generate the greatest amount of profits.
Rationale
 Have senior management develop the overall goals and permit the divisional manager to determine how these goals will be met.
This answer is incorrect. Having senior management develop the overall goals and permitting the divisional manager to determine how these goals
will be met, compared to other options listed, will not result in a successful budget with the greatest amount of positive motivation and goal
congruence.
Rationale
 Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan.
Feedback: In any organization, it is important for the divisional and senior management to jointly develop goals, as it should be assured that these
goals meet the strategic goals of the organization. The implementation plan should be developed by the divisional manager, as the divisional
manager understands the roles of the members of the division and their impact on working towards the goals of the department.
Rationale
 Have the divisional and senior management jointly develop goals and objectives while constructing the corporation's overall plan of
operation.
This answer is incorrect. Having the divisional and senior management jointly develop goals and objectives while constructing the corporation's
overall plan of operation, compared to other options listed, will not result in a successful budget with the greatest amount of positive motivation
and goal congruence.
Rationale
 Permit the divisional manager to develop the goal for the division that in the manager's view will generate the greatest amount of
profits.
This answer is incorrect. Permitting the divisional manager to develop the goal for the division that in the manager's view will generate the greatest
amount of profits, compared to other options listed, will not result in a successful budget with the greatest amount of positive motivation and goal
congruence.
Question 41
1.B.2.q
tb.bud.stand.027_1809
LOS: 1.B.2.q
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning revising budgets in response to significant new information is true?
“We cannot revise the budget even though our labor wage rate increased by 20% because many of our performance targets will change.”
“We should revise the budget to reflect that our labor wage rate increased by 20% since it will be easier for us to hit our earnings targets if they are
revised downward.”
Correct
“We should revise the budget to reflect that our labor wage rate increased by 20% since the original cost estimates are not at all realistic and following
them is not helpful.”
“We should not revise the budget to reflect that our labor wage rate increased by 20% so that it is easier to see the missed estimate and hold the
responsible person accountable.”
Rationale
 “We cannot revise the budget even though our labor wage rate increased by 20% because many of our performance targets will
change.”
Incorrect. While revising estimates adds complexity to performance evaluation, the additional complexity is likely worth the increased validity
resulting from revising the budget.
Rationale
 “We should revise the budget to reflect that our labor wage rate increased by 20% since it will be easier for us to hit our earnings targets
if they are revised downward.”
Incorrect. While revising estimates likely increases the accuracy of the budget, making it easier to achieve budgeted targets is not a valid reason for
making the revisions.
Rationale
 “We should revise the budget to reflect that our labor wage rate increased by 20% since the original cost estimates are not at all
realistic and following them is not helpful.”
Correct. Budgets are only as valid as the assumptions used to create them. If significant new information is learned after a budget has been created,
the original budget is not really useful to monitor and assess performance. While revising estimates adds complexity to performance evaluation,
the additional complexity is likely worth the increased validity resulting from a more accurate revised budget.
Rationale
 “We should not revise the budget to reflect that our labor wage rate increased by 20% so that it is easier to see the missed estimate and
hold the responsible person accountable.”
Incorrect. Continuing to rely on a budget based on information everyone knows is inaccurate is not a smart business decision. There are other ways
to hold managers accountable for flawed estimates.
Question 42
1.B.2.m
tb.bud.stand.011_1809
LOS: 1.B.2.m
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
All of the following statements concerning currently attainable standards are correct except:
Currently attainable standards assume machines will be taken off-line for preventative maintenance.
Currently attainable standards assume employees work at a normal pace.
Correct
Currently attainable standards can only be reached by the most skilled and efficient employees.
Currently attainable standards are expected to be achieved most of the time.
Rationale
 Currently attainable standards assume machines will be taken off-line for preventative maintenance.
Incorrect. Currently attainable standards are sometimes called reasonably attainable standards as they can be achieved under normal operating
conditions. One example of normal operating conditions is that machines need to be taken off-line for preventative maintenance from time to time
to keep them operating properly.
Rationale
 Currently attainable standards assume employees work at a normal pace.
Incorrect. Currently attainable standards are sometimes called reasonably attainable standards as they can be achieved under normal operating
conditions. One example of normal operating conditions is that employees work at a normal pace by taking breaks from time to time.
Rationale
 Currently attainable standards can only be reached by the most skilled and efficient employees.
Correct. An organization can use ideal standards or currently attainable standards to develop budgets. Ideal standards can only be reached by the
most skilled and efficient employees while currently attainable standards require average workers who are properly trained.
Rationale
 Currently attainable standards are expected to be achieved most of the time.
Incorrect. Currently attainable standards are sometimes called reasonably attainable standards as they can be achieved under normal operating
conditions. Because they can be achieved under normal operating conditions, they should be achieved most of the time.
Question 43
1.B.2.s
tb.bud.stand.001_1805
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Joan King, a manager with Steel Works Inc., would love to “beat the budget” this year. She believes that revenues for the coming year will be $200,000
and expenses will be $120,000. To build in budgetary slack, Joan is most likely to budget for which of the following?
$110,000 of expenses
Correct
$130,000 of expenses
$210,000 of revenue
$80,000 of income
Rationale
 $110,000 of expenses
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $110,000 in expenses, the company
budgets for $90,000 in net income rather than $80,000 in net income ($200,000 − $120,000). It is more difficult to achieve net income of $90,000 than
net income of $80,000. Therefore, this is an incorrect answer.
Rationale
 $130,000 of expenses
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. This could lead to goal incongruence since the manager's
incentive to “beat the budget” conflicts with the organization's goal of developing a budget based on realistic expectations. It can be accomplished
by budgeting for less revenue than expected or more expenses than expected. In both cases budgeted net income will be lower than expected net
income. This increases the chances of achieving the actual expected net income. By budgeting for $130,000 in expenses, the company budgets for
$70,000 in net income rather than $80,000 in net income ($200,000 − $120,000). It is easier to achieve net income of $70,000 than net income of
$80,000. Therefore, this is the correct answer.
Rationale
 $210,000 of revenue
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $210,000 in revenue, the company
budgets for $90,000 in net income rather than $80,000 in net income ($200,000 − $120,000). It is more difficult to achieve net income of $90,000 than
net income of $80,000. Therefore, this is an incorrect answer.
Rationale
 $80,000 of income
Budgetary slack is used to increase the chances of achieving budgetary goals and targets. By budgeting for $80,000 in net income, it is not
increasing the odds of achieving the actual targeted net income of $80,000 ($200,000 − $120,000). Therefore, this is an incorrect answer.
Question 44
1.B.2.l
tb.bud.stand.005_1805
LOS: 1.B.2.l
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning the use of “standards” in budgeting is correct?
“Standards” only involve the expected amount of inputs needed to complete an activity.
Your Answer
“Standards” only involve the expected price of inputs in an activity.
Correct
“Standards” represent expected or targeted level of performance.
“Standards” do not change from one period to the next.
Rationale
 “Standards” only involve the expected amount of inputs needed to complete an activity.
While “standards” do involve the expected amount of a resource needed to complete an activity, they also involve the expected price of inputs in
the activity; therefore, this is an incorrect answer.
Rationale
 “Standards” only involve the expected price of inputs in an activity.
While “standards” do involve the expected price of inputs in an activity, they also involve the expected amount of a resource needed to complete
the activity; therefore, this is an incorrect answer.
Rationale
 “Standards” represent expected or targeted level of performance.
“Standards” are useful in the budgeting process as they represent expected or targeted level of performance. They can be used to predict the
amount of an input needed for an expected level of activity (for example, the time needed to complete a task or the amount of materials needed to
complete a unit of output as well as the expected cost of that resource (for example, the cost per hour of labor or the cost per pound of material).
They should be based on expected or targeted level of performance. Standards based on expected performance can result in the most accurate
forecasts, while standards based on targeted performance can provide motivation to achieve targets. Therefore, this is the correct answer.
Rationale
 “Standards” do not change from one period to the next.
Standards should be updated periodically to reflect changes in conditions. For example, new technology may reduce the amount of time needed to
complete an activity. Therefore, this is an incorrect answer.
Question 45
1.B.2.s
1B2-LS01
LOS: 1.B.2.s
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
Which of the following groups is most likely to introduce budget slack into a budget?
Budget committee.
Top management.
Your Answer
Board of directors.
Correct
Middle and lower management.
Rationale
 Budget committee.
This answer is incorrect. The budget committee is not likely to introduce budget slack into a budget.
Rationale
 Top management.
This answer is incorrect. Top management is not likely to introduce budget slack into a budget.
Rationale
 Board of directors.
This answer is incorrect. The board of directors is not likely to introduce budget slack into a budget.
Rationale
 Middle and lower management.
Middle and lower managers introduce budget slack by building in some extra money for their budget to deal with the unexpected.
Question 46
1.B.2.l
tb.bud.stand.008_1805
LOS: 1.B.2.l
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Which of the following is not an example of a standard that can be used in budgeting?
A company expects that it will take 20 minutes to complete a step in the manufacturing process.
Correct
A company pays $25 per pound for direct materials.
Your Answer
A company expects it will pay $27 per pound for direct materials.
A company expects it will cost $100 to manufacture a product.
Rationale
 A company expects that it will take 20 minutes to complete a step in the manufacturing process.
A company expecting to take 20 minutes to complete a step in the manufacturing process is an example of a standard as it can be used to predict
manufacturing costs to include in a budget; therefore, this is an incorrect answer.
Rationale
 A company pays $25 per pound for direct materials.
“Standards” are useful in the budgeting process as they represent expected or targeted level of performance. They can be used to predict the
amount of an input needed for an expected level of activity (for example, the time needed to complete a task or the amount of materials needed to
complete a unit of output as well as the expected cost of that resource (for example, the cost per hour of labor or the cost per pound of material). A
company paying $25 per pound for direct materials is not an example of a standard as it represents actual cost, not budgeted costs; therefore, this
is the correct answer.
Rationale
 A company expects it will pay $27 per pound for direct materials.
A company expecting to pay $27 per pound for direct materials is an example of a standard as it can be used to predict material costs to include in a
budget; therefore, this is an incorrect answer.
Rationale
 A company expects it will cost $100 to manufacture a product.
A company expecting to pay $100 to manufacture a product is an example of a standard as it can be used to predict manufacturing costs to include
in a budget; therefore, this is an incorrect answer.
Question 47
1.B.2.q
aq.bud.stand.008_0720
LOS: 1.B.2.q
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
The production manager of Brian Matthews Group has received an urgent order from a regular customer for an additional 10,000 units. To fulfill the
order, the employees need to work overtime. The overtime wages will be 150% of the usual hourly wage rate. However, the personnel manager is not in
favor of allowing overtime because this will use up too much of the budgeted wages for the quarter. Which of the following alternatives will most likely
undermine the personnel manager's argument?
Your Answer
The personnel manager should not allow overtime as the actual wages will increase the budgeted wages.
Correct
The personnel manager should allow overtime to avoid losing its regular customer.
The production manager should provide the extra units to the customer by postponing other less urgent orders.
The production manager should not accept the order for extra units as this will affect the current personnel budget.
Rationale
 The personnel manager should not allow overtime as the actual wages will increase the budgeted wages.
The actual wages will not affect the amount of the wages budgeted.
Rationale
 The personnel manager should allow overtime to avoid losing its regular customer.
Rigid enforcement of budgets will, in some situations, cost an organization more in the long run than if some flexibility is allowed. Therefore, in this
situation, the personnel manager should allow the overtime and exceed the budgeted wages rather than losing its customer.
Rationale
 The production manager should provide the extra units to the customer by postponing other less urgent orders.
This would avoid overtime; however, it could have a negative impact on other customers.
Rationale
 The production manager should not accept the order for extra units as this will affect the current personnel budget.
This statement agrees with the personnel manager's argument. What other argument would undermine the manager's position?
Question 48
1.B.2.q
tb.bud.stand.026_1809
LOS: 1.B.2.q
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 3
Which of the following statements concerning revising budgets in response to significant new information is true?
“We cannot revise the budget even though our main raw material increased in price by 15% because many of our performance targets will change.”
“We should revise the budget to reflect that our main raw material increased in price by 15% since it will be easier for us to hit our earnings targets if
they are revised downward.”
“We should not revise the budget to reflect that our main raw material increased in price by 15% so that it is easier to see the missed estimate and
hold the responsible person accountable.”
Correct
“We should revise the budget to reflect that our main raw material increased in price by 15% since the original cost estimates are not at all realistic
and following them is not helpful.”
Rationale
 “We cannot revise the budget even though our main raw material increased in price by 15% because many of our performance targets
will change.”
Incorrect. Budgets are only as valid as the assumptions used to create them. If significant new information is learned after a budget has been
created, the original budget is not really useful to monitor and assess performance. While revising estimates adds complexity to performance
evaluation, the additional complexity is likely worth the increased validity resulting from revising the budget.
Rationale
 “We should revise the budget to reflect that our main raw material increased in price by 15% since it will be easier for us to hit our
earnings targets if they are revised downward.”
Incorrect. While revising estimates likely increases the accuracy of the budget, making it easier to achieve budgeted targets is not a valid reason for
making the revisions.
Rationale
 “We should not revise the budget to reflect that our main raw material increased in price by 15% so that it is easier to see the missed
estimate and hold the responsible person accountable.”
Incorrect. Budgets are only as valid as the assumptions used to create them. If significant new information is learned after a budget has been
created, the original budget is not really useful to monitor and assess performance. Continuing to rely on a budget based on information everyone
knows is inaccurate is not a smart business decision. There are other ways to hold managers accountable for flawed estimates.
Rationale
 “We should revise the budget to reflect that our main raw material increased in price by 15% since the original cost estimates are not at
all realistic and following them is not helpful.”
Correct. Budgets are only as valid as the assumptions used to create them. If significant new information is learned after a budget has been created,
the original budget is not really useful to monitor and assess performance. While revising estimates adds complexity to performance evaluation,
the additional complexity is likely worth the increased validity resulting from a more accurate revised budget.
Question 49
1.B.2.o
1B2-W021
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
The production manager of Eileen Corp. is responsible for determining the standard cost for direct materials during budget preparation. For ascertaining
the supply chain costs he always selects the lowest-cost vendor. How will this affect the general cost behavior?
Correct
The costs will vary each year.
The costs will remain more stable each year.
Your Answer
The costs will remain fixed each year.
The costs behavior cannot be determined.
Rationale
 The costs will vary each year.
Selecting the lowest cost vendor each time will result in varying costs each year as the vendor quoting the lowest cost is likely to change every year.
Rationale
 The costs will remain more stable each year.
This answer is incorrect. Selecting the lowest cost vendor each year will not result in costs that remain more stable each year.
Rationale
 The costs will remain fixed each year.
This answer is incorrect. Selecting the lowest cost vendor each year will not result in costs that remain fixed each year.
Rationale
 The costs behavior cannot be determined.
This answer is incorrect. The cost behavior can be determined based on the information provided.
Question 50
1.B.2.p
tb.bud.stand.023_1809
LOS: 1.B.2.p
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning establishing standards is true?
Activity analysis involves analyzing past performance data to determine the average time needed to perform the activity.
Correct
Activity analysis involves analyzing the steps in a process to determine the average time needed to perform the activity.
Your Answer
Activity analysis uses existing information to establish standards.
One problem with activity analysis is that past data may not be reliable.
Rationale
 Activity analysis involves analyzing past performance data to determine the average time needed to perform the activity.
Incorrect. Historical analysis, not activity analysis, analyzes past performance data to determine the average time needed to perform an activity.
Rationale
 Activity analysis involves analyzing the steps in a process to determine the average time needed to perform the activity.
Correct. In activity analysis, the activities themselves are analyzed to determine the resources and steps needed to perform an activity.
Rationale
 Activity analysis uses existing information to establish standards.
Incorrect. Historical analysis, not activity analysis, uses existing information to establish standards.
Rationale
 One problem with activity analysis is that past data may not be reliable.
Incorrect. In historical analysis, past performance data is used to determine the average time needed to perform an activity. Historical data may not
be reliable in establishing standards as current operating conditions may differ from the conditions that existed when the data were collected. This
means that unreliable past data is a problem with historical analysis, not activity analysis.
Question 51
1.B.2.n
tb.bud.stand.018_1809
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
All of the following statements concerning authoritative standards are correct except:
Employees tend to resent authoritative standards more than participative standards.
Correct
Authoritative standards tend to be established less quickly than participative standards.
Authoritative standards tend to improve employee motivation less than participative standards.
Authoritative standards tend to be more closely matched to company goals than participative standards.
Rationale
 Employees tend to resent authoritative standards more than participative standards.
Incorrect. Authoritative standards are determined exclusively by management. Because they are not included in the standard-setting process,
employees tend to resent authoritative standards more than participative standards.
Rationale
 Authoritative standards tend to be established less quickly than participative standards.
Correct. Authoritative standards are determined exclusively by management. Because there is no discussion outside of management ranks when
the authoritative process is used, standards tend to be established more quickly in the authoritative approach, not less quickly.
Rationale
 Authoritative standards tend to improve employee motivation less than participative standards.
Incorrect. Authoritative standards are determined exclusively by management. Because they are not included in the standard-setting process,
authoritative standards tend to improve employee motivation less than participative standards.
Rationale
 Authoritative standards tend to be more closely matched to company goals than participative standards.
Incorrect. Authoritative standards are determined exclusively by management. Management is more likely than others to understand how
standards track company goals. Because only people with this knowledge are involved in the authoritative approach, these standards tend to more
closely match company goals.
Question 52
1.B.2.q
1B2-LS28
LOS: 1.B.2.q
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
A company allows its managers to regularly revise the budget whenever they feel that circumstances merit a change. Which of the following is not a risk
for such a policy?
Employees may not be motivated to work as hard toward their goals.
Correct
Employees may be confused due to less clear operating guidelines.
Managers may set the threshold for revisions too low, and changes could occur too frequently.
Managers may anticipate changes and not prepare budgets carefully.
Rationale
 Employees may not be motivated to work as hard toward their goals.
This answer is incorrect. Employees not motivated to work as hard toward their goals is a risk that comes from allowing managers to regularly
revise the budget whenever they feel that circumstances merit a change.
Rationale
 Employees may be confused due to less clear operating guidelines.
Regular revisions usually provide clearer operating guidelines. The other options are all risks of regular revisions.
Rationale
 Managers may set the threshold for revisions too low, and changes could occur too frequently.
This answer is incorrect. Managers setting the threshold for revisions too low and making changes too frequently is a risk that comes from allowing
managers to regularly revise the budget whenever they feel that circumstances merit a change.
Rationale
 Managers may anticipate changes and not prepare budgets carefully.
This answer is incorrect. Managers anticipating changes and not preparing budgets carefully is a risk that comes from allowing managers to
regularly revise the budget whenever they feel that circumstances merit a change.
Question 53
1.B.2.n
1B2-LS06
LOS: 1.B.2.n
Lesson Reference: Building Budget Standards
Difficulty: easy
Bloom Code: 2
The major disadvantage of a top-down budgeting process is:
lack of involvement by upper-level management.
Your Answer
inconsistencies of goals with strategic plans.
Correct
lack of buy-in by middle and lower-level management.
the introduction of budgetary slack.
Rationale
 lack of involvement by upper-level management.
This answer is incorrect. In a top-down budgeting process, upper-level management creates the budget and communicates goals to managers at
lower levels.
Rationale
 inconsistencies of goals with strategic plans.
This answer is incorrect. One advantage of the top-down budgeting process is a budget containing goals consistent with strategic plans.
Rationale
 lack of buy-in by middle and lower-level management.
In a top-down approach, upper-level management creates the budget and communicates goals to managers at lower levels. Two advantages of this
method are lack of budgetary slack and consistency of goals with strategic plans. One disadvantage is lack of buy-in from lower-level managers.
Rationale
 the introduction of budgetary slack.
This answer is incorrect. One advantage of the top-down budgeting process is a budget lacking budgetary slack.
Question 54
1.B.2.o
aq.bud.stand.006_0720
LOS: 1.B.2.o
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 3
Thomas Corp is developing a standard cost sheet to specify the standard price and standard quantity of direct labor used to build a single widget. Which
of the following includes the proper steps to be taken in developing the standard quantity of direct labor used to build a single widget?
Calculate the time taken to produce a single widget, adjust for direct material handling expense, adjust for expected downtime, and adjust for normal
rejected units.
Your Answer
Calculate the time taken to produce a single widget, adjust for scheduled breaks, adjust for direct material handling expense, adjust for expected
downtime, and adjust for normal rejected units.
Correct
Calculate the time taken to produce a single widget, adjust for scheduled breaks, adjust for expected downtime, and adjust for normal rejected units.
Calculate the time taken to produce a single widget, adjust for expected downtime, and adjust for normal rejected units.
Rationale
 Calculate the time taken to produce a single widget, adjust for direct material handling expense, adjust for expected downtime, and
adjust for normal rejected units.
The proper steps to be taken in developing the standard quantity of direct labor used to build a single widget do not include adjusting for direct
material handling expense (as this is considered in the standard price of a standard amount of direct material), but does include adjusting for
scheduled breaks.
Rationale
 Calculate the time taken to produce a single widget, adjust for scheduled breaks, adjust for direct material handling expense, adjust for
expected downtime, and adjust for normal rejected units.
The proper steps to be taken in developing the standard quantity of direct labor used to build a single widget do not include adjusting for direct
material handling expense (as this is considered in the standard price of a standard amount of direct material).
Rationale
 Calculate the time taken to produce a single widget, adjust for scheduled breaks, adjust for expected downtime, and adjust for normal
rejected units.
These are the proper steps to be taken in developing the standard quantity of direct labor used to build a single widget.
Rationale
 Calculate the time taken to produce a single widget, adjust for expected downtime, and adjust for normal rejected units.
The proper steps to be taken in developing the standard quantity of direct labor used to build a single widget also include adjusting for scheduled
breaks.
Question 55
1.B.2.m
1B2-W009
LOS: 1.B.2.m
Lesson Reference: Building Budget Standards
Difficulty: medium
Bloom Code: 4
The board of directors of Tim Craig Group wishes to increase the production for the current year. During the preparation of current year's budget, the
company's production manager set the employee targets higher than the previous year. He was of the view that higher targets will motivate the
employees to increase their productivity. Evaluate the validity of the production manager's decision.
His decision is incorrect as the labor efficiency variance will be lower than the previous year.
Correct
His decision is incorrect as employees may not strive to achieve targets they view as unrealistic.
His decision is correct as the employee turnover will decrease.
His decision is correct as the employees' current year's performance will improve as compared to the previous year.
Rationale
 His decision is incorrect as the labor efficiency variance will be lower than the previous year.
This answer is incorrect. If the labor efficiency variance will be lower this year compared to the previous year, then his decision would be correct.
However, based on the information provided, the labor efficiency variance will most likely increase.
Rationale
 His decision is incorrect as employees may not strive to achieve targets they view as unrealistic.
If the benchmark for employees is set too high, they may not strive to achieve targets they view as unrealistic. As a result, the variances from
budgets will be high.
Rationale
 His decision is correct as the employee turnover will decrease.
This answer is incorrect. If the employee turnover will decrease, then his decision would be correct. However, based on the information provided,
the employee turnover will most likely increase.
Rationale
 His decision is correct as the employees' current year's performance will improve as compared to the previous year.
This answer is incorrect. If the employees' current year's performance will improve compared to the previous year, then his decision would be
correct. However, based on the information provided, the employees' performance will most likely get worse.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.3.c
tb.reg.anal.001_1805
LOS: 1.B.3.c
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
Gill's Golf Gear (GGG) conducted a regression analysis on its shipping costs for the last year, which resulted in the following equation: $2.30x + $375. If
GGG plans to ship 320 boxes of golf balls next month, what are the shipping costs expected to be?
$377.30
$736.00
Your Answer
$862.50
Correct
$1,111.00
Rationale
 $377.30
Based on the regression analysis performed, GGG's fixed costs for 320 shipments are estimated as $375. For the total cost for 320 shipments to be
$377.30 the total variable cost would have to be $2.30. That is the variable cost for one shipment, not for 320 shipments; therefore, this is an
incorrect answer.
Rationale
 $736.00
Based on the regression analysis performed, GGG's variable costs for 320 shipments are estimated as $736 ($2.30 × 320); however, the $736 does not
take fixed costs into consideration. Therefore, this is an incorrect answer.
Rationale
 $862.50
If GGG multiplied the “intercept” of $375 by the “slope coefficient” of $2.30 the result would be $862.50 ($375 × $2.30). This is not the proper way to
estimate costs using the results of regression analysis; therefore, this is an incorrect answer.
Rationale
 $1,111.00
Regression analysis uses past data to develop an equation that can be used to make predictions about the future. Simple regression involves using
one independent variable (for example, sales, production, or some other measure of volume) to predict future costs. Regression analysis produces
an “intercept” and a “slope coefficient.” The “intercept” is the estimate of fixed costs and the “slope coefficient” is the estimate of variable cost per
unit of volume. Based on the regression analysis performed, GGG's fixed costs for 320 shipments are estimated as $375 and variable costs for 320
shipments are estimated as $736 ($2.30 × 320). This results in a total estimated cost for 320 shipments of $1,111.00 ($736 + $375); therefore, this is
the correct answer.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.3.a
tb.reg.anal.005_1805
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
Which of the following correctly describes the use of the output from a simple linear regression analysis?
The coefficient of the “intercept” is the estimate of variable amount per unit of the independent variable and the coefficient on the independent
variable is the estimate of the fixed component of the dependent variable.
Correct
The coefficient of the “intercept” is the estimate of the fixed component of the dependent variable and the coefficient on the independent variable is
the estimate of variable amount per unit of the independent variable.
Your Answer
The coefficient of the “intercept” is the estimate of the total amount of the dependent variable and the coefficient on the independent variable is the
estimate of the variable amount per unit of the independent variable.
The coefficient of the “intercept” is the estimate of the fixed component of the dependent variable and the coefficient on the independent variable is
the estimate of the amount of variability explained by the regression equation.
Rationale
 The coefficient of the “intercept” is the estimate of variable amount per unit of the independent variable and the coefficient on the
independent variable is the estimate of the fixed component of the dependent variable.
The “intercept” is the point on the vertical axis (y-axis) where the line estimated by the equation begins. This means it is not the variable amount
per unit of the independent variable. The coefficient on the independent variable is the slope of the estimated line from the regression equation.
Another way of saying that is that it is an estimate of how much the dependent variable changes when the independent variable changes by one
unit over the relevant range of activity. This means it is not an estimate of the fixed component of the dependent variable. Therefore, this is an
incorrect answer.
Rationale
 The coefficient of the “intercept” is the estimate of the fixed component of the dependent variable and the coefficient on the
independent variable is the estimate of variable amount per unit of the independent variable.
Simple linear regression is a statistical technique where past data is used to develop an equation that can be used to predict something of interest.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. The
“intercept” is the point on the vertical axis (y-axis) where the line estimated by the equation begins. This means it is an estimate of the fixed
component of the dependent variable, assuming we are within the relevant range of activity. The coefficient on the independent variable is the
slope of the estimated line. Another way of saying that is that it is an estimate of how much the dependent variable changes when the independent
variable changes by one unit over the relevant range of activity. This means it is an estimate of the variable amount per unit of the independent
variable. Therefore, this is the correct answer.
Rationale
 The coefficient of the “intercept” is the estimate of the total amount of the dependent variable and the coefficient on the independent
variable is the estimate of the variable amount per unit of the independent variable.
The coefficient on the independent variable is the slope of the estimated line. Another way of saying that is that it is an estimate of how much the
dependent variable changes when the independent variable changes by one unit over the relevant range of activity. This means it is an estimate of
the variable amount per unit of the independent variable. However, the coefficient on the “intercept” is not an estimate of the total amount of the
dependent variable; therefore, this is an incorrect answer.
Rationale
 The coefficient of the “intercept” is the estimate of the fixed component of the dependent variable and the coefficient on the
independent variable is the estimate of the amount of variability explained by the regression equation.
The “intercept” is the point on the vertical axis (y-axis) where the line estimated by the equation begins. This means it is an estimate of the fixed
component of the dependent variable, assuming we are within the relevant range of activity. However, the coefficient on the independent variable
is not the amount of variability explained by the regression equation. That is measured by the coefficient of determination (R-squared); therefore,
this is an incorrect answer.
Question 3
1.B.3.a
aq.reg.anal.001_0720
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
The CFO of Maureen Systems prepares targets for future years using historical data. However, for the last two years, the company has failed to achieve
the targeted results. The CFO has employed a team of analysts solely for the preparation of budgets for the upcoming year. The new team uses a
forecasted budget to set targets for the future years rather than carrying forward increases in past results based on historical data. Evaluate the validity
of the new team's approach.
Correct
The new team's approach is better because the forecasted budget takes into account future conditions that were not present in past years.
The new team's approach is better because the forecasted budget quantifies the effect of unexpected adverse circumstances that may hinder
achievement of targets.
Your Answer
The new team's approach is not better because the forecasted budget sets targets higher than previous years.
The new team's approach is not better because the increased historical targets should be the ideal target as they define and approach the capacity of
an entity.
Rationale
 The new team's approach is better because the forecasted budget takes into account future conditions that were not present in past
years.
Employing a forecasted budget as a plan allows for the use of the expected results as the benchmark. Another benefit of using a forecasted budget
instead of historical results is that past performance is not always indicative of future results. A budget may be able to predict and account for such
shifts, but relying only on increases on historical data leads to a sense that the past year must always be improved on, irrespective of the
circumstances.
Rationale
 The new team's approach is better because the forecasted budget quantifies the effect of unexpected adverse circumstances that may
hinder achievement of targets.
The forecasted budget does not quantify the effect of unexpected adverse circumstances. Employing a forecasted budget as a plan allows for the
use of the expected results as the benchmark.
Rationale
 The new team's approach is not better because the forecasted budget sets targets higher than previous years.
The new team's approach does not necessarily set targets higher than previous years. Employing a forecasted budget as a plan allows for the use of
the expected results as the benchmark. Relying only on historical data leads to a sense that the past year must always be improved on, irrespective
of the circumstances. In this situation, the team could have set targets lower than previous years because of new circumstances.
Rationale
 The new team's approach is not better because the increased historical targets should be the ideal target as they define and approach
the capacity of an entity.
Past performance is not always indicative of future results.
Question 4
1.B.3.c
aq.reg.anal.006_0720
LOS: 1.B.3.c
Lesson Reference: Regression Analysis
Difficulty: hard
Bloom Code: 5
Eight quarters of production data from Pear, Inc., a cell phone manufacturing company, are presented below.
Pear, Inc.
Quarter Phones
Cost
1
2,331 $3,245,874
2
2,657 $3,474,318
3
1,987 $2,883,675
4
2,412 $3,287,621
5
2,583 $3,354,966
6
2,497 $3,428,752
7
2,285 $3,152,347
8
2,645 $3,271,899
The regression analysis results on these data are displayed below.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept $1,473,119
Phones
$738
$356,978
4.13
0.01
$147
5.03
0.00
$599,625 $2,346,614
$379
$1,097
Regression Statistics
Multiple R
0.90
R Square
0.81
Adjusted R Square
Standard Error
Observations
0.78
$87,127
8
Based on the regression analysis result above, and with approximately 68% confidence, predict the total cost to produce 2,500 phones next quarter.
Your Answer
$3,318,119
Between $2,960,994 and $3,675,244
Correct
Between $3,230,992 and $3,405,246
Between $3,143,865 and $3,492,373
Rationale
 $3,318,119
This answer calculates the estimated total cost using the regression equation (total cost equation): Total costs = ($738 × 2,500 phones) + $1,473,119
= $3,318,119. However, this answer does not provide a 68% confidence interval around that estimate.
Rationale
 Between $2,960,994 and $3,675,244
This answer calculates the estimated total cost using the regression equation (total cost equation) and then uses the standard error for both total
fixed costs of $356,978 and variable cost per phone of $147 to develop a 68% confidence interval. However, the standard error for the total cost
estimate is $87,127, and this amount should be used to calculate a 68% confidence interval.
Rationale
 Between $3,230,992 and $3,405,246
This answer calculates the estimated total cost using the regression equation (total cost equation): Total costs = ($738 × 2,500 phones) + $1,473,119
= $3,318,119. Then it calculates the 68% confidence interval, which is one standard error: $3,318,119 ± $87,127 = between $3,230,992 and
$3,405,246.
Rationale
 Between $3,143,865 and $3,492,373
This answer calculates the estimated total cost using the regression equation (total cost equation): Total costs = ($738 × 2,500 phones) + $1,473,119
= $3,318,119. But it then calculates a 95% confidence interval instead of a 68% confidence interval by using two standard errors.
Question 5
1.B.3.c
tb.reg.anal.010_1805
LOS: 1.B.3.c
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
Ben's Toy Shop performed a regression analysis on its shipping costs for the previous 12 months. The number of units shipped during those 12 months
ranged from 1,500 units to 2,150 units. The regression analysis yielded an intercept of $10,000, a coefficient on units shipped of $25, and an R-squared of
94.2%. If Ben expects to ship 1,800 units in the next month, what would Ben estimate total shipping costs to be?
$51,810
Correct
$55,000
Your Answer
$45,000
$63,750
Rationale
 $51,810
Based on the regression analysis performed, Ben's fixed costs to ship 1,800 units are estimated as $10,000 and variable costs to ship 1,800 units are
estimated as $45,000 ($25 × 1,800). This results in a total estimated cost to ship 1,800 units of $55,000 ($10,000 + $45,000). If this estimate is
multiplied by the R-squared of 94.2%, the revised estimate would be $51,810. R-squared is used to evaluate the accuracy of the regression model,
not as part of the estimation process; therefore, this is an incorrect answer.
Rationale
 $55,000
Regression analysis produces an “intercept” and a “slope coefficient.” The “intercept” is the estimate of fixed costs and the “slope coefficient” is the
estimate of variable cost per unit of volume. Based on the regression analysis performed, Ben's fixed costs to ship 1,800 units are estimated as
$10,000 and variable costs to ship 1,800 units are estimated as $45,000 ($25 × 1,800). This results in a total estimated cost to ship 1,800 units of
$55,000 ($10,000 + $45,000); therefore, this is the correct answer.
Rationale
 $45,000
Based on the regression analysis performed, Ben's variable costs to ship 1,800 units are estimated as $45,000 ($25 × 1,800). The fixed costs also
need to be included; therefore, this is an incorrect answer.
Rationale
 $63,750
Based on the regression analysis performed, Ben's fixed costs to ship 1,800 units are estimated as $10,000. If the highest number of units shipped
from the previous year (2,150) is mistakenly used, variable costs will be estimated as $53,750 ($25 × 2,150). This results in a total estimated cost of
$63,750 ($10,000 + $53,750). This is not the correct way to estimate total variable costs; therefore, this is an incorrect answer.
Question 6
1.B.3.b
aq.reg.anal.007_0720
LOS: 1.B.3.b
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
Eight quarters of production data from Pear, Inc., a cell phone manufacturing company, are presented below.
Pear, Inc.
Quarter Phones Shut Downs
Cost
1
2,331
2
$3,245,874
2
2,657
1
$3,474,318
3
1,987
3
$2,883,675
4
2,412
2
$3,287,621
5
2,583
1
$3,354,966
6
2,497
3
$3,428,752
7
2,285
2
$3,152,347
8
2,645
0
$3,271,899
The regression analysis results on these data are displayed below.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept
Phones
Shut Downs
$466,096
$309,413
1.51
0.19 −$329,275 $1,261,467
$1,080
$114
9.50
0.00
$788
$1,373
$100,963
$24,675
4.09
0.01
$37,534
$164,391
Regression Statistics
Multiple R
0.98
R Square
0.96
Adjusted R Square
Standard Error
0.94
$45,769
Observations
8
What is the regression equation (total cost equation) for the above information?
Total costs = $1,080(Phones) + $466,096
Your Answer
Total costs = $24,675(Shut Downs) + $309,413
Correct
Total costs = $1,080(Phones) + $100,963(Shut Downs) + $466,096
Total costs = $114(Phones) + $24,675(Shut Downs) + $309,413
Rationale
 Total costs = $1,080(Phones) + $466,096
This answer fails to include the Shut Down coefficient in the regression equation (total cost equation).
Rationale
 Total costs = $24,675(Shut Downs) + $309,413
This answer mistakes the standard error for the coefficients. The coefficients are used to create the regression equation (total cost equation). This
answer also fails to include the Phones coefficient in the regression equation (total cost equation).
Rationale
 Total costs = $1,080(Phones) + $100,963(Shut Downs) + $466,096
This is the correct regression equation (total cost equation) for the above information.
Rationale
 Total costs = $114(Phones) + $24,675(Shut Downs) + $309,413
This answer mistakes the standard error for the coefficients. The coefficients are used to create the regression equation (total cost equation).
Question 7
1.B.3.b
tb.reg.anal.008_1805
LOS: 1.B.3.b
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
How does a multiple linear regression equation differ from a simple linear regression equation?
Correct
More than one independent variable is used to predict a dependent variable in a multiple linear regression equation but only one independent
variable is used to predict a dependent variable in a simple linear regression equation.
More than one dependent variable is predicted by a multiple linear regression equation but only one dependent variable is predicted in a simple
linear regression equation.
Your Answer
A multiple linear regression is likely to be less accurate than a simple linear regression model.
A multiple linear regression is likely to be less difficult to interpret than a simple linear regression model.
Rationale
 More than one independent variable is used to predict a dependent variable in a multiple linear regression equation but only one
independent variable is used to predict a dependent variable in a simple linear regression equation.
Linear regression is a statistical technique where past data is used to develop an equation that can be used to predict something of interest. The
factor being predicted is the dependent variable and the factor or factors used to predict the dependent variable are the independent variables. In
multiple linear regression two or more independent variables are used to predict the dependent variable while only one independent variable is
used to predict the dependent variable in simple linear regression. Therefore, this is the correct answer.
Rationale
 More than one dependent variable is predicted by a multiple linear regression equation but only one dependent variable is predicted in
a simple linear regression equation.
There is only one dependent variable in both types of regression; therefore, this is an incorrect answer.
Rationale
 A multiple linear regression is likely to be less accurate than a simple linear regression model.
In multiple linear regression two or more independent variables are used to predict the dependent variable while only one independent variable is
used to predict the dependent variable in simple linear regression. Because multiple linear regression uses more than one independent variable to
predict a dependent variable, it is likely to be more accurate, not less accurate, than a simple linear regression model that uses only one
independent variable to predict a dependent variable. Therefore, this is an incorrect answer.
Rationale
 A multiple linear regression is likely to be less difficult to interpret than a simple linear regression model.
In multiple linear regression two or more independent variables are used to predict the dependent variable while only one independent variable is
used to predict the dependent variable in simple linear regression. Because multiple linear regression uses more than one independent variable to
predict a dependent variable, it is likely to be more difficult, not less difficult, to interpret than a simple linear regression model because the
relationship between the multiple independent variables must be taken into consideration (multi-collinearity). Therefore, this is an incorrect
answer.
Question 8
1.B.3.a
cma11.p1.t1.me.0027_0820
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: hard
Bloom Code: 4
A company uses regression analysis in which monthly advertising expenses are used to predict monthly product sales, both in millions of dollars. The
results show a regression coefficient for the independent variable equal to 0.8. This coefficient value indicates that
*Source: Retired ICMA CMA Exam Questions.
Correct
on average, every additional dollar of advertising results in $0.8 of additional sales.
advertising is not a good predictor of sales because the coefficient is so small.
when monthly advertising is at its average level, product sales will be $800,000.
Your Answer
the average monthly advertising expenditure in the sample is $800,000.
Rationale
 on average, every additional dollar of advertising results in $0.8 of additional sales.
The dependent variable in this problem is monthly product sales. The independent variable is advertising expense. The coefficient of 0.8 indicates
that for every dollar of advertising expense, product sales will increase by $0.80.
Y = a + bx
where
Y = dependent variable, sales
x =independent variable, advertising dollars
a = intercept constant, in this example, what product sales would be without advertising
b = slope or regression coefficient for the independent variable, or each advertising dollar spent
Y = a + 0.8x.
Rationale
 advertising is not a good predictor of sales because the coefficient is so small.
This answer is incorrect. There is not enough information to determine if advertising is or is not a good predictor of sales. The R2. is needed to make
that determination. The coefficient of 0.8 indicates that for every dollar spent on advertising, sales will increase by $0.8.
Rationale
 when monthly advertising is at its average level, product sales will be $800,000.
This answer is incorrect. Regression analysis does not use the average level of a cost to predict or forecast. It is used to demonstrate the
relationship between a dependent variable, in this case product sales, and an independent variable, advertising dollars.
Y = a + bx
where
Y = product sales
a = intercept constant or sales without any advertising dollars spent
bx = 0.8 times the dollars spent on advertising or the independent variable
Rationale
 the average monthly advertising expenditure in the sample is $800,000.
This answer is incorrect. Regression analysis is not used to determine an average expenditure. The regression coefficient for the independent
variable equal to 0.8 in this example indicates that every dollar of advertising expense will result in $0.8 of product sales.
Question 9
1.B.3.c
cma11.p1.t1.me.0032_0820
LOS: 1.B.3.c
Lesson Reference: Regression Analysis
Difficulty: hard
Bloom Code: 4
A regression analysis of production costs produced the following output:
Intercept:
X-variable 1:
47757.05
6.364
Based on these results, what is the estimated cost for a production level of 1,200 units?
$47,763
Correct
$55,394
Your Answer
$7,636
$40,120
Rationale
 $47,763
This answer is incorrect. $47,763 is the sum of the two pieces of output from the regression analysis.
Rationale
 $55,394
Estimating the cost at that production level requires entering the 1,200 units into the regression equation y = α + βX, where α is the y-intercept, β is
the coefficient on the independent variable, and X is the value of the independent variable. So y = $47, 757.05 + (6.364 × 1,200) = $55.394.
Rationale
 $7,636
This answer is incorrect. This is the expected variable costs at 1,200 units of production.
Rationale
 $40,120
This answer is incorrect. Expected variable costs are added to expected fixed costs, not subtracted from expected fixed costs.
Question 10
1.B.3.c
reg.anal.tb.013_0120
LOS: 1.B.3.c
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
An electronics company has developed a regression model to forecast quarterly sales. The model explains the relationship between the company’s sales
and the amount it spends on marketing activities. The regression equation for the model is expressed below.
s = $3(m) + $150,000
where:
s = sales per quarter
m = total dollars spent on marketing activities per quarter
If the company has forecasted sales of $189,000 for the next quarter, what amount is it planning to spend on marketing activities in the next quarter?
*Source: Retired ICMA CMA Exam Questions.
Correct
$13,000
$39,000
$63,000
$113,000
Rationale
 $13,000
To solve for the amount that the company is planning on spending on marketing activities in the next quarter, set the equation equal to the
forecasted sales of $189,000 and solve for m as follows:
$189,000 = $3(m) + $150,000
$39,000 = $3(m)
$13,000 = m
Rationale
 $39,000
This answer is incorrect. To solve for the amount that the company is planning on spending on marketing activities in the next quarter, set the
equation equal to the forecasted sales of $189,000 and solve for m. The amount that the company is planning on spending would be $39,000 if you
omit dividing by $3 when solving for m.
Rationale
 $63,000
This answer is incorrect. To solve for the amount that the company is planning on spending on marketing activities in the next quarter, set the
equation equal to the forecasted sales of $189,000 and solve for m. The amount that the company is planning on spending would be $63,000 if you
divide the forecasted sales of $189,000 by 3.
Rationale
 $113,000
This answer is incorrect. To solve for the amount that the company is planning on spending on marketing activities in the next quarter, set the
equation equal to the forecasted sales of $189,000 and solve for m. The amount that the company is planning on spending would be $113,000 if you
add $150,000 instead of subtracting that amount when solving the equation for m.
Question 11
1.B.3.a
aq.reg.anal.004_0720
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
Eight quarters of production data from Pear, Inc., a cell phone manufacturing company, are presented below.
Pear, Inc.
Quarter Phones
Cost
1
2,331 $3,245,874
2
2,657 $3,474,318
3
1,987 $2,883,675
4
2,412 $3,287,621
5
2,583 $3,354,966
6
2,497 $3,428,752
7
2,285 $3,152,347
8
2,645 $3,271,899
The regression analysis results on these data are displayed below.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept $1,473,119
Phones
$738
$356,978
4.13
0.01
$147
5.03
0.00
$599,625 $2,346,614
$379
S1,097
Regression Statistics
Multiple R
0.90
R Square
0.81
Adjusted R Square
Standard Error
0.78
$87,127
Observations
8
Describe the confidence interval for the variable cost per phone as found in the regression analysis results.
Correct
There is a 95% probability that the variable cost per phone is between $379 and $1,097.
There is a 5% probability that the variable cost per phone is between $379 and $1,097.
There is a 95% probability that the variable cost per phone is less than $379 or greater than $1,097.
There is a 95% probability that the variable cost per phone is between $738 and $1,097
Rationale
 There is a 95% probability that the variable cost per phone is between $379 and $1,097.
This correctly describes the confidence interval for the variable cost per phone as found in the regression analysis result.
Rationale
 There is a 5% probability that the variable cost per phone is between $379 and $1,097.
There is a 5% probability that the variable cost per phone is less than $379 or greater than $1,097, not between.
Rationale
 There is a 95% probability that the variable cost per phone is less than $379 or greater than $1,097.
There is a 5% probability, not a 95% probability, that the variable cost per phone is less than $379 or greater than $1,097.
Rationale
 There is a 95% probability that the variable cost per phone is between $738 and $1,097
This answer includes the upper 95% confidence interval limit, but not the lower 95% confidence interval limit.
Question 12
1.B.3.a
tb.reg.anal.007_1805
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
Which of the following concerning simple linear regression analysis is not correct?
A higher coefficient of determination (R-squared) is preferred to a lower one since it measures the amount of variability in the dependent variable
explained by changes in the independent variable.
A higher t-value for the independent variable coefficient is preferred to a lower one since it measures the statistical significance of the relationship
between an independent variable and dependent variable.
Your Answer
If a new piece of energy-efficient equipment is purchased, a regression analysis performed using past data on energy usage and units produced is not
valid for predicting energy usage and various levels of production.
Correct
The coefficient of the “intercept” resulting from a regression analysis where marketing expenditures ranging from $10,000 per month to $20,000 per
month and sales ranging from $250,000 per month to $600,000 per month are used is the estimated sales when marketing expenditures are zero.
Rationale
 A higher coefficient of determination (R-squared) is preferred to a lower one since it measures the amount of variability in the
dependent variable explained by changes in the independent variable.
The coefficient of determination (R-squared) measures the amount of variability in the dependent variable explained by changes in the
independent variable. Higher values are preferred as they indicate that a greater amount of variability is explained by the regression equation;
therefore, this is an incorrect answer.
Rationale
 A higher t-value for the independent variable coefficient is preferred to a lower one since it measures the statistical significance of the
relationship between an independent variable and dependent variable.
The t-value for the independent variable coefficient measures the statistical significance of the relationship between an independent variable and
dependent variable. Higher values are preferred as they indicate a stronger relationship between the independent and dependent variables;
therefore, this is an incorrect answer.
Rationale
 If a new piece of energy-efficient equipment is purchased, a regression analysis performed using past data on energy usage and units
produced is not valid for predicting energy usage and various levels of production.
Since past data is used to predict future activity, a significant change in operations invalidates the usefulness of the regression equation for
predicting future activity. The purchase of energy-efficient equipment represents a significant change in operations concerning energy usage. Any
regression equation based on data prior to the purchase is invalid; therefore, this is an incorrect answer.
Rationale
 The coefficient of the “intercept” resulting from a regression analysis where marketing expenditures ranging from $10,000 per month
to $20,000 per month and sales ranging from $250,000 per month to $600,000 per month are used is the estimated sales when marketing
expenditures are zero.
Simple linear regression is a statistical technique where past data is used to develop an equation that can be used to predict something of interest.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. It is
important to keep in mind that the resulting regression equation is only valid over the range of data used in the analysis. In this example, the
equation should only be used to estimate monthly sales when monthly marketing expenditures are between $10,000 and $20,000 per month. It
cannot be used to estimate monthly sales when monthly marketing expenditures are zero. This means that the coefficient of the “intercept” is not
the estimated sales when marketing expenditures are zero; therefore, this is the correct answer.
Question 13
1.B.3.b
aq.reg.anal.008_0720
LOS: 1.B.3.b
Lesson Reference: Regression Analysis
Difficulty: hard
Bloom Code: 5
Eight quarters of production data from Pear, Inc., a cell phone manufacturing company, are presented below.
Pear, Inc.
Quarter Phones Shut Downs
Cost
1
2,331
2
$3,245,874
2
2,657
1
$3,474,318
3
1,987
3
$2,883,675
4
2,412
2
$3,287,621
5
2,583
1
$3,354,966
6
2,497
3
$3,428,752
7
2,285
2
$3,152,347
8
2,645
0
$3,271,899
The regression analysis results on these data are displayed below.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept
Phones
Shut Downs
$466,096
$309,413
1.51
0.19 −$329,275 $1,261,467
$1,080
$114
9.50
0.00
$788
$1,373
$100,963
$24,675
4.09
0.01
$37,534
$164,391
Regression Statistics
Multiple R
0.98
R Square
0.96
Adjusted R Square
Standard Error
Observations
0.94
$45,769
8
Based on the regression analysis result above, and with approximately 68% confidence, predict the total cost to produce 2,500 phones next quarter that
includes two shutdowns.
Between $3,033,820 and $3,702,224
Your Answer
$3,368,022
Between $3,276,484 and $3,459,560
Correct
Between $3,322,253 and $3,413,791
Rationale
 Between $3,033,820 and $3,702,224
This answer calculates the total cost using the regression equation (total cost equation) and then uses the standard error for total fixed costs of
$309,413, variable cost per phone of $114, and variable cost per shutdown of $24,675 to develop a 68% confidence interval. However, the standard
error for the regression equation (total cost equation) is $45,769, and only this amount should be used to calculate the 68% confidence interval.
Rationale
 $3,368,022
This answer calculates the total cost using the regression equation (total cost equation): Total costs = ($1,080 × 2,500 phones) + ($100,963 × 2
shutdowns) + $466,096 = $3,368,022. However, this answer does not calculate a 68% confidence interval.
Rationale
 Between $3,276,484 and $3,459,560
This answer calculates the total cost using the regression equation (total cost equation): Total costs = ($1,080 × 2,500 phones) + ($100,963 × 2
shutdowns) + $466,096 = $3,368,022. However, it then calculates a 95% confidence interval instead of a 68% confidence interval by using two
standard errors.
Rationale
 Between $3,322,253 and $3,413,791
This answer calculates the total cost using the regression equation (total cost equation): Total costs = ($1,080 × 2,500 phones) + ($100,963 × 2
shutdowns) + $466,096 = $3,368,022. Then it calculates the 68% confidence interval, which is one standard error: $3,368,022 ± $45,769 = between
$3,322,253 and $3,413,791.
Question 14
1.B.3.a
tb.reg.anal.004_1805
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
In a simple linear regression equation where units produced is used to predict electricity costs, which of the following is true?
Correct
Units produced is the independent variable and electricity costs is the dependent variable.
Your Answer
Units produced is the dependent variable and electricity costs is the independent variable.
Units produced and electricity costs are both independent variables.
Units produced and electricity costs are both dependent variables.
Rationale
 Units produced is the independent variable and electricity costs is the dependent variable.
Simple linear regression is a statistical technique where past data is used to develop an equation that can be used to predict something of interest.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. In this
example, units produced is the independent variable and electricity costs is the dependent variable since units produced is used to predict
electricity costs; therefore, this is the correct answer.
Rationale
 Units produced is the dependent variable and electricity costs is the independent variable.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. In this
example, units produced is not the dependent variable because it is being used to predict electricity costs. In addition, electricity costs is not the
independent variable because it is the factor being predicted. Therefore, this is an incorrect answer.
Rationale
 Units produced and electricity costs are both independent variables.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. In this
example, units produced is the independent variable since it is used to predict electricity costs; however, electricity costs is not an independent
variable since it is the factor being predicted. In addition, multiple regression uses more than one independent variable while only one independent
variable is used in simple regression; therefore, this is an incorrect answer.
Rationale
 Units produced and electricity costs are both dependent variables.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. In this
example, electricity costs is the dependent variable since it is the factor being predicted; however, units produced is not a dependent variable
because it is the factor used to predict electricity costs. Therefore, this is an incorrect answer.
Question 15
1.B.3.a
aq.reg.anal.005_0720
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
Eight quarters of production data from Pear, Inc., a cell phone manufacturing company, are presented below.
Pear, Inc.
Quarter Phones
Cost
1
2,331 $3,245,874
2
2,657 $3,474,318
3
1,987 $2,883,675
4
2,412 $3,287,621
5
2,583 $3,354,966
6
2,497 $3,428,752
7
2,285 $3,152,347
8
2,645 $3,271,899
The regression analysis results on these data are displayed below.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept $1,473,119
Phones
$738
$356,978
4.13
0.01
$147
5.03
0.00
$599,625 $2,346,614
$379
$1,097
Regression Statistics
Multiple R
0.90
R Square
0.81
Adjusted R Square
Standard Error
Observations
0.78
$87,127
8
Which measure from the regression analysis result is the best indicator of how much we understand about total costs in the dataset based on the volume
of phone production in the dataset?
Your Answer
R Square of 0.81
Correct
Adjusted R Square of 0.78
Multiple R of 0.90
Standard Error of $87,127
Rationale
 R Square of 0.81
The R Square indicates how much of the change in one or more sets of data explains the variance (change) in the other. In this case, the 0.81
statistic means that variance (change) in phone production explains 81% of the variance (change) in costs. However, there is a better measure that
more accurately indicates how much we understand about total costs in the dataset based on the volume of phone production in the dataset
Rationale
 Adjusted R Square of 0.78
The Adjusted R Square is the R Square metric adjusted for the size of the data set. Compared to R Square, the Adjusted R Square is a more accurate
measure to use when explaining variance in cost data. In this case, the 0.78 statistic means that variance (change) in phone production explains
78% of the variance (change) in costs.
Rationale
 Multiple R of 0.90
The Multiple R statistic is the simple correlation between two or more sets of data (volume and costs, for example). In this case, there is a 90%
correlation between volume of phone production and total costs.
Rationale
 Standard Error of $87,127
A Standard Error signifies that there is a 68% chance (assuming the data has a normal distribution) the actual total cost will be within range of the
original estimate plus or minus the Standard Error.
Question 16
1.B.3.c
tb.reg.anal.011_1805
LOS: 1.B.3.c
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
Connor's Shirt Shop performed a regression analysis on its delivery costs for the previous 12 months. The number of deliveries during those 12 months
ranged from 10,000 deliveries to 15,000 deliveries. The regression analysis yielded an intercept of $9,000, a coefficient on deliveries of $3.50, and an Rsquared of 92.6%. If Connor expects to make 14,000 deliveries in the next month, what would Connor estimate total delivery costs to be?
$53,708
Your Answer
$44,000
$49,000
Correct
$58,000
Rationale
 $53,708
Based on the regression analysis performed, Connor's fixed costs to make 14,000 deliveries are estimated as $9,000 and variable costs to make
14,000 deliveries are estimated as $49,000 ($3.50 × 14,000). This results in a total estimated cost to make 14,000 deliveries of $58,000 ($9,000 +
$49,000). If this estimate is multiplied by the R-squared of 92.6%, the revised estimate would be $53,708. R-squared is used to evaluate the accuracy
of the regression model, not as part of the estimation process; therefore, this is an incorrect answer.
Rationale
 $44,000
Based on the regression analysis performed, Connor's fixed costs to make 14,000 deliveries are estimated as $9,000. If the lowest number of
deliveries from the previous year (10,000) is mistakenly used, variable costs will be estimated as $35,000 ($3.50 × 10,000). This results in a total
estimated cost of $44,000 ($9,000 + $35,000); however, this is not the correct way to estimate total variable costs. Therefore, this is an incorrect
answer.
Rationale
 $49,000
Based on the regression analysis performed, Connor's variable costs to make 14,000 deliveries are estimated as $49,000 ($3.50 × 14,000). The fixed
costs also need to be included; therefore, this is an incorrect answer.
Rationale
 $58,000
Regression analysis produces an “intercept” and a “slope coefficient.” The “intercept” is the estimate of fixed costs and the “slope coefficient” is the
estimate of variable cost per unit of volume. Based on the regression analysis performed, Connor's fixed costs to make 14,000 deliveries are
estimated as $9,000 and variable costs to make 14,000 deliveries are estimated as $49,000 ($3.50 × 14,000). This results in a total estimated cost to
make 14,000 deliveries of $58,000 ($9,000 + $49,000); therefore, this is the correct answer.
Question 17
1.B.3.b
aq.reg.anal.009_0720
LOS: 1.B.3.b
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
Eight quarters of production data from Pear, Inc., a cell phone manufacturing company, are presented below.
Pear, Inc.
Quarter Phones Shut Downs
Cost
1
2,331
2
$3,245,874
2
2,657
1
$3,474,318
3
1,987
3
$2,883,675
4
2,412
2
$3,287,621
5
2,583
1
$3,354,966
6
2,497
3
$3,428,752
7
2,285
2
$3,152,347
8
2,645
0
$3,271,899
The regression analysis results on these data are displayed below.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept
Phones
Shut Downs
$466,096
$309,413
1.51
0.19 −$329,275 $1,261,467
$1,080
$114
9.50
0.00
$788
$1,373
$100,963
$24,675
4.09
0.01
$37,534
$164,391
Regression Statistics
Multiple R
0.98
R Square
0.96
Adjusted R Square
Standard Error
Observations
0.94
$45,769
8
What does the Multiple R statistic represent in this analysis?
Your Answer
The Multiple R statistic of 0.98 indicates how much we understand about total costs in the dataset based on the volume of phone production and
number of shutdowns. The 0.98 statistic means that variance (change) in the phone production and number of shutdowns explains 98% of the
variance (change) in total costs.
The Multiple R statistic of 0.98 indicates how much we understand about total costs in the dataset based on the volume of phone production and
number of shutdowns. The 0.98 statistic means that variance (change) in the phone production and number of shutdowns explains 2% of the variance
(change) in total costs.
The Multiple R statistic of 0.98 is the correlation of total costs, volume of phone production, and number of shutdowns. There is a 2% correlation
between these numbers.
Correct
The Multiple R statistic of 0.98 is the correlation of total costs, volume of phone production, and number of shutdowns. There is a 98% correlation
between these numbers.
Rationale
 The Multiple R statistic of 0.98 indicates how much we understand about total costs in the dataset based on the volume of phone
production and number of shutdowns. The 0.98 statistic means that variance (change) in the phone production and number of shutdowns
explains 98% of the variance (change) in total costs.
This is an explanation of the R Square or Adjusted R Square, not the Multiple R.
Rationale
 The Multiple R statistic of 0.98 indicates how much we understand about total costs in the dataset based on the volume of phone
production and number of shutdowns. The 0.98 statistic means that variance (change) in the phone production and number of shutdowns
explains 2% of the variance (change) in total costs.
This explanation appears to be related to the R Square or Adjusted R Square, not the Multiple R. However, if this were an evaluation of R Square or
Adjusted R Square, variance (change) in the phone production and number of shutdowns explains does not explain 2% of the variance (change) in
total costs; rather, it explains 98% of the variance (change in total costs).
Rationale
 The Multiple R statistic of 0.98 is the correlation of total costs, volume of phone production, and number of shutdowns. There is a 2%
correlation between these numbers.
There is a 98% correlation between these numbers, not a 2% correlation.
Rationale
 The Multiple R statistic of 0.98 is the correlation of total costs, volume of phone production, and number of shutdowns. There is a 98%
correlation between these numbers.
This is an accurate definition of Multiple R.
Question 18
1.B.3.a
aq.reg.anal.002_0720
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
Eight quarters of production data from Pear, Inc., a cell phone manufacturing company, are presented below.
Pear, Inc.
Quarter Phones
Cost
1
2,331 $3,245,874
2
2,657 $3,474,318
3
1,987 $2,883,675
4
2,412 $3,287,621
5
2,583 $3,354,966
6
2,497 $3,428,752
7
2,285 $3,152,347
8
2,645 $3,271,899
The regression analysis results on these data are displayed below.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept $1,473,119
Phones
$356,978 4.13
0.01
$147 5.03
0.00
$738
$599,625 $2,346,614
$379
$1,097
Regression Statistics
Multiple R
0.90
R Square
0.81
Adjusted R Square
Standard Error
0.78
$87,127
Observations
8
What is the regression equation (total cost equation) for the above information?
Total costs = $147(Phones) + $356,978
Your Answer
Total costs = $1,473,119(Phones) + 738
Total costs = $356,978(Phones) + $147
Correct
Total costs = $738(Phones) + $1,473,119
Rationale
 Total costs = $147(Phones) + $356,978
This answer mistakes the standard error for the coefficients. The coefficients are used to create the regression equation (total cost equation).
Rationale
 Total costs = $1,473,119(Phones) + 738
This answer confuses the total fixed costs for the variable cost per phone.
Rationale
 Total costs = $356,978(Phones) + $147
This answer mistakes the standard error for the coefficients. The coefficients are used to create the regression equation (total cost equation). This
answer also mistakes the total fixed costs for the variable cost per phone.
Rationale
 Total costs = $738(Phones) + $1,473,119
This is the correct regression equation (total cost equation) for the above information.
Question 19
1.B.3.c
tb.reg.anal.002_1805
LOS: 1.B.3.c
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
Jamie's Jams conducted a regression analysis on its shipping costs for the last year, which resulted in the following equation: $3.25x + $115. If Jamie
plans to ship 287 pints of jam next month, what are the shipping costs expected to be?
Correct
$1,047.75
$932.75
Your Answer
$817.75
$118.25
Rationale
 $1,047.75
Regression analysis uses past data to develop an equation that can be used to make predictions about the future. Simple regression involves using
one independent variable (for example, sales, production, or some other measure of volume) to predict future costs. Regression analysis produces
an “intercept” and a “slope coefficient.” The “intercept” is the estimate of fixed costs and the “slope coefficient” is the estimate of variable cost per
unit of volume. Based on the regression analysis performed, Jamie's fixed costs to ship 287 pints are estimated as $115 and variable costs to ship
287 pints are estimated as $932.75 ($3.25 × 287). This results in a total estimated cost to ship 287 pints of $1,047.75 ($932.75 + $115); therefore, this
is the correct answer.
Rationale
 $932.75
Based on the regression analysis performed, Jamie's variable costs to ship 287 pints are estimated as $932.75 ($3.25 × 287). The $932.75 does not
take fixed costs into consideration; therefore, this is an incorrect answer.
Rationale
 $817.75
Based on the regression analysis performed, Jamie's fixed costs to ship 287 pints are estimated as $115 and variable costs to ship 287 pints are
estimated as $932.75 ($3.25 × 287). Shipping costs to ship 287 pints would be estimated as $817.75 if the estimated fixed costs are subtracted from
the estimated variable costs ($932.75 − $115.00). This is not the correct equation; therefore, this is an incorrect answer.
Rationale
 $118.25
Based on the regression analysis performed, Jamie's fixed costs to ship 287 pints are estimated as $115. For the total cost to ship 287 pints to be
$118.25 the total variable cost would have to be $3.25; however, that is the variable cost to ship one pint, not 287 pints. Therefore, this is an
incorrect answer.
Question 20
1.B.3.a
tb.reg.anal.003_1805
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
In a simple linear regression equation where advertising expenditures is used to predict sales, which of the following is true?
Correct
Advertising expenditures is the independent variable and sales is the dependent variable.
Advertising expenditures is the dependent variable and sales is the independent variable.
Your Answer
Advertising expenditures and sales are both independent variables.
Advertising expenditures and sales are both dependent variables.
Rationale
 Advertising expenditures is the independent variable and sales is the dependent variable.
Simple linear regression is a statistical technique where past data is used to develop an equation that can be used to predict something of interest.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. In this
example, advertising expenditures is the independent variable and sales is the dependent variable since advertising expenditures is used to predict
sales; therefore, this is the correct answer.
Rationale
 Advertising expenditures is the dependent variable and sales is the independent variable.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. In this
example, advertising expenditures is not the dependent variable because it is being used to predict sales. In addition, sales is not the independent
variable because it is the factor being predicted. Therefore, this is an incorrect answer.
Rationale
 Advertising expenditures and sales are both independent variables.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. In this
example, advertising expenditures is the independent variable since it is used to predict sales; however, sales is not the independent variable, since
it is the factor being predicted. In addition, multiple regression uses more than one independent variable while only one independent variable is
used in simple regression; therefore, this is an incorrect answer.
Rationale
 Advertising expenditures and sales are both dependent variables.
The factor being predicted is the dependent variable and the factor used to predict the dependent variable is the independent variable. In this
example, sales is the dependent variable since it is the factor being predicted; however, advertising expenditures is not a dependent variable,
because it is the factor used to predict sales. Therefore, this is an incorrect answer.
Question 21
1.B.3.a
aq.reg.anal.003_0720
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: hard
Bloom Code: 6
Eight quarters of production data from Pear, Inc., a cell phone manufacturing company, are presented below.
Pear, Inc.
Quarter Phones
Cost
1
2,331 $3,245,874
2
2,657 $3,474,318
3
1,987 $2,883,675
4
2,412 $3,287,621
5
2,583 $3,354,966
6
2,497 $3,428,752
7
2,285 $3,152,347
8
2,645 $3,271,899
The regression analysis results on these data are displayed below.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept $1,473,119
Phones
$738
$356,978
4.13
0.01
$147
5.03
0.00
$599,625 $2,346,614
$379
$1,097
Regression Statistics
Multiple R
0.90
R Square
0.81
Adjusted R Square
Standard Error
0.78
$87,127
Observations
8
Evaluate the estimate for total fixed costs.
The estimate for total fixed costs is not precise for the following reasons:
1. The t-Stat of 4.13 is more than the preferred statistical significance, which traditionally targets a t-Stat of 2 or lower.
2. The P-value of 0.01 is less than the preferred statistical significance, which traditionally targets a P-value of 0.10 or greater.
Correct
The estimate for total fixed costs is acceptably precise for the following reasons:
1. The t-Stat of 4.13 is more than the preferred statistical significance, which traditionally targets a t-Stat of 2 or greater.
2. The P-value of 0.01 is less than the preferred statistical significance, which traditionally targets a P-value of 0.10 or lower.
The estimate for total fixed costs is not precise for the following reasons:
1. The Adjusted R Square of 0.78 is less than the R Square of 0.81. Preferred statistical significance traditionally targets a R Square higher than the
Adjusted R Square.
2. The standard error for total fixed costs of $356,978 is greater than the standard error for the total cost equation of $87,127. Preferred statistical
significance traditionally targets a standard error for fixed costs less than the standard error of the total cost equation.
The estimate for total fixed costs is acceptably precise for the following reasons:
1. The Adjusted R Square of 0.78 is less than the R Square of 0.81. Preferred statistical significance traditionally targets a R Square lower than the
Adjusted R Square.
2. The standard error for total fixed costs of $356,978 is greater than the standard error for the total cost equation of $87,127. Preferred statistical
significance traditionally targets a standard error for fixed costs greater than the standard error of the total cost equation.
Rationale
 The estimate for total fixed costs is not precise for the following reasons:
1. The t-Stat of 4.13 is more than the preferred statistical significance, which traditionally targets a t-Stat of 2 or lower.
2. The P-value of 0.01 is less than the preferred statistical significance, which traditionally targets a P-value of 0.10 or greater.
Acceptable statistical significance, which relates to the precision, traditionally targets a t-Stat above 2 (above 3 is preferred), and a P-value below
0.10 (below 0.05 is preferred).
Rationale
 The estimate for total fixed costs is acceptably precise for the following reasons:
1. The t-Stat of 4.13 is more than the preferred statistical significance, which traditionally targets a t-Stat of 2 or greater.
2. The P-value of 0.01 is less than the preferred statistical significance, which traditionally targets a P-value of 0.10 or lower.
This is an accurate evaluation of the estimate of total fixed costs. Acceptable statistical significance, which relates to the precision, traditionally
targets a t-Stat above 2 (above 3 is preferred), and a P-value below 0.10 (below 0.05 is preferred).
Rationale
 The estimate for total fixed costs is not precise for the following reasons:
1. The Adjusted R Square of 0.78 is less than the R Square of 0.81. Preferred statistical significance traditionally targets a R Square
higher than the Adjusted R Square.
2. The standard error for total fixed costs of $356,978 is greater than the standard error for the total cost equation of $87,127. Preferred
statistical significance traditionally targets a standard error for fixed costs less than the standard error of the total cost equation.
The above statements are not true. Adjusted R Square compared to R Square—and standard error for total fixed costs compared to standard error
for the total cost equation—are not appropriate to evaluate the estimate for total fixed costs.
Rationale
 The estimate for total fixed costs is acceptably precise for the following reasons:
1. The Adjusted R Square of 0.78 is less than the R Square of 0.81. Preferred statistical significance traditionally targets a R Square lower
than the Adjusted R Square.
2. The standard error for total fixed costs of $356,978 is greater than the standard error for the total cost equation of $87,127. Preferred
statistical significance traditionally targets a standard error for fixed costs greater than the standard error of the total cost equation.
The above statements are not true. Adjusted R Square compared to R Square—and standard error for total fixed costs compared to standard error
for the total cost equation—are not appropriate to evaluate the estimate for total fixed costs.
Question 22
1.B.3.c
tb.reg.anal.012_1805
LOS: 1.B.3.c
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
Sophia Company performed a regression analysis on its customer service costs for the previous 12 months. The number of orders during those 12
months ranged from 5,000 orders to 12,000 orders and the customer service costs ranged from $120,000 to $300,000. The regression analysis yielded an
intercept of $30,000, a coefficient on orders of $22, and an R-squared of 91.3%. If Sophia expects to have 9,000 orders in the next month, what would
Sophia estimate total customer service costs to be?
Correct
$228,000
$210,000
Your Answer
$198,000
$294,000
Rationale
 $228,000
Regression analysis produces an “intercept” and a “slope coefficient.” The “intercept” is the estimate of fixed costs and the “slope coefficient” is the
estimate of variable cost per unit of volume. Based on the regression analysis performed, Sophia's fixed costs for 9,000 orders are estimated as
$30,000 and variable costs for 9,000 orders are estimated as $198,000 ($22 × 9,000). This results in a total estimated customer service cost for 9,000
orders of $228,000 ($30,000 + $198,000). Therefore, this is the correct answer.
Rationale
 $210,000
The mid-point of the previous customer service costs is $210,000. This is not the correct way to use regression analysis to estimate future costs;
therefore, this is an incorrect answer.
Rationale
 $198,000
Based on the regression analysis performed, Sophia's variable costs for 9,000 orders are estimated as $198,000 ($22 × 9,000). The fixed costs also
need to be included; therefore, this is an incorrect answer.
Rationale
 $294,000
Based on the regression analysis performed, Sophia's fixed costs for 9,000 orders are estimated as $30,000. If the highest number of orders from the
previous year (12,000) is mistakenly used, variable costs will be estimated as $264,000 ($22 × 12,000). This results in a total estimated cost of
$294,000 ($30,000 + $264,000). This is not the correct way to estimate total variable costs; therefore, this is an incorrect answer.
Question 23
1.B.3.b
tb.reg.anal.009_1805
LOS: 1.B.3.b
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 4
Which of the following statements is not true?
A multiple linear regression is likely to be more difficult to interpret than a simple linear regression model.
A multiple linear regression is likely to be more accurate than a simple linear regression model.
Correct
A multiple linear regression is likely to be less costly than a simple linear regression model to develop.
Multi-collinearity can be a problem in multiple linear regression but not in simple linear regression.
Rationale
 A multiple linear regression is likely to be more difficult to interpret than a simple linear regression model.
In multiple linear regression two or more independent variables are used to predict the dependent variable while only one independent variable is
used to predict the dependent variable in simple linear regression. Because multiple linear regression uses more than one independent variable to
predict a dependent variable, it is likely to be more difficult to interpret than a simple linear regression model because the relationship between the
multiple independent variables must be taken into consideration (multi-collinearity). Therefore, this is an incorrect answer.
Rationale
 A multiple linear regression is likely to be more accurate than a simple linear regression model.
In multiple linear regression two or more independent variables are used to predict the dependent variable while only one independent variable is
used to predict the dependent variable in simple linear regression. Because multiple linear regression uses more than one independent variable to
predict a dependent variable, it is likely to be more accurate than a simple linear regression model that uses only one independent variable to
predict a dependent variable. Therefore, this is an incorrect answer.
Rationale
 A multiple linear regression is likely to be less costly than a simple linear regression model to develop.
In multiple linear regression two or more independent variables are used to predict the dependent variable while only one independent variable is
used to predict the dependent variable in simple linear regression. Because multiple linear regression uses more than one independent variable to
predict a dependent variable, it is likely to be more costly, not less costly, than a simple linear regression model to develop and interpret because
more data need to be collected. Therefore, this is the correct answer.
Rationale
 Multi-collinearity can be a problem in multiple linear regression but not in simple linear regression.
Multi-collinearity involves the correlation between two or more independent variables. Because multiple linear regression uses more than one
independent variable, multi-collinearity can be a problem. It will not be a problem in simple linear regression since only one independent variable
is used. Therefore, this is an incorrect answer.
Question 24
1.B.3.a
cma11.p1.t1.me.0023_0820
LOS: 1.B.3.a
Lesson Reference: Regression Analysis
Difficulty: medium
Bloom Code: 3
BusyBee Cleaning Co. is evaluating its costs to clean a standard office. The controller has done a linear regression of the hours spent cleaning various
offices and the total costs (labor, supplies, transportation) for each office cleaned. The regression analysis yielded the following information.
y = $25x + $75
y = total cost to clean an office
x = hours spent cleaning an office
What is the best description of the costs of cleaning an office based on this regression analysis?
*Source: Retired ICMA CMA Exam Questions.
Your Answer
The cost is $100 per hour to clean an office.
There is $25 of fixed costs and $75 of variable costs per hour to clean an office.
Correct
There is $25 of variable costs per hour and $75 of fixed costs to clean an office.
The cost is $25 per hour to clean an office.
Rationale
 The cost is $100 per hour to clean an office.
This answer is incorrect. The cost is not $100 per hour to clean an office. The regression equation or cost function Y = bx + a, where Y = the total cost
to clean an office, b = the variable cost per hour to clean an office, x = the number of hours spent cleaning an office, and a = the fixed cost to clean
an office. As given above, Y = $25x + $75 would be interpreted as a fixed cost of $75 per office plus $25 per hour spent cleaning the office.
Rationale
 There is $25 of fixed costs and $75 of variable costs per hour to clean an office.
This answer is incorrect. The equation Y = $25x + $75 would be interpreted as $25 of variable cost per hour to clean an office and $75 of fixed cost to
clean an office.
Rationale
 There is $25 of variable costs per hour and $75 of fixed costs to clean an office.
The regression equation or cost function Y = bx + a, where Y = the total cost to clean an office, b = the variable cost per hour to clean an office, x = the
number of hours spent cleaning an office, and a = the fixed cost to clean an office. As given above, Y = $25x + $75 would be interpreted as a fixed cost
of $75 per office plus $25 per hour spent cleaning the office.
Rationale
 The cost is $25 per hour to clean an office.
This answer is incorrect. While it is correct that the cost function of Y = $25x + $75 does indicate that there is a $25-per-hour variable cost to clean an
office, it is not the best description of the cost of cleaning an office. The total cost of cleaning an office would also include the fixed cost of $75 per
office.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.3.f
tb.lc.anal.017_1805
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is a limitation of regression analysis?
Regression analysis measures the “average” outcome of a situation.
Correct
Regression analysis can only be used to predict performance that is within the range of data used to develop the regression equation.
Your Answer
Regression analysis assumes all improvements in production efficiency are caused by employee learning.
Regression analysis cannot be used when it is difficult to accurately measure the impact of efficiency improvements.
Rationale
 Regression analysis measures the “average” outcome of a situation.
Regression analysis does not measure the “average” outcome of a situation. Expected value analysis measures the “average” outcome if the
situation occurred a number of times; however, in reality the situation only occurs once. The actual result of one trial may be drastically different
than the average result of a theoretical number of trials. This means using the average outcome of a situation is a limitation of expected value
analysis, not regression analysis; therefore, this is an incorrect answer.
Rationale
 Regression analysis can only be used to predict performance that is within the range of data used to develop the regression equation.
Regression analysis is a statistical technique where past data is used to develop an equation that can be used to predict something of interest. The
data used to develop the regression equation define the “relevant range of activity” over which the equation is valid. Using the equation to predict
costs for activity within the relevant range is valid; however, using the equation to predict costs for activity outside the relevant range is not valid.
The need to stay within the relevant range limits the usefulness of regression analysis; therefore, this is the correct answer.
Rationale
 Regression analysis assumes all improvements in production efficiency are caused by employee learning.
Regression analysis does not take improvements in efficiency into account as it assumes past performance will be repeated in the future. Assuming
all improvements in production efficiency are caused by employee learning is a limitation of learning curve analysis, not regression analysis;
therefore, this is an incorrect answer.
Rationale
 Regression analysis cannot be used when it is difficult to accurately measure the impact of efficiency improvements.
Accurately measuring the impact of efficiency improvements is a limitation of learning curve analysis, not regression analysis; therefore, this is an
incorrect answer.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.3.g
tb.lc.anal.022_1805
LOS: 1.B.3.g
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
The Nicholas Ski Lodge prepares the following distribution of expected visitors for various weather conditions and the probability of those conditions.
What is the expected number of visitors for Nicholas?
Economic Condition Expected Visitors Probability
Milder Winter
25,000
15%
Normal Winter
40,000
65%
Colder Winter
85,000
20%
40,000
Your Answer
85,000
Correct
46,750
50,000
Rationale
 40,000
The most likely number of visitors is 40,000. This does not take into consideration the likelihood of the weather conditions occurring or the
possibility that there may be 25,000 or 85,000 visitors; therefore, this is an incorrect answer.
Rationale
 85,000
The highest probability for the number of visitors is 85,000. This is different from the expected number of visitors; therefore, this is an incorrect
answer.
Rationale
 46,750
To determine the expected visitors, the expected visitors under each possible weather condition is multiplied by the likelihood of each condition
occurring. These products are then added together. In this example, the expected number of visitors is (25,000 × 15%) + (40,000 × 65%) + (85,000 ×
20%) = 46,750. Therefore, this is the correct answer.
Rationale
 50,000
The average number of visitors is 50,000. This assumes each weather condition is equally likely, which is not the case; therefore, this is an incorrect
answer.
Question 3
1.B.3.e
lc.anal.tb.032_0120
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 4
A corporation has determined that when the quantity produced in units doubles from x to 2x, the average time per unit for 2x units is 90% of the average
time per unit for x units. The decline in time per unit as production doubles is an example of the:
*Source: Retired ICMA CMA Exam Questions.
incremental unit-time learning model.
Correct
cumulative average-time learning model.
high-low cost estimation model.
Your Answer
simple regression cost estimation model.
Rationale
 incremental unit-time learning model.
This answer is incorrect. The incremental unit-time learning model focuses on the time to produce the 2xth unit, not all 2x units.
Rationale
 cumulative average-time learning model.
Learning curve analysis focuses on the reduction in time a process takes every time output doubles. It measures the improvement in efficiency that
results from learning the process. Under the cumulative average-time learning model, the focus is on the average time to produce a number of
units. In this example, since the average time per unit for all 2x units is 90% of the average time for x units, the company must be using the
cumulative average-time learning model.
Rationale
 high-low cost estimation model.
This answer is incorrect. The high-low cost estimation model is used to estimate the fixed and variable components of a mixed cost.
Rationale
 simple regression cost estimation model.
This answer is incorrect. The simple regression cost estimation model is used to estimate the fixed and variable components of a mixed cost.
Question 4
1.B.3.i
tb.lc.anal.031_1805
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 4
The Tucker Company prepares the following distribution of cash flow forecasts for a possible investment under various economic conditions and the
probability of those conditions. If the investment requires an initial investment of $750,000 should Tucker make the investment?
Economic Condition Cash Inflow Probability
Robust Growth
$1,300,000
20%
Moderate Growth
$600,000
55%
Recession
$200,000
25%
Your Answer
No, because the expected net cash flow from the investment is an outflow of $50,000.
Correct
No, because the expected net cash flow from the investment is an outflow of $110,000.
Yes, because there is a chance that the net cash flow from the investment will be an inflow of $550,000.
Yes, because the expected net cash flow from the investment is an inflow of $1,350,000.
Rationale
 No, because the expected net cash flow from the investment is an outflow of $50,000.
The average of the three possible cash inflow amounts is $700,000. If this is used to calculate the investment's net cash flow, it will be calculated as
an outflow of $50,000 ($700,000 − $750,000). The $700,000 figure assumes each condition is equally likely, which is not the case; therefore, this is an
incorrect answer.
Rationale
 No, because the expected net cash flow from the investment is an outflow of $110,000.
To determine the expected cash inflow for the investment, the cash inflow under each possible economic condition is multiplied by the likelihood
of each condition occurring. These products are then added together. In this example, the expected cash inflow is ($1,300,000 × 20%) + ($600,000 ×
55%) + ($200,000 × 25%) = $640,000. Because the initial investment needed is $750,000, the expected cash flow from the investment is an outflow of
$110,000 ($640,000 − $750,000). The fact that the expected net cash flow from the investment is negative means the investment should not be
made; therefore, this is the correct answer.
Rationale
 Yes, because there is a chance that the net cash flow from the investment will be an inflow of $550,000.
The best-case scenario for the investment's cash inflow is $1,300,000. If this is used to calculate the investment's net cash flow, it will be calculated
as an inflow of $550,000 ($1,300,000 − $750,000). All possible outcomes and the probabilities of those outcomes need to be considered when
calculating the investment's expected cash inflow. Therefore, this is an incorrect answer.
Rationale
 Yes, because the expected net cash flow from the investment is an inflow of $1,350,000.
The three possible cash inflows total $2,100,000. If this is used to calculate the investment's net cash flow, it will be calculated as $1,350,000
($2,100,000 − $750,000). The probabilities of the possible outcomes need to be considered when calculating the investment's expected cash inflow;
therefore, this is an incorrect answer.
Question 5
1.B.3.h
tb.lc.anal.025_1805
LOS: 1.B.3.h
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is a benefit of expected value analysis?
Expected value analysis assumes a decision-maker is risk neutral.
Expected value analysis provides a way to predict future costs using past data.
Your Answer
Expected value measures the “average” outcome of a situation.
Correct
Expected value analysis attempts to apply objectivity to uncertain situations.
Rationale
 Expected value analysis assumes a decision-maker is risk neutral.
Expected value analysis assumes decision-makers are risk neutral, which means decision-makers are assumed to “like” a $10,000 gain as much as
they “dislike” a $10,000 loss. Evidence indicates that many people are risk averse, not risk neutral. That means they “dislike” a $10,000 loss more
than they “like” a $10,000 gain. Assuming decision-makers are risk neutral is a limitation of expected value analysis. Therefore, this is an incorrect
answer.
Rationale
 Expected value analysis provides a way to predict future costs using past data.
Regression analysis, not expected value analysis, provides a way to use past data to help predict future costs; therefore, this is an incorrect answer.
Rationale
 Expected value measures the “average” outcome of a situation.
One way to think of the expected value of a situation is the average result if the situation occurred a number of times; however, in reality the
situation only occurs once. The actual result of one trial may be drastically different than the average result of a theoretical number of trials. Using
the average outcome of a situation is a limitation of expected value analysis; therefore, this is an incorrect answer.
Rationale
 Expected value analysis attempts to apply objectivity to uncertain situations.
Expected value is a tool where the expected results of something (for example, sales, income, or cash flow) and the probability of those results are
combined to determine the expected (weighed-average) result. The expected value calculated is then used as the basis for making a decision. While
the estimates can be subjective, the calculations are fairly objective. This is a benefit as it can reduce the subjectivity of the decision process;
therefore, this is the correct answer.
Question 6
1.B.3.h
tb.lc.anal.027_1805
LOS: 1.B.3.h
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is a benefit of expected value analysis?
Expected value analysis can be used to separate a mixed cost into its fixed and variable components.
Expected value analysis can be used to estimate the time and cost to perform an activity under the assumption that people become more efficient the
more times they perform the task.
Your Answer
Expected value analysis can be used to help predict costs at various levels of output.
Correct
Expected value analysis attempts to apply objectivity to uncertain situations.
Rationale
 Expected value analysis can be used to separate a mixed cost into its fixed and variable components.
Separating a mixed cost into its fixed and variable components is a benefit of linear regression analysis, not expected value analysis; therefore, this
is an incorrect answer.
Rationale
 Expected value analysis can be used to estimate the time and cost to perform an activity under the assumption that people become
more efficient the more times they perform the task.
Estimating the time and cost to perform an activity under the assumption that people will learn to perform the activity more efficiently the more
times they perform the task is a benefit of learning curve analysis, not expected value analysis. Therefore, this is an incorrect answer.
Rationale
 Expected value analysis can be used to help predict costs at various levels of output.
Predicting costs at various levels of output is a benefit of regression analysis, not expected value analysis. Therefore, this is an incorrect answer.
Rationale
 Expected value analysis attempts to apply objectivity to uncertain situations.
Expected value is a tool where the expected results of something (for example, sales, income, or cash flow) and the probability of those results are
combined to determine the expected (weighed-average) result. The expected value calculated is then used as the basis for making a decision. While
the estimates can be subjective, the calculations are fairly objective. This is a benefit of expected value analysis as it reduces the subjectivity of the
decision process; therefore, this is the correct answer.
Question 7
1.B.3.h
tb.lc.anal.026_1805
LOS: 1.B.3.h
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is a limitation of expected value analysis?
Expected value analysis assumes that there will be no changes in past performance in the future (for example, efficiency will not improve).
Expected value analysis can only be used when performance is expected to be within the relevant range of activity.
Correct
Expected value measures the “average” outcome of a situation.
Expected value analysis cannot be used when it is difficult to accurately measure the impact of efficiency improvements.
Rationale
 Expected value analysis assumes that there will be no changes in past performance in the future (for example, efficiency will not
improve).
The need to assume that there will be no changes in past performance in the future is a limitation of linear regression analysis, not expected value
analysis; therefore, this is an incorrect answer.
Rationale
 Expected value analysis can only be used when performance is expected to be within the relevant range of activity.
The need to be within the relevant range of activity is a limitation of linear regression analysis, not expected value analysis. Therefore, this is an
incorrect answer.
Rationale
 Expected value measures the “average” outcome of a situation.
Expected value is a tool where the expected results of something (for example, sales, income, or cash flow) and the probability of those results are
combined to determine the expected (weighed-average) result. The expected value calculated is then used as the basis for making a decision. One
way to think of the expected value of a situation is the average result if the situation occurred a number of times; however, in reality the situation
only occurs once. The actual result of one trial may be drastically different than the average result of a theoretical number of trials, which means
using the average outcome of a situation is a limitation of expected value analysis. Therefore, this is the correct answer.
Rationale
 Expected value analysis cannot be used when it is difficult to accurately measure the impact of efficiency improvements.
The difficulty of accurately measuring the impact of expected efficiency improvements is a limitation of learning curve analysis, not expected value
analysis. Therefore, this is an incorrect answer.
Question 8
1.B.3.e
aq.lc.anal.009_0720
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 5
Wall, Corp. (Wall) is the leading manufacturer of drywall in the United States. A competitor has announced plans to begin selling a new and improved
type of drywall starting next year. To compete and maintain their position as the leading manufacturer, Wall decided to start producing an improved
type of drywall as well. When the production line started, it took 29 hours to make the first batch of 100 8' by 4' sheets. Wall estimates the learning rate to
be 75%. Forecast the cumulative average time per batch to make the first seven batches of 8' by 4' sheets, and use that average to determine the total
production time to make these seven batches of sheets?
589.77 hours
Your Answer
203 hours
Correct
90.52 hours
12.93 hours
Rationale
 589.77 hours
This answer is incorrect because it multiplies the “X” factor of 7 batches by “b,” −0.4150, instead of raising “X” to the power of “b.”
Rationale
 203 hours
This answer represents the hours it took to make the first batch multiplied by seven batches. This answer is incorrect because it does not take into
account the learning rate of 75%.
Rationale
 90.52 hours
Using the formula Y = aXb
a = 29 hours
X = 7 batches
b = ln 75% ÷ ln 2 or − .2877 ÷ .6931 = − 0.4150
29(7−0.4150) = 12.93 cumulative average hours per batch for the first seven batches
7 batches × 12.93 hours = 90.52 total hours for all seven batches
Note: the short-cut approach will not work for this problem.
Rationale
 12.93 hours
This answer represents the cumulative average hours per batch for the first seven batches; however, this number must be multiplied by seven to
get the total production time to make these seven batches.
Question 9
1.B.3.i
tb.lc.anal.029_1805
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 4
The Laney Company prepares the following distribution of cash flow forecasts for a possible investment under various economic conditions and the
probability of those conditions. If the investment requires an initial investment of $150,000, should Laney make the investment?
Economic Condition Cash Inflow Probability
Robust Growth
$700,000
25%
Moderate Growth
$300,000
55%
−$400,000
20%
Recession
Your Answer
Yes, because the expected net cash flow from the investment is $50,000.
Correct
Yes, because the expected net cash flow from the investment is $110,000.
No, because there is a chance that the net cash flow from the investment will be an outflow of $550,000.
Yes, because the most likely net cash flow from the investment is $150,000.
Rationale
 Yes, because the expected net cash flow from the investment is $50,000.
The average of the three possible cash inflow amounts is $200,000. If this is used to calculate the investment's net cash flow, it will be calculated as
$50,000 ($200,000 − $150,000). The $200,000 figure assumes each condition is equally likely, which is not the case; therefore, this is an incorrect
answer.
Rationale
 Yes, because the expected net cash flow from the investment is $110,000.
To determine the expected cash inflow for the investment, the cash inflow under each possible economic condition is multiplied by the likelihood
of each condition occurring. These products are then added together. In this example, the expected cash inflow is ($700,000 × 25%) + ($300,000 ×
55%) + (−$400,000 × 20%) = $260,000. Because the initial investment needed is $150,000, the expected cash inflow from the investment is $110,000
($260,000 − $150,000). The fact that the expected net cash flow from the investment is positive means the investment should be made; therefore,
this is the correct answer.
Rationale
 No, because there is a chance that the net cash flow from the investment will be an outflow of $550,000.
The worst-case scenario for the investment's cash inflow is −$400,000. If this is used to calculate the investment's net cash flow, it will be calculated
as an outflow of $550,000 (−$400,000 − $150,000). All possible outcomes and the probabilities of those outcomes need to be considered when
calculating the investment's expected cash inflow; therefore, this is an incorrect answer.
Rationale
 Yes, because the most likely net cash flow from the investment is $150,000.
If the most likely cash inflow of $300,000 is used to calculate the investment's net cash flow, it will be calculated as $150,000 ($300,000 − $150,000).
All possible outcomes and the probabilities of those outcomes need to be considered when calculating the investment's expected cash inflow;
therefore, this is an incorrect answer.
Question 10
1.B.3.i
lc.anal.tb.034_0120
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
A toy company is in the process of forecasting sales for a new toy. The company has the following estimates of unit sales with a corresponding
probability distribution.
Unit Sales Probability
550,000
20%
475,000
35%
350,000
45%
How many units should the company forecast for sales of the new toys?
*Source: Retired ICMA CMA Exam Questions.
350,000
Correct
433,750
458,250
1,375,000
Rationale
 350,000
This answer is incorrect. Selling 350,000 units is the most likely outcome. However, when forecasting sales, a company must consider all of the
possible scenarios and the probability of each scenario occurring.
Rationale
 433,750
To forecast sales of new toys, the company should determine an expected value of sales. An expected value is the weighted average value of
possible outcomes. Based on the information provided, the company should forecast sales of 433,750 units ((550,000 × 20%) + (475,000 × 35%) +
(350,000 × 45%)).
Rationale
 458,250
This answer is incorrect. This option incorrectly calculates the forecast for sales of the new toys. To calculate the forecast, the company should
determine an expected value of sales which is the weighted average value of the possible outcomes.
Rationale
 1,375,000
This answer is incorrect. The company would forecast sales of 1,375,000 units if the forecast equaled the sum of the unit sales for the possible
scenarios (550,000 + 475,000 + 350,000). However, the forecast must also consider the probability of each scenario occurring.
Question 11
1.B.3.f
tb.lc.anal.015_1805
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is not a limitation of learning curve analysis?
Learning curve analysis assumes that the percentage improvement from learning only fully occurs when production doubles.
Learning curve analysis cannot be used when it is difficult to accurately measure the impact of efficiency improvements.
Learning curve analysis assumes all improvements in production efficiency are caused by employee learning.
Correct
Learning curve analysis can only be used to predict performance that is within the range of data used to develop the analysis.
Rationale
 Learning curve analysis assumes that the percentage improvement from learning only fully occurs when production doubles.
Learning curve analysis assumes that the time and cost to perform an activity will decrease by a fixed percentage when production doubles. It does
not allow for situations where the decrease occurs at intervals other than doubling. This lack of flexibility is a limitation of learning curve analysis;
therefore, this is an incorrect answer.
Rationale
 Learning curve analysis cannot be used when it is difficult to accurately measure the impact of efficiency improvements.
It can be difficult to measure the impact of the learning in a learning curve analysis. Since that is needed to analyze the expected decrease in time
and cost, the fact that it is difficult to estimate means it is a limitation of learning curve analysis; therefore, this is an incorrect answer.
Rationale
 Learning curve analysis assumes all improvements in production efficiency are caused by employee learning.
Learning curve analysis assumes that all improvements in efficiency are caused by employee learning. A different labor mix, improved machinery,
and better-quality materials could also be the cause of improved efficiency. Because learning curve analysis ignores these factors, it is a limitation
of learning curve analysis; therefore, this is an incorrect answer.
Rationale
 Learning curve analysis can only be used to predict performance that is within the range of data used to develop the analysis.
Learning curve analysis is a way to estimate the time and cost to perform an activity under the assumption that people will learn to perform the
activity more efficiently the more times they perform the task. Linear regression is a statistical technique where past data is used to develop an
equation that can be used to predict something of interest. The data used to develop the regression equation define the “relevant range of activity”
over which the equation is valid. Using the equation to predict costs for activity within the relevant range is valid; however, using the equation to
predict costs for activity outside the relevant range is not valid. The need to stay within the relevant range limits the usefulness of regression
analysis, which means it is a limitation of regression analysis, not learning curve analysis; therefore, this is the correct answer.
Question 12
1.B.3.i
tb.lc.anal.030_1805
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 4
The Urban Company prepares the following distribution of cash flow forecasts for a possible investment under various economic conditions and the
probability of those conditions. If the investment requires an initial investment of $240,000, should Urban make the investment?
Economic Condition Cash Inflow Probability
Robust Growth
$1,000,000
25%
Moderate Growth
$400,000
55%
Recession
$100,000
20%
Yes, because the expected net cash flow from the investment is $260,000.
Correct
Yes, because the expected net cash flow from the investment is $250,000.
No, because there is a chance that the net cash flow from the investment will be an outflow of $140,000.
Yes, because the most likely net cash flow from the investment is $160,000.
Rationale
 Yes, because the expected net cash flow from the investment is $260,000.
The average of the three possible cash inflow amounts is $500,000. If this is used to calculate the investment's net cash flow, it will be calculated as
$260,000 ($500,000 − $240,000). The $500,000 figure assumes each condition is equally likely, which is not the case; therefore, this is an incorrect
answer.
Rationale
 Yes, because the expected net cash flow from the investment is $250,000.
To determine the expected cash inflow for the investment, the cash inflow under each possible economic condition is multiplied by the likelihood
of each condition occurring. These products are then added together. In this example, the expected cash inflow is ($1,000,000 × 25%) + ($400,000 ×
55%) + ($100,000 × 20%) = $490,000. Because the initial investment needed is $240,000, the expected cash inflow from the investment is $250,000
($490,000 − $240,000). The fact that the expected net cash flow from the investment is positive means the investment should be made; therefore,
this is the correct answer.
Rationale
 No, because there is a chance that the net cash flow from the investment will be an outflow of $140,000.
The worst-case scenario for the investment's cash inflow is $100,000. If this is used to calculate the investment's net cash flow, it will be calculated
as an outflow of $140,000 ($100,000 − $240,000). All possible outcomes and the probabilities of those outcomes need to be considered when
calculating the investment's expected cash inflow; therefore, this is an incorrect answer.
Rationale
 Yes, because the most likely net cash flow from the investment is $160,000.
If the most likely cash inflow of $400,000 is used to calculate the investment's net cash flow, it will be calculated as $160,000 ($400,000 − $240,000).
All possible outcomes and the probabilities of those outcomes need to be considered when calculating the investment's expected cash inflow;
therefore, this is an incorrect answer.
Question 13
1.B.3.e
cma11.p1.t1.me.0033_0820
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
Calhat, Inc. is beginning the production of a new product to be used in cargo ships. Management believes that the company will experience a learning
curve of 80% on production. Production of the first unit required 8,000 direct labor hours. If eight units are planned for production, the cumulative
average direct labor hours per unit of the product will be
5,120 hours.
1,678 hours.
Correct
4,096 hours
5,346 hours
Rationale
 5,120 hours.
This answer is incorrect. If 4 units are planned for production, the cumulative average direct labor hours per unit is 5,120 hours.
Rationale
 1,678 hours.
This answer is incorrect. If the 80% learning is applied after every unit rather than when production doubles, the cumulative average direct labor
hours per unit is 1,678 hours.
Rationale
 4,096 hours
As production doubles, the amount of time needed to make one unit falls at the learning curve rate. For production of eight units, the cumulative
average direct labor hours per unit is calculated as [8,000 × (2 × 0.8) × (2 × 0.8) × (2 × 0.8)] ÷ 8 = 4,096 hours. It can also be calculated as 8,000 × 0.8 ×
0.8 × 0.8 = 4,096 hours.
Rationale
 5,346 hours
This answer is incorrect. The average time to produce 8 units is 5,346 direct labor hours assuming an 80% incremental unit learning curve.
Question 14
1.B.3.g
aq.lc.anal.001_0720
LOS: 1.B.3.g
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
Wall, Corp. (Wall) is the leading manufacturer of sheetrock in the United States. Wall is trying to forecast direct material costs for next year. The cost of
calcium sulfate dihydrate (gypsum) used in sheetrock production fluctuates from year to year. Below are Wall's estimates for the cost of a pound of
gypsum next year.
Pound of Gypsum Price Probability
$1.45
15%
$1.60
25%
$1.85
40%
$2.00
20%
Based on these estimates, what is the expected cost per pound of gypsum next year?
$1.45
Your Answer
$1.73
$1.85
Correct
$1.76
Rationale
 $1.45
This answer chooses the price with the lowest probability. This method is incorrect as each price must be weighted by the probability.
Rationale
 $1.73
This answer takes a simple average of the four prices. This method is incorrect as each price must be weighted by the probability.
Rationale
 $1.85
This answer chooses the price with the highest probability. This method is incorrect as each price must be weighted by the probability.
Rationale
 $1.76
The expected cost per pound of gypsum is calculated as follows:
Pound of Gypsum Price Probability Weighted Value
$1.45
15%
$0.22
$1.60
25%
$0.40
$1.85
40%
$0.74
$2.00
20%
$0.40
Expected Value
100%
$1.76
Question 15
1.B.3.i
tb.lc.anal.028_1805
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
The Joseph Company prepares the following distribution of net cash flows for a possible investment under various economic conditions and the
probability of those conditions. What is Joseph's expected net cash flow from this investment
Economic Condition Net Cash Flow Probability
Robust Growth
$5,000,000
20%
Moderate Growth
$2,000,000
70%
−$1,300,000
10%
Recession
Correct
$2,270,000
Your Answer
$1,900,000
$2,000,000
$5,000,000.
Rationale
 $2,270,000
To determine the expected net cash flow for the investment, the cash flow under each possible economic condition is multiplied by the likelihood
of each condition occurring. These products are then added together. In this example, the expected net cash flow is ($5,000,000 × 20%) +
($2,000,000 × 70%) + (−$1,300,000 × 10%) = $2,270,000. Therefore, this is the correct answer.
Rationale
 $1,900,000
The average possible cash flow is $1,900,000. This assumes each economic condition is equally likely, which is not the case; therefore, this is an
incorrect answer.
Rationale
 $2,000,000
The most likely possible cash flow is $2,000,000. This does not take into consideration the likelihood of the economic conditions occurring or the
possibility that the cash flow may be $5,000,000 or −$1,300,000; therefore, this is an incorrect answer.
Rationale
 $5,000,000.
The maximum level of possible cash flow is $5,000,000. This is different from the expected cash flow from the investment; therefore, this is an
incorrect answer.
Question 16
1.B.3.e
tb.lc.anal.008_1805
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 4
A company implements a new process to manufacture its product and uses 100 hours to complete one unit. It expects that the new process will be
subject to an 80% learning curve. If the company assumes the learning curve will follow the cumulative average-time learning model, how many total
hours will be needed to produce the third and fourth batches?
256 hours
Correct
96 hours
160 hours
Your Answer
64 hours
Rationale
 256 hours
With an 80% learning curve, the average time to produce two batches is 80 hours per batch (100 × 80%) and the average time to produce four
batches is 64 hours per batch (80 × 80%). If each batch takes an average of 64 hours to produce, the total time needed for four batches is 256 hours
(64 × 4). The question asks for the time to produce the third and fourth batches only; therefore, this is an incorrect answer.
Rationale
 96 hours
Learning curve analysis is a way to estimate the cost of an activity under the assumption that people will learn to perform the activity more
efficiently the more times they perform the task. The time to produce decreases every time production doubles. In the cumulative average-time
model, the full expected learning is expected to occur for all units produced (the cumulative units produced). With an 80% learning curve, the
average time to produce two batches is 80 hours per batch (100 × 80%) and the average time to produce four batches is 64 hours per batch (80 ×
80%). If the average time to produce the first two batches is 80 hours, the total time to complete the first two batches is 160 hours. Similarly, the
total time needed to produce four batches is 256 hours (64 × 4). This means 96 hours will be needed to complete the third and fourth batches (256 −
160); therefore, this is the correct answer.
Rationale
 160 hours
With an 80% learning curve, the average time to produce two batches is 80 hours per batch (100 × 80%). If the average time to produce the first two
batches is 80 hours, the total time to complete the first two batches is 160 hours. The question asks the time to produce the third and fourth
batches, not the first two batches; therefore, this is an incorrect answer.
Rationale
 64 hours
With an 80% learning curve, the average time to produce two batches is 80 hours per batch (100 × 80%) and the average time to produce four
batches is 64 hours per batch (80 × 80%). The question asks for the time to produce the third and fourth batches, not the average time to produce
four batches; therefore, this is an incorrect answer.
Question 17
1.B.3.i
aq.lc.anal.005_0720
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 5
Wall, Corp. (Wall) is the leading manufacturer of drywall in the United States. Wall is trying to predict cash flow for the next year. Depreciation of $1
million is included in cost of goods sold (COGS). There is no depreciation expense as part of selling, general and administration expense (SG&A). Wall is
not forecasting any capital expenditures or change in net working capital. Wall's tax rate is 20%. Below are Wall's estimates in millions:
Estimate 1 Probability Estimate 2 Probability
Sales
$19.00
30%
$16.50
70%
COGS
$13.50
60%
$14.00
40%
SG&A
$3.00
50%
$4.00
50%
Based on the above estimates, what will be Wall's after-tax cash flow for next year?
$0.04
Your Answer
$0.05
$17.25
Correct
$1.04
Rationale
 $0.04
This answer does not add back depreciation. Depreciation is added to Net Income to get cash flow as it is a non-cash expense.
Rationale
 $0.05
This answer does not consider tax or add back depreciation. Tax is a cash expense, so it is considered. Depreciation, a non-cash expense, is added
back to Net Income to get cash flow.
Rationale
 $17.25
This answer only considers sales. COGS, SG&A, and Tax are also cash flows that must be considered. An adjustment must be made for depreciation
as well.
Rationale
 $1.04
Cash flow for the next year is calculated as follows:
Estimate 1 Probability Weighted Value Estimate 2 Probability Weighted Value Total Weighted Value
Sales
$19.00
30%
$5.70
$16.50
70%
$11.55
$17.25
COGS
$13.50
60%
$8.10
$14.00
40%
$5.60
$13.70
SG&A
$3.00
50%
$1.50
$4.00
50%
$2.00
$3.50
Operating Income
$0.05
Tax
$0.01
Net Income
$0.04
Add Back Depreciation
$1.00
Cash Flow
$1.04
Question 18
1.B.3.f
tb.lc.anal.016_1805
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is a benefit of linear regression analysis?
Correct
Linear regression analysis can be used to help predict costs at various levels of output.
Linear regression analysis assumes the relationship between the dependent variable and independent variable is linear.
Your Answer
Linear regression analysis can be used to predict performance that is within the range of data used to develop the regression equation.
Linear regression analysis can be used to estimate the time and cost to perform an activity under the assumption that people become more efficient
the more times they perform the task.
Rationale
 Linear regression analysis can be used to help predict costs at various levels of output.
Linear regression analysis is a statistical technique where past data is used to develop an equation that can be used to predict something of
interest. For example, the equation can be used to predict costs at various levels of output. The ability to predict costs at various levels of output is
a benefit of regression analysis; therefore, this is the correct answer.
Rationale
 Linear regression analysis assumes the relationship between the dependent variable and independent variable is linear.
One assumption of linear regression analysis is that the relationship of interest is linear. If the relationship is not linear (for example, the
relationship could be a curve because of improvements in efficiency), then linear regression analysis is not valid. This means this is a limitation, not
a benefit, of linear regression analysis; therefore, this is an incorrect answer
Rationale
 Linear regression analysis can be used to predict performance that is within the range of data used to develop the regression equation.
The data used to develop the regression equation define the “relevant range of activity” over which the equation is valid. Using the equation to
predict costs for activity within the relevant range is valid; however, using the equation to predict costs for activity outside the relevant range is not
valid. The need to stay within the relevant range limits the usefulness of regression analysis, which means this is a limitation, not a benefit, of linear
regression analysis; therefore, this is an incorrect answer.
Rationale
 Linear regression analysis can be used to estimate the time and cost to perform an activity under the assumption that people become
more efficient the more times they perform the task.
Linear regression analysis does not take improvements in efficiency into account as it assumes past performance will be repeated in the future.
Estimating the time and cost to perform an activity under the assumption that people become more efficient the more times they perform the task
is a benefit of learning curve analysis, not regression analysis; therefore, this is an incorrect answer.
Question 19
1.B.3.i
cma11.p1.t1.me.0030_0820
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
A manager is reviewing a potential investment that has significant uncertainty related to its ultimate financial outcome. The manager has estimated the
following probabilities for the various levels of net cash flows that may result from the investment.
Likelihood of Outcome Net Cash Flows
10%
(300,000)
20%
0
50%
100,000
20%
600,000
What is the expected value of net cash flows that the manager should use in evaluating the investment?
*Source: Retired ICMA CMA Exam Questions.
Your Answer
$100,000
$200,000
Correct
$140,000
$400,000
Rationale
 $100,000
This answer is incorrect. $100,000 would be the expected value if each cash flow were equally likely.
Rationale
 $200,000
This answer is incorrect. $200,000 is the expected value if the $300,000 is an inflow, not an outflow.
Rationale
 $140,000
The correct answer is calculated as follows:
Rationale
 $400,000
This answer is incorrect. Expected value is not calculated by adding possible outcomes together.
Question 20
1.B.3.e
tb.lc.anal.007_1805
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
A company implements a new process to manufacture its product and uses 100 hours to complete one unit. It expects that the new process will be
subject to an 80% learning curve. If the company assumes the learning curve will follow the cumulative average-time learning model, what is the average
time per unit when producing two batches?
Correct
80 hours
60 hours
Your Answer
90 hours
160 hours
Rationale
 80 hours
Learning curve analysis is a way to estimate the cost of an activity under the assumption that people will learn to perform the activity more
efficiently the more times they perform the task. The time to produce decreases every time production doubles. In the cumulative average-time
model, the full expected learning is expected to occur for all units produced (the cumulative units produced). With an 80% learning curve, the
average time to produce two batches is 80 hours per batch (100 × 80%); therefore, this is the correct answer.
Rationale
 60 hours
With an 80% learning curve, the average time to produce two batches is 80 hours per batch (100 × 80%) and the total time to produce two batches is
160 hours. This means the second batch would take 60 hours to produce. The question asks for the average time to produce two batches, not the
time to produce the second batch; therefore, this is an incorrect answer.
Rationale
 90 hours
This answer applied the learning curve to the second batch only. $400 labor cost from the first batch and $280 ($400 × 70%) labor cost from the
second batch equals $680 labor cost total. The learning curve should have been applied to all units produced; therefore, this is an incorrect answer.
Rationale
 160 hours
With an 80% learning curve, the average time to produce two batches is 80 hours per batch (100 × 80%) and the total time to produce two batches is
160 hours. The question asks for the average time to produce two batches, not the total time to produce two batches; therefore, this is an incorrect
answer.
Question 21
1.B.3.e
tb.lc.anal.005_1805
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
A company implements a new process to manufacture its product and uses 100 hours to complete one unit. It expects that the new process will be
subject to an 80% learning curve. If the company assumes the learning curve will follow the cumulative average-time learning model, how many total
hours will be needed to complete four batches?
Correct
256 hours
204.8 hours
400 hours
Your Answer
64 hours
Rationale
 256 hours
Learning curve analysis is a way to estimate the cost of an activity under the assumption that people will learn to perform the activity more
efficiently the more times they perform the task. The time to produce decreases every time production doubles. In the cumulative average-time
model, the full expected learning is expected to occur for all units produced (the cumulative units produced). With an 80% learning curve, the
average time to produce two batches is 80 hours per batch (100 × 80%) and the average time to produce four batches is 64 hours per batch (80 ×
80%). If each batch takes an average of 64 hours to produce, the total time needed for four batches is 256 hours (64 × 4); therefore, this is the correct
answer.
Rationale
 204.8 hours
If it is assumed that the time to produce decreases with each batch, then the average time to produce two batches would be 80 hours per batch
(100 × 80%), the average time to produce three batches would be 64 hours per batch (80 × 80%), and the average time to produce four batches
would be 51.2 hours per batch (64 × 80%). If each batch takes an average of 51.2 hours to produce, the total time needed for four batches would be
204.8 hours (51.2 × 4). Learning curve analysis is based on the learning occurring when production doubles, not with each additional unit or batch;
therefore, this is an incorrect answer.
Rationale
 400 hours
If no learning occurs, then it would take 400 hours to produce four batches (100 × 4); however, the question states that learning does occur.
Therefore, this is an incorrect answer.
Rationale
 64 hours
With an 80% learning curve, the average time to produce two batches is 80 hours per batch (100 × 80%) and the average time to produce four
batches is 64 hours per batch (80 × 80%); however, the question asks for the total time to produce four batches, not the average time to produce
each batch. Therefore, this is an incorrect answer.
Question 22
1.B.3.d
aq.lc.anal.007_1802
LOS: 1.B.3.d
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: easy
Bloom Code: 2
Which of the following is the proper formula for computing the cumulative average?
Correct
The formula for calculating the cumulative average is Y = aXb, where Y = cumulative average per unit, a = time required for first unit, X = cumulative
number of units, and b = ln learning curve % ÷ ln 2.
The formula for calculating the cumulative average is Y = aXb, where Y = cumulative average per unit, a = time required for first unit, X = cumulative
number of units, and b = ln learning curve % ÷ ln 2.
Your Answer
The formula for calculating the cumulative average is Y = abXb, where Y = cumulative average per unit, a = time required for first unit, X = cumulative
number of units, and b = ln learning curve % ÷ ln 2.
The formula for calculating the cumulative average is Y = aXb, where Y = cumulative average per unit, a = time required for all units, X = cumulative
number of units, and b = ln learning curve % ÷ ln 2.
Rationale
b
 The formula for calculating the cumulative average is Y = aX , where Y = cumulative average per unit, a = time required for first unit, X =
cumulative number of units, and b = ln learning curve % ÷ ln 2.
This is the proper formula for computing the cumulative average.
Rationale
 The formula for calculating the cumulative average is Y = aXb, where Y = cumulative average per unit, a = time required for first unit, X =
cumulative number of units, and b = ln learning curve % ÷ ln 2.
The cumulative number of units should raised to the power of the ln learning curve % ÷ ln 2, not multiplied.
Rationale
b b
 The formula for calculating the cumulative average is Y = a X , where Y = cumulative average per unit, a = time required for first unit, X
= cumulative number of units, and b = ln learning curve % ÷ ln 2.
The “a” factor in the equation is not raised to the power of the ln learning curve % ÷ ln 2, only the “X” factor uses this exponent.
Rationale
b
 The formula for calculating the cumulative average is Y = aX , where Y = cumulative average per unit, a = time required for all units, X =
cumulative number of units, and b = ln learning curve % ÷ ln 2.
The “a” factor in the equation represents the time required for the first unit, not the time required for all units.
Question 23
1.B.3.g
tb.lc.anal.021_1805
LOS: 1.B.3.g
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
The Madeline Company prepares the following distribution of sales forecasts for various economic conditions and the probability of those conditions.
What is the expected value of sales for Madeline?
Economic Condition Sales Forecast Probability
Robust Growth
$20,000,000
15%
Moderate Growth
$14,000,000
65%
$5,000,000
20%
Recession
$13,000,000
Correct
$13,100,000
$14,000,000
$5,000,000.
Rationale
 $13,000,000
The average of the three possible sales levels is $13,000,000. This assumes each condition is equally likely, which is not the case; therefore, this is an
incorrect answer.
Rationale
 $13,100,000
To determine the expected sales, the sales under each possible economic condition is multiplied by the likelihood of each condition occurring.
These products are then added together. In this example, the expected sales are ($20,000,000 × 15%) + ($14,000,000 × 65%) + ($5,000,000 × 20%) =
$13,100,000. Therefore, this is the correct answer.
Rationale
 $14,000,000
The most likely of the three possible sales levels is $14,000,000. This does not take into consideration the likelihood of the economic conditions
occurring or the possibility that the sales may be $20,000,000 or $5,000,000; therefore, this is an incorrect answer.
Rationale
 $5,000,000.
The minimum level of sales is $5,000,000. This is different from the expected sales; therefore, this is an incorrect answer.
Question 24
1.B.3.e
aq.lc.anal.008_0720
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
Wall, Corp. (Wall) is the leading manufacturer of drywall in the United States. A competitor has announced plans to begin selling a new and improved
type of drywall starting next year. To compete and maintain their position as the leading manufacturer, Wall decided to start producing an improved
type of drywall as well. When the production line started, it took 20 hours to make the first batch of 100 8' by 4' sheets. Wall estimates the learning rate to
be 80%. Forecast the cumulative average time per batch to make the first four batches of 8' by 4' sheets, and use that average to determine the total
production time to make these four batches of sheets.
12.8 hours
Correct
51.2 hours
Your Answer
80 hours
64 hours
Rationale
 12.8 hours
This answer represents the cumulative average hours per batch for the first four batches; however, this number must be multiplied by four to get
the total production time to make these four batches.
Rationale
 51.2 hours
Using the formula Y = aXb
a = 20 hours
X = 4 batches
b = ln 80% ÷ ln 2 or − .2231 ÷ .6931 = − 0.3219
20(4−0.3219) = 12.8 cumulative average hours per batch for the first four batches
4 batches × 12.8 hours = 51.2 total hours for all four batches
Alternatively, using the short-cut approach:
Total Quantity 80% Computation Cumulative Average Hours per Batch Total Time
1 batch
20.0 hours
20.0 hours
2 batches
20.0 × 80% =
16.0 hours
32.0 hours
4 batches
16.0 × 80% =
12.8 hours
51.2 hours
Rationale
 80 hours
This answer is the hours it took to make the first batch multiplied by four batches. This answer is incorrect because it does not take into account the
learning rate of 80%.
Rationale
 64 hours
This answer is the cumulative average hours per batch for two batches multiplied by two to get four batches. This answer is incorrect because it
does not consider the learning rate of 80% for the next two batches.
Question 25
1.B.3.f
tb.lc.anal.018_1805
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is a benefit of learning curve analysis?
Learning curve analysis can be used to help predict costs at various levels of output.
Correct
Learning curve analysis assumes efficiency improvements are greatest when production begins and decrease as production increases.
Your Answer
Learning curve analysis produces diagnostic statistics that can be used to evaluate the quality of the analysis.
Learning curve analysis assumes all improvements in production efficiency are caused by employee learning.
Rationale
 Learning curve analysis can be used to help predict costs at various levels of output.
Learning curve analysis does not help predict costs at various levels of output. Predicting costs at various levels of output is a benefit of regression
analysis, not learning curve analysis; therefore, this is an incorrect answer.
Rationale
 Learning curve analysis assumes efficiency improvements are greatest when production begins and decrease as production increases.
Learning curve analysis is a way to estimate the time and cost to perform an activity under the assumption that people will learn to perform the
activity more efficiently the more times they perform the task. It assumes that the greatest efficiency improvement occurs when production first
doubles and then the rate of improvement decreases over time until it levels off. This is more realistic than assuming efficiency improvements can
occur indefinitely. This realism is a benefit of learning curve analysis; therefore, this is the correct answer.
Rationale
 Learning curve analysis produces diagnostic statistics that can be used to evaluate the quality of the analysis.
Diagnostic statistics are not produced as a part of the analysis. Diagnostic statistics are a benefit of regression analysis, not learning curve analysis;
therefore, this is an incorrect answer.
Rationale
 Learning curve analysis assumes all improvements in production efficiency are caused by employee learning.
Learning curve analysis assumes that all improvements in efficiency are caused by employee learning. A different labor mix, improved machinery,
and better-quality materials could also be the cause of improved efficiency. Because learning curve analysis ignores these factors, it is a limitation
of learning curve analysis not a benefit of it; therefore, this is an incorrect answer.
Question 26
1.B.3.h
aq.lc.anal.003_0720
LOS: 1.B.3.h
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 3
Which of the following is a benefit of expected value computations?
The underlying probabilities used in the expected value formula are usually based on subjective judgments.
Correct
The expected value computation reduces multiple outcomes down to a single value, which is easily understood and can be entered into a budget
plan.
Your Answer
The expected value computation is the most likely outcome in the future.
Expected value computations incorporate multiple possibilities, making them more representative of a certain future.
Rationale
 The underlying probabilities used in the expected value formula are usually based on subjective judgments.
This is actually a shortcoming of expected value computations.
Rationale
 The expected value computation reduces multiple outcomes down to a single value, which is easily understood and can be entered into
a budget plan.
This is a benefit of expected value computations.
Rationale
 The expected value computation is the most likely outcome in the future.
The result of the EV formula is not actually the most likely outcome in the future. It is a weighted average of the possible results used in the
computation. This shortcoming is particularly important if the possible outcomes are discrete events (rather than a continuous range of
possibilities).
Rationale
 Expected value computations incorporate multiple possibilities, making them more representative of a certain future.
This statement is incorrect. Expected value computations that incorporate multiple possibilities are generally more representative of an uncertain
future compared to forecasts of a single outcome.
Question 27
1.B.3.g
tb.lc.anal.023_1805
LOS: 1.B.3.g
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
The Dana Hotel prepares the following distribution of expected visitors for various economic conditions and the probability of those conditions. What is
the expected number of visitors for Dana?
Economic Condition Expected Visitors Probability
Robust Growth
18,000
20%
Moderate Growth
9,000
70%
Recession
3,000
10%
9,000
Your Answer
18,000
Correct
10,200
10,000
Rationale
 9,000
The most likely possible number of visitors is 9,000. This does not take into consideration the likelihood of the economic conditions occurring or the
possibility that there may be 18,000 or 3,000 visitors; therefore, this is an incorrect answer.
Rationale
 18,000
The highest possible number of visitors is 18,000. This is different from the expected number of visitors; therefore, this is an incorrect answer.
Rationale
 10,200
To determine the expected visitors, the expected visitors under each possible economic condition is multiplied by the likelihood of each condition
occurring and these products are then added together. In this example, the expected number of visitors is (18,000 × 20%) + (9,000 × 70%) + (3,000 ×
10%) = 10,200. Therefore, this is the correct answer.
Rationale
 10,000
The average possible number of visitors is 10,000. This assumes each economic condition is equally likely, which is not the case; therefore, this is an
incorrect answer.
Question 28
1.B.3.e
tb.lc.anal.009_1805
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 4
A company implements a new process to manufacture its product and spends $500 on labor to produce 50 units. It expects that the new process will be
subject to an 80% learning curve. If the company assumes the learning curve will follow the cumulative average-time learning model, what will be the
total labor cost to produce 200 units?
Correct
$1,280
$320
Your Answer
$1,024
$1,600
Rationale
 $1,280
Learning curve analysis is a way to estimate the cost of an activity under the assumption that people will learn to perform the activity more
efficiently the more times they perform the task. The time and cost to produce decreases every time production doubles. In the cumulative averagetime model, the full expected learning is expected to occur for all units produced (the cumulative units produced). With an 80% learning curve, the
average cost to produce two batches (100 units) is $400 per batch (500 × 80%) and the average cost to produce four batches (200 units) is $320 per
batch (400 × 80%). If each batch costs an average of $320 for labor, four batches would cost $1,280 ($320 × 4). Therefore, this is the correct answer.
Rationale
 $320
With an 80% learning curve, the average cost to produce two batches (100 units) is $400 per batch (500 × 80%) and the average cost to produce four
batches (200 units) is $320 per batch (400 × 80%). The question asks for the total cost to produce 200 units, not the average cost per batch;
therefore, this is an incorrect answer.
Rationale
 $1,024
If it is assumed that the time to produce decreases with each batch, then the average cost to produce two batches would be $400 per batch (500 ×
80%), the average cost to produce three batches would be $320 per batch (400 × 80%), and the average cost to produce four batches would be $256
per batch (320 × 80%). If each batch costs an average of $256 for labor, four batches would cost $1,024 ($256 × 4). Learning curve analysis is based
on the learning occurring when production doubles, not with each additional unit or batch; therefore, this is an incorrect answer.
Rationale
 $1,600
With an 80% learning curve, the average cost to produce two batches (100 units) is $400 per batch (500 × 80%). If this $400 per batch is used to
calculate the total labor cost for four batches (200 units), four batches would appear to cost $1,600 in labor ($400 × 4). The $400 per batch does not
take into account the learning that occurs when going from two batches to four batches; therefore, this is an incorrect answer.
Question 29
1.B.3.i
aq.lc.anal.004_0720
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
Wall, Corp. (Wall) is the leading manufacturer of drywall in the United States. Wall is trying to predict net income for the next year. Wall's tax rate is 20%.
There are no other expenses besides cost of goods sold (COGS) and selling, general and administrative expense (SG&A). Below are Wall's estimates in
millions:
Estimate 1 Probablity Estimate 2 Probablity
Sales
$17.00
60%
$15.00
40%
COGS
$12.00
50%
$13.00
50%
SG&A
$2.00
70%
$3.00
30%
Based on the above estimates, what will be Wall's expected net income for next year?
Correct
$1.12
$1.40
$2.80
($1.40)
Rationale
 $1.12
Expected net income for next year is calculated as follows:
Estimated 1 Probability Weighted Value Estimated 2 Probability Weighted Value Total Weighted Value
Sales
$17.00
60%
$10.20
$15.00
40%
$6.00
$16.20
COGS
$12.00
50%
$6.00
$13.00
50%
$6.50
$12.50
SG&A
$2.00
70%
$1.40
$3.00
30%
$0.90
$2.30
Operating Income
$1.40
Tax
$0.28
Net Income (in millions)
$1.12
Rationale
 $1.40
This answer does not consider the effect of tax.
Rationale
 $2.80
This answer is calculated based on the weighted values from Estimate 1. However, the weighted values of Estimate 2 must also be considered.
Rationale
 ($1.40)
This answer is calculated based on the weighted values from Estimate 2. However, the weighted values of Estimate 1 must also be considered.
Question 30
1.B.3.d
aq.lc.anal.006_0720
LOS: 1.B.3.d
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: easy
Bloom Code: 2
Finish the following sentence: Learning curve analysis is focused on the ____________ improvement rather than on the ____________ improvement for
each unit of output.
Curved; flat
Correct
Cumulative average; individual
Individual; cumulative average
Your Answer
Flat; curved
Rationale
 Curved; flat
The nature of learning is that it “curves.” That is, learning results in the biggest improvements in the beginning, and then learning (and
improvement) becomes smaller over time until learning is essentially “flat.” This is a defining concept of learning curve analysis; however, this is
not the proper terminology for the type of improvement learning curve analysis is focused on.
Rationale
 Cumulative average; individual
Learning curves are defined in terms of cumulative averages of time or cost that reduce by a constant percentage over time. The key factor to
understand is that the analysis is focused on improvements in “cumulative averages” rather than on the individual improvement for each unit of
output.
Rationale
 Individual; cumulative average
Learning curve analysis is not focused on the improvement of individual units.
Rationale
 Flat; curved
The nature of learning is that it “curves.” That is, learning results in the biggest improvements in the beginning, and then learning (and
improvement) become smaller over time until learning is essentially “flat.” This is a defining concept of learning curve analysis; however, this is not
the proper terminology for the type of improvement learning curve analysis is focused on.
Question 31
1.B.3.f
aq.lc.anal.010_0720
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 3
Which of the following is a shortcoming of learning curve analysis?
Correct
Learning curve analysis assumes the learning rate is constant.
Because learning curve analysis is not working to anticipate where costs are moving, organizations are unable to establish more relevant budgets
with appropriate stretch targets.
Learning curve analysis is focused on machine learning. Hence, learning curve analysis may not be relevant to more human-intensive processes.
Your Answer
Learning curve analysis is anticipating movement in future costs by recognizing that the organization is learning and becoming more efficient with its
processes.
Rationale
 Learning curve analysis assumes the learning rate is constant.
This is a shortcoming of learning curve analysis.
Rationale
 Because learning curve analysis is not working to anticipate where costs are moving, organizations are unable to establish more
relevant budgets with appropriate stretch targets.
This statement is false. Learning curve analysis is actually a method of anticipating where costs are moving, which can help organizations establish
more relevant budgets with appropriate stretch targets. This is a benefit of learning curve analysis.
Rationale
 Learning curve analysis is focused on machine learning. Hence, learning curve analysis may not be relevant to more human-intensive
processes.
This statement is false. Learning curve analysis is focused on human learning and behavior. Hence, learning curve analysis may not be relevant to
more machine-intensive processes, which is a shortcoming.
Rationale
 Learning curve analysis is anticipating movement in future costs by recognizing that the organization is learning and becoming more
efficient with its processes.
This is a benefit of learning curve analysis.
Question 32
1.B.3.i
lc.anal.tb.033_0120
LOS: 1.B.3.i
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
A clothing company is evaluating two possible locations for a new retail store. The company’s research indicates that Location A has a 45% probability of
generating $400,000 in cash flow, and a 55% probability of generating $325,000 in cash flow. Location B has a 25% probability of generating $600,000 in
cash flow, and a 75% probability of generating $250,000 in cash flow. Based on the expected value for each location, the company should choose
Location:
*Source: Retired ICMA CMA Exam Questions.
Correct
A, because its expected value is $21,250 higher than Location B.
Your Answer
A, because its expected value is $75,000 higher than Location B.
B, because its expected value is $125,000 higher than Location A.
B, because its expected value is $8,750 higher than Location A.
Rationale
 A, because its expected value is $21,250 higher than Location B.
An expected value is the weighted average value of possible outcomes. The probabilities for a given scenario must equal 100%. In this problem, the
expected cash flow value for Location A equals $358,750 (($400,000 × 45%) + ($325,000 × 55%)) and the expected value for Location B equals
$337,500 (($600,000 × 25%) + ($250,000 × 75%)). This company should choose Location A because its expected value is $21,250 higher than Location
B’s expected value ($358,750 − $337,500).
Rationale
 A, because its expected value is $75,000 higher than Location B.
This answer is incorrect. The most likely outcome for each location is that Location A will generate cash flow of $325,000 and Location B will have
cash flow of $250,000. If the expected value for each location were based solely on the most likely outcome, the company would choose Location A.
However, an expected value is the weighted average of a set of possible outcomes.
Rationale
 B, because its expected value is $125,000 higher than Location A.
This answer is incorrect. Location B’s expected value would be $125,000 higher than Location A if a location’s expected value equaled the sum of
the possible outcomes. Location A would have an expected value of $725,000 ($400,000 + $325,000) and Location B would have an expected value
of $850,000 ($600,000 + $250,000). The cash flow possibilities must be multiplied by the probability of obtaining that cash flow to get the correct
expected value.
Rationale
 B, because its expected value is $8,750 higher than Location A.
This answer is incorrect. Location B would have an expected value that is $8,750 higher than Location A if the expected value equaled the most
likely outcome multiplied by the probability of obtaining that outcome but the most likely outcome is not the only factor to take into consideration.
Question 33
1.B.3.f
tb.lc.anal.012_1805
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is not a benefit of regression analysis?
Regression analysis can be used to help predict costs at various levels of output.
Regression analysis can be used to separate a mixed cost into its fixed and variable components.
Your Answer
Regression analysis produces diagnostic statistics that can be used to evaluate the quality of the equation produced.
Correct
Regression analysis can be used to estimate the time and cost to perform an activity under the assumption that people become more efficient the
more times they perform the task.
Rationale
 Regression analysis can be used to help predict costs at various levels of output.
The ability to predict costs at various levels of output is a benefit of regression analysis; therefore, this is an incorrect answer.
Rationale
 Regression analysis can be used to separate a mixed cost into its fixed and variable components.
The ability to separate the components of mixed cost is a benefit of regression analysis; therefore, this is an incorrect answer.
Rationale
 Regression analysis produces diagnostic statistics that can be used to evaluate the quality of the equation produced.
The statistical significance of the relationship between an independent variable and dependent variable is measured by the t-value for the
independent variable coefficient. Both of these are useful to evaluate the quality of the equation produced. Therefore, this is an incorrect answer.
Rationale
 Regression analysis can be used to estimate the time and cost to perform an activity under the assumption that people become more
efficient the more times they perform the task.
Regression analysis is a statistical technique where past data is used to develop an equation that can be used to predict something of interest. It
does not take improvements in efficiency into account as it assumes past performance will be repeated in the future. Learning curve analysis is a
way to estimate the time and cost to perform an activity under the assumption that people will learn to perform the activity more efficiently the
more times they perform the task. This means estimating the time and cost to perform an activity under the assumption that people become more
efficient the more times they perform the task is a benefit of learning curve analysis, not regression analysis; therefore, this is the correct answer.
Question 34
1.B.3.e
tb.lc.anal.010_1805
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 4
A company implements a new process to manufacture its product and spends $400 on labor to produce one batch. It expects that the new process will be
subject to a 70% learning curve. If the company assumes the learning curve will follow the cumulative average-time learning model, what will be the
total labor cost to produce 200 units if each batch is 100 units?
Correct
$560
$160
Your Answer
$680
$280
Rationale
 $560
Learning curve analysis is a way to estimate the cost of an activity under the assumption that people will learn to perform the activity more
efficiently the more times they perform the task. The time and cost to produce decreases every time production doubles. In the cumulative averagetime model, the full expected learning is expected to occur for all units produced (the cumulative units produced). With a 70% learning curve, the
average cost to produce two batches (200 units) is $280 per batch ($400 × 70%). If each batch costs an average of $280 for labor, two batches would
cost $560 ($280 × 2); therefore, this is the correct answer.
Rationale
 $160
With a 70% learning curve, the average cost to produce two batches (200 units) is $280 per batch ($400 × 70%). If each batch costs an average of
$280 for labor, two batches would cost $560 ($280 × 2). The first batch would cost $400 and the second would cost $160. However, the question asks
for the total labor cost to produce two batches (200 units), not the cost to produce the second batch; therefore, this is an incorrect answer.
Rationale
 $680
This answer applied the learning curve to the second batch only. $400 labor cost from the first batch and $280 ($400 × 70%) labor cost from the
second batch equals $680 labor cost total. The learning curve should have been applied to all units produced; therefore, this is an incorrect answer.
Rationale
 $280
With a 70% learning curve, the average cost to produce two batches (200 units) is $280 per batch ($400 × 70%). The question asks for the total labor
cost to produce two batches, not the average cost to produce two batches; therefore, this is an incorrect answer.
Question 35
1.B.3.f
tb.lc.anal.013_1805
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is not a limitation of linear regression analysis?
Linear regression analysis assumes that there will be no changes in past performance in the future (for example, efficiency will not improve).
Linear regression analysis can only be used to predict performance that is within the range of data used to develop the regression equation.
Your Answer
Linear regression analysis assumes the relationship between the dependent variable and independent variable is linear.
Correct
Regression analysis cannot be used when it is difficult to accurately measure the impact of efficiency improvements.
Rationale
 Linear regression analysis assumes that there will be no changes in past performance in the future (for example, efficiency will not
improve).
Linear regression analysis does not take improvements in efficiency into account as it assumes past performance will be repeated in the future. As a
result, regression analysis cannot be used when past performance is not likely to be repeated in the future. This is a limitation of regression
analysis; therefore, this is an incorrect answer.
Rationale
 Linear regression analysis can only be used to predict performance that is within the range of data used to develop the regression
equation.
The data used to develop the linear regression analysis equation defines the “relevant range of activity” over which the equation is valid. Using the
equation to predict costs for activity within the relevant range is valid, but using the equation to predict costs for activity outside the relevant range
is not valid. The need to stay within the relevant range limits the usefulness of regression analysis; therefore, this is an incorrect answer.
Rationale
 Linear regression analysis assumes the relationship between the dependent variable and independent variable is linear.
One assumption of linear regression analysis is that the relationship of interest is linear. If the relationship is not linear (for example, the
relationship could be a curve because of improvements in efficiency), then regression analysis is not valid; therefore, this is an incorrect answer.
Rationale
 Regression analysis cannot be used when it is difficult to accurately measure the impact of efficiency improvements.
Linear regression analysis is a statistical technique where past data is used to develop an equation that can be used to predict something of
interest. It does not take improvements in efficiency into account as it assumes past performance will be repeated in the future. Learning curve
analysis is a way to estimate the time and cost to perform an activity under the assumption that people will learn to perform the activity more
efficiently the more times they perform the task. It can be difficult to measure the impact of the learning, which means it is a limitation of learning
curve analysis, not regression analysis. Therefore, this is the correct answer.
Question 36
1.B.3.g
aq.lc.anal.002_0720
LOS: 1.B.3.g
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: hard
Bloom Code: 6
Wall, Corp. (Wall) is the leading manufacturer of drywall in the United States. Wall is trying to predict total sales revenue for next year. A new competitor
has announced plans to begin selling a new and improved type of drywall starting next year. Wall believes the new product has a 50% chance of lowering
sales of 8' by 4' sheets of drywall, their only product, from 1,235,305 sheets to 1,054,255 sheets. If turns out that the new product does reduce Wall's sales
volume, there is a 20% chance that Wall will also be forced to reduce its price of $15.00 per sheet to $13.50 per sheet in order to stay competitive at the
new sales volume of 1,054,255 sheets.
Based on these estimates, what is the expected sales revenue for next year?
Your Answer
$17,171,700.00
$18,529,575.00
Correct
$17,013,561.75
$17,603,096.25
Rationale
 $17,171,700.00
This answer calculates the weighted sales correctly, but incorrectly multiplies the total weighted sales by $15. The weighted prices must also be
calculated for each weighted sales estimate.
Rationale
 $18,529,575.00
This answer calculates the weighted sales by multiplying sales of 1,235,305 sheets by $15. This is incorrect as the weighted sales must first be
calculated. Additionally, the weighted price must be calculated for each weighted sales estimate.
Rationale
 $17,013,561.75
Correct. The weighted value is calculated as follows:
Sales (Sheets) Probability Weighted Sales Price Probability Weighted Price Weighted Value
1,235,305
50%
617,652.50
$15.00
100%
$15.00
$9,264,787.50
1,054,255
50%
527,127.50
$15.00
80%
$12.00
$6,325,530.00
527,127.50
$13.50
20%
$2.70
Expected Value
100%
$1,423,244.25
$17,013,561.75
Weighted value = Weighted sales × Weighted price
Rationale
 $17,603,096.25
This answer correctly calculates the weighted value for the sales estimate of 1,235,305, but does not calculate the weighted values for the sales
estimate of 1,054,255. The weighted price must be calculated and used instead of simply multiplying $13.50 by 1,054,255.
Question 37
1.B.3.e
tb.lc.anal.006_1805
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
A company implements a new process to manufacture its product and uses 100 hours to complete one unit. It expects that the new process will be
subject to an 80% learning curve. If the company assumes the learning curve will follow the cumulative average-time learning model, what is the average
time needed to produce four batches?
256 hours
60 hours
Your Answer
51.2 hours
Correct
64 hours
Rationale
 256 hours
With an 80% learning curve, the average time to produce two batches is 80 hours per batch (100 × 80%) and the average time to produce four
batches is 64 hours per batch (80 × 80%). If each batch takes an average of 64 hours to produce, the total time needed for four batches is 256 hours
(64 × 4). The question asks for the average time to produce four batches, not the total time to produce four batches; therefore, this is an incorrect
answer.
Rationale
 60 hours
With an 80% learning curve, the average time to produce two batches is 80 hours per batch (100 × 80%) which means the second batch would take
60 hours to produce. The question asks for the average time to produce four batches, not the time to produce the second batch; therefore, this is an
incorrect answer.
Rationale
 51.2 hours
If it is assumed that the time to produce decreases with each batch, then the average time to produce two batches would be 80 hours per batch
(100 × 80%), the average time to produce three batches would be 64 hours per batch (80 × 80%), and the average time to produce four batches
would be 51.2 hours per batch (64 × 80%). Learning curve analysis is based on the learning occurring when production doubles, not with each
additional unit or batch; therefore, this is an incorrect answer.
Rationale
 64 hours
Learning curve analysis is a way to estimate the cost of an activity under the assumption that people will learn to perform the activity more
efficiently the more times they perform the task. The time to produce decreases every time production doubles. In the cumulative average-time
model, the full expected learning is expected to occur for all units produced (the cumulative units produced). With an 80% learning curve, the
average time to produce two batches is 80 hours per batch (100 × 80%) and the average time to produce four batches is 64 hours per batch (80 ×
80%); therefore, this is the correct answer.
Question 38
1.B.3.g
tb.lc.anal.020_1805
LOS: 1.B.3.g
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 4
The Andrew Company prepares the following distribution of sales forecasts for various economic conditions and the probability of those conditions.
What is the expected value of sales for Andrew?
Economic Condition Sales Forecast Probability
Robust Growth
$10,000,000
20%
Moderate Growth
$8,000,000
70%
Recession
$3,000,000
10%
Correct
$7,900,000
$7,000,000
$8,000,000
$10,000,000.
Rationale
 $7,900,000
To determine the expected sales, the sales under each possible economic condition is multiplied by the likelihood of each condition occurring and
these products are then added together. In this example, the expected sales are ($10,000,000 × 20%) + ($8,000,000 × 70%) + ($3,000,000 × 10%) =
$7,900,000. Therefore, this is the correct answer.
Rationale
 $7,000,000
The average of the three possible sales levels is $7,000,000. This assumes each economic condition is equally likely, which is not the case; therefore,
this is an incorrect answer.
Rationale
 $8,000,000
The most likely of the three possible sales levels is $8,000,000. This does not take into consideration the likelihood of the economic conditions
occurring or the possibility that the sales may be $10,000,000 or $3,000,000; therefore, this is an incorrect answer.
Rationale
 $10,000,000.
The maximum level of possible sales is $10,000,000. This is different from the expected sales; therefore, this is an incorrect answer.
Question 39
1.B.3.f
tb.lc.anal.019_1805
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is a limitation of learning curve analysis?
Correct
Learning curve analysis assumes that the percentage improvement from learning only fully occurs when production doubles.
Learning curve analysis can only be used to predict performance that is within the range of data used in the analysis.
Your Answer
Learning curve analysis assumes a decision-maker is risk neutral.
Learning curve analysis assumes that there will be no changes in past performance in the future.
Rationale
 Learning curve analysis assumes that the percentage improvement from learning only fully occurs when production doubles.
Learning curve analysis is a way to estimate the time and cost to perform an activity under the assumption that people will learn to perform the
activity more efficiently the more times they perform the task. It assumes that the time and cost to perform an activity will decrease by a fixed
percentage when production doubles. It does not allow for situations where the decrease occurs at intervals other than doubling. This lack of
flexibility is a limitation of learning curve analysis; therefore, this is the correct answer.
Rationale
 Learning curve analysis can only be used to predict performance that is within the range of data used in the analysis.
Learning curve analysis does not rely on a relevant range of activity. The need to stay within the relevant range is a limitation of regression analysis,
not learning curve analysis; therefore, this is an incorrect answer.
Rationale
 Learning curve analysis assumes a decision-maker is risk neutral.
Learning curve analysis does not rely on a decision-maker being risk neutral. The assumption that decision-makers are risk neutral is a limitation of
expected value analysis, not learning curve analysis; therefore, this is an incorrect answer.
Rationale
 Learning curve analysis assumes that there will be no changes in past performance in the future.
Learning curve analysis does not assume that there will be no change in past performance in the future as it explicitly takes learning into
consideration. The assumption that there will be no changes in past performance in the future is a limitation of regression analysis, not learning
curve analysis; therefore, this is an incorrect answer.
Question 40
1.B.3.e
tb.lc.anal.011_1805
LOS: 1.B.3.e
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 3
Tough Tables (TT) plans to begin manufacturing a new line of indestructible tables by the end of the year. Their target customers are families with small
children. TT believes that the first table will take them 17 hours to manufacture and estimates the learning rate to be 85%. Forecast the cumulative
average time per table to make the first five tables, and use that average to determine the total production time to make the first five tables.
Correct
58.28 hours
Your Answer
85 hours
99.65 hours
11.66 hours
Rationale
 58.28 hours
Note: The short-cut approach for the cumulative average method will not work for this problem. Using the formula Y = aXb calculate the following
(calculator strokes included):
a = 17 hours
X = 5 tables
b = ln 85% (in the calculator enter .85 and then press the LN function) ÷ ln 2 (in the calculator enter 2 and then press the LN function) or −.1625 ÷
.6931 = −0.2345
17(5−0.2345) = 11.66 cumulative average hours per table for the first five tables (in the calculator enter 5 and then press the yx key to get .6856 and
multiply this amount by 17 to get 11.66)
5 tables × 11.66 hours = 58.28 total hours for all five tables
Rationale
 85 hours
This answer is incorrect. This answer represents the hours it took to make the first table multiplied by five tables. This answer is incorrect because it
does not take into account the learning rate of 85%.
Rationale
 99.65 hours
This answer is incorrect. This answer multiplies the “X” factor of five tables by “b” (−0.2345), instead of raising “X” to the power of “b.”
Rationale
 11.66 hours
This answer is incorrect. This answer represents the cumulative average hours per table for the first five tables; however, this number must be
multiplied by 5 to get the total production time to make these five tables.
Question 41
1.B.3.f
tb.lc.anal.014_1805
LOS: 1.B.3.f
Lesson Reference: Expected Value Computations and Learning Curve Analysis
Difficulty: medium
Bloom Code: 2
Which of the following is not a benefit of learning curve analysis?
Correct
Learning curve analysis can be used to help predict costs at various levels of output.
Learning curve analysis assumes efficiency improvements are greatest when production begins and decrease as production increases.
Your Answer
Learning curve analysis can incorporate various rates of efficiency improvements depending on circumstances.
Learning curve analysis takes into consideration that people tend to get more efficient at performing a task the more times they perform the task.
Rationale
 Learning curve analysis can be used to help predict costs at various levels of output.
Learning curve analysis is a way to estimate the time and cost to perform an activity under the assumption that people will learn to perform the
activity more efficiently the more times they perform the task. It does not help predict costs at various levels of output. Linear regression is a
statistical technique where past data is used to develop an equation that can be used to predict costs at various levels of output. Predicting costs at
various levels of output is a benefit of regression analysis, not learning curve analysis; therefore, this is the correct answer.
Rationale
 Learning curve analysis assumes efficiency improvements are greatest when production begins and decrease as production increases.
Learning curve analysis assumes that the greatest efficiency improvement occurs when production first doubles and then the rate of improvement
decreases over time until it levels off. This is more realistic than assuming efficiency improvements can occur indefinitely. This realism is a benefit of
learning curve analysis; therefore, this is an incorrect answer.
Rationale
 Learning curve analysis can incorporate various rates of efficiency improvements depending on circumstances.
Different rates of efficiency improvements can be incorporated depending on the circumstances. For example, an 80% learning curve assumes that
the time to perform a task decreases by 20% when output doubles, while a 70% learning curve assumes that the time to perform a task decreases
by 30% when output doubles. This flexibility is a benefit of learning curve analysis; therefore, this is an incorrect answer.
Rationale
 Learning curve analysis takes into consideration that people tend to get more efficient at performing a task the more times they
perform the task.
Learning curve analysis is a way to estimate the time and cost to perform an activity under the assumption that people will learn to perform the
activity more efficiently the more times they perform the task. Taking this into consideration is more realistic than assuming no learning takes
place. This is a benefit of learning curve analysis; therefore, this is an incorrect answer.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.4.c
tb.frazp.bud.024_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
The final result of the master budget is:
Correct
Pro forma financial information.
Your Answer
A sales forecast.
A variance analysis.
Expected financing needed.
Rationale
 Pro forma financial information.
Correct. A master budget system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows. This
information is then used to prepare pro forma financial information.
Rationale
 A sales forecast.
Incorrect. The sales forecast is the starting point in the preparation of the master budget, not the final result.
Rationale
 A variance analysis.
Incorrect. While variances are based on information from a master budget, variance analysis is a separate process.
Rationale
 Expected financing needed.
Incorrect. Expected financing needed is the final result of a cash budget, not a master budget.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.4.g
tb.frazp.bud.010_1805
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: hard
Bloom Code: 5
Flora Generators is preparing a production cost budget for August. The production of 60 generators incurred the following actual costs in July:
Materials cost
$5,200
Labor cost
$2,600
Rent
$1,200
Depreciation
$1,700
Other fixed costs $4,600
Total
$15,300
Materials and labor are the only variable costs. The company has estimated that it can increase sales to 70 generators in August if it changes the selling
price of generators to $450 instead of the current $480 per unit. Given the expected changes, what will happen to the cost per unit?
Correct
It will decrease because fixed costs do not increase with increases in volume.
Your Answer
It will decrease because selling price per unit decreases.
It will increase because more units will be produced.
It will increase because fixed costs do not increase with increases in volume.
Rationale
 It will decrease because fixed costs do not increase with increases in volume.
Total costs consist of variable costs and fixed costs. Variable costs change in direct proportion to changes in output while fixed costs do not change
when output changes. The variable costs are $7,800 ($5,200 + $2,600) in July when production is 60 generators. This results in variable costs being
$130 per unit ($7,800 ÷ 60) for July. It will be the same in August. The fixed costs of $7,500 will not change when production changes, which means
that the fixed cost per unit will be lower in August than in July since the same $7,500 will be spread over more units in August. The total cost per unit
will decrease in August; therefore, this is the correct answer.
Rationale
 It will decrease because selling price per unit decreases.
On a per-unit basis, total cost will decrease in August; however, the decrease is related to the increase in volume since fixed cost per unit decreases,
not because the selling price decreases. Total cost per unit is not related to selling price; therefore, this is an incorrect answer.
Rationale
 It will increase because more units will be produced.
Total variable cost will increase because more units will be produced, but the variable cost per unit will remain the same. Total fixed cost will
remain the same, but fixed cost per unit will decrease because more units will be produced. This means the total cost per unit will decrease, not
increase; therefore, this is an incorrect answer.
Rationale
 It will increase because fixed costs do not increase with increases in volume.
Total fixed cost will remain the same, but fixed cost per unit will decrease, not increase, because the same cost will be spread over more units. Total
variable cost will increase because more units will be produced, but the variable cost per unit will remain the same. This means the total cost per
unit will decrease, not increase; therefore, this is an incorrect answer.
Question 3
1.B.4.f
aq.frazp.bud.006_0720
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
Pretty Fast Production makes five products. The company's annual budget includes $3,000,000 in manufacturing overhead costs. In the past, the
company has allocated overhead costs based on normal capacity of 100,000 direct labor hours. Management at Pretty Fast would like to explore activitybased budgeting, and has determined that overhead costs can be broken into five activity cost pools: order processing, setups, milling, painting, and
shipping. The following is a summary of budgeted costs and activities:
Activity
Budgeted Cost Expected Activity Level
Order processing
$375,000
20,000 orders
Setups
$635,000
8,000 setups
Milling
$780,000 45,000 machine hours
Inspections
$590,000
2,000 inspections
Shipping
$620,000
25,500 shipments
Total
$3,000,000
Calculate the budgeted overhead rates based on activity-based budgeting methodology for all activities. What's the activity-based budgeting overhead
rate for shipping?
$29.85
Your Answer
$30.00
Correct
$24.31
$117.65
Rationale
 $29.85
This answer represents the total budgeted overhead costs divided by the total of all the activity cost drivers.
Rationale
 $30.00
This answer represents the total budgeted overhead rate based on the traditional methodology of direct labor hours.
Rationale
 $24.31
This answer represents the activity-based budgeting overhead rate for shipping $620,000 ÷ 25,500 shipments = $24.31 per shipment (rounded). All
activity overhead rates for Pretty Fast are provided below.
Activity
Overhead Rate
Order processing $18.75 per order
Setups
$79.38 per setup
Milling
$17.33 per machine hour
Inspections
$295.00 per inspection
Shipping
$24.31 per shipment
Rationale
 $117.65
This answer represents total budgeted overhead costs divided by the cost driver for shipping.
Question 4
1.B.4.d
tb.frazp.bud.033_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a benefit of using a project budgeting system?
A project budgeting system is designed to eliminate wasteful spending in a project.
A project budgeting system results in project budgets that are up-to-date and that reflect current conditions.
Correct
A project budgeting system helps separately identify the benefits and costs related to an individual project.
A project budgeting system is designed to develop a comprehensive budget that aligns an organization's operations with its strategy.
Rationale
 A project budgeting system is designed to eliminate wasteful spending in a project.
Incorrect. A zero-based budgeting system, not a project budgeting system, is designed to eliminate wasteful spending.
Rationale
 A project budgeting system results in project budgets that are up-to-date and that reflect current conditions.
Incorrect. A continuous (rolling) budgeting system, not a project budgeting system, results in budgets that are up-to-date and that reflect current
conditions.
Rationale
 A project budgeting system helps separately identify the benefits and costs related to an individual project.
Correct. A project budgeting system is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company. Because it only focuses on a single project, it allows the company to separately identify the
benefits and costs related to an individual project.
Rationale
 A project budgeting system is designed to develop a comprehensive budget that aligns an organization's operations with its strategy.
Incorrect. A master budgeting system, not a project budgeting system, results in a comprehensive budget that aligns an organization's operations
with its strategy.
Question 5
1.B.4.a
tb.frazp.bud.018_1809
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
Which of the following statements correctly defines a zero-based budgeting system?
Correct
A budgeting system that focuses on constant cost justification of every budget item.
A comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and results in the preparation of pro forma
financial information.
Your Answer
A budgeting system where activities are the focus, not departments, products, or services.
A budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the budget stays
up-to-date with the operating environment.
Rationale
 A budgeting system that focuses on constant cost justification of every budget item.
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. Managers review
each area to justify continued spending rather than adjust historical spending for the upcoming period.
Rationale
 A comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and results in the preparation
of pro forma financial information.
Incorrect. A master budget system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and
results in the preparation of pro forma financial information.
Rationale
 A budgeting system where activities are the focus, not departments, products, or services.
Incorrect. An activity-based budget system is a budgeting system where activities are the focus.
Rationale
 A budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the
budget stays up-to-date with the operating environment.
Incorrect. A continuous or rolling budget system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment.
Question 6
1.B.4.g
tb.frazp.bud.008_1805
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
Flora Generators is preparing a production cost budget for August. The production of 60 generators incurred the following actual costs in July:
Materials cost
$5,200
Labor cost
2,600
Rent
1,200
Depreciation
1,700
Other fixed costs
Total
4,600
$15,300
Materials and labor are the only variable costs. If production and sales are budgeted to increase to 70 generators in August, then what will be the
expected total cost on the August budget?
$17,850
Your Answer
$9,100
Correct
$16,600
$15,300
Rationale
 $17,850
The variable costs are $7,800 ($5,200 + $2,600) in July when production is 60 generators. This results in variable costs being $130 per unit ($7,800 ÷
60) for July. If August production is budgeted to be 70 generators, total variable costs will be budgeted as $9,100 (70 × $130). Fixed costs per unit at
60 generators is $125 ($7,500 ÷ 60). If fixed costs are treated like variable costs, total fixed costs for 70 generators would be calculated as $8,750 (70
× $125). This would make expected total costs at 570 generators $17,850 ($9,100 + $8,750). This is not the correct treatment of fixed costs; therefore,
this is an incorrect answer.
Rationale
 $9,100
The variable costs are $7,800 ($5,200 + $2,600) in July when production is 60 generators. This results in variable costs being $130 per unit ($7,800 ÷
60) for July. If August production is budgeted to be 70 generators, total variable costs will be budgeted as $9,100 (70 × $130). This is not the
expected total cost as fixed costs are not included; therefore, this is an incorrect answer.
Rationale
 $16,600
Total costs consist of variable costs and fixed costs. Variable costs change in direct proportion to changes in output while fixed costs do not change
when output changes. The variable costs are $7,800 ($5,200 + $2,600) in July when production is 60 generators. This results in variable costs being
$130 per unit ($7,800 ÷ 60) for July. If August production is budgeted to be 70 generators, total variable costs will be budgeted as $9,100 (70 × $130).
The fixed costs of $7,500 will not change when production changes. The expected total costs for 70 generators is $16,600 ($9,100 + $7,500);
therefore, this is the correct answer.
Rationale
 $15,300
The total cost for 60 generators is $15,300. The only way total cost for 70 generators would be the same as total cost for 60 generators is if 100% of
the costs are fixed costs. That is not the case for Flora; therefore, this is an incorrect answer.
Question 7
1.B.4.f
tb.frazp.bud.066_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
At the start of 20x8 the Andrew Company forecasts sales for the next eight quarters as follows: $300,000, $320,000, $360,000, $380,000, $320,000,
$350,000, $390,000, and $410,000. Sales in the first quarter of 20x8 totaled $270,000.
Based on this, Andrew revises sales estimates as follows (starting with Q2 of 20x8): $280,000, $320,000, $340,000, $275,000, $290,000, $330,000, $350,000,
and $300,000. If Andrew uses continuous or rolling budgeting, what will be the new annual budgeted sales figure (as of the beginning of Q2 of 20x8)?
$1,210,000
Your Answer
$1,330,000
Correct
$1,215,000
$1,360,000
Rationale
 $1,210,000
Incorrect. If the actual sales for Q1 of 20x8 are included, then the revised sales forecast would be $1,210,000 ($270,000 + $280,000 + $320,000 +
$340,000). Actual sales are not included in a continuous or rolling budget.
Rationale
 $1,330,000
Incorrect. If the actual sales for Q1 of 20x8 are included and the original forecasts for Q2, Q3, and Q4 are included then the revised sales forecast
would be $1,330,000 ($270,000 + $320,000 + $360,000 + $380,000). Actual sales are not included in a continuous or rolling budget and the most
recent forecasts should be included.
Rationale
 $1,215,000
Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment. To implement continuous or rolling budgeting as of
Q2 of 20x8, Andrew would include forecasts for sales for Q2, Q3 and Q4 of 20x8 as well as the forecast for sales for Q1 in 20x9. This would result in a
revised sales forecast of $1,215,000 ($280,000 + $320,000 + $340,000 + $275,000).
Rationale
 $1,360,000
Incorrect. If the original forecasts (as of Q1 of 20x8) are used then the sales forecast would be $1,360,000 ($300,000 + $320,000 + $360,000 +
$380,000). This is the forecast as of Q1 of 20x8, not Q2 of 20x8.
Question 8
1.B.4.c
tb.frazp.bud.028_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
All of the following items are likely to be included in a project budget for renovating one store in a chain of stores except:
Expected costs to be incurred for the renovation itself.
Expected costs to be incurred to move items during the renovation.
Expected costs to be incurred to temporarily store items off-site during the renovation.
Correct
Expected allocation of corporate overhead to be assigned to the project.
Rationale
 Expected costs to be incurred for the renovation itself.
Incorrect. Since the expected costs to be incurred for the renovation itself are specific to the project, they are likely included in this project budget.
Rationale
 Expected costs to be incurred to move items during the renovation.
Incorrect. Since the expected costs to be incurred to move items during the renovation are specific to the project, they are likely included in this
project budget.
Rationale
 Expected costs to be incurred to temporarily store items off-site during the renovation.
Incorrect. Since the expected costs to be incurred to temporarily store items off-site during the renovation are specific to the project, they are likely
included in this project budget.
Rationale
 Expected allocation of corporate overhead to be assigned to the project.
Correct. A project budget system is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company. No company overhead to be assigned to the project is included in a project budget since these
costs are not specific to the project.
Question 9
1.B.4.a
tb.frazp.bud.020_1809
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
Which of the following statements correctly defines a flexible budget system?
A budgeting system that focuses on constant cost justification of every budget item.
Your Answer
A comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and results in the preparation of pro forma
financial information.
Correct
A budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual sales would be.
A budgeting system used when a project is completely separate from other components of a company's operations or is the only component of the
company.
Rationale
 A budgeting system that focuses on constant cost justification of every budget item.
Incorrect. A zero-based budget system is a budgeting system that focuses on constant cost justification of every budget item.
Rationale
 A comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and results in the preparation
of pro forma financial information.
Incorrect. A master budget system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and
results in the preparation of pro forma financial information.
Rationale
 A budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual sales
would be.
Correct. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in
advance what its actual sales would be. Variable costs are adjusted based on changes in volume while fixed costs remain the same.
Rationale
 A budgeting system used when a project is completely separate from other components of a company's operations or is the only
component of the company.
Incorrect. A project budget system is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company.
Question 10
1.B.4.d
tb.frazp.bud.037_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a benefit of using a flexible budgeting system?
A flexible budgeting system uses nonvolume cost drivers to more accurately estimate costs than other budgeting systems.
Your Answer
A flexible budgeting system helps separately identify the benefits and costs related to an individual project.
A flexible budgeting system is designed to develop a comprehensive budget that aligns an organization's operations with its strategy.
Correct
A flexible budgeting system is used to facilitate variance analysis.
Rationale
 A flexible budgeting system uses nonvolume cost drivers to more accurately estimate costs than other budgeting systems.
Incorrect. An activity-based budgeting system, not a flexible budgeting system, uses nonvolume cost drivers to more accurately estimate costs.
Rationale
 A flexible budgeting system helps separately identify the benefits and costs related to an individual project.
Incorrect. A project budgeting system, not a flexible budgeting system, helps separately identify the benefits and costs related to an individual
project.
Rationale
 A flexible budgeting system is designed to develop a comprehensive budget that aligns an organization's operations with its strategy.
Incorrect. A master budgeting system, not a flexible budgeting system, is designed to develop a comprehensive budget that aligns an organization's
operations with its strategy.
Rationale
 A flexible budgeting system is used to facilitate variance analysis.
Correct. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in
advance what its actual sales would be. This helps facilitate variance analysis as the actual amount spent on a resource can be compared to the
flexible budget amount that represents the amount that “should have” been spent on the resource for the actual amount of volume.
Question 11
1.B.4.e
tb.frazp.bud.052_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wants to develop a budget that is suitable to use to plan activities in an industry where technology advances occur rapidly. Which budgeting
system would be the most appropriate system to use for this purpose?
Correct
A continuous or rolling budgeting system.
A master budgeting system.
Your Answer
An activity-based budgeting system.
A flexible budgeting system.
Rationale
 A continuous or rolling budgeting system.
Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment. Because a continuous or rolling budgeting system
results in up-to-date budgets, it is the most appropriate system to use for planning activities in an industry where technology advances occur
rapidly.
Rationale
 A master budgeting system.
Incorrect. While comprehensive, a master budget system is typically only prepared once a year.
Rationale
 An activity-based budgeting system.
Incorrect. While an activity-based budgeting system can result in a more accurate estimate of costs, it is typically only prepared once a year. This
means that it may not reflect current operating conditions. In addition, it does not focus on revenues. These aspects make it unsuitable to use for
planning activities in an industry where technology advances occur rapidly.
Rationale
 A flexible budgeting system.
Incorrect. Because a flexible budgeting system is prepared using budgeted assumptions after a period is over, it typically will not reflect current
operating conditions.
Question 12
1.B.4.f
tb.frazp.bud.059_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: hard
Bloom Code: 5
In 20x7 the Orange Company incurred $2,500,000 in set-up costs. It spent 25,000 hours on set-up to produce 250,000 units that year. In 20x8 Orange
expects to need 28,000 hours of set-up to produce 400,000 units. Using 20x7 cost data and activity-based budgeting, what would Orange's budget for setup costs equal in 20x8?
$4,000,000
Correct
$2,800,000
$2,232,250
$1,562,500
Rationale
 $4,000,000
Incorrect. The budgeted set-up costs would equal $4,000,000 if the calculation were based on expected units produced. Using the 20x7 cost data,
Orange would estimate set-up costs as $10 per unit ($2,500,000 ÷ 250,000 units). Based on an expected 400,000 units in 20x8, Orange would budget
set-up costs as $4,000,000 ($10 × 400,000). This is the amount using traditional budgeting, not activity-based budgeting.
Rationale
 $2,800,000
Correct. An activity-based budgeting system is a budgeting system where activities are the focus, not departments, products, or services. An
activity-based budgeting system uses non-volume cost drivers to more accurately estimate costs since not all costs vary with volume. To
implement activity-based budgeting, Orange would budget set-up costs based on expected set-up hours. Using the 20x7 cost data, Orange would
estimate set-up costs as $100 per set-up hour ($2,500,000 ÷ 25,000 hours). Based on an expected 28,000 set-up hours in 20x8, Orange would budget
set-up costs as $2,800,000 ($100 × 28,000).
Rationale
 $2,232,250
Incorrect. To implement activity-based budgeting, Orange would budget set-up costs based on expected set-up hours. If Orange mistakenly
calculated the budgeted rate based on the 28,000 expected hours and used the 20x7 cost data, the rate would be $89.29 per hour ($2,500,000 ÷
28,000). If this rate of $89.29 is then multiplied by the 25,000 set-up hours for 20x7, 20x8 set-up costs would be budgeted as $2,232,250 ($89.29 ×
25,000). This is not the correct formula.
Rationale
 $1,562,500
Incorrect. If Orange used traditional budgeting, it would budget set-up costs based on expected units produced. If Orange mistakenly calculated
the budgeted rate based on the 400,000 expected units, the rate would be $6.25 per unit ($2,500,000 ÷ 400,000). If this rate of $6.25 is then
multiplied by the 250,000 units for 20x7, 20x8 set-up costs would be budgeted as $1,562,500 ($6.25 × 250,000). This is not the correct formula.
Question 13
1.B.4.e
1B4-LS09
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Near the end of the year, a manager for a government agency has significant funds left in the budget. The manager decides to hire a new employee and
purchase a new projector in order to use up the entire budget even though these expenditures aren't necessary. What sort of budget is this manager
most likely working under?
Activity-based budgeting.
Correct
Zero-based budgeting.
Continuous budgeting.
Kaizen budgeting.
Rationale
 Activity-based budgeting.
This answer is incorrect. Activity-based budgeting does not encourage managers to exhaust all of their resources during a budget period.
Rationale
 Zero-based budgeting.
Zero-based budgets have a potential drawback in that they can encourage managers to exhaust all of their resources during a budget period for
fear that they will be allocated less funds during the next budget cycle.
Rationale
 Continuous budgeting.
This answer is incorrect. Continuous budgeting does not encourage managers to exhaust all of their resources during a budget period.
Rationale
 Kaizen budgeting.
This answer is incorrect. Kaizen budgeting does not encourage managers to exhaust all of their resources during a budget period.
Question 14
1.B.4.e
tb.frazp.bud.054_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wishes to prepare a budget that will enable it to compare the amount actually spent to service 20,000 clients with the amount that should
have been spent to service 20,000 clients. Which budgeting system would be the most appropriate system for this company to use?
A zero-based budgeting system.
Your Answer
A master budgeting system.
A project budgeting system.
Correct
A flexible budgeting system.
Rationale
 A zero-based budgeting system.
Incorrect. A zero-based budgeting system is not designed to be used to determine what costs should have been incurred for the actual level of
output achieved.
Rationale
 A master budgeting system.
Incorrect. Although comprehensive, a master budgeting system is not designed to be used to determine what costs should have been incurred for
the actual level of output achieved.
Rationale
 A project budgeting system.
Incorrect. A project budgeting system is used to predict what project costs will be, assuming a level of output. It is not designed to be used to
determine what the project costs should have been for the actual level of output achieved.
Rationale
 A flexible budgeting system.
Correct. A flexible budgeting system is a budgeting system that shows the budget that would have been prepared if the organization knew in
advance what its actual volume would be. It is the only budgeting system that will enable the company to compare the amount actually spent to
service 20,000 clients with the amount that should have been spent to service 20,000 clients.
Question 15
1.B.4.e
aq.frazp.bud.005_0720
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Nice Knives (Nice) is facing fierce competition in the cutlery industry. Nice's main competitors are stealing market share on certain knives by offering
similar products at lower prices. Nice management believes that costs are not being allocated correctly across product lines of different knives. Nice
would like to change its budgeting process to improve cost allocation assignment and better understand profitability of knives.
Which of the following budget tools and methods would be most helpful to Nice in this situation?
Correct
An activity-based budget
Your Answer
A continuous rolling budget
A zero-based budget
A flexible budget
Rationale
 An activity-based budget
Activity-based budgeting methods focus on identifying and using core activities throughout the organization to establish activity cost rates in order
to assign costs to products, customers, and other business targets based on actual consumption relationships. This process will give the
management team the information they seek by making the cost allocation process more accurate.
Rationale
 A continuous rolling budget
Rolling budgets are particularly helpful tools for organizations that want to avoid an annual master budget planning event that can consume a
large block of management time. In this situation, the management team is not worried about saving time. They are worried about making the cost
allocation process more accurate.
Rationale
 A zero-based budget
Zero-based budgeting methods demand that all budgeting choices are taken back to a “blank page” to be fully evaluated and, if approved, put into
the master budget plan. While this process could be informative to the management team, they will not receive the cost allocation information they
are seeking.
Rationale
 A flexible budget
Flexible budget tools are used to examine possible future scenarios in sales volume. However, a flexible budget would not provide the cost
allocation information that the management team is seeking.
Question 16
1.B.4.d
1B4-LS06
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
A firm wants to make a clear connection between resource consumption and output, and feels that one process is best measured in machine hours while
another is best measured in number of setups. Which of the following systems would allow such options?
Correct
Activity-based budgeting.
Continuous budgeting.
Your Answer
Kaizen budgeting.
Flexible budgeting.
Rationale
 Activity-based budgeting.
Machine hours is a volume-based cost driver, and number of setups is an activity-based cost driver. The only possible budgeting system allowing
such inputs is an activity-based budget.
Rationale
 Continuous budgeting.
This answer is incorrect. Continuous budgeting is not the system that would allow one process to be measured in machine hours while another is
measured in number of setups.
Rationale
 Kaizen budgeting.
This answer is incorrect. Kaizen budgeting is not the system that would allow one process to be measured in machine hours while another is
measured in number of setups.
Rationale
 Flexible budgeting.
This answer is incorrect. Flexible budgeting is not the system that would allow one process to be measured in machine hours while another is
measured in number of setups.
Question 17
1.B.4.g
tb.frazp.bud.011_1805
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: hard
Bloom Code: 4
Weaver Company plans to make and sell 55,000 shirts in one month. The company's total fixed costs are expected to be $108,000, and its total variable
costs are expected to be $178,750. What is the expected cost per shirt if the production level changes to 60,000 units?
$4.94
Correct
$5.05
Your Answer
$5.21
$4.78
Rationale
 $4.94
If variable costs are assumed to remain the same when production increases, variable cost per unit will be calculated as $2.98 per shirt ($178,750 ÷
60,000). If fixed costs per unit are assumed to remain the same when production increases, fixed cost per unit will be calculated as $1.96 per shirt
($108,000 ÷ 55,000). This results in total cost per unit of $4.94 ($2.98 + $1.96). This is not the correct treatment of variable costs or fixed costs;
therefore, this is an incorrect answer.
Rationale
 $5.05
Total costs consist of variable costs and fixed costs. Variable costs change in direct proportion to changes in output while fixed costs do not change
when output changes. If variable costs are budgeted to be $178,750 when budgeted production is 55,000 shirts, budgeted variable costs are $3.25
per unit ($178,750 ÷ 55,000). If production changes to 60,000 shirts, variable costs will remain $3.25 per shirt. If fixed costs are budgeted to be
$108,000 for 60,000 shirts, fixed costs will be $1.80 per shirt ($108,000 ÷ 60,000). This means expected total costs will be $5.05 per shirt for 60,000
shirts ($3.25 + $1.80). Therefore, this is the correct answer.
Rationale
 $5.21
Total costs for 55,000 shirts is $286,750 ($178,750 + $108,000). This translates to $5.21 per shirt ($286,750 ÷ 55,000). The total cost per unit would
remain at $5.21 per shirt only if 100% of Weaver's costs are variable costs. However, that is not the case for Weaver. Although the variable cost per
unit will remain the same, the fixed cost per unit will decrease. Therefore, this is an incorrect answer.
Rationale
 $4.78
Total costs for 55,000 shirts is $286,750 ($178,750 + $108,000). If total cost remains the same for 60,000 shirts, total cost per unit would be $4.78 per
shirt ($286,750 ÷ 60,000). The total cost would only remain the same if 100% of Weaver's costs are fixed costs. However, that is not the case for
Weaver. Although the total fixed costs will remain the same, total variable cost will increase when production increases to 60,000 shirts. Therefore,
this is an incorrect answer.
Question 18
1.B.4.c
tb.frazp.bud.026_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following is needed to prepare a zero-based budget?
The amount spent the last period.
The percentage change in spending for the last five years.
Correct
The expected benefits from expenditures to be made.
Your Answer
The amount spent by a major competitor the last period.
Rationale
 The amount spent the last period.
Incorrect. Because spending in the prior period is not the starting point for developing a zero-based budget, that information is not needed.
Rationale
 The percentage change in spending for the last five years.
Incorrect. Because a zero-based budget is not developed with the expectation that spending will change based on historical changes in spending,
that information is not needed.
Rationale
 The expected benefits from expenditures to be made.
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. Managers review
each area to justify continued spending rather than adjust historical spending for the upcoming period. Because a zero-based budget is developed
based on the justification for expenditures, expected benefits from the expenditures is needed when preparing a zero-based budget.
Rationale
 The amount spent by a major competitor the last period.
Incorrect. Because the amount spent by a major competitor in the prior period is not the starting point for developing a zero-based budget, that
information is not needed.
Question 19
1.B.4.b
cma11.p1.t1.me.0036_0820
LOS: 1.B.4.b
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
Which one of the following is not needed in preparing a production budget?
Budgeted unit sales
Correct
Budgeted raw materials
Your Answer
Beginning finished goods units
Ending finished goods units
Rationale
 Budgeted unit sales
This answer is incorrect. The production budget begins with unit sales, adds the expected or desired level of ending finished goods inventory, and
subtracts the level of beginning finished goods inventory. Therefore, budgeted unit sales are necessary for the preparation of the production
budget.
Rationale
 Budgeted raw materials
The budget for raw materials is driven by the production budget. It is not necessary for the preparation of the production budget.
Rationale
 Beginning finished goods units
This answer is incorrect. The production budget begins with unit sales, adds the expected or desired level of ending finished goods inventory, and
subtracts the level of beginning finished goods inventory. Therefore, beginning finished goods are necessary for the preparation of the production
budget.
Rationale
 Ending finished goods units
This answer is incorrect. The production budget begins with unit sales, adds the expected or desired level of ending finished goods inventory, and
subtracts the level of beginning finished goods inventory. Therefore, ending finished goods are necessary for the preparation of the production
budget.
Question 20
1.B.4.d
tb.frazp.bud.040_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a disadvantage of using an activity-based budgeting system?
If a project uses resources that are used in other areas of the organization, an activity-based budgeting system may not give an accurate estimate of
its costs.
Managers need to spend time every month to use an activity-based budgeting system.
Correct
An activity-based budgeting system is quite expensive to design, implement, and maintain.
An activity-based budgeting system is only useful for control purposes, not planning purposes.
Rationale
 If a project uses resources that are used in other areas of the organization, an activity-based budgeting system may not give an accurate
estimate of its costs.
Incorrect. If a project uses resources that are also used in other areas of the organization, a project budgeting system, not an activity-based
budgeting system, may not give an accurate estimate of its costs.
Rationale
 Managers need to spend time every month to use an activity-based budgeting system.
Incorrect. Managers need to spend time every month to use a continuous (rolling) budgeting system, not an activity-based budgeting system.
Rationale
 An activity-based budgeting system is quite expensive to design, implement, and maintain.
Correct. An activity-based budgeting system is a budgeting system where activities are the focus, not departments, products, or services. An
activity-based budgeting system uses nonvolume cost drivers to more accurately estimate costs since not all costs vary with volume. While this
approach typically results in more accurate cost estimates, it can be quite expensive to design, implement, and maintain an activity-based
budgeting system.
Rationale
 An activity-based budgeting system is only useful for control purposes, not planning purposes.
Incorrect. A flexible budgeting system, not an activity-based budgeting system, is only useful for control purposes and not for planning purposes.
This is because a flexible budget is not prepared until a period is over.
Question 21
1.B.4.e
tb.frazp.bud.050_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wants to develop a budget that includes plans for all aspects of the organization. Which budgeting system would be the most appropriate
system to use for this purpose?
Correct
A master budgeting system.
Your Answer
A project budgeting system.
A flexible budgeting system.
A zero-based budgeting system.
Rationale
 A master budgeting system.
Correct. A master budget system includes information about operating plans and financing plans. It is a comprehensive budgeting system that
covers every aspect of an organization's revenue and cost flows.
Rationale
 A project budgeting system.
Incorrect. The limited focus of a project budgeting system makes it unsuitable for including plans for all aspects of the organization.
Rationale
 A flexible budgeting system.
Incorrect. Because a flexible budget is prepared after a period is over, it is unsuitable for preparing plans covering all aspects of the organization.
Rationale
 A zero-based budgeting system.
Incorrect. While a zero-based budgeting system covers costs across an organization, it does not cover revenues. This makes it unsuitable for
including plans for all aspects of the organization.
Question 22
1.B.4.f
tb.frazp.bud.056_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
The Johnson Company has gathered the information below concerning budgeted and actual selling costs. Based on this information, what would
Johnson's flexible budget selling costs be for 20x8?
Year Budgeted Units Budgeted Costs Actual Units Actual Costs
20x7
20,000
$120,000
19,900
$116,415
20x8
22,000
$137,500
22,200
$136,530
Correct
$138,750
$135,300
$119,400
$128,700
Rationale
 $138,750
Correct. A flexible budgeting system is a budgeting system that shows the budget that would have been prepared if the organization knew in
advance what its actual volume would be. It is the amount that “should have” been spent for the actual level of volume, based on budgeted
expectations. Amounts are calculated by multiplying the actual volume of activity by the budgeted cost per unit. Johnson's budgeted selling costs
per unit for 20x8 is $6.25 per unit ($137,500 ÷ 22,000). This means the flexible budget selling costs for 20x8 equal $138,750 (22,200 × $6.25).
Rationale
 $135,300
Incorrect. Johnson's flexible budget for 20x8 would be calculated as $135,300 if the budgeted units were multiplied by the actual cost per unit.
There are 22,000 budgeted units and the actual cost is $6.15 per unit ($136,530 ÷ 22,200). Therefore, the flexible budget selling costs would equal
$135,300 (22,000 × $6.15). This is not the correct formula.
Rationale
 $119,400
Incorrect. Amounts in a flexible budgeting system are calculated by multiplying the actual volume of activity by the budgeted cost per unit.
Johnson's flexible budget for 20x7 equals $119,400 (19,900 × $6.00). However, the question asks for Johnson's flexible budget for 20x8, not 20x7.
This is an incorrect answer.
Rationale
 $128,700
Incorrect. If the 20x8 budgeted units of 22,000 were multiplied by the actual 20x7 cost of $5.85 per unit ($116,415 ÷ 19,900), the result would be
flexible budget selling costs of $128,700 (22,000 × $5.85). This is not the correct formula.
Question 23
1.B.4.f
tb.frazp.bud.068_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
The Fox Company gathers the following information on actual spending in 20x7 and likely spending in 20x8 for three projects:
Project
20x7 Actual
Spending
20x8 Expected
Spending
Evaluation
Product Delivery
$25,000
$28,000 Can likely be done by private firm at lower cost with similar quality
Focus Groups
$32,000
$40,000 Fox receives critical information not available from other sources
Employee
Training
$22,000
$27,000 Employees learn valuable skills from these sessions
Coffee Service
$9,000
$9,500 Many employees bring their own drinks to work and coffee is often
discarded
If Fox practices zero-based budgeting, what would be the total budget for these projects in 20x8?
Correct
$67,000
$104,500
$95,000
$76,500
Rationale
 $67,000
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. This focus increases
the likelihood of identifying wasteful and ineffective spending. Product Delivery can be outsourced for less cost (and similar quality) and the Coffee
Service seems wasteful as coffee is often discarded. Focus Groups and Employee Training would likely pass the cost-benefit test. The expected
spending for these two activities is $67,000 ($40,000 + $27,000).
Rationale
 $104,500
Incorrect. The total expected 20x8 spending on these four activities is $104,500. A cost-benefit test should be performed on each of the four
activities to determine whether they should be continued, or if they should be outsourced or stopped entirely. Not all of the activities meet the costbenefit test. Therefore, they should not all be included in a zero-based budget. This is an incorrect answer.
Rationale
 $95,000
Incorrect. The total 20x8 expected spending for Product Delivery, Focus Groups, and Employee Training is $95,000. For costs to be included in a
zero-based budget, they must meet the cost-benefit test. Not all of these costs would meet the test.
Rationale
 $76,500
Incorrect. The total 20x8 expected spending for Focus Groups, Employee Training, and Coffee Service is $76,500. For costs to be included in a zerobased budget, they must meet the cost-benefit test. Not all of these costs would meet the test.
Question 24
1.B.4.b
1B4-LS01
LOS: 1.B.4.b
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Which of the following statements is true regarding budget systems?
Correct
The rolling budgeting process establishes the budget for a period of time and then steps the budget forward at the end of each operating period.
Your Answer
Activity-based budgeting identifies a single cost driver (generally the number of units produced) as the prime indicator for budgeting.
Zero-based budgets create a plan where the firm breaks even (i.e., zero net income).
Flexible budgeting allows all costs to vary directly with projected sales.
Rationale
 The rolling budgeting process establishes the budget for a period of time and then steps the budget forward at the end of each
operating period.
Rolling budgets are used to establish and maintain a constant number of operating periods moving forward in the master budget. As each period
on a budget concludes, the budgeting team, steps the budget forward so the budget always contains the same number of periods.
Rationale
 Activity-based budgeting identifies a single cost driver (generally the number of units produced) as the prime indicator for budgeting.
This answer is incorrect. Activity-based budgeting does not identify a single cost driver, it identifies several.
Rationale
 Zero-based budgets create a plan where the firm breaks even (i.e., zero net income).
This answer is incorrect. Zero-based budgeting does not create a plan where the firm breaks even, rather the budget starts at zero each year.
Rationale
 Flexible budgeting allows all costs to vary directly with projected sales.
This answer is incorrect. Flexible budgeting allows variable costs, not all costs, to vary directly with projected sales.
Question 25
1.B.4.f
tb.frazp.bud.060_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: hard
Bloom Code: 5
In 20x7 the Blue Company incurred $3,000,000 in set-up costs. It spent 75,000 hours on set-up to produce 400,000 units that year. In 20x8 Blue expects to
need 80,000 hours of set-up to produce 410,000 units. Using activity-based budgeting and the 20x7 cost data, what would Blue's budget for set-up costs
equal in 20x8?
$3,075,000
Correct
$3,200,000
Your Answer
$2,812,500
$2,928,000
Rationale
 $3,075,000
Incorrect. The budgeted setup costs would be $3,075,000 if the activity-based budgeting calculation were based on expected units produced. Using
the 20x7 cost data, Blue would estimate set-up costs as $7.50 per unit ($3,000,000 ÷ 400,000 units). Based on an expected 410,000 units in 20x8, Blue
would budget setup costs as $3,075,000 ($7.50 × 410,000). This is the amount using traditional budgeting, not activity-based budgeting.
Rationale
 $3,200,000
Correct. An activity-based budgeting system is a budgeting system where activities are the focus, not departments, products, or services. An
activity-based budgeting system uses nonvolume cost drivers to more accurately estimate costs since not all costs vary with volume. To implement
activity-based budgeting, Blue would budget set-up costs based on expected set-up hours. Using 20x7 cost data, Blue would estimate set-up costs
as $40 per set-up hour ($3,000,000 ÷ 75,000 hours). Based on an expected 80,000 set-up hours in 20x8, Blue would budget setup costs as $3,200,000
($40 × 80,000).
Rationale
 $2,812,500
Incorrect. To implement activity-based budgeting, Blue would budget setup costs based on expected setup hours. If it mistakenly calculated the
budgeted rate based on the 80,000 expected hours, the rate would be $37.50 per hour ($3,000,000 ÷ 80,000). If this rate of $37.50 is then multiplied
by the 75,000 set-up hours for 20x7, 20x8 set-up costs would be budgeted as $2,812,500 ($37.50 × 75,000). This is not the correct formula.
Rationale
 $2,928,000
Incorrect. If Blue used traditional budgeting, it would budget setup costs based on expected units produced. If Blue mistakenly calculated the
budgeted rate based on the 410,000 expected units, the rate would be $7.32 per unit ($3,000,000 ÷ 410,000). If this rate of $7.32 is then multiplied by
the 400,000 units for 20x7, 20x8 set-up costs would be budgeted as $2,928,000 ($7.32 × 400,000). This is not the correct formula.
Question 26
1.B.4.e
cma11.p1.t1.me.0021_0820
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
Devin's Custom Construction designs and builds custom houses for consumers. Customers have several base plans to choose from, and modifications
can be made from those plans. The modifications can range from being very minor to significant. The houses generally take from three months to one
year to design and build, depending on the amount of customization. What is the best type of budgeting for this business situation?
*Source: Retired ICMA CMA Exam Questions.
Correct
Project budgeting
Your Answer
Activity-based budgeting
Flexible budgeting
Rolling/continuous budgeting
Rationale
 Project budgeting
The best type of budgeting for this business situation would be project budgeting. Project budgeting focuses on one particular project or venture. It
estimates the cost, time, and resources needed to plan and execute a particular project in an organization. Project budgeting is best suited to the
unique nature of custom home building.
Rationale
 Activity-based budgeting
This answer is incorrect. Although activity-based budgeting could be used for this type of business situation, it would not be the best type of
budgeting. Activity-based budgeting focuses on the budgeted cost for each activity necessary to produce and sell a product or service. Custom
home building would have many varying activities unique to each home. Activity-based budgeting would be best with a limited number of possible
activities.
Rationale
 Flexible budgeting
This answer is incorrect. Flexible budgeting would not be appropriate for this business situation. Flexible budgeting is a series of budgets for
comparing different levels of activity.
Rationale
 Rolling/continuous budgeting
This answer is incorrect. Rolling/continuous budgeting would not be the best type of budgeting for this business situation. Rolling/continuous
budgeting is always available for a specified future period by adding a period (month, quarter, or year) to the period that just ended.
Question 27
1.B.4.e
tb.frazp.bud.055_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wishes to focus on reducing wasteful and ineffective R&D spending. Which budgeting system would be the most appropriate system for this
company to use?
Correct
A zero-based budgeting system.
A continuous or rolling budgeting system.
Your Answer
A project budgeting system.
An activity-based budgeting system.
Rationale
 A zero-based budgeting system.
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of each and every budget item. This focus
increases the likelihood of identifying wasteful and ineffective spending.
Rationale
 A continuous or rolling budgeting system.
Incorrect. A continuous or rolling budgeting system does not specifically focus on reducing wasteful and ineffective spending. This makes it
unsuitable for the company to use.
Rationale
 A project budgeting system.
Incorrect. A project budgeting system does not specifically focus on reducing wasteful and ineffective spending. This makes it unsuitable for the
company to use.
Rationale
 An activity-based budgeting system.
Incorrect. An activity-based budgeting system does not specifically focus on reducing wasteful and ineffective spending. This makes it unsuitable
for the company to use.
Question 28
1.B.4.a
frazp.bud.tb.072_0120
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
A budget that is extended by an additional operating period as the most current period is completed, encouraging management to maintain an ongoing
view of future operation periods, is a:
*Source: Retired ICMA CMA Exam Questions.
flexible budget.
Your Answer
master budget.
Correct
rolling budget.
sales budget.
Rationale
 flexible budget.
This answer is incorrect. A flexible budget establishes a base for a specific output level plus an incremental cost-volume amount that shows the
behavior of costs at various activity levels. A flexible budget does not add a new period to the budget after the end of the current period.
Rationale
 master budget.
This answer is incorrect. A master budget is a comprehensive budget that expresses management’s plans for one fiscal year or less. The master
budget does not add a new period to the budget after the end of the current period.
Rationale
 rolling budget.
A rolling budget, also known as a continuous budget, adds a new period to the budget after the end of the current period so there are always the
same number of future periods in the budget. This method encourages management to constantly consider future operating periods.
Rationale
 sales budget.
This answer is incorrect. A sales budget uses a sales forecast to project the number of sales units and selling prices to accomplish company goals. A
sales budget does not add a new period to the budget after the end of the current period.
Question 29
1.B.4.a
tb.frazp.bud.015_1809
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
Which of the following statements correctly defines a master budget system?
Correct
A comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and results in the preparation of pro forma
financial information.
A budgeting system used when a project is completely separate from other components of a company's operations or is the only component of the
company.
Your Answer
A budgeting system where activities are the focus, not departments, products, or services.
A budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual sales would be.
Rationale
 A comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and results in the preparation
of pro forma financial information.
Correct. A master budget system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and
results in the preparation of pro forma financial information.
Rationale
 A budgeting system used when a project is completely separate from other components of a company's operations or is the only
component of the company.
Incorrect. A project budget system is a budgeting system used when a project is completely separate from other components of a company's
operations, or is the only component of the company.
Rationale
 A budgeting system where activities are the focus, not departments, products, or services.
Incorrect. An activity-based budget system is a budgeting system where activities are the focus.
Rationale
 A budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual sales
would be.
Incorrect. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in
advance what its actual sales would be.
Question 30
1.B.4.c
cma11.p1.t1.me.0029_0820
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
The major feature of zero-based budgeting is that it
*Source: Retired ICMA CMA Exam Questions.
assumes all activities are legitimate and worthy of receiving budget increases to cover any increased costs.
Correct
evaluates each activity and determines whether it should be maintained as it is, reduced, or eliminated.
Your Answer
uses the previous year's budget and adjusts it for inflation.
focuses on planned capital outlays for property, plant, and equipment.
Rationale
 assumes all activities are legitimate and worthy of receiving budget increases to cover any increased costs.
This answer is incorrect. Zero-based budgeting is prepared every year from zero. Each line item must be justified. Amounts do not simply increase
or decrease from prior year's budgets.
Rationale
 evaluates each activity and determines whether it should be maintained as it is, reduced, or eliminated.
Zero-based budgeting requires justification of each item on the budget. Therefore, each activity is evaluated to determine if it will remain on the
budget.
Rationale
 uses the previous year's budget and adjusts it for inflation.
This answer is incorrect. Zero-based budgeting eliminates the practice of increasing or decreasing prior year's budgets. Each budgeted activity
must be individually justified.
Rationale
 focuses on planned capital outlays for property, plant, and equipment.
This answer is incorrect. Zero-based budgeting requires annual justification of all expenditures, and the focus is not on any one individual area of
the budget like property, plant, and equipment.
Question 31
1.B.4.d
tb.frazp.bud.041_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a disadvantage of using a zero-based budgeting system?
Correct
The annual review needed to implement a zero-based budgeting system can be very time consuming and expensive.
A zero-based budgeting system is based on a set of assumptions that may not come true.
Your Answer
If a project uses resources that are used in other areas of the organization, a zero-based budgeting system may not give an accurate estimate of its
costs.
A zero-based budgeting system is only useful for control purposes, not planning purposes.
Rationale
 The annual review needed to implement a zero-based budgeting system can be very time consuming and expensive.
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of each budget item. Managers review
each area to justify continued spending rather than adjust historical spending for the upcoming period. This review is designed to eliminate
wasteful spending, but it can be very time consuming and expensive.
Rationale
 A zero-based budgeting system is based on a set of assumptions that may not come true.
Incorrect. A master budgeting system, not a zero-based budgeting system, is based on a set of assumptions that may not come true. If the
assumptions that it is based on do not come true (for example, sales are less than expected), then many of the spending amounts in the budget will
not be valid.
Rationale
 If a project uses resources that are used in other areas of the organization, a zero-based budgeting system may not give an accurate
estimate of its costs.
Incorrect. If a project uses resources that are used in other areas of the organization, a project budgeting system, not a zero-based budgeting
system, may not give an accurate estimate of its costs.
Rationale
 A zero-based budgeting system is only useful for control purposes, not planning purposes.
Incorrect. A flexible budgeting system, not a zero-based budgeting system, is only useful for control purposes and not for planning purposes. This is
because a flexible budget is not prepared until a period is over.
Question 32
1.B.4.f
tb.frazp.bud.057_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
The Drum Company has gathered the information below concerning budgeted and actual selling costs. Based on this information, what would Drum's
flexible budget selling costs be for 20x8?
Year Budgeted Units Budgeted Costs Actual Units Actual Costs
20x7
30,000
$210,000
31,000
$224,750
20x8
32,000
$216,000
31,200
$213,720
Correct
$210,600
Your Answer
$219,200
$217,000
$232,000
Rationale
 $210,600
Correct. A flexible budgeting system is a budgeting system that shows the budget that would have been prepared if the organization knew in
advance what its actual volume would be. It is the amount that “should have” been spent for the actual level of volume, based on budgeted
expectations. Amounts are calculated by multiplying the actual volume of activity by the budgeted cost per unit. Drum's budgeted selling costs per
unit for 20x8 is $6.75 per unit ($216,000 ÷ 32,000). This means the flexible budget selling costs for 20x8 equal $210,600 (31,200 × $6.75).
Rationale
 $219,200
Incorrect. Drum's flexible budget for 20x8 would be calculated as $219,200 if the budgeted units were multiplied by the actual cost per unit. There
are 32,000 budgeted units and the actual cost equals $6.85 per unit ($213,720 ÷ 31,200). Therefore, the flexible budget would be $219,200 (32,000 ×
$6.85). This is not the correct formula.
Rationale
 $217,000
Incorrect. Amounts in a flexible budgeting system are calculated by multiplying the actual volume of activity by the budgeted cost per unit. Drum's
flexible budget for 20x7 equals $217,000 (31,000 × $7.00). However, the question asks for Drum's flexible budget for 20x8, not 20x7. This is an
incorrect answer.
Rationale
 $232,000
Incorrect. If the 20x8 budgeted units of 32,000 were multiplied by the actual 20x7 cost of $7.25 per unit ($224,750 ÷ 31,000) the result would be
flexible budget selling costs of $232,000 (32,000 × $7.25). This is not the correct formula.
Question 33
1.B.4.f
tb.frazp.bud.070_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
The Shark Company gathers the following information on actual spending in 20x7 and likely spending in 20x8 for three projects:
20x7 Actual
Spending
20x8 Expected
Spending
Customer Training
$150,000
$175,000
Many customers buy from Shark because of this training
Tuition Reimbursement
$60,000
$70,000
Shark has learned that many employees leave the company upon
graduation
Visits to Customer
Facilities
$90,000
$100,000
Many customers buy from Shark after visits
Employee Exercise
Room
$90,000
$75,000
Shark could enroll all employees in a local gym for less money
Project
Evaluation
If Shark practices zero-based budgeting, what would be the total budget for these projects in 20x8?
Correct
$275,000
Your Answer
$420,000
$350,000
$345,000
Rationale
 $275,000
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. This focus increases
the likelihood of identifying wasteful and ineffective spending. Tuition Reimbursement seems wasteful as many employees leave the company
upon graduation and the Employee Exercise Room can be outsourced for less money. Since these would not likely pass the cost-benefit test, they
would not be included in the zero-based budget. Customer Training and Visits to Customer Facilities would likely pass the cost-benefit test and the
expected spending for these two activities is $275,000 ($175,000 + $100,000).
Rationale
 $420,000
Incorrect. The total expected 20x8 spending on these four activities is $420,000 ($175,000 + $70,000 + $100,000 + $75,000). A cost-benefit test should
be performed on each of the four activities to determine whether they should be continued, or if they should be outsourced or stopped entirely. Not
all of the activities meet the cost-benefit test. therefore, they should not all be included in a zero-based budget. This is an incorrect answer.
Rationale
 $350,000
Incorrect. The total budget would be $350,000 if the Customer Training, Visits to Customer Facilities, and the Employee Exercise Room were
included ($175,000 + $100,000 + $75,000). These are not the correct costs that would pass the cost-benefit test and be included in the zero-based
budget.
Rationale
 $345,000
Incorrect. The total budget would be $345,000 if the Customer Training, Visits to Customer Facilities, and Tuition Reimbursement were included
($175,000 + $100,000 + $70,000). These are not the correct costs that would pass the cost-benefit test and be included in the zero-based budget.
Question 34
1.B.4.d
1B2-LS34
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
What is the most effective approach to a budgeting process:
participative approach.
Your Answer
authoritative approach.
non-qualitative approach.
Correct
combination approach.
Rationale
 participative approach.
This answer is incorrect. A participative approach is not the most effective approach to a budgeting process.
Rationale
 authoritative approach.
This answer is incorrect. An authoritative approach is not the most effective approach to a budgeting process.
Rationale
 non-qualitative approach.
This answer is incorrect. A non-qualitative approach is not the most effective approach to a budgeting process.
Rationale
 combination approach.
In an authoritative budget (top-down budget), top management sets everything from strategic goals down to the individual items of the budget for
each department and expects lower managers and employees to adhere to the budget and meet the goals. In a participative budget (bottom-up or
self-imposed budget), managers at all levels and certain key employees cooperate to set budgets for their areas, and top management usually
retains final approval. The ideal process combines the features of each and falls somewhere between these methods.
Question 35
1.B.4.c
1B4-LS08
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Which of the following methods do managers use when determining what to fund in a zero-based budget?
Benchmarks from best-practice firms.
Determining specific cost drivers and cost pools.
Your Answer
Analysis of the prior year's zero-based budget.
Correct
In-depth reviews of each area the manager controls.
Rationale
 Benchmarks from best-practice firms.
This answer is incorrect. When determining what to fund in a zero-based budget, managers do not use benchmarks from best-practice firms.
Rationale
 Determining specific cost drivers and cost pools.
This answer is incorrect. When determining what to fund in a zero-based budget, managers do not determine specific cost drivers and cost pools.
Rationale
 Analysis of the prior year's zero-based budget.
This answer is incorrect. When determining what to fund in a zero-based budget, managers do not use analysis of the prior year's zero-based
budget.
Rationale
 In-depth reviews of each area the manager controls.
In order to justify what items to continue funding, managers must conduct in-depth reviews of each area under their control.
Question 36
1.B.4.f
tb.frazp.bud.067_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
At the start of 20x8 the Joseph Company forecasts sales for the next eight quarters as follows: $400,000, $410,000, $430,000, $440,000, $410,000,
$420,000, $430,000, and $440,000. Sales in the first quarter of 20x8 totaled $420,000.
Based on this, Joseph revises sales estimates as follows (starting with Q2 of 20x8): $430,000, $440,000, $460,000, $430,000, $440,000, $450,000, $470,000,
and $480,000. If Joseph uses continuous or rolling budgeting, what will be the new annual budgeted sales figure (as of the beginning of Q2 of 20x8)?
$1,750,000
$1,700,000
Correct
$1,760,000
$1,680,000
Rationale
 $1,750,000
Incorrect. If the actual sales for Q1 of 20x8 are included, then the revised sales forecast would be $1,750,000 ($420,000 + $430,000 + $440,000 +
$460,000). Actual sales are not included in a continuous or rolling budget.
Rationale
 $1,700,000
Incorrect. If the actual sales for Q1 of 20x8 are included and the original forecasts for Q2, Q3, and Q4 are included then the revised sales forecast
would be $1,700,000 ($420,000 + $410,000 + $430,000 + $440,000). Actual sales are not included in a continuous or rolling budget and the most
recent forecasts should be included.
Rationale
 $1,760,000
Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment. To implement continuous or rolling budgeting as of
Q2 of 20x8, Joseph would include forecasts for sales for Q2, Q3, and Q4 of 20x8 as well as the forecast for sales for Q1 in 20x9. This would result in a
revised sales forecast of $1,760,000 ($430,000 + $440,000 + $460,000 + $430,000).
Rationale
 $1,680,000
Incorrect. If the original forecasts (as of Q1 of 20x8) are used then the sales forecast would be $1,680,000 ($400,000 + $410,000 + $430,000 +
$440,000). This is the forecast as of Q1 of 20x8, not Q2 of 20x8.
Question 37
1.B.4.a
tb.frazp.bud.019_1809
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
Which of the following statements correctly defines a continuous or rolling budget system?
A budgeting system that focuses on constant cost justification of every budget item.
A comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and results in the preparation of pro forma
financial information
A budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual sales would be.
Correct
A budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the budget stays
up-to-date with the operating environment.
Rationale
 A budgeting system that focuses on constant cost justification of every budget item.
Incorrect. A zero-based budget system is a budgeting system that focuses on constant cost justification of every budget item.
Rationale
 A comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and results in the preparation
of pro forma financial information
Incorrect. A master budget system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and
results in the preparation of pro forma financial information.
Rationale
 A budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual sales
would be.
Incorrect. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in
advance what its actual sales would be.
Rationale
 A budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the
budget stays up-to-date with the operating environment.
Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment.
Question 38
1.B.4.a
1B4-LS12
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Which of the following budgets is based more on planned future operating practices than on current practices?
Continuous budgeting.
Zero-based budgeting.
Correct
Kaizen budgeting.
Activity-based budgeting.
Rationale
 Continuous budgeting.
This answer is incorrect. Continuous budgeting is not based more on planned future operating practices than on current practices.
Rationale
 Zero-based budgeting.
This answer is incorrect. Zero-based budgeting is not based more on planned future operating practices than on current practices.
Rationale
 Kaizen budgeting.
A kaizen budget is a budgeting method that incorporates continuous improvement ("kaizen" in Japanese) into each budget. While traditional
budgeting continues current practices, a kaizen budgeting process is based on planned future operating practices.
Rationale
 Activity-based budgeting.
This answer is incorrect. Activity-based budgeting is not based more on planned future operating practices than on current practices.
Question 39
1.B.4.g
tb.frazp.bud.007_1805
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
In a period when anticipated production is 5,000 units, budgeted variable costs are $75,000 and budgeted fixed costs are $24,000. If 5,600 units are
actually produced, what is the expected total cost?
$110,880
Correct
$108,000
$84,000
$88,400
Rationale
 $110,880
If variable costs are budgeted to be $75,000 when budgeted production is 5,000 units, budgeted variable costs are $15 per unit ($75,000 ÷ 5,000). If
production is actually 5,600 units, total variable costs will be $84,000 (5,600 × $15). Fixed costs per unit at 5,000 units would be $4.80 ($24,000 ÷
5,000). If fixed costs are treated like variable costs, total fixed costs for 5,600 units would be calculated as $26,880 (5,600 × $4.80). This would make
expected total costs at 5,600 units $110,880 ($84,000 + $26,880). This is not the correct treatment of fixed costs; therefore, this is an incorrect
answer.
Rationale
 $108,000
Total costs consist of variable costs and fixed costs. Variable costs change in direct proportion to changes in output while fixed costs do not change
when output changes. If variable costs are budgeted to be $75,000 when budgeted production is 5,000 units, budgeted variable costs are $15 per
unit ($75,000 ÷ 5,000). If production is actually 5,600 units, total variable costs will be $84,000 (5,600 × $15). The fixed costs of $24,000 will not
change when production changes, which means that expected total costs at 5,600 units is $108,000 ($84,000 + $24,000). Therefore, this is the correct
answer.
Rationale
 $84,000
If variable costs are budgeted to be $75,000 when budgeted production is 5,000 units, budgeted variable costs are $15 per unit ($75,000 ÷ 5,000). If
production is actually 5,600 units, total variable costs will be $84,000 (5,600 × $15). This is not the expected total cost as fixed costs are not included;
therefore, this is an incorrect answer.
Rationale
 $88,400
If current output is mistakenly assumed to be 5,600 units, budgeted variable costs per unit are $13.39 per unit ($75,000 ÷ 5,600). If actual production
is incorrectly assumed to be 5,000 units, total variable costs will be $66,950 (5,000 × $13.39). If fixed costs per unit are also calculated based on 5,600
units, budgeted fixed costs per unit would be $4.29 ($24,000 ÷ 5,600). If fixed costs are treated like variable costs, total fixed costs would be
calculated as $21,450 (5,000 × $4.29). This would make expected total costs $88,400 ($66,950 + $21,450). This is not the correct treatment of fixed
costs and it is based on reversing budgeted and actual output; therefore, this is an incorrect answer.
Question 40
1.B.4.d
1B4-LS07
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
Which of the following budgets focuses on constant cost justification?
Project budgeting.
Correct
Zero-based budgeting.
Your Answer
Activity-based budgeting.
Continuous budgeting.
Rationale
 Project budgeting.
This answer is incorrect. Project budgeting does not focus on constant cost justification.
Rationale
 Zero-based budgeting.
A zero-based budget starts with zero dollars allocated anywhere. While the traditional budget focuses on changes to the past budget, the zerobased budget focuses on constant cost justification.
Rationale
 Activity-based budgeting.
This answer is incorrect. Activity-based budgeting does not focus on constant cost justification.
Rationale
 Continuous budgeting.
This answer is incorrect. Continuous budgeting does not focus on constant cost justification.
Question 41
1.B.4.d
tb.frazp.bud.042_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a disadvantage of using a continuous (rolling) budgeting system?
Correct
Managers need to spend time every month to use a continuous (rolling) budgeting system.
If a project uses resources that are used in other areas of the organization, a continuous (rolling) budgeting system may not give an accurate estimate
of its costs.
Your Answer
The annual review needed to implement a zero-based budgeting system can be very time consuming and expensive.
A continuous (rolling) budgeting system is only useful for control purposes, not planning purposes.
Rationale
 Managers need to spend time every month to use a continuous (rolling) budgeting system.
Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment. This results in budgets that are up-to-date and that
reflect current conditions. Managers need to spend time every month to use a continuous (rolling) budgeting system because a new period is being
added to the budget on a regular basis.
Rationale
 If a project uses resources that are used in other areas of the organization, a continuous (rolling) budgeting system may not give an
accurate estimate of its costs.
Incorrect. If a project uses resources that are also used in other areas of the organization, a project budgeting system, not a zero-based budgeting
system, may not give an accurate estimate of its costs.
Rationale
 The annual review needed to implement a zero-based budgeting system can be very time consuming and expensive.
Incorrect. A time-consuming and expensive annual review process is needed to implement a zero-based budgeting system, not a continuous
(rolling) budgeting system.
Rationale
 A continuous (rolling) budgeting system is only useful for control purposes, not planning purposes.
Incorrect. A flexible budgeting system, not a continuous (rolling) budgeting system, is only useful for control purposes and not for planning
purposes. This is because a flexible budget is not prepared until a period is over.
Question 42
1.B.4.c
aq.frazp.bud.002_0720
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
The master budget structure represents the process of implementing strategy as a two-sided process. What are the two different sides of budgeting?
Your Answer
Periodic planning for long-term capital investing (project budgeting) and constant planning for long-term operational spending (operational
budgeting)
Periodic planning for short-term capital investing (operational budgeting) and constant planning for short-term operational spending (project
budgeting)
Correct
Periodic planning for long-term capital investing (project budgeting) and constant planning for short-term operational spending (operational
budgeting)
Periodic planning for short-term capital investing (operational budgeting) and constant planning for long-term operational spending (project
budgeting)
Rationale
 Periodic planning for long-term capital investing (project budgeting) and constant planning for long-term operational spending
(operational budgeting)
Constant planning for operational spending is performed for the short term.
Rationale
 Periodic planning for short-term capital investing (operational budgeting) and constant planning for short-term operational spending
(project budgeting)
Periodic planning for capital investing is performed for the long term.
Rationale
 Periodic planning for long-term capital investing (project budgeting) and constant planning for short-term operational spending
(operational budgeting)
The two sides are: (1) Periodic planning for long-term capital investing to establish the organization's strategic position in its environment and
competitive space. This management work is project budgeting. (2) Constant planning for short-term operational spending to achieve strategic
objectives. This management work is operational budgeting.
Rationale
 Periodic planning for short-term capital investing (operational budgeting) and constant planning for long-term operational spending
(project budgeting)
Periodic planning for capital investing is performed for the long term. Constant planning for operational spending is performed for the short term.
Question 43
1.B.4.a
tb.frazp.bud.016_1809
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
Which of the following statements correctly defines a project budget system?
A budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual sales would be.
Correct
A budgeting system used when a project is completely separate from other components of a company's operations or is the only component of the
company.
A budgeting system where activities are the focus, not departments, products, or services.
A budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the budget stays
up-to-date with the operating environment.
Rationale
 A budgeting system used to show the budget that would have been prepared if the organization knew in advance what its actual sales
would be.
Incorrect. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in
advance what its actual sales would be.
Rationale
 A budgeting system used when a project is completely separate from other components of a company's operations or is the only
component of the company.
Correct. A project budget system is a budgeting system used when a project is completely separate from other components of a company's
operations, or is the only component of the company.
Rationale
 A budgeting system where activities are the focus, not departments, products, or services.
Incorrect. An activity-based budget system is a budgeting system where activities are the focus.
Rationale
 A budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the
budget stays up-to-date with the operating environment.
Incorrect. A continuous or rolling budget system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment.
Question 44
1.B.4.a
1B4-AT02
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
The type of budget that is available on a continuous basis for a specified future period by adding a month, a quarter, or a year in the future as the month,
quarter, or year just ended is deleted, is called a:
flexible budget.
Your Answer
kaizen budget.
Correct
rolling budget.
activity-based budget.
Rationale
 flexible budget.
This answer is incorrect. A flexible budget is not the type of budget that is available on a continuous basis for a specified future period by adding a
month, a quarter, or a year in the future as the month, quarter, or year just ended is deleted.
Rationale
 kaizen budget.
This answer is incorrect. A kaizen budget is not the type of budget that is available on a continuous basis for a specified future period by adding a
month, a quarter, or a year in the future as the month, quarter, or year just ended is deleted.
Rationale
 rolling budget.
A rolling budget (or continuous budget) is a plan that always covers a specified future period by adding a period in the future and dropping the
period just ended. It forces management to continuously focus on the future specified time period. The time period is always the same length, but
the actual time period covered by the budget moves forward with the passage of time.
Rationale
 activity-based budget.
This answer is incorrect. An activity-based budget is not the type of budget that is available on a continuous basis for a specified future period by
adding a month, a quarter, or a year in the future as the month, quarter, or year just ended is deleted.
Question 45
1.B.4.d
1B4-LS20
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
When compared to static budgets, flexible budgets:
* Source: Retired ICMA CMA Exam Questions.
encourage managers to use less fixed costs items and more variable cost items that are under their control.
Correct
offer managers a more realistic comparison of budget and actual revenue and cost items under their control.
Your Answer
offer managers a more realistic comparison of budget and actual fixed cost items under their control.
provide a better understanding of the capacity variances during the period being evaluated.
Rationale
 encourage managers to use less fixed costs items and more variable cost items that are under their control.
This answer is incorrect. When compared to static budgets, flexible budgets do not necessarily encourage managers to use less fixed cost items and
more variable cost items that are under their control.
Rationale
 offer managers a more realistic comparison of budget and actual revenue and cost items under their control.
Flexible budgeting offers managers a more realistic comparison of budget and actual revenue and cost items under their control as it adjusts the
budgets to accommodate fluctuations in activity levels.
Rationale
 offer managers a more realistic comparison of budget and actual fixed cost items under their control.
This answer is incorrect. When compared to static budgets, flexible budgets do not necessarily offer managers a more realistic comparison of
budget and actual fixed cost items under their control.
Rationale
 provide a better understanding of the capacity variances during the period being evaluated.
This answer is incorrect. When compared to static budgets, flexible budgets do not necessarily provide a better understanding of the capacity
variances during the period being evaluated.
Question 46
1.B.4.e
tb.frazp.bud.045_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wants to develop a budget that will focus on factors directly related to developing a new drug and not on any corporate administrative costs
or activities. Which budgeting system would be the most appropriate system to use for this purpose?
A continuous or rolling budgeting system.
Correct
A project budgeting system.
An activity-based budgeting system.
A zero-based budgeting system.
Rationale
 A continuous or rolling budgeting system.
Incorrect. A continuous or rolling budgeting system focuses on activities throughout an entire organization, including corporate administrative
costs and activities.
Rationale
 A project budgeting system.
Correct. A project budgeting system is used when the goal is to only focus on factors directly related to a specific project such as developing a new
drug. It does not take corporate administrative costs or activities into consideration.
Rationale
 An activity-based budgeting system.
Incorrect. An activity-based budgeting system focuses on activities throughout an organization, including corporate administrative costs and
activities and does not focus on revenues. These aspects make it unsuitable for planning the development of a new drug.
Rationale
 A zero-based budgeting system.
Incorrect. A zero-based budgeting system focuses on activities throughout an organization, including corporate administrative costs and activities,
but it does not focus on revenues. These aspects make it unsuitable for planning the development of a new drug.
Question 47
1.B.4.d
1B4-AT01
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Which one of the following is not an advantage of activity-based budgeting?
Better identification of resource needs.
Your Answer
Linking of costs to outputs.
Correct
Reduction of planning uncertainty.
Identification of budgetary slack.
Rationale
 Better identification of resource needs.
This answer is incorrect. Better identification of resource needs is an advantage of activity-based budgeting.
Rationale
 Linking of costs to outputs.
This answer is incorrect. Linking costs to outputs is an advantage of activity-based budgeting.
Rationale
 Reduction of planning uncertainty.
Activity-based budgeting concentrates on the budgeted cost of activities necessary to produce and sell products and services (outputs). This, in
turn, will increase the identification of resource needs and budgetary slack. However, activity-based budgeting does not necessarily reduce
planning uncertainty.
Rationale
 Identification of budgetary slack.
This answer is incorrect. Identification of budgetary slack is an advantage of activity-based budgeting.
Question 48
1.B.4.f
tb.frazp.bud.061_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: hard
Bloom Code: 5
In 20x7 the Black Company incurred $3,900,000 in set-up costs. It spent 80,000 hours on set-up to produce 500,000 units that year. In 20x8 Black expects
to need 81,250 hours of set-up to produce 520,000 units. Using activity-based budgeting and 20x7 cost data, what would Black budget for set-up costs
equal in 20x8?
$4,056,000
Correct
$3,960,938
$3,840,000
$3,750,000
Rationale
 $4,056,000
Incorrect. The budgeted set-up costs would equal $4,056,000 if the calculation were based on expected units produced. Using 20x7 data, Black
would estimate set-up costs as $7.80 per unit ($3,900,000 ÷ 500,000 units). Based on an expected 520,000 units in 20x8, Black would budget setup
costs as $4,056,000 ($7.80 × 520,000). This is the amount using traditional budgeting, not activity-based budgeting.
Rationale
 $3,960,938
Correct. An activity-based budgeting system is a budgeting system where activities are the focus, not departments, products, or services. An
activity-based budgeting system uses nonvolume cost drivers to more accurately estimate costs since not all costs vary with volume. To implement
activity-based budgeting, Black would budget set-up costs based on expected set-up hours. Black would estimate set-up costs as $48.75 per set-up
hour ($3,900,000 ÷ 80,000 hours). Based on an expected 81,250 set-up hours in 20x8, Black would budget set-up costs as $3,960,938 ($48.75 ×
81,250).
Rationale
 $3,840,000
Incorrect. To implement activity-based budgeting, Black would budget setup costs based on expected setup hours. If Black mistakenly calculated
the budgeted rate based on the 81,250 expected hours, the rate would be $48.00 per hour ($3,900,000 ÷ 81,250). If this rate of $48.00 is then
multiplied by the 80,000 set-up hours for 20x7, 20x8 setup costs would be budgeted as $3,840,000 ($48.00 × 80,000). This is not the correct formula.
Rationale
 $3,750,000
Incorrect. If Black used traditional budgeting, it would budget setup costs based on expected units produced. If it mistakenly calculated the
budgeted rate based on the 520,000 expected units, the rate would be $7.50 per unit ($3,900,000 ÷ 520,000). If this rate of $7.50 is then multiplied by
the 500,000 units for 20x7, 20x8 set-up costs would be budgeted as $3,750,000 ($7.50 × 500,000). This is not the correct formula.
Question 49
1.B.4.d
1B4-LS10
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Which of the following is not a potential drawback of using zero-based budgeting?
Such budgets can have an expensive and time-consuming review process.
Review is often cursory and inadequate.
Correct
Major changes may be ignored in place of incremental improvements.
Budget slack can exaggerate waste in a zero-based budget.
Rationale
 Such budgets can have an expensive and time-consuming review process.
This answer is incorrect. An expensive and time-consuming review process is a potential drawback of zero-based budgeting.
Rationale
 Review is often cursory and inadequate.
This answer is incorrect. A review that is often cursory and inadequate is a potential drawback of zero-based budgeting.
Rationale
 Major changes may be ignored in place of incremental improvements.
Zero-based budgeting is primarily focused on major changes, not incremental improvements.
Rationale
 Budget slack can exaggerate waste in a zero-based budget.
This answer is incorrect. Budget slack which exaggerates waste is a potential drawback of zero-based budgeting.
Question 50
1.B.4.g
tb.frazp.bud.014_1805
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Brandie's Candies projects it will produce 4,000 pounds of candy in August and factory rent for the month is $8,000. If rent is a fixed cost, and if
production is expected to increase to 6,000 units in September, then what is the expected cost of rent in September?
$12,000
Correct
$8,000
$7,000
Not enough information is provided to determine the answer
Rationale
 $12,000
If rent is a variable cost, it will increase from $8,000 to $12,000 if output increases from 4,000 pounds to 6,000 pounds; however, it is a fixed cost.
Therefore, this is an incorrect answer.
Rationale
 $8,000
Fixed costs do not change as production changes. That is, a fixed cost will be the same whether output is 4,000 pounds or 6,000 pounds. That
means rent will be $8,000 if production increases to 6,000 units. Therefore, this is the correct answer.
Rationale
 $7,000
If a fixed cost is $8,000 with 4,000 pounds of output, it cannot be $7,000 with 6,000 pounds of output; therefore, this is an incorrect answer.
Rationale
 Not enough information is provided to determine the answer
There is enough information to determine the expected cost at 6,000 pounds since the cost at 4,000 pounds is given. Therefore, this is an incorrect
answer.
Question 51
1.B.4.d
tb.frazp.bud.034_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a benefit of using an activity-based budgeting system?
An activity-based budgeting system helps separately identify the benefits and costs related to an individual project.
An activity-based budgeting system results in budgets that are up-to-date and that reflect current conditions.
Correct
An activity-based budgeting system uses nonvolume cost drivers to more accurately estimate costs than other budgeting systems.
An activity-based budgeting system is used to facilitate variance analysis.
Rationale
 An activity-based budgeting system helps separately identify the benefits and costs related to an individual project.
Incorrect. A project budgeting system, not an activity-based budgeting system, helps separately identify the benefits and costs related to an
individual project.
Rationale
 An activity-based budgeting system results in budgets that are up-to-date and that reflect current conditions.
Incorrect. A continuous (rolling) budgeting system, not an activity-based budgeting system, results in budgets that are up-to-date and that reflect
current conditions.
Rationale
 An activity-based budgeting system uses nonvolume cost drivers to more accurately estimate costs than other budgeting systems.
Correct. An activity-based budgeting system is a budgeting system where activities are the focus, not departments, products, or services. An
activity-based budgeting system uses nonvolume cost drivers to more accurately estimate costs since not all costs vary with volume.
Rationale
 An activity-based budgeting system is used to facilitate variance analysis.
Incorrect. A flexible budgeting system, not an activity-based budgeting system, is used to facilitate variance analysis.
Question 52
1.B.4.e
tb.frazp.bud.053_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company produces several products where a number of overhead items vary with cost drivers such as setup time required per batch produced and
number of inspections per batch produced rather than with traditional measures of volume such as direct labor hours and units produced. Which
budgeting system would be the most appropriate system for this company to use?
A continuous or rolling budgeting system.
A master budgeting system.
Correct
An activity-based budgeting system.
A flexible budgeting system.
Rationale
 A continuous or rolling budgeting system.
Incorrect. A continuous or rolling budgeting system does not specifically focus on using non-volume-related cost drivers to estimate costs. This
makes it unsuitable for this company to use.
Rationale
 A master budgeting system.
Incorrect. While comprehensive, a master budgeting system typically relies on traditional measures of volume to estimate costs. This makes it
unsuitable for this company to use.
Rationale
 An activity-based budgeting system.
Correct. An activity-based budgeting system is a budgeting system where activities are the focus, not departments, products, or services. An
activity-based budgeting system uses nonvolume cost drivers to more accurately estimate costs since not all costs vary with volume. Because this
company has a large number of overhead items that do not vary with traditional measures of volume, an activity-based budgeting system is the
most appropriate system for this company to use.
Rationale
 A flexible budgeting system.
Incorrect. Because a flexible budget is prepared after a period is over, it is not useful for estimating costs, whether they vary with traditional
measures of volume or not. This makes it unsuitable for this company to use.
Question 53
1.B.4.e
tb.frazp.bud.049_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wishes to focus on reducing wasteful and ineffective spending when preparing its budget. Which budgeting system would be the most
appropriate system for this company to use?
Correct
A zero-based budgeting system.
A continuous or rolling budgeting system.
Your Answer
A project budgeting system.
An activity-based budgeting system.
Rationale
 A zero-based budgeting system.
Correct. A zero-based budgeting system focuses on constant cost justification of every budget item. This focus increases the likelihood of
identifying wasteful and ineffective spending.
Rationale
 A continuous or rolling budgeting system.
Incorrect. A continuous or rolling budgeting system does not specifically focus on reducing wasteful and ineffective spending.
Rationale
 A project budgeting system.
Incorrect. A project budgeting system does not specifically focus on reducing wasteful and ineffective spending.
Rationale
 An activity-based budgeting system.
Incorrect. An activity-based budgeting system does not specifically focus on reducing wasteful and ineffective spending.
Question 54
1.B.4.e
tb.frazp.bud.044_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wants to develop a budget that will enable it to prepare pro forma financial statements for the entire organization. Which budgeting system
would be the most appropriate system to use for this purpose?
Correct
A master budgeting system.
A project budgeting system.
Your Answer
A flexible budgeting system.
A zero-based budgeting system.
Rationale
 A master budgeting system.
Correct. A master budget system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows. This
information can then be used in the preparation of pro forma financial statements for the entire organization.
Rationale
 A project budgeting system.
Incorrect. The limited focus of a project budgeting system makes it unsuitable for preparing pro forma financial statements for the entire
organization.
Rationale
 A flexible budgeting system.
Incorrect. A flexible budget is prepared after a period is over so it is unsuitable for preparing pro forma financial statements.
Rationale
 A zero-based budgeting system.
Incorrect. The focus of a zero-based budgeting system on cost justification makes it unsuitable for preparing pro forma financial statements.
Question 55
1.B.4.e
1B4-LS05
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
A firm wants to place its budgeting emphasis on teamwork, synchronized activity, and customer satisfaction. Which of the following budget types would
best fit these needs?
Zero-based budgeting.
Project budgeting.
Your Answer
Continuous budgeting.
Correct
Activity-based budgeting.
Rationale
 Zero-based budgeting.
This answer is incorrect. If a firm wants to place its budgeting emphasis on teamwork, synchronized activity, and customer satisfaction, zero-based
budgeting would not best fit these needs.
Rationale
 Project budgeting.
This answer is incorrect. If a firm wants to place its budgeting emphasis on teamwork, synchronized activity, and customer satisfaction, project
budgeting would not best fit these needs.
Rationale
 Continuous budgeting.
This answer is incorrect. If a firm wants to place its budgeting emphasis on teamwork, synchronized activity, and customer satisfaction, continuous
budgeting would not best fit these needs.
Rationale
 Activity-based budgeting.
An activity-based budget places emphasis on teamwork, synchronized activity, and customer satisfaction. Traditional budgeting places emphasis
on increasing management performance.
Question 56
1.B.4.d
1C1-LS85
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
An advantage of using a flexible budget as opposed to a static budget is that in a flexible budget:
* Source: Retired ICMA CMA Exam Questions.
standards can easily be changed to adjust to changing circumstances.
Your Answer
fixed cost variances are more clearly presented.
Correct
budgeted costs for a given output level can be compared with actual costs for that same level of output.
shortfalls in planned production are clearly presented.
Rationale
 standards can easily be changed to adjust to changing circumstances.
This answer is incorrect. Standards cannot more easily be changed to adjust to changing circumstances in a flexible budget compared to a static
budget.
Rationale
 fixed cost variances are more clearly presented.
This answer is incorrect. Fixed cost variances are not more clearly presented in a flexible budget compared to a static budget.
Rationale
 budgeted costs for a given output level can be compared with actual costs for that same level of output.
In a flexible budget, budgeted costs for a given output level can be compared with actual costs for that same level of output. The flexible budget will
evaluate performance by comparing actual revenue and expenses to the budgeted amount (standard rate) for the actual production activity. A
static budget on the other hand is a budget that does not change when actual sales activity differ from planned sales activity.
Rationale
 shortfalls in planned production are clearly presented.
This answer is incorrect. Shortfalls in planned production are not more clearly presented in a flexible budget compared to a static budget.
Question 57
1.B.4.e
tb.frazp.bud.001_1805
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Which of the following companies is likely to have the least formal budget process?
Trending Fashions, a new business that is trying to get investment funding
Correct
Betty's Bakery, a small-town bakery that has been open for three years
Jet Ski Haven, a Jet Ski rental company with rental offices along the U.S. coasts
Altman Industries, an international manufacturing company
Rationale
 Trending Fashions, a new business that is trying to get investment funding
A new business trying to get investment funding likely has a relatively formal budgeting process as a way to convince investors to provide funding.
Investors are not likely to provide funding to companies with informal budgeting processes. Therefore, this is an incorrect answer.
Rationale
 Betty's Bakery, a small-town bakery that has been open for three years
The formality of a company's budgeting process is related to the complexity of its business. Companies with less complex businesses typically have
less formal budgeting processes. A small-town bakery likely has the least complex business of the options listed; therefore, it likely has the least
formal budget process. This is the correct answer.
Rationale
 Jet Ski Haven, a Jet Ski rental company with rental offices along the U.S. coasts
The formality of a company's budgeting process is related to the complexity of its business. Companies with less complex businesses typically have
less formal budgeting processes. A Jet Ski rental company with rental offices along the U.S. coasts likely has a relatively formal budgeting process
because of the number of different offices involved. Therefore, this is an incorrect answer.
Rationale
 Altman Industries, an international manufacturing company
The formality of a company's budgeting process is related to the complexity of its business. Companies with less complex businesses typically have
less formal budgeting processes. An international manufacturing company likely has a relatively formal budgeting process because of the
international nature of the company's operations. Therefore, this is an incorrect answer.
Question 58
1.B.4.b
tb.frazp.bud.022_1809
LOS: 1.B.4.b
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 4
All of the following are factors to consider when determining the appropriate budget system to be used except:
The complexity of the organization.
Top management's attitude toward budgeting.
Your Answer
The time period the budget will cover.
Correct
The extent that lower-level employees will be a part of the budget development team.
Rationale
 The complexity of the organization.
Incorrect. Some budget systems are more appropriate in simpler organizations and some are more appropriate for more complex organizations.
Rationale
 Top management's attitude toward budgeting.
Incorrect. Top management's attitude toward the benefits from budgeting will play a role in the system used.
Rationale
 The time period the budget will cover.
Incorrect. The different budget systems focus on different time periods. Some focus on annual time periods, some focus on shorter time periods,
and some focus on varying time periods depending on the scenario. Organizations can choose the system that is consistent with the time period
desired.
Rationale
 The extent that lower-level employees will be a part of the budget development team.
Correct. There are a number of different systems that can be used to prepare a budget. Each has its own strengths and weaknesses. The extent that
lower-level employees will be a part of the budget development team does not play a role in the system used as lower-level employees can be
involved to a limited extent or to a greater extent under all the systems.
Question 59
1.B.4.c
tb.frazp.bud.027_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning the preparation of a project budget is correct?
Correct
A project budget is prepared in much the same way as a master budget is prepared.
A project budget is prepared in much the same way as an activity-based budget is prepared.
Your Answer
A project budget is prepared in much the same way as a zero-based budget is prepared.
A project budget is prepared in much the same way as a flexible budget is prepared.
Rationale
 A project budget is prepared in much the same way as a master budget is prepared.
Correct. A project budget system is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company. It is prepared in much the same way as a master budget is prepared except only the costs and
revenues specific to the project are included. No company overhead unrelated to the project is included.
Rationale
 A project budget is prepared in much the same way as an activity-based budget is prepared.
Incorrect. A project budget system is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company. It is not prepared the same way as an activity-based budget is prepared. An activity-based
budget is based on activities that multiple projects are likely to use, not just a single project.
Rationale
 A project budget is prepared in much the same way as a zero-based budget is prepared.
Incorrect. A zero-based budget is based on justifying costs each time a budget is prepared. A project budget lasts for as long as the project lasts, so
there would be no opportunity to reevaluate costs included in the budget.
Rationale
 A project budget is prepared in much the same way as a flexible budget is prepared.
Incorrect. A flexible budget is prepared after a period is over to determine the amount that “would have been” budgeted if the eventual actual
volume of activity were known when the budget was prepared. A project budget is needed while the project is active, not when it is completed.
Question 60
1.B.4.c
tb.frazp.bud.005_1805
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
An organization is planning their master budget. They begin by listing all their expected cash outflows, including employee salaries and benefits, utilities,
program expenses, insurance, vehicle registration and maintenance, and rent expenses. This organization is likely which of the following?
Manufacturer
Your Answer
Merchandiser
Service company
Correct
Not-for-profit
Rationale
 Manufacturer
The master budget is a set of budgets that establish an organization's plans for a period of time. A manufacturer would likely list expected
production, expected material usage, expected labor usage, expected material price, and expected labor wage rate. Therefore, this is an incorrect
answer.
Rationale
 Merchandiser
The master budget is a set of budgets that establish an organization's plans for a period of time. A merchandiser would likely list expected inventory
purchases and purchase prices. Therefore, this is an incorrect answer.
Rationale
 Service company
The master budget is a set of budgets that establish an organization's plans for a period of time. A service company would likely list expected labor
hours needed to provide services. Therefore, this is an incorrect answer.
Rationale
 Not-for-profit
The master budget is a set of budgets that establish an organization's plans for a period of time. It consists of operating budgets (what an
organization plans to do) and financial budgets (where it expects to get needed financial resources from). Since this organization did not list
expected sales (in units) or selling prices, it is not likely to be a for-profit organization. Rather, it is likely to be a not-for-profit organization.
Therefore, this is the correct answer.
Question 61
1.B.4.f
tb.frazp.bud.058_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
The Leon Company has gathered the information below concerning budgeted and actual selling costs. Based on this information, what would Leon's
flexible budget selling costs be for 20x8?
Year Budgeted Units Budgeted Costs Actual Units Actual Costs
20x7
50,000
$500,000
48,000
$528,000
20x8
49,000
$514,500
46,000
$517,500
Correct
$483,000
$551,250
Your Answer
$480,000
$539,000
Rationale
 $483,000
Correct. A flexible budgeting system is a budgeting system that shows the budget that would have been prepared if the organization knew in
advance what its actual volume would be. It is the amount that “should have” been spent for the actual level of volume, based on budgeted
expectations. Amounts are calculated by multiplying the actual volume of activity by the budgeted cost per unit. Leon's budgeted selling costs for
20x8 is $10.50 per unit ($514,500 ÷ 49,000). This means the flexible budget selling costs for 20x8 equals $483,000 (46,000 × $10.50).
Rationale
 $551,250
Incorrect. Leon's flexible budget for 20x8 would be calculated as $551,250 if the budgeted units were multiplied by the actual cost per unit. There
are 49,000 budgeted units and the actual cost equals $11.25 per unit ($517,500 ÷ 46,000). Therefore, the flexible budget would equal $551,250
(49,000 × $11.25). This is not the correct formula.
Rationale
 $480,000
Incorrect. Amounts for a flexible budgeting system are calculated by multiplying the actual volume of activity by the budgeted cost per unit. Leon's
flexible budget for 20x7 is $217,000 (48,000 × $10.00). However, the question asks for Leon's flexible budget for 20x8, not 20x7. This is an incorrect
answer.
Rationale
 $539,000
Incorrect. If the 20x8 budgeted units of 49,000 is multiplied by the actual 20x7 cost of $11.00 per unit ($528,000 ÷ 48,000) the result would be flexible
budget selling costs of $539,000 (49,000 × $11.00). This is not the correct formula.
Question 62
1.B.4.e
1B4-LS11
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
A company feels that its budget process lacks relevance by the middle of the year, even though the process took a great deal of time and expense to
complete. Which of the following budget types would help solve both of these issues?
Kaizen budgeting.
Correct
Continuous budgeting.
Your Answer
Zero-based budgeting.
Activity-based budgeting.
Rationale
 Kaizen budgeting.
This answer is incorrect. Kaizen budgeting would not improve the relevance of the budget nor reduce the time and expense spent on the budget.
Rationale
 Continuous budgeting.
A continuous budget adds a new period on the end of the budget at the end of each period such as a month so that the budgets remain up to date
with the operating environment. A monthly continuous budget also breaks down a large budgeting process into 12 easily manageable steps.
Rationale
 Zero-based budgeting.
This answer is incorrect. Zero-based budgeting would not improve the relevance of the budget nor reduce the time and expense spent on the
budget.
Rationale
 Activity-based budgeting.
This answer is incorrect. Activity-based budgeting would not improve the relevance of the budget nor reduce the time and expense spent on the
budget.
Question 63
1.B.4.f
tb.frazp.bud.069_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
The Wolf Company gathers the following information on actual spending in 20x7 and likely spending in 20x8 for three projects:
20x7 Actual
Spending
20x8 Expected
Spending
Product Installation
$75,000
$88,000
Many customers buy from Wolf because of
installation service
In-Store Product Demonstrations
$50,000
$60,000
Many customers buy products after seeing them
demonstrated
Tuition Reimbursement
$60,000
$75,000
Wolf has found this to be an attractive recruiting
tool
Subsidies to Reduce Employee Food Costs in
Cafeteria
$30,000
$24,000
Many employees bring their own lunches to work
Project
Evaluation
If Wolf practices zero-based budgeting, what would be the total budget for these projects in 20x8?
Correct
$223,000
Your Answer
$247,000
$135,000
$148,000
Rationale
 $223,000
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of each and every budget item. This focus
increases the likelihood of identifying wasteful and ineffective spending. Cafeteria Subsidies seem wasteful as many employees bring their own
lunches to work. Product Installation, Product Demonstrations, and Tuition Reimbursement would likely pass the cost-benefit test. The expected
spending for these three activities is $223,000 ($88,000 + $60,000 + $75,000).
Rationale
 $247,000
Incorrect. The total expected 20x8 spending on these four activities is $247,000 ($88,000 + $60,000 + $75,000 + $60,000). A cost-benefit test should be
performed on each of the four activities to determine whether they should be continued, or if they should be outsourced or stopped entirely. Not all
of the activities meet the cost-benefit test. Therefore, they should not all be included in a zero-based budget.
Rationale
 $135,000
Incorrect. The total budget would be $135,000 in 20x8 if only the Product Demonstrations and Tuition Reimbursement were included ($60,000 +
$75,000). These are not the only two costs that would pass the cost-benefit test.
Rationale
 $148,000
Incorrect. One type of budgeting system is a zero-based budgeting system. It is a budgeting system that focuses on constant cost justification of
each and every budget item. This focus increases the likelihood of identifying wasteful and ineffective spending. Product Installation and Product
Demonstrations would likely pass the cost-benefit test. The total budget would be $148,000 in 20x8 if only the Product Installation and Product
Demonstrations were included ($88,000 + $60,000). These are not the only two costs that would pass the cost-benefit test.
Question 64
1.B.4.f
tb.frazp.bud.065_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
At the start of 20x8 the Nicholas Company forecasts sales for the next eight quarters as follows: $200,000, $250,000, $260,000, $280,000, $210,000,
$270,000, $290,000, and $300,000. Sales in the first quarter of 20x8 totaled $220,000.
Based on this, Nicholas revises sales estimates as follows (starting with Q2 of 20x8): $260,000, $275,000, $290,000, $230,000, $290,000, $310,000,
$320,000, and $250,000. If Nicholas uses continuous or rolling budgeting, what will be the new annual budgeted sales figure (as of the beginning of Q2 of
20x8)?
$1,045,000
$1,010,000
Correct
$1,055,000
$990,000
Rationale
 $1,045,000
Incorrect. If the actual sales for Q1 of 20x8 are included, then the revised sales forecast would be $1,045,000 ($220,000 + $260,000 + $275,000 +
$290,000). Actual sales are not included in a continuous or rolling budget.
Rationale
 $1,010,000
Incorrect. If the actual sales for Q1 of 20x8 are included and the original forecasts for Q2, Q3, and Q4 are included then the revised sales forecast
would be $1,010,000 ($220,000 + $250,000 + $260,000 + $280,000). Actual sales are not included in a continuous or rolling budget and the most
recent forecasts should be included.
Rationale
 $1,055,000
Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment. To implement continuous or rolling budgeting as of
Q2 of 20x8, Nicholas would include forecasts for sales for Q2, Q3 and Q4 of 20x8 as well as the forecast for sales for Q1 in 20X9. This would result in a
revised sales forecast of $1,055,000 ($260,000 + $275,000 + $290,000 + $230,000).
Rationale
 $990,000
Incorrect. If the original forecasts (as of Q1 of 20x8) are used, then the sales forecast would be $990,000 ($200,000 + $250,000 + $260,000 + $280,000).
This is the forecast as of Q1 of 20x8, not Q2 of 20x8.
Question 65
1.B.4.d
1B4-LS03
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Which of the following is a potential drawback to using a project budget?
Using a project budget can be expensive and time-consuming due to large data requirements.
The link to the master budget may be poorly maintained by the budget coordinator.
Your Answer
Managers may lower quality levels to control costs.
Correct
Staff committed to the project and to other company requirements may have conflicting lines of authority.
Rationale
 Using a project budget can be expensive and time-consuming due to large data requirements.
This answer is incorrect. Project budgets are not expensive and time-consuming because they do not have large data requirements.
Rationale
 The link to the master budget may be poorly maintained by the budget coordinator.
This answer is incorrect. The link to the master budget being poorly maintained by the budget coordinator is not a concern when using a project
budget.
Rationale
 Managers may lower quality levels to control costs.
This answer is incorrect. Managers lowering quality levels to control costs does not occur as a result of using a project budget.
Rationale
 Staff committed to the project and to other company requirements may have conflicting lines of authority.
When project budgets use resources and staff that is committed to the entire organization and not just the project, the budget will contain links to
these resource centers. When this occurs, affected individuals may have two bosses.
Question 66
1.B.4.g
tb.frazp.bud.009_1805
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
Flora Generators is preparing a production cost budget for August. The production of 60 generators incurred the following actual costs in July:
Materials cost
$5,200
Labor cost
2,600
Rent
1,200
Depreciation
1,700
Other fixed costs
Total
4,600
$15,300
Materials and labor are the only variable costs. If production and sales are budgeted to increase to 70 generators in August, then how much is the
expected total variable cost on the August budget?
$17,850
$16,600
Your Answer
$15,300
Correct
$9,100
Rationale
 $17,850
Total variable costs change in direct proportion to changes in output. The variable costs are $7,800 ($5,200 + $2,600) in July when production is 60
generators. This results in variable costs being $130 per unit ($7,800 ÷ 60) for July. If August production is budgeted to be 70 generators, total
variable costs will be budgeted as $9,100 (70 × $130). Fixed costs per unit at 60 generators is $125 ($7,500 ÷ 60). If fixed costs are treated like variable
costs, total fixed costs for 70 generators would be calculated as $8,750 (70 × $125). This would make expected total costs for 70 generators $17,850
($9,100 + $8,750). The question asks about total variable costs, not total costs, and the expected fixed cost for August is not correct; therefore, this is
an incorrect answer.
Rationale
 $16,600
Total variable costs change in direct proportion to changes in output. The variable costs are $7,800 ($5,200 + $2,600) in July when production is 60
generators. This results in variable costs being $130 per unit ($7,800 ÷ 60) for July. If August production is budgeted to be 70 generators, total
variable costs will be budgeted as $9,100 (70 × $130). The fixed costs of $7,500 will not change when production changes. This means expected total
costs for 70 generators is $16,600 ($9,100 + $7,500). The question asks about total variable costs, not total costs; therefore, this is an incorrect
answer.
Rationale
 $15,300
Total variable costs change in direct proportion to changes in output. The variable costs are $7,800 ($5,200 + $2,600) in July when production is 60
generators. This results in variable costs being $130 per unit ($7,800 ÷ 60) for July. If August production is budgeted to be 70 generators, total
variable costs will be budgeted as $9,100 (70 × $130). The total cost (variable and fixed) for July is $15,300. This question asks about total variable
costs, not total cost; therefore, this is an incorrect answer.
Rationale
 $9,100
Total variable costs change in direct proportion to changes in output. The variable costs are $7,800 ($5,200 + $2,600) in July when production is 60
generators. This results in variable costs being $130 per unit ($7,800 ÷ 60) for July. If August production is budgeted to be 70 generators, total
variable costs will be budgeted as $9,100 (70 × $130). Therefore, this is the correct answer.
Question 67
1.B.4.d
1B4-AT07
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
One difference between incremental budgeting and zero-based budgeting (ZBB) is that incremental budgeting:
eliminates functions and duties that have outlived their usefulness.
Correct
accepts the existing base as being satisfactory.
Your Answer
eliminates the need to periodically review all functions to obtain optimum utilization of resources.
makes it easy to discontinue outdated functions.
Rationale
 eliminates functions and duties that have outlived their usefulness.
This answer is incorrect. Incremental budgeting does not eliminate functions and duties that have outlived their useful lives, zero-based budgeting
does.
Rationale
 accepts the existing base as being satisfactory.
Incremental budgeting accepts the current budget as satisfactory and uses it as the base. ZBB requires that the cost of each item in the budget be
re-justified with each new budget. The starting point, or base, for each budgeting line item is zero.
Rationale
 eliminates the need to periodically review all functions to obtain optimum utilization of resources.
This answer is incorrect. Incremental budgeting does not eliminate the need to periodically review all functions to obtain optimum utilization of
resources, zero-based budgeting does.
Rationale
 makes it easy to discontinue outdated functions.
This answer is incorrect. Incremental budgeting does not make it easy to discontinue outdated functions, zero-based budgeting does.
Question 68
1.B.4.a
tb.frazp.bud.021_1809
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning budgeting timeframes is correct?
Project budgets typically cover one year.
Continuous budgets typically cover one year when first developed and then the coverage time decreases over that year.
Correct
Project budgets cover various periods of time based on the project involved.
The time covered by a flexible budget is independent of the time covered by any other budget.
Rationale
 Project budgets typically cover one year.
Incorrect. A project budget system is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company. Since a project budget only concerns a particular project, the time period runs for the
expected project time, not for one year.
Rationale
 Continuous budgets typically cover one year when first developed and then the coverage time decreases over that year.
Incorrect. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are
always several periods budgeted out and the budget stays up-to-date with the operating environment. This means that the time covered by a
continuous budget never decreases.
Rationale
 Project budgets cover various periods of time based on the project involved.
Correct. A project budget system is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company. Since a project budget only concerns a particular project, the time period runs for the
expected project time.
Rationale
 The time covered by a flexible budget is independent of the time covered by any other budget.
Incorrect. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in
advance what its actual sales would be. Variable costs are adjusted based on changes in volume while fixed costs remain the same. Flexible
budgets cover the same period of time as the “static” budget created at the beginning of a period. This means the time covered is dependent on the
time covered by the static budget.
Question 69
1.B.4.a
1B4-LS18
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
A budgeting approach that requires a manager to justify the entire budget for each budget period is known as:
* Source: Retired ICMA CMA Exam Questions.
program budgeting.
Your Answer
incremental budgeting.
Correct
zero-base budgeting.
performance budgeting.
Rationale
 program budgeting.
This answer is incorrect. Program budgeting is not a budgeting approach that requires a manager to justify the entire budget for each budget
period.
Rationale
 incremental budgeting.
This answer is incorrect. Incremental budgeting is not a budgeting approach that requires a manager to justify the entire budget for each budget
period.
Rationale
 zero-base budgeting.
Per the definition of zero-based budgeting, it is a budgeting approach that requires a manager to justify the entire budget for each budget period.
Rationale
 performance budgeting.
This answer is incorrect. Performance budgeting is not a budgeting approach that requires a manager to justify the entire budget for each budget
period.
Question 70
1.B.4.a
tb.frazp.bud.017_1809
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
Which of the following statements correctly defines an activity-based budgeting system?
A budgeting system that focuses on constant cost justification of every budget item.
A budgeting system used when a project is completely separate from other components of a company's operations or is the only component of the
company.
Correct
A budgeting system where activities are the focus, not departments, products, or services.
A budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the budget stays
up-to-date with the operating environment.
Rationale
 A budgeting system that focuses on constant cost justification of every budget item.
Incorrect. Zero-based budgeting is a budgeting system that focuses on constant cost justification of every budget item.
Rationale
 A budgeting system used when a project is completely separate from other components of a company's operations or is the only
component of the company.
Incorrect. Project-based budgeting is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company.
Rationale
 A budgeting system where activities are the focus, not departments, products, or services.
Correct. An activity-based budgeting system is a budgeting system where activities are the focus, not departments, products, or services.
Rationale
 A budgeting system where a new period is added to the budget each period so there are always several periods budgeted out and the
budget stays up-to-date with the operating environment.
Incorrect. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are
always several periods budgeted out and the budget stays up-to-date with the operating environment.
Question 71
1.B.4.e
tb.frazp.bud.047_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company has a large number of cost items that do not vary with respect to traditional measures of volume such as direct labor hours, direct labor
dollars, units produced, or machine hours. Which budgeting system would be the most appropriate system for this company to use?
A continuous or rolling budgeting system.
Your Answer
A master budgeting system.
Correct
An activity-based budgeting system.
A flexible budgeting system.
Rationale
 A continuous or rolling budgeting system.
Incorrect. A continuous or rolling budgeting system does not specifically focus on using non-volume-related cost drivers to estimate costs.
Rationale
 A master budgeting system.
Incorrect. A master budget system typically relies on traditional measures of volume to estimate costs.
Rationale
 An activity-based budgeting system.
Correct. An activity-based budgeting system is a budgeting system where activities are the focus, not departments, products, or services. An
activity-based budgeting system uses nonvolume cost drivers to more accurately estimate costs since not all costs vary with volume. Because this
company has a large number of costs that do not vary with traditional measures of volume, an activity-based budgeting system is the most
appropriate system for this company to use.
Rationale
 A flexible budgeting system.
Incorrect. Because a flexible budgeting system is prepared after a period is over, it is not useful for estimating costs whether they vary with
traditional measures of volume are not.
Question 72
1.B.4.e
tb.frazp.bud.002_1805
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
The company that is most likely to use a budget committee when developing a company-wide budget is which of the following?
Rendon Hospitality, a regional company of small bed and breakfasts
Huntington Lumber Co., a local lumber and hardware store
Correct
Bruner Electronics, an international electronics manufacturer
Nancy's Noodles, an online company run by one family that sells homemade noodles
Rationale
 Rendon Hospitality, a regional company of small bed and breakfasts
Companies with more complex businesses typically have more formal budgeting processes. To deal with this complexity, budget committees are
often used in the budget creation process. A regional company of small bed and breakfasts is not the company most likely to need a budget
committee of the options listed as it is not the most complicated company. Therefore, this is an incorrect answer.
Rationale
 Huntington Lumber Co., a local lumber and hardware store
Companies with more complex businesses typically have more formal budgeting processes. To deal with this complexity, budget committees are
often used in the budget creation process. A local lumber and hardware store is not the option most likely to need a budget committee as it is not
the most complex; therefore, this is an incorrect answer.
Rationale
 Bruner Electronics, an international electronics manufacturer
Companies with more complex businesses typically have more formal budgeting processes. To deal with this complexity, budget committees are
often used in the budget creation process. An international electronics manufacturer likely has the most complex business of any business listed;
therefore, it is most likely to need a budget committee to manage the budget creation process. This is the correct answer.
Rationale
 Nancy's Noodles, an online company run by one family that sells homemade noodles
Companies with more complex businesses typically have more formal budgeting processes. To deal with this complexity, budget committees are
often used in the budget creation process. An online company run by one family that sells homemade noodles is not the option most likely to need
a budget committee as it is not the most complex; therefore, this is an incorrect answer.
Question 73
1.B.4.e
tb.frazp.bud.048_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wishes to prepare a budget that will enable it to compare the amount actually spent to produce 10,000 units of output with the amount that
should have been spent to produce 10,000 units. Which budgeting system would be the most appropriate system for this company to use?
A zero-based budgeting system.
Your Answer
A master budgeting system.
A project budgeting system.
Correct
A flexible budgeting system.
Rationale
 A zero-based budgeting system.
Incorrect. A zero-based budgeting system is not designed to be used to determine what costs should have been incurred for the actual level of
output achieved.
Rationale
 A master budgeting system.
Incorrect. A master budget system is not designed to be used to determine what costs should have been incurred for the actual level of output
achieved.
Rationale
 A project budgeting system.
Incorrect. A project budgeting system is used to predict what project costs will be assuming a level of output, but it is not designed to be used to
determine what the project costs should have been for the actual level of output achieved.
Rationale
 A flexible budgeting system.
Correct. A flexible budgeting system is a budgeting system that shows the budget that would have been prepared if the organization knew in
advance what its actual volume would be. It is the only budgeting system that will enable the company to compare the amount actually spent to
produce 10,000 units of output with the amount that should have been spent to produce 10,000 units.
Question 74
1.B.4.g
tb.frazp.bud.012_1805
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: hard
Bloom Code: 4
Hanover Gears plans to produce 6,000 rotor gears in July. The production budget for this level of activity is:
Labor (variable) $35,000
Rent
6,000
Depreciation
4,000
Materials costs
7,000
Packaging
3,000
Other fixed costs
8,000
Calculate the cost per unit in August if the production level is changed to 5,000 units.
$12.60
Your Answer
$10.50
Correct
$11.10
$12.00
Rationale
 $12.60
Labor, materials costs, and packaging are all variable costs. They add up to $45,000 ($35,000 + $7,000 + $3,000) when 6,000 gears are produced in
July. If variable costs are treated as fixed costs and are assumed to remain the same in total regardless of output, variable cost per unit in August
will be calculated as $9.00 per gear ($45,000 ÷ 5,000). Fixed costs will be $18,000 ($6,000 + $4,000 + $8,000) for July and August. This translates to
$3.60 per gear in August ($18,000 ÷ 5,000) which means expected total costs per gear for 5,000 units will be $12.60 per gear ($9.00 + $3.60). This is
not the correct treatment of variable costs; therefore, this is an incorrect answer.
Rationale
 $10.50
Labor, materials costs, and packaging are all variable costs. They add up to $45,000 ($35,000 + $7,000 + $3,000) when 6,000 gears are produced in
July. This results in variable costs being $7.50 per gear ($75,000 ÷ 6,000) for July. Variable costs will remain $7.50 per gear in August. Fixed costs will
be $18,000 ($6,000 + $4,000 + $8,000) for July. This translates to $3.00 per gear in July ($18,000 ÷ 6,000). If fixed costs are treated as variable costs
and are assumed to be the same on a per-unit basis regardless of output, fixed cost per unit in August will be $3.00 per gear, which means expected
total costs per gear for 5,000 units will be $10.50 per gear ($7.50 + $3.00). This is not the correct treatment of fixed costs; therefore, this is an
incorrect answer.
Rationale
 $11.10
Total costs consist of variable costs and fixed costs. Variable costs change in direct proportion to changes in output while fixed costs do not change
when output changes. Labor, materials costs, and packaging are all variable costs. They add up to $45,000 ($35,000 + $7,000 + $3,000) when 6,000
gears are produced in July. This results in variable costs being $7.50 per gear ($45,000 ÷ 6,000) for July. Variable costs will remain $7.50 per gear in
August. Fixed costs will be $18,000 ($6,000 + $4,000 + $8,000) for July and August. This translates to $3.60 per gear in August ($18,000 ÷ 5,000), which
means expected total costs per gear for 5,000 units will be $11.10 per gear ($7.50 + $3.60). Therefore, this is the correct answer.
Rationale
 $12.00
Labor, materials costs, and packaging are all variable costs. They add up to $45,000 ($35,000 + $7,000 + $3,000) when 6,000 gears are produced in
July. If variable costs are treated as fixed costs and are assumed to remain the same in total regardless of output, variable cost per unit in August
will be calculated as $9.00 per gear ($45,000 ÷ 5,000). Fixed costs will be $18,000 ($6,000 + $4,000 + $8,000) for July. This translates to $3.00 per gear
in July ($18,000 ÷ 6,000). If fixed costs are treated as variable costs and are assumed to be the same on a per-unit basis regardless of output, fixed
cost per unit in August will be $3.00 per gear, which means expected total costs per gear for 5,000 units will be $12.00 per gear ($9.00 + $3.00). This is
not the correct treatment of variable costs or fixed costs; therefore, this is an incorrect answer.
Question 75
1.B.4.d
1B2-LS44
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
All of the following are disadvantages of authoritative budgeting as opposed to participatory budgeting, except that it:
*Source: Retired ICMA CMA Exam Questions.
may result in a budget that is not possible to achieve.
reduces the communication between employees and management.
Your Answer
may limit the acceptance of proposed goals and objectives.
Correct
reduces the time required for budgeting.
Rationale
 may result in a budget that is not possible to achieve.
This answer is incorrect. A disadvantage of authoritative budgeting as opposed to participatory budgeting is that authoritative budgeting may
result in a budget that is not possible to achieve.
Rationale
 reduces the communication between employees and management.
This answer is incorrect. A disadvantage of authoritative budgeting as opposed to participatory budgeting is that authoritative budgeting reduces
the communication between employees and management.
Rationale
 may limit the acceptance of proposed goals and objectives.
This answer is incorrect. A disadvantage of authoritative budgeting as opposed to participatory budgeting is that authoritative budgeting may limit
the acceptance of proposed goals and objectives.
Rationale
 reduces the time required for budgeting.
In an authoritative budgeting process, there is a top-down approach to budgeting. Therefore, the divisional managers who are being affected by an
authoritative budgeting process do not necessarily have the ability to provide input and qualifications to the budget process. With this, an
authoritative approach to budgeting would have a much more reduced time to develop the budget as the input of those divisional and operational
employees are not included in the decision process.
Question 76
1.B.4.d
1B2-AT09
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
The budgeting technique that is most likely to motivate managers is:
top-down budgeting.
incremental budgeting.
Correct
bottom-up budgeting.
zero-base budgeting.
Rationale
 top-down budgeting.
This answer is incorrect. Top-down budgeting is not the budgeting technique that is most likely to motivate managers.
Rationale
 incremental budgeting.
This answer is incorrect. Incremental budgeting is not the budgeting technique that is most likely to motivate managers.
Rationale
 bottom-up budgeting.
Motivation is enhanced by having lower-level managers involved in the budgeting process. Bottom-up, participative budgeting promotes such
involvement.
Rationale
 zero-base budgeting.
This answer is incorrect. Zero-base budgeting is not the budgeting technique that is most likely to motivate managers.
Question 77
1.B.4.a
1B4-LS02
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following budgeting methods establishes a base cost budget for a particular level of output plus a marginal cost-volume amount that shows
the behavior of costs at various volumes?
Activity-based budgeting.
Correct
Flexible budgeting.
Kaizen budgeting.
Your Answer
Continuous budgeting.
Rationale
 Activity-based budgeting.
This answer is incorrect. Activity-based budgeting does not establish a base cost budget for a particular level of output plus a marginal cost-volume
amount that shows the behavior of costs at various volumes.
Rationale
 Flexible budgeting.
Flexible budgeting separates the costs that are fixed from the costs that are variable so that various output levels can be entered in the flexible
budget to see their overall effect on costs.
Rationale
 Kaizen budgeting.
This answer is incorrect. Kaizen budgeting does not establish a base cost budget for a particular level of output plus a marginal cost-volume
amount that shows the behavior of costs at various volumes.
Rationale
 Continuous budgeting.
This answer is incorrect. Continuous budgeting does not establish a base cost budget for a particular level of output plus a marginal cost-volume
amount that shows the behavior of costs at various volumes.
Question 78
1.B.4.a
frazp.bud.tb.071_0120
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
A budget that expresses the operating and financial plans of management for a fiscal year is called a:
*Source: Retired ICMA CMA Exam Questions.
flexible budget.
rolling budget.
Correct
master budget.
strategic budget.
Rationale
 flexible budget.
This answer is incorrect. A flexible budget establishes a base for a specific output level plus an incremental cost-volume amount that shows the
behavior of costs at various activity levels. It does not express the operating and financial plans of management for a fiscal year.
Rationale
 rolling budget.
This answer is incorrect. A rolling budget adds a new period to the budget at the end of each period so there are always the same number of future
periods budgeted for. It does not express the operating and financial plans of management for a fiscal year.
Rationale
 master budget.
A master budget is a comprehensive budget that expresses management’s operating and financial plans for one fiscal year.
Rationale
 strategic budget.
This answer is incorrect. A strategic budget expresses management’s plans for a period greater than one year.
Question 79
1.B.4.c
tb.frazp.bud.006_1805
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Kim is helping a not-for-profit organization plan their master budget. What information is Kim likely to ask for first?
Correct
The organization's expenditures
The organization's cash receipts
Your Answer
The organization's non-cash donations
The organization's revenues
Rationale
 The organization's expenditures
The master budget is a set of budgets that establish an organization's plans for a period of time. It consists of operating budgets (what an
organization plans to do) and financial budgets (where it expects to get needed financial resources from). The key item for a not-for-profit company
would be expected expenditures because expense control is a key factor and the level of expenditures is likely to drive many decisions at a not-forprofit. The importance of expenditures for a not-for-profit organization is analogous to the importance of the sales forecast for for-profit
organizations. Therefore, this is the correct answer.
Rationale
 The organization's cash receipts
Cash receipts are not likely what a not-for-profit company would base its master budget on. Not-for-profits tend to focus on providing services to
clients in a cost-effective manner. Although cash receipts are important, they are not the driving force of a not-for-profit's master budget.
Therefore, this is an incorrect answer.
Rationale
 The organization's non-cash donations
Non-cash donations are not likely what a not-for-profit company would base its master budget on because non-cash donations are likely smaller
than cash donations. Therefore, this is an incorrect answer.
Rationale
 The organization's revenues
Revenue is not likely what a not-for-profit company would base its master budget on because revenue is not likely to be a major source of funds for
a not-for-profit organization. Therefore, this is an incorrect answer.
Question 80
1.B.6.c
1C1-AT06
LOS: 1.B.6.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1.B.4.a
Comparing actual results with a budget based on achieved volume is possible with the use of a:
master budget.
monthly budget.
Your Answer
rolling budget.
Correct
flexible budget.
Rationale
 master budget.
This answer is incorrect. Comparing actual results with a budget based on achieved volume is not possible with a master budget alone.
Rationale
 monthly budget.
This answer is incorrect. Comparing actual results with a budget based on achieved volume is not possible with a monthly budget alone.
Rationale
 rolling budget.
This answer is incorrect. Comparing actual results with a budget based on achieved volume is not possible with a rolling budget alone.
Rationale
 flexible budget.
A flexible budget shows the expected revenue and costs for the levels of activity (output) over a relevant range. A flexible budget can be "flexed" or
adjusted to the actual level of activity for the period, so that actual results can be compared to budget expectations at the same level of output.
Question 81
1.B.4.c
tb.frazp.bud.030_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements concerning the preparation of a continuous (rolling) budget is correct?
Correct
A continuous (rolling) budget is initially prepared like any other budget.
Your Answer
Justifying all expenditures is needed to prepare a continuous (rolling) budget.
A continuous (rolling) budget is prepared after a period is over and actual activity is known.
A continuous (rolling) budget is prepared using information only for a single project.
Rationale
 A continuous (rolling) budget is initially prepared like any other budget.
Correct. A continuous or rolling budget system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment. It is initially prepared like any other budget.
Rationale
 Justifying all expenditures is needed to prepare a continuous (rolling) budget.
Incorrect. Justifying all expenditures is needed to prepare a zero-based budget, not a continuous (rolling) budget.
Rationale
 A continuous (rolling) budget is prepared after a period is over and actual activity is known.
Incorrect. A flexible budget is prepared after a period is over and actual activity is known, not a continuous (rolling) budget.
Rationale
 A continuous (rolling) budget is prepared using information only for a single project.
Incorrect. A project budget is prepared using information only for a single project, not a continuous (rolling) budget.
Question 82
1.B.4.g
tb.frazp.bud.013_1805
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Epoxy Auto Repair is expecting to produce 8,600 units in July and projects variable labor costs of $21,500. If production drops to 8,000 units in August,
what is the expected labor cost in August?
$21,500
$23,113
$20,900
Correct
$20,000
Rationale
 $21,500
If labor costs were fixed, then budgeted labor costs would be $21,500 in August. The labor costs in this example are variable, not fixed; therefore,
this is an incorrect answer.
Rationale
 $23,113
Based on the variable costs of $21,500 and the production of 8,600 units in July, labor costs are $2.50 per unit ($21,500 ÷ 8,600). Expected labor
costs would be $23,113 if 8,000 units is used to determine the variable cost per unit ($21,500 ÷ 8,000) and then this rate is multiplied by 8,600 hours
(8,600 × $2.6875). Therefore, this is an incorrect answer.
Rationale
 $20,900
Based on the variable costs of $21,500 and the production of 8,600 units in July, labor costs are $2.50 per unit ($21,500 ÷ 8,600). Expected labor
costs would be $20,900 if 8,360 units is multiplied by $2.50 per unit, not 8,000. Therefore, this is an incorrect answer.
Rationale
 $20,000
Variable costs change in direct proportion to changes in output. Based on the variable costs of $21,500 and the production of 8,600 units in July,
labor costs are $2.50 per unit ($21,500 ÷ 8,600). If production drops to 8,000 units in August, then labor costs are expected to be $20,000 in August
(8,000 × $2.50). Therefore, this is the correct answer.
Question 83
1.B.4.d
aq.frazp.bud.003_0720
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
What is a downside of using a rolling budget tool in the master budget plan?
The rolling budget tool breaks the budget process down into monthly processes rather than taking place as an annual process.
The rolling budget affects the way managers work and make decisions.
Your Answer
The rolling budget affects the relevancy of data and perspective used in the master budget.
Correct
The rolling budget requires commitment across the organization to be in continuous budgeting mode.
Rationale
 The rolling budget tool breaks the budget process down into monthly processes rather than taking place as an annual process.
This is actually a benefit. Once the master budget plan is established, the rolling budget tool breaks the budget process down into more
manageable monthly processes rather than a lengthier annual process.
Rationale
 The rolling budget affects the way managers work and make decisions.
This is actually a benefit. With the rolling budget, managers are effectively planning each month to look forward into the future. Managers who are
constantly viewing the long-run future of the organization will tend to be more strategic in their work and the decisions they make.
Rationale
 The rolling budget affects the relevancy of data and perspective used in the master budget.
This is actually a benefit. The rolling budget approach should improve the relevancy of data and perspective used in the master budget process as
current data, perspective, and experience are incorporated each month into the budget plan
Rationale
 The rolling budget requires commitment across the organization to be in continuous budgeting mode.
This is a downside. The obvious cost of using rolling budgets is the commitment across the organization to be in continuous budgeting mode.
Despite its benefits, the time and resources spent in the rolling budgeting effort still represent time and resources not being invested in day-to-day
operations. Hence, it's critical that the monthly budgeting process is designed to be as efficient as possible.
Question 84
1.B.4.c
tb.frazp.bud.023_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
The starting point for preparing a master budget is the:
Correct
Sales forecast.
Production forecast.
Your Answer
Cash expenditure forecast.
Cash collection forecast.
Rationale
 Sales forecast.
Correct. A master budget system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and
results in the preparation of pro forma financial information. The sales forecast is the starting point since it helps determine budgeted revenue and
budgeted production.
Rationale
 Production forecast.
Incorrect. The production forecast cannot be the starting point since the sales forecast is needed to prepare the production forecast.
Rationale
 Cash expenditure forecast.
Incorrect. The cash expenditure forecast cannot be the starting point since the production forecast is needed to determine the expected
expenditures on items such as direct materials and direct labor.
Rationale
 Cash collection forecast.
Incorrect. The cash collection forecast cannot be the starting point since the sales forecast is needed to prepare the cash collection forecast.
Question 85
1.B.4.c
tb.frazp.bud.031_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements concerning the preparation of a flexible budget is correct?
A flexible budget is prepared based on activities.
Justifying all expenditures is needed to prepare a flexible budget.
Correct
A flexible budget is prepared after a period is over and actual activity is known.
A flexible budget is prepared using information only for a single project.
Rationale
 A flexible budget is prepared based on activities.
Incorrect. An activity-based budget, not a flexible budget, is prepared based on activities.
Rationale
 Justifying all expenditures is needed to prepare a flexible budget.
Incorrect. Justifying all expenditures is needed to prepare a zero-based budget, not a flexible budget.
Rationale
 A flexible budget is prepared after a period is over and actual activity is known.
Correct. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in
advance what its actual activity level would be. Variable costs are adjusted based on changes in volume while fixed costs remain the same. It can
only be prepared after a period is over and actual activity is known.
Rationale
 A flexible budget is prepared using information only for a single project.
Incorrect. A project budget, not a flexible budget, is prepared using information only for a single project.
Question 86
1.B.4.e
tb.frazp.bud.046_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wants to develop a budget that is suitable to plan activities in an environment of rapid changes. Which budgeting system would be the most
appropriate system to use for this purpose?
Correct
A continuous or rolling budgeting system.
Your Answer
A master budgeting system.
An activity-based budgeting system.
A flexible budgeting system.
Rationale
 A continuous or rolling budgeting system.
Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment. Because a continuous or rolling budgeting system
results in up-to-date budgets, it is the most appropriate system to use for planning activities in an environment of rapid changes.
Rationale
 A master budgeting system.
Incorrect. While a master budget system is comprehensive, it is typically only prepared once a year. This means that it may not reflect current
operating conditions which makes it unsuitable to use for planning activities in an environment of rapid changes.
Rationale
 An activity-based budgeting system.
Incorrect. While an activity-based budgeting system can result in a more accurate estimate of costs, it is typically only prepared once a year, which
means that it may not reflect current operating conditions. In addition, it does not focus on revenues. These aspects make it unsuitable to use for
planning activities in an environment of rapid changes.
Rationale
 A flexible budgeting system.
Incorrect. Because a flexible budgeting system is prepared using budgeted assumptions after a period is over, it typically will not reflect current
operating conditions.
Question 87
1.B.4.e
aq.frazp.bud.004_0720
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Fashionable Purses (FP) is about to begin its annual budgeting process, but would like to make the process more informative. Specifically, FP is facing
product demand uncertainty. Management is forecasting that FP will sell around 30,000 purses; however, this amount could be 20% more or 30% less.
What tool or method should FP employ this year to make the budget process more informative?
A zero-based budget
Correct
A flexible budget
Your Answer
An activity-based budget
A continuous rolling budget
Rationale
 A zero-based budget
Zero-based budgeting demands that all budgeting choices are taken back to a “blank page” to be fully evaluated and, if approved, put into the
master budget plan. While this process could be informative to FP management, they will not receive the “what if” information they are seeking in
this situation.
Rationale
 A flexible budget
Flexible budgets are used to examine possible future (“what if”) scenarios in sales volume. A flexible budget would provide the information that FP
management is seeking in this situation.
Rationale
 An activity-based budget
Activity-based budgeting focuses on identifying and using core activities throughout the organization to establish activity cost rates to assign costs
to products, customers, and other business targets based on actual consumption relationships. While this process will be informative to
management, it will not provide the (“what if”) information they are seeking in this situation.
Rationale
 A continuous rolling budget
Rolling budgets are particularly helpful to organizations that want to avoid an annual master budget planning event that can consume a large block
of management time. While it's true that FP management does plan the budget annually; in this situation, they are not worried about saving time.
They are worried about making the budgeting process more informative.
Question 88
1.B.4.e
1B4-LS13
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A manager for a firm has been given a goal of maintaining production levels while reducing costs by 10%. The manager decides to move the main plant
overseas to a cheaper labor market, even though the manager understands that product quality may suffer. Which of the following budget types is most
likely to have encouraged this behavior?
Continuous budgeting.
Correct
Kaizen budgeting.
Your Answer
Flexible budgeting.
Activity-based budgeting.
Rationale
 Continuous budgeting.
This answer is incorrect. Continuous budgeting is less likely to encourage a manager to reduce costs at the risk of hurting quality.
Rationale
 Kaizen budgeting.
A potential drawback of a kaizen budget is that managers may lower quality levels or move practices to cheaper labor markets in order to meet the
goals set by a system that stresses continuous improvement.
Rationale
 Flexible budgeting.
This answer is incorrect. Flexible budgeting is less likely to encourage a manager to reduce costs at the risk of hurting quality.
Rationale
 Activity-based budgeting.
This answer is incorrect. Activity-based budgeting is less likely to encourage a manager to reduce costs at the risk of hurting quality.
Question 89
1.B.4.d
tb.frazp.bud.035_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a benefit of using a zero-based budgeting system?
Correct
A zero-based budgeting system is designed to eliminate wasteful spending.
A zero-based budgeting system is designed to develop a comprehensive budget that aligns an organization's operations with its strategy.
Your Answer
A zero-based budgeting system uses nonvolume cost drivers to more accurately estimate costs than other budgeting systems.
A zero-based budgeting system is used to facilitate variance analysis.
Rationale
 A zero-based budgeting system is designed to eliminate wasteful spending.
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. Managers review
each area to justify continued spending rather than adjust historical spending for the upcoming period. This review is designed to eliminate
wasteful spending.
Rationale
 A zero-based budgeting system is designed to develop a comprehensive budget that aligns an organization's operations with its
strategy.
Incorrect. A master budgeting system, not a zero-based budgeting system, is designed to develop a comprehensive budget that aligns an
organization's operations with its strategy.
Rationale
 A zero-based budgeting system uses nonvolume cost drivers to more accurately estimate costs than other budgeting systems.
Incorrect. An activity-based budgeting system, not a zero-based budgeting system, uses nonvolume cost drivers to more accurately estimate costs.
Rationale
 A zero-based budgeting system is used to facilitate variance analysis.
Incorrect. A flexible budgeting system, not a zero-based budgeting system, is used to facilitate variance analysis.
Question 90
1.B.4.d
tb.frazp.bud.039_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a disadvantage of using a project budgeting system?
The annual review needed to implement a project budgeting system can be very time consuming and expensive.
Managers need to spend time every month to use a project budgeting system.
Correct
If a project uses resources that are used in other areas of the organization, a project budgeting system may not give an accurate estimate of its costs.
A project budgeting system is quite expensive to design, implement, and maintain.
Rationale
 The annual review needed to implement a project budgeting system can be very time consuming and expensive.
Incorrect. A time-consuming and expensive annual review process is needed to implement a zero-based budgeting system, not a project budgeting
system.
Rationale
 Managers need to spend time every month to use a project budgeting system.
Incorrect. Managers need to spend time every month to use a continuous (rolling) budgeting system, not a project budgeting system.
Rationale
 If a project uses resources that are used in other areas of the organization, a project budgeting system may not give an accurate
estimate of its costs.
Correct. A project budgeting system is a budgeting system used when a project is completely separate from other components of a company's
operations or is the only component of the company. Because it only focuses on a single project, it allows the company to separately identify the
benefits and costs related to an individual project. This is accurate when project resources are fully dedicated to the project. If the project uses
resources that are also used in other areas of the organization, a project budgeting system may not give an accurate estimate of its costs.
Rationale
 A project budgeting system is quite expensive to design, implement, and maintain.
Incorrect. An activity-based budgeting system, not a project budgeting system, is quite expensive to design, implement, and maintain.
Question 91
1.B.4.a
cma11.p1.t1.me.0035_0820
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
What is the primary difference between a static budget and a flexible budget?
A static budget contains only fixed costs, while a flexible budget contains only variable costs.
Correct
The static budget is prepared for a single level of activity, while a flexible budget is adjusted for different activity levels.
Your Answer
The static budget is constructed using input from only upper-level management, while a flexible budget obtains input from all levels of management.
The static budget is prepared only for units produced, while a flexible budget reflects the number of units sold.
Rationale
 A static budget contains only fixed costs, while a flexible budget contains only variable costs.
This answer is incorrect. Flexible budgets contain both fixed and variable costs, but variable costs are adjusted for different activity levels.
Rationale
 The static budget is prepared for a single level of activity, while a flexible budget is adjusted for different activity levels.
The flexible budget shows estimated revenues, costs, and income for various different activity levels, including actual activity.
Rationale
 The static budget is constructed using input from only upper-level management, while a flexible budget obtains input from all levels of
management.
This answer is incorrect. The levels of management input do not define the difference between the static and the flexible budget.
Rationale
 The static budget is prepared only for units produced, while a flexible budget reflects the number of units sold.
This answer is incorrect. Units sold versus produced do not define the difference between the static and the flexible budget.
Question 92
1.B.4.e
tb.frazp.bud.051_1809
LOS: 1.B.4.e
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
A company wants to develop a budget that will focus on factors directly related to building a new warehouse building and not on any corporate
administrative costs or activities. Which budgeting system would be the most appropriate system to use for this purpose?
A continuous or rolling budgeting system.
Correct
A project budgeting system.
An activity-based budgeting system.
A zero-based budgeting system.
Rationale
 A continuous or rolling budgeting system.
Incorrect. A continuous or rolling budgeting system focuses on activities throughout an entire organization, including corporate administrative
costs and activities.
Rationale
 A project budgeting system.
Correct. A project budgeting system is used when the goal is to only focus on factors directly related to a specific project such as building a new
warehouse building. It does not take corporate administrative costs or activities into consideration.
Rationale
 An activity-based budgeting system.
Incorrect. An activity-based budgeting system focuses on activities throughout an organization, including corporate administrative costs and
activities.
Rationale
 A zero-based budgeting system.
Incorrect. A zero-based budgeting system focuses on activities throughout an organization, including corporate administrative costs and activities.
Question 93
1.B.4.d
1B2-LS33
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Which one of the following is an attribute of a participative approach to budgeting:
Correct
expertise leads to informed budget decisions.
budgets are dictated with little to no opportunity for response.
better control over decisions.
Your Answer
incorporation of strategic goals in budgets.
Rationale
 expertise leads to informed budget decisions.
In a participative budget (bottom-up or self-imposed budget), managers at all levels and certain key employees cooperate to set budgets for their
areas, and top management usually retains final approval.
Rationale
 budgets are dictated with little to no opportunity for response.
This answer is incorrect. Under participative budgeting, budgets are not dictated with little to no opportunity for response.
Rationale
 better control over decisions.
This answer is incorrect. Under participative budgeting, there is not better control over decisions.
Rationale
 incorporation of strategic goals in budgets.
This answer is incorrect. Under participative budgeting, strategic goals are not necessarily incorporated into budgets.
Question 94
1.B.4.d
tb.frazp.bud.043_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a disadvantage of using a flexible budgeting system?
A flexible budgeting system is quite expensive to design, implement, and maintain.
Your Answer
If a project uses resources that are used in other areas of the organization, a flexible budgeting system may not give an accurate estimate of its costs.
A flexible budgeting system is based on a set of assumptions that may not come true.
Correct
A flexible budgeting system is only useful for control purposes, not planning purposes.
Rationale
 A flexible budgeting system is quite expensive to design, implement, and maintain.
Incorrect. An activity-based budgeting system, not a flexible budgeting system, is quite expensive to design, implement, and maintain.
Rationale
 If a project uses resources that are used in other areas of the organization, a flexible budgeting system may not give an accurate
estimate of its costs.
Incorrect. If a project uses resources that are also used in other areas of the organization, a project budgeting system, not a flexible budgeting
system, may not give an accurate estimate of its costs.
Rationale
 A flexible budgeting system is based on a set of assumptions that may not come true.
Incorrect. A master budgeting system, not a flexible budgeting system, is based on a set of assumptions that may not come true. If the assumptions
that it is based on do not come true (for example, sales are less than expected), then many of the spending amounts in the budget will not be valid.
Rationale
 A flexible budgeting system is only useful for control purposes, not planning purposes.
Correct. A flexible budget system is a budgeting system used to show the budget that would have been prepared if the organization knew in
advance what its actual sales would be. This helps facilitate variance analysis as the actual amount spent on a resource can be compared to the
flexible budget amount that represents the amount that “should have” been spent on the resource for the actual amount of volume. However, a
flexible budgeting system is only useful for control purposes and not for planning purposes. This is because a flexible budget is not prepared until a
period is over.
Question 95
1.B.4.c
tb.frazp.bud.029_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 4
All of the following questions are likely to be asked in the preparation of a zero-based budget except:
Does this activity need to be performed?
What happens if the activity is not performed?
Your Answer
What benefits do we expect to get from performing this activity?
Correct
How much did we spend on this activity last year?
Rationale
 Does this activity need to be performed?
Incorrect. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. To justify spending
on an activity it would be helpful to ask whether it needs to be performed.
Rationale
 What happens if the activity is not performed?
Incorrect. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. To justify spending
on an activity it would be helpful to ask what happens if it is not performed.
Rationale
 What benefits do we expect to get from performing this activity?
Incorrect. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. To justify spending
on an activity it would be helpful to ask about the expected benefits from continuing to perform the activity.
Rationale
 How much did we spend on this activity last year?
Correct. A zero-based budgeting system is a budgeting system that focuses on constant cost justification of every budget item. Managers review
each area to justify continued spending rather than adjust historical spending for the upcoming period.
Question 96
1.B.4.a
1B4-AT05
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 1
A method of budgeting where the cost of each program must be justified, starting with the one most vital to the company is:
Correct
zero-based budgeting (ZBB).
Your Answer
continuous budgeting.
flexible budgeting.
incremental budgeting.
Rationale
 zero-based budgeting (ZBB).
ZBB requires that the cost of each item or program in the budget be re-justified with each new budget. ZBB ranks items and programs by how vital
they are to the company. The base for each budget line item or program is zero.
Rationale
 continuous budgeting.
This answer is incorrect. Continuous budgeting is not a method of budgeting where the cost of each program must be justified.
Rationale
 flexible budgeting.
This answer is incorrect. Flexible budgeting is not a method of budgeting where the cost of each program must be justified.
Rationale
 incremental budgeting.
This answer is incorrect. Incremental budgeting is not a method of budgeting where the cost of each program must be justified.
Question 97
1.B.4.d
tb.frazp.bud.036_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a benefit of using a continuous (rolling) budgeting system?
Correct
A continuous (rolling) budgeting system results in budgets that are up-to-date and that reflect current conditions.
A continuous (rolling) budgeting system helps separately identify the benefits and costs related to an individual project.
Your Answer
A continuous (rolling) budgeting system is designed to eliminate wasteful spending.
A continuous (rolling) budgeting system is used to facilitate variance analysis.
Rationale
 A continuous (rolling) budgeting system results in budgets that are up-to-date and that reflect current conditions.
Correct. A continuous or rolling budgeting system is a budgeting system where a new period is added to the budget each period so there are always
several periods budgeted out and the budget stays up-to-date with the operating environment. This results in budgets that are up-to-date and that
reflect current conditions.
Rationale
 A continuous (rolling) budgeting system helps separately identify the benefits and costs related to an individual project.
Incorrect. A project budgeting system, not a continuous (rolling) budgeting system, helps separately identify the benefits and costs related to an
individual project.
Rationale
 A continuous (rolling) budgeting system is designed to eliminate wasteful spending.
Incorrect. A zero-based budgeting system, not a continuous (rolling) budgeting system, is designed to eliminate wasteful spending.
Rationale
 A continuous (rolling) budgeting system is used to facilitate variance analysis.
Incorrect. A flexible budgeting system, not a continuous (rolling) budgeting system, is used to facilitate variance analysis.
Question 98
1.B.4.b
tb.frazp.bud.003_1805
LOS: 1.B.4.b
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
Jessica has helped develop the sales budget, the production budget, the cash budget, and several other budgets. Jessica is working on developing the
________ budget.
operating
Correct
master
Your Answer
financial
administrative
Rationale
 operating
Operating budgets include the sales and production budgets; however, the cash budget is a type of financial budget, not operating budget.
Therefore, this is an incorrect answer.
Rationale
 master
The master budget is a set of budgets that establish an organization's plans for a period of time. It consists of operating budgets (what an
organization plans to do) and financial budgets (where it expects to get needed financial resources from). Operating budgets include the sales
budget and production budget, while the cash budget is a type of financial budget. Therefore, this is the correct answer.
Rationale
 financial
The cash budget is a type of financial budget; however, the sales budget and production budget are types of operating budgets, not financial
budgets. Therefore, this is an incorrect answer.
Rationale
 administrative
The administrative budget is a type of operating budget; however, neither the sales budget, the production budget, nor the cash budget are part of
the administrative budget. Therefore, this is an incorrect answer.
Question 99
1.B.4.g
aq.frazp.bud.007_0720
LOS: 1.B.4.g
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: hard
Bloom Code: 5
Concept Cars Manufacturing (CCM) is in the process of building a flexible budget to plan for and control key overhead costs in the organization. After
concluding an analysis of overhead costs in the company, CCM established the following cost formulas for variable costs per machine hour and monthly
fixed costs.
Cost per Month
Formula
Plant utilities
$12(MH) + $6,000
Equipment maintenance $8(MH) + $12,000
Equipment depreciation $53(MH)
Rent on production plant $31,000
The normal production budget is based on 2,135 machine hours for the month. Actual production volume (in machine hours) could be 15% lower or 20%
higher. Build a flexible budget to calculate total manufacturing overhead costs for normal production volume, 15% lower volume, and 20% higher
volume, respectively.
Correct
$204,855 for normal production level. $181,495 for production 15% lower. $236,026 for production 20% higher.
Your Answer
$155,855 for normal production level. $132,495 for production 15% lower. $187,026 for production 20% higher.
$204,855 for normal production level. $174,145 for production 15% lower. $245,826 for production 20% higher.
$204,855 for normal production level.% 204,855 for production 15% lower.% 204,855 for production 20% higher.
Rationale
 $204,855 for normal production level. $181,495 for production 15% lower. $236,026 for production 20% higher.
This answer represents the total manufacturing overhead costs for normal production volume, 15% lower volume, and 20% higher volume,
respectively
Manufacturing Overhead Flexible Budget
Machine Hours
Normal
−15%
+20%
2,135
1,815
2,562
Variable Costs:
Utilities
$ 25,620 $ 21,780 $ 30,744
Maintenance
17,080
Depreciation
113,155
Total Variable Costs
14,520
20,496
96,195 135,786
$155,855 $132,495 $187,026
Fixed Costs:
Utilities
$ 6,000 $ 6,000 $ 6,000
Maintenance
12,000
12,000
12,000
Rent
31,000
31,000
31,000
Total Fixed Costs
$ 49,000 $ 49,000 $ 49,000
Total Manufacturing Overhead $204,855 $181,495 $236,026
Rationale
 $155,855 for normal production level. $132,495 for production 15% lower. $187,026 for production 20% higher.
This answer represents only the total variable manufacturing costs.
Rationale
 $204,855 for normal production level. $174,145 for production 15% lower. $245,826 for production 20% higher.
This answer adjusted total fixed costs down 15% and up 20% in the second and third scenarios to calculate the amount of total fixed costs to
include in total manufacturing overhead.
Rationale
 $204,855 for normal production level.% 204,855 for production 15% lower.% 204,855 for production 20% higher.
While it is true that total fixed costs remain constant, variable costs will change based on the production level.
Question 100
1.B.4.f
tb.frazp.bud.062_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
The Benny Company is planning to start a project to expand into a new geographic region. It estimates that in 20x8 revenues from the project will be
$10,000,000, variable costs will be $6,000,000, direct fixed costs will be $1,500,000, and a charge for corporate administrative costs will be $500,000. If
Benny uses a project budgeting system, what will be the income included in that budget?
$3,500,000
Your Answer
$4,000,000
$2,000,000
Correct
$2,500,000
Rationale
 $3,500,000
Incorrect. Budgeted income would equal $3,500,000 if the variable costs and the corporate administrative costs are subtracted from revenue while
the direct fixed costs are not subtracted ($10,000,000 − $6,000,000 − $500,000). This is not the correct calculation because some costs that are
directly related to the project are not subtracted and other costs that are not directly related are subtracted.
Rationale
 $4,000,000
Incorrect. Subtracting only the variable costs results in income of $4,000,000 ($10,000,000 − $6,000,000). This is not the correct calculation because
other costs that are directly related to the project should also be subtracted to determine the income using a project budgeting system.
Rationale
 $2,000,000
Incorrect. Subtracting the variable costs, direct fixed costs, and corporate administrative costs from revenue results in income of $2,000,000
($10,000,000 − $6,000,000 − $1,500,000 − $500,000). This is not the correct calculation because some of the costs are not directly related to the
project so they should not be included when calculating income using a project budgeting system.
Rationale
 $2,500,000
Correct. A project budgeting system is a budgeting system used when the goal is to focus only on factors directly related to a specific project such as
expanding into a new geographic region. It does not take corporate administrative costs or activities into consideration. Subtracting the variable
costs and direct fixed costs from revenue while not subtracting the charge for corporate administrative costs results in income of $2,500,000
($10,000,000 − $6,000,000 − $1,500,000).
Question 101
1.B.4.f
tb.frazp.bud.064_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Sophia Company is planning to start a project to build a new distribution center. To build the center, Sophia Company estimates that in 20x8 labor costs
will be $4,000,000, material costs will be $3,000,000, legal costs will be $1,000,000, architectural/engineering costs will be $3,500,000, and a charge for
corporate administrative costs will be $1,200,000. If Sophia uses the project budgeting system, what will be the total costs included in that budget?
Your Answer
$7,000,000
$4,500,000
$12,700,000
Correct
$11,500,000
Rationale
 $7,000,000
Incorrect. Including only the labor and material costs in the project budget results in total costs of $7,000,000 ($4,000,000 + $3,000,000). This is not
the correct calculation because all costs directly related to building the new distribution center are not included.
Rationale
 $4,500,000
Incorrect. Including only the legal costs and architectural/engineering costs in the project budget results in total costs of $4,500,000 ($1,000,000 +
$3,500,000). This is not the correct calculation because all costs directly related to building the new distribution center are not included.
Rationale
 $12,700,000
Incorrect. Including all the costs in the project budget results in total costs of $12,700,000 ($4,000,000 + $3,000,000 + $1,000,000 + $3,500,000 +
$1,200,000). This is not the correct calculation because costs that are not directly related to building the new distribution center should not be
included.
Rationale
 $11,500,000
Correct. A project budgeting system is a budgeting system used when the goal is to only focus on factors directly related to a specific project such as
building a new distribution center. It does not take corporate administrative costs or activities into consideration. All the costs given except for the
corporate administrative costs of $1,200,000 should be included in the project budget. They add up to $11,500,000 ($4,000,000 + $3,000,000 +
$1,000,000 + $3,500,000).
Question 102
1.B.4.a
aq.frazp.bud.001_0720
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
What type of budgeting is used to establish and maintain a constant number of operating periods moving forward in the master budget?
Flexible budgets
Correct
Continuous rolling budgets
Your Answer
Zero-based budgets
Activity-based budgets
Rationale
 Flexible budgets
Flexible budgets are used to examine possible future scenarios in sales volume and are crucial for computing variances to evaluate past operating
results based on relevant costs. Flexible budgets use a contribution margin statement approach, separating variable costs and fixed costs, which is
helpful to organizations working to control cost and evaluate cost performance.
Rationale
 Continuous rolling budgets
A continuous rolling budget is used to establish and maintain a constant number of operating periods moving forward in the master budget (e.g.,
six months of weekly budgets, followed by a half-year of monthly budgets, followed by a second year of quarterly budgets, and an annual budget in
the third year). As each month of operations concludes, the budget rolls forward.
Rationale
 Zero-based budgets
Zero-based budgeting methods demand that all budgeting choices are taken back to a “blank page” to be fully evaluated and, if approved, put into
the master budget plan. Nothing is assumed to carry forward to the next year's budget. Projects are prioritized and allocated resources based on
their alignment with the organization's strategy.
Rationale
 Activity-based budgets
Activity-based budgeting is a detailed budget methodology that focuses on identifying and using core activities throughout the organization to
establish activity cost rates to assign costs to products, customers, and other business targets based on actual consumption relationships.
Question 103
1.B.4.a
1B4-AT04
LOS: 1.B.4.a
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
A continuous (rolling) budget:
presents the plan for only one level of activity and does not adjust to changes in the level of activity.
Correct
is a plan that is revised monthly or quarterly, dropping one period and adding another.
Your Answer
is one of the budgets that is part of a long-range strategic plan, unchanged unless the strategy of the company changes.
presents the plan for a range of activity so the plan can be adjusted for changes in activity.
Rationale
 presents the plan for only one level of activity and does not adjust to changes in the level of activity.
This answer is incorrect. A continuous (rolling) budget does not present the plan for only one level of activity and does not adjust to changes in the
level of activity.
Rationale
 is a plan that is revised monthly or quarterly, dropping one period and adding another.
A continuous or rolling budget is one that is revised regularly by dropping the current period and adding another. The budget period could be a
week, month, quarter, or year.
Rationale
 is one of the budgets that is part of a long-range strategic plan, unchanged unless the strategy of the company changes.
This answer is incorrect. A continuous (rolling) budget is not one of the budgets that is part of a long-range strategic plan, unchanged unless the
strategy of the company changes.
Rationale
 presents the plan for a range of activity so the plan can be adjusted for changes in activity.
This answer is incorrect. A continuous (rolling) budget does not present the plan for a range of activity so the plan can be adjusted for changes in
activity.
Question 104
1.B.4.c
1B4-LS04
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
Which of the following is true of activity-based budgeting (ABB)?
ABB uses only activity-based cost drivers; fixed and variable costs are kept in separate cost pools.
ABB uses both volume-based and activity-based cost drivers; fixed and variable costs are grouped together in cost pools.
Correct
ABB uses both volume-based and activity-based cost drivers; fixed and variable costs are kept in separate cost pools.
ABB uses only activity-based cost drivers; fixed and variable costs are grouped together in cost pools.
Rationale
 ABB uses only activity-based cost drivers; fixed and variable costs are kept in separate cost pools.
This answer is incorrect. ABB does not use only activity-based cost drivers. However, it is true that fixed and variable costs are kept in separate cost
pools.
Rationale
 ABB uses both volume-based and activity-based cost drivers; fixed and variable costs are grouped together in cost pools.
This answer is incorrect. It is true that ABB uses both volume-based and activity-based cost drivers. However, fixed and variable costs are not
grouped together in cost pools.
Rationale
 ABB uses both volume-based and activity-based cost drivers; fixed and variable costs are kept in separate cost pools.
ABB adds activity-based cost drivers to the traditional volume-based cost drivers but doesn't remove any options. ABB also separates similar acting
costs such as fixed and variable costs into their own cost pools.
Rationale
 ABB uses only activity-based cost drivers; fixed and variable costs are grouped together in cost pools.
This answer is incorrect. ABB does not use only activity-based cost drivers. Additionally, fixed and variable costs are not grouped together in cost
pools.
Question 105
1.B.4.d
tb.frazp.bud.038_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a disadvantage of using a master budgeting system?
Your Answer
The annual review needed to implement a master budgeting system can be very time consuming and expensive.
Managers need to spend time every month to use a master budgeting system.
A master budgeting system is quite expensive to design, implement, and maintain.
Correct
A master budgeting system is based on a set of assumptions that may not come true.
Rationale
 The annual review needed to implement a master budgeting system can be very time consuming and expensive.
Incorrect. A time-consuming and expensive annual review process is needed to implement a zero-based budgeting system, not a master budgeting
system.
Rationale
 Managers need to spend time every month to use a master budgeting system.
Incorrect. Managers need to spend time every month to use a continuous (rolling) budgeting system, not a master budgeting system.
Rationale
 A master budgeting system is quite expensive to design, implement, and maintain.
Incorrect. An activity-based budgeting system, not a master budgeting system, is quite expensive to design, implement, and maintain.
Rationale
 A master budgeting system is based on a set of assumptions that may not come true.
Correct. A master budgeting system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and
results in the preparation of pro forma financial information. The comprehensive nature of the master budgeting system helps ensure alignment
between an organization's operations and strategy. If the assumptions that it is based on do not come true (for example, sales are less than
expected), then many of the spending amounts in the budget will not be valid.
Question 106
1.B.4.f
tb.frazp.bud.063_1809
LOS: 1.B.4.f
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 3
Connor Company is planning to start a project to build a new warehouse. To build the warehouse, Connor Company estimates that in 20x8 labor costs
will be $1,000,000, material costs will be $300,000, legal costs will be $400,000, architectural/engineering costs will be $800,000, and a charge for
corporate administrative costs will be $200,000. If Connor uses the project budgeting system, what will be the total costs included in that budget?
$1,300,000
Your Answer
$1,200,000
$2,700,000
Correct
$2,500,000
Rationale
 $1,300,000
Incorrect. Including only the labor and material costs in the project budget results in total costs of $1,300,000 ($1,000,000 + $300,000). This is not the
correct calculation because all costs directly related to building the new warehouse are not included.
Rationale
 $1,200,000
Incorrect. Including only the legal costs and architectural/engineering costs in the project budget results in total costs of $1,200,000 ($400,000 +
$800,000). This is not the correct calculation because all costs directly related to building the new warehouse are not included.
Rationale
 $2,700,000
Incorrect. Including all the costs in the project budget results in total costs of $2,700,000 ($1,000,000 + $300,000 + $400,000 + $800,000 + $200,000).
This is not the correct calculation because costs that are not directly related to building the new warehouse should not be included.
Rationale
 $2,500,000
Correct. A project budgeting system is a budgeting system used when the goal is to only focus on factors directly related to a specific project such as
building a new warehouse. It does not take corporate administrative costs or activities into consideration. All the costs given except for the
corporate administrative costs of $200,000 should be included in the project budget. They add up to $2,500,000 ($1,000,000 + $300,000 + $400,000 +
$800,000).
Question 107
1.B.4.c
tb.frazp.bud.025_1809
LOS: 1.B.4.c
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
All of the following numbers are needed to prepare an activity-based budget except:
Estimated cost of each activity.
Your Answer
Estimated total usage for each activity.
The amount of each activity expected to be used by each product or service.
Correct
Actual usage of each activity for the previous year.
Rationale
 Estimated cost of each activity.
Incorrect. The estimated cost of each activity is needed to prepare the expected activity cost rate.
Rationale
 Estimated total usage for each activity.
Incorrect. The estimated total usage for each activity is needed to prepare the expected activity cost rate.
Rationale
 The amount of each activity expected to be used by each product or service.
Incorrect. The amount of each activity expected to be used by each product or service is needed to estimate the activity cost for each product or
service.
Rationale
 Actual usage of each activity for the previous year.
Correct. The actual usage of each activity for the previous year is not needed to prepare an activity-based budget as that information pertains to the
previous year, not the upcoming year.
Question 108
1.B.4.d
1C1-AT09
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: easy
Bloom Code: 2
Which one of the following statements regarding the difference between a flexible budget and a static budget is correct?
Correct
A flexible budget provides cost allowances for different levels of activity whereas a static budget provides costs for one level of activity.
A flexible budget primarily is prepared for planning purposes while a static budget is prepared for performance evaluation.
Your Answer
A flexible budget includes only variable costs whereas a static budget includes only fixed costs.
A flexible budget is established by operating management while a static budget is determined by top management.
Rationale
 A flexible budget provides cost allowances for different levels of activity whereas a static budget provides costs for one level of activity.
Static budgets are established for one level of activity only. Flexible budgets can be "flexed" or adjusted as the output level changes, in order to
reflect actual output levels.
Rationale
 A flexible budget primarily is prepared for planning purposes while a static budget is prepared for performance evaluation.
This answer is incorrect. A flexible budget is not primarily prepared for planning purposes. Additionally, a static budget is not prepared for
performance evaluation.
Rationale
 A flexible budget includes only variable costs whereas a static budget includes only fixed costs.
This answer is incorrect. A flexible budget does not include only variable costs. Additionally, a static budget does not include only fixed costs.
Rationale
 A flexible budget is established by operating management while a static budget is determined by top management.
This answer is incorrect. A flexible budget is not established by only operating management. Additionally, a static budget is not necessarily
determined only by top management.
Question 109
1.B.4.d
tb.frazp.bud.032_1809
LOS: 1.B.4.d
Lesson Reference: Comparing Flexible, Rolling, Activity-Based, Zero-Based, and Project Budgeting
Difficulty: medium
Bloom Code: 2
Which of the following statements correctly describes a benefit of using a master budgeting system?
A master budgeting system is designed to eliminate wasteful spending.
A master budgeting system results in budgets that are up-to-date and that reflect current conditions.
Your Answer
A master budgeting system uses nonvolume cost drivers to more accurately estimate costs than other budgeting systems.
Correct
A master budgeting system is designed to develop a comprehensive budget that aligns an organization's operations with its strategy.
Rationale
 A master budgeting system is designed to eliminate wasteful spending.
Incorrect. A zero-based budgeting system, not a master budgeting system, is designed to eliminate wasteful spending.
Rationale
 A master budgeting system results in budgets that are up-to-date and that reflect current conditions.
Incorrect. A continuous (rolling) budgeting system, not a master budgeting system, results in budgets that are up-to-date and that reflect current
conditions.
Rationale
 A master budgeting system uses nonvolume cost drivers to more accurately estimate costs than other budgeting systems.
Incorrect. An activity-based budgeting system, not a master budgeting system, uses nonvolume cost drivers to more accurately estimate costs.
Rationale
 A master budgeting system is designed to develop a comprehensive budget that aligns an organization's operations with its strategy.
Correct. A master budgeting system is a comprehensive budgeting system that shows every aspect of an organization's revenue and cost flows and
results in the preparation of pro forma financial information. The comprehensive nature of the master budgeting system helps ensure alignment
between an organization's operations and strategy.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.5.a
1B5-LS16
LOS: 1.B.5.a
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 2
Which of the following is the element that if inaccurate will throw off all of the other master budget elements?
Capital budget.
Correct
Sales forecast.
Your Answer
Production forecast.
Cash budget.
Rationale
 Capital budget.
This answer is incorrect. If the capital budget is incorrect, not all of the other master budget elements will be thrown off.
Rationale
 Sales forecast.
Without an accurate sales forecast, all other budget elements will be inaccurate because production levels, purchases, etc., are set to match
expected sales.
Rationale
 Production forecast.
This answer is incorrect. If the production budget is incorrect, not all of the other master budget elements will be thrown off.
Rationale
 Cash budget.
This answer is incorrect. If the cash budget is incorrect, not all of the other master budget elements will be thrown off.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.5.f
tb.sp.bud.023_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
The Crawford Company has 3,000 units in beginning finished goods. The sales budget shows expected sales to be 12,000 units. If the production budget
shows that 14,000 units are required for production, what was the desired ending finished goods?
1,000
3,000
Your Answer
23,000
Correct
5,000
Rationale
 1,000
Units to be produced is calculated as “Expected Sales + Target Ending Inventory − Beginning Inventory.” Rearranging the formula results in
Targeted Ending Inventory calculated as “Production + Beginning Inventory − Expected Sales.” In this example targeted ending inventory would be
1,000 units if production is subtracted and expected sales are added (−14,000 + 3,000 + 12,000). That does not correctly apply the formula;
therefore, this is an incorrect answer.
Rationale
 3,000
Units to be produced is calculated as “Expected Sales + Target Ending Inventory − Beginning Inventory.” Rearranging the formula results in
Targeted Ending Inventory calculated as “Production + Beginning Inventory − Expected Sales.” In this example 3,000 is the beginning finished
goods inventory, not desired ending finished goods inventory. Therefore, this is an incorrect answer.
Rationale
 23,000
Units to be produced is calculated as “Expected Sales + Target Ending Inventory − Beginning Inventory.” Rearranging the formula results in
Targeted Ending Inventory calculated as “Production + Beginning Inventory − Expected Sales.” In this example targeted ending inventory would be
23,000 units if beginning inventory is subtracted and expected sales are added (14,000 − 3,000 + 12,000). However, that is not the correct formula.
Therefore, this is an incorrect answer.
Rationale
 5,000
Units to be produced is calculated as “Expected Sales + Target Ending Inventory − Beginning Inventory.” Rearranging the formula results in
Targeted Ending Inventory calculated as “Production + Beginning Inventory − Expected Sales.” In this example targeted ending inventory is 5,000
units (14,000 + 3,000 − 12,000). Therefore, this is the correct answer.
Question 3
1.B.5.e
tb.sp.bud.032_1809
LOS: 1.B.5.e
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Which of the following statements correctly describes the impact of finished goods inventory on the production budget?
Beginning finished goods inventory increases budgeted production while desired ending inventory of finished goods decreases budgeted production.
Your Answer
Beginning finished goods inventory and desired ending inventory of finished goods both increase budgeted production.
Finished goods inventory levels do not impact the production budget.
Correct
Beginning finished goods inventory decreases budgeted production while desired ending inventory of finished goods increases budgeted production.
Rationale
 Beginning finished goods inventory increases budgeted production while desired ending inventory of finished goods decreases
budgeted production.
Incorrect. The amount of beginning finished goods inventory decreases budgeted production, not increases it, as these units can be used to satisfy
finished goods needs. In addition, desired ending inventory of finished goods increases budgeted production, not decreases it, as this increases the
need for finished goods.
Rationale
 Beginning finished goods inventory and desired ending inventory of finished goods both increase budgeted production.
Incorrect. The desired ending inventory of finished goods increases budgeted production as this increases the need for finished goods. However,
the amount of beginning finished goods inventory decreases budgeted production, not increases it, as these units can be used to satisfy finished
goods needs.
Rationale
 Finished goods inventory levels do not impact the production budget.
Incorrect. The amount of beginning finished goods inventory decreases budgeted production as these units can be used to satisfy finished goods
needs. In addition, desired ending inventory of finished goods increases budgeted production as this increases the need for finished goods.
Rationale
 Beginning finished goods inventory decreases budgeted production while desired ending inventory of finished goods increases
budgeted production.
Correct. A production budget is an estimate of expected production for a period. It is based on expected unit sales, beginning finished goods
inventory, and desired ending inventory of finished goods. The amount of beginning finished goods inventory decreases budgeted production as
these units can be used to satisfy finished goods needs. In addition, desired ending inventory of finished goods increases budgeted production as
this increases the need for finished goods.
Question 4
1.B.5.c
tb.sp.bud.029_1809
LOS: 1.B.5.c
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 4
The Thomas Company has the following information for the second quarter. Based on this information, what is the sales budget for the second quarter?
April May June
Sales in units
10,000 11,000 12,000
Selling price per unit $15 $15.25 $15.50
Correct
$503,750
$495,000
$511,500
$503,250
Rationale
 $503,750
Correct. A sales budget is an estimate of expected sales revenue for a period. It is based on expected unit sales and expected selling prices.
Expected revenue is $150,000 in April (10,000 × $15), $167,750 in May (11,000 × 15.25), and $186,000 in June (12,000 × $15.50). These three add up to
$503,750.
Rationale
 $495,000
Incorrect. If the selling price of $15 is used for all three months, the expected revenue would be $495,000 (33,000 units × $15). However, the selling
price is different from $15 in May and June.
Rationale
 $511,500
Incorrect. If the selling price of $15.50 is used for all three months, the expected revenue would be $511,500 (33,000 units × $15.50). However, the
selling price is different from $15.50 in April and May.
Rationale
 $503,250
Incorrect. If the selling price of $15.25 is used for all three months, the expected revenue would be $511,500 (33,000 units × $15.25). However, the
selling price is different from $15.25 in April and June.
Question 5
1.B.5.f
tb.sp.bud.011_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Spartan Bicycles forecasts sales of 12,000 bikes for June and 14,000 bikes for July. Its inventory at the end of May stands at 3,000 bikes. If Spartan plans
to keep an inventory of 25% of July sales at the end of June, how many bikes should it manufacture for the month of June?
12,000
11,500
Your Answer
13,000
Correct
12,500
Rationale
 12,000
In this example the 12,000 units is only the amount needed to satisfy expected sales in June. It does not account for beginning and ending
inventory. Therefore, this is an incorrect answer.
Rationale
 11,500
The targeted ending inventory for June is 25% of expected July sales or 3,500 units (25% × 14,000). The ending inventory for May is the same as the
beginning inventory for June. In this example planned production for June would be 11,500 units if the beginning inventory is added and the ending
inventory is subtracted (12,000 − 3,500 + 3,000). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 13,000
The targeted ending inventory for June is 25% of expected July sales or 3,500 units (25% × 14,000). The ending inventory for May is the same as the
beginning inventory for June. In this example planned production for June would be 13,000 units if the average of expected sales for June and July
is the planned production for June. This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 12,500
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” In this example the targeted
ending inventory for June is 25% of expected July sales or 3,500 units (25% × 14,000). The ending inventory for May is the same as the beginning
inventory for June. Putting it all together yields planned production of 12,500 units (12,000 + 3,500 − 3,000) for June; therefore, this is the correct
answer.
Question 6
1.B.5.f
1B5-AT12
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 3
Daffy Tunes manufactures an animated rabbit with moving parts and a built-in voice box. Projected sales in units are:
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are purchased from another supplier at
$1.00 each. Assembly labor cost is $2.00 per rabbit and variable overhead cost is $0.50 per rabbit. Fixed manufacturing overhead applicable to rabbit
production is $12,000 per month.
Daffy's policy is to manufacture 1.5 times the coming month's projected sales every other month starting with January (i.e., odd-numbered months) for
February sales, and to manufacture 0.5 times the coming month's projected sales in alternate months (i.e., even-numbered months). This allows Daffy to
allocate limited manufacturing resources to other products as needed during the even-numbered months.
The unit production budget for animated rabbits for January is:
15,000 units.
18,000 units.
Your Answer
45,000 units.
Correct
54,000 units.
Rationale
 15,000 units.
This answer is incorrect. This answer was calculated by multiplying 30,000, January's projected sales in units, by 0.5. However, Daffy's policy is to
manufacture 1.5 times the coming month's projected sales every other month starting with January.
Additionally, to calculate unit production for January, February's projected sales in units must be used.
Rationale
 18,000 units.
This answer is incorrect. This answer was calculated by multiplying 36,000, February's projected sales in units, by 0.5. However, Daffy's policy is to
manufacture 1.5 times the coming month's projected sales every other month starting with January.
Rationale
 45,000 units.
This answer is incorrect. This answer was calculated by multiplying 30,000, January's projected sales in units, by 1.5. However, to calculate unit
production for January, 1.5 must be multiplied by February's projected sales in units.
Rationale
 54,000 units.
The production in odd numbered months is 1.5 times the projected sales for the following month. Therefore, the production budget for January is
1.5 times the projected sales for February or 1.5(36,000 units) = 54,000 units.
Question 7
1.B.5.c
aq.sp.bud.004_1802
LOS: 1.B.5.c
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Card & Co. (CC), a creator of popular card games such as “Tres” and “Go Hunt,” is preparing a quarterly sales budget. CC predicts sales of 40,000 games in
Q1, 45,000 in Q2, 45,000 in Q3, and 90,000 in Q4. CC plans to hold the price of each game constant at $5.00 for the whole year. Each game costs $3.00 to
produce. Using a quarterly sales budget, calculate sales revenue for the year.
$220,000
Your Answer
$440,000
$200,000
Correct
$1,100,000
Rationale
 $220,000
This answer represents the estimated total volume of games to be sold during the year. This number must be multiplied by price to find sales
revenue for the year.
Rationale
 $440,000
This answer represents the estimated gross profit for the year, not the sales revenue.
Rationale
 $200,000
This answer represents the estimated total sales revenue for Q1. However, CC wants to calculate sales revenue for the year.
Rationale
 $1,100,000
The following is CC's quarterly sales budget for the year:
Sales Volume
× Price
Revenue
Q1
Q2
Q3
Q4
Total
40,000
45,000
45,000
90,000
220,000
$5.00
$5.00
$5.00
$5.00
$5.00
$200,000 $225,000 $225,000 $450,000 $1,100,000
Question 8
1.B.5.e
1B5-CQ38
LOS: 1.B.5.e
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Consider the following information for Timbucktoo Kalamazoo Industries:
Additional information:
60% of a month's sales are collected by the month's end; the remaining 40% is collected in the following month.
40% of a month's purchases are paid by the month's end; the remaining 60% is paid in the following month.
The desired ending finished goods inventory every month is 30% of the next month's sales.
The desired ending direct materials inventory every month is 25% of the next month's production needs.
What is the total budgeted production in units for the month of December?
1,274.
Your Answer
1,820.
Correct
1,564.
2,110.
Rationale
 1,274.
This answer is incorrect. This amount was calculated as expected sales for December less December beginning inventory; however, this answer
does not consider December desired ending inventory.
Rationale
 1,820.
This answer is incorrect. This amount represents expected sales for December; however, it does not consider beginning or desired ending inventory.
Rationale
 1,564.
To solve this problem, a production budget must be created, which is as follows:
Rationale
 2,110.
This answer is incorrect. This amount represents the sum of expected sales for December and December desired ending inventory; however, it does
not consider beginning inventory.
Question 9
1.B.5.b
tb.sp.bud.026_1809
LOS: 1.B.5.b
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Which statement is correct concerning preparing a sales budget?
Sales forecasts should only be based on statistical analysis techniques such as regression analysis and time series analysis.
Sales forecasts should only be based on qualitative analysis techniques such as sales managers’ knowledge about the market and customer needs.
Correct
Sales forecasts should be based on both statistical analysis and qualitative analysis techniques.
Last year's sales should be used as the sales forecast for the current year.
Rationale
 Sales forecasts should only be based on statistical analysis techniques such as regression analysis and time series analysis.
Incorrect. Statistical analysis is not the only way to forecast sales as qualitative techniques that rely on sales managers’ judgment and experience
can also provide valuable information.
Rationale
 Sales forecasts should only be based on qualitative analysis techniques such as sales managers’ knowledge about the market and
customer needs.
Incorrect. Statistical analysis techniques such as regression analysis and time series analysis are also useful as they can provide objective
information based on large amounts of data.
Rationale
 Sales forecasts should be based on both statistical analysis and qualitative analysis techniques.
Correct. A sales budget is an estimate of expected unit sales and expected selling prices. One way to determine expected unit sales is to use
statistical analysis techniques such as regression analysis and time series analysis. These techniques have the advantage of being able to
incorporate a large amount of data in an objective way. In addition, qualitative techniques that rely on sales managers’ judgment and experience
are also useful as these can provide information that statistical techniques cannot. Using both of these types of techniques results in better
forecasts than relying on only one type of technique.
Rationale
 Last year's sales should be used as the sales forecast for the current year.
Incorrect. While last year's sales can be used as one input in developing a sales forecast for the current year, it should not automatically be the
forecast as current and future market conditions may not be the same as last year's condition.
Question 10
1.B.5.e
tb.sp.bud.034_1809
LOS: 1.B.5.e
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Which of the following statements correctly describes the impact of finished goods inventory on the production budget?
A decrease in beginning finished goods inventory decreases the units needed to be produced.
Your Answer
An increase in desired ending inventory of finished goods inventory does not impact the units needed to be produced.
Correct
A decrease in desired ending inventory of finished goods inventory decreases the units needed to be produced.
An increase in beginning finished goods inventory does not impact the units needed to be produced.
Rationale
 A decrease in beginning finished goods inventory decreases the units needed to be produced.
Incorrect. Beginning finished goods inventory is one component of the sources of units in a period (budgeted production is the other). As beginning
finished goods inventory decreases, the units needed to be produced increases, not decreases.
Rationale
 An increase in desired ending inventory of finished goods inventory does not impact the units needed to be produced.
Incorrect. Desired ending inventory of finished goods is one component of the total finished goods units needed in a period (expected sales is the
other). As desired ending inventory of finished goods inventory increases, the units needed to be produced increases, not remains the same.
Rationale
 A decrease in desired ending inventory of finished goods inventory decreases the units needed to be produced.
Correct. A production budget is an estimate of expected production for a period. It is based on expected unit sales, beginning finished goods
inventory, and desired ending inventory of finished goods. Desired ending inventory of finished goods is one component of the total finished goods
units needed in a period (expected sales is the other). As desired ending inventory of finished goods inventory decreases, the units needed to be
produced also decreases.
Rationale
 An increase in beginning finished goods inventory does not impact the units needed to be produced.
Incorrect. Beginning finished goods inventory is one component of the sources of units in a period (budgeted production is the other). As beginning
finished goods inventory increases, the units needed to be produced decreases, not remains the same.
Question 11
1.B.5.b
tb.sp.bud.005_1805
LOS: 1.B.5.b
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Why is a company's sales budget developed before the production budget?
The company needs to find ways to sell as many units as it can maximally produce.
Your Answer
The company's sales managers have more control over the company's finances than the production managers.
The sales budget is more important than the production budget, so it receives a larger portion of the company's financial reserves.
Correct
The company only wants to produce as many units as it expects to sell.
Rationale
 The company needs to find ways to sell as many units as it can maximally produce.
By developing the production budget after the sales budget, a company can produce only as many units as it expects to sell (before any changes in
inventory). A company would not want to produce as many units as possible and then attempt to sell them because this increases the likelihood of
having excessive inventory. Therefore, this is an incorrect answer.
Rationale
 The company's sales managers have more control over the company's finances than the production managers.
Whether the company's sales managers have more control over its finances than the production managers do not impact the order in which the
sales and production budgets are prepared. Therefore, this is an incorrect answer.
Rationale
 The sales budget is more important than the production budget, so it receives a larger portion of the company's financial reserves.
The sales budget may be more important than the production budget (since the sales budget drives the other budgets), but that does not mean it
receives a larger portion of the company's financial reserves. Therefore, this is an incorrect answer.
Rationale
 The company only wants to produce as many units as it expects to sell.
The sales budget is used to determine expected revenue. It is based on the sales forecast (expected units to be sold) and expected selling prices. By
developing the production budget after the sales budget, a company can produce only as many units as it expects to sell (before any changes in
inventory). Therefore, this is the correct answer.
Question 12
1.B.5.c
1B5-CQ12
LOS: 1.B.5.c
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with 60% collected in the month of sale and 40% collected in the
following month. A partial schedule of cash collections for January through March of the coming year reveals the following receipts for the period.
Other information includes the following:
Inventories are maintained at 30% of the following month's sales in units.
Assume that March sales total $150,000.
The number of units to be purchased in February is:
7,750 units.
4,900 units.
Correct
6,100 units.
3,850 units.
Rationale
 7,750 units.
This answer is incorrect. This answer does not consider expected beginning inventory.
Rationale
 4,900 units.
This answer is incorrect. This answer incorrectly considers expected beginning and ending inventory.
Rationale
 6,100 units.
The expected unit purchases for any month is calculated as follows: Expected purchases = (expected sales in units) + (expected ending inventory) −
(expected beginning inventory) The expected ending inventory for a month is 30% of the next month's expected sales.
Expected sales is calculated as follows: Expected sales = (sales in $) / ($20 selling price per unit)
Number of units to be purchased in February = ($110,000 / $20 per unit) + [0.3($150,000 / $20 per unit)] − [0.3($110,000 / $20 per unit)]
Number of units to be purchased in February = 5,500 units + [0.3(7,500 units)] − [0.3(5,500 units)]
Number of units to be purchased in February = 5,500 units + 2,250 units − 1,650 units = 6,100 units
Rationale
 3,850 units.
This answer is incorrect. This answer does not consider expected ending inventory.
Question 13
1.B.5.f
tb.sp.bud.012_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
CC Candy Manufacturers produces and sells a variety of candies, including fudge. In budgeting for production, the company requires that 20% of the next
month's sales be on hand at the end of each month. Budgeted sales of fudge for the next four months are:
February March April
May
Budgeted sales (lbs) 45,000 60,000 90,000 75,000
The budgeted production for April would be ________ pounds.
Correct
87,000
72,000
93,000
105,000
Rationale
 87,000
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” In this example the targeted
ending inventory for April is 20% of expected May sales or 15,000 units (20% × 75,000). The beginning inventory for April is 20% of expected April
sales or 18,000 units (20% × 90,000). Putting it all together yields planned production of 87,000 units (90,000 + 15,000 − 18,000) for April; therefore,
this is the correct answer.
Rationale
 72,000
The targeted ending inventory for April is 20% of expected May sales or 15,000 units (20% × 75,000). The beginning inventory for April is 20% of
expected April sales or 18,000 units (20% × 90,000). In this example planned production in April would be 72,000 units if the targeted ending
inventory is ignored (90,000 − 18,000). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 93,000
The targeted ending inventory for April is 20% of expected May sales or 15,000 units (20% × 75,000). The beginning inventory for April is 20% of
expected April sales or 18,000 units (20% × 90,000). In this example planned production in April would be 93,000 units if the beginning inventory is
added and the ending inventory is subtracted (90,000 − 15,000 + 18,000). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 105,000
The targeted ending inventory for April is 20% of expected May sales or 15,000 units (20% × 75,000). The beginning inventory for April is 20% of
expected April sales or 18,000 units (20% × 90,000). In this example planned production in April would be 105,000 units if the beginning inventory is
ignored (90,000 + 15,000). This is not the correct calculation; therefore, this is an incorrect answer.
Question 14
1.B.5.d
tb.sp.bud.031_1809
LOS: 1.B.5.d
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Which of the following statements correctly describes the relationship between the sales budget and the production budget?
The sales budget is prepared after the production budget.
Correct
The production budget is prepared after the sales budget.
Your Answer
The production budget is used to prepare the sales budget.
The production budget and the sales budget are the same things.
Rationale
 The sales budget is prepared after the production budget.
Incorrect. A sales budget is an estimate of expected sales revenue for a period. It is based on expected unit sales and expected selling prices. The
expected units to be sold is used to prepare the production budget as it is one component of production needs. The other two components are
beginning inventory and desired ending inventory. This means the sales budget is prepared before the production budget, not after.
Rationale
 The production budget is prepared after the sales budget.
Correct. A sales budget is an estimate of expected sales revenue for a period. It is based on expected unit sales and expected selling prices. The
expected units to be sold is used to prepare the production budget as it is one component of production needs. The other two components are
beginning inventory and desired ending inventory. This means the production budget is prepared after the sales budget.
Rationale
 The production budget is used to prepare the sales budget.
Incorrect. A sales budget is an estimate of expected sales revenue for a period. It is based on expected unit sales and expected selling prices. The
expected units to be sold is used to prepare the production budget as it is one component of production needs. The production budget is not used
to prepare the sales budget.
Rationale
 The production budget and the sales budget are the same things.
Incorrect. A sales budget is an estimate of expected sales revenue for a period. It is based on expected unit sales and expected selling prices. The
production budget is an estimate of the number of units to prepare in a period. It is based on expected unit sales, beginning inventory, and desired
ending inventory. They are not the same things.
Question 15
1.B.5.b
aq.sp.bud.003_1802
LOS: 1.B.5.b
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 3
Sales volumes and prices that make up revenue need to be carefully forecasted. However, sales volumes and prices can be impacted significantly by
many external factors. Which of the following is not one of those external factors?
Market opportunities for the organization
Correct
Improper sales budget planning
Your Answer
Legal factors
Customer power
Rationale
 Market opportunities for the organization
Market opportunities for the organization can significantly impact sales volumes and prices. Identifying these opportunities of the organization is
part of SWOT analysis.
Rationale
 Improper sales budget planning
Improper sales budget planning might impact sales volumes and prices. However, this is an internal factor, not an external factor.
Rationale
 Legal factors
Legal factors can significantly impact sales volumes and prices. Understanding legal factors is a part of PESTLE analysis.
Rationale
 Customer power
Supplier power can significantly impact sales volumes and prices. Analyzing supplier power is a part of Porter's Five Forces.
Question 16
1.B.5.f
tb.sp.bud.022_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
In early February, Heavenly Swimwear is preparing the summer season swimsuits budget. Budgeted sales are 47,600 suits for May, 58,200 suits for June,
and 43,500 suits for July. Each suit requires 1.3 yards of fabric. Heavenly Swimwear requires ending Finished Goods inventory equal to 30% of the
following month's budgeted sales. What is Heavenly Swimwear's budgeted production for May?
47,600 units
65,060 units
Correct
50,780 units
44,420 units
Rationale
 47,600 units
In this example the 47,600 units is only the amount needed to satisfy expected sales in May. It does not account for beginning and ending inventory;
therefore, this is an incorrect answer.
Rationale
 65,060 units
Based on expected June sales, target ending inventory for May is 17,460 units (30% × 58,200). Based on expected May sales, beginning inventory for
May is 14,280 units (30% × 47,600). In this example, planned production in May would be 65,060 units if the beginning inventory is ignored (47,600 +
17,460). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 50,780 units
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory – Beginning Inventory.” Based on expected June sales,
target ending inventory for May is 17,460 units (30% × 58,200). Based on expected May sales, beginning inventory for May is 14,280 units (30% ×
47,600). Putting this all together yields planned production of 50,780 units in May (47,600 + 17,460 – 14,280). Therefore, this is the correct answer.
Rationale
 44,420 units
Based on expected June sales, target ending inventory for May is 17,460 units (30% × 58,200). Based on expected May sales, beginning inventory for
May is 14,280 units (30% × 47,600). In this example, planned production in May would be 44,420 units if the ending inventory is subtracted and
beginning inventory is added (47,600 – 17,460 + 14,280). This is not the correct calculation; therefore, this is an incorrect answer.
Question 17
1.B.5.a
1B4-AT06
LOS: 1.B.5.a
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 2
After the goals of the company have been established and communicated, the next step in the planning process would be the development of the:
Correct
sales forecast.
production budget.
Your Answer
selling and administrative budget.
direct materials budget.
Rationale
 sales forecast.
After the goals of the company have been established and communicated, the budgeting process begins. The first step in the budgeting process is
the completion of a sales forecast.
Rationale
 production budget.
This answer is incorrect. After the goals of the company have been established and communicated, the next step in the planning process is not the
development of the production budget.
Rationale
 selling and administrative budget.
This answer is incorrect. After the goals of the company have been established and communicated, the next step in the planning process is not the
development of the selling and administrative budget.
Rationale
 direct materials budget.
This answer is incorrect. After the goals of the company have been established and communicated, the next step in the planning process is not the
development of the direct materials budget.
Question 18
1.B.5.e
1B5-CQ09
LOS: 1.B.5.e
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the
second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter.
Streeter usually maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be sold in the next quarter.
However, due to a work stoppage, the finished goods inventory at the end of the first quarter is 8,000 units less than it should be.
How many units should Streeter produce in the second quarter?
Correct
86,000 units.
Your Answer
78,000 units.
58,000 units.
66,000 units.
Rationale
 86,000 units.
Budgeted production is calculated as follows:
Budgeted production = (expected sales) + (expected ending inventory) − (expected beginning inventory)
The expected ending inventory for each quarter equals 50% of the next quarter's expected sales. Since the finished goods inventory at the end of
the first quarter is 8,000 less than it should be, the budgeted production for the second quarter is calculated as follows:
Budgeted production, second quarter = 72,000 units + 0.5(84,000 units) − [0.5(72,000 units) − 8,000 units]
Budgeted production, second quarter = 72,000 units + 42,000 units − [36,000 units − 8,000 units]
Budgeted production, second quarter = 114,000 units − 28,000 units = 86,000 units
Rationale
 78,000 units.
This answer is incorrect. This answer does not consider that the finished goods inventory at the end of the first quarter is 8,000 units less than it
should be.
Rationale
 58,000 units.
This answer is incorrect. This answer does not correctly consider beginning and ending inventory.
Rationale
 66,000 units.
This answer is incorrect. This answer does not correctly consider beginning and ending inventory. Additionally, this answer does not consider that
the finished goods inventory at the end of the first quarter is 8,000 units less than it should be.
Question 19
1.B.5.f
tb.sp.bud.014_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Quality Foods has budgeted $1,500,000 in sales of ginger chicken for May. It wants to end every month with inventory equal to 10 days’ worth of the next
month's sales (based on a 30-day month). April sales are projected at $1,400,000. The sales price is $5 per box. Inventory at the beginning of April is
estimated at 93,400 boxes of ginger chicken. How many boxes of ginger chicken should Quality Foods manufacture in April?
280,000 boxes
273,400 boxes
Correct
286,600 boxes
Your Answer
300,000 boxes
Rationale
 280,000 boxes
In this example the 280,000 boxes are only the amount needed to satisfy expected sales in April calculated as projected sales ÷ price per box
($1,400,000 ÷ $5). It does not account for beginning and ending inventory; therefore, this is an incorrect answer.
Rationale
 273,400 boxes
A total of 280,000 boxes are needed to satisfy April sales ($1,400,000 ÷ $5). Based on expected May sales of 300,000 boxes ($1,500,000 ÷ $5), target
ending inventory for April is 100,000 boxes (10 days of May sales). In this example planned production in April would be 273,400 boxes if the
beginning inventory is added and the ending inventory is subtracted (280,000 – 100,000 + 93,400). This is not the correct calculation; therefore, this
is an incorrect answer.
Rationale
 286,600 boxes
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” A total of 280,000 boxes are
needed to satisfy April sales ($1,400,000 ÷ $5). Based on expected May sales of 300,000 boxes ($1,500,000 ÷ $5), target ending inventory for April is
100,000 boxes (10 days of May sales). Putting it all together yields planned production of 286,600 boxes in April (280,000 + 100,000 − 93,400).
Therefore, this is the correct answer.
Rationale
 300,000 boxes
In this example the 300,000 boxes is the amount needed to satisfy expected sales in May calculated as projected sales ÷ price per box ($1,500,000 ÷
$5). This answer does not account for beginning and ending inventory and concerns May production, not April production; therefore, this is an
incorrect answer.
Question 20
1.B.5.f
1B5-LS08
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 3
Using the information from Exhibit A, compute the number of units to be produced in January.
Your Answer
4,990 units.
4,500 units.
Correct
5,010 units.
5,510 units.
Rationale
 4,990 units.
This answer is incorrect. This answer was calculated by subtracting 510 (10% of 5,100), desired ending inventory, and adding 500 (10% of 5,000),
beginning inventory, from 5,000, the projected sales for January. However, this amount is not the correct amount of units to be produced in
January.
Rationale
 4,500 units.
This answer is incorrect. This answer was calculated by subtracting 500 (10% of 5,000), beginning inventory, from 5,000, the projected sales for
January. However, this amount alone does not represent the number of units to be produced for January.
Rationale
 5,010 units.
The number of units to be produced equals sales (5,000 units) plus desired ending inventory (10% of 5,100 = 510) less beginning inventory (10% of
5,000 = 500) = 5,010 units.
Rationale
 5,510 units.
This answer is incorrect. This answer was calculated by adding 510 (10% of 5,100), desired ending inventory, to 5,000, the projected sales for
January. However, this amount alone does not represent the number of units to be produced for January.
Question 21
1.B.5.a
aq.sp.bud.001_1802
LOS: 1.B.5.a
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 2
Which of the following specific budgets is the key driving force of the overall operational budget?
Correct
The sales budget
The production budget
Your Answer
The capital projects budget
The pro forma income statement
Rationale
 The sales budget
The sales budget is the key driving force of the operational budget.
Rationale
 The production budget
The production budget is dependent on the key driving force of the operational budget.
Rationale
 The capital projects budget
The capital projects budget is dependent on the strategic plan. The key driving force of the operational budget is also dependent on the strategic
plan.
Rationale
 The pro forma income statement
The pro forma income statement is dependent on all of the budget schedules that comprise the operational budget.
Question 22
1.B.5.d
tb.sp.bud.006_1805
LOS: 1.B.5.d
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
If the sales budget increases by 10%, the production budget:
Correct
Is likely to increase by the same number of units as the sales budget
Is not likely to increase by the same number of units as the sales budget
Is not likely to be affected
Your Answer
Is likely to decrease by the same number of units as the sales budget
Rationale
 Is likely to increase by the same number of units as the sales budget
The production budget is based on the sales budget (the number of units expected to be sold), expected beginning inventory, and targeted ending
inventory. As the number of units expected to be sold increases, the number of units expected to be produced increases by the same number of
units (assuming expected beginning inventory and targeted ending inventory remain the same). This ensures production will satisfy expected sales.
Therefore, this is the correct answer.
Rationale
 Is not likely to increase by the same number of units as the sales budget
The production budget is based on the sales budget (the number of units expected to be sold), expected beginning inventory, and targeted ending
inventory. As the number of units expected to be sold increases, the number of units expected to be produced increases by the same number of
units (assuming expected beginning inventory and targeted ending inventory remain the same). If the increase in production differs from the
increase in units sold, then there may not be enough units produced to cover expected sales or too many units will be produced. Therefore, this is
an incorrect answer.
Rationale
 Is not likely to be affected
The production budget is based on the sales budget (the number of units expected to be sold), expected beginning inventory, and targeted ending
inventory. If there is no change in expected units to be produced, then there will not likely be enough units produced to cover expected sales or
targeted ending inventory. Therefore, this is an incorrect answer.
Rationale
 Is likely to decrease by the same number of units as the sales budget
The production budget is based on the sales budget (the number of units expected to be sold), expected beginning inventory, and targeted ending
inventory. If the number of units to be sold increases, and the units to be produced decreases, then there will not likely be enough units produced
to cover expected sales or targeted ending inventory. Therefore, this is an incorrect answer.
Question 23
1.B.5.b
tb.sp.bud.027_1809
LOS: 1.B.5.b
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Each of following factors is likely to be considered when preparing a sales budget except:
Expected advertising and marketing expenditures.
Historical sales trends.
Expected competitor actions.
Correct
Desired ending inventory level.
Rationale
 Expected advertising and marketing expenditures.
Incorrect. Since advertising and marketing expenditures are likely to impact expected sales and expected selling prices, they are likely to be
considered when preparing a sales budget.
Rationale
 Historical sales trends.
Incorrect. Since historical sales trends are likely to impact expected sales and expected selling prices, they are likely to be considered when
preparing a sales budget.
Rationale
 Expected competitor actions.
Incorrect. Since expected competitor actions are likely to impact expected sales and expected selling prices, they are likely to be considered when
preparing a sales budget.
Rationale
 Desired ending inventory level.
Correct. A sales budget is an estimate of expected unit sales and expected selling prices. Desired ending inventory level impacts the production
budget, not the sales budget. It is not likely to impact expected sales and expected selling prices.
Question 24
1.B.5.f
tb.sp.bud.008_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
The Burlington Company has 12,000 units in beginning finished goods. If sales are expected to be 60,000 units for the year and Burlington desires ending
finished goods of 15,000 units, how many units must Burlington produce?
57,000
60,000
Correct
63,000
75,000
Rationale
 57,000
Units to be produced is calculated as “Expected Sales + Target Ending Inventory − Beginning Inventory.” Budgeted production would be 57,000 in
this example if targeted ending inventory is subtracted and beginning inventory is added (60,000 − 15,000 + 12,000). That is not the correct formula;
therefore, this is an incorrect answer.
Rationale
 60,000
Units to be produced is calculated as “Expected Sales + Target Ending Inventory − Beginning Inventory.” Budgeted production would be 60,000 in
this example if beginning inventory and targeted ending inventory are ignored. That is not the correct formula; therefore, this is an incorrect
answer.
Rationale
 63,000
Units to be produced is calculated as “Expected Sales + Target Ending Inventory − Beginning Inventory.” In this example 63,000 units are to be
produced (60,000 + 15,000 − 12,000). Therefore, this is the correct answer.
Rationale
 75,000
Units to be produced is calculated as “Expected Sales + Target Ending Inventory - Beginning Inventory.” Budgeted production would be 75,000 in
this example if beginning inventory is ignored (60,000 + 15,000). That is not the correct formula; therefore, this is an incorrect answer.
Question 25
1.B.5.f
tb.sp.bud.013_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Gulfcoast Shrimp Packaging supplies frozen shrimp to grocery chains. It expects sales of 34 tons of shrimp in the next quarter. It currently has an
inventory of 15 tons of shrimp. If production of shrimp adds up to 26 tons in the upcoming quarter, what will be the company's inventory at the end of
the quarter?
8 tons.
Correct
7 tons.
Your Answer
0 tons.
An indeterminate level.
Rationale
 8 tons.
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” Target ending inventory can be
calculated by rearranging this formula. In this example 8 tons is the amount inventory will decrease, not the targeted ending inventory (Sales of 34
tons − Production of 26 tons). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 7 tons.
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” Rearranging these figures results
in target ending inventory being calculated as “Planned Production − Units Needed for Sales + Beginning Inventory.” In this example the targeted
ending inventory is 7 tons (26 − 34 + 15). This is the correct answer.
Rationale
 0 tons.
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory – Beginning Inventory.” Target ending inventory can be
calculated by rearranging this formula. In this example 0 tons would be the targeted ending inventory if sales are 41 tons, not 34 tons. This is not the
correct figure for sales; therefore, this is an incorrect answer.
Rationale
 An indeterminate level.
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory – Beginning Inventory.” Target ending inventory can be
calculated by rearranging this formula. All the required information is provided to determine the targeted ending inventory; therefore, this is an
incorrect answer.
Question 26
1.B.5.f
tb.sp.bud.019_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Phillip Co. manufactures decorative pillows. Phillip requires that 30% of next month's sales be on hand at the end of each month. Budgeted unit sales for
February through May are as follows:
February March April
May
June
Sales (Units) 25,000 22,000 30,000 44,000 60,000
What is the budgeted production for May?
44,000 units
Your Answer
62,000 units
30,800 units
Correct
48,800 units
Rationale
 44,000 units
In this example, 44,000 units is only the amount needed to satisfy expected sales in May. It does not account for beginning and ending inventory;
therefore, this is an incorrect answer.
Rationale
 62,000 units
In May, 44,000 units are needed to support expected sales. Targeted ending inventory is 18,000 units (30% of expected June sales) and beginning
inventory is 13,200 units (30% of expected May sales). In this example, planned production in May would be 62,000 units if the beginning inventory
is ignored (44,000 + 18,000). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 30,800 units
In May 44,000 units are needed to support expected sales. Targeted ending inventory is 18,000 units (30% of expected June sales) and beginning
inventory is 13,200 units (30% of expected May sales). In this example, planned production in May would be 30,800 units if the target ending
inventory is ignored (44,000 − 13,200). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 48,800 units
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” In May 44,000 units are needed to
support expected sales. Targeted ending inventory is 18,000 units (30% of expected June sales) and beginning inventory is 13,200 units (30% of
expected May sales). Putting this all together yields planned production of 48,800 units in May (44,000 + 18,000 − 13,200). Therefore, this is the
correct answer.
Question 27
1.B.5.f
1B5-LS18
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
A firm has budgeted sales for Period 1 of 50,000 units and Period 2 of 55,000 units. The firm maintains a policy that ending inventory is 20% of the
following period's forecasted sales. The policy is currently met. What is the budgeted production for Period 1?
49,000 units.
50,000 units.
Your Answer
61,000 units.
Correct
51,000 units.
Rationale
 49,000 units.
This answer is incorrect. This answer incorrectly considers beginning and ending inventory.
Rationale
 50,000 units.
This answer is incorrect. This answer does not consider beginning and ending inventory.
Rationale
 61,000 units.
This answer is incorrect. This answer does not consider beginning inventory.
Rationale
 51,000 units.
The budgeted production is calculated by adding budgeted sales (50,000) to desired ending inventory (55,000 × 0.2) minus the beginning inventory
(50,000 × 0.2) = 51,000 units.
Question 28
1.B.5.f
tb.sp.bud.018_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 3
Sam Montana Bookcases (SMB) manufactures bookcases for sale to colleges and universities for use in dorm rooms. Each bookcase sells for $65. Due to
the cyclical nature of the business, the company budgets two months ahead. In early May, company managers are planning for July, the company's
busiest month. SMB plans to sell 114,500 bookcases in July. The company expects to have 26,000 assembled bookcases in its inventory at the end of
June. It also plans to have 560,000 board feet of lumber (cost $6,720,000), 75,000 quarts of stain (cost $300,000), and 160,000 board feet of trim (cost
$2,400,000) in inventory. The company would like to have 3,000 assembled bookcases, 120,000 board feet of lumber, 4,500 quarts of stain, and 12,000
board feet of trim on hand at the end of July. What is SMB's budgeted production for July?
Your Answer
143,500
88,500
Correct
91,500
85,500
Rationale
 143,500
In this example, planned production in July would be 143,500 bookcases if the beginning inventory is added, not subtracted (114,500 + 3,000 +
26,000). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 88,500
In this example, planned production in July would be 88,500 bookcases if the target ending inventory is not included (114,500 − 26,000). This is not
the correct calculation; therefore, this is an incorrect answer.
Rationale
 91,500
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” In July 114,500 bookcases are
needed to support expected sales. Targeted ending inventory is 3,000 bookcases and beginning inventory is 26,000 bookcases. Putting this all
together yields planned production of 91,500 bookcases (114,500 + 3,000 − 26,000). Therefore, this is the correct answer.
Rationale
 85,500
In this example, planned production in July would be 85,500 bookcases if the ending inventory is subtracted, not added (114,500 − 3,000 − 26,000).
This is not the correct calculation; therefore, this is an incorrect answer.
Question 29
1.B.5.c
tb.sp.bud.030_1809
LOS: 1.B.5.c
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 4
The Jupiter Company has the following information for the first quarter. Based on this information, what is the sales budget for the first quarter?
January February March
Sales in units
Selling price per unit
20,000
$16
22,000 24,000
$16.50
$17
Correct
$1,091,000
$1,056,000
$1,122,000
$1,089,000
Rationale
 $1,091,000
Correct. A sales budget is an estimate of expected sales revenue for a period. It is based on expected unit sales and expected selling prices.
Expected revenue is $320,000 in January (20,000 × $16), $363,000 in February (22,000 × 16.50), and $408,000 in March (24,000 × $17). These three add
up to $1,091,000.
Rationale
 $1,056,000
Incorrect. If the selling price of $16 is used for all three months, the expected revenue would be $1,056,000 (66,000 units × $16). However, the selling
price is different from $16 in February and March.
Rationale
 $1,122,000
Incorrect. If the selling price of $17 is used for all three months, the expected revenue would be $1,122,000 (66,000 units × $17). However, the selling
price is different from $17 in January and February.
Rationale
 $1,089,000
Incorrect. If the selling price of $16.50 is used for all three months, the expected revenue would be $1,089,000 (66,000 units × $16.50). However, the
selling price is different from $16.50 in January and March.
Question 30
1.B.5.e
aq.sp.bud.007_1802
LOS: 1.B.5.e
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 2
Which of the following best describes the mathematical relationship between sales volume and production when inventory is present in the budget?
Correct
Production volume = Sales volume + Ending inventory – Beginning inventory
Production volume – Beginning inventory = Sales volume + Ending inventory
Production volume + Ending inventory = Sales volume – Beginning inventory
Your Answer
Production volume = Sales volume × Ending inventory – Beginning inventory
Rationale
 Production volume = Sales volume + Ending inventory – Beginning inventory
This answer describes the relationship between sales volume and production when inventory is present in the budget.
Rationale
 Production volume – Beginning inventory = Sales volume + Ending inventory
This answer does not describe the relationship between sales volume and production when inventory is present in the budget. Think about
beginning inventory's role in the relationship.
Rationale
 Production volume + Ending inventory = Sales volume – Beginning inventory
This answer does not describe the relationship between sales volume and production when inventory is present in the budget. Think about ending
inventory's role in the relationship.
Rationale
 Production volume = Sales volume × Ending inventory – Beginning inventory
This answer does not describe the relationship between sales volume and production when inventory is present in the budget. Think about the
relationship between sales volume and ending inventory.
Question 31
1.B.5.f
tb.sp.bud.017_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Mounce Inc. produces and sells free-standing quilt frames. In budgeting for production needs, the company requires that 5% of the next month's sales be
on hand at the end of each month. Budgeted sales of quilt frames over the next four months are:
September October November December
Sales (Units)
20,000
30,000
50,000
40,000
What is budgeted production for October?
30,000 units
Correct
31,000 units
29,000 units
32,500 units
Rationale
 30,000 units
In this example the 30,000 units is only the amount needed to satisfy expected sales in October; it does not account for beginning and ending
inventory. This is an incorrect answer.
Rationale
 31,000 units
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” Based on expected November
sales, target ending inventory for October is 2,500 units (5% × 50,000). Based on expected October sales, the beginning inventory for October is
1,500 units (5% × 30,000). Putting this all together yields planned production of 31,000 units in October (30,000 + 2,500 − 1,500). This is the correct
answer.
Rationale
 29,000 units
Based on expected November sales, target ending inventory for October is 2,500 units (5% × 50,000). Based on expected October sales of, beginning
inventory for October is 1,500 units (5% × 30,000). In this example planned production in October would be 29,000 units if the beginning inventory is
added and the ending inventory is subtracted (30,000 − 2,500 + 1,500). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 32,500 units
Based on expected November sales, target ending inventory for October is 2,500 units (5% x 50,000In this example planned production in October
would be 32,500 units if the beginning inventory is ignored (30,000 + 2,500). This is not the correct calculation; therefore, this is an incorrect answer.
Question 32
1.B.5.c
tb.sp.bud.010_1805
LOS: 1.B.5.c
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 3
Sewing Masters produces curtains and sells each curtain for $40. Sewing Masters often sees a spike in sales in March and April due to spring cleaning. The
company plans to sell 257,000 curtains in the month of April. At the end of March, it expects to have 52,000 curtains in inventory, and it would like to have
15,000 curtains in inventory at the end of April. What is the company's budgeted sales revenue for April?
$8,800,000
$11,760,000
Correct
$10,280,000
$9,680,000
Rationale
 $8,800,000
In this example the budgeted revenue would be $8,800,000 if the expected production of 220,000 curtains (257,000 + 15,000 − 52,000) is used as the
expected sales figure (220,000 × $40). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 $11,760,000
In this example the budgeted revenue would be $11,760,000 if the beginning inventory of 52,000 curtains is added and the ending inventory of
15,000 curtains is subtracted from the expected sales of 257,000 (294,000 × $40). This is not the correct calculation; therefore, this is an incorrect
answer.
Rationale
 $10,280,000
Budgeted revenue is calculated as “Budgeted Unit Sales × Budgeted Selling Price.” Each curtain is expected to sell for $40 and a total of 257,000
curtains are expected to be sold. This results in budgeted sales revenue of $10,280,000 (257,000 × $40). Therefore, this is the correct answer.
Rationale
 $9,680,000
In this example the budgeted revenue would be $9,680,000 if the ending inventory of 15,000 curtains is subtracted from the expected sales of
257,000 (242,000 × $40). This is not the correct calculation; therefore, this is an incorrect answer.
Question 33
1.B.5.e
1B5-CQ39
LOS: 1.B.5.e
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Consider the following information for Timbucktoo Kalamazoo Industries:
Additional information:
60% of a month's sales are collected by the month's end; the remaining 40% is collected in the following month.
40% of a month's purchases are paid by the month's end; the remaining 60% is paid in the following month.
The desired ending finished goods inventory every month is 30% of the next month's sales.
The desired ending direct materials inventory every month is 25% of next month's production needs.
What is the total budgeted production in units for the month of November?
1,820.
892.
Correct
1,438.
1,110.
Rationale
 1,820.
This answer is incorrect. This answer does not consider beginning finished goods inventory.
Rationale
 892.
This answer is incorrect. This answer does not consider desired ending finished goods inventory.
Rationale
 1,438.
To solve this problem, a production budget must be created, which is:
Rationale
 1,110.
This answer is incorrect. This answer incorrectly considers beginning and desired ending finished goods inventory.
Question 34
1.B.5.f
tb.sp.bud.021_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
In early March, Percy's Pickled Snacks is preparing the upcoming quarter's budget for pickled beets. Budgeted sales are 12,000 jars for April, 16,000 jars
for May, and 19,000 jars for June. Each jar requires 1.2 pounds of beets and sells for $15. Percy requires ending finished goods inventory equal to 25% of
the following month's budgeted sales. What is Percy's budgeted production for April?
12,000 units
Correct
13,000 units
Your Answer
16,000 units
11,000 units
Rationale
 12,000 units
In this example, 12,000 units is only the amount needed to satisfy expected sales in April. It does not account for beginning and ending inventory;
therefore, this is an incorrect answer.
Rationale
 13,000 units
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory – Beginning Inventory.” Based on expected May sales,
target ending inventory for April is 4,000 units (25% × 16,000). Based on expected April sales, beginning inventory for April is 3,000 units (25% ×
12,000). Putting this all together yields planned production of 13,000 units in April (12,000 + 4,000 – 3,000). Therefore, this is the correct answer.
Rationale
 16,000 units
Based on expected May sales, target ending inventory for April is 4,000 units (25% × 16,000). Based on expected April sales, beginning inventory for
April is 3,000 units (25% × 12,000). In this example, planned production in April would be 16,000 units if the beginning inventory is ignored (12,000 +
4,000). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 11,000 units
Based on expected May sales, target ending inventory for April is 4,000 units (25% × 16,000). Based on expected April sales, beginning inventory for
April is 3,000 units (25% × 12,000). In this example, planned production in April would be 11,000 units if the ending inventory is subtracted and
beginning inventory is added (12,000 - 4,000 + 3,000). This is not the correct calculation; therefore, this is an incorrect answer.
Question 35
1.B.5.a
tb.sp.bud.002_1805
LOS: 1.B.5.a
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
The ________ is derived from the _________.
Correct
sales budget, sales forecast
sales forecast, sales budget
production budget, budgeted income statement
Your Answer
production budget, direct labor budget
Rationale
 sales budget, sales forecast
The sales forecast is the starting point for the master budget process. It is the basis for the sales budget since the sales budget is based on the sales
forecast and expected selling prices. Therefore, this is the correct answer.
Rationale
 sales forecast, sales budget
The sales forecast cannot be derived from the sales budget as the sales forecast is the starting point for the master budget process. Therefore, this
is an incorrect answer.
Rationale
 production budget, budgeted income statement
The budgeted income statement is the end result of the operating budgeting process. It is based on the sales budget, cost of goods sold budget,
and selling and administrative budget. The production budget is derived from the sales forecast, not the budgeted income statement. Therefore,
this is an incorrect answer.
Rationale
 production budget, direct labor budget
The production budget helps determine the direct labor budget as it determines the number of units to be produced. The production budget is
derived from the sales forecast, not the direct labor budget. Therefore, this is an incorrect answer.
Question 36
1.B.5.e
tb.sp.bud.033_1809
LOS: 1.B.5.e
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Which of the following statements correctly describes the impact of finished goods inventory on the production budget?
An increase in beginning finished goods inventory increases the units needed to be produced.
An increase in desired ending inventory of finished goods inventory decreases the units needed to be produced.
Correct
An increase in desired ending inventory of finished goods inventory increases the units needed to be produced.
Your Answer
A decrease in beginning finished goods inventory decreases the units needed to be produced.
Rationale
 An increase in beginning finished goods inventory increases the units needed to be produced.
Incorrect. Beginning finished goods inventory is one component of the sources of units needed in a period (budgeted production is the other). As
beginning finished goods inventory increases, the units needed to be produced decreases, not increases.
Rationale
 An increase in desired ending inventory of finished goods inventory decreases the units needed to be produced.
Incorrect. Desired ending inventory of finished goods is one component of the total finished goods units needed in a period (expected sales is the
other). As desired ending inventory of finished goods inventory increases, the units needed to be produced increases, not decreases.
Rationale
 An increase in desired ending inventory of finished goods inventory increases the units needed to be produced.
Correct. A production budget is an estimate of expected production for a period. It is based on expected unit sales, beginning finished goods
inventory, and desired ending inventory of finished goods. Desired ending inventory of finished goods is one component of the total finished goods
units needed in a period (expected sales is the other). As desired ending inventory of finished goods inventory increases, the units needed to be
produced also increases.
Rationale
 A decrease in beginning finished goods inventory decreases the units needed to be produced.
Incorrect. Beginning finished goods inventory is one component of the sources of units in a period (budgeted production is the other). As beginning
finished goods inventory decreases, the units needed to be produced increases, not decreases.
Question 37
1.B.5.f
aq.sp.bud.009_1802
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 6
Card & Co. (CC), a creator of popular card games such as “Tres” and “Go Hunt,” is preparing a quarterly production budget. CC predicts sales of 45,000
games in Q1 and predicts that game sales will grow 6% every quarter indefinitely. The company consistently follows a budget policy of maintaining an
ending inventory of 20% of the next quarter's sales. Using a quarterly production budget, calculate production volume for the year.
Correct
199,220
208,220
196,858
Your Answer
207,806
Rationale
 199,220
The following is CC's quarterly production budget for the year.
Q1
Sales Volume
Q2
Q3
Q4
Total
45,000 47,700 50,562 53,596 196,858
Planned End. Inventory 9,540 10,112 10,719 11,362 11,362
Units Needed
54,540 57,812 61,281 64,958 208,220
Less Beg. Inventory
(9,000) (9,540) (10,112) (10,719) (9,000)
Production Volume
45,540 48,272 51,169 54,239 199,220
Q1 Planned Ending Inventory is calculated as 47,700 Q2 Sales Volume × 20% = 9,540. Q2 Sales Volume is calculated as 45,000 Q1 Sales Volume × 1.06
= 47,700.
Q1 Beginning Inventory is the ending inventory from last year's Q4. Even though this number is not provided, it can be calculated because CC
constantly follows the budget policy of maintaining an ending inventory of 20% of the next quarter's sales. Q1 Beginning Inventory is calculated
based on Q1 sales as 45,000 × 20% = 9,000.
Follow this same pattern for all quarters.
Note: Sales volume in Q1 of the following year, necessary for computing ending inventory in Q4, will be 53,596 units × 1.06 = 56,812 units, based on
the same assumption of 6% growth in game sales.
Rationale
 208,220
This answer represents units needed for the year; however, beginning inventory must be considered to calculate production volume.
Rationale
 196,858
This answer represents sales volume for the year; however, beginning and ending inventory must be considered to calculate production volume.
Rationale
 207,806
This answer is based on summing up each quarter of inventory needs to adjust annual sales volume to production volume. However, annual sales
volume is adjusted based only ending inventory for Q1 next year and beginning inventory for Q1 this year.
Question 38
1.B.5.c
aq.sp.bud.005_1802
LOS: 1.B.5.c
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Card & Co. (CC), a creator of popular card games such as “Tres” and “Go Hunt,” is preparing a quarterly sales budget. CC predicts sales of 40,000 games in
Q1 at $5.00 per game. CC predicts that game sales will grow by 4% each quarter and that game price will increase by 5% each quarter. Each game costs
$3.00 to produce in Q1. Costs are expected to grow by 3% each quarter. Using a quarterly sales budget, calculate sales revenue for the year.
$800,000
Correct
$917,306
Your Answer
$169,859
$383,598
Rationale
 $800,000
This answer does not take into consideration the growth rates of game sales and the increase in game price.
Rationale
 $917,306
Below is CC's quarterly sales budget for the year. (Note: prices are rounded to the penny each quarter.)
Sales Volume
× Price
Revenue
Q1
Q2
Q3
Q4
Total
40,000
41,600
43,264
44,995 169,859
$5.00
$5.25
$5.51
$5.79
$200,000 $218,400 $238,385 $260,521 $917,306
Rationale
 $169,859
This answer represents the estimated total volume of games to be sold during the year. This number must be multiplied by price to find sales
revenue for the year.
Rationale
 $383,598
This answer represents the estimated gross profit for the year, not the sales revenue.
Question 39
1.B.5.a
tb.sp.bud.001_1805
LOS: 1.B.5.a
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Hailey has been tasked with overseeing the development of the company's master budget. This is the first time Hailey has had this role, and she's not
sure where to start. What advice would you give her? Why?
She should help develop the cash budget before the production budget because understanding cash flows will help determine the level of production.
She should help develop the direct material and direct labor budgets before the production budget because the production budget is just the sum of
the direct material and direct labor budgets.
Your Answer
She should help develop the selling and administrative budget before developing the manufacturing overhead budget because selling and
administrative expenses are part of manufacturing overhead.
Correct
She should help develop the sales budget before the production budget because production will depend on the number of sales.
Rationale
 She should help develop the cash budget before the production budget because understanding cash flows will help determine the level
of production.
The cash budget is based (in part) on expected production, because expected production will help determine the number of materials to purchase,
the number of workers to hire, and the manufacturing overhead needed. This means the production budget must be developed before the cash
budget can be developed. Therefore, this is an incorrect answer.
Rationale
 She should help develop the direct material and direct labor budgets before the production budget because the production budget is
just the sum of the direct material and direct labor budgets.
The production budget must be developed before the direct material and direct labor budgets can be developed because the direct material and
direct labor budgets are based (in part) on expected production. Therefore, this is an incorrect answer.
Rationale
 She should help develop the selling and administrative budget before developing the manufacturing overhead budget because selling
and administrative expenses are part of manufacturing overhead.
These budgets are developed independently because the selling and administrative budget is based on the sales budget and the manufacturing
overhead budget is based on the production budget. In addition, selling and administrative expenses are not a part of manufacturing overhead.
Therefore, this is an incorrect answer.
Rationale
 She should help develop the sales budget before the production budget because production will depend on the number of sales.
The master budget is the overall budget for an organization. It comprises an operating budget (expected day-to-day activities) and a financial
budget (expected sources and uses of cash). Two important sub-budgets are the sales budget and the production budget. The production budget is
based on expected sales, expected beginning inventory, and targeted ending inventory; therefore, the sales budget must be developed before the
production budget can be developed. Therefore, this is the correct answer.
Question 40
1.B.5.b
aq.sp.bud.002_1802
LOS: 1.B.5.b
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 3
Organizations invest significant time and resources researching the market industry, economic environment, and competitive landscape to reduce
uncertainty around the sales forecast. Which of the following is not one of the common tools employed in this process?
Leading economic indicators
Your Answer
Cross-functional research teams
Correct
Analysis of small, limited data sets
External consultants
Rationale
 Leading economic indicators
This is one of the common tools used to reduce uncertainty around the sales forecast.
Rationale
 Cross-functional research teams
This is one of the common tools used to reduce uncertainty around the sales forecast.
Rationale
 Analysis of small, limited data sets
While analysis of small data sets can be helpful, a better insight comes from sophisticated analysis of large data sets—both internal data sets and
external data sets. This is sometimes called big data analytics.
Rationale
 External consultants
This is one of the common tools used to reduce uncertainty around the sales forecast.
Question 41
1.B.5.d
aq.sp.bud.006_1802
LOS: 1.B.5.d
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 3
Which of the following best describes the relationship between the sales budget and the production budget?
The sales budget is dependent on the production budget.
The sales budget and production budget in turn affect each other. A change in one will change the other.
Correct
The production budget is dependent on the sales budget.
There is no relationship between the sales budget and the production budget.
Rationale
 The sales budget is dependent on the production budget.
The sales budget is not dependent on the production budget.
Rationale
 The sales budget and production budget in turn affect each other. A change in one will change the other.
The relationship is one-directional. The production budget does not affect the sales budget.
Rationale
 The production budget is dependent on the sales budget.
This statement describes the relationship between the sales budget and the production budget. The production budget is often relatively simple to
assemble once the sales budget is complete. Whatever is needed for the budgeted sales volume is then scheduled to be produced.
Rationale
 There is no relationship between the sales budget and the production budget.
There is a relationship between the sales budget and the production budget.
Question 42
1.B.5.f
1B5-AT13
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Daffy Tunes manufactures an animated rabbit with moving parts and a built-in voice box. Projected sales in units are:
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are purchased from another supplier at
$1.00 each. Assembly labor cost is $2.00 per rabbit and variable overhead cost is $0.50 per rabbit. Fixed manufacturing overhead applicable to rabbit
production is $12,000 per month.
Daffy's policy is to manufacture 1.5 times the coming month's projected sales every other month starting with January (i.e., odd-numbered months) for
February sales, and to manufacture 0.5 times the coming month's projected sales in alternate months (i.e., even-numbered months). This allows Daffy to
allocate limited manufacturing resources to other products as needed during the even-numbered months.
Assuming any beginning inventory has no impact on the production budget, the dollar production budget for animated rabbits for February is:
$358,500.
$115,500.
Correct
$127,500.
$390,000.
Rationale
 $358,500.
This answer is incorrect. Because February is an even-numbered month, Daffy's policy is to manufacture 0.5 times the coming month's projected
sales, not 1.5 times.
Rationale
 $115,500.
This answer is incorrect. This answer fails to consider fixed manufacturing overhead applicable to rabbit production.
Rationale
 $127,500.
Assuming any beginning inventory has no impact on the production budget means that the February production budget in dollars can be
calculated as (Projected Sales for March × 0.5 × Variable Costs) + Fixed Costs. Said differently, the budgeted costs for February production are
calculated by taking the unit variable costs of production (basic materials, voice box, assembly labor, and variable overhead per rabbit) multiplied
by the number of rabbits to be produced, and adding that to the monthly fixed manufacturing overhead costs of $12,000.
The variable costs per rabbit are $3.50 (basic material) + $1.00 (voice box) + $2.00 (direct labor) + $0.50 (variable overhead), which totals $7 per unit.
The number of units budgeted for February (an even-numbered month) are: 0.5 × 33,000 units = 16,500 units.
The budgeted costs for February = ($7 × 16,500 units) + $12,000 = $115,500 + $12,000 = $127,500.
Rationale
 $390,000.
This answer is incorrect. Because February is an even-numbered month, Daffy's policy is to manufacture 0.5 times the coming month's projected
sales, not 1.5 times the current month.
Question 43
1.B.5.f
aq.sp.bud.008_1802
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Card & Co. (CC), a creator of popular card games such as “Tres” and “Go Hunt,” is preparing a quarterly production budget. The sales forecast for game
sales is provided below:
Q1
Q2
Q3
Q4
Total
Sales Volume 40,000 42,000 34,000 86,000 202,000
The company uses a budget policy of maintaining an ending inventory of 15% of the next quarter's sales. Due to some unexpected events, the production
manager plans to end the current year with an inventory of 8,000 games. Assume that the sales forecast for the first quarter of the following year is the
same as the first quarter forecast for this upcoming year. Using a quarterly production budget, calculate total production volume for the year.
202,000
208,000
232,300
Correct
200,000
Rationale
 202,000
This answer represents total sales volume for the year; however, beginning and ending inventory must be considered to calculate total production
volume.
Rationale
 208,000
This answer represents units needed for the year; however, beginning inventory must be considered to calculate total production volume.
Rationale
 232,300
This answer represents the sum of units needed for each quarter; however, beginning inventory must be considered to calculate total production
volume.
Rationale
 200,000
CC's quarterly production budget for the year is provided below.
Q1
Sales Volume
Q2
Q3
Q4
Total
40,000 42,000 34,000 86,000 202,000
Planned End. Inventory 6,300 5,100 12,900
6,000
6,000
Units Needed
46,300 47,100 46,900 92,000 208,000
Less Beg. Inventory
(8,000) (6,300) (5,100) (12,900) (8,000)
Production Volume
38,300 40,800 41,800 79,100 200,000
Notice that the annual production budget could be computed directly as follows:
Annual sales volume plus planned ending inventory (based on Q1 next year ) less beginning inventory (based on Q1 this year).
202,000 + (40,000 × 15%) − (8,000) = 200,000
Question 44
1.B.5.f
tb.sp.bud.016_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Kids Plastics manufactures plastic action figures for kids. In budgeting for production, the company requires that 25% of the next month's budgeted
sales be on hand at the end of each month. Budgeted sales of action figures for the next four months are:
October November December January
Action Figures 15,800
19,600
145,200
14,700
What is budgeted production for December?
Correct
112,575 action figures
148,875 action figures
Your Answer
108,900 action figures
177,825 action figures
Rationale
 112,575 action figures
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory − Beginning Inventory.” Based on the expected January
sales, target ending inventory for December is 3,675 action figures (25% × 14,700). Based on expected December sales, beginning inventory for
December is 36,300 action figures (25% × 145,200). This results in planned production of 112,575 action figures in December (145,200 + 3,675 −
36,300). This is the correct answer.
Rationale
 148,875 action figures
Based on expected January sales, target ending inventory for December is 3,675 action figures (25% × 14,700). In this example planned production
in December would be 148,875 action figures if the beginning inventory is ignored (145,200 + 3,675). This is not the correct calculation; therefore,
this is an incorrect answer.
Rationale
 108,900 action figures
Based on expected December sales, beginning inventory for December is 36,300 action figures (25% × 145,200). In this example planned production
in December would be 108,900 action figures if the targeted ending inventory is ignored (145,200 – 36,300). This is not the correct calculation;
therefore, this is an incorrect answer.
Rationale
 177,825 action figures
Based on expected January sales, target ending inventory for December is 3,675 action figures (25% × 14,700). Based on expected December sales,
beginning inventory for December is 36,300 action figures (25% × 145,200). In this example planned production in December would be 177,825
action figures if the beginning inventory is added and the ending inventory is subtracted (145,200 − 3,675 + 36,300. This is not the correct
calculation; therefore, this is an incorrect answer.
Question 45
1.B.5.a
tb.sp.bud.024_1809
LOS: 1.B.5.a
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Which statement is most correct concerning the role of the sales budget in the development of an accurate annual profit plan?
Having an accurate sales budget ensures a company of having an accurate annual profit plan.
Correct
Without an accurate sales budget a company is less likely to have an accurate annual profit plan.
Your Answer
It is more likely for a company to have an accurate annual profit plan with an inaccurate sales budget.
The accuracy of a company's annual profit plan is unrelated to the accuracy of its sales forecast.
Rationale
 Having an accurate sales budget ensures a company of having an accurate annual profit plan.
Incorrect. While an accurate sales budget increases the likelihood of having an accurate annual profit plan, it does not ensure it as many other
factors are involved in determining the annual profit plan (for example, labor costs, material costs, labor usage, material usage, and selling costs
per unit).
Rationale
 Without an accurate sales budget a company is less likely to have an accurate annual profit plan.
Correct. A sales budget is an estimate of expected unit sales and expected selling prices. The two factors are combined to determine budgeted sales
revenue. The expected unit sales figure is used to determine the production budget as well as the selling expense budget. If the expected unit sales
figure is not accurate, these other budgets are also less likely to be accurate. This makes an accurate annual profit plan less likely.
Rationale
 It is more likely for a company to have an accurate annual profit plan with an inaccurate sales budget.
Incorrect. If the expected unit sales figure is not accurate, other budgets (production budgets, etc.) are also likely to be inaccurate. This makes an
accurate annual profit plan less likely, not more likely.
Rationale
 The accuracy of a company's annual profit plan is unrelated to the accuracy of its sales forecast.
Incorrect. If it is accurate, other budgets (production budgets, etc.) are also likely to be accurate. This means the accuracy of a company's annual
profit plan is related to the accuracy of its sales forecast.
Question 46
1.B.5.a
tb.sp.bud.025_1809
LOS: 1.B.5.a
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 4
All of the following statements concerning the relationship between the sales budget and the annual profit plan are correct except:
The sales budget is an input for preparing the selling expense budget.
Without an accurate sales budget a company is less likely to have an accurate annual profit plan.
Correct
It does not matter when the sales budget is developed while preparing the annual profit plan as it only impacts budgeted sales revenue.
The sales budget is an input for preparing the production budget.
Rationale
 The sales budget is an input for preparing the selling expense budget.
Incorrect. The expected unit sales figure is used to determine the selling expense budget.
Rationale
 Without an accurate sales budget a company is less likely to have an accurate annual profit plan.
Incorrect. If the expected unit sales figure is not accurate, the production and selling budgets are also less likely to be accurate. This makes an
accurate annual profit plan less likely.
Rationale
 It does not matter when the sales budget is developed while preparing the annual profit plan as it only impacts budgeted sales revenue.
Correct. A sales budget is an estimate of expected unit sales and expected selling prices. The two factors are combined to determine budgeted sales
revenue. In addition, the expected unit sales figure is used to determine the production budget as well as the selling expense budget. Therefore, it
needs to be prepared at the beginning of the annual profit plan development process.
Rationale
 The sales budget is an input for preparing the production budget.
Incorrect. The expected unit sales figure is used to determine the production budget as the units to produce partially depends on the units expected
to be sold.
Question 47
1.B.5.a
cma11.p1.t1.me.0017_0820
LOS: 1.B.5.a
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 1
Which one of following budgets is regarded as the foundation of the master budget?
*Source: Retired ICMA CMA Exam Questions.
Production
Correct
Sales
Your Answer
Operating
Cash
Rationale
 Production
This answer is incorrect. The sales budget is the foundation of the master budget. The production budget is based on the sales budget.
Rationale
 Sales
The sales budget is the foundation of the master budget. It is the first budget prepared in the master budget process.
Rationale
 Operating
This answer is incorrect. The operating budget begins with the sales budget and includes all the supporting budgets up to the budgeted income
statement.
Rationale
 Cash
This answer is incorrect. The cash budget is prepared after most of the other operating budgets in the master budget. The sales budget is the
foundation of the master budget.
Question 48
1.B.5.d
tb.sp.bud.007_1805
LOS: 1.B.5.d
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
What effect does an increase in the production budget have on the sales budget?
An increase in the production budget will increase the sales budget by the same amount.
Correct
An increase in the production budget has no effect on the sales budget.
Your Answer
An increase in the production budget will decrease the sales budget by the same amount.
An increase in the production budget will increase the sales budget by double the amount.
Rationale
 An increase in the production budget will increase the sales budget by the same amount.
The production budget is based on the sales budget (the number of units expected to be sold), expected beginning inventory, and targeted ending
inventory. As a result, an increase in the production budget does not result in an increase in the sales budget by the same amount. Therefore, this is
an incorrect answer.
Rationale
 An increase in the production budget has no effect on the sales budget.
The production budget is based on the sales budget (the number of units expected to be sold), expected beginning inventory, and targeted ending
inventory. As a result, an increase in the production budget has no effect on the sales budget. An increase in the sales budget results in an increase
in the production budget. Therefore, this is the correct answer.
Rationale
 An increase in the production budget will decrease the sales budget by the same amount.
The production budget is based on the sales budget (the number of units expected to be sold), expected beginning inventory, and targeted ending
inventory. As a result, an increase in the production budget does not result in a decrease in the sales budget by the same amount. Therefore, this is
an incorrect answer.
Rationale
 An increase in the production budget will increase the sales budget by double the amount.
The production budget is based on the sales budget (the number of units expected to be sold), expected beginning inventory, and targeted ending
inventory. As a result, an increase in the production budget does not result in an increase in the sales budget by double the amount. Therefore, this
is an incorrect answer.
Question 49
1.B.5.f
tb.sp.bud.015_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: hard
Bloom Code: 5
Boots Unlimited has budgeted for cowboy boots sales of $2,783,104 in October. It wants to end every month with inventory equal to 15 days’ worth of the
next month's sales (based on a 30-day month). September sales are projected at $2,550,016. The sales price is $128 per pair. Inventory at the beginning of
September is estimated at 9,960 pairs of cowboy boots. How many pairs of cowboy boots should Boots Unlimited manufacture in September?
30,794 pairs
Your Answer
10,872 pairs
19,010 pairs
Correct
20,834 pairs
Rationale
 30,794 pairs
A total of 19,922 pairs are needed to satisfy September sales ($2,550,016 ÷ $128). Based on expected October sales of 21,743 pairs ($2,783,104 ÷
$128), target ending inventory for September is 10,872 pairs (15 days of October sales). In this example planned production in September would be
30,794 pairs if the beginning inventory is ignored (19,922 + 10,872). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 10,872 pairs
In this example targeted ending inventory for September is 10,872 pairs (15 days of October sales of 21,743 units). This is not the same as the
planned production for the month; therefore, this is an incorrect answer.
Rationale
 19,010 pairs
A total of 19,922 pairs are needed to satisfy September sales ($2,550,016 ÷ $128). Based on expected October sales of 21,743 pairs ($2,783,104 ÷
$128), target ending inventory for September is 10,872 pairs (15 days of October sales). In this example planned production in September would be
19,010 pairs if the beginning inventory is added and the ending inventory is subtracted (19,922 − 10,872 + 9,960). This is not the correct calculation;
therefore, this is an incorrect answer
Rationale
 20,834 pairs
Planned production is calculated as “Units Needed tor Sales + Targeted Ending Inventory − Beginning Inventory.” A total of 19,922 pairs are needed
to satisfy September sales ($2,550,016 ÷ $128). Based on expected October sales of 21,743 pairs ($2,783,104 ÷ $128), target ending inventory for
September is 10,872 pairs (15 days of October sales). Putting this all together yields planned production of 20,834 pairs in September (19,922 +
10,872 − 9,960). This is the correct answer.
Question 50
1.B.5.c
tb.sp.bud.028_1809
LOS: 1.B.5.c
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: easy
Bloom Code: 4
Which of the following correctly lists the components of a sales budget?
Correct
Expected unit sales and expected selling prices.
Expected unit sales, beginning inventory, and desired ending inventory.
Expected production needs, beginning inventory, and desired ending inventory.
Your Answer
Expected selling prices and desired ending inventory.
Rationale
 Expected unit sales and expected selling prices.
Correct. A sales budget is an estimate of expected sales revenue for a period. It is based on expected unit sales and expected selling prices. These
are multiplied together to determine expected sales revenue.
Rationale
 Expected unit sales, beginning inventory, and desired ending inventory.
Incorrect. A sales budget is an estimate of expected sales revenue for a period. It is based on expected unit sales and expected selling prices.
Expected unit sales, beginning inventory, and desired ending inventory are components of the production budget, not the sales budget.
Rationale
 Expected production needs, beginning inventory, and desired ending inventory.
Incorrect. A sales budget is an estimate of expected unit sales and expected selling prices. Since expected competitor actions are likely to impact
expected sales and expected selling prices, they are likely to be considered when preparing a sales budget.
Rationale
 Expected selling prices and desired ending inventory.
Incorrect. A sales budget is an estimate of expected unit sales and expected selling prices. Desired ending inventory level impacts the production
budget, not the sales budget. It is not likely to impact expected sales and expected selling prices.
Question 51
1.B.5.c
tb.sp.bud.009_1805
LOS: 1.B.5.c
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 3
Sam Montana manufactures bookcases for colleges and universities to use in dorm rooms. Each bookcase sells for $65. Due to the cyclical nature of the
business, the company budgets two months ahead. In early May, it is planning for July, its busiest month. The company plans to sell 114,500 bookcases
in July. At the end of June, it expects to have 26,000 assembled bookcases in inventory, and it would like to have 3,000 bookcases in inventory at the end
of July. What is the company's budgeted sales revenue for July?
Your Answer
$5,947,500
Correct
$7,442,500
$9,132,500
$1,690,000
Rationale
 $5,947,500
Budgeted revenue is calculated as “Budgeted Unit Sales × Budgeted Selling Price.” In this example the budgeted revenue would be $5,947,500 if the
expected production of 91,500 bookcases (114,500 + 3,000 − 26,000) is used as the expected sales figure (91,500 × $65). This is not the correct
calculation; therefore, this is an incorrect answer.
Rationale
 $7,442,500
Each bookcase is expected to sell for $65 and a total of 114,500 bookcases are expected to be sold. This results in budgeted sales revenue of
$7,442,500 (114,500 × $65). Therefore, this is the correct answer.
Rationale
 $9,132,500
In this example the budgeted revenue would be $9,132,500 if the beginning inventory of 26,000 bookcases is added to the expected sales of 114,500
(140,500 × $65). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 $1,690,000
In this example the budgeted revenue would be 1,690,000 if the beginning inventory of 26,000 bookcases is used as the expected sales figure (26,000
× $65). This is not the correct calculation; therefore, this is an incorrect answer.
Question 52
1.B.5.f
tb.sp.bud.020_1805
LOS: 1.B.5.f
Lesson Reference: Sales Budgets and Production Budgets
Difficulty: medium
Bloom Code: 4
Mounds Company has provided you with the following sales data:
September October November December
Sales (Units)
20,000
30,000
50,000
40,000
The company requires that 5% of the next month's sales be on hand at the end of each month. Budgeted production for September would be how many
units?
Correct
20,500
20,000
21,500
19,000
Rationale
 20,500
Planned production is calculated as “Units Needed for Sales + Targeted Ending Inventory – Beginning Inventory.” Based on expected October sales,
target ending inventory for September is 1,500 units (5% × 30,000). Based on expected September sales of 20,000 units, beginning inventory for
September is 1,000 units (5% × 20,000). Putting this all together yields planned production of 20,500 units in September (20,000 + 1,500 – 1,000).
Therefore, this is the correct answer.
Rationale
 20,000
In this example the 20,000 units is only the amount needed to satisfy expected sales in September. It does not account for beginning and ending
inventory; therefore, this is an incorrect answer.
Rationale
 21,500
Based on expected October sales, target ending inventory for September is 1,500 units (5% × 30,000). Based on expected September sales,
beginning inventory for September is 1,000 units (5% × 20,000). In this example, planned production in September would be 21,500 units if the
beginning inventory is ignored (20,000 + 1,500). This is not the correct calculation; therefore, this is an incorrect answer.
Rationale
 19,000
Based on expected October sales, target ending inventory for September is 1,500 units (5% × 30,000). Based on expected September sales,
beginning inventory for September is 1,000 units (5% × 20,000). In this example, planned production in September would be 19,000 units if the
target ending inventory is ignored (20,000 – 1,000). This is not the correct calculation; therefore, this is an incorrect answer.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.B.5.h
tb.pc.bud.052_1809
LOS: 1.B.5.h
Lesson Reference: Budgeting for Production Costs
Difficulty: medium
Bloom Code: 4
All of the following statements concerning a direct materials purchase budget are correct except:
As budgeted production decreases, the amount of materials to purchase decreases.
As desired ending direct materials inventory deceases, the amount of materials to purchase decreases.
Correct
As beginning direct materials inventory decreases, the amount of materials to purchase decreases.
As the amount of direct materials required per unit decreases, the amount of materials to purchase decreases.
Rationale
 As budgeted production decreases, the amount of materials to purchase decreases.
Incorrect. As budgeted production decreases, the amount of materials needed for production decreases. As materials needed for production
decreases, the amount of materials to purchase decreases.
Rationale
 As desired ending direct materials inventory deceases, the amount of materials to purchase decreases.
Incorrect. As desired ending direct materials inventory decreases, the amount of materials needed for the period decreases. As materials needed for
the period decreases, the amount of materials to purchase decreases.
Rationale
 As beginning direct materials inventory decreases, the amount of materials to purchase decreases.
Correct. A direct materials purchases budget is an estimate of the quantity and cost of direct materials to be purchased in a period. The quantity to
be purchased is based on materials needed for production, beginning direct materials inventory, and desired ending direct materials inventory.
Materials needed during a period come from beginning inventory of direct materials and material purchases. As beginning direct materials
inventory decreases, the amount of materials to purchase increases, not decreases.
Rationale
 As the amount of direct materials required per unit decreases, the amount of materials to purchase decreases.
Incorrect. As the amount of direct materials required per unit decreases, the amount of materials needed for production decreases. As materials
needed for production decreases, the amount of materials to purchase decreases.
https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.B.5.l
aq.pc.bud.009_1802
LOS: 1.B.5.l
Lesson Reference: Budgeting for Production Costs
Difficulty: hard
Bloom Code: 6
Plush Pillows Production (3P) manufactures premium feather pillows for a chain of mattress stores. The company plans to manufacture and sell 80,000
pillows during the first quarter. Overhead costs are expected to include:
Variable Overhead Costs
Indirect Materials $0.65 per pillow
Indirect Labor
$1.45 per pillow
Other Overhead $0.90 per pillow
Fixed Overhead Costs
Salaries
$50,000 per quarter
Insurance
$4,000 per quarter
Depreciation $30,000 per quarter
Using a manufacturing overhead budget, compute 3P's total manufacturing overhead cost rate per pillow, and the total manufacturing overhead cost for
the quarter.
Your Answer
$3.00 total per pillow and $84,000 total for the quarter
Correct
$4.05 total per pillow and $324,000 total for the quarter
$1.05 total per pillow and $84,000 total for the quarter
$3.00 total per pillow and $240,000 total for the quarter
Rationale
 $3.00 total per pillow and $84,000 total for the quarter
This answer represents the variable manufacturing overhead rate and the fixed manufacturing overhead cost for the quarter.
Rationale
 $4.05 total per pillow and $324,000 total for the quarter
The following is 3P's manufacturing overhead budget for the first quarter.
Variable Overhead Costs
Indirect Materials
$0.65 per pillow
Indirect Labor
$1.45 per pillow
Other Overhead
$0.90 per pillow
Variable OH Rate
$3.00 per pillow
× Production Volume
80,000 pillows
Total Variable OH Cost $240,000 per quarter
Fixed Overhead Costs
Salaries
Insurance
Depreciation
$50,000
$4,000
$30,000
Total Fixed OH Cost $84,000
÷ Production Volume 80,000
Fixed OH Rate
$1.05
Manufacturing Overhead Budget
Rate per Pillow Total per Quarter
Variable Overhead
$3.00
Fixed Overhead
$1.05
$240,000
$84,000
Total Overhead
$4.05
$324,000
Rationale
 $1.05 total per pillow and $84,000 total for the quarter
This answer represents the fixed manufacturing overhead rate and the fixed manufacturing overhead cost for the quarter.
Rationale
 $3.00 total per pillow and $240,000 total for the quarter
This answer represents the variable manufacturing overhead rate and the variable manufacturing overhead cost for the quarter.
Question 3
1.B.5.i
tb.pc.bud.015_1805
LOS: 1.B.5.i
Lesson Reference: Budgeting for Production Costs
Difficulty: medium
Bloom Code: 4
At the Progressa Company, the required June production is 44,000 units. To make one unit of finished product, three pounds of direct material Z are
required. Actual beginning and desired ending inventories of direct material Z are 100,000 and 110,000 pounds, respectively. How many pounds of direct
material Z must be purchased?
122,000
132,000
Correct
142,000
54,000
Rationale
 122,000
The total materials required to be purchased for a period is calculated as “Materials needed for Production + Desired Ending Inventory − Expected
Beginning Inventory.” Materials needed for production is calculated as “Expected Production × Direct Materials per Unit.” In this example 132,000
pounds are needed for production (44,000 × 3 pounds per unit). The amount to be purchased would be 122,000 if the beginning inventory is added
and the targeted ending inventory is subtracted (132,000 + 100,000 − 110,000). This is not the correct calculation; therefore, this is an incorrect
answer.
Rationale
 132,000
The total materials required to be purchased for a period is calculated as “Materials needed for Production + Desired Ending Inventory − Expected
Beginning Inventory.” Materials needed for production is calculated as “Expected Production × Direct Materials per Unit.” In this example 132,000
pounds are needed for production (44,000 × 3 pounds per unit). However, this is not the amount to purchase as the beginning and targeted ending
inventory need to be taken into account. Therefore, this is an incorrect answer.
Rationale
 142,000
The total materials required to be purchased for a period is calculated as “Materials needed for Production + Desired Ending Inventory − Expected
Beginning Inventory.” Materials needed for production is calculated as “Expected Production × Direct Materials per Unit.” In this example 132,000
pounds are needed for production (44,000 × 3 pounds per unit). This means that the company needs to purchase 142,000 pounds of materials
(132,000 + 110,000 − 100,000). Therefore, this is the correct answer.
Rationale
 54,000
The total materials required to be purchased for a period is calculated as “Materials needed for Production + Desired Ending Inventory − Expected
Beginning Inventory.” Materials needed for production is calculated as “Expected Production × Direct Materials per Unit.” In this example 132,000
pounds are needed for production (44,000 × 3 pounds per unit). The amount to be purchased would be 54,000 if the units to be produced is used
instead of the materials needed for production (44,000 + 110,000 − 100,000). However, this is not the correct calculation. Therefore, this is an
incorrect answer.
Question 4
1.B.5.h
1B5-LS20
LOS: 1.B.5.h
Lesson Reference: Budgeting for Production Costs
Difficulty: easy
Bloom Code: 2
The direct materials budget is often broken down into:
a direct materials mix budget and a direct materials yield budget.
Correct
a direct materials usage budget and a direct materials purchase budget.
a direct materials mix budget and a direct materials purchase budget.
Your Answer
a direct materials yield budget and a direct materials usage budget.
Rationale
 a direct materials mix budget and a direct materials yield budget.
This answer is incorrect. The direct materials budget is not broken down into a direct materials mix budget and a direct materials yield budget.
Rationale
 a direct materials usage budget and a direct materials purchase budget.
The direct usage budget plus the direct materials purchase budget equals the direct materials budget.
Rationale
 a direct materials mix budget and a direct materials purchase budget.
This answer is incorrect. The direct materials budget is not broken down into a direct materials mix budget and a direct materials purchase budget.
Rationale
 a direct materials yield budget and a direct materials usage budget.
This answer is incorrect. The direct materials budget is not broken down into a direct materials yield budget and a direct materials usage budget.
Question 5
1.B.5.i
tb.pc.bud.011_1805
LOS: 1.B.5.i
Lesson Reference: Budgeting for Production Costs
Difficulty: medium
Bloom Code: 4
B&R Tax Services is preparing its direct labor budget for the first quarter of the year. The total direct labor budget for the first quarter is $55,500. The firm
expects to prepare 300 small returns which take 1 hour each, 200 medium returns which take 1.75 hours each, and 100 complicated returns which take
2.75 each. What is B&R's direct labor cost per hour?
$92.50
$52.86
Correct
$60.00
$33.64
Rationale
 $92.50
The total direct labor budget is calculated as “Expected Hours Needed × Direct Labor Cost Per Hour.” Rearranging this results in direct labor per
hour being calculated as “Total Direct Labor Budget ÷ Expected Hours Needed.” The labor cost per tax return is $92.50 ($55,500 ÷ 600 total returns);
however, the question asks for direct labor cost per hour. Therefore, this is an incorrect answer.
Rationale
 $52.86
The total direct labor budget is calculated as “Expected Hours Needed × Direct Labor Cost Per Hour.” Rearranging this results in direct labor per
hour being calculated as “Total Direct Labor Budget ÷ Expected Hours Needed.” In this example 1,050 hours would be needed if 1.75 hours were
needed for all 600 returns (600 × 1.75). This would result in a direct labor cost of $52.86 per hour ($55,500 ÷ 1,050). However, this is not the correct
way to calculate the hours needed. Therefore, this is an incorrect answer.
Rationale
 $60.00
The total direct labor budget is calculated as “Expected Hours Needed × Direct Labor Cost Per Hour.” Rearranging this results in direct labor per
hour being calculated as “Total Direct Labor Budget ÷ Expected Hours Needed.” In this example 300 hours are needed for small returns (300 × 1
hour), 350 hours for medium returns (200 × 1.75), and 275 hours for complicated returns (100 × 2.75). This sums to 925 total hours. Since the total
direct labor budget is $55,500, the direct labor cost per hour is $60.00 ($55,500 ÷ 925). Therefore, this is the correct answer.
Rationale
 $33.64
The total direct labor budget is calculated as “Expected Hours Needed × Direct Labor Cost Per Hour.” Rearranging this results in direct labor per
hour being calculated as “Total Direct Labor Budget ÷ Expected Hours Needed.” In this example 1,650 hours would be needed if 2.75 hours were
needed for all 600 returns (600 × 2.75). This would result in a direct labor cost of $33.64 per hour ($55,500 ÷ 1,650); however, this is not the correct
way to calculate the hours needed. Therefore, this is an incorrect answer.
Question 6
1.B.5.k
tb.pc.bud.056_1809
LOS: 1.B.5.k
Lesson Reference: Budgeting for Production Costs
Difficulty: medium
Bloom Code: 4
All of the following statements are correct except:
Total variable costs change in direct proportion to changes in volume.
Total fixed costs remain the same as volume changes.
Your Answer
Fixed cost per unit decreases as volume increases.
Correct
Variable costs per unit increases as production volume increases.
Rationale
 Total variable costs change in direct proportion to changes in volume.
Incorrect. Total variable costs change in direct proportion to changes in volume.
Rationale
 Total fixed costs remain the same as volume changes.
Incorrect. Total fixed costs stay the same even when volume changes.
Rationale
 Fixed cost per unit decreases as volume increases.
Incorrect. Since total fixed costs stay the same as volume increases, fixed cost per unit decreases as volume increases since the same cost is spread
over more units.
Rationale
 Variable costs per unit increases as production volume increases.
Correct. One type of cost is a variable cost. Examples include direct materials, direct labor, and sales commissions. Total variable costs change in
direct proportion to changes in volume. Since total variable costs increase at the same rate as volume increases, the variable costs per unit stays
the same when volume increases. It does not increase.
Question 7
1.B.5.i
1B5-LS10
LOS: 1.B.5.i
Lesson Reference: Budgeting for Production Costs
Difficulty: medium
Bloom Code: 4
A firm has projected sales of 50,000, 51,000, and 52,000 units for the next three periods (periods 1, 2 and 3, respectively). The firm maintains an ending
finished goods inventory equal to 10% of the next period's projected sales. Each unit requires 5 pounds of direct material (DM). The firm maintains an
ending DMs inventory equal to 15% of the next period's DMs needs. Assume that all inventory standards are currently met. How many pounds of material
must be purchased in period 1?
Correct
251,250 pounds.
Your Answer
250,500 pounds.
255,500 pounds.
250,000 pounds.
Rationale
 251,250 pounds.
Compute the number of units that must be produced in periods 1 and 2 (budgeted production = budgeted sales + ending inventory − beginning
inventory):
Period 1 = 50,000 + (51,000 × 0.1) − (50,000 × 0.1) = 50,100 units; period 2 = 51,000 + (52,000 × 0.1) − (51,000 × 0.1) = 51,100 units.
Then find DMs needed for both periods (multiply number of units to be produced by 5 lbs.). Getting period 1 DM needs 250,500 lbs. and period 2 DM
needs of 255,500 lbs. To find DM purchases for period 1, take period 1 DM needed + desired ending DM inventory of 38,325 pounds (255,500 lbs. ×
15%) less beginning DM inventory of 37,575 (250,500 × 15%) and get 251,250 pounds.
Rationale
 250,500 pounds.
This answer is incorrect. This amount represents period 1's direct material needs; however, this amount does not equal the material that must be
purchased in period 1.
Rationale
 255,500 pounds.
This answer is incorrect. This amount represents period 2's direct material needs; however, this amount does not equal the material that must be
purchased in period 1.
Rationale
 250,000 pounds.
This answer is incorrect. This amount represents period 1's projected sales of 50,000 multiplied by 5 pounds of direct materials; however, this
amount does not equal the material that must be purchased in period 1.
Question 8
1.B.5.j
tb.pc.bud.048_1805
LOS: 1.B.5.j
Lesson Reference: Budgeting for Production Costs
Difficulty: hard
Bloom Code: 4
Nathan is working on the operating budgets for his company. He has already done the sales and production budgets, and he is now working on the direct
materials, direct labor, and manufacturing overhead budgets. He decides to do the direct labor budget first, then the manufacturing overhead budget,
then the direct materials budget. Do you think this is an appropriate way to prepare the budgets? Why or why not?
Yes, because the direct materials budget depends on the direct labor and manufacturing overhead budgets, so it should always be prepared last.
Correct
Yes, because the manufacturing overhead budget depends on the direct labor budget, but none of the other budgets depend on the direct materials
budget.
No, because the direct labor budget depends on the direct materials budget, so the direct materials budget should be prepared first.
No, because the manufacturing overhead budget depends on the direct materials budget, so the direct materials budget should be prepared second.
Rationale
 Yes, because the direct materials budget depends on the direct labor and manufacturing overhead budgets, so it should always be
prepared last.
All three budgets are based on the production budget; however, the direct materials budget does not depend on the direct labor or manufacturing
overhead budgets. In addition to the production budget, it only depends on expected materials per unit, the expected cost per unit, expected
beginning inventory, and targeted ending inventory. The direct materials budget can be prepared before or after the direct labor and
manufacturing overhead budgets; therefore, this is an incorrect answer.
Rationale
 Yes, because the manufacturing overhead budget depends on the direct labor budget, but none of the other budgets depend on the
direct materials budget.
All three budgets are based on the production budget. The variable component of the manufacturing overhead budget is often based on direct
labor hours as direct labor is used to allocate variable manufacturing overhead; consequently, the direct labor budget needs to be prepared prior to
the manufacturing overhead budget. The direct labor and manufacturing overhead budgets do not depend on the direct materials budget, so the
direct materials budget can be prepared independent of the other two. Therefore, this is the correct answer.
Rationale
 No, because the direct labor budget depends on the direct materials budget, so the direct materials budget should be prepared first.
All three budgets are based on the production budget. The direct labor budget does not depend on the direct materials budget. In addition to the
production budget, it only depends on expected labor hours per unit and the expected hourly wage rate; consequently, the direct materials budget
can be prepared before or after the direct labor budget. This is an incorrect answer.
Rationale
 No, because the manufacturing overhead budget depends on the direct materials budget, so the direct materials budget should be
prepared second.
Both budgets are based on the production budget. The variable component of the manufacturing overhead budget is often based on direct labor
hours as direct labor is used to allocate variable manufacturing overhead. The manufacturing overhead budget is not related to the direct materials
budget as direct materials are typically not used to allocate variable manufacturing overhead; therefore, this is an incorrect answer.
Question 9
1.B.5.k
tb.pc.bud.045_1805
LOS: 1.B.5.k
Lesson Reference: Budgeting for Production Costs
Difficulty: medium
Bloom Code: 3
Firecracker Wings has budgeted the following costs for a month:
Wings, breading, and sauce $4,900
Direct labor (Variable)
$3,500
Rent
$1,100
Depreciation
$900
Other fixed costs
$400
If 24,000 wings are cooked and sold in this month, and each wing sells for $0.80, what is the budgeted total fixed cost?
$7,300
Your Answer
$8,400
$10,800
Correct
$2,400
Rationale
 $7,300
Total fixed costs do not change when output changes. Total fixed costs would be $7,300 if the wings, breading, and sauce, rent, depreciation and
other fixed costs were included in the calculation ($4,900 + $1,100 + $900 + $400). Not all of these costs are fixed costs; therefore, this is an incorrect
answer.
Rationale
 $8,400
Total fixed costs do not change when output changes. Total fixed costs would be $8,400 if wings, breading, and sauce and direct labor were
included in the calculation. These costs are variable costs because they change when output changes; therefore, this is an incorrect answer.
Rationale
 $10,800
Total fixed costs do not change when output changes. Total fixed costs would be $10,800 if all the costs listed were fixed costs. This is not the case
for this example; therefore, this is an incorrect answer.
Rationale
 $2,400
Total fixed costs do not change when output changes. Rent, depreciation, and other fixed costs are all fixed costs and they add up to $2,400. Wings,
breading, and sauce and direct labor are variable costs as they will change in direct proportion to changes in output. Therefore, this is the correct
answer.
Question 10
1.B.5.j
aq.pc.bud.007_1802
LOS: 1.B.5.j
Lesson Reference: Budgeting for Production Costs
Difficulty: easy
Bloom Code: 2
What is the relationship between the manufacturing overhead budget and the production budget?
The manufacturing overhead budget has no relation with the production budget.
The production budget depends on, and is a function of, the manufacturing overhead budget.
Correct
The manufacturing overhead budget depends on, and is a function of, the production budget.
The manufacturing overhead budget affects the sales budget, which then affects the production budget.
Rationale
 The manufacturing overhead budget has no relation with the production budget.
The manufacturing overhead budget is related to the production budget.
Rationale
 The production budget depends on, and is a function of, the manufacturing overhead budget.
The production budget does not depend on the manufacturing overhead budget.
Rationale
 The manufacturing overhead budget depends on, and is a function of, the production budget.
This answer correctly describes the relationship between the manufacturing overhead budget and the production budget.
Rationale
 The manufacturing overhead budget affects the sales budget, which then affects the production budget.
The sales budget does affect the production budget. However, the manufacturing overhead budget does not affect the sales budget.
Question 11
1.B.5.i
tb.pc.bud.029_1805
LOS: 1.B.5.i
Lesson Reference: Budgeting for Production Costs
Difficulty: medium
Bloom Code: 3
Gulfcoast Shrimp Packaging supplies frozen shrimp to grocery chains. It expects sales of 400 tons of shrimp in the next quarter and it plans to produce
380 tons dur