Master Budgeting MCQs
1. What is a master budget?
A) A budget for each department separately
B) A detailed plan of a company’s financial activities
C) A long-term financial strategy
D) A summary of past financial statements
✅Correct Answer: B) A detailed plan of a company’s financial activities
2. Which of the following is NOT a purpose of budgeting?
A) Planning
B) Control
C) Random spending
D) Performance evaluation
✅Correct Answer: C) Random spending
3. Which type of budget continuously rolls forward each month or quarter?
A) Static Budget
B) Perpetual Budget
C) Flexible Budget
D) Capital Budget
✅Correct Answer: B) Perpetual Budget
4. What is the primary purpose of the sales budget?
A) To estimate future sales revenue
B) To determine administrative costs
C) To track past financial performance
D) To allocate employee salaries
✅Correct Answer: A) To estimate future sales revenue
5. In budgeting, control refers to:
A) Setting goals and making plans
B) Comparing actual performance with planned performance
C) Recording past transactions
D) Forecasting economic trends
✅Correct Answer: B) Comparing actual performance with planned performance
6. Which budget is the starting point for preparing a master budget?
A) Cash Budget
B) Sales Budget
C) Production Budget
D) Direct Materials Budget
✅Correct Answer: B) Sales Budget
7. Which of the following budgets is used to determine production needs?
A) Selling and administrative budget
B) Cash budget
C) Production budget
D) Capital expenditure budget
✅Correct Answer: C) Production budget
8. Which of the following is an example of a fixed budget?
A) A budget that adjusts with changes in activity level
B) A budget that remains unchanged regardless of sales volume
C) A budget that updates automatically every month
D) A budget used only for capital projects
✅Correct Answer: B) A budget that remains unchanged regardless of sales volume
9. The master budget consists of which two major components?
A) Sales and cash budgets
B) Financial and operating budgets
C) Capital expenditure and inventory budgets
D) Labor and production budgets
✅Correct Answer: B) Financial and operating budgets
10. Which of the following budgets helps determine the amount of raw materials needed
for production?
A) Sales Budget
B) Production Budget
C) Direct Materials Budget
D) Cash Budget
✅Correct Answer: C) Direct Materials Budget
11. Which type of budget is prepared first?
A) Direct materials budget
B) Cash budget
C) Sales budget
D) Production budget
✅Correct Answer: C) Sales budget
12. What is the purpose of a cash budget?
A) To determine how much cash will be collected and spent
B) To predict depreciation expenses
C) To estimate long-term investment decisions
D) To allocate labor hours
✅Correct Answer: A) To determine how much cash will be collected and spent
13. A self-imposed budget is:
A) A budget set only by top management
B) A budget prepared with input from managers at all levels
C) A budget set by external auditors
D) A budget that does not require approval
✅Correct Answer: B) A budget prepared with input from managers at all levels
14. Which of the following is NOT included in the financial budget?
A) Cash Budget
B) Budgeted Income Statement
C) Sales Budget
D) Budgeted Balance Sheet
✅Correct Answer: C) Sales Budget
15. What is budgetary slack?
A) Extra time given for budget preparation
B) The difference between actual and budgeted expenses
C) The practice of underestimating revenues or overestimating expenses to create an easier
target
D) The surplus amount left in the cash budget
✅Correct Answer: C) The practice of underestimating revenues or overestimating
expenses to create an easier target
16. Which component of the master budget focuses on expenses and revenues?
A) Cash Budget
B) Operating Budget
C) Financial Budget
D) Capital Budget
✅Correct Answer: B) Operating Budget
17. Which budget ensures that a company has enough materials to meet production
needs?
A) Direct Materials Budget
B) Selling & Administrative Budget
C) Cash Budget
D) Balance Sheet Budget
✅Correct Answer: A) Direct Materials Budget
18. Which of the following is included in a production budget?
A) Expected unit sales
B) Direct labor costs
C) Material costs
D) Cash inflows
✅Correct Answer: A) Expected unit sales
19. A flexible budget is useful because it:
A) Remains fixed at all levels of activity
B) Adjusts to different levels of production
C) Is prepared once and never revised
D) Eliminates the need for variance analysis
✅Correct Answer: B) Adjusts to different levels of production
20. Which budget helps determine whether additional borrowing is needed?
A) Cash Budget
B) Sales Budget
C) Production Budget
D) Inventory Budget
✅Correct Answer: A) Cash Budget
21. The direct labor budget is based on which budget?
A) Sales Budget
B) Production Budget
C) Cash Budget
D) Financial Budget
✅Correct Answer: B) Production Budget
22. Which of the following budgets includes depreciation as a non-cash cost?
A) Sales Budget
B) Cash Budget
C) Manufacturing Overhead Budget
D) Direct Materials Budget
✅Correct Answer: C) Manufacturing Overhead Budget
23. What does the budgeted income statement help to estimate?
A) Total assets
B) Net income
C) Cash flow
D) Raw material costs
✅Correct Answer: B) Net income
24. Which budget shows expected inflows and outflows of cash?
A) Sales Budget
B) Operating Budget
C) Cash Budget
D) Capital Expenditure Budget
✅Correct Answer: C) Cash Budget
25. The ending finished goods inventory budget is based on which cost components?
A) Direct materials, direct labor, and manufacturing overhead
B) Sales, marketing, and administration costs
C) Interest, cash collections, and borrowings
D) Fixed assets, depreciation, and capital expenses
✅Correct Answer: A) Direct materials, direct labor, and manufacturing overhead
26. Which of the following is NOT included in a cash budget?
A) Cash inflows from sales
B) Depreciation expense
C) Cash outflows for expenses
D) Expected borrowings and repayments
✅Correct Answer: B) Depreciation expense
27. Which financial statement is prepared last in the budgeting process?
A) Budgeted Income Statement
B) Budgeted Balance Sheet
C) Cash Flow Statement
D) Sales Budget
✅Correct Answer: B) Budgeted Balance Sheet
28. What is the purpose of a capital expenditure budget?
A) To estimate long-term investment spending
B) To plan monthly sales
C) To allocate marketing costs
D) To track daily operational expenses
✅Correct Answer: A) To estimate long-term investment spending
29. Which budget provides input for the direct labor budget?
A) Sales Budget
B) Cash Budget
C) Production Budget
D) Manufacturing Overhead Budget
✅Correct Answer: C) Production Budget
30. Which of the following is an advantage of self-imposed budgets?
A) They always lead to higher profits
B) They are imposed by top management
C) They improve motivation and accuracy
D) They do not require managerial involvement
✅Correct Answer: C) They improve motivation and accuracy
31. What does the flexible budget adjust for?
A) Past financial performance
B) Variability in production or sales levels
C) Fixed costs only
D) Historical profit margins
✅Correct Answer: B) Variability in production or sales levels
32. In a cash budget, what does an excess of cash indicate?
A) The company needs to borrow money
B) The company can invest or repay debts
C) There is a budget deficit
D) The company has high depreciation costs
✅Correct Answer: B) The company can invest or repay debts
33. What happens when a budgeted expense exceeds actual expense?
A) There is a budget deficit
B) The company faces a financial loss
C) There is a favorable variance
D) It requires immediate adjustment
✅Correct Answer: C) There is a favorable variance
34. What is the main purpose of variance analysis?
A) To increase costs
B) To compare budgeted and actual performance
C) To create a new budget
D) To eliminate the need for forecasting
✅Correct Answer: B) To compare budgeted and actual performance
35. Which budget includes both fixed and variable expenses?
A) Sales Budget
B) Selling & Administrative Budget
C) Direct Materials Budget
D) Cash Budget
✅Correct Answer: B) Selling & Administrative Budget
36. Why is depreciation excluded from the cash budget?
A) It is not a real cost
B) It does not affect financial statements
C) It is a non-cash expense
D) It has no impact on business decisions
✅Correct Answer: C) It is a non-cash expense
37. If the expected production is 10,000 units and each unit requires 5 lbs. of material,
how much material is needed?
A) 10,000 lbs
B) 15,000 lbs
C) 50,000 lbs
D) 5,000 lbs
✅Correct Answer: C) 50,000 lbs
38. Which of the following budgets is most useful for forecasting future borrowing
needs?
A) Sales Budget
B) Cash Budget
C) Direct Labor Budget
D) Capital Budget
✅Correct Answer: B) Cash Budget
39. What is the role of the budget committee?
A) To approve all financial transactions
B) To prepare and monitor the budgeting process
C) To conduct external audits
D) To approve only capital budgets
✅Correct Answer: B) To prepare and monitor the budgeting process
40. What is the primary input to the sales budget?
A) Historical sales data and market analysis
B) Employee payroll data
C) Fixed assets and depreciation
D) Inventory levels
✅Correct Answer: A) Historical sales data and market analysis
41. What does the production budget determine?
A) The number of units to be produced
B) The amount of cash available
C) The direct labor cost per unit
D) The marketing budget for the period
✅Correct Answer: A) The number of units to be produced
42. Which of the following is an example of a cash disbursement?
A) Depreciation expense
B) Purchase of raw materials
C) Amortization of intangible assets
D) Increase in retained earnings
✅Correct Answer: B) Purchase of raw materials
43. What is the first step in the budgeting process?
A) Prepare the production budget
B) Develop a sales forecast
C) Determine cash flow needs
D) Compute operating expenses
✅Correct Answer: B) Develop a sales forecast
44. What is the primary purpose of the direct materials budget?
A) To determine the required quantity of materials for production
B) To estimate employee wages
C) To forecast cash flow needs
D) To allocate advertising expenses
✅Correct Answer: A) To determine the required quantity of materials for production
45. Which of the following is included in a flexible budget?
A) Fixed costs only
B) Variable costs only
C) Both fixed and variable costs
D) Capital expenditures only
✅Correct Answer: C) Both fixed and variable costs
46. What does a favorable variance indicate?
A) Actual performance exceeded expectations
B) The company experienced financial loss
C) The company needs to revise its budget
D) Actual expenses exceeded budgeted expenses
✅Correct Answer: A) Actual performance exceeded expectations
47. The budgeted income statement includes which key element?
A) Retained earnings
B) Net income
C) Depreciation expense
D) Ending inventory balance
✅Correct Answer: B) Net income
48. Why is variance analysis important?
A) It helps managers understand financial performance
B) It eliminates the need for financial statements
C) It predicts future sales
D) It prevents capital expenditures
✅Correct Answer: A) It helps managers understand financial performance
49. Which of the following is a limitation of budgeting?
A) It prevents fraud completely
B) It requires accurate estimates
C) It eliminates financial risks
D) It guarantees profitability
✅Correct Answer: B) It requires accurate estimates
50. Which budget focuses on long-term investment plans?
A) Capital expenditure budget
B) Sales budget
C) Direct labor budget
D) Cash budget
✅Correct Answer: A) Capital expenditure budget
51. What happens when actual expenses are higher than budgeted expenses?
A) A favorable variance occurs
B) A break-even situation arises
C) An unfavorable variance occurs
D) Budgeting is unnecessary
✅Correct Answer: C) An unfavorable variance occurs
52. What is the function of a responsibility center?
A) To oversee the financial performance of different business units
B) To manage only capital investments
C) To regulate tax payments
D) To eliminate the need for budgets
✅Correct Answer: A) To oversee the financial performance of different business units
53. What type of cost remains unchanged regardless of production levels?
A) Fixed cost
B) Variable cost
C) Mixed cost
D) Direct cost
✅Correct Answer: A) Fixed cost
54. Which budget estimates future staffing needs?
A) Direct labor budget
B) Sales budget
C) Production budget
D) Cash budget
✅Correct Answer: A) Direct labor budget
55. What is budgetary slack?
A) Overestimating revenues or underestimating costs
B) The process of revising a budget
C) A method of cost-cutting
D) A method for increasing efficiency
✅Correct Answer: A) Overestimating revenues or underestimating costs
56. The cash budget helps to determine:
A) The break-even point
B) Cash inflows and outflows
C) Depreciation expense
D) Total capital expenditures
✅Correct Answer: B) Cash inflows and outflows
57. What is the main purpose of the direct labor budget?
A) To determine labor hours needed for production
B) To calculate marketing expenses
C) To estimate fixed costs
D) To determine tax liabilities
✅Correct Answer: A) To determine labor hours needed for production
58. Which of the following budgets is used to project borrowing and repayments?
A) Cash budget
B) Sales budget
C) Capital budget
D) Direct materials budget
✅Correct Answer: A) Cash budget
59. What does the manufacturing overhead budget include?
A) Fixed and variable costs related to production
B) Only direct material costs
C) Only marketing expenses
D) Administrative salaries
✅Correct Answer: A) Fixed and variable costs related to production
60. What does the selling and administrative budget include?
A) Production costs
B) Direct material expenses
C) Fixed and variable non-production expenses
D) Manufacturing overhead
✅Correct Answer: C) Fixed and variable non-production expenses
61. What is the role of the sales budget in the master budget?
A) It determines cash flow needs
B) It forecasts production requirements
C) It calculates total capital investment
D) It estimates tax liabilities
✅Correct Answer: B) It forecasts production requirements
62. What is the primary purpose of the production budget?
A) To determine the number of units that must be produced
B) To estimate labor costs
C) To calculate interest expenses
D) To set marketing goals
✅Correct Answer: A) To determine the number of units that must be produced
63. Which financial statement is prepared using data from the budgeted income
statement?
A) Cash Budget
B) Budgeted Balance Sheet
C) Sales Budget
D) Capital Expenditure Budget
✅Correct Answer: B) Budgeted Balance Sheet
64. A budget that adjusts for different activity levels is called:
A) Static Budget
B) Flexible Budget
C) Zero-Based Budget
D) Operating Budget
✅Correct Answer: B) Flexible Budget
65. Which component of the master budget is essential for monitoring liquidity?
A) Sales Budget
B) Cash Budget
C) Production Budget
D) Manufacturing Overhead Budget
✅Correct Answer: B) Cash Budget
66. What does a company use to compare actual results with budgeted figures?
A) Variance Analysis
B) Cash Flow Statement
C) Tax Return
D) Balance Sheet
✅Correct Answer: A) Variance Analysis
67. Which budget outlines planned investments in long-term assets?
A) Capital Budget
B) Cash Budget
C) Sales Budget
D) Production Budget
✅Correct Answer: A) Capital Budget
68. What is the purpose of the direct materials budget?
A) To forecast inventory needs
B) To set advertising budgets
C) To allocate payroll expenses
D) To calculate interest payments
✅Correct Answer: A) To forecast inventory needs
69. Which of the following is NOT included in the operating budget?
A) Sales Budget
B) Production Budget
C) Budgeted Income Statement
D) Budgeted Balance Sheet
✅Correct Answer: D) Budgeted Balance Sheet
70. What does the budgeted balance sheet show?
A) The company’s expected financial position at the end of the budget period
B) The total amount of net sales
C) The monthly cash collections
D) The detailed breakdown of expenses
✅Correct Answer: A) The company’s expected financial position at the end of the
budget period
71. What is the primary purpose of a budgetary control system?
A) To provide tax calculations
B) To compare actual and budgeted performance
C) To replace financial accounting
D) To estimate goodwill
✅Correct Answer: B) To compare actual and budgeted performance
72. What does a zero-based budget require?
A) Justification of all expenses
B) Use of last year’s budget as a base
C) Focus only on fixed costs
D) No revisions during the year
✅Correct Answer: A) Justification of all expenses
73. Which of the following is a limitation of budgeting?
A) It prevents fraud
B) It requires estimation and may be inaccurate
C) It guarantees profit
D) It eliminates financial risk
✅Correct Answer: B) It requires estimation and may be inaccurate
74. What is a rolling budget?
A) A budget that continuously updates by adding a new period as the previous one ends
B) A budget prepared only once a year
C) A budget that includes capital investments only
D) A fixed budget that cannot be adjusted
✅Correct Answer: A) A budget that continuously updates by adding a new period as
the previous one ends
75. The direct labor budget helps in estimating:
A) Number of hours required for production
B) Total capital investments
C) Marketing expenses
D) Selling and administrative costs
✅Correct Answer: A) Number of hours required for production
76. What is the benefit of a participative budgeting approach?
A) Increased employee motivation and accountability
B) It eliminates budgetary slack
C) It requires no managerial oversight
D) It prevents all financial risk
✅Correct Answer: A) Increased employee motivation and accountability
77. What happens when actual sales are higher than budgeted sales?
A) A favorable variance occurs
B) A company must reduce production
C) A budget revision is required immediately
D) A company incurs a loss
✅Correct Answer: A) A favorable variance occurs
78. What is the primary focus of a sales budget?
A) Estimating future sales revenue
B) Reducing costs
C) Calculating production overhead
D) Allocating payroll expenses
✅Correct Answer: A) Estimating future sales revenue
79. A company’s cash budget includes which of the following?
A) Depreciation expense
B) Total assets
C) Expected cash receipts and disbursements
D) Fixed asset investments
✅Correct Answer: C) Expected cash receipts and disbursements
80. What is the primary goal of a budgeted income statement?
A) To estimate the expected net income
B) To determine total liabilities
C) To calculate interest payments
D) To project marketing expenses
✅Correct Answer: A) To estimate the expected net income