ACCA MA · Chapter 10
Budgeting MCQs with Answers
11 multiple-choice questions on Budgeting for ACCA MA Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
What is the principal budget factor?
- A) The largest cost item in the budget
- B) The budget prepared last in the budgeting process
- C) The factor that limits the activities of the organisation, so that it has to be budgeted for first
- D) The difference between budgeted and actual profit
Show answer & explanation
Answer: C) The factor that limits the activities of the organisation, so that it has to be budgeted for first
The principal (key or limiting) budget factor restricts the organisation's activity. It is often sales demand, but could be machine capacity or a scarce material. Its budget is prepared first because all other budgets depend on it.
Question 2
Budgeted sales for May are 12,000 units, and for June 10,000 units. Opening finished goods inventory on 1 May is 1,500 units. Closing inventory each month is to be 20% of the next month's sales. What is the production budget for May?
- A) 11,500 units
- B) 13,500 units
- C) 12,500 units
- D) 12,000 units
Show answer & explanation
Answer: C) 12,500 units
Closing inventory for May = 20% x 10,000 = 2,000 units. Production = sales + closing inventory - opening inventory = 12,000 + 2,000 - 1,500 = 12,500 units.
Question 3
Production for a period is budgeted at 12,500 units. Each unit uses 3 kg of material costing $2 per kg. Opening raw material inventory is 4,000 kg and closing inventory is budgeted at 5,000 kg. What is the material purchases budget in $?
- A) $75,000
- B) $73,000
- C) $77,000
- D) $93,000
Show answer & explanation
Answer: C) $77,000
Material needed for production = 12,500 x 3 = 37,500 kg. Purchases = usage + closing inventory - opening inventory = 37,500 + 5,000 - 4,000 = 38,500 kg. Cost = 38,500 x $2 = $77,000.
Question 4
Production is budgeted at 12,500 units. Each unit needs 0.6 standard direct labour hours. Idle time is expected to be 10% of hours paid, and the labour rate is $18 per hour. What is the direct labour cost budget?
- A) $135,000
- B) $150,000
- C) $148,500
- D) $121,500
Show answer & explanation
Answer: B) $150,000
Productive hours needed = 12,500 x 0.6 = 7,500. Since idle time is 10% of hours paid, productive hours are 90% of hours paid. Hours paid = 7,500 / 0.9 = 8,333.33. Cost = 8,333.33 x 18 = $150,000. Adding 10% to productive hours (7,500 x 1.1 x 18 = $148,500) is wrong because idle time is a percentage of hours paid, not of productive hours.
Question 5
Sales are made on credit and cash is received as follows: 20% in the month of sale (customers take a 2% discount), 50% in the following month, 28% in the second month after sale, and 2% become irrecoverable debts. Sales were January $50,000, February $60,000 and March $70,000. What are the budgeted cash receipts for March?
- A) $58,000
- B) $57,720
- C) $58,720
- D) $43,720
Show answer & explanation
Answer: B) $57,720
March sales: 70,000 x 20% x 98% = $13,720. February sales: 60,000 x 50% = $30,000. January sales: 50,000 x 28% = $14,000. Total = 13,720 + 30,000 + 14,000 = $57,720. Ignoring the discount gives $58,000.
Question 6
A budget for 10,000 units includes direct materials $50,000, direct labour $40,000 and production overheads $30,000. Materials and labour are fully variable. At 8,000 units the production overhead budget would be $27,600. What is the total flexed budget cost for 11,500 units?
- A) $138,000
- B) $135,300
- C) $133,500
- D) $120,000
Show answer & explanation
Answer: B) $135,300
Variable overhead per unit (high-low) = (30,000 - 27,600) / (10,000 - 8,000) = $1.20, so fixed overhead = 30,000 - (10,000 x 1.20) = $18,000. At 11,500 units: materials 11,500 x 5 = 57,500; labour 11,500 x 4 = 46,000; overheads 18,000 + (11,500 x 1.20) = 31,800. Total = $135,300. Treating all costs as variable would give $138,000.
Question 7
What is a flexible budget?
- A) A budget prepared for one level of activity that is not changed
- B) A budget that is updated every month by adding a new period
- C) A budget that managers may change whenever they wish
- D) A budget that is adjusted to reflect the actual level of activity, by recognising how costs behave
Show answer & explanation
Answer: D) A budget that is adjusted to reflect the actual level of activity, by recognising how costs behave
A flexible budget recognises cost behaviour, so variable costs change with activity while fixed costs stay the same. Comparing actual results with a budget flexed to the actual activity level gives more meaningful variances for control. A fixed budget is set for one activity level only.
Question 8
Which of the following is a disadvantage of participative (bottom-up) budgeting?
- A) Managers are less committed to targets they helped to set
- B) Managers may build slack into their budgets to make targets easier to achieve
- C) Senior management has no involvement in the process
- D) Local knowledge of operating managers is ignored
Show answer & explanation
Answer: B) Managers may build slack into their budgets to make targets easier to achieve
When managers help set their own budgets they may overstate costs or understate revenues (budgetary slack) so their targets are easier to meet. The advantages of participation are greater commitment and the use of local knowledge. Senior managers still review and approve the budgets.
Question 9
Which of the following is NOT a purpose of budgeting?
- A) To co-ordinate the activities of different departments
- B) To guarantee that the organisation will achieve its planned profit
- C) To communicate plans and targets to managers
- D) To provide a basis for controlling performance
Show answer & explanation
Answer: B) To guarantee that the organisation will achieve its planned profit
Budgets help with planning, co-ordination, communication, motivation, authorisation and control. A budget is a plan; it cannot guarantee that the planned results will actually be achieved.
Question 10
Which document sets out the instructions, procedures, timetable and responsibilities for preparing the budget?
- A) Master budget
- B) Cash budget
- C) Budget variance report
- D) Budget manual
Show answer & explanation
Answer: D) Budget manual
The budget manual contains the rules and guidance for the budgeting process, including who is responsible for each budget and the timetable. The master budget is the final output (budgeted statement of profit or loss, statement of financial position and cash budget).
Question 11
Senior management prepares the budget and passes it down to operational managers, who are given little or no opportunity to take part in setting their own targets. What is this approach called?
- A) Participative (bottom-up) budgeting
- B) Flexible budgeting
- C) Imposed (top-down) budgeting
- D) Fixed budgeting
Show answer & explanation
Answer: C) Imposed (top-down) budgeting
In imposed (top-down) budgeting, senior managers set the budget with little input from the managers who must achieve it. It can be quick and consistent with strategy, but it may reduce motivation and ignore local knowledge. Participative (bottom-up) budgeting involves operational managers in setting their own budgets. Fixed and flexible budgets describe how a budget responds to activity levels, not who sets it.