ACCA PM · Chapter 10
Budgetary systems and types of budget MCQs with Answers
9 multiple-choice questions on Budgetary systems and types of budget for ACCA PM Performance Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is the main criticism of incremental budgeting?
- A) It requires every activity to be justified from a zero base
- B) It is too time-consuming and expensive to prepare
- C) It is updated continuously by adding a new period as each period ends
- D) It tends to carry forward past inefficiencies and slack into the new budget
Show answer & explanation
Answer: D) It tends to carry forward past inefficiencies and slack into the new budget
Incremental budgeting takes last year's figures and adjusts them for expected changes, so existing inefficiencies and wasteful spending are rarely questioned. Justifying everything from zero describes ZBB, and continuous updating describes rolling budgets. Incremental budgeting is actually quick and cheap to prepare.
Question 2
Under zero-based budgeting, what is a decision package?
- A) A summary of last year's actual results adjusted for inflation
- B) A set of budget targets agreed between head office and divisions
- C) A document describing an activity, its costs and benefits, and alternative levels of service, which is ranked against other packages
- D) A computer model used to flex the budget for the actual level of activity
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Answer: C) A document describing an activity, its costs and benefits, and alternative levels of service, which is ranked against other packages
In ZBB each activity is described in a decision package setting out its purpose, costs, benefits and alternative ways or levels of performing it. Packages are ranked and resources are allocated to the highest-ranked packages until the budget is exhausted.
Question 3
For which of the following types of cost is zero-based budgeting most likely to be useful?
- A) Direct material costs that vary with production volume
- B) Discretionary costs, such as staff training and advertising
- C) Depreciation on factory buildings
- D) Rent payable under a long-term lease
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Answer: B) Discretionary costs, such as staff training and advertising
ZBB is most useful where spending is discretionary and there is no clear link between input and output, such as training, advertising or research. Material costs are driven by output, and depreciation and lease rent are committed costs that cannot easily be changed in the short term.
Question 4
A company prepares a 12-month budget. At the end of each month, it adds a budget for the same month of the following year and revises the remaining months. Which type of budget is this, and when is it most useful?
- A) An incremental budget, most useful when operations are stable
- B) A zero-based budget, most useful for discretionary costs
- C) A rolling budget, most useful when the business environment is uncertain or changing quickly
- D) A fixed budget, most useful for controlling variable costs
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Answer: C) A rolling budget, most useful when the business environment is uncertain or changing quickly
A rolling (continuous) budget always covers a full period ahead by adding a new period as one expires, so plans reflect current conditions. This is particularly valuable where conditions change rapidly and an annual budget would soon become out of date. Its drawback is the time and cost of frequent revision.
Question 5
Which of the following is a principle of the 'beyond budgeting' model?
- A) Setting fixed annual targets that are agreed a year in advance
- B) Allocating resources once a year through the annual budget
- C) Using relative performance targets, such as benchmarks against competitors, instead of fixed annual targets
- D) Centralising decision-making at head office to improve control
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Answer: C) Using relative performance targets, such as benchmarks against competitors, instead of fixed annual targets
Beyond budgeting argues that fixed annual budgets cause dysfunctional behaviour. It favours relative, flexible targets, resources made available on demand, decentralised decision-making and frequent rolling forecasts separate from performance evaluation.
Question 6
Which of the following is a recognised disadvantage of participative (bottom-up) budgeting?
- A) Managers are less motivated because the budget is imposed on them
- B) Managers may build budgetary slack into their budgets to make targets easier to achieve
- C) Budgets take less time to prepare than imposed budgets
- D) Local managers' knowledge is ignored in setting targets
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Answer: B) Managers may build budgetary slack into their budgets to make targets easier to achieve
When managers set their own budgets, they may overstate costs or understate revenues to create slack and make targets easier to meet. Participation generally improves motivation and uses local knowledge, but it takes longer than an imposed approach.
Question 7
The original budget for 10,000 units included: variable costs $60,000; semi-variable costs $35,000 (of which $15,000 is fixed); and fixed costs $40,000. Actual output was 12,000 units. What is the total flexed budget cost?
- A) $162,000
- B) $147,000
- C) $135,000
- D) $151,000
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Answer: D) $151,000
Variable cost per unit = $60,000 / 10,000 = $6; flexed = 12,000 x $6 = $72,000. Semi-variable: variable element $20,000 / 10,000 = $2 per unit, so 12,000 x $2 = $24,000 plus $15,000 fixed = $39,000. Fixed costs stay at $40,000. Total = $72,000 + $39,000 + $40,000 = $151,000.
Question 8
A manager compares the latest forecast of the year's results with the annual target and takes corrective action before the year end to close an expected shortfall. What type of control is this?
- A) Feedback control
- B) Post-completion audit
- C) Incremental control
- D) Feedforward control
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Answer: D) Feedforward control
Feedforward control compares forecast outcomes with targets so that action can be taken before deviations occur. Feedback control compares actual results with the budget after the event and corrects future performance.
Question 9
Hopwood identified three styles of using budget information to evaluate managers. Under which style is a manager judged mainly on the ability to meet the budget in the short term, with little regard to other measures?
- A) Profit-conscious style
- B) Non-accounting style
- C) Participative style
- D) Budget-constrained style
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Answer: D) Budget-constrained style
In the budget-constrained style, meeting short-term budget targets is the main criterion, which can cause stress and manipulation of data. The profit-conscious style focuses on long-term effectiveness, and the non-accounting style places little emphasis on budget data. 'Participative' describes how budgets are set, not one of Hopwood's evaluation styles.