CA Inter P4 · Chapter 14

Budgets and Budgetary Control MCQs with Answers

7 multiple-choice questions on Budgets and Budgetary Control for CA Inter P4 Cost and Management Accounting. Try each one before revealing the answer and explanation.

1. Question 1

   The overheads of a factory are ₹3,36,000 at 60% capacity and ₹4,08,000 at 80% capacity. Assuming overheads are semi-variable and behave linearly, the overheads in a flexible budget for 95% capacity are:

   • A) ₹5,32,000
   • B) ₹4,84,500
   • C) ₹4,62,000
   • D) ₹3,42,000
   Show answer & explanation

   Answer: C) ₹4,62,000

   Variable overhead per 1% of capacity = (₹4,08,000 - ₹3,36,000) / 20 = ₹3,600. Fixed overhead = ₹3,36,000 - 60 x ₹3,600 = ₹1,20,000. At 95%: ₹1,20,000 + 95 x ₹3,600 = ₹1,20,000 + ₹3,42,000 = ₹4,62,000. Scaling total overheads proportionately ignores the fixed element.

2. Question 2

   Budgeted sales for the quarter are 24,000 units. Opening stock of finished goods is 3,000 units and the desired closing stock is 4,500 units. Budgeted production is:

   • A) 22,500 units
   • B) 31,500 units
   • C) 28,500 units
   • D) 25,500 units
   Show answer & explanation

   Answer: D) 25,500 units

   Budgeted production = budgeted sales + desired closing stock - opening stock = 24,000 + 4,500 - 3,000 = 25,500 units.

3. Question 3

   Budgeted production is 25,500 units and each unit needs 2 kg of raw material. Opening stock of raw material is 6,000 kg and the desired closing stock is 8,000 kg. The budgeted purchase of raw material is:

   • A) 49,000 kg
   • B) 53,000 kg
   • C) 51,000 kg
   • D) 65,000 kg
   Show answer & explanation

   Answer: B) 53,000 kg

   Material required for production = 25,500 x 2 = 51,000 kg. Purchases = requirement + closing stock - opening stock = 51,000 + 8,000 - 6,000 = 53,000 kg.

4. Question 4

   Sales are budgeted at ₹4,00,000 for August, ₹5,00,000 for September and ₹6,00,000 for October. 20% of sales are for cash; 50% of sales are collected in the month following the sale and the remaining 30% in the second month following the sale. Cash collections from customers in October are:

   • A) ₹4,70,000
   • B) ₹3,70,000
   • C) ₹6,00,000
   • D) ₹4,90,000
   Show answer & explanation

   Answer: D) ₹4,90,000

   October collections = cash sales of October 20% x ₹6,00,000 = ₹1,20,000 + 50% of September sales ₹2,50,000 + 30% of August sales ₹1,20,000 = ₹4,90,000.

5. Question 5

   A budgeting approach in which every activity must be justified afresh as if it were being undertaken for the first time, without reference to the previous year's figures, is called:

   • A) Incremental budgeting
   • B) Flexible budgeting
   • C) Zero-based budgeting
   • D) Rolling budgeting
   Show answer & explanation

   Answer: C) Zero-based budgeting

   Zero-based budgeting requires each manager to justify the entire budget for each activity from scratch, ranking decision packages by priority. Incremental budgeting takes last year's figures as a base and adjusts them; a flexible budget changes with activity level; a rolling budget is continuously extended by adding a new period as one expires.

6. Question 6

   The factor that limits the activities of an organisation over the budget period and therefore determines the order in which functional budgets are prepared is known as the:

   • A) Master budget
   • B) Principal budget factor
   • C) Budget centre
   • D) Margin of safety
   Show answer & explanation

   Answer: B) Principal budget factor

   The principal (key or limiting) budget factor, often sales demand but sometimes materials, labour or machine capacity, restricts the level of activity. The budget for that factor is prepared first and the other functional budgets are built around it.

7. Question 7

   Budgeted direct labour hours for a month are 10,000. Actual hours worked were 9,000 and the standard hours for the actual output were 9,900. The activity ratio is:

   • A) 90%
   • B) 110%
   • C) 99%
   • D) 90.91%
   Show answer & explanation

   Answer: C) 99%

   Activity ratio = standard hours for actual output / budgeted hours x 100 = 9,900 / 10,000 x 100 = 99%. For reference, capacity ratio = 9,000/10,000 = 90% and efficiency ratio = 9,900/9,000 = 110%; activity ratio = capacity ratio x efficiency ratio.