CIMA BA2 · Chapter 6
Budgeting MCQs with Answers
13 multiple-choice questions on Budgeting for CIMA BA2 Fundamentals of Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following items would NOT appear in a cash budget?
- A) Proceeds from the sale of a non-current asset
- B) Payment of a dividend
- C) Receipt of a bank loan
- D) Depreciation of non-current assets
Show answer & explanation
Answer: D) Depreciation of non-current assets
A cash budget records only cash inflows and outflows. Depreciation is a non-cash accounting charge that spreads the cost of an asset over its life, so it is excluded. The asset disposal proceeds, dividend payment and loan receipt are all cash flows.
Question 2
What is meant by the PRINCIPAL BUDGET FACTOR?
- A) The budget with the largest total value
- B) The budget that is prepared last, after all other budgets
- C) The factor that is most difficult to forecast accurately
- D) The factor that limits the activities of the organisation and therefore determines the level of the other budgets
Show answer & explanation
Answer: D) The factor that limits the activities of the organisation and therefore determines the level of the other budgets
The principal (key or limiting) budget factor is the constraint on the organisation's activity, often sales demand but sometimes machine capacity, labour or materials. It must be identified first because it determines the level of activity on which the other functional budgets are based.
Question 3
Which of the following is NOT a purpose of budgeting?
- A) To coordinate the activities of different departments
- B) To communicate plans to managers
- C) To guarantee that actual results will equal planned results
- D) To provide a benchmark against which actual performance can be controlled
Show answer & explanation
Answer: C) To guarantee that actual results will equal planned results
Budgets help plan, coordinate, communicate, motivate, authorise spending and control performance. They cannot guarantee that actual outcomes will match the plan; differences are investigated through variance analysis.
Question 4
Budgeted sales for March are 18,000 units and for April 20,000 units. Opening inventory of finished goods at 1 March is expected to be 2,400 units. Closing inventory each month is to be 15% of the following month's budgeted sales. What is the production budget for March?
- A) 18,600 units
- B) 17,400 units
- C) 18,300 units
- D) 21,000 units
Show answer & explanation
Answer: A) 18,600 units
Closing inventory for March = 15% x 20,000 = 3,000 units. Production = sales + closing inventory - opening inventory = 18,000 + 3,000 - 2,400 = 18,600 units.
Question 5
A company plans to produce 18,600 units in March. Each unit uses 3 kg of material costing $4.50 per kg. Opening inventory of material is 6,000 kg and the company plans to reduce material inventory to 5,200 kg by the end of March. What is the material purchases budget for March in $?
- A) $247,500
- B) $251,100
- C) $254,700
- D) $278,100
Show answer & explanation
Answer: A) $247,500
Material required for production = 18,600 x 3 kg = 55,800 kg. Purchases = usage + closing inventory - opening inventory = 55,800 + 5,200 - 6,000 = 55,000 kg. Cost = 55,000 x $4.50 = $247,500.
Question 6
A company budgets to produce 4,000 units, each needing 2.5 standard hours of productive labour. Idle time is expected to be 20% of the total hours paid. Labour is paid $16 per hour. What is the labour cost budget?
- A) $192,000
- B) $160,000
- C) $128,000
- D) $200,000
Show answer & explanation
Answer: D) $200,000
Productive hours required = 4,000 x 2.5 = 10,000 hours. Because idle time is 20% of hours PAID, productive hours are 80% of hours paid: hours paid = 10,000 / 0.80 = 12,500 hours. Labour cost = 12,500 x $16 = $200,000. Adding 20% to productive hours (12,000 hours) is incorrect because the 20% is a proportion of hours paid, not of hours worked.
Question 7
A company's credit sales are expected to be: January $60,000, February $75,000, March $80,000. Customers pay as follows: 20% in the month of sale, receiving a 2% discount; 50% in the month after sale; 28% in the second month after sale; and 2% are irrecoverable. What are the budgeted cash receipts in March?
- A) $70,300
- B) $71,180
- C) $72,760
- D) $69,980
Show answer & explanation
Answer: D) $69,980
March receipts: from March sales 20% x $80,000 x 98% = $15,680; from February sales 50% x $75,000 = $37,500; from January sales 28% x $60,000 = $16,800. Total = $69,980. Irrecoverable debts are never received, and the discount reduces the cash collected from March sales.
Question 8
What is a FLEXIBLE budget?
- A) A budget that is designed to change in line with the actual level of activity, by recognising cost behaviour
- B) A budget that is updated every month by adding a new month at the end
- C) A budget prepared from zero each year, with every activity justified
- D) A budget that managers may overspend without authorisation
Show answer & explanation
Answer: A) A budget that is designed to change in line with the actual level of activity, by recognising cost behaviour
A flexible budget recognises which costs are fixed and which vary with activity, so it can be flexed to the actual output achieved. This allows a meaningful comparison of actual costs with the costs that should have been incurred at that level of activity. Adding a new period describes a rolling budget.
Question 9
A department's budgeted costs are $84,000 at 10,000 units and $105,600 at 14,000 units. Actual output was 12,500 units. What is the flexed budget cost allowance for the actual output?
- A) $97,500
- B) $105,000
- C) $94,286
- D) $94,800
Show answer & explanation
Answer: A) $97,500
Variable cost per unit = ($105,600 - $84,000) / (14,000 - 10,000) = $5.40. Fixed cost = $84,000 - (10,000 x $5.40) = $30,000. Flexed budget = $30,000 + (12,500 x $5.40) = $97,500.
Question 10
Which budgeting approach requires every activity and its costs to be justified from a base of zero, as if the activity were being undertaken for the first time?
- A) Incremental budgeting
- B) Rolling budgeting
- C) Fixed budgeting
- D) Zero-based budgeting
Show answer & explanation
Answer: D) Zero-based budgeting
Zero-based budgeting starts from zero and requires each activity to be justified in terms of its costs and benefits. Incremental budgeting takes the previous period as its base and adjusts it for expected changes, which can carry forward past inefficiencies.
Question 11
Budgetary slack (padding) is most likely to arise in which of the following situations?
- A) Budgets are imposed by senior management with no participation from budget holders
- B) The budget is revised every quarter by adding a further quarter
- C) Budgets are prepared using the zero-based approach for discretionary costs
- D) Managers participate in setting the budgets against which their own performance will be judged
Show answer & explanation
Answer: D) Managers participate in setting the budgets against which their own performance will be judged
When managers help set their own targets and are rewarded for meeting them, they have an incentive to overstate costs or understate revenues to make the budget easier to achieve. This is a recognised disadvantage of participative budgeting, despite its motivational benefits.
Question 12
What is a ROLLING (continuous) budget?
- A) A budget that is flexed to the actual level of activity
- B) A budget that is set once a year and never changed
- C) A budget that is continuously updated by adding a further period, such as a month or quarter, as the earliest period expires
- D) A budget for a single project that rolls over into the next financial year
Show answer & explanation
Answer: C) A budget that is continuously updated by adding a further period, such as a month or quarter, as the earliest period expires
A rolling budget always covers the same length of time ahead (for example 12 months), because a new period is added as each period ends. This keeps the budget realistic in changing conditions, at the cost of more time spent budgeting.
Question 13
Which of the following make up the MASTER budget?
- A) The sales budget, production budget and materials usage budget
- B) The budgeted income statement, budgeted statement of financial position and cash budget
- C) The capital expenditure budget and the labour budget only
- D) The flexible budget and the variance report
Show answer & explanation
Answer: B) The budgeted income statement, budgeted statement of financial position and cash budget
The master budget summarises all the functional budgets into a budgeted income statement, a budgeted statement of financial position and a cash budget. Sales, production, materials and labour budgets are functional budgets that feed into it.