US CMA Part 1 · Chapter 2
Planning, Budgeting and Forecasting MCQs with Answers
30 multiple-choice questions on Planning, Budgeting and Forecasting for US CMA Part 1 Financial Planning, Performance and Analytics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is the most commonly cited disadvantage of participative (bottom-up) budgeting?
- A) Lower-level managers feel less ownership of the budget
- B) Managers may build budgetary slack into the targets they help to set
- C) Budgets ignore the operational knowledge of front-line managers
- D) It always produces targets that are too difficult to achieve
Show answer & explanation
Answer: B) Managers may build budgetary slack into the targets they help to set
Participative budgeting improves ownership and uses local knowledge, but it is more time-consuming and gives managers the opportunity to pad their budgets. The other options describe disadvantages of an imposed (top-down) approach, or are simply untrue.
Question 2
Which type of standard is generally considered most likely to motivate employees when used for budgeting and performance evaluation?
- A) Currently attainable (practical) standards that allow for normal spoilage, downtime and rest periods
- B) Ideal standards that assume perfect operating conditions
- C) Historical standards equal to the average of the last three years' actual results
- D) Basic standards that are left unchanged for many years
Show answer & explanation
Answer: A) Currently attainable (practical) standards that allow for normal spoilage, downtime and rest periods
Attainable standards are challenging but achievable with efficient effort, which tends to motivate employees. Ideal standards are rarely met and can discourage staff; historical and basic standards may embed past inefficiency or become outdated.
Question 3
In a SWOT analysis for a regional coffee chain, which item would be classified as a threat?
- A) The chain's baristas have well-regarded training and low staff turnover
- B) A large international competitor announces plans to open outlets in the chain's main cities
- C) The chain's point-of-sale system is outdated and frequently fails
- D) The chain owns well-located freehold premises in several cities
Show answer & explanation
Answer: B) A large international competitor announces plans to open outlets in the chain's main cities
Threats are external factors that could harm the organization, such as a new competitor entering the market. Staff skills and property ownership are internal strengths, and an unreliable point-of-sale system is an internal weakness.
Question 4
Using Porter's five forces model, which situation would most likely REDUCE the bargaining power of buyers in an industry?
- A) Customers face high costs and disruption if they switch to a rival supplier
- B) Products in the industry are standardized and easily compared
- C) A small number of customers account for most of the industry's sales
- D) Customers could realistically produce the product themselves
Show answer & explanation
Answer: A) Customers face high costs and disruption if they switch to a rival supplier
High switching costs lock customers in and weaken their ability to negotiate on price. Standardized products, concentrated purchasing and a credible threat of backward integration all increase buyer power.
Question 5
A software company performing a PEST analysis notes that new data privacy legislation will restrict how it may use customer data. Under which heading does this factor belong?
- A) Economic factors
- B) Political (including legal and regulatory) factors
- C) Social factors
- D) Technological factors
Show answer & explanation
Answer: B) Political (including legal and regulatory) factors
PEST analysis groups external macro-environmental factors into political, economic, social and technological categories. Government legislation and regulation fall under political (sometimes separately labeled legal) factors.
Question 6
Which statement best describes scenario planning as a strategic planning tool?
- A) It produces a single most-likely forecast that becomes the master budget
- B) It changes one input at a time to measure its effect on a planned outcome
- C) It sets budget targets by adjusting the previous year's actual results for inflation
- D) It develops several plausible pictures of the future environment and considers how the organization would respond under each
Show answer & explanation
Answer: D) It develops several plausible pictures of the future environment and considers how the organization would respond under each
Scenario planning builds a small number of internally consistent alternative futures and tests strategies against each, helping managers prepare contingency plans. Changing one variable at a time is sensitivity analysis, and adjusting prior results is incremental budgeting.
Question 7
What is budgetary slack?
- A) The difference between actual and budgeted results at the end of the period
- B) Unused production capacity included in the budget for unexpected orders
- C) The deliberate underestimation of revenues or overestimation of costs by managers so that budget targets are easier to achieve
- D) A contingency reserve approved by the board for unforeseen expenditure
Show answer & explanation
Answer: C) The deliberate underestimation of revenues or overestimation of costs by managers so that budget targets are easier to achieve
Budgetary slack (padding) arises when managers build cushions into their budgets, typically by understating revenue or overstating costs. It is most common in participative systems where performance is evaluated against the budget.
Question 8
The first unit of a new specialized machine took 500 direct labor hours to assemble. Production follows an 80% cumulative average-time learning curve. How many hours in total should units 5 to 8 require?
- A) 2,048 hours
- B) 768 hours
- C) 1,024 hours
- D) 1,280 hours
Show answer & explanation
Answer: B) 768 hours
With a cumulative average-time model, the average time falls to 80% each time cumulative output doubles. Average for 4 units = 500 x 0.8^2 = 320 hours, total 1,280. Average for 8 units = 500 x 0.8^3 = 256 hours, total 2,048. Units 5-8 = 2,048 - 1,280 = 768 hours.
Question 9
A product manager estimates next quarter's unit demand as follows: 10,000 units: probability 0.3 14,000 units: probability 0.5 18,000 units: probability 0.2 What is the expected demand?
- A) 14,000 units
- B) 14,400 units
- C) 18,000 units
- D) 13,600 units
Show answer & explanation
Answer: D) 13,600 units
Expected value = (10,000 x 0.3) + (14,000 x 0.5) + (18,000 x 0.2) = 3,000 + 7,000 + 3,600 = 13,600 units. The most likely outcome (14,000) and the simple average (14,000) ignore the probability weights. Pairing the probabilities with the wrong outcomes (10,000 x 0.2 + 14,000 x 0.5 + 18,000 x 0.3) gives 14,400, and 18,000 is simply the highest possible demand.
Question 10
A company's maintenance cost has been estimated by regression as: Cost = $12,500 + $3.40 x machine hours. What is the forecast maintenance cost for a month in which 8,000 machine hours are expected?
- A) $39,700
- B) $27,200
- C) $12,500
- D) $52,200
Show answer & explanation
Answer: A) $39,700
Forecast cost = fixed component + variable rate x activity = $12,500 + $3.40 x 8,000 = $12,500 + $27,200 = $39,700.
Question 11
Utility costs at Orchard Foods were $61,500 in the month with the highest activity (9,000 machine hours) and $43,500 in the month with the lowest activity (5,000 machine hours). Using the high-low method, what are the expected utility costs at 7,500 machine hours?
- A) $51,250
- B) $52,500
- C) $33,750
- D) $54,750
Show answer & explanation
Answer: D) $54,750
Variable cost per hour = ($61,500 - $43,500) / (9,000 - 5,000) = $4.50. Fixed cost = $61,500 - $4.50 x 9,000 = $21,000. Cost at 7,500 hours = $21,000 + $4.50 x 7,500 = $54,750.
Question 12
Budgeted sales for the next quarter are 24,000 units. Finished goods inventory at the start of the quarter is 3,000 units and management wants 4,500 units on hand at the end. How many units should be produced?
- A) 22,500 units
- B) 24,000 units
- C) 28,500 units
- D) 25,500 units
Show answer & explanation
Answer: D) 25,500 units
Required production = budgeted sales + desired ending inventory - beginning inventory = 24,000 + 4,500 - 3,000 = 25,500 units.
Question 13
Production of 25,500 units is budgeted. Each unit requires 3 pounds of material costing $4 per pound. Materials inventory is expected to be 8,000 pounds at the beginning of the period, and the desired ending inventory is 9,500 pounds. What is the budgeted cost of materials purchases?
- A) $306,000
- B) $312,000
- C) $300,000
- D) $108,000
Show answer & explanation
Answer: B) $312,000
Materials needed for production = 25,500 x 3 = 76,500 lb. Purchases = 76,500 + 9,500 ending - 8,000 beginning = 78,000 lb. Cost = 78,000 x $4 = $312,000.
Question 14
A company plans to produce 25,500 units next quarter. Each unit requires 0.75 direct labor hours, and the wage rate is $28 per hour. What is the direct labor budget?
- A) $504,000
- B) $714,000
- C) $535,500
- D) $669,375
Show answer & explanation
Answer: C) $535,500
Direct labor hours = 25,500 units x 0.75 = 19,125 hours. Budget = 19,125 x $28 = $535,500. The budget is driven by production, not sales.
Question 15
Credit sales are budgeted at $200,000 in January, $240,000 in February and $260,000 in March. Collections follow this pattern: 30% in the month of sale, 60% in the following month and 8% in the second month after sale; 2% is uncollectible. What are the budgeted cash collections in March?
- A) $242,000
- B) $238,000
- C) $254,800
- D) $224,800
Show answer & explanation
Answer: B) $238,000
March collections = 30% of March sales + 60% of February sales + 8% of January sales = $78,000 + $144,000 + $16,000 = $238,000. The 2% bad debts are never collected and must be excluded.
Question 16
A retailer pays for 40% of its merchandise purchases in the month of purchase and the remaining 60% in the following month. Purchases are $120,000 in February and $150,000 in March. What are budgeted cash payments for purchases in March?
- A) $150,000
- B) $138,000
- C) $132,000
- D) $72,000
Show answer & explanation
Answer: C) $132,000
March payments = 40% x $150,000 (March purchases) + 60% x $120,000 (February purchases) = $60,000 + $72,000 = $132,000.
Question 17
A company's cash budget for April shows a beginning cash balance of $35,000, cash receipts of $238,000 and cash disbursements of $251,000. Policy is to maintain a minimum cash balance of $30,000, borrowing from a credit line in multiples of $5,000. How much should be borrowed in April?
- A) $8,000
- B) $30,000
- C) $13,000
- D) $10,000
Show answer & explanation
Answer: D) $10,000
Cash before financing = $35,000 + $238,000 - $251,000 = $22,000. The shortfall against the $30,000 minimum is $8,000. Rounding up to the next multiple of $5,000 gives borrowing of $10,000, leaving an ending balance of $32,000.
Question 18
A static budget prepared for 10,000 units shows total variable costs of $180,000 and fixed costs of $95,000. Actual output was 11,500 units. What is the total cost in the flexible budget for the actual output (assuming output is within the relevant range)?
- A) $275,000
- B) $302,000
- C) $316,250
- D) $207,000
Show answer & explanation
Answer: B) $302,000
Variable cost per unit = $180,000 / 10,000 = $18. Flexible budget = $18 x 11,500 + $95,000 fixed = $207,000 + $95,000 = $302,000. Fixed costs do not change within the relevant range.
Question 19
Which budgeting approach requires every expenditure to be justified from a base of zero in each budget period, rather than starting from the prior year's amount?
- A) Incremental budgeting
- B) Zero-based budgeting
- C) Continuous (rolling) budgeting
- D) Flexible budgeting
Show answer & explanation
Answer: B) Zero-based budgeting
Zero-based budgeting requires managers to justify each activity and its cost afresh, which helps eliminate wasteful spending. Incremental budgeting starts from last year's figures, rolling budgets add a new period as one ends, and flexible budgets adjust for activity levels.
Question 20
A company always maintains a 12-month budget by adding a new month to the end of the budget as each month is completed. This is an example of:
- A) A continuous (rolling) budget
- B) A zero-based budget
- C) A project budget
- D) A kaizen budget
Show answer & explanation
Answer: A) A continuous (rolling) budget
A continuous or rolling budget is updated by dropping the period just completed and adding a new future period, so the planning horizon always remains the same length.
Question 21
Using activity-based budgeting, a plant plans to run 120 production batches next year. Each batch requires 2 machine setups, and each setup consumes resources costing $425. What is the budgeted cost of the setup activity?
- A) $51,000
- B) $102,000
- C) $10,200
- D) $153,000
Show answer & explanation
Answer: B) $102,000
Activity-based budgeting starts from the planned volume of the activity driver. Setups = 120 batches x 2 = 240 setups. Budgeted cost = 240 x $425 = $102,000.
Question 22
Which budgeting approach explicitly builds expected continuous improvements, such as planned cost reductions each period, into the budget figures?
- A) Incremental budgeting
- B) Authoritative budgeting
- C) Kaizen budgeting
- D) Static budgeting
Show answer & explanation
Answer: C) Kaizen budgeting
Kaizen budgeting incorporates expected continuous improvement into budget estimates, for example assuming that the cost per unit will fall by a set percentage each quarter. The other approaches do not specifically embed improvement targets.
Question 23
A construction company has won a three-year contract to build a hospital. Which type of budget is most appropriate for planning and controlling the costs of this contract?
- A) An annual master budget for the company as a whole
- B) A continuous budget with a rolling 12-month horizon
- C) A flexible budget based on the company's annual sales volume
- D) A project budget covering the entire life of the contract
Show answer & explanation
Answer: D) A project budget covering the entire life of the contract
A project budget is prepared for a specific, one-off undertaking and spans the full life of the project, which may cross several fiscal years. The annual master budget covers the whole company for a single year and does not isolate the project.
Question 24
A manufacturer budgets beginning finished goods inventory of $46,000, cost of goods manufactured of $820,000 and ending finished goods inventory of $52,000. What is budgeted cost of goods sold?
- A) $826,000
- B) $820,000
- C) $918,000
- D) $814,000
Show answer & explanation
Answer: D) $814,000
Budgeted COGS = beginning finished goods + cost of goods manufactured - ending finished goods = $46,000 + $820,000 - $52,000 = $814,000.
Question 25
A pro forma income statement is being prepared. Budgeted sales are $2,400,000, cost of goods sold is 60% of sales, selling and administrative expenses (including depreciation) are $520,000, and interest expense is $40,000. The income tax rate is 25%. What is budgeted net income?
- A) $400,000
- B) $300,000
- C) $330,000
- D) $100,000
Show answer & explanation
Answer: B) $300,000
Gross profit = $2,400,000 x 40% = $960,000. Income before tax = $960,000 - $520,000 - $40,000 = $400,000. Net income = $400,000 x (1 - 25%) = $300,000.
Question 26
Sales are forecast to rise from $5,000,000 to $6,000,000. Assets that vary with sales are 60% of sales and spontaneous liabilities are 15% of sales. The net profit margin is expected to be 8%, and 40% of net income will be paid as dividends. Using the percentage-of-sales method, how much external financing is needed?
- A) $450,000
- B) $258,000
- C) $162,000
- D) $312,000
Show answer & explanation
Answer: C) $162,000
Required increase in assets = 60% x $1,000,000 = $600,000. Spontaneous financing = 15% x $1,000,000 = $150,000. Retained earnings = 8% x $6,000,000 x (1 - 40%) = $288,000. External funds needed = $600,000 - $150,000 - $288,000 = $162,000.
Question 27
A financial planning model is used to show how budgeted operating income would change if the selling price fell by 5% while all other inputs stayed the same. This technique is known as:
- A) Monte Carlo simulation
- B) Regression analysis
- C) Sensitivity (what-if) analysis
- D) Zero-based budgeting
Show answer & explanation
Answer: C) Sensitivity (what-if) analysis
Sensitivity analysis changes one input at a time to see its effect on the outcome, helping managers identify the variables to which the plan is most sensitive. Monte Carlo simulation varies many inputs at once using probability distributions.
Question 28
How do strategic plans typically differ from operational plans?
- A) Strategic plans are prepared by front-line supervisors, while operational plans are set by the board
- B) Strategic plans cover a longer time horizon and set broad direction, while operational plans are short-term and detailed
- C) Strategic plans are expressed only in financial terms, while operational plans are non-financial
- D) Strategic plans are revised monthly, while operational plans are fixed for several years
Show answer & explanation
Answer: B) Strategic plans cover a longer time horizon and set broad direction, while operational plans are short-term and detailed
Strategic planning is a long-term, top-level activity concerned with the organization's overall direction and resource allocation. Operational planning translates the strategy into detailed short-term plans and budgets, usually covering a year or less.
Question 29
Within a master budget, which of the following is part of the financial budget rather than the operating budget?
- A) The production budget
- B) The direct labor budget
- C) The selling and administrative expense budget
- D) The cash budget
Show answer & explanation
Answer: D) The cash budget
The financial budget comprises the capital expenditure budget, the cash budget and the budgeted balance sheet and statement of cash flows. The production, labor and selling and administrative budgets are operating budgets that lead to the budgeted income statement.
Question 30
A budgeting and performance evaluation system is said to achieve goal congruence when:
- A) Every department receives an identical percentage increase in its budget
- B) Managers pursuing their own objectives are also led to act in the best interests of the organization as a whole
- C) Actual results exactly match budgeted results
- D) Budgets are imposed by senior management without consultation
Show answer & explanation
Answer: B) Managers pursuing their own objectives are also led to act in the best interests of the organization as a whole
Goal congruence exists when individual and departmental goals align with organizational goals, so that self-interested decisions also benefit the company. Equal increases, perfect accuracy and imposed budgets do not guarantee this alignment.