Budgeting and Budgetary Control Q&A
Accounting Q&A · Cost and Management Accounting · Topic 16
Work through the questions, then reveal the answers to check your reasoning.
25 short-answer questions. Try each question before revealing its answer.
Worked example
Budgeted variable cost is 4 per unit and fixed cost is 6,000. At actual output of 2,500 units, flex the cost budget to 16,000. Actual cost of 16,700 gives a 700 unfavourable cost variance.
See also Flexible Budget practice and Budgetary Control practice.
Core concepts
1. What is a budget?
A quantified plan for a future period.
2. What is budgetary control?
Compare actual results with relevant budgets and investigate differences to guide action.
3. What is a master budget?
A coordinated set of operating and financial budgets for the organisation.
4. Which budget often starts the master budget?
The sales budget, unless another factor such as capacity limits planned activity.
5. What is a production budget?
A plan for units to be produced to meet sales and inventory targets.
6. What is the production units formula?
Planned sales plus desired closing finished goods less opening finished goods.
7. What does a cash budget show?
Expected cash receipts, payments and closing cash by period.
8. Why does cash budget profit differ from accounting profit?
Cash timing and non-cash charges differ from accrual recognition.
9. What is a static budget?
A budget prepared for one planned activity level.
10. What is a flexible budget?
A budget that adjusts expected amounts for a chosen activity level using cost and revenue assumptions.
Worked applications
11. Sales are 4,000 units, opening stock is 300 and desired closing stock is 500. What is planned production?
4,200 units.
12. Each of those units uses two kilos. How much material is needed for production?
8,400 kilos.
13. Opening materials are 900 kilos and desired closing materials are 1,100. What quantity should be purchased?
8,600 kilos.
14. What is labour cost for 2,100 hours at 18 an hour?
37,800.
15. Opening cash is 3,000, collections 12,000 and payments 13,500. What is closing cash?
1,500 before financing.
16. If the minimum balance is 2,000, what funding is needed?
500 before interest or other effects.
17. At 2,000 units with variable cost of 5 and fixed cost of 4,000, what is flexed cost?
14,000 within the relevant range.
18. If actual cost was 13,600, what is the flexible-budget cost variance?
400 favourable.
19. Why compare actual costs with a flexed budget?
It helps distinguish the impact of activity from differences in cost at that activity.
Review and exam practice
20. What is a rolling budget?
A budget extended by adding a period as the earliest period passes.
21. What is zero-based budgeting?
Justifying proposed activities and costs from a zero starting point.
22. What is budgetary slack?
A deliberate allowance that makes budget targets easier to meet.
23. What is a limiting factor?
A constraint such as demand, labour hours or materials that restricts the plan.
24. Why investigate a favourable cost variance?
It can reflect efficiencies or problems such as postponed maintenance or lower quality.
25. What should a budget review record?
Explain significant differences, assign an owner and agree follow-up action.
