ACCA AK Management Accounting (MA) Budgeting — Questions and Answers
Question 1: Which of the following best describes a rolling (continuous) budget?
- A budget that is set once and never revised
- A budget that is continuously updated by adding a new period as the most recent period expires (Correct answer)
- A budget prepared from scratch each year with no reference to previous budgets
- A budget that only covers capital expenditure
Correct answer: A budget that is continuously updated by adding a new period as the most recent period expires
A rolling budget is continuously updated so that it always covers a fixed future period (e.g., 12 months). As one month or quarter passes, a new month or quarter is added at the end, keeping the budget current and forward-looking.
Question 2: Zero-based budgeting (ZBB) requires managers to:
- Simply adjust last year's budget by an inflation percentage
- Justify every item of expenditure from a zero base for each new period (Correct answer)
- Only budget for new projects and ignore ongoing activities
- Set all budgets at zero and wait for actual costs to emerge
Correct answer: Justify every item of expenditure from a zero base for each new period
ZBB starts from scratch each budget period. Every activity and its associated costs must be justified as if it were new, rather than simply rolling forward last year's figures. This helps identify and eliminate unnecessary spending.
Question 3: What is the principal budget factor?
- The factor that limits the overall level of activity for the budget period (Correct answer)
- The cost that represents the highest proportion of total expenditure
- The budget that is prepared first in the budgeting process regardless of circumstances
- The factor that has no impact on the budget
Correct answer: The factor that limits the overall level of activity for the budget period
The principal budget factor (also called the limiting factor or key budget factor) is the factor that constrains the organisation's activities. It is identified first because all other budgets are built around this constraint — commonly sales demand, but could be labour, materials, or machine capacity.
Question 4: A company budgets to sell 10,000 units. Opening inventory of finished goods is 800 units and the desired closing inventory is 1,200 units. How many units must be produced?
- 9,600 units
- 10,000 units
- 10,400 units (Correct answer)
- 11,200 units
Correct answer: 10,400 units
Production budget = Budgeted sales + Desired closing inventory − Opening inventory = 10,000 + 1,200 − 800 = 10,400 units. More units must be produced than sold because the company wants to increase its inventory.
Question 5: Which of the following is a disadvantage of incremental budgeting?
- It requires extensive management time to prepare
- It automatically eliminates inefficiencies from prior periods
- It may perpetuate past inefficiencies and unnecessary spending (Correct answer)
- It forces managers to justify every item of expenditure
Correct answer: It may perpetuate past inefficiencies and unnecessary spending
Incremental budgeting takes the previous period's budget as its starting point and adjusts it. This can perpetuate existing inefficiencies, waste, and budgetary slack because past spending is rarely questioned — it is simply carried forward.
Question 6: A fixed budget is most useful for controlling costs when:
- Activity levels fluctuate significantly from period to period
- Activity levels remain constant and predictable (Correct answer)
- The organisation operates in a highly volatile market
- There are many cost centres with different cost behaviours
Correct answer: Activity levels remain constant and predictable
A fixed budget is prepared for a single level of activity. It is most useful when actual activity is close to the budgeted level. When activity fluctuates significantly, a flexible budget is more appropriate for meaningful cost control comparisons.
ACCA AK Management Accounting (MA) Budgeting
Which of the following best describes a rolling (continuous) budget?