CA CA Budgeting & Forecasting 1 — Questions and Answers
Question 1: What is a 'master budget' in managerial accounting?
- The largest departmental spending plan in the organization
- A comprehensive financial plan integrating all individual subsidiary budgets (Correct answer)
- The budget formally approved by the board of directors
- A budget covering only capital expenditure projects
Correct answer: A comprehensive financial plan integrating all individual subsidiary budgets
A master budget is a comprehensive financial plan that consolidates all subsidiary budgets — operating, capital, and financial — into a single integrated document.
Question 2: Which budgeting approach requires all expenditures to be justified from scratch each period, starting from a zero base?
- Incremental budgeting
- Activity-based budgeting
- Zero-based budgeting (Correct answer)
- Rolling budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires managers to justify every expense from the ground up each period rather than using prior-year figures as an automatic baseline.
Question 3: What is 'variance analysis' in the context of the budgeting process?
- Measuring statistical variability in financial data sets
- Comparing actual results to budgeted amounts to identify and explain differences (Correct answer)
- Analyzing cost behavior patterns across departments
- Evaluating alternative investment scenarios
Correct answer: Comparing actual results to budgeted amounts to identify and explain differences
Variance analysis compares actual financial performance against budgeted figures to identify the amount and causes of differences for management action.
Question 4: A 'favorable variance' in a cost budget occurs when:
- Actual costs exceed the budgeted amount
- Actual costs are less than the budgeted amount (Correct answer)
- Revenue exceeds projected levels
- Production volume surpasses the budgeted target
Correct answer: Actual costs are less than the budgeted amount
A favorable cost variance occurs when actual costs come in below the budgeted amount, indicating better-than-planned cost control or efficiency.
Question 5: In the master budgeting process, which budget is typically prepared first because it drives all other budgets?
- The capital expenditure budget
- The sales budget (Correct answer)
- The cash budget
- The administrative expense budget
Correct answer: The sales budget
The sales budget is prepared first because revenue projections determine production requirements, which in turn drive all cost, expense, and cash flow budgets.
Question 6: What is 'participative budgeting' (also called bottom-up budgeting)?
- A budgeting process where costs are allocated based on activity cost drivers
- A process where lower-level managers participate in setting their own budget targets (Correct answer)
- A budgeting approach performed by external management consultants
- Budgets benchmarked against industry peer performance
Correct answer: A process where lower-level managers participate in setting their own budget targets
Participative budgeting involves lower-level managers in the budget-setting process, which can improve forecast accuracy and increase employee commitment to targets.
CA CA Budgeting & Forecasting 1
What is a 'master budget' in managerial accounting?