FAC Finance and Accounting Budgeting & Cost Management 2 — Questions and Answers
Question 1: A company uses activity-based budgeting (ABB). Which of the following best describes its primary advantage over traditional budgeting?
- It eliminates all fixed costs from the budget
- It links resource consumption to specific activities and cost drivers (Correct answer)
- It requires fewer inputs from department managers
- It focuses exclusively on capital expenditure planning
Correct answer: It links resource consumption to specific activities and cost drivers
ABB links resource requirements to the activities that drive costs, providing a more accurate picture of how spending relates to organizational outputs.
Question 2: Under a standard cost system, a favorable material price variance occurs when:
- Actual quantity used exceeds standard quantity allowed
- Actual price paid is less than the standard price (Correct answer)
- Standard price exceeds actual quantity purchased
- Actual usage is less than budgeted usage
Correct answer: Actual price paid is less than the standard price
A favorable material price variance arises when the actual price paid per unit of material is lower than the standard price.
Question 3: Which budgeting approach requires managers to justify every dollar of expenditure from a zero base each period?
- Incremental budgeting
- Rolling budgeting
- Zero-based budgeting (Correct answer)
- Flexible budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting (ZBB) starts from zero and requires justification for all expenses rather than using prior-year figures as a baseline.
Question 4: A firm's static budget shows sales of 10,000 units, but actual sales were 12,000 units. When preparing a flexible budget for performance evaluation, what should the flexible budget reflect?
- 10,000 units at actual costs
- 12,000 units at standard costs (Correct answer)
- 10,000 units at standard costs
- 12,000 units at actual costs
Correct answer: 12,000 units at standard costs
A flexible budget adjusts to the actual activity level (12,000 units) but uses standard (budgeted) costs to isolate efficiency variances.
Question 5: In the context of cost-volume-profit analysis, the margin of safety ratio is calculated as:
- (Budgeted sales − breakeven sales) ÷ budgeted sales (Correct answer)
- Fixed costs ÷ contribution margin per unit
- Variable costs ÷ total revenue
- Net income ÷ total fixed costs
Correct answer: (Budgeted sales − breakeven sales) ÷ budgeted sales
The margin of safety ratio measures how far actual or budgeted sales exceed breakeven sales as a percentage of budgeted sales.
Question 6: When a company applies overhead using a predetermined overhead rate and actual overhead incurred exceeds applied overhead, the result is:
- Overapplied overhead, increasing gross profit
- Underapplied overhead, which is typically closed to cost of goods sold (Correct answer)
- A favorable budget variance that reduces WIP
- An unfavorable efficiency variance recorded in finished goods
Correct answer: Underapplied overhead, which is typically closed to cost of goods sold
Underapplied overhead means more overhead was incurred than absorbed into production, and the difference is usually closed to cost of goods sold at period end.
Question 7: Which of the following is a characteristic of a rolling (continuous) budget?
- It is prepared once a year and never revised
- It adds a new future period as each current period ends, maintaining a constant planning horizon (Correct answer)
- It allocates costs only to direct cost centers
- It requires approval from external auditors before implementation
Correct answer: It adds a new future period as each current period ends, maintaining a constant planning horizon
A rolling budget continuously extends the planning horizon by adding a new period whenever the most recent one expires, keeping the forecast window constant.
FAC Finance and Accounting Budgeting & Cost Management 2
A company uses activity-based budgeting (ABB).
Which of the following best describes its primary advantage over traditional budgeting?