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Budgeting and Forecasting Flashcards

6 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A company's actual sales were £420,000 against a budgeted £400,000. The budget was based on 4,000 units at £100 each. Actual sales were 4,200 units at £100 each. What is the sales volume variance in terms of contribution (C/S ratio = 40%)?

    Answer: £8,000 Favourable

    Sales volume variance = (Actual volume − Budgeted volume) × Standard contribution per unit. Contribution per unit = £100 × 40% = £40. Variance = (4,200 − 4,000) × £40 = 200 × £40 = £8,000 Favourable.

  2. Which of the following is a disadvantage of participative (bottom-up) budgeting?

    Answer: Managers may build in budget slack to make targets easier to achieve

    Budget slack (deliberately understating revenues or overstating costs to create easy targets) is a key drawback of participative budgeting, where managers have the opportunity to influence their own targets.

  3. The high-low method is used to separate fixed and variable costs. The highest activity was 12,000 units costing £85,000. The lowest was 7,000 units costing £60,000. What is the variable cost per unit?

    Answer: £5.00

    Variable cost per unit = (Highest cost − Lowest cost) ÷ (Highest activity − Lowest activity) = (£85,000 − £60,000) ÷ (12,000 − 7,000) = £25,000 ÷ 5,000 = £5.00 per unit.

  4. A cash budget shows a forecast deficit of £40,000 in March. Which action would be most appropriate to address this?

    Answer: Arrange an overdraft facility with the bank in advance

    Arranging an overdraft facility in advance is the most prudent and practical response to a forecast cash deficit, ensuring finance is available when needed without resorting to inappropriate payment delays.

  5. A company uses exponential smoothing to forecast demand. The current forecast is 500 units and actual demand was 520 units. Using a smoothing constant (α) of 0.3, what is the new forecast?

    Answer: 506 units

    New forecast = Old forecast + α × (Actual − Old forecast) = 500 + 0.3 × (520 − 500) = 500 + 0.3 × 20 = 500 + 6 = 506 units.

  6. What is the main purpose of a master budget?

    Answer: To summarise all functional budgets into a budgeted income statement, balance sheet, and cash flow

    The master budget consolidates all functional budgets (sales, production, labour, overhead, etc.) into the three key financial statements: budgeted profit and loss account, budgeted balance sheet, and budgeted cash flow statement.