CA Budgeting & Forecasting Flashcards

What is 'incremental budgeting'?

Answer: Using the prior year's budget as a baseline and adjusting for expected changes

Incremental budgeting starts with the prior period's approved budget and makes adjustments for anticipated changes, rather than justifying every cost from zero.

What does 'activity-based budgeting' (ABB) focus on?

Answer: Linking resource requirements directly to the activities needed to produce outputs

Activity-based budgeting ties resource planning to the specific activities that consume resources, providing a more accurate and transparent view of cost drivers than traditional line-item budgets.

Which budget type separates costs into fixed and variable components and recalculates totals based on actual output achieved?

Answer: Flexible budget

A flexible budget classifies costs as fixed or variable and automatically adjusts total budgeted spending to the actual level of production or sales activity.

What is 'budgetary slack' (also called budget slack or padding)?

Answer: Intentionally understating expected revenues or overstating expected costs in a budget

Budgetary slack occurs when managers intentionally build cushion into a budget by underestimating revenues or overestimating costs to make performance targets easier to achieve.

In capital budgeting, Net Present Value (NPV) is used to:

Answer: Determine whether an investment's discounted future cash flows exceed its initial cost

NPV discounts a project's future cash flows back to present value using the required rate of return; a positive NPV indicates the investment creates value by earning more than the cost of capital.

What does the 'payback period' measure in capital budgeting analysis?

Answer: How long it takes for cumulative project cash inflows to recover the initial investment

The payback period measures how many years it takes for a project's cumulative cash inflows to equal and thereby recover the original capital investment.