Budgeting & Forecasting Flashcards

A company uses zero-based budgeting (ZBB). What is the primary difference from traditional incremental budgeting?

Answer: Every expense must be justified from scratch each period

ZBB requires managers to justify all expenditures from zero each budget cycle rather than using prior-year figures as a starting point.

Which forecasting method uses a weighted average of past data, giving more weight to recent observations?

Answer: Exponential smoothing

Exponential smoothing assigns exponentially decreasing weights to older observations, making recent data more influential in the forecast.

A rolling forecast differs from a static annual budget primarily because it:

Answer: Is updated continuously to maintain a fixed forward-looking horizon

A rolling forecast extends the planning horizon forward (e.g., always 12 months ahead) as each period closes, unlike a static budget set once per year.

In a master budget, which component is prepared first to drive all other budgets?

Answer: Sales budget

The sales budget is the starting point of the master budget because all other operating budgets depend on projected sales volume.

The production budget formula for required units is:

Answer: Budgeted sales + ending inventory − beginning inventory

Required production = Budgeted sales + Desired ending inventory − Beginning inventory, ensuring enough units are produced to meet demand and inventory targets.

A flexible budget adjusts for changes in:

Answer: Activity or volume levels

A flexible budget recalculates budgeted costs at the actual activity level, isolating the effect of volume changes from efficiency variances.

Which technique breaks a forecast into trend, seasonal, cyclical, and irregular components?

Answer: Time-series decomposition

Time-series decomposition separates historical data into its component patterns to improve forecasting accuracy.