AAT L4 Management Accounting: Budgeting & Evaluation 3 — Questions and Answers
Question 1: The purpose of a cash budget is to:
- Measure profitability over the budget period
- Identify future cash surpluses and deficits so that appropriate financing or investment can be arranged (Correct answer)
- Calculate the corporation tax liability
- Reconcile the bank balance to the ledger
Correct answer: Identify future cash surpluses and deficits so that appropriate financing or investment can be arranged
A cash budget forecasts all expected cash inflows and outflows over the budget period, enabling management to plan for shortfalls (arrange overdraft or loan) or invest surpluses productively.
Question 2: Capital expenditure appraisal using the payback period method primarily assesses:
- The total profitability of a project
- How quickly the initial investment is recovered from net cash inflows (Correct answer)
- The project's return relative to the cost of capital
- The accounting profit generated by the project
Correct answer: How quickly the initial investment is recovered from net cash inflows
Payback measures the time required to recover the initial investment from the project's net cash inflows; it is simple to calculate and focuses on liquidity and risk (sooner = lower risk) but ignores cash flows after payback.
Question 3: Budget committee responsibilities typically include:
- Day-to-day operational decision making
- Coordinating budget preparation, reviewing submissions, resolving conflicts, and approving the master budget (Correct answer)
- Preparing individual departmental budgets
- Setting interest rates for the business's borrowings
Correct answer: Coordinating budget preparation, reviewing submissions, resolving conflicts, and approving the master budget
The budget committee oversees the budget process — issuing the budget manual, coordinating submissions, resolving conflicts between departments, and approving the final master budget.
Question 4: In variance analysis, the term 'controllable variance' means:
- A variance that has been eliminated
- A variance that can be influenced by the manager being held accountable for it (Correct answer)
- Any adverse variance regardless of cause
- A variance in excess of a materiality threshold
Correct answer: A variance that can be influenced by the manager being held accountable for it
Controllable variances are those within the manager's sphere of influence — only these should be used for performance evaluation. Uncontrollable variances (e.g., due to economic changes) should not be used to assess managerial performance.
Question 5: The direct materials usage variance is:
- (Standard price − Actual price) × Actual quantity used
- (Standard quantity for actual output − Actual quantity used) × Standard price (Correct answer)
- (Actual quantity used − Standard quantity) × Actual price
- Actual materials cost − Standard materials cost for actual output
Correct answer: (Standard quantity for actual output − Actual quantity used) × Standard price
Materials usage variance = (Standard quantity for actual output − Actual quantity used) × Standard price. A favourable variance means less material was used than standard for the actual production.
Question 6: Operating statements reconciling standard and actual profit typically present variances in which order?
- Only the most significant variances
- Sales variances, then cost variances (materials, labour, overheads), to reconcile standard profit to actual profit (Correct answer)
- Revenue variances only
- Fixed cost variances only
Correct answer: Sales variances, then cost variances (materials, labour, overheads), to reconcile standard profit to actual profit
An operating statement starts with standard profit for actual sales, then lists all variances — sales price, sales volume, materials (price, usage), labour (rate, efficiency), and overhead variances — to reconcile to actual profit.
AAT L4 Management Accounting: Budgeting & Evaluation 3
The purpose of a cash budget is to: