AAT L4 Management Accounting: Budgeting & Evaluation 4 — Questions and Answers
Question 1: Activity-based budgeting (ABB) is best described as:
- Budgeting based solely on prior year expenditure
- Planning resource requirements by first identifying activities and then determining the cost drivers that cause activity costs (Correct answer)
- Zero-based budgeting for service companies only
- Setting budgets based on revenue targets only
Correct answer: Planning resource requirements by first identifying activities and then determining the cost drivers that cause activity costs
ABB uses the cost drivers and activities identified in an ABC system to budget resource requirements; budgets are built from activities needed to achieve output rather than from last year's cost headings.
Question 2: The purpose of a master budget is to:
- Replace all individual departmental budgets
- Provide a comprehensive, consolidated budget comprising the budgeted income statement, balance sheet, and cash budget (Correct answer)
- Set the production schedule for the year
- Determine the prices the business will charge customers
Correct answer: Provide a comprehensive, consolidated budget comprising the budgeted income statement, balance sheet, and cash budget
The master budget consolidates all functional budgets into three comprehensive statements: budgeted profit or loss (income statement), budgeted balance sheet, and cash budget — providing a complete picture of planned performance.
Question 3: Performance against budget is more meaningful when compared using:
- Fixed budget figures regardless of activity
- Flexible budget figures adjusted for actual activity (Correct answer)
- Prior year actuals only
- Industry averages
Correct answer: Flexible budget figures adjusted for actual activity
Comparing actual results against a flexible budget (adjusted for actual activity) isolates genuine efficiency and price variances, as opposed to a fixed budget comparison which mixes activity effects with performance effects.
Question 4: Which of the following is a limitation of the traditional incremental budgeting approach?
- It is too complicated for most finance teams
- It tends to perpetuate existing inefficiencies by automatically extending prior year spending (Correct answer)
- It requires too much manager involvement
- It cannot be used in manufacturing businesses
Correct answer: It tends to perpetuate existing inefficiencies by automatically extending prior year spending
Incremental budgeting starts from last year's base and adds or adjusts at the margin; this perpetuates waste and inefficiency from previous periods, as spending is not challenged from first principles.
Question 5: In a standard costing system, the labour rate variance is calculated as:
- (Standard hours − Actual hours) × Standard rate
- (Standard rate − Actual rate) × Actual hours worked (Correct answer)
- (Actual rate − Standard rate) × Standard hours
- (Actual hours − Standard hours) × Actual rate
Correct answer: (Standard rate − Actual rate) × Actual hours worked
Labour rate variance = (Standard rate − Actual rate) × Actual hours. Favourable if actual rate was below standard (paid less per hour than expected); adverse if actual rate exceeded standard.
Question 6: The contribution per unit for a product is £15. Fixed costs are £90,000 and the target profit is £36,000. How many units must be sold?
- 6,000 units
- 8,400 units (Correct answer)
- 9,000 units
- 4,000 units
Correct answer: 8,400 units
Units to achieve target profit = (Fixed costs + Target profit) / Contribution per unit = (£90,000 + £36,000) / £15 = £126,000 / £15 = 8,400 units.
AAT L4 Management Accounting: Budgeting & Evaluation 4
Activity-based budgeting (ABB) is best described as: