AAT L4 Management Accounting: Budgeting & Evaluation 4

Question 1

Activity-based budgeting (ABB) is best described as:

Accepted Answer

Planning resource requirements by first identifying activities and then determining the cost drivers that cause activity costs

Answer

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:

Accepted Answer

Provide a comprehensive, consolidated budget comprising the budgeted income statement, balance sheet, and cash budget

Answer

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:

Accepted Answer

Flexible budget figures adjusted for actual activity

Answer

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?

Accepted Answer

It tends to perpetuate existing inefficiencies by automatically extending prior year spending

Answer

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:

Accepted Answer

(Standard rate − Actual rate) × Actual hours worked

Answer

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.

AAT Level 4 Practice Test

AAT Level 4 Practice Test

AAT L4 Management Accounting: Budgeting & Evaluation 4