AAT L4 Management Accounting: Budgeting & Evaluation

Question 1

Which type of budget is most suitable for a business operating in a rapidly changing environment where forecasts quickly become outdated?

Accepted Answer

Rolling (continuous) budget

Answer

Fixed annual budget

Answer

Incremental budget

Answer

Zero-based budget

Question 2

The principal budget factor (limiting factor) must be identified before other budgets are prepared because:

Accepted Answer

All other budgets flow from the constraint — it determines the maximum achievable activity level

Answer

It determines the tax liability for the period

Answer

It sets the directors' remuneration

Answer

It is required by HMRC

Question 3

Participative budgeting involves:

Accepted Answer

Lower-level managers contributing to and negotiating their own budgets

Answer

The board of directors setting all budgets centrally

Answer

An external consultant preparing the budget

Answer

Using prior year actuals to set current year targets automatically

Question 4

Budget slack refers to:

Accepted Answer

Deliberately understating revenue or overstating costs to make targets easier to achieve

Answer

Time wasted during the budget preparation process

Answer

The difference between fixed and flexible budget figures

Answer

The contingency reserve built into the capital budget

Question 5

A flexible budget differs from a fixed budget in that it:

Accepted Answer

Adjusts the budgeted costs and revenues to reflect the actual level of activity achieved

Answer

Cannot be revised once approved

Answer

Is prepared on a monthly basis rather than annually

Answer

Is only used in manufacturing companies

Question 6

Which of the following is a behavioural consequence of setting excessively tight (demanding) budget targets?

Accepted Answer

Managers may become demotivated and give up if targets seem unachievable

Answer

Managers become more motivated to exceed targets

Answer

Budget slack increases significantly

Answer

Participative budgeting becomes unnecessary