AAT L4 Management Accounting Budgeting — Questions and Answers
Question 1: A company has budgeted sales of 12,000 units for Q1. Opening inventory is 2,000 units and the desired closing inventory is 3,000 units. How many units must be produced?
- 11,000
- 12,000
- 13,000 (Correct answer)
- 14,000
Correct answer: 13,000
Production budget = Budgeted sales + Desired closing inventory - Opening inventory = 12,000 + 3,000 - 2,000 = 13,000 units.
Question 2: Which budgeting approach requires every item of expenditure to be justified from scratch each period?
- Incremental budgeting
- Flexed budgeting
- Zero-based budgeting (Correct answer)
- Rolling budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from a zero base each period, requiring all expenditure to be justified as if budgeting for the first time. Unlike incremental budgeting, it does not simply adjust the previous year's budget.
Question 3: A flexed budget adjusts the original budget for:
- Changes in selling prices
- The actual level of activity achieved (Correct answer)
- Inflation only
- Management bonus targets
Correct answer: The actual level of activity achieved
A flexed budget recalculates budgeted revenues and variable costs based on the actual volume of activity achieved, while keeping fixed costs unchanged. This provides a like-for-like comparison with actual results.
Question 4: A company budgets fixed overheads of £180,000 and variable overheads of £6 per unit. Budgeted output is 20,000 units but actual output is 22,000 units. What is the flexed budget for total overheads?
- £300,000
- £312,000 (Correct answer)
- £292,000
- £316,000
Correct answer: £312,000
Flexed budget total overheads = Fixed overheads + (Variable overhead per unit x Actual output) = £180,000 + (£6 x 22,000) = £180,000 + £132,000 = £312,000.
Question 5: What is the principal budget factor?
- The budget with the largest monetary value
- The factor that limits the organisation's activities in a given period (Correct answer)
- The managing director's budget
- The cost centre with the most employees
Correct answer: The factor that limits the organisation's activities in a given period
The principal budget factor is the factor that constrains the organisation's output — commonly sales demand, but it could be labour, materials, or machine capacity. All other budgets are prepared based on this constraint.
Question 6: Participative (bottom-up) budgeting is most likely to result in:
- Budgets that are impossible to achieve
- Greater staff motivation and ownership of targets (Correct answer)
- Shorter budget preparation time
- Less accurate forecasts
Correct answer: Greater staff motivation and ownership of targets
Participative budgeting involves managers at all levels in setting their own budgets. This increases buy-in, motivation, and ownership because staff have contributed to the targets they are expected to meet.
AAT L4 Management Accounting Budgeting
A company has budgeted sales of 12,000 units for Q1.
Opening inventory is 2,000 units and the desired closing inventory is 3,000 units.
How many units must be produced?