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Management Accounting: Budgeting & Evaluation Flashcards

6 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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

    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.

  2. The purpose of a master budget is to:

    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.

  3. Performance against budget is more meaningful when compared using:

    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.

  4. Which of the following is a limitation of the traditional incremental budgeting approach?

    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.

  5. In a standard costing system, the labour rate variance is calculated as:

    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.

  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?

    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.