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.
Read the first 6 Management Accounting: Budgeting & Evaluation flashcards as text
Which type of budget is most suitable for a business operating in a rapidly changing environment where forecasts quickly become outdated?
Answer: Rolling (continuous) budget
A rolling budget is continuously updated by adding a new period as each one expires, maintaining a constant planning horizon and ensuring forecasts remain relevant in dynamic environments.
The principal budget factor (limiting factor) must be identified before other budgets are prepared because:
Answer: All other budgets flow from the constraint — it determines the maximum achievable activity level
The principal budget factor is the constraint limiting the organisation's activity (commonly sales demand, but can be materials, labour, or capacity). All other budgets — production, labour, materials — must be built around this constraint.
Participative budgeting involves:
Answer: Lower-level managers contributing to and negotiating their own budgets
Participative (bottom-up) budgeting gives operational managers input into the budget-setting process, improving motivation and information quality, though it can create budget slack if not properly managed.
Budget slack refers to:
Answer: Deliberately understating revenue or overstating costs to make targets easier to achieve
Budget slack is the deliberate overstatement of costs or understatement of revenue by managers to create an easy-to-achieve target, reducing the risk of missing budget but distorting planning accuracy.
A flexible budget differs from a fixed budget in that it:
Answer: Adjusts the budgeted costs and revenues to reflect the actual level of activity achieved
A flexible budget recalculates what revenues and costs should have been at the actual activity level, enabling meaningful variance analysis that separates the effect of activity changes from efficiency changes.
Which of the following is a behavioural consequence of setting excessively tight (demanding) budget targets?
Answer: Managers may become demotivated and give up if targets seem unachievable
Budget targets that are perceived as unachievable can demotivate managers, as they see no point in trying to meet them. Research suggests targets should be challenging but achievable to maximise motivation.