ACCA AK Management Accounting (MA) Budgeting 2 — Questions and Answers
Question 1: What is the purpose of a flexible budget?
- To remain unchanged regardless of actual activity levels
- To adjust budgeted costs and revenues to reflect the actual level of activity achieved (Correct answer)
- To forecast sales for the next five years
- To set individual employee performance targets
Correct answer: To adjust budgeted costs and revenues to reflect the actual level of activity achieved
A flexible budget adjusts the original budget figures to reflect the actual level of activity. This provides a more meaningful basis for comparing actual costs against what should have been spent at the actual activity level, improving cost control.
Question 2: In the context of budgeting, what is budgetary slack?
- An underestimate of revenues or overestimate of costs deliberately built into a budget by managers (Correct answer)
- The variance between budgeted and actual fixed costs
- The gap between the budget period start and end dates
- The time delay in preparing the budget
Correct answer: An underestimate of revenues or overestimate of costs deliberately built into a budget by managers
Budgetary slack occurs when managers deliberately underestimate revenues or overestimate costs to make targets easier to achieve. This is a behavioural problem that undermines the accuracy and usefulness of budgets.
Question 3: Which of the following is the correct sequence for preparing functional budgets?
- Production budget → Sales budget → Materials budget → Cash budget
- Sales budget → Production budget → Materials and labour budgets → Cash budget (Correct answer)
- Cash budget → Sales budget → Production budget → Materials budget
- Materials budget → Production budget → Sales budget → Cash budget
Correct answer: Sales budget → Production budget → Materials and labour budgets → Cash budget
The budgeting process typically starts with the sales budget (assuming sales is the principal budget factor), then derives the production budget, followed by materials, labour, and overhead budgets. The cash budget is one of the last to be prepared as it draws on all other budgets.
Question 4: A company's budgeted sales are £500,000. 60% of customers pay in the month of sale and 40% pay in the following month. Opening trade receivables are £80,000. What are the budgeted cash receipts for the month?
- £500,000
- £380,000 (Correct answer)
- £300,000
- £340,000
Correct answer: £380,000
Cash receipts from current month sales = £500,000 × 60% = £300,000. Cash receipts from prior month (opening receivables) = £80,000. Total cash receipts = £300,000 + £80,000 = £380,000.
Question 5: What is a key advantage of participative (bottom-up) budgeting?
- It is faster to prepare than top-down budgets
- It eliminates the possibility of budgetary slack
- It increases motivation and ownership among managers who help set the budget (Correct answer)
- It requires no coordination between departments
Correct answer: It increases motivation and ownership among managers who help set the budget
Participative budgeting involves lower-level managers in the budget-setting process. This increases their sense of ownership and commitment to achieving budget targets, improving motivation and often leading to more realistic budgets based on operational knowledge.
Question 6: Activity-based budgeting (ABB) focuses on:
- Setting budgets based solely on prior year figures plus inflation
- Budgeting the costs of activities and the cost drivers that cause those costs (Correct answer)
- Preparing a single fixed budget for the year
- Allocating all overhead costs based on direct labour hours
Correct answer: Budgeting the costs of activities and the cost drivers that cause those costs
ABB uses the principles of activity-based costing to budget costs. It identifies activities, determines cost drivers, and budgets the cost of each activity based on expected levels of the cost driver, providing a more accurate reflection of resource consumption.
ACCA AK Management Accounting (MA) Budgeting 2
What is the purpose of a flexible budget?