CAT Accounting Technician Budgeting & Cost Control 3 — Questions and Answers
Question 1: Which of the following best describes 'budget slack'?
- The time allowed between budget preparation and implementation
- The deliberate overestimation of costs or underestimation of revenues by managers (Correct answer)
- A reserve fund held for unexpected expenditures
- The difference between budgeted and actual profit
Correct answer: The deliberate overestimation of costs or underestimation of revenues by managers
Budget slack occurs when managers intentionally build in extra cost allowances or reduce revenue targets to make their budgets easier to achieve.
Question 2: In absorption costing, which costs are included in the cost of inventory?
- Variable production costs only
- All variable costs including selling costs
- Both fixed and variable production costs (Correct answer)
- Fixed production costs only
Correct answer: Both fixed and variable production costs
Absorption costing includes both fixed and variable production overheads in product cost, unlike marginal costing which only includes variable production costs.
Question 3: A labour efficiency variance is calculated as:
- (Standard hours − Actual hours) × Standard rate (Correct answer)
- (Standard rate − Actual rate) × Actual hours
- (Actual hours − Budgeted hours) × Actual rate
- (Standard hours − Actual hours) × Actual rate
Correct answer: (Standard hours − Actual hours) × Standard rate
Labour efficiency variance = (Standard hours for actual output − Actual hours worked) × Standard labour rate per hour.
Question 4: What is the purpose of a cash budget?
- To forecast profit for the period
- To plan and monitor cash inflows and outflows (Correct answer)
- To allocate overhead costs to products
- To determine the standard cost per unit
Correct answer: To plan and monitor cash inflows and outflows
A cash budget projects expected cash receipts and payments to ensure the business has sufficient liquidity and to identify potential cash shortfalls.
Question 5: Contribution per unit is calculated as:
- Selling price minus total cost per unit
- Selling price minus variable cost per unit (Correct answer)
- Fixed costs divided by number of units
- Gross profit divided by number of units
Correct answer: Selling price minus variable cost per unit
Contribution = Selling price per unit − Variable cost per unit; it represents the amount each unit contributes toward covering fixed costs and generating profit.
Question 6: A company uses activity-based costing (ABC). Which of the following best describes a 'cost driver'?
- A manager responsible for controlling departmental costs
- A factor that causes a change in the cost of an activity (Correct answer)
- The highest-cost item in the production process
- A fixed overhead allocation base
Correct answer: A factor that causes a change in the cost of an activity
In ABC, a cost driver is the factor that causes an activity's costs to increase or decrease, such as number of machine setups or purchase orders raised.
Question 7: When actual fixed overheads exceed absorbed fixed overheads, the result is:
- Over-absorption of overheads
- Under-absorption of overheads (Correct answer)
- A favorable overhead variance
- A positive volume variance
Correct answer: Under-absorption of overheads
Under-absorption occurs when actual overheads incurred are greater than the overhead absorbed into production, resulting in an adverse variance.
CAT Accounting Technician Budgeting & Cost Control 3
Which of the following best describes 'budget slack'?