CBS Budget Development & Forecasting 3 — Questions and Answers
Question 1: A city government must prepare a budget that cannot exceed revenue projections by law. This is an example of:
- Deficit budgeting
- Balanced budget requirement (Correct answer)
- Zero-based budgeting
- Performance budgeting
Correct answer: Balanced budget requirement
A balanced budget requirement mandates that planned expenditures not exceed projected revenues, common in public sector budgeting.
Question 2: In regression-based budget forecasting, the R-squared value measures:
- The slope of the trend line
- The proportion of variance in the dependent variable explained by the independent variable(s) (Correct answer)
- The number of data points in the sample
- The forecast error in dollar terms
Correct answer: The proportion of variance in the dependent variable explained by the independent variable(s)
R-squared (coefficient of determination) indicates how well the regression model explains the variability in the dependent variable, ranging from 0 to 1.
Question 3: Which scenario best illustrates the use of a flexible budget?
- A company sets one fixed budget for all possible sales levels
- A manufacturer adjusts budgeted costs to reflect the actual units produced during the period (Correct answer)
- A nonprofit freezes all spending mid-year regardless of donation levels
- A startup creates a budget without historical data
Correct answer: A manufacturer adjusts budgeted costs to reflect the actual units produced during the period
A flexible budget recalculates expected costs based on actual activity levels, enabling more meaningful performance comparisons.
Question 4: Budget padding, also known as budgetary slack, most commonly occurs when:
- Managers overestimate revenues or underestimate costs to create a cushion (Correct answer)
- Executives impose aggressive targets from the top down
- Accountants use conservative depreciation methods
- The finance team adjusts for inflation proactively
Correct answer: Managers overestimate revenues or underestimate costs to create a cushion
Budgetary slack occurs when managers deliberately build in extra cushion by inflating cost estimates or understating revenue projections.
Question 5: When forecasting personnel costs for the next fiscal year, which data point is LEAST relevant?
- Planned headcount changes
- Anticipated merit increases
- Current benefit costs per employee
- The prior year's office supply budget (Correct answer)
Correct answer: The prior year's office supply budget
Office supply costs are unrelated to personnel cost forecasting, which focuses on salaries, benefits, and headcount.
Question 6: The master budget in a manufacturing company typically begins with which component?
- The cash budget
- The sales budget (Correct answer)
- The production budget
- The capital expenditure budget
Correct answer: The sales budget
The sales budget is the starting point of the master budget because all other budgets—production, purchasing, and overhead—depend on expected sales volume.
Question 7: A technique that identifies the sales volume at which total revenues equal total costs is called:
- Sensitivity analysis
- Break-even analysis (Correct answer)
- Payback period analysis
- Net present value analysis
Correct answer: Break-even analysis
Break-even analysis determines the output level at which total revenue equals total costs, resulting in neither profit nor loss.
CBS Budget Development & Forecasting 3
A city government must prepare a budget that cannot exceed revenue projections by law.
This is an example of: