Corporate Budgeting & Forecasting Flashcards

Which type of budget flexes to reflect actual activity levels and is most useful for performance evaluation?

Answer: Flexible budget

A flexible budget adjusts cost allowances to the actual level of activity, enabling a meaningful comparison between actual and expected costs at that activity level.

A company's direct materials budget shows a need for 50,000 lbs of raw material. Desired ending inventory is 5,000 lbs and beginning inventory is 3,000 lbs. How many lbs must be purchased?

Answer: 52,000 lbs

Purchases = Production needs + Desired ending inventory − Beginning inventory = 50,000 + 5,000 − 3,000 = 52,000 lbs.

In scenario-based forecasting, what distinguishes a 'base case' from a 'stress case'?

Answer: The base case reflects most-likely assumptions; the stress case tests extreme adverse conditions

The base case captures the most probable outcome, while the stress case evaluates the impact of severe but plausible adverse scenarios.

Which term describes the practice of embedding intentional slack into a budget by understating revenues or overstating costs to make targets easier to achieve?

Answer: Budget padding or budgetary slack

Budgetary slack occurs when managers deliberately set easy targets by understating revenues or overstating expenses to protect their performance evaluations.

A corporate treasurer reviews the cash budget and notices a projected cash shortfall of $2 million in Q3. Which action is MOST appropriate?

Answer: Arrange a revolving credit facility in advance to cover the shortfall

Proactively arranging a revolving credit facility before the shortfall occurs is the most prudent treasury management response.

When using the percentage-of-sales method for financial forecasting, which balance sheet item is typically assumed to NOT vary directly with sales?

Answer: Long-term debt

Long-term debt does not automatically increase with sales; it is a discretionary financing decision, unlike operating items that scale with activity.

A division manager is evaluated solely on whether she meets her budget targets. This performance system is MOST likely to discourage which behavior?

Answer: Cost reduction initiatives that benefit future periods

When managers are rewarded only for hitting current-period targets, they may avoid investments or cost reductions that hurt current results but benefit the company long-term.