CCA Corporate Budgeting & Forecasting 2 — Questions and Answers
Question 1: A company's sales budget shows projected units of 10,000 at $50 each, but the production budget reflects only 9,500 units. What is the most likely cause of this discrepancy?
- A forecasting error in the sales budget
- Planned reduction in ending finished goods inventory (Correct answer)
- Planned increase in ending finished goods inventory
- A raw materials shortage affecting production capacity
Correct answer: Planned reduction in ending finished goods inventory
If production is less than budgeted sales, the company plans to draw down finished goods inventory, resulting in lower ending inventory.
Question 2: Which rolling forecast approach replaces the traditional annual budget by continuously adding a new period as the most recent period expires?
- Zero-based budgeting
- Activity-based budgeting
- Rolling 12-month forecast (Correct answer)
- Incremental budgeting
Correct answer: Rolling 12-month forecast
A rolling 12-month forecast always maintains a forward-looking horizon by dropping the completed period and adding a new future period.
Question 3: During a budget variance analysis, a favorable volume variance combined with an unfavorable price variance most likely indicates that:
- The company sold more units than planned but at lower prices than budgeted (Correct answer)
- The company sold fewer units than planned at higher prices
- Both volume and pricing strategies underperformed
- Production efficiency improved while material costs rose
Correct answer: The company sold more units than planned but at lower prices than budgeted
A favorable volume variance means more units were sold than budgeted, while an unfavorable price variance means the selling price was below budget.
Question 4: In preparing a cash budget, which of the following items would NOT appear as a cash outflow?
- Payment of dividends
- Purchase of equipment
- Depreciation expense (Correct answer)
- Repayment of bank loan principal
Correct answer: Depreciation expense
Depreciation is a non-cash expense and does not involve any actual outflow of cash.
Question 5: A manufacturing company uses an activity-based budget. Which of the following would be the BEST cost driver for its machine setup costs?
- Number of direct labor hours
- Number of production runs (Correct answer)
- Total machine hours
- Number of units produced
Correct answer: Number of production runs
Machine setup costs are incurred each time a new production run begins, so number of production runs is the most appropriate cost driver.
Question 6: When a budget is described as 'participative' or 'bottom-up,' what is the primary advantage over a top-down imposed budget?
- It reduces total budgeted costs significantly
- It increases management commitment and accuracy through direct involvement (Correct answer)
- It eliminates the need for budget revisions during the year
- It ensures alignment with shareholder return targets
Correct answer: It increases management commitment and accuracy through direct involvement
Participative budgeting increases buy-in and motivation because managers who set their own targets are more committed to achieving them.
Question 7: A company forecasts next year's revenue using the formula: Y = $500,000 + ($45 × units sold). If the sales team projects 20,000 units, what is the forecasted revenue?
- $900,000
- $1,400,000 (Correct answer)
- $1,200,000
- $500,000
Correct answer: $1,400,000
Revenue = $500,000 + ($45 × 20,000) = $500,000 + $900,000 = $1,400,000.
CCA Corporate Budgeting & Forecasting 2
A company's sales budget shows projected units of 10,000 at $50 each, but the production budget reflects only 9,500 units.
What is the most likely cause of this discrepancy?