CCA Corporate Budgeting & Forecasting 3 — Questions and Answers
Question 1: Which type of budget flexes to reflect actual activity levels and is most useful for performance evaluation?
- Static budget
- Capital budget
- Flexible budget (Correct answer)
- Incremental budget
Correct 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.
Question 2: 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?
- 48,000 lbs
- 50,000 lbs
- 52,000 lbs (Correct answer)
- 55,000 lbs
Correct answer: 52,000 lbs
Purchases = Production needs + Desired ending inventory − Beginning inventory = 50,000 + 5,000 − 3,000 = 52,000 lbs.
Question 3: In scenario-based forecasting, what distinguishes a 'base case' from a 'stress case'?
- The base case uses historical data; the stress case uses market surveys
- The base case reflects most-likely assumptions; the stress case tests extreme adverse conditions (Correct answer)
- The base case is prepared by finance; the stress case by operations
- The base case is updated quarterly; the stress case is updated annually
Correct 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.
Question 4: Which term describes the practice of embedding intentional slack into a budget by understating revenues or overstating costs to make targets easier to achieve?
- Sensitivity analysis
- Budget padding or budgetary slack (Correct answer)
- Zero-based budgeting
- Variance smoothing
Correct 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.
Question 5: A corporate treasurer reviews the cash budget and notices a projected cash shortfall of $2 million in Q3. Which action is MOST appropriate?
- Reduce the capital expenditure budget retroactively
- Arrange a revolving credit facility in advance to cover the shortfall (Correct answer)
- Defer all vendor payments indefinitely
- Increase product pricing immediately to generate more cash
Correct 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.
Question 6: When using the percentage-of-sales method for financial forecasting, which balance sheet item is typically assumed to NOT vary directly with sales?
- Accounts receivable
- Inventory
- Long-term debt (Correct answer)
- Accounts payable
Correct 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.
Question 7: A division manager is evaluated solely on whether she meets her budget targets. This performance system is MOST likely to discourage which behavior?
- Cost reduction initiatives that benefit future periods (Correct answer)
- Accurate reporting of actual results
- Timely submission of budget revisions
- Collaboration with other departments on shared resources
Correct 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.
CCA Corporate Budgeting & Forecasting 3
Which type of budget flexes to reflect actual activity levels and is most useful for performance evaluation?