Budgeting and Forecasting Flashcards

Activity-based budgeting (ABB) improves on traditional budgeting primarily by:

Answer: Linking resource consumption to activities and cost drivers rather than departments alone

ABB allocates resources based on planned activities and their cost drivers, giving managers a more accurate picture of what drives spending.

Budget slack (also called budgetary slack) occurs when managers:

Answer: Intentionally underestimate revenues or overestimate costs to create an easier target

Budget slack is the deliberate padding of budgets—underforecasting revenues or overforecasting costs—so actual results look favorable versus the budget.

In a participative (bottom-up) budgeting process, budgets are primarily:

Answer: Developed by lower-level managers and submitted upward for approval

Participative budgeting involves operational managers in building their own budgets, which tends to increase commitment and incorporate detailed local knowledge.

Pro forma financial statements in the budgeting context are best described as:

Answer: Projected financial statements prepared to reflect the expected results of planned activities

Pro forma statements are forward-looking financial statements built from budget assumptions to show the projected income statement, balance sheet, and cash flows.

Which forecasting method uses the relationship between a dependent variable and one or more independent variables to predict future values?

Answer: Regression analysis

Regression analysis models the statistical relationship between variables (e.g., sales and advertising spend) to forecast the dependent variable based on expected inputs.

The Delphi method of forecasting relies on:

Answer: Iterative anonymous expert consensus to converge on a forecast

The Delphi method gathers forecasts anonymously from a panel of experts across multiple rounds, feeding back summarized results until consensus is reached.

Sensitivity analysis in budgeting is used to:

Answer: Examine how changes in key assumptions affect budgeted outcomes

Sensitivity analysis tests how budgeted profit, cash flow, or other metrics change when individual assumptions (price, volume, cost rates) are varied.