Budgeting and Forecasting Flashcards

The 'beyond budgeting' model primarily advocates for:

Answer: Replacing fixed annual budgets with adaptive, relative performance targets and rolling forecasts

Beyond budgeting proposes abandoning rigid annual fixed budgets in favor of dynamic targets benchmarked against peers and continuous rolling forecasts that respond to changing conditions.

A production budget is calculated as:

Answer: Budgeted sales units + desired ending inventory – beginning inventory

Units to produce = budgeted sales + desired ending finished goods inventory − beginning finished goods inventory, ensuring sufficient stock is available.

Which of the following best describes an operating budget?

Answer: A short-term budget covering revenues and expenses for routine business operations

An operating budget covers the day-to-day revenues and operating expenses (sales, COGS, SG&A) for a defined period, typically one year.

When a company's actual material cost is higher than the flexible budget amount, the result is a:

Answer: Unfavorable spending variance

When actual costs exceed the flexible budget (adjusted for actual volume), the variance is unfavorable because the company spent more than expected per unit of activity.

Incremental budgeting is criticized primarily because it:

Answer: Perpetuates inefficiencies by treating prior-year spending as automatically justified

Incremental budgeting simply adds a percentage to last year's figures without questioning whether the base spending was necessary or efficient.

In the context of budgeting, a 'stretch goal' is intended to:

Answer: Establish ambitious but achievable targets that push employees toward higher performance

Stretch goals are challenging targets set above current performance levels to motivate improvement, while still being attainable with significant effort.

Which of the following is a key limitation of using historical data alone for forecasting?

Answer: Past patterns may not predict future outcomes when market conditions change significantly

Historical data assumes the future will resemble the past, which breaks down during structural market shifts, economic disruptions, or industry changes.