Certified Management Accountant Budgeting and Forecasting 2 — Questions and Answers
Question 1: Activity-based budgeting (ABB) improves on traditional budgeting primarily by:
- Limiting the budget to a single cost pool for simplicity
- Linking resource consumption to activities and cost drivers rather than departments alone (Correct answer)
- Requiring every cost to be approved by the CFO individually
- Replacing variance analysis with balanced scorecard metrics
Correct 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.
Question 2: Budget slack (also called budgetary slack) occurs when managers:
- Submit budgets that are more ambitious than achievable targets
- Intentionally underestimate revenues or overestimate costs to create an easier target (Correct answer)
- Use stretch goals to motivate higher performance
- Fail to submit their budgets before the deadline
Correct 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.
Question 3: In a participative (bottom-up) budgeting process, budgets are primarily:
- Set by top executives and imposed on lower-level managers
- Developed by lower-level managers and submitted upward for approval (Correct answer)
- Based entirely on prior-year actuals with no management input
- Prepared by external consultants to ensure objectivity
Correct 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.
Question 4: Pro forma financial statements in the budgeting context are best described as:
- Audited statements required by the SEC for public companies
- Projected financial statements prepared to reflect the expected results of planned activities (Correct answer)
- Statements prepared under IFRS rather than US GAAP
- Historical statements restated to exclude non-recurring items
Correct 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.
Question 5: Which forecasting method uses the relationship between a dependent variable and one or more independent variables to predict future values?
- Moving average
- Exponential smoothing
- Regression analysis (Correct answer)
- Delphi method
Correct 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.
Question 6: The Delphi method of forecasting relies on:
- Extrapolating a time series trend line into the future
- Iterative anonymous expert consensus to converge on a forecast (Correct answer)
- Calculating a weighted average of recent historical data
- Running Monte Carlo simulations of possible outcomes
Correct 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.
Question 7: Sensitivity analysis in budgeting is used to:
- Ensure budget assumptions comply with GAAP
- Examine how changes in key assumptions affect budgeted outcomes (Correct answer)
- Distribute overhead costs to products using activity rates
- Calculate the break-even point for a new product launch
Correct 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.
Certified Management Accountant Budgeting and Forecasting 2
Activity-based budgeting (ABB) improves on traditional budgeting primarily by: