Certified Management Accountant Financial Planning 5 — Questions and Answers
Question 1: Which of the following is the most significant limitation of the traditional annual budgeting process?
- It requires too many employees to participate in budget preparation
- It can become disconnected from current business conditions due to its rigid one-year fixed horizon (Correct answer)
- It always produces budgetary slack because managers set their own targets
- It does not allow for allocation of overhead costs to products
Correct answer: It can become disconnected from current business conditions due to its rigid one-year fixed horizon
Annual budgets may quickly become outdated in dynamic environments, reducing their usefulness as management control tools.
Question 2: A company budgets production of 20,000 units. Each unit requires 3 lbs of raw material at $4/lb. The company wants ending raw material inventory of 5,000 lbs and has beginning inventory of 8,000 lbs. What is the budgeted raw material purchase cost?
- $228,000 (Correct answer)
- $240,000
- $212,000
- $260,000
Correct answer: $228,000
Purchases needed = (20,000 × 3) + 5,000 − 8,000 = 57,000 lbs × $4 = $228,000.
Question 3: A beyond budgeting approach differs from traditional budgeting primarily because it:
- Requires more detailed line-item approval by senior management
- Replaces fixed annual targets with relative performance benchmarks and rolling forecasts (Correct answer)
- Mandates zero-based justification for every cost center
- Eliminates variance analysis from the management reporting cycle
Correct answer: Replaces fixed annual targets with relative performance benchmarks and rolling forecasts
Beyond budgeting replaces fixed annual plans with adaptive processes using rolling forecasts and relative targets such as industry benchmarks or peer comparisons.
Question 4: If a company's actual direct labor hours are less than standard hours allowed for actual production, the direct labor efficiency variance is:
- Unfavorable, because less time was used than expected
- Favorable, because workers completed production in fewer hours than planned (Correct answer)
- Not determinable without knowing the actual wage rate
- Zero, because efficiency variance only applies to materials
Correct answer: Favorable, because workers completed production in fewer hours than planned
A favorable labor efficiency variance results when actual hours worked are less than the standard hours allowed, meaning workers were more productive than planned.
Question 5: Which of the following capital items would typically appear in a capital expenditure budget but NOT in the operating budget?
- Routine maintenance and repair costs
- Purchase of a new manufacturing machine (Correct answer)
- Annual insurance premiums on plant assets
- Lease payments for office equipment
Correct answer: Purchase of a new manufacturing machine
Capital expenditure budgets cover long-term asset purchases, while the operating budget covers recurring revenues and expenses within the current period.
Question 6: A manager's performance report shows that actual costs are $10,000 above the flexible budget for that manager's department. This most likely indicates:
- Sales volume was lower than budgeted
- The manager spent more per unit of activity than the standard rate (Correct answer)
- Fixed costs exceeded their budget due to higher-than-expected production volume
- The static budget was set too aggressively by top management
Correct answer: The manager spent more per unit of activity than the standard rate
A flexible budget variance in costs reflects differences in spending efficiency or prices, not volume, since the flexible budget already adjusts for actual activity level.
Question 7: When evaluating a profit center manager's performance, the most appropriate measure to use in the budget report is:
- Net income after allocated corporate overhead
- Contribution margin minus controllable fixed costs (Correct answer)
- Return on investment based on total company assets
- Gross profit before deducting selling and administrative expenses
Correct answer: Contribution margin minus controllable fixed costs
Profit center managers should be evaluated only on revenues and costs they can control, which typically means contribution margin less direct/controllable fixed costs.
Certified Management Accountant Financial Planning 5
Which of the following is the most significant limitation of the traditional annual budgeting process?