CFC Budgeting & Forecasting 2 — Questions and Answers
Question 1: A company uses zero-based budgeting (ZBB). What is the primary difference from traditional incremental budgeting?
- Every expense must be justified from scratch each period (Correct answer)
- Prior year actuals are used as the baseline
- Only capital expenditures require justification
- Budget increases are capped at the inflation rate
Correct answer: Every expense must be justified from scratch each period
ZBB requires managers to justify all expenditures from zero each budget cycle rather than using prior-year figures as a starting point.
Question 2: Which forecasting method uses a weighted average of past data, giving more weight to recent observations?
- Simple moving average
- Exponential smoothing (Correct answer)
- Regression analysis
- Seasonal decomposition
Correct answer: Exponential smoothing
Exponential smoothing assigns exponentially decreasing weights to older observations, making recent data more influential in the forecast.
Question 3: A rolling forecast differs from a static annual budget primarily because it:
- Requires board approval each quarter
- Is updated continuously to maintain a fixed forward-looking horizon (Correct answer)
- Replaces actual reporting with projected figures
- Fixes targets at the start of the fiscal year
Correct answer: Is updated continuously to maintain a fixed forward-looking horizon
A rolling forecast extends the planning horizon forward (e.g., always 12 months ahead) as each period closes, unlike a static budget set once per year.
Question 4: In a master budget, which component is prepared first to drive all other budgets?
- Production budget
- Sales budget (Correct answer)
- Cash budget
- Capital expenditure budget
Correct answer: Sales budget
The sales budget is the starting point of the master budget because all other operating budgets depend on projected sales volume.
Question 5: The production budget formula for required units is:
- Budgeted sales + beginning inventory − ending inventory
- Budgeted sales − beginning inventory + ending inventory
- Budgeted sales + ending inventory − beginning inventory (Correct answer)
- Actual sales + ending inventory − beginning inventory
Correct answer: Budgeted sales + ending inventory − beginning inventory
Required production = Budgeted sales + Desired ending inventory − Beginning inventory, ensuring enough units are produced to meet demand and inventory targets.
Question 6: A flexible budget adjusts for changes in:
- Selling prices only
- Activity or volume levels (Correct answer)
- Fixed cost allocations
- Headcount decisions
Correct answer: Activity or volume levels
A flexible budget recalculates budgeted costs at the actual activity level, isolating the effect of volume changes from efficiency variances.
Question 7: Which technique breaks a forecast into trend, seasonal, cyclical, and irregular components?
- Monte Carlo simulation
- Delphi method
- Time-series decomposition (Correct answer)
- Scenario analysis
Correct answer: Time-series decomposition
Time-series decomposition separates historical data into its component patterns to improve forecasting accuracy.
CFC Budgeting & Forecasting 2
A company uses zero-based budgeting (ZBB).
What is the primary difference from traditional incremental budgeting?