CFC Budgeting & Forecasting 3 — Questions and Answers
Question 1: A favorable budget variance on labor costs most likely indicates that:
- More labor hours were used than budgeted
- Actual labor costs were lower than budgeted (Correct answer)
- The wage rate increased beyond expectations
- Overtime hours exceeded the budget
Correct answer: Actual labor costs were lower than budgeted
A favorable variance means actual results were better than budget; for a cost, this means actual spending was less than planned.
Question 2: Capital budgeting differs from operating budgeting primarily in that it:
- Covers a period of less than one year
- Focuses on long-term investment decisions with multi-year impacts (Correct answer)
- Is prepared by the accounting department without management input
- Tracks only debt-financed expenditures
Correct answer: Focuses on long-term investment decisions with multi-year impacts
Capital budgeting evaluates long-term investments in assets or projects spanning multiple years, whereas operating budgets cover day-to-day activities within a fiscal year.
Question 3: Which budget variance analysis technique compares the flexible budget to actual results to measure efficiency?
- Volume variance
- Spending (efficiency) variance (Correct answer)
- Sales price variance
- Mix variance
Correct answer: Spending (efficiency) variance
The spending or efficiency variance compares flexible budget costs (at actual volume) to actual costs, isolating operational efficiency from volume effects.
Question 4: In participative budgeting, a key risk is:
- Budgets that are too aggressive and unachievable
- Budgetary slack introduced by managers padding their estimates (Correct answer)
- Loss of strategic alignment across departments
- Overuse of historical data without forward-looking adjustments
Correct answer: Budgetary slack introduced by managers padding their estimates
Participative budgeting can lead to budgetary slack where managers deliberately understate revenues or overstate costs to make targets easier to achieve.
Question 5: A company forecasts cash collections assuming 60% of sales are collected in the month of sale and 40% in the following month. If January sales are $500,000 and February sales are $600,000, what are February cash collections?
- $560,000 (Correct answer)
- $500,000
- $600,000
- $360,000
Correct answer: $560,000
February collections = 60% × $600,000 + 40% × $500,000 = $360,000 + $200,000 = $560,000.
Question 6: What is the primary purpose of a cash budget?
- To determine profitability of product lines
- To project cash inflows and outflows and identify potential shortfalls (Correct answer)
- To allocate overhead costs across departments
- To set performance targets for sales managers
Correct answer: To project cash inflows and outflows and identify potential shortfalls
A cash budget forecasts cash receipts and disbursements to ensure the company can meet obligations and identify when external financing may be needed.
Question 7: Activity-based budgeting (ABB) allocates costs by:
- Spreading overhead equally across all departments
- Linking resource consumption to cost drivers and activities (Correct answer)
- Using prior-year actuals adjusted for inflation
- Applying a flat percentage increase to each line item
Correct answer: Linking resource consumption to cost drivers and activities
ABB identifies activities that drive costs and budgets resources based on expected activity levels, providing more accurate cost allocation than traditional methods.
CFC Budgeting & Forecasting 3
A favorable budget variance on labor costs most likely indicates that: