CFC Budgeting & Forecasting 5 — Questions and Answers
Question 1: Which of the following best describes a 'top-down' budgeting approach?
- Department managers build budgets independently and submit them upward
- Senior management sets overall targets that are then allocated to departments (Correct answer)
- Budget committees negotiate targets across all organizational levels equally
- Budgets are created only for revenue-generating units
Correct answer: Senior management sets overall targets that are then allocated to departments
Top-down budgeting has senior leadership establish high-level targets that are then disaggregated and communicated down to operating departments.
Question 2: A financial controller notices that the company's selling and administrative expense budget is consistently overstated. The most likely corrective action is to:
- Switch from incremental to zero-based budgeting (Correct answer)
- Increase the budget amounts to match actuals
- Eliminate the budget for administrative expenses
- Consolidate the budget with the capital expenditure plan
Correct answer: Switch from incremental to zero-based budgeting
Persistent over-budgeting often signals embedded slack; ZBB forces managers to justify each dollar, eliminating padding built into historical baselines.
Question 3: What is the key assumption underlying the high-low method for cost estimation?
- Costs are entirely fixed over the relevant range
- There is a linear relationship between cost and activity between the highest and lowest data points (Correct answer)
- Costs follow a step-function pattern
- Only variable costs are included in the analysis
Correct answer: There is a linear relationship between cost and activity between the highest and lowest data points
The high-low method assumes linearity between the highest and lowest activity levels and uses only those two data points to estimate fixed and variable cost components.
Question 4: An operating budget that uses contribution margin analysis is primarily designed to:
- Track fixed asset depreciation schedules
- Highlight the relationship between volume, variable costs, and profit (Correct answer)
- Allocate administrative overhead by headcount
- Prepare the GAAP-compliant income statement
Correct answer: Highlight the relationship between volume, variable costs, and profit
Contribution margin budgeting separates variable from fixed costs, making it easier to analyze the profit impact of volume changes and inform break-even decisions.
Question 5: When actual fixed overhead costs exceed the budgeted fixed overhead, the resulting variance is:
- Favorable fixed overhead spending variance
- Unfavorable fixed overhead spending variance (Correct answer)
- Unfavorable volume variance
- Favorable efficiency variance
Correct answer: Unfavorable fixed overhead spending variance
An unfavorable fixed overhead spending variance occurs when actual fixed overhead costs are higher than the budgeted amount, indicating overspending.
Question 6: In forecasting, the term 'bias' refers to:
- The standard deviation of forecast errors
- A systematic tendency to consistently over- or under-forecast (Correct answer)
- The range between the optimistic and pessimistic scenarios
- The lag between a leading indicator and the forecasted variable
Correct answer: A systematic tendency to consistently over- or under-forecast
Forecast bias is a consistent directional error — always forecasting too high or too low — which undermines budget reliability and requires recalibration of assumptions.
Question 7: Which of the following is a limitation of using historical data as the primary basis for financial forecasting?
- It makes variance analysis unnecessary
- It assumes past trends and relationships will continue into the future (Correct answer)
- It eliminates the need for management judgment
- It overstates the impact of seasonal patterns
Correct answer: It assumes past trends and relationships will continue into the future
Relying solely on historical data presumes that past patterns will persist, which can be misleading when market conditions, competition, or business models change.
CFC Budgeting & Forecasting 5
Which of the following best describes a 'top-down' budgeting approach?