Financial Planning Flashcards

Which budgeting approach requires managers to justify every expenditure from a base of zero each period?

Answer: Zero-based budgeting

Zero-based budgeting ignores prior-year amounts and requires every cost to be justified anew.

A budget that adjusts revenues and costs to the actual level of activity achieved is called a:

Answer: Flexible budget

A flexible budget restates budgeted amounts for the actual activity level, enabling meaningful variance comparisons.

Which budget is normally prepared first when building a master budget?

Answer: Sales budget

Expected sales drive production, purchasing, labor, and cash budgets, so the sales budget comes first.

A company budgets sales of 10,000 units, desired ending finished goods of 2,000 units, and beginning finished goods of 1,500 units. How many units must be produced?

Answer: 10,500

Production = 10,000 + 2,000 - 1,500 = 10,500 units.

A budget that continuously adds a new month as the current month ends is known as a:

Answer: Rolling budget

A rolling (continuous) budget always maintains a fixed forward horizon, such as 12 months.

What is the primary purpose of a cash budget?

Answer: To identify the timing of cash shortages and surpluses

The cash budget shows when financing will be needed or when excess cash can be invested.

Which risk is most commonly associated with participative budgeting?

Answer: Budgetary slack built into estimates

Managers involved in setting their own targets may understate revenues or overstate costs to make goals easier.