CIA Budgeting and Forecasting 2 — Questions and Answers
Question 1: A company uses a rolling budget that is continuously updated by adding a new quarter as each quarter ends. What is the primary advantage of this approach?
- It eliminates the need for variance analysis
- Management always has a forward-looking plan covering a full period (Correct answer)
- It reduces the time spent on budget preparation
- It guarantees more accurate cost estimates
Correct answer: Management always has a forward-looking plan covering a full period
Rolling budgets ensure management always has a current, forward-looking plan covering the same horizon (e.g., 12 months ahead), improving planning continuity.
Question 2: Which forecasting method uses the historical relationship between a dependent variable and one or more independent variables to project future values?
- Delphi method
- Moving average
- Regression analysis (Correct answer)
- Exponential smoothing
Correct answer: Regression analysis
Regression analysis models the statistical relationship between a dependent variable (e.g., sales) and independent variables (e.g., advertising spend) to forecast future outcomes.
Question 3: In a manufacturing company, a flexible budget variance is computed by comparing actual results to:
- The original static budget for the planned output level
- The flexible budget adjusted to the actual output level achieved (Correct answer)
- The prior year's actual results at the same output level
- The industry average cost for the actual output level
Correct answer: The flexible budget adjusted to the actual output level achieved
A flexible budget variance compares actual costs to the budget that has been recalculated at the actual activity level achieved, isolating spending efficiency.
Question 4: A firm's sales forecast shows a 20% increase in unit volume, but selling price per unit will decrease by 5%. If current revenue is $500,000, what is the projected revenue?
- $570,000 (Correct answer)
- $600,000
- $580,000
- $560,000
Correct answer: $570,000
$500,000 × 1.20 × 0.95 = $570,000; the volume increase is partially offset by the price reduction.
Question 5: Which budgeting approach requires every budget line item to be justified from zero each period, regardless of prior year spending?
- Activity-based budgeting
- Zero-based budgeting (Correct answer)
- Incremental budgeting
- Kaizen budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires managers to justify all expenditures from scratch each cycle, eliminating the assumption that prior-year spending levels are automatically continued.
Question 6: When preparing a cash budget, which of the following items would NOT be included?
- Depreciation expense (Correct answer)
- Tax payments
- Capital expenditure outflows
- Loan repayment principal
Correct answer: Depreciation expense
Depreciation is a non-cash expense and therefore does not appear in a cash budget, which records only actual cash inflows and outflows.
Question 7: A company forecasts its ending inventory using the formula: Beginning Inventory + Budgeted Production − Budgeted Sales = Ending Inventory. If beginning inventory is 500 units, production is 3,200 units, and desired ending inventory is 400 units, how many units must be sold?
- 3,300 units (Correct answer)
- 3,100 units
- 3,200 units
- 2,900 units
Correct answer: 3,300 units
Rearranging the formula: Budgeted Sales = 500 + 3,200 − 400 = 3,300 units.
CIA Budgeting and Forecasting 2
A company uses a rolling budget that is continuously updated by adding a new quarter as each quarter ends.
What is the primary advantage of this approach?