FA Budgeting and Forecasting 2 — Questions and Answers
Question 1: What is the purpose of a sales forecast in the budgeting process?
- To determine fixed overhead allocation
- To serve as the foundation for all other operational budgets (Correct answer)
- To calculate depreciation schedules
- To set employee compensation levels
Correct answer: To serve as the foundation for all other operational budgets
The sales forecast drives virtually all other budgets—production, inventory, staffing, and cash flow—making it the cornerstone of the budgeting process.
Question 2: Which method uses historical data patterns plus adjustments for expected changes to create a budget?
- Zero-Based Budgeting
- Incremental Budgeting (Correct answer)
- Activity-Based Budgeting
- Performance Budgeting
Correct answer: Incremental Budgeting
Incremental budgeting starts with the prior period's budget or actuals and adds or subtracts adjustments for the new period.
Question 3: In forecasting, what does a 'bottom-up' approach involve?
- Senior executives setting targets for each department
- Individual departments building their own estimates that roll up to the company total (Correct answer)
- Using industry benchmarks to set targets
- Starting from desired profit and working backwards
Correct answer: Individual departments building their own estimates that roll up to the company total
Bottom-up forecasting aggregates estimates from individual departments or product lines into an overall company forecast, improving accuracy through operational input.
Question 4: Which of the following is a key limitation of incremental budgeting?
- It requires too much management time
- It can perpetuate inefficiencies by carrying forward prior-year waste (Correct answer)
- It is too accurate to allow for variance
- It ignores variable costs entirely
Correct answer: It can perpetuate inefficiencies by carrying forward prior-year waste
Incremental budgeting can entrench wasteful spending patterns because it validates prior-period costs without questioning their necessity.
Question 5: What is the primary benefit of driver-based forecasting?
- It eliminates the need for a finance team
- It links financial forecasts directly to key business activity drivers (Correct answer)
- It guarantees forecast accuracy
- It replaces the annual budget entirely
Correct answer: It links financial forecasts directly to key business activity drivers
Driver-based forecasting ties financial projections to operational metrics (e.g., units sold, headcount), making forecasts more responsive to business changes.
Question 6: A budget that projects cash receipts and payments for a future period is called a:
- Capital Budget
- Operating Budget
- Cash Budget (Correct answer)
- Pro Forma Income Statement
Correct answer: Cash Budget
A cash budget forecasts cash inflows and outflows over a specific period to ensure adequate liquidity and identify potential shortfalls.
FA Budgeting and Forecasting 2
What is the purpose of a sales forecast in the budgeting process?