FA Budgeting and Forecasting 1 — Questions and Answers
Question 1: What type of budget is adjusted based on actual activity levels rather than fixed predetermined amounts?
- Static Budget
- Flexible Budget (Correct answer)
- Zero-Based Budget
- Master Budget
Correct answer: Flexible Budget
A flexible budget adjusts revenues and variable costs to reflect actual activity levels, enabling more meaningful variance analysis.
Question 2: In zero-based budgeting, every budget cycle begins with:
- Last year's approved budget plus adjustments
- A zero base where all expenses must be re-justified (Correct answer)
- Only capital expenditure requests
- A percentage increase from prior year
Correct answer: A zero base where all expenses must be re-justified
Zero-based budgeting requires managers to justify all expenditures from scratch each period, regardless of prior-year spending.
Question 3: Which budgeting method allocates resources based on a company's strategic objectives and priorities?
- Incremental Budgeting
- Activity-Based Budgeting
- Priority-Based Budgeting (Correct answer)
- Rolling Budget
Correct answer: Priority-Based Budgeting
Priority-based budgeting links resource allocation directly to strategic priorities, funding high-priority initiatives first.
Question 4: A rolling forecast typically covers:
- A fixed 12-month calendar year
- A continuous future period that is updated regularly (Correct answer)
- Only the current quarter
- The prior 12 months of actuals
Correct answer: A continuous future period that is updated regularly
A rolling forecast is continuously updated (e.g., always covering the next 12–18 months) as each period passes, keeping the outlook current.
Question 5: Which variance occurs when actual costs exceed budgeted costs?
- Favorable Variance
- Unfavorable Variance (Correct answer)
- Zero Variance
- Volume Variance
Correct answer: Unfavorable Variance
An unfavorable (adverse) variance means actual costs exceeded budget, reducing profitability relative to plan.
Question 6: What is the master budget?
- A budget created only by senior management
- A comprehensive set of budgets that together describe overall company plans (Correct answer)
- The highest-value capital expenditure budget
- A budget approved by the board of directors only
Correct answer: A comprehensive set of budgets that together describe overall company plans
The master budget consolidates all departmental and operational budgets into one comprehensive financial plan including income statement, balance sheet, and cash flow projections.
FA Budgeting and Forecasting 1
What type of budget is adjusted based on actual activity levels rather than fixed predetermined amounts?