Finance for Non-Finance Managers Budgeting and Variance Analysis 1 — Questions and Answers
Question 1: What is a budget in a business context?
- A historical report of last year's spending
- A quantified financial plan for a future period (Correct answer)
- A list of all company assets
- A record of tax obligations
Correct answer: A quantified financial plan for a future period
A budget is a forward-looking financial plan that quantifies expected revenues and expenditures for a set period.
Question 2: What does a favorable variance mean?
- Actual costs were higher than budgeted
- Actual results were better than budgeted (Correct answer)
- The budget was not approved
- Revenue was lower than expected
Correct answer: Actual results were better than budgeted
A favorable variance occurs when actual performance is better than the budget (e.g., lower costs or higher revenue).
Question 3: An adverse (unfavorable) variance on expenses means:
- Actual expenses were less than budgeted
- Actual expenses were more than budgeted (Correct answer)
- The expense category was not included in the budget
- Expenses matched the budget exactly
Correct answer: Actual expenses were more than budgeted
An adverse expense variance means the company spent more than planned, negatively impacting profitability.
Question 4: Which type of budget adjusts for actual activity levels rather than remaining fixed?
- Zero-based budget
- Static budget
- Flexible budget (Correct answer)
- Capital budget
Correct answer: Flexible budget
A flexible budget adjusts budget figures based on actual output or activity, making variance analysis more meaningful.
Question 5: Zero-based budgeting (ZBB) requires managers to:
- Carry over last year's budget with small adjustments
- Justify every line item from scratch each period (Correct answer)
- Set all budget targets at zero and add only capital costs
- Use only historical data to predict future costs
Correct answer: Justify every line item from scratch each period
ZBB starts from a zero base each period, requiring justification for every expense rather than rolling forward prior-year figures.
Question 6: What is the master budget?
- A budget prepared only for the senior management team
- An integrated summary of all functional budgets into one financial plan (Correct answer)
- The largest departmental budget in the company
- A budget that cannot be revised once approved
Correct answer: An integrated summary of all functional budgets into one financial plan
The master budget consolidates all departmental and functional budgets into a comprehensive financial plan including budgeted income statement, balance sheet, and cash flow.
Finance for Non-Finance Managers Budgeting and Variance Analysis 1
What is a budget in a business context?