IFA Management Accounting & Budgeting 2 — Questions and Answers
Question 1: A company uses zero-based budgeting (ZBB). What is the primary distinction of ZBB compared to incremental budgeting?
- Prior-year figures are automatically carried forward with a fixed percentage increase
- Every budget line must be justified from scratch regardless of prior-year spending (Correct answer)
- Only capital expenditures are reviewed; operating costs remain unchanged
- Managers submit wish-list budgets and finance cuts them by 50%
Correct answer: Every budget line must be justified from scratch regardless of prior-year spending
ZBB requires managers to justify every expenditure from zero each period, rather than basing budgets on prior-year actuals.
Question 2: Which costing method assigns a share of fixed overhead to each unit produced, causing inventory values to include fixed production costs?
- Marginal costing
- Activity-based costing
- Absorption costing (Correct answer)
- Target costing
Correct answer: Absorption costing
Absorption costing (full costing) includes both variable and fixed manufacturing overhead in the cost per unit.
Question 3: A flexible budget shows that budgeted output was 10,000 units but actual output was 12,000 units. The budget for variable costs should be:
- The same as the original fixed budget
- Recalculated at 12,000 units to enable a valid variance comparison (Correct answer)
- Reduced proportionally because fewer fixed costs are spread
- Ignored—only actual costs matter for performance evaluation
Correct answer: Recalculated at 12,000 units to enable a valid variance comparison
A flexible budget is restated at actual activity levels so that variable cost variances reflect efficiency, not volume differences.
Question 4: The contribution margin ratio is 40% and fixed costs are $80,000. What is the break-even sales revenue?
- $32,000
- $112,000
- $200,000 (Correct answer)
- $320,000
Correct answer: $200,000
Break-even revenue = Fixed costs ÷ Contribution margin ratio = $80,000 ÷ 0.40 = $200,000.
Question 5: In a standard costing system, an adverse labour efficiency variance indicates that:
- Workers were paid more per hour than the standard rate
- More hours were worked than the standard hours allowed for actual output (Correct answer)
- Fewer units were produced than budgeted
- Material usage exceeded the standard quantity
Correct answer: More hours were worked than the standard hours allowed for actual output
Labour efficiency variance compares standard hours for actual output with actual hours worked; more hours than allowed gives an adverse variance.
Question 6: Which budgeting approach involves senior management setting overall targets that are then passed down for operational managers to plan within?
- Bottom-up budgeting
- Participative budgeting
- Top-down budgeting (Correct answer)
- Rolling budgeting
Correct answer: Top-down budgeting
Top-down (imposed) budgeting has senior management establish targets that lower-level managers must meet.
Question 7: A company produces two products, X and Y, with contribution margins of $30 and $20 respectively. Machine hours are limited to 500 hours; X requires 3 hours and Y requires 1 hour per unit. Which product should be prioritised?
- Product X, because its total contribution per unit is higher
- Product Y, because its contribution per machine hour ($20) is higher than X ($10) (Correct answer)
- Both equally, as the total budget must be balanced
- Product X, because it uses more machine hours and keeps the factory busy
Correct answer: Product Y, because its contribution per machine hour ($20) is higher than X ($10)
When a resource is scarce, rank products by contribution per unit of the limiting factor; Y yields $20/hr vs X's $10/hr.
IFA Management Accounting & Budgeting 2
A company uses zero-based budgeting (ZBB).
What is the primary distinction of ZBB compared to incremental budgeting?