OM Financial Management & Budgeting 3 — Questions and Answers
Question 1: Which cost behavior remains constant in total regardless of changes in production volume within the relevant range?
- Variable costs
- Mixed costs
- Fixed costs (Correct answer)
- Step costs
Correct answer: Fixed costs
Fixed costs (e.g., rent, salaries of permanent staff) do not change in total as production volume fluctuates within the relevant range.
Question 2: A nonprofit organization must allocate indirect costs to federal grants. Which federal cost principles document governs this allocation?
- OMB Circular A-133
- 2 CFR Part 200 (Uniform Guidance) (Correct answer)
- FASB ASC 958
- GAAP Codification Topic 840
Correct answer: 2 CFR Part 200 (Uniform Guidance)
2 CFR Part 200 (Uniform Guidance) establishes federal cost principles, audit requirements, and administrative requirements for non-federal entities receiving federal awards.
Question 3: When preparing a cash flow forecast, which item is typically included in operating activities under the indirect method?
- Proceeds from issuing bonds
- Purchase of equipment
- Depreciation added back to net income (Correct answer)
- Payment of dividends
Correct answer: Depreciation added back to net income
Under the indirect method, non-cash charges like depreciation are added back to net income because they reduced income but did not use cash.
Question 4: An activity-based costing (ABC) system differs from traditional costing because it:
- Assigns overhead based solely on direct labor hours
- Uses multiple cost drivers to trace overhead to products or services (Correct answer)
- Ignores indirect costs entirely
- Allocates costs equally across all departments
Correct answer: Uses multiple cost drivers to trace overhead to products or services
ABC identifies multiple cost drivers (e.g., machine setups, purchase orders) to allocate overhead more accurately than single-rate methods.
Question 5: A manager reviewing the budget sees 'favorable variance' on a line item. This MOST likely means:
- Actual costs exceeded budgeted costs
- Actual revenue fell below budgeted revenue
- Actual costs were lower than budgeted costs (Correct answer)
- The budget was not approved on time
Correct answer: Actual costs were lower than budgeted costs
A favorable cost variance occurs when actual spending is less than the budgeted amount, improving the financial position.
Question 6: Which financial metric measures how efficiently an organization collects its receivables?
- Debt-to-equity ratio
- Days sales outstanding (DSO) (Correct answer)
- Gross profit margin
- Operating leverage
Correct answer: Days sales outstanding (DSO)
DSO (also called accounts receivable days) measures the average number of days it takes to collect payment after a sale is made.
Question 7: A top-down budget approach means that:
- Front-line employees submit budget requests that are approved upward
- Senior leadership sets overall spending targets that cascade down to departments (Correct answer)
- Each unit competes for resources in an open bidding process
- Budgets are built from historical cost data without adjustment
Correct answer: Senior leadership sets overall spending targets that cascade down to departments
Top-down budgeting starts with executive-level targets and directives that are then distributed to lower organizational levels for implementation.
OM Financial Management & Budgeting 3
Which cost behavior remains constant in total regardless of changes in production volume within the relevant range?