Budgets practice questions.

Define the term 'budget' as used in business management.

• A record of actual income and expenditure over a past period
• A financial plan of expected income and expenditure over a future period
• A statement of a firm's assets and liabilities at a point in time
• The maximum amount a bank will lend to a business

Answer: A financial plan of expected income and expenditure over a future period

A budget is a forward-looking financial plan for a set period; it forecasts income and expenditure rather than recording what has already happened.

A sales revenue budget was set at 80000 but actual revenue was 92000. State the type of variance.

• Adverse variance of 12000
• Favourable variance of 12000
• Adverse variance of 172000
• Favourable variance of 172000

Answer: Favourable variance of 12000

For revenue, actual (92000) above budget (80000) is favourable. The variance is 92000 − 80000 = 12000.

Distinguish which of the following best describes 'zero-based budgeting'.

• Each budget starts from the previous period's figure adjusted for inflation
• Every cost must be justified from a starting base of zero for each new period
• The budget is set so that total profit equals zero
• Only capital expenditure is budgeted, with revenue set to zero

Answer: Every cost must be justified from a starting base of zero for each new period

In zero-based budgeting no expenditure is carried over automatically; every item must be justified afresh from zero each period, which controls costs but is time-consuming.

In a decentralised structure, who is held accountable for the outcomes of a specific delegated budget?

• The external auditor
• The department budget holder
• The company's shareholders collectively
• The tax authority

Answer: The department budget holder

A budget holder is the individual (often a department or cost-centre manager) given responsibility and accountability for keeping to a delegated budget.

Outline one advantage of using budgets as a management tool.

• They guarantee that a business will make a profit
• They set targets that aid planning and control
• They remove the need for any financial forecasting
• They eliminate all variances automatically

Answer: They set targets that aid planning and control

Budgets set quantified targets that help managers plan, coordinate departments and control spending by comparing actual with budgeted figures.

A manager sets an easily achievable budget so that the department always reports a favourable variance. Identify the problem this illustrates.

• Zero-based budgeting
• Budgetary slack
• Flexible budgeting
• Capital rationing

Answer: Budgetary slack

Deliberately setting undemanding targets to guarantee favourable variances is called budgetary slack or padding, which undermines the control value of budgets.