1. In "Zero-Based Budgeting" (ZBB), the budgeting process starts from:
Top management's discretion.
Scratch (Zero), requiring justification for every expense.
The previous year's figures adjusted for inflation.
The average of the last 3 years.
Explanation:
ZBB does not take the previous year's budget as a base. Every activity/expense must be justified from scratch as if it were new.
2. A "Master Budget" is essentially:
A budget prepared by the government.
A summary of all functional budgets (Sales, Production, Cash, etc.) integrating them into Projected Financial Statements.
A budget for capital expenditure only.
A budget for the production department only.
Explanation:
The Master Budget aggregates all sub-budgets to present the overall plan of the organization, typically culminating in a Budgeted P&L and Balance Sheet.
3. Which of the following items is NOT included in a Cash Budget?
Capital Expenditure.
Depreciation.
Cash Sales.
Payment to Creditors.
Explanation:
Cash Budget records only actual cash inflows and outflows. Depreciation is a non-cash expense and is excluded.
4. A "Flexible Budget" is designed to change with:
The management team.
The rate of inflation.
The tax rates.
The level of activity or volume of output.
Explanation:
A Flexible Budget adjusts budgeted costs for different levels of activity, recognizing that variable costs change with volume while fixed costs remain constant.
5. Performance Budgeting focuses primarily on:
Reducing staff.
The amount of money spent.
Historical data.
The outcome or result achieved for the money spent.
Explanation:
Unlike traditional budgeting which focuses on inputs (expenditure items), Performance Budgeting links funding to expected outcomes and outputs (results).
6. Management by Exception (MBE) in budgetary control implies:
Focusing attention only on significant variances (adverse or favorable) that exceed a certain threshold.
Ignoring all variances.
Changing the budget every month.
Checking every single variance.
Explanation:
MBE saves management time by alerting them only when actual performance deviates significantly from the plan.
7. Which of the following is estimated as a cash INFLOW in a Cash Budget?
Collection from Debtors
Credit Sales
Depreciation
Bad Debts
Explanation:
Credit sales do not bring immediate cash. Only when debtors pay (collection) does cash flow in. Depreciation and Bad Debts are non-cash items.
8. Which of the following is a distinct feature of "Zero Based Budgeting" (ZBB)?
It assumes the current year's budget is the best estimate for next year.
It is used only for capital expenditure.
It focuses solely on increasing sales.
It justifies every expense from scratch, treating the previous year's budget as non-existent.
Explanation:
ZBB reverses the traditional incremental budgeting approach. Managers must justify all expenses for each new period, starting from a "zero base," forcing a review of cost-benefit for every activity to eliminate inefficiencies.
9. In a Cash Budget, if the closing cash balance is negative (deficit), the management should plan for:
Investing surplus funds.
Paying higher dividends.
Arranging short-term borrowing (Overdraft).
Increasing depreciation.
Explanation:
A projected cash deficit indicates that outflows exceed inflows. Management must arrange temporary financing like an overdraft or short-term loan to maintain liquidity.
10. Which budget is usually prepared FIRST and serves as the basis for other budgets?
Sales Budget
Cash Budget
Purchase Budget
Production Budget
Explanation:
The Sales Budget estimates the revenue and demand. Since production, purchasing, and cash needs depend on how much the company expects to sell, the Sales Budget is the starting point (Key Factor).
11. A "Rolling Budget" is one that:
Remains constant for 5 years.
Has no fixed period.
Is revised continuously by adding a new period (month/quarter) as the current period expires.
Is used only for rolling stock (trains).
Explanation:
This ensures that a budget for a full year is always available, keeping the plan current and responsive to changes.
12. In preparing a Cash Budget, if "Wages are paid with a time lag of 1/4 month", it means in the month of April, the wages paid will be:
75% of April's wages + 25% of May's wages.
25% of April's wages + 75% of March's wages.
75% of April's wages + 25% of March's wages.
100% of April's wages.
Explanation:
1/4 lag means 1 week's wages are paid next month. So, in April, you pay for the remaining 3 weeks (3/4 or 75%) of April and the pending 1 week (1/4 or 25%) of March.
13. A "Functional Budget" relates to:
The functions of the CEO.
Government functions.
The overall Master Budget only.
Specific functions like Sales, Production, Material, etc.
Explanation:
Budgets prepared for individual functions/departments of the organization (e.g., Sales Budget, Production Budget) are Functional Budgets. They are consolidated into the Master Budget.
14. "Capacity Ratio" in budgetary control is calculated as:
(Standard Hours / Budgeted Hours) * 100
(Standard Hours / Actual Hours) * 100
(Actual Output / Budgeted Output) * 100
(Actual Hours / Budgeted Hours) * 100
Explanation:
Capacity Ratio measures whether the available capacity was utilized fully. >100% means overtime was worked; <100% means underutilization.