1. In "Zero-Based Budgeting" (ZBB), the budgeting process starts from:
Scratch (Zero), requiring justification for every expense.
The previous year's figures adjusted for inflation.
Top management's discretion.
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 for capital expenditure only.
A summary of all functional budgets (Sales, Production, Cash, etc.) integrating them into Projected Financial Statements.
A budget prepared by the government.
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?
Payment to Creditors.
Capital Expenditure.
Cash Sales.
Depreciation.
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 rate of inflation.
The level of activity or volume of output.
The tax rates.
The management team.
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:
The outcome or result achieved for the money spent.
Reducing staff.
The amount of money spent.
Historical data.
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:
Ignoring all variances.
Checking every single variance.
Focusing attention only on significant variances (adverse or favorable) that exceed a certain threshold.
Changing the budget every month.
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?
Bad Debts
Collection from Debtors
Credit Sales
Depreciation
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 justifies every expense from scratch, treating the previous year's budget as non-existent.
It assumes the current year's budget is the best estimate for next year.
It focuses solely on increasing sales.
It is used only for capital expenditure.
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:
Paying higher dividends.
Investing surplus funds.
Increasing depreciation.
Arranging short-term borrowing (Overdraft).
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?
Production Budget
Purchase Budget
Cash Budget
Sales 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:
Is revised continuously by adding a new period (month/quarter) as the current period expires.
Remains constant for 5 years.
Is used only for rolling stock (trains).
Has no fixed period.
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.
75% of April's wages + 25% of March's wages.
25% of April's wages + 75% 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:
Specific functions like Sales, Production, Material, etc.
The functions of the CEO.
The overall Master Budget only.
Government functions.
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:
(Actual Hours / Budgeted Hours) * 100
(Actual Output / Budgeted Output) * 100
(Standard Hours / Actual Hours) * 100
(Standard Hours / Budgeted Hours) * 100
Explanation:
Capacity Ratio measures whether the available capacity was utilized fully. >100% means overtime was worked; <100% means underutilization.