Q1. Which of the following best describes the primary purpose of budgetary control?
(a) To prepare the annual financial statements.
(b) To compare actual performance with planned targets and take corrective action.
(c) To maximize the market price of the company’s shares.
(d) To eliminate all variances in the accounting records.
Answer: (b)
Explanation: Budgetary control involves setting budgets, comparing actual results with those budgets, analysing variances, and implementing corrective measures to keep the organisation on track.
Q2. The first step in the budgetary control process is:
(a) Preparation of the master budget.
(b) Identification of responsibility centres.
(c) Establishing performance standards.
(d) Comparing actual results with budget.
Answer: (c)
Explanation: Before any budget can be prepared, performance standards or targets must be established; these serve as the basis for budget formulation.
Q3. Which type of budget is prepared for a single level of activity and does not change with variations in output?
(a) Flexible budget
(b) Zero‑based budget
(c) Fixed budget
(d) Performance budget
Answer: (c)
Explanation: A fixed (or static) budget remains unchanged irrespective of the actual level of activity; it is based on one assumed level of output.
Q4. A flexible budget is most useful when:
(a) Costs are entirely fixed.
(b) Activity levels are expected to fluctuate significantly.
(c) The organisation prefers a single‑year planning horizon.
(d) Responsibility accounting is not practiced.
Answer: (b)
Explanation: Flexible budgets adjust for changes in volume or activity, making them ideal for environments where output varies.
Q5. Zero‑based budgeting (ZBB) requires that:
(a) Each budget period starts from the previous year’s figures.
(b) Every expense must be justified for each new period, starting from a zero base.
(c) Only capital expenditures are considered.
(d) Budgets are prepared only for profit centres.
Answer: (b)
Explanation: In ZBB, managers must justify all budgeted expenditures as if starting from zero, rather than using the prior year’s budget as a baseline.
Q6. Which of the following is NOT a characteristic of a good budgetary control system?
(a) Participation of employees in budget preparation.
(b) Rigid adherence to the budget without any revisions.
(c) Timely reporting of variances.
(d) Clear assignment of responsibility.
Answer: (b)
Explanation: Effective budgetary control allows for revisions when circumstances change; rigidity defeats the purpose of control.
Q7. Variance analysis in budgetary control primarily helps to:
(a) Determine the exact amount of tax payable.
(b) Identify reasons for differences between actual and budgeted figures.
(c) Replace the need for internal audit.
(d) Calculate depreciation expense.
Answer: (b)
Explanation: By analysing variances, management can pinpoint whether differences are due to price, volume, efficiency, or other factors and act accordingly.
Q8. A favourable variance occurs when:
(a) Actual costs exceed budgeted costs.
(b) Actual revenue is less than budgeted revenue.
(c) Actual performance is better than the budgeted standard.
(d) The budget is not prepared for the period.
Answer: (c)
Explanation: Favourable variances indicate that actual results are better than planned (lower costs or higher revenues than budgeted).
Q9. Which of the following budgets is prepared first in the master budgeting process?
(a) Cash budget
(b) Sales budget
(c) Production budget
(d) Capital expenditure budget
Answer: (b)
Explanation: The sales budget drives production, purchases, and other functional budgets; hence it is prepared first.
Q10. Responsibility accounting is closely linked to budgetary control because:
(a) It eliminates the need for budgeting.
(b) It holds managers accountable for the performance of their responsibility centres.
(c) It focuses only on financial statements.
(d) It applies only to not‑for‑profit organisations.
Answer: (b)
Explanation: Responsibility accounting assigns costs and revenues to specific managers, enabling effective budgetary control through performance evaluation.
Q11. In a performance budget, the emphasis is placed on:
(a) Historical cost data only.
(b) Inputs and outputs linked to organisational objectives.
(c) Maximising short‑term profit irrespective of strategy.
(d) Eliminating all variable costs.
Answer: (b)
Explanation: Performance budgeting ties financial resources to measurable outputs and outcomes, aligning spending with goals.
Q12. The budgetary control cycle does NOT include which of the following steps?
(a) Setting standards
(b) Recording transactions in the ledger
(c) Comparing actual performance with budget
(d) Taking corrective action
Answer: (b)
Explanation: Recording transactions is part of routine accounting, not a distinct step of the budgetary control cycle.
Q13. Which variance would be investigated first if both material price variance and material usage variance are unfavourable and large?
(a) Labour rate variance
(b) Material price variance
(c) Overhead efficiency variance
(d) Sales volume variance
Answer: (b)
Explanation: Material price variance reflects the cost of raw materials; a large unfavourable price variance often signals purchasing issues that need immediate attention.
Q14. A cash budget is primarily prepared to:
(a) Determine the company’s market share.
(b) Estimate future cash inflows and outflows to ensure liquidity.
(c) Calculate depreciation for fixed assets.
(d) Set the selling price of products.
Answer: (b)
Explanation: The cash budget forecasts cash receipts and payments, helping management avoid shortages or excess cash.
Q15. Which of the following statements about a master budget is true?
(a) It consists only of the operating budget.
(b) It is a comprehensive plan that includes all functional budgets.
(c) It is prepared after the financial statements are finalised.
(d) It cannot be revised during the budget period.
Answer: (b)
Explanation: The master budget integrates the operating budget (sales, production, etc.) and the financial budget (cash, capital expenditures, balance sheet).
Q16. In budgetary control, a “controllable cost” is best defined as:
(a) A cost that varies directly with sales volume.
(b) A cost that a manager can influence through their decisions.
(c) A cost that is always fixed in nature.
(d) A cost that appears only in the cash budget.
Answer: (b)
Explanation: Controllable costs are those for which a responsibility centre manager has authority to affect the amount incurred.
Q17. The principal advantage of using a flexible budget over a fixed budget is that it:
(a) Eliminates the need for variance analysis.
(b) Provides a performance benchmark that adjusts for changes in activity level.
(c) Requires less time to prepare.
(d) Is applicable only to service organisations.
Answer: (b)
Explanation: Flexible budgets recalculate budgeted amounts based on actual activity, making comparisons more meaningful.
Q18. Which of the following is an example of a non‑financial performance measure often used alongside budgetary control?
(a) Gross profit margin
(b) Return on investment
(c) Number of defective units produced
(d) Cash conversion cycle
Answer: (c)
Explanation: Non‑financial measures like defect rates help assess operational efficiency, complementing financial variances.
Q19. If the actual labour hours worked are less than the standard labour hours allowed for actual output, the labour efficiency variance will be:
(a) Unfavourable
(b) Favourable
(c) Zero
(d) Cannot be determined
Answer: (b)
Explanation: Using fewer hours than allowed indicates efficiency, resulting in a favourable labour efficiency variance.
Q20. Which budgeting approach encourages managers to treat each budget period as if starting from scratch, requiring justification of all expenditures?
(a) Incremental budgeting
(b) Activity‑based budgeting
(c) Zero‑based budgeting
(d) Rolling budget
Answer: (b) is incorrect; correct is (c)
Answer: (c)
Explanation: Zero‑based budgeting mandates that every expense be justified anew each period, irrespective of prior budgets.
Q21. A rolling budget (or continuous budget) is characterised by:
(a) Being prepared only once every five years.
(b) Adding a new period as the current period expires, keeping the budget horizon constant.
(c) Focusing exclusively on capital expenditures.
(d) Being used only in governmental accounting.
Answer: (b)
Explanation: In a rolling budget, after each month (or quarter) ends, another future period is added so that the budget always covers, say, the next 12 months.
Q22. Which of the following variances would be classified under overhead variances?
(a) Material price variance
(b) Labour rate variance
(c) Variable overhead expenditure variance
(d) Sales price variance
Answer: (c)
Explanation: Overhead variances include variable overhead expenditure (or spending) variance and variable overhead efficiency variance, among others.
Q23. In budgetary control, the term “variance” refers to:
(a) The difference between budgeted and actual figures.
(b) The total amount of fixed costs incurred.
(c) The percentage increase in sales over the previous year.
(d) The amount of depreciation charged to profit and loss.
Answer: (a)
Explanation: Variance is simply the difference (Actual – Budgeted) for any financial or operational metric.
Q24. Which of the following is NOT a typical objective of budgetary control?
(a) Coordinating activities across departments.
(b) Providing a basis for performance evaluation and motivation.
(c) Guaranteeing that the organisation will never incur a loss.
(d) Facilitating communication of organisational goals.
Answer: (c)
Explanation: While budgets help manage risk, they cannot guarantee avoidance of losses; external factors and uncertainties remain.
Q25. When preparing a production budget, the required production units are calculated as:
(a) Budgeted sales + Desired ending inventory – Beginning inventory.
(b) Budgeted sales – Desired ending inventory + Beginning inventory.
(c) Budgeted sales + Beginning inventory – Desired ending inventory.
(d) Budgeted sales × (1 + Desired ending inventory ratio).
Answer: (a)
Explanation: Production needed equals sales forecast plus the inventory you want to have at period end, minus the inventory you already have at the start.
