Budgeting Process quiz Managerial Accounting Quiz On Mar 13, 2024 Share /25 12345678910111213141516171819202122232425 Budgeting Process 25 questions in 20 minutes Answers at the end of the exam Pass Score 70% The questions change when you repeat the exam enter full-screen mode by pressing the icon located in the top- right comer of the exam 1 / 25 MBO (Management by objectives) managers are most likely to believe that employees : Avoid responsibility whenever possible Are self-motivated Work best when threatened with punishment Dislike their work MBO managers believe that employees are committed to achieving objectives, working hard to receive the rewards of achievement, and striving for self-actualization. The MBO view is that employees enjoy work, need little supervision, seek responsibility, and are imaginative problem solvers 2 / 25 The major disadvantage of a budget produced by means of a top-down process is : Lack of involvement by upper-level management Absence of a significant motivational effect Impairment of goal congruence Inconsistency with strategic plans Budgets provide a means for coordinating the plans of all organizational subunits. Thus, budgets are a way to promote goal congruence. Although budgets should be consistent with the strategic plans of top management, they should also be based on input from lower-level managers since the latter have detailed knowledge of operating activities. Successful budgets are therefore a compromise. In a top-down process, however, budgets are imposed on subordinates without their participation. This lack of participation may impair the coordination of the goals of subunits with those of the organization (goal congruence) since lower-level managers will tend not to have an understanding of and support for the top-down budget 3 / 25 Rock Industries has four divisions. In the quest to develop a more achievable budget for the coming year, the chief executive officer has elected to develop the company’s budget by using a decentralized bottom-up budget approach. Chip Jarrett is production manager in one of the divisions. Jarrett’s involvement in the budget process this year will probably: Require development of a production budget based on the prior year’s manufacturing activity Require development of a production budget that is forwarded to the Budget Department Be negligible Require development of a production budget after receiving the division’s projected sales forecast Management of the division is responsible for setting the sales forecast. As production manager, Jarrett has the responsibility of ensuring the products are ready on schedule and in the right quantities 4 / 25 Which of the following statements regarding budgets is false ? Budgets may be developed for cash flows or labor usage A budget is a plan that contains a quantitative statement of expected results Budgets present organizational plans in a formal, logical, and integrated manner Budgets are used only as a planning function Budget formulation is a planning function; however, budgets are also useful control devices. Budgets provide a basis for control of performance through comparisons of actual with budgeted data. They permit analysis of variations from plans and signal the need for corrective managerial action 5 / 25 Which one of the following is not an advantage of a participatory budgeting process ? Goal congruence Control of uncertainties Communication between departments Coordination between departments Uncertainties can be prepared for, but they cannot be subjected to human control through any budget process 6 / 25 Which one of the following is not considered to be a benefit of participative budgeting ? Individuals at all organizational levels are recognized as being part of the team; this results in greater support of the organization The budget estimates are prepared by those in direct contact with various activities Managers are more motivated to reach the budget objectives since they participated in setting them When managers set the final targets for the budget, senior management need not be concerned with the overall profitability of current operations One of the behavioral considerations of budgeting is the extent of participation in the process by managers at all levels within the organization. Managers are more motivated to achieve budgeted goals when they are involved in budget preparation. A broad level of participation usually leads to greater support for the budget and the entity as a whole, as well as a greater understanding of what is to be accomplished. Advantages of a participative budget include greater accuracy of budget estimates. Managers with immediate operational responsibility for activities have a better understanding of what results can be achieved and at what costs. Also, managers cannot blame unrealistic objectives as an excuse for not achieving budget expectations when they have helped to establish those objectives. Despite the involvement of lower level managers, senior management must still participate in the budget process to ensure that the combined objectives of the various departments are consistent with profitability objectives of the company 7 / 25 One of the primary advantages of budgeting is that it : Bases the profit plan on estimates Requires departmental managers to make plans in conjunction with the plans of other interdependent departments Is continually adapted to fit changing circumstances Does not take the place of management and administration A budget promotes goal congruence within a company. Departments must coordinate their activities with other interdependent departments in planning and developing the budget 8 / 25 Budgeting problems where departmental managers are repeatedly achieving easy goals or failing to achieve demanding goals can be best minimized by establishing: A policy that allows managers to build slack into the budget Better communication whereby managers discuss budget matters daily with their superiors Preventive controls Participative budgeting where managers pursue objectives consistent with those set by top management Participative budgeting is a practical means of setting realistic, achievable budget goals 9 / 25 Ineffective budget control systems are characterized by : Use of budgets as a planning but not a control tool Lack of timely feedback in the use of the budget Use of budgets for harassment of individuals rather than motivation All of the answers are correct Ineffective budget control systems are characterized by each of the items noted. The use of budgets for planning only is a problem that must be resolved through the education process. Management must be educated to use the budget documents for control, not just planning. Management must learn that budgets can motivate and help individuals achieve professional growth as well as the goals of the firm. Ignoring budgets obviously contributes to the ineffectiveness of the budget system. Finally, feedback must be timely or lower management and employees will soon recognize that budget feedback is so late it provides no information, making the budget a worthless device 10 / 25 A budget helps a company control costs by setting cost guidelines. However, a budget also performs the function(s) of : Communicating Motivating Planning All of the answers are correct A budget is a realistic plan for the future expressed in quantitative terms. It is a planning tool that establishes goals and permits a company to anticipate problems and to plan for decisions. A budget can be a motivator, especially if it sets reasonable standards, has some flexibility, and was prepared with the participation of those affected. A budget is a communication tool because it informs employees about the goals the company is striving to attain and thus enhances goal congruence. A budget is also a means of coordinating the company’s various activities. The company’s overall budget consists of many smaller budgets 11 / 25 An advantage of participative budgeting is that it : Encourages acceptance of the budget by employees Reduces the effect on the budgetary process of employee biases Minimizes the cost of developing budgets Yields information known to management but not to employees Participative (grass-roots) budgeting and standard-setting use input from lower-level and middle-level employees. Participation encourages employees to have a sense of ownership of the output of the process. The result is an acceptance of and commitment to the goals expressed in the budget 12 / 25 A budget manual, which enhances the operation of a budget system, is most likely to include : Documentation of the accounting system software A chart of accounts Employee hiring policies Distribution instructions for budget schedules A budget manual describes how a budget is to be prepared. Items usually included in a budget manual are a planning calendar and distribution instructions for all budget schedules. Distribution instructions are important because, once a schedule is prepared, other departments within the organization will use the schedule to prepare their own budgets. Without distribution instructions, someone who needs a particular schedule may be overlooked 13 / 25 Each organization plans and budgets its operations for slightly different reasons. Which one of the following is not a significant reason for planning ? Checking progress toward the objectives of the organization Forcing managers to consider expected future trends and conditions Ensuring profitable operations Providing a basis for controlling operations This question is apparently directed toward budgeting. A budget is a realistic plan for the future that is expressed in quantitative terms. It is a planning, control, motivational, and communications tool. A budget promotes goal congruence and coordination among operating units. Unfortunately, a budget does not ensure profitable operations 14 / 25 Which one of the following is an advantage of using the budgeting process to judge performance ? Management is able to measure actual performance against predicted performance Management believes that past conditions are an indicator of future conditions Past performance can be used to evaluate performance improvements Company performance can be measured against the performance of others in the same industry This is an advantage of using the budgeting process to judge performance. Comparing actual results to the budget allows the organization as a whole to evaluate performance and allows managers to do the same on an individual level 15 / 25 An improperly executed budget process might have the effect(s) of : Meeting short-term but not long-term goals Inflated budget requests All of the answers are correct Disregard of overall company goals Lack of goal congruence can result when attaining a subunit’s budgetary goal results in disregard of overall company goals. Subunit managers may inflate their budget requests to provide operating leeway and then engage in unnecessary spending to avoid future budget cuts. A budget may encourage exclusive concentration on meeting short-term standards at the expense of long-term considerations. A manager fearful of not meeting the budget targets may improperly manipulate allocation of expenses. The manager seeking to stay within the budget may disregard employee morale and poor working conditions. Interunit resentment may develop as a result of competition for scarce funds 16 / 25 All of the following are advantages of the use of budgets in a management control system except that budgets : Force management planning Provide performance criteria Limit unauthorized expenditures Promote communication and coordination within the organization Budgets serve many roles. They force management to plan ahead, communicate organizational goals throughout the organization, and provide criteria for future performance evaluations 17 / 25 The best explanation of how the efficient allocation of organizational resources is planned during the budgeting process is that a budget : Demonstrates how a company can pull resources from bottlenecks to apply them to other areas to attain goals Is a process for evaluating projects needed and related external financing required to meet resource requirements Identifies the resources and commitments required to fulfill the organization’s goals for the period identified Demonstrates how important it is to have additional spare resources on hand in case the actual results vary from the budget A budget lays out in specific terms an organization’s expectations about the consumption of resources and the resulting outcomes. Therefore, it identifies the resources and commitments required to fulfill the organization’s goals for the period identified 18 / 25 The major objectives of any budget system are to : Foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among organization segments Foster the planning of operations, facilitate the fixing of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates Define responsibility centers, provide a framework for performance evaluation, and promote communication and coordination among organization segments Define responsibility centers, facilitate the fixing of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates A budget is a realistic plan for the future expressed in quantitative terms. The process of budgeting forces a company to establish goals, determine the resources necessary to achieve those goals, and anticipate future difficulties in their achievement. A budget is also a control tool because it establishes standards and facilitates comparison of actual and budgeted performance. Because a budget establishes standards and accountability, it motivates good performance by highlighting the work of effective managers. Moreover, the nature of the budgeting process fosters communication of goals to company subunits and coordination of their efforts. Budgeting activities by entities within the company must be coordinated because they are interdependent. Thus, the sales budget is a necessary input to the formulation of the production budget. In turn, production requirements must be known before purchases and expense budgets can be developed, and all other budgets must be completed before preparation of the cash budget 19 / 25 Which one of the following is most important to a successful budgeting effort? Experienced analysts Reliable forecasts and trend analyses Top management support Integrated budget software An organizational budget requires a significant commitment of internal resources. The single most important factor in assuring its success is for upper management to demonstrate that they take the project seriously and consider it vital to the organization’s future 20 / 25 All of the following are advantages of top-down budgeting as opposed to participatory budgeting, except that it: Reduces the time required for budgeting Facilitates implementation of strategic plans May limit the acceptance of proposed goals and objectives Increases coordination of divisional objectives Since a top-down budget is imposed by upper management, it has less chance of acceptance (also called buy-in) by those on whom the budget is imposed 21 / 25 Which one of the following statements best describes budgetary slack ? The margin of error assigned to each cost center to encourage the manager to budget accurately and consistently The practice of management assigning relaxed budgetary goals after the company achieves the first several months of the annual budget The total amount that actual expenses are below budgeted expenses and actual revenues exceed budgeted revenues The practice of understating budgeted revenues or overestimating budgeted costs to make budgeted targets more achievable Budgetary slack is the practice of understating budgeted revenues or overestimating budgeted costs to make budgeted targets more achievable. The natural tendency of a manager is to negotiate for a less stringent measure of performance to avoid unfavorable variances from expectations 22 / 25 Which one of the following statements concerning approaches for the budget development process is correct ? To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed even if the sales forecast upon which they are based proves to be wrong in the middle of the fiscal year The top-down approach to budgeting will ensure adherence to strategic organizational goals With the information technology available, the role of budgets as an organizational communication device has declined Since department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the operating budget Since department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the operating budget 23 / 25 A planning calendar in budgeting is the : Sales forecast by months in the annual budget period Calendar period covered by the budget Calendar period covered by the annual budget and the long-range plan Schedule of activities for the development and adoption of the budget The budget planning calendar is the schedule of activities for the development and adoption of the budget. It should include a list of dates indicating when specific information is to be provided by each information source to others. The preparation of a master budget usually takes several months. For instance, many firms start the budget for the next calendar year some time in September in hopes of having it completed by December 1. Because all of the individual departmental budgets are based on forecasts prepared by others and the budgets of other departments, it is essential to have a planning calendar to ensure the proper integration of the entire process 24 / 25 When comparing performance report information for top management with that for lower-level management : Lower-level management reports are typically for longer time periods Top management reports show control over fewer costs Lower-level management reports are likely to contain more quantitative data and less financial data Top management reports are more detailed Information sent to top management is ordinarily more highly aggregated and less timely than that communicated to managers at operational levels. Top managers are concerned with the organization’s overall financial results and long-term prospects and are responsible for the strategic planning function. Lower-level reports contain more quantitative information of an operational nature, e.g., production data 25 / 25 In developing the budget for the next year, which one of the following approaches would produce the greatest amount of positive motivation and goal congruence? Have the divisional and senior management jointly develop goals and objectives while constructing the corporation’s overall plan of operation Have senior management develop the overall goals and permit the divisional manager to determine how these goals will be met Permit the divisional manager to develop the goal for the division that in the manager’s view will generate the greatest amount of profits Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan Joint development of goals is more conducive to motivation, as is allowing divisional managers to develop the implementation plan. Goal congruence is enhanced when senior management is involved in the budgeting process along with division managers Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback 4 steps of budgeting process8 steps of budgeting processa common starting point in the budgeting process is