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 The major objectives of any budget system are to : Define responsibility centers, 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 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 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 2 / 25 All of the following are advantages of the use of budgets in a management control system except that budgets : Provide performance criteria Limit unauthorized expenditures Promote communication and coordination within the organization Force management planning Budgets serve many roles. They force management to plan ahead, communicate organizational goals throughout the organization, and provide criteria for future performance evaluations 3 / 25 Which one of the following is not a characteristic of a successful budget process ? Implementing the budget as the only benchmark for performance evaluation Gaining top management’s support Setting specific expectations to compare to actual results Using market feedback to assist in setting expectations Implementing the budget as the only benchmark for performance evaluation is not a characteristic of a successful budget process. Decisions about a firm’s strategy, and in turn about its budget, are dependent upon general economic conditions and their expected trends as well as the availability of financial resources. Industry information is also a crucial aspect of benchmarking performance 4 / 25 All of the following are disadvantages of top-down budgeting as opposed to participatory budgeting, except that it : Reduces the time required for budgeting May result in a budget that is not possible to achieve Reduces the communication between employees and management May limit the acceptance of proposed goals and objectives Since a top-down budget is coordinated from above, it is less time-consuming than obtaining lower-level input 5 / 25 All of the following are criticisms of the traditional budgeting process except that it : Is not used until the end of the budget period to evaluate performance Overemphasizes a fixed time horizon, such as one year Makes across-the-board cuts when early budget iterations show that planned expenses are too high Incorporates non-financial measures as well as financial measures into its output Traditional budgeting focuses strictly on financial measures 6 / 25 Which one of the following best describes the role of top management in the budgeting process ? Top management Should be involved only in the approval process Lacks the detailed knowledge of the daily operations and should limit their involvement Needs to be involved, including using the budget process to communicate goals Needs to separate the budgeting process and the business planning process into two separate processes Among other things, the budget is a tool by which management can communicate goals to lower-level employees. It is also a tool for motivating employees to reach those goals. For the budget to function in these communication and motivating roles, top management must be involved in the process. This involvement does not extend to dictating the exact numerical contents of the budget since top management lacks a detailed knowledge of daily operations 7 / 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 Identifies the resources and commitments required to fulfill the organization’s goals for the period identified Is a process for evaluating projects needed and related external financing required to meet resource requirements 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 8 / 25 The major disadvantage of a budget produced by means of a top-down process is : Inconsistency with strategic plans Impairment of goal congruence Absence of a significant motivational effect Lack of involvement by upper-level management 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 9 / 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 10 / 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 the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan 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 senior management develop the overall goals and permit the divisional manager to determine how these goals will be met 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 11 / 25 Each organization plans and budgets its operations for slightly different reasons. Which one of the following is not a significant reason for planning ? Ensuring profitable operations Forcing managers to consider expected future trends and conditions Providing a basis for controlling operations Checking progress toward the objectives of the organization 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 12 / 25 Which of the following statements regarding budgets is false ? Budgets present organizational plans in a formal, logical, and integrated manner Budgets may be developed for cash flows or labor usage Budgets are used only as a planning function A budget is a plan that contains a quantitative statement of expected results 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 13 / 25 An improperly executed budget process might have the effect(s) of : All of the answers are correct Inflated budget requests Disregard of overall company goals Meeting short-term but not long-term 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 14 / 25 Budgeting problems where departmental managers are repeatedly achieving easy goals or failing to achieve demanding goals can be best minimized by establishing: Participative budgeting where managers pursue objectives consistent with those set by top management Preventive controls A policy that allows managers to build slack into the budget Better communication whereby managers discuss budget matters daily with their superiors Participative budgeting is a practical means of setting realistic, achievable budget goals 15 / 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 Does not take the place of management and administration Is continually adapted to fit changing circumstances A budget promotes goal congruence within a company. Departments must coordinate their activities with other interdependent departments in planning and developing the budget 16 / 25 Which one of the following items would most likely cause the planning and budgeting system to fail? The lack of : Top management support Adherence to rigid budgets during the year Input from several levels of management Historical financial data Top management’s belief in and support of the planning and budgeting process is the single most important element in its success 17 / 25 Suboptimal decision making is not likely to occur when : Guidance is given to subunit managers about how standards and goals affect them Goals and standards of performance are set by the top management There is little congruence among the overall organization goals, the subunit goals, and the individual goals of decision makers The subunits in the organization compete with each other for the same input factors or for the same customers 18 / 25 Which one of the following is most important to a successful budgeting effort? Integrated budget software Reliable forecasts and trend analyses Experienced analysts Top management support 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 19 / 25 In the budgeting and planning process for a firm, which one of the following should be completed first ? Cost management plan Strategic plan Financial budget Sales budget An organization must complete its strategic plan before any specific budgeting can begin. The strategic plan lays out the means by which a firm expects to fulfill its stated mission 20 / 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 21 / 25 When comparing performance report information for top management with that for lower-level management : Top management reports are more detailed 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 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 22 / 25 Which one of the following is an advantage of using the budgeting process to judge performance ? Company performance can be measured against the performance of others in the same industry Management believes that past conditions are an indicator of future conditions Past performance can be used to evaluate performance improvements Management is able to measure actual performance against predicted performance 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 23 / 25 Which one of the following statements best describes budgetary slack ? 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 The margin of error assigned to each cost center to encourage the manager to budget accurately and consistently 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 24 / 25 Ineffective budget control systems are characterized by : Use of budgets for harassment of individuals rather than motivation Lack of timely feedback in the use of the budget Use of budgets as a planning but not a control tool 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 25 / 25 A budget helps a company control costs by setting cost guidelines. However, a budget also performs the function(s) of : All of the answers are correct Planning Motivating Communicating 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 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