MA5128 – Integrated Review in Financial Reporting,

Planning, Performance, and Control

Second Term, Academic Year 2021-2022

HANDOUT 2: BUDGETING CONCEPTS

STRATEGY IMPLEMENTATION AND BUDGETING

1. What are the defining aspects of controlling operational processes in the context of
planning, controlling, and evaluating operations in the organization?
A. Controlling operational processes requires that (1) expectations are established
and incentivized, (2) results are gathered and reported, (3) variances from the
budget are computed, and (4) performance is rewarded.
B. Controlling operational processes requires that (1) expectations are established
and incentivized, (2) results are gathered and reported, and (3) variances from
the budget are computed.
C. Controlling operational processes requires that (1) performance is rewarded, (2)
results are analyzed to understand why objectives were met or not, and (3)
insight gained is used to inform the planning stage of the upcoming operational
cycle.
D. Controlling operational processes requires that (1) the strategy is defined into
operational objectives, (2) performance measures are set, and (3) resources are
committed.

2. Which of the following is not involved in the budget performance evaluation process
of an organization?
A. Using the insight gained to inform the planning stage for the next operational
cycle
B. Analyzing results to understand why objectives were met or not
C. Rewarding performance
D. Resources are committed for the next operational cycle

3. In which of the following situations is it not appropriate to adjust the budget?

A. The government passes new regulation causing a substantial increase in the cost
to produce the company's highest selling good.
B. During the course of the year, several new competitors entered the market and
gained a substantial market share.
C. A production department has been much less efficient this year compared to prior
years.
D. A new invention makes it possible to produce the company's highest selling good
in a third of the time that it used to take.

4. Identify which of the following statements is most accurate in regard to budgeting

and strategy implementation:
A. Budgeting is entirely focused on long-term objectives. Long-term objectives and
processes must be constantly evaluated and adjusted to ensure alignment with
the overall strategy.
B. Budgeting is entirely focused on short-term objectives, and is not involved in
long-term objectives. Short-term objectives and processes must be constantly
evaluated and adjusted to ensure alignment with the overall strategy.
C. Budgeting is focused on short-term objectives. Short-term objectives and
processes must be constantly evaluated and adjusted to ensure alignment with
long-term objectives and the organization's overall strategy.
 Budgeting does not support short-term weekly objectives. Budgeting is more
focused on annual operating objectives.

5. In the context of planning, controlling, and evaluating operations in the organization,

which of the following statements reflects specifically the function of planning
process?
A. It provides insight into better ways to achieve goals that have already been
established.
B. It promotes communication and coordination of efforts within an organization.
C. It compares the actual results for a period to the budgeted results for the period.
D. It allows the organization to communicate its goals to everyone in an
organization.

6. Which of the following is not a characteristic of successful budgeting?

A. The budget has a good balance of firmness and flexibility.
B. The results of every budgeting cycle should be assessed and that insight should
inform and improve the next budgeting cycle.
C. Everyone in the organization understands and commits to the budget.
D. The budget should not establish expectations of performance. This should be
determined by team leaders and individual employees.

7. Which of the following is not a characteristic of successful budgeting?

A. The budget represents forecasts of external and internal factors.
B. The budget should guide the strategy of the company.
C. The budget clearly connects to and supports the organization's strategy.
D. The budget should be motivating for everyone in the organization.

8. The board of directors of Edith Research Group has prepared the budget for the next
quarter and decided to review the company's performance after each quarter. At the
end of the first quarter, the variances of actual performance from the budgets were
examined and the reasons for the variances were recorded. The company also
collected feedback from the employees on improvements for the budget. Identify the
flaw, if any, in the budget cycle of Edith Research Group.
A. The company is not revising the plans according to the feedback of employees.
B. The company is not taking corrective actions to reduce the variance.
C. The budget is not used by the company to test current results against
expectations.
D. There are no flaws in the given budget.

THE BUDGETING PROCESS

1. How does the budgeting process facilitate communication among organizational

units?
A. The budgeting process has nothing to do with communication among
organization units.
B. The smaller and more simple the organization, the more crucial it is to develop
clear budgets to support communication and coordination. Budgets help
divisions know what resources they can expect to receive, but not what
deliverables they are expected to provide.
C. The bigger and more complex the organization, the more crucial it is to develop
clear budgets to support communication and coordination. Budgets help
divisions know what resources they can expect to receive, and what deliverables
they are expected to provide.
 D. The bigger and more complex the organization, the more crucial it is to develop
clear budgets to support communication and coordination. Budgets help
divisions know what resources they can expect to receive, but not what
deliverables they are expected to provide.

2. Which costs should managers be held responsible for and evaluated on their ability
to manage?
A. All costs because managers should be responsible to help accurately plan all
costs.
B. Only variable costs because these costs vary with the amount of units produced.
C. Only critical costs because these are the most important costs to the organization.
D. Only controllable costs; otherwise, managers may have incentive to build
budgetary slack into cost estimates.

3. How does the budget affect the allocation of organization resources?

A. Spending money and positioning assets are not carried out in the day-to-day
decisions taking place during the organization's period of operations. Therefore,
these decisions are not affected by the budget.
B. Spending money and positioning assets is carried out in the day-to-day decisions
taking place during the organization's period of operations. These decisions are
planned, controlled, and evaluated as a core aspect of budgeting.
C. Spending money and positioning assets is carried out by management
infrequently. These decisions are planned, controlled, and evaluated as a core
aspect of budgeting.
D. The budget does not affect the allocation of organization resources.

4. Which of the following statements correctly describes the time frame for building and
achieving a budget?
A. Beginning with the three-to-five-year focus of the strategy plan, budgets are
typically designed by working backwards from the strategy to design one-to-
three-year targets, followed by quarterly targets, monthly targets, and weekly
targets. When operating with the budget, performance is achieved by focusing on
short-run operations (weekly or monthly), and working forward to achieve more
long-run objectives in the quarterly and annual budgets.
B. Beginning with the three-to-five-year focus of the strategy plan, budgets are
typically designed by working backwards from the strategy to design one-to-
three-year targets, followed by quarterly targets, monthly targets, and weekly
targets. When operating with the budget, performance is achieved by focusing on
long-run operations (quarterly or yearly), and working backwards to achieve
more short-run objectives in the weekly and monthly budgets.
C. Beginning with the weekly or monthly focus of the strategy plan, budgets are
typically designed by working forwards from the strategy to design weekly
targets, monthly targets, quarterly targets, and one-year targets. When operating
with the budget, performance is achieved by focusing on long-run operations
(quarterly or yearly), and working backwards to achieve more short-run
objectives in the weekly and monthly budgets.
D. Beginning with the weekly or monthly focus of the strategy plan, budgets are
typically designed by working forwards from the strategy to design weekly
targets, monthly targets, quarterly targets, and one-year targets. When operating
with the budget, performance is achieved by focusing on short-run operations
(weekly or monthly), and working forwards to achieve more long-run objectives
in the quarterly and annual budgets.
5. Which of the following correctly orders the budgeting process?
A. Form Budget Committee, Submit Budget Proposals, Negotiate Budget Proposals,
Establish Budget Guidelines, Review & Approve the Final Budget
B. Establish Budget Guidelines, Form Budget Committee, Negotiate Budget
Proposals, Submit Budget Proposals, Review & Approve the Final Budget
C. Establish Budget Guidelines, Form Budget Committee, Submit Budget Proposals,
Negotiate Budget Proposals, Review & Approve the Final Budget
D. Form Budget Committee, Establish Budget Guidelines, Submit Budget Proposals,
Negotiate Budget Proposals, Review & Approve the Final Budget

6. This type of budgeting takes less time and resources and doesn't exhaust the
employees as much, but the budget may have blind spots and may be resisted by the
employees.
What kind of budgeting approach does the above definition describe?
A. Bottom-up, authoritative budgeting approach
B. Top-down, authoritative budgeting approach
C. Top-down, participating budgeting approach
D. Bottom-up, participating budgeting approach

7. Which of the following is not a best practice guideline for the budget process?
A. Reduce budget complexity and budget cycle time so the budget does not disrupt
the organization's core activities.
B. Link the budget to strategy so resources are allocated correctly.
C. Develop flexible budgets so the budget does not have to accommodate change.
D. Establish budget targets based on realistic expectations and based on stretch
goals to balance planning and motivation purposes.

8. Which of the following will likely result from eliminating the ability of SBU (strategic
business unit) managers to negotiate changes made by the budget committee in the
final review and approval step of the budget process?
A. The budget process will take longer to complete.
B. The budget will be rigid and will be perceived as a pressure device by the
employees.
C. The budget will contain more reasonably attainable standards rather than ideal
standards.
D. SBU managers will feel more ownership in the final budget.

9. Identify the contribution of employees who have expertise in critical products or

processes in the preparation of participative budgets.
A. They are responsible for budget preparation and review of results.
B. They are responsible for communication of organizational goals to the
operational level.
C. They help in identification and elimination of discrepancies between various
budgets.
D. They aid in having a detailed understanding of the costs of a particular area.

10. Under which of the following circumstances can a budget be considered a pressure or
blame device rather than a planning, communication, and coordinating tool?
A. When it includes technically incorrect or unrealistic targets.
B. When it is viewed as an internal control device.
C. When the budget is prepared with as much speed as possible.
D. When executive leadership fully endorses the budget.
BUILDING BUDGET STANDARDS

1. Murphy Harvey, Inc. has completed one year of operations. For the upcoming year,
the board of directors has prepared a budget planning its course of actions
throughout the year. However, the company's CFO is of the opinion that cost
standards will not accurately predict future costs. Which of the following conditions
will most likely justify the CFO's view?
A. If raw materials will not be available at the prices estimated in the budget.
B. There is no way to justify the CFO's view. Budgets, if prepared correctly,
accurately predict costs all the time.
C. If the company plans to make an investment in a new equipment.
D. If there is a negative change in expected sales.

2. The representative for the company's budgeting committee consults the production
manager to set the standards for the upcoming quarter. Allowing for normal work
delays, spoilage, waste, employee rest periods, and machine downtime, the average
defect rate is 2 out of 10 units per worker per day. In addition, the manager provides
the following information:
• The average daily production is 10 total units per worker.
• The production department operates for eight hours per day, five days a week.
• The company assumes four work weeks per month.
The quarterly budget submitted by the budgeting committee assumes the monthly
production target per worker to be 200 acceptable units (without defects).
The board of directors disapproved the budget, stating it to be unattainable.
Under which of the following situations can the given budget be achieved?
A. The budget can be achieved if the production department is able to reduce the
defect rate to 1 out of 10 units per day.
B. The budget can be achieved if the production department operates 45 hours in a
week.
C. The budget can be achieved if the production manager allows for normal work
delays, spoilage, waste, employee rest periods, and machine downtime.
D. The budget can only be achieved with an ideal production standard provided by
the most efficient and skilled workers at their best efficiency all of the time.

3. The executives for Ana Huff, Inc. developed and proposed a budget for the current
year. The budget assumes that there will be no work delays, interruptions, waste, or
machine breakdown. Which type of standard is being prepared?
A. Participative standard
B. Reasonably attainable standards
C. Participative ideal standard
D. Authoritative ideal standard

4. Thomas Corp is developing a standard cost sheet to specify the standard price and
standard quantity of direct material used to build a single widget. Which of the
following includes the proper steps to be taken in developing the standard quantity
of direct material used to build a single widget?
A. Identify the standard content of direct material in the finished unit, adjust for
abnormal scrap, adjust for quality rejects, and adjust for downtime.
B. Identify the standard content of direct material in the finished unit, adjust for
normal scrap, and adjust for quality rejects.
C. Identify the standard content of direct material in the finished unit, adjust for
abnormal scrap, and adjust for quality rejects.
D. Identify the standard content of direct material in the finished unit, adjust for
normal scrap, adjust for quality rejects, and adjust for down time.
5. Thomas Corp is developing a standard cost sheet to specify the standard price and
standard quantity of direct material used to build a single widget. Which of the
following includes the proper steps to be taken in developing the standard price for a
standard amount of direct material?
A. The price of a standard amount of direct material, adjust for costs of receiving the
direct material, and adjust for the costs of preparing the direct material for
production.
B. The price of a standard amount of direct material, adjust for costs of receiving the
direct material, adjust for the costs of preparing the direct material for
production, and adjust for the hourly direct labor costs of assembling the widget.
C. The price of a standard amount of direct material and adjust for the costs of
preparing the direct material for production.
D. The price of a standard amount of direct material, adjust for the costs of preparing
the direct material for production, and adjust for the hourly direct labor costs of
assembling the widget.

6. Thomas Corp is developing a standard cost sheet to specify the standard price and
standard quantity of direct labor used to build a single widget. Which of the following
includes the proper steps to be taken in developing the standard quantity of direct
labor used to build a single widget?
A. Calculate the time taken to produce a single widget, adjust for direct material
handling expense, adjust for expected downtime, and adjust for normal rejected
units.
B. Calculate the time taken to produce a single widget, adjust for scheduled breaks,
adjust for direct material handling expense, adjust for expected downtime, and
adjust for normal rejected units.
C. Calculate the time taken to produce a single widget, adjust for scheduled breaks,
adjust for expected downtime, and adjust for normal rejected units.
D. Calculate the time taken to produce a single widget, adjust for expected
downtime, and adjust for normal rejected units.

7. The production manager of Gibson Systems has considered the following for the
determination of standard costs for direct materials:
• The standard is developed on the basis of production facilities, quality of the
product, costs of manufacturing, and the equipment to be used.
• The standard does not allow for losses, spoilage, scrap, and waste normally
expected in the production process.
• The price is set after considering historical costs and also includes supply chain
costs.
Evaluate the validity of the given standard as an attainable standard.
A. The given standard is not valid as it considers the supply chain costs for the
determination of price.
B. The given standard is not valid because it does not allow for losses, spoilage,
scrap, and waste normally expected in the production process.
C. The given standard is valid as it considers production facilities, quality of the
product, costs of manufacturing, and the equipment to be used.
D. The given standard is valid as the prices are set after considering supply chain
costs.

8. The production manager of Brian Matthews Group has received an urgent order from
a regular customer for an additional 10,000 units. To fulfill the order, the employees
need to work overtime. The overtime wages will be 150% of the usual hourly wage
rate. However, the personnel manager is not in favor of allowing overtime because
this will use up too much of the budgeted wages for the quarter. Which of the
following alternatives will most likely undermine the personnel manager's
argument?
 A. The personnel manager should not allow overtime as the actual wages will
increase the budgeted wages.
B. The personnel manager should allow overtime to avoid losing its regular
customer.
C. The production manager should provide the extra units to the customer by
postponing other less urgent orders.
D. The production manager should not accept the order for extra units as this will
affect the current personnel budget.

9. How does budget slack affect the master budget?

A. Budget slack hinders ease of communication of organizational goals.
B. Presence of budget slack can lead to decreased commitment from the employees.
C. Cumulative budget slack at each sublevel can result in an inaccurate master
budget.
D. Strategic goals do not receive priority in the budgetary process due to existence
of budget slack.