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MA: Budgeting

32 free practice questions on budgeting, Section D of the ACCA Management Accounting (MA) question bank. Topics include Cash budget, Capital budgeting, Beyond budgeting, Principal budget factor, Flexible budgets, Purpose of budgeting. Each question carries its syllabus reference and a worked explanation. Practise them in the quiz with instant feedback, or read every question with its answer further down this page.

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All 32 budgeting questions

The same questions the quiz above draws on, in syllabus order, each with its answer and worked explanation. 21 are multiple choice and 11 are numerical, where you work the answer out before choosing it.

Question 1 · Syllabus ref D2a · Principal budget factor

When preparing a budget, an organisation identifies that machine capacity limits production to 80,000 units per year, while market demand could absorb 120,000 units. What is the principal budget factor, and which budget should be prepared first?

  1. Sales demand is the principal budget factor; the sales budget should be prepared first
  2. Machine capacity is the principal budget factor; the sales budget should be prepared first
  3. Labour availability is the principal budget factor; the labour budget should be prepared first
  4. Machine capacity is the principal budget factor; the production budget should be prepared first
Show answer and explanation

Answer: D. The principal budget factor (also called the key budget factor or limiting factor) is the constraint that restricts the organisation's activity. Here, machine capacity at 80,000 units constrains output — demand is not the limiting factor. Once the principal budget factor is identified, that budget is prepared first, since all other budgets must be built around it. The production budget (constrained by machine capacity) is therefore prepared before the sales budget. This is a key conceptual point the examiner tests regularly.

Question 2 · Syllabus ref D2d · Cash budget

A business had an opening cash balance of £12,000 in April. April receipts from customers totalled £45,000. Payments during April were: suppliers £28,000, wages £9,000, and new equipment £15,000. What is the closing cash balance at the end of April?

  1. £5,000
  2. £8,000
  3. £20,000
  4. £3,000
Show answer and explanation

Answer: A. Cash budget working: Opening balance £12,000 + Receipts £45,000 = £57,000 available. Less payments: Suppliers £28,000 + Wages £9,000 + Equipment £15,000 = £52,000 total payments. Closing balance = £57,000 − £52,000 = £5,000. Option C (£20,000) omits the equipment payment. Options B and D contain other arithmetic errors. In cash budgets, all cash movements are included regardless of whether they relate to capital or revenue — the equipment payment is a cash outflow even though it creates an asset.

Question 3 · Syllabus ref D3d · Flexible budgets

A business budgeted to produce 5,000 units with total costs of £35,000 (fixed costs £15,000, variable costs £20,000). Actual production was 6,000 units with actual costs of £37,000. What is the total cost variance against the flexed budget?

  1. £4,000 adverse
  2. £2,000 favourable
  3. £2,000 adverse
  4. £4,000 favourable
Show answer and explanation

Answer: B. The budget must be flexed to the actual activity level before comparing. Variable cost per unit = £20,000 ÷ 5,000 = £4. Flexed budget for 6,000 units = variable £24,000 (6,000 × £4) + fixed £15,000 (unchanged) = £39,000. Actual costs = £37,000. Total cost variance = £39,000 − £37,000 = £2,000 favourable (actual spending was below the flexed allowance). Option C (£2,000 adverse) is the classic error of comparing actual £37,000 with the original fixed budget of £35,000 — forgetting to flex. Options A and D (£4,000) result from other budget-base errors. Always flex the budget to actual volume before calculating a cost variance.

Question 4 · Syllabus ref D1a · Purpose of budgeting

Which of the following best describes the purpose of a budget in a commercial organisation?

  1. To legally restrict management from spending more than agreed amounts in any period
  2. To satisfy the requirements of external auditors who need a performance benchmark for their audit
  3. To translate strategic plans into quantified targets, coordinate activities across departments, and provide a benchmark against which actual performance is measured
  4. To provide shareholders with a forecast of expected dividends for the coming year
Show answer and explanation

Answer: C. Budgets serve multiple purposes: they quantify plans, coordinate departments (ensuring sales, production, and finance plans are aligned), motivate managers, and provide a control benchmark. They are management tools, not legal restrictions (A). External audit does not require budgets (B) — auditors focus on historical financial statements. Budgets are internal documents not shared with shareholders for dividend planning (D).

Question 5 · Syllabus ref D1b · Budget preparation — sales budget

A company forecasts sales of 8,000 units in Q1, 10,000 in Q2, 12,000 in Q3, and 9,000 in Q4. The selling price per unit is £45. What is the total budgeted sales revenue for the year?

  1. £175,500
  2. £1,755,000
  3. £39,000
  4. £1,620,000
Show answer and explanation

Answer: B. Total units = 8,000 + 10,000 + 12,000 + 9,000 = 39,000 units. Budgeted revenue = 39,000 × £45 = £1,755,000. Option A misplaces the decimal. Option C gives only total units (39,000) without applying the price. Option D calculates 36,000 × £45, omitting Q4.

Question 6 · Syllabus ref D1c · Production budget

Budgeted sales are 15,000 units. Opening finished goods inventory is 2,000 units and the company wants closing inventory of 3,500 units. What is the budgeted production volume?

  1. 13,500 units
  2. 15,000 units
  3. 16,500 units
  4. 17,000 units
Show answer and explanation

Answer: C. Production budget = Sales + Closing inventory − Opening inventory = 15,000 + 3,500 − 2,000 = 16,500 units. This formula is fundamental to production budgeting. Option A deducts closing inventory and adds opening (inverted formula). Option B ignores inventory movements. Option D adds both opening and closing.

Question 7 · Syllabus ref D1d · Materials purchases budget

Budgeted production is 20,000 units, each requiring 3 kg of material. Opening raw materials inventory is 8,000 kg and target closing inventory is 12,000 kg. Material costs £4 per kg. What is the budgeted material purchases cost?

  1. £240,000
  2. £248,000
  3. £260,000
  4. £256,000
Show answer and explanation

Answer: D. Materials needed for production = 20,000 × 3 kg = 60,000 kg. Purchases = Production needs + Closing inventory − Opening inventory = 60,000 + 12,000 − 8,000 = 64,000 kg. Cost = 64,000 × £4 = £256,000. Option A ignores inventory movements (60,000 × £4). Option B uses 62,000 kg. Option C uses 65,000 kg.

Question 8 · Syllabus ref D2b · Zero-based budgeting

Which of the following best describes zero-based budgeting (ZBB) and an advantage it has over incremental budgeting?

  1. ZBB requires managers to justify all expenditure from scratch each period, eliminating historical inefficiencies that incremental budgeting perpetuates
  2. ZBB is faster to prepare than incremental budgeting as it uses the prior year's figures as a starting point
  3. ZBB guarantees lower total expenditure by requiring all costs to start from zero
  4. ZBB is only suitable for capital expenditure decisions, not for operational budgeting
Show answer and explanation

Answer: A. ZBB rejects the prior year as a baseline — every line of expenditure must be justified from zero. This prevents inefficient legacy spending being perpetuated simply because 'it was in last year's budget.' Incremental budgeting (adding a % to last year) is quicker but embeds historical inefficiencies. ZBB is slower, not faster (B). It does not guarantee lower costs (C) — it simply requires justification. It can be applied to any type of expenditure (D).

Question 9 · Syllabus ref D2c · Rolling budgets

A company prepares a 12-month rolling budget. At the end of January, it adds a budget for the following January to replace the period just completed. Which of the following is a key advantage of this approach?

  1. The budget becomes progressively more accurate as each period is completed and replaced
  2. Managers always have a budget looking 12 months ahead, keeping planning relevant in uncertain or fast-changing environments
  3. Rolling budgets eliminate the need for any annual budget review or variance analysis
  4. The approach reduces the total time spent on budgeting as the budget only needs to be updated once per year
Show answer and explanation

Answer: B. Rolling budgets maintain a constant planning horizon — managers are never near the end of the budget period with no forward visibility. This is particularly valuable in uncertain environments. Option A is not necessarily true — adding a period 12 months ahead involves estimation, not historical certainty. Rolling budgets require continuous updating, so they do not eliminate reviews (C) or reduce time spent (D) — they actually increase the time commitment.

Question 10 · Syllabus ref D2e · Behavioural aspects of budgeting

A manager deliberately overestimates the costs in their budget submission to make it easier to achieve the budget and look good at year-end. This practice is known as which of the following?

  1. Budgetary control — the process of comparing actual to budgeted performance
  2. Responsibility accounting — assigning budget responsibility to the manager closest to each cost
  3. Budgetary slack — padding the budget to create a safety margin that makes targets easier to achieve
  4. Rolling budgeting — continuously updating the budget as new information becomes available
Show answer and explanation

Answer: C. Budgetary slack is the deliberate overstatement of costs (or understatement of revenues) in a budget to make targets easier to achieve. It reduces the value of budgets as planning tools and distorts performance assessment. Budgetary control (A) is the monitoring process — comparing actuals to budget. Responsibility accounting (B) is the framework of assigning accountability. Rolling budgeting (D) is a preparation methodology.

Question 11 · Syllabus ref D3a · Standard costing — purpose

Which of the following best describes the purpose of setting standard costs?

  1. To set the minimum price at which products can be sold to recover costs
  2. To comply with financial reporting standards requiring disclosure of product costs
  3. To replace the need for budgeting as standard costs provide all the information needed for planning
  4. To provide a pre-determined unit cost benchmark against which actual costs can be compared, enabling variance analysis and performance management
Show answer and explanation

Answer: D. Standard costs are pre-determined estimates of what a product should cost under efficient operating conditions. They serve as benchmarks for variance analysis — comparing actual to standard reveals where performance has deviated and why. They inform pricing but are not the minimum price (A). They are a management tool, not a financial reporting requirement (B). They complement, not replace, budgets (C).

Question 12 · Syllabus ref D3b · Types of standard

A company sets its standard costs based on the assumption that all operations will run perfectly with no wastage, no idle time, and no inefficiency. Which type of standard is this?

  1. Ideal standard — assumes perfect operating conditions with no inefficiency
  2. Attainable standard — assumes efficient but realistic operating conditions with some allowance for normal losses
  3. Current standard — based on current operating conditions including known inefficiencies
  4. Basic standard — a long-term standard that remains unchanged over several years
Show answer and explanation

Answer: A. An ideal standard assumes perfect conditions — zero waste, zero idle time, maximum efficiency. These are rarely achieved in practice and can demotivate employees if used for performance assessment. Attainable (or expected) standards (B) allow for realistic levels of normal inefficiency and are more commonly used. Current standards (C) reflect actual current conditions. Basic standards (D) are historical baselines kept constant over time — useful for trend analysis but not current performance management.

Question 13 · Syllabus ref D3c · Flexible budgeting — purpose

Why is it important to compare actual results against a flexed budget rather than the original fixed budget when assessing operational performance?

  1. A flexed budget incorporates actual prices paid for resources, making variance analysis more accurate
  2. A flexed budget adjusts for the actual level of activity, isolating whether costs were managed efficiently at the actual output level — rather than penalising managers for volume differences outside their control
  3. A flexed budget eliminates fixed costs from the comparison, focusing only on variable cost efficiency
  4. A flexed budget is prepared by divisional managers rather than central finance, making it more realistic
Show answer and explanation

Answer: B. The key purpose of flexing is to isolate operational efficiency (cost management) from volume effects (sales/production volume). If actual volume differs from budget, comparing to the original fixed budget confuses these two effects — managers would appear to over or underspend simply because volume changed. Flexing adjusts for volume, revealing true efficiency. It does not use actual prices (A) — it uses standard prices. It adjusts variable costs but retains fixed costs (C). It is prepared by finance using the standard cost card (D).

Question 14 · Syllabus ref D2f · Cash budget — receipts from customers

A company's credit sales are: January £60,000, February £72,000, March £80,000. 40% of customers pay in the month of sale, 50% pay in the following month, and 10% pay two months later. What are the cash receipts from customers in March?

  1. £74,000
  2. £80,000
  3. £70,800
  4. £68,800
Show answer and explanation

Answer: A. March receipts are made up of three elements: 40% of March sales (month of sale): £80,000 × 40% = £32,000. 50% of February sales (one month later): £72,000 × 50% = £36,000. 10% of January sales (two months later): £60,000 × 10% = £6,000. Total cash receipts = £32,000 + £36,000 + £6,000 = £74,000 — option A. Option B (£80,000) ignores timing entirely and assumes all March sales are received in March. Options C and D apply the percentages to the wrong months or mix up which percentage applies to which month.

Question 15 · Syllabus ref D2g · Participative vs imposed budgeting

Which of the following is an advantage of participative (bottom-up) budgeting compared to imposed (top-down) budgeting?

  1. Participative budgeting is faster to complete as each manager sets their own figures without central coordination
  2. Managers who set their own budgets are more likely to be motivated to achieve them and have superior knowledge of their own operational constraints
  3. Participative budgeting eliminates the risk of budgetary slack as managers set realistic targets for themselves
  4. Senior management retains full control over resource allocation under participative budgeting
Show answer and explanation

Answer: B. Participative budgeting engages managers in setting their own targets. Advantages include better information (operational managers know their area best) and motivation (people commit more to targets they helped set). It is slower, not faster (A) — coordinating submissions from many managers takes time. It actually increases the risk of budgetary slack (C) — managers may pad their budgets. Senior management has less, not more, control (D) under participative budgeting.

Question 16 · Syllabus ref D1e · Labour budget

Budgeted production is 4,000 units. Each unit requires 2.5 hours of direct labour. The standard wage rate is £13.50 per hour. What is the budgeted direct labour cost?

  1. £54,000
  2. £108,000
  3. £270,000
  4. £135,000
Show answer and explanation

Answer: D. Total labour hours = 4,000 × 2.5 = 10,000 hours. Budgeted labour cost = 10,000 × £13.50 = £135,000. Option A divides by an incorrect factor. Option B uses 8,000 hours (4,000 × 2). Option C uses 20,000 hours (4,000 × 5).

Question 17 · Syllabus ref D3e · Budgetary control — interpreting variances

A production manager reports a favourable material usage variance of £12,000 but an adverse labour efficiency variance of £9,000 in the same period. Which of the following is the most likely explanation for this combination?

  1. Lower-quality materials were purchased cheaply, requiring more labour time to work with — a trade-off between the two variances
  2. Both variances are unrelated and should be investigated separately with no assumed connection
  3. The production manager deliberately used excess labour to process fewer materials
  4. The favourable usage variance indicates fraud in the materials recording system
Show answer and explanation

Answer: A. Favourable material usage (less material used) combined with adverse labour efficiency (more time taken) often signals a trade-off: lower-quality or cheaper materials may be harder to work with, requiring more skilled attention or reworking. This is a classic interconnection between variances that the examiner tests — variances should not always be interpreted in isolation. The purchasing manager's decision to buy cheaper materials may have caused the production team's efficiency problem. Options B and C ignore the likely interdependence. Option D is unwarranted without evidence.

Question 18 · Syllabus ref D2h · Capital budgeting — payback period

A project requires an initial investment of £120,000. Net cash inflows are: Year 1: £35,000; Year 2: £40,000; Year 3: £45,000; Year 4: £30,000. What is the payback period?

  1. 3 years and 0 months
  2. 3 years and 4 months
  3. 2 years and 9 months
  4. 3 years and 8 months
Show answer and explanation

Answer: A. Cumulative cash flows: End Y1: £35,000. End Y2: £75,000. End Y3: £120,000. The project pays back exactly at the end of Year 3 — payback period = 3 years. If Y3 inflow had been less than £45,000, we'd interpolate within the year. Here: £120,000 − £75,000 = £45,000 needed in Y3; Y3 cash flow = £45,000. Payback = exactly 3 years = 3 years 0 months. Option B: 3 years + (£45k remaining/£30k Y4 inflow) is wrong. Option C misreads the cumulative flows. Option D is incorrect.

Question 19 · Syllabus ref D2i · Net present value

A project costs £50,000 today. It generates cash inflows of £25,000 in Year 1 and £35,000 in Year 2. The discount rate is 10%. Discount factors: Year 1 = 0.909, Year 2 = 0.826. What is the NPV?

  1. £1,635
  2. £10,000
  3. £60,000
  4. £12,500
Show answer and explanation

Answer: A. Year 0: −£50,000. Year 1: £25,000 × 0.909 = £22,725. Year 2: £35,000 × 0.826 = £28,910. NPV = −£50,000 + £22,725 + £28,910 = £1,635 — option A. The project has a small positive NPV, meaning it just exceeds the 10% required return and should be accepted. Option B (£10,000) is the undiscounted net cash inflow (£25,000 + £35,000 − £50,000), ignoring the time value of money. Option C (£60,000) sums the cash inflows and ignores the initial outlay entirely. Option D (£12,500) has no clear derivation from the given figures.

Question 20 · Syllabus ref D2j · Internal rate of return

The internal rate of return (IRR) of a project is 14%. The company's cost of capital is 11%. Which of the following statements is correct?

  1. The project should be rejected — the IRR is too close to the cost of capital to justify the risk
  2. The project should be accepted — the IRR exceeds the cost of capital, indicating a positive NPV at the required rate
  3. The IRR of 14% is the actual return the project will generate in cash terms
  4. The project should be accepted only if the IRR is also higher than the industry average return
Show answer and explanation

Answer: B. A project is acceptable if its IRR exceeds the cost of capital (hurdle rate). Here 14% > 11% — the project generates a return above what investors require, indicating a positive NPV at 11%. Option A applies an arbitrary proximity criterion — there is no such rule. Option C misunderstands IRR — it is the discount rate at which NPV = 0, not an actual cash return rate. Option D introduces an irrelevant criterion — the decision is based on the company's cost of capital, not industry averages.

Question 21 · Syllabus ref D2k · Discounted payback

Which of the following best describes the advantage of discounted payback over simple payback as a method of investment appraisal?

  1. Discounted payback is simpler to calculate than simple payback as it uses annual averages
  2. Discounted payback always gives a shorter payback period than simple payback
  3. Discounted payback considers all cash flows over the life of the project, unlike simple payback
  4. Discounted payback accounts for the time value of money by using discounted cash flows, giving a more accurate picture of how long it takes to recover the investment in real terms
Show answer and explanation

Answer: D. Simple payback ignores the time value of money — £1 received in Year 1 is treated the same as £1 received in Year 5. Discounted payback uses present values, so it measures how long it takes to recover the investment in today's money — a more accurate measure. It is more complex, not simpler (A). Discounted payback always gives a longer period than simple payback because discounted cash flows are lower (B is wrong). Both payback methods share the limitation of ignoring cash flows after the payback date (C is wrong — this limitation applies to both).

Question 22 · Syllabus ref D1f · Fixed overhead budget

A company has budgeted fixed overheads of £144,000 for the year. Monthly fixed overhead budget for control purposes should be stated as which amount?

  1. £144,000
  2. £6,000
  3. £12,000
  4. £24,000
Show answer and explanation

Answer: C. For period-by-period budgetary control, annual fixed overheads are typically divided equally across 12 months: £144,000 ÷ 12 = £12,000 per month. This provides a monthly benchmark for variance analysis. Some organisations budget by week or quarter but monthly is standard. Option A is the annual total. Option B divides by 24 (bi-monthly). Option D divides by 6 (bi-monthly in reverse).

Question 23 · Syllabus ref D2l · Beyond budgeting

The 'beyond budgeting' movement argues that traditional annual budgeting should be replaced. Which of the following best summarises the main criticism it makes of traditional budgeting?

  1. Traditional budgets are too simple to capture the complexity of modern business
  2. Traditional budgets encourage gaming, create rigidity, and are outdated before the year begins in fast-moving environments — replacing them with rolling forecasts and relative performance targets is more adaptive
  3. Traditional budgets require too much computational power to prepare using modern technology
  4. Traditional budgets are always politically manipulated and therefore have no value as planning tools
Show answer and explanation

Answer: B. The beyond budgeting critique (Hope and Fraser) argues that fixed annual budgets: (1) become obsolete in dynamic environments; (2) encourage gaming and budgetary slack; (3) lead to 'use it or lose it' spending; and (4) stifle adaptability. Alternatives include rolling forecasts, KPI-based targets, and relative benchmarking. The criticism is about the budget process's rigidity and perverse incentives, not its computational complexity (A, C) or a blanket claim of no value (D).

Question 24 · Syllabus ref D2m · Budgeting — fixed vs flexible

A fixed budget is prepared at the start of the year based on planned output of 20,000 units. Actual output is 23,000 units. Which of the following statements about comparing actual results to the fixed budget is correct?

  1. The fixed budget comparison is perfectly valid as all costs are fixed and do not change with output
  2. Actual costs will always exceed the fixed budget when output exceeds plan, indicating poor cost control
  3. The fixed budget should be compared to actual results only for revenue, not for costs
  4. The comparison is misleading for cost control purposes as the original budget was set for a different activity level
Show answer and explanation

Answer: D. Comparing actual costs at 23,000 units to a budget set for 20,000 units is misleading for variable and semi-variable costs — these naturally increase with output. The comparison would show adverse cost variances simply because output exceeded plan, not because costs were poorly controlled. A flexed budget adjusts for the actual activity level, isolating true efficiency. Option A is wrong — variable costs change with output. Option B incorrectly concludes adverse variance means poor control. Option C has no theoretical basis.

Question 25 · Syllabus ref D2n · Sales budget — market considerations

Which of the following factors would typically need to be considered when preparing a sales budget?

  1. Only historical sales data from the previous three years
  2. The preferences of the finance director regarding revenue recognition timing
  3. The tax implications of reporting different levels of sales revenue
  4. Historical sales trends, market growth rates, competitor activity, and the capacity of the production department
Show answer and explanation

Answer: D. Sales budgeting requires analysis of both internal factors (production capacity constraining achievable sales) and external factors (market trends, competitor behaviour, economic conditions). Using only historical data (A) ignores forward-looking market intelligence. Finance director preferences (B) should not drive sales forecasts. Tax implications (C) relate to financial reporting strategy, not sales volume planning.

Question 26 · Syllabus ref D2o · Forecasting for budgeting

A company uses exponential smoothing to forecast next month's sales. The smoothing constant (α) is 0.3. This month's actual sales are 1,200 units and this month's forecast was 1,000 units. What is the forecast for next month?

  1. 1,200 units
  2. 1,060 units
  3. 1,000 units
  4. 1,100 units
Show answer and explanation

Answer: B. Exponential smoothing: Next forecast = Previous forecast + α(Actual − Previous forecast) = 1,000 + 0.3(1,200 − 1,000) = 1,000 + 0.3(200) = 1,000 + 60 = 1,060 units. A higher α gives more weight to recent actual data (more responsive). A lower α gives more weight to the forecast (smoother). Option A assumes the forecast equals actual (α=1). Option C assumes no update (α=0). Option D uses α=0.5.

Question 27 · Syllabus ref D2p · Beyond budgeting — alternatives

Which of the following is a performance management tool that beyond budgeting advocates suggest should replace fixed annual profit targets?

  1. Absolute annual profit targets set by the board and communicated to all divisions
  2. Monthly budget comparisons against the original annual plan
  3. Relative benchmarking against external competitors or internal peers, assessed on a rolling basis
  4. Zero-based budgeting prepared annually with full departmental justification
Show answer and explanation

Answer: C. Beyond budgeting advocates replacing fixed annual targets with relative measures — comparing performance to competitors or peers (e.g. 'top quartile in industry ROCE') rather than fixed budget targets. Relative targets adapt automatically to external conditions — if the whole market deteriorates, managers are not penalised for conditions outside their control. Fixed annual targets (A), monthly plan comparisons (B), and ZBB (D) are all features of traditional budgeting that beyond budgeting seeks to move away from.

Question 28 · Syllabus ref D1g · Budgeting process — master budget

The master budget of an organisation typically consists of which of the following?

  1. Only the sales budget, as all other budgets are derived from it
  2. Only the cash budget, as cash management is the primary concern of budgeting
  3. A budgeted statement of profit or loss, a budgeted statement of financial position, and a cash budget
  4. The detailed operational budgets for each department, presented separately without consolidation
Show answer and explanation

Answer: C. The master budget is the top-level summary of all subsidiary budgets, typically comprising: the budgeted income statement (profit or loss), budgeted balance sheet (financial position), and cash budget. All functional budgets (sales, production, materials, labour, overheads) feed into these three summary statements. The sales budget (A) is the starting point but not the master budget. The cash budget (B) is one component. The master budget consolidates all functional budgets (D).

Question 29 · Syllabus ref D2q · Capital budgeting — ARR

A project costs £80,000 and has a useful life of 4 years with zero residual value. Annual profit (after depreciation) averages £12,000. What is the accounting rate of return (ARR) based on average investment?

  1. 15%
  2. 20%
  3. 25%
  4. 30%
Show answer and explanation

Answer: D. Average investment = (Initial cost + Residual value) ÷ 2 = (£80,000 + £0) ÷ 2 = £40,000. ARR = Average annual profit ÷ Average investment × 100 = £12,000 ÷ £40,000 × 100 = 30%. Option A uses initial investment (£12,000 ÷ £80,000 = 15%). Option B divides by wrong figure. Option C is a miscalculation. ARR is a quick but unsophisticated appraisal method — it ignores the time value of money and uses profit rather than cash flows.

Question 30 · Syllabus ref D2r · Budgeting for non-production costs

When preparing a selling and distribution cost budget, which of the following would typically be classified as a variable selling cost?

  1. Sales director's annual salary
  2. Depreciation of the company's delivery vehicles
  3. Rent of the sales office premises
  4. Sales commission paid as a percentage of sales revenue
Show answer and explanation

Answer: D. Variable costs change proportionally with activity. Sales commission is typically a percentage of revenue — it increases directly with sales. Sales director salary (A) is fixed — it does not change with sales volume. Depreciation (B) is typically fixed (straight-line method). Office rent (C) is fixed — it does not vary with sales. Identifying variable versus fixed selling costs is important for flexible budgeting and contribution analysis.

Question 31 · Syllabus ref D2s · Overhead budget — departments

A business has two production departments (A and B) and one service department (maintenance). After reapportioning maintenance costs (40% to A, 60% to B), department A has total overheads of £96,000 and budgets 12,000 machine hours. What is department A's overhead absorption rate?

  1. £9.60 per machine hour
  2. £8.00 per machine hour
  3. £6.40 per machine hour
  4. £4.00 per machine hour
Show answer and explanation

Answer: B. OAR = Total departmental overheads ÷ Budgeted activity = £96,000 ÷ 12,000 machine hours = £8.00 per machine hour. The maintenance reapportionment has already been done — the £96,000 is the total including the reapportioned share. Option A: £96,000÷10,000. Option C: £96,000÷15,000. Option D: £96,000÷24,000. The OAR is a predetermined rate used to absorb overheads into production as actual activity occurs.

Question 32 · Syllabus ref D2t · Budget committee

What is the primary role of a budget committee in the budgeting process?

  1. To prepare all the detailed functional budgets on behalf of departmental managers
  2. To set the company's strategic objectives from which the budget is derived
  3. To coordinate the preparation of functional budgets, resolve conflicts between departments, and review and approve the master budget
  4. To conduct the external audit of the budgeting process for compliance purposes
Show answer and explanation

Answer: C. The budget committee coordinates the overall budgeting process — it sets the timetable, resolves interdepartmental conflicts (e.g. production capacity vs sales targets), reviews submissions for consistency, and approves the final master budget. It does not prepare budgets for departments (A) — that is line management's responsibility. Strategic objectives (B) come from the board, not the budget committee. External audit (D) is a governance function unrelated to the budget committee.

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