sec b Roles of Budgets and the Budgeting Process

Question 1

1All of the following are advantages of the use of budgets in a management control system except that
budgets
A. Force management planning.
B. Provide performance criteria.
C. Promote communication and coordination within the organization.
D. Limit unauthorized expenditures.

Answer 1

Answer (D) is correct.
Budgets serve many roles. They force management to plan ahead, communicate organizational goals
throughout the organization, and provide criteria for future performance evaluations.

Question 2

2In the budgeting and planning process for a firm, which one of the following should be completed
first?
A. Sales budget.
B. Financial budget.
C. Cost management plan.
D. Strategic plan.

Answer 2

Answer (D) is correct.
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.

Question 3

3Which one of the following best describes the role of top management in the budgeting process? Top
management
A. Should be involved only in the approval process.
B. Lacks the detailed knowledge of the daily operations and should limit their involvement.
C. Needs to be involved, including using the budget process to communicate goals.
D. Needs to separate the budgeting process and the business planning process into two separate processes.

Answer 3

Answer (C) is correct.
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.

Question 4

4Which one of the following is usually not cited as being an advantage of a formal budgetary process?
A. Forces management to evaluate the reasonableness of assumptions used and goals identified in the
budgetary process.
B. Ensures improved cost control within the organization and prevents inefficiencies.
C. Provides a formal benchmark to be used for feedback and performance evaluation.
D. Serves as a coordination and communication device between management and subordinates.

Answer 4

Answer (B) is correct.
A budget is a realistic plan for the future expressed in quantitative terms. It is useful for planning,
control, motivation, communication, and achieving goal congruence. As a planning tool, a budget
forces management to evaluate the reasonableness of assumptions used and goals identified in the
budgetary process. As a control tool, the budget provides a formal benchmark to be used for feedback
and performance evaluation. As a communication tool, a budget serves to coordinate activities between
management and subordinates and provides management with a means of dealing with uncertainty.
Despite its advantages, a budget neither ensures improved cost control nor prevents inefficiencies.

Question 5

5The major objectives of any budget system are to
A. Define responsibility centers, provide a framework for performance evaluation, and promote
communication and coordination among organization segments.
B. Define responsibility centers, facilitate the fixing of blame for missed budget predictions, and ensure goal
congruence between superiors and subordinates.
C. Foster the planning of operations, provide a framework for performance evaluation, and promote
communication and coordination among organization segments.
D. Foster the planning of operations, facilitate the fixing of blame for missed budget predictions, and ensure
goal congruence between superiors and subordinates

Answer 5

Answer (C) is correct.
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.

Question 6

6One of the primary advantages of budgeting is that it
A. Does not take the place of management and administration.
B. Bases the profit plan on estimates.
C. Is continually adapted to fit changing circumstances.
D. Requires departmental managers to make plans in conjunction with the plans of other interdependent
departments.

Answer 6

Answer (D) is correct.
A budget promotes goal congruence within a company. Departments must coordinate their activities
with other interdependent departments in planning and developing the budget.

Question 7

7A budget helps a company control costs by setting cost guidelines. However, a budget also performs
the function(s) of
A. Planning.
B. Motivating.
C. Communicating.
D. All of the answers are correct.

Answer 7

Answer (D) is 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.

Question 8

8An improperly executed budget process might have the effect(s) of
A. Disregard of overall company goals.
B. Inflated budget requests.
C. Meeting short-term but not long-term goals.
D. All of the answers are correct.

Answer 8

Answer (D) is correct.
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.

Question 9

9Ineffective budget control systems are characterized by
A. Use of budgets as a planning but not a control tool.
B. Use of budgets for harassment of individuals rather than motivation.
C. Lack of timely feedback in the use of the budget.
D. All of the answers are correct.

Answer 9

Answer (D) is 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.

Question 10

10Which of the following statements regarding budgets is false?
A. Budgets present organizational plans in a formal, logical, and integrated manner.
B. Budgets are used only as a planning function.
C. Budgets may be developed for cash flows or labor usage.
D. A budget is a plan that contains a quantitative statement of expected results

Answer 10

Answer (B) is correct.
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

Question 11

11A planning calendar in budgeting is the
A. Calendar period covered by the budget.
B. Schedule of activities for the development and adoption of the budget.
C. Calendar period covered by the annual budget and the long-range plan.
D. Sales forecast by months in the annual budget period.

Answer 11

Answer (B) is correct.
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.

Question 12

12A budget manual, which enhances the operation of a budget system, is most likely to include
A. A chart of accounts.
B. Distribution instructions for budget schedules.
C. Employee hiring policies.
D. Documentation of the accounting system software.

Answer 12

Answer (B) is correct.
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.

Question 13

13Which one of the following is not an advantage of a participatory budgeting process?
A. Coordination between departments.
B. Communication between departments.
C. Goal congruence.
D. Control of uncertainties.

Answer 13

Answer (D) is correct.
Uncertainties can be prepared for, but they cannot be subjected to human control through any budget
process.

Question 14

14In developing the budget for the next year, which one of the following approaches would produce
the greatest amount of positive motivation and goal congruence?
A. Permit the divisional manager to develop the goal for the division that in the manager’s view will
generate the greatest amount of profits.
B. Have senior management develop the overall goals and permit the divisional manager to determine how
these goals will be met.
C. Have the divisional and senior management jointly develop goals and objectives while constructing the
corporation’s overall plan of operation.
D. Have the divisional and senior management jointly develop goals and the divisional manager develop the
implementation plan

Answer 14

Answer (D) is correct.
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.

Question 15

15Which one of the following statements concerning approaches for the budget development process
is correct?
A. The top-down approach to budgeting will ensure adherence to strategic organizational goals.
B. 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.
C. With the information technology available, the role of budgets as an organizational communication
device has declined.
D. Since department managers have the most detailed knowledge about organizational operations, they
should use this information as the building blocks of the operating budget.

Answer 15

Answer (D) is correct.
Since department managers have the most detailed knowledge about organizational operations, they
should use this information as the building blocks of the operating budget.

Question 16

16When developing a budget, an external factor to consider in the planning process is
A. A change to a decentralized management system.
B. The implementation of a new bonus program.
C. New product development.
D. The merger of two competitors

Answer 16

Answer (D) is correct.
Several planning assumptions should be made at the beginning of the budget process. Some of these
assumptions are internal factors; others are external to the company. External factors include general
economic conditions and their expected trend, governmental regulatory measures, the labor market in
the locale of the company’s facilities, and activities of competitors, including the effects of mergers.

Question 17

17The primary role of the budget director and the budgeting department is to
A. Settle disputes among operating executives during the development of the annual operating plan.
B. Develop the annual profit plan by selecting the alternatives to be adopted from the suggestions submitted
by the various operating segments.
C. Justify the budget to the executive committee of the board of directors.
D. Compile the budget and manage the budget process.

Answer 17

Answer (D) is correct.
The budget department is responsible for compiling the budget and managing the budget process. The
budget director and department are not responsible for actually developing the estimates on which the
budget is based. This role is performed by those to whom the resulting budget will be applicable. The
budget director has staff, not line, authority. (S)he has a technical and advisory role. The final decisionmaking
responsibility rests with line management.

Question 18

18Which one of the following is not considered to be a benefit of participative budgeting?
A. Individuals at all organizational levels are recognized as being part of the team; this results in greater
support of the organization.
B. The budget estimates are prepared by those in direct contact with various activities.
C. Managers are more motivated to reach the budget objectives since they participated in setting them.
D. When managers set the final targets for the budget, senior management need not be concerned with the
overall profitability of current operations.

Answer 18

Answer (D) is correct.
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.

Question 19

19The budgeting technique that is most likely to motivate managers is
A. Top-down budgeting.
B. Zero-based budgeting.
C. Program budgeting and review technique.
D. Bottom-up budgeting.

Answer 19

Answer (D) is correct.
Bottom-up budgeting is the best way of motivating managers to meet budget estimates because it
permits participation in the budget process. Lower level managers who take part in budgeting decisions
are more likely to support the result and less likely to feel that the budget has been imposed from
above.

Question 20

20Which one of the following is most important to a successful budgeting effort?
A. Experienced analysts.
B. Integrated budget software.
C. Reliable forecasts and trend analyses.
D. Top management support.

Answer 20

Answer (D) is correct.
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.

Question 21

21The major disadvantage of a budget produced by means of a top-down process is
A. Impairment of goal congruence.
B. Lack of involvement by upper-level management.
C. Inconsistency with strategic plans.
D. Positive motivational effect.

Answer 21

Answer (A) is correct.
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 topdown
process, however, budgets are imposed on subordinates without their participation.

Question 22

22All of the following are criticisms of the traditional budgeting process except that it
A. Makes across-the-board cuts when early budget iterations show that planned expenses are too high.
B. Incorporates non-financial measures as well as financial measures into its output.
C. Overemphasizes a fixed time horizon, such as one year.
D. Is not used until the end of the budget period to evaluate performance.

Answer 22

Answer (B) is correct.
Traditional budgeting focuses strictly on financial measures.

Question 23

23The following sequence of steps is employed by a company to develop its annual profit plan:
 Planning guidelines are disseminated downward by top management after receiving input from all levels of
management.
 A sales budget is prepared by individual sales units reflecting the sales targets of the various segments. This
provides the basis for departmental production budgets and other related components by the various
operating units. Communication is primarily lateral with some upward communication possible.
 A profit plan is submitted to top management for coordination and review. Top management’s
recommendations and revisions are acted upon by middle management. A revised profit plan is resubmitted
for further review to top management.
 Top management grants final approval and distributes the formal plan downward to the various operating
units.
This outline of steps best describes which one of the following approaches to budget development?
A. Imposed budgeting by top management.
B. Bottom-up approach.
C. Top-down approach.
D. Total justification of all activities by operating units.

Answer 23

Answer (B) is correct.
A bottom-up approach is characterized by general guidance from the highest levels of management,
followed by extensive input from middle and lower management. This sequence of steps aptly
describes this process

Question 24

24All of the following are advantages of top-down budgeting as opposed to participatory
budgeting, except that it
A. Increases coordination of divisional objectives.
B. Reduces the time required for budgeting.
C. May limit the acceptance of proposed goals and objectives.
D. Facilitates implementation of strategic plans.

Answer 24

Answer (C) is correct.
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.

Question 25

25A corporation’s vice president of planning has seen and heard it all. She has told the corporate
controller that she is “….very upset with the degree of slack that veteran managers use when preparing their
budgets.” The vice president has considered implementing some of the following activities during the budgeting
process.
1. Develop the budgets by top management and issue them to lower-level operating units.
2. Study the actual revenues and expenses of previous periods in detail.
3. Have the budgets developed by operating units and accept them as submitted by a company-wide
budget committee.
4. Share the budgets with all employees as a means to reach company goals and objectives.
5. Use an iterative budgeting process that has several “rounds” of changes initiated by operating units
and/or senior managers.
Which one of these activities should the corporation implement in order to best remedy the vice president’s
concerns, help eliminate the problems experienced by the corporation, and motivate personnel?
A. 1 only.
B. 2 and 3.
C. 2 and 4.
D. 2, 4, and 5.

Answer 25

Answer (D) is correct.
Steps 2, 4, and 5 are appropriate for alleviating the corporation’s budget problems. Step 1 should not
be performed because a budget imposed from the top is more likely to encounter resistance. Step 3
should not be performed because operating units will tend to consider only their own interests when
preparing budgets.

Question 26

26Budgeting problems where departmental managers are repeatedly achieving easy goals or failing to
achieve demanding goals can be best minimized by establishing
A. Preventive controls.
B. A policy that allows managers to build slack into the budget.
C. Participative budgeting where managers pursue objectives consistent with those set by top management
D. Better communication whereby managers discuss budget matters daily with their superiors.

Answer 26

Answer (C) is correct.
Participative budgeting is a practical means of setting realistic, achievable budget goals.

Question 27

27Which one of the following items would most likely cause the planning and budgeting system to
fail? The lack of
A. Historical financial data.
B. Input from several levels of management.
C. Top management support.
D. Adherence to rigid budgets during the year.

Answer 27

Answer (C) is correct.
Top management’s belief in and support of the planning and budgeting process is the single most
important element in its success.

Question 28

28All of the following are disadvantages of top-down budgeting as opposed to participatory
budgeting, except that it
A. May result in a budget that is not possible to achieve.
B. May limit the acceptance of proposed goals and objectives.
C. Reduces the communication between employees and management.
D. Reduces the time required for budgeting.

Answer 28

Answer (D) is correct.
Since a top-down budget is coordinated from above, it is less time-consuming than obtaining lowerlevel
input.

Question 29

29Suboptimal decision making is not likely to occur when
A. There is little congruence among the overall organization goals, the subunit goals, and the individual
goals of decision makers.
B. Goals and standards of performance are set by the top management.
C. Guidance is given to subunit managers about how standards and goals affect them
D. The subunits in the organization compete with each other for the same input factors or for the same
customers.

Answer 29

Answer (C) is correct.
Suboptimal decision making is not likely to occur when guidance is given to subunit managers about
how standards and goals affect them.

Question 30

30The budgeting process should be one that motivates managers and employees to work toward
organizational goals. Which one of the following is least likely to motivate managers?
A. Setting budget targets at attainable levels.
B. Participation by subordinates in the budgetary process.
C. Use of management by exception.
D. Having top management set budget levels.

Answer 30

Answer (D) is correct.
A budget is potentially a good motivational tool. If lower-level managers have participated in
preparing the budget, instead of simply receiving a budget imposed by top management, they are more
likely to understand and share the goals of top management and to work to keep costs within the
budget. Participation and understanding are also likely to result in budgets that are reasonably
attainable and viewed as realistic. However, a budget is also a motivator in the sense that managers are
accountable for variances in controllable costs but are rewarded for good performance. Moreover,
budgeting coupled with analysis of variances tends to improve motivation by allowing upper-level
managers to concentrate on problems (exceptions) rather than engaging in routine supervision of
subordinates, which may be viewed as unnecessarily intrusive and unwelcome.

Question 31

31The best explanation of how the efficient allocation of organizational resources is planned during
the budgeting process is that a budget
A. Demonstrates how important it is to have additional spare resources on hand in case the actual results
vary from the budget.
B. Demonstrates how a company can pull resources from bottlenecks to apply them to other areas to attain
goals.
C. Identifies the resources and commitments required to fulfill the organization’s goals for the period
identified.
D. Is a process for evaluating projects needed and related external financing required to meet resource
requirements.

Answer 31

Answer (C) is correct.
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.

Question 32

32A company’s annual budget provides information that can impact the company’s
A. Long-term planning only.
B. Long-term planning and operational budgets only.
C. Operational budgets and strategy only.
D. Long-term planning, operational budgets, and strategy.

Answer 32

Answer (D) is correct.
Budgeting plays a role in the overall planning and evaluation process of the company. It includes
information that can impact the company’s long-term planning, operational budgets, and strategy. The
strategic plan is made up of long-term objectives that make clear the priorities of the organization.
Awareness of priorities is crucial for the allocation of resources because it affects the operational and
financial budgets.

Question 33

33Which one of the following is an advantage of using the budgeting process to judge performance?
A. Management is able to measure actual performance against predicted performance.
B. Past performance can be used to evaluate performance improvements.
C. Management believes that past conditions are an indicator of future conditions.
D. Company performance can be measured against the performance of others in the same industry.

Answer 33

Answer (A) is correct.
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.

Question 34

34Which one of the following is not a characteristic of a successful budget process?
A. Setting specific expectations to compare to actual results.
B. Gaining top management’s support.
C. Using market feedback to assist in setting expectations.
D. Implementing the budget as the only benchmark for performance evaluation.

Answer 34

Answer (D) is correct.
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.

Question 35

35Which one of the following statements best describes budgetary slack?
A. The practice of management assigning relaxed budgetary goals after the company achieves the first
several months of the annual budget.
B. The total amount that actual expenses are below budgeted expenses and actual revenues exceed budgeted
revenues.
C. The practice of understating budgeted revenues or overestimating budgeted costs to make budgeted
targets more achievable.
D. The margin of error assigned to each cost center to encourage the manager to budget accurately and
consistently.

Answer 35

Answer (C) is correct.
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.

Question 36

36The finance department of a large company has prepared a master budget with very limited expense
budgets for each department. The department managers are worried about being held accountable for these assigned
targets, but senior management wants to keep spending reduced to allow for contingencies and strategic adjustments
to the company-wide master budget. Based on this information, this budget process is
A. A successful budgeting process because it will be a very useful tool to hold people accountable for
overspending.
B. A successful budgeting process because it will encourage the associates to work their hardest to meet the
goals.
C. Not a successful budgeting process because management has left too much room for strategic unknowns.
D. Not a successful budgeting process because it has not been widely accepted by the employees.

Answer 36

Answer (D) is correct.
This budget process represents a top-down budgeting approach. It is imposed by upper management
and therefore has less of a chance of acceptance by those on whom the budget is imposed. It is not a
successful budgeting process since there is not a buy-in at all levels. Participative budgeting has a
much greater chance of acceptance by those affected and thus of achieving ultimate success than does
a budget that is imposed from above.

Question 37

37A ceramics manufacturer is facing several challenges in its operations due to economic and
industry conditions. The company is currently preparing its annual plan and budget. Which one of the following is
subject to the least control by management in the current fiscal year?
A. A new machine that was purchased this year has not helped reduce the company’s unfavorable labor
efficiency variances.
B. A competitor has achieved an unexpected technological breakthrough that has given them a significant
quality advantage, and has caused the company to lose market share.
C. Vendors have asked that the contract price for the goods they supply to the company be renegotiated and
adjusted for inflation.
D. Experienced employees have decided to terminate their employment with the company and go to work
for the competition.

Answer 37

Answer (B) is correct.
The company has no control over the actions of its competitors; it can only respond to these actions,
e.g., increase the company’s research and development efforts. The company has some control over the
other alternatives presented.

Question 38

38A company uses participative budgeting. In order to more easily meet budgetary goals, the
controller underestimates the amount of revenue and overestimates fixed selling and administrative expenses. This is
an example of
A. Flexible budgeting.
B. Budgetary slack.
C. Zero-based budgeting.
D. Budgetary variance.

Answer 38

Answer (B) is correct.
Budgetary slack is the excess of resources budgeted over the resources necessary to achieve
organizational goals. Management may create slack by overestimating costs and underestimating
revenues.

Question 39

39All of the following are advantages of the budgeting process except that the budget
A. Forces management to assess the future objectives of the company.
B. Establishes benchmarks to identify unsatisfactory organizational performance.
C. Facilitates communication among organizational units.
D. Allocates resources on an as-needed basis.

Answer 39

Answer (D) is correct.
Allocating resources on an as-needed basis is not an advantage of the budgeting process. The budget is
usually determined before the period begins, and an as-needed basis would be decided during the
period, not before.

Question 40

40Which one of the following best describes a reason why a company’s budgeting should be based on
the company’s strategic plans?
A. Helps control costs so that products can be sold profitably.
B. Identifies resources needed to reach strategic goals.
C. Identifies the external factors that have changed from the prior year and those that remain the same.
D. Establishes standards to measure employee performance.

Answer 40

Answer (B) is correct.
The strategic plan is the basis for everything else a company does. The budget identifies the resources
needed to achieve strategic goals.

Question 41

41An advantage of participatory budgeting is that it
A. Minimizes the cost of developing budgets.
B. Yields information known to management but not to employees.
C. Encourages acceptance of the budget by employees.
D. Reduces the effect on the budgetary process of employee biases.

Answer 41

Answer (C) is correct.
Participatory budgeting is considered motivational because it involves the individuals who are
responsible for meeting the budget. Since employees are involved in preparing the budget, they are
more encouraged to accept the budget than if it were simply handed down to them by top management.

Question 42

42A manufacturer’s factory manager had lost her patience. Six months ago, she appointed a team
from the production and service departments to finalize the allocation of costs and setting of standard costs. They
were still feuding, so she hired a large consulting firm to resolve the matter.
All of the following are potential consequences of having the standards set by the consulting firm except that
A. The consulting firm may not fully understand the manufacturer’s manufacturing process, resulting in
suboptimal performance.
B. Employees could react negatively since they did not participate in setting the standards.
C. There could be dissatisfaction if the standards contain costs that are not controllable by the unit held
responsible.
D. The standards may appear to lack management support.

Answer 42

Answer (D) is correct.
Apparent lack of management support is not a potential consequence of having an outside consultant
set standards. Management did the hiring, so the consultant’s work product naturally appears to have
management support.

Question 43

43When properly developed and administered, budgets provide the following advantages to the
organization except to
A. Provide a structure for measuring performance.
B. Motivate managers and other employees.
C. Ensure that the organization makes a profit.
D. Promote the efficient allocation of resources.

Answer 43

Answer (C) is correct.
Though budgets may be designed to produce a profit for an organization, they cannot ensure that an
organization makes a profit. There are many reasons an organization may stray from a profitable
budget, such as errors, inefficiencies, or unforeseen events (e.g., a fire at a warehouse). Thus, budgets
cannot guarantee that a company will turn a profit.