Chapter 10 Subunit 4

Zero-based budgeting forces managers to

Justify all expenditures at the beginning of every budget period.

The goal is to reduce wastefulness and develop a tight, efficient budget. The management team knows that this will take time, so they plan to allow more time and additional resources in the budget process. For the next budget year, a complete review of all activities and functions will be undertaken. The controller has elected to use this year's master budget as the starting point for next year's budget process. Considering management's goals, did the controller make the most appropriate choice of budgeting methodologies?

No, he should select zero-based budgeting to allow no costs unless they are justified.

A construction company designs and builds custom houses for consumers. Customers have several base plans to choose from and modifications can be made from those plans. The modifications can range from being very minor to significant. The houses generally take from 3 months to 1 year to design and build depending upon the amount of customization. What is the best type of budgeting for this business situation?

Project budgeting.

Which one of the following is not an advantage of activity-based budgeting?

Reduction of planning uncertainty.

A budget in which each quarter is superseded by the next, encouraging management to think about the upcoming quarter, is a

Rolling budget.

The type of budget that is available on a continuous basis for a specified future period-by adding a month, quarter, or year in the future as the month, quarter, or year just ended is dropped-is called a(n)

Rolling budget.

The type of budget that is continually updated to add a new budget period as the most recent budget period is completed is called a(n)

Rolling budget.

An advantage of incremental budgeting when compared with zero-based budgeting is that incremental budgeting

Accepts the existing base as being satisfactory.

Which one of the following types of budgets will allow management to best assess how costs will change based on changes in cost drivers such as direct labor hours or machine hours?

Activity-based budget.

A company uses a type of budgeting that focuses on the cost of the processes required to produce and sell products and services. This type of budgeting is known as

Activity-based budgeting.

There are many different budget techniques or processes that business organizations can employ. One of these techniques or processes is zero-based budgeting, which is

Budgeting from the ground up as though the budget process were being initiated for the first time.

The purpose of project budgeting is to identify, evaluate, and select beneficial projects that require

Commitments of large sums of funds, and the appropriate time frame is over the project's life cycle.

A firm has found that its annual budgets are quickly outdated once actual data is recorded. Sometimes actual preparations have already begun for the period being budgeted by the time the annual budget is finished, which leaves no time to react to changing factors. The firm wants the budget to be as up-to-date as possible, and management is willing to revise budgets as needed. Which budgeting solution would be most appropriate for the firm?

Continuous budgeting.

A firm has prepared budgets for the next 5 months: May, June, July, August, and September. As soon as May results are reported, the firm will add October to their budget plans. What type of budget system is the firm using?

Continuous budgeting.

A systemized approach known as zero-based budgeting (ZBB)

Divides the activities of individual responsibility centers into a series of packages that are prioritized.

The major feature of zero-based budgeting is that it

Evaluates each activity and determines whether it should be maintained as it is, reduced, or eliminated.

Which one of the following budgeting methodologies would be most appropriate for a firm facing a significant level of uncertainty in unit sales volumes for next year?

Flexible budgeting.

Which of the following statements apply to the continuous budget methodology? The current financial forecast reflects the most recent monthly results and any material changes to the company's outlook or economy. Forecasts are updated every few months, reassessing the company's outlook several times a year. The decision-making process to develop the budget takes place during the fourth quarter of the prior year being budgeted.

I and II only.

Traditional budgeting methods look at historical data and current resources and then project forward. Activity-based budgeting is different in thatIt looks at desired outcomes and works back from there to determine resources needed.It uses current levels of activity to determine future levels without regard to resources currently available.Being under budget in one year would not necessarily indicate that an operating unit would have its budget cut the following year.The focus is on planning department by department based on resources available.

I and III only.

A company produces and sells eight different varieties of cereal. The company has eight marketing managers, each of whom is responsible for advertising one of the varieties. Historically, the company has budgeted advertising costs as 10% of each product's anticipated revenues, and actual advertising costs have been very close to budgeted amounts, yielding very insignificant variances. In order to provide for a more efficient allocation of resources available for its advertising, the company should

Implement zero-based budgeting.

A budgeting approach that requires a manager to justify the entire budget for each budget period is known as

Zero-based budgeting.

A company's board of directors has requested a full in-depth review of all budgeted items for next fiscal year's operating budget. The controller of the company subsequently advised all business unit heads that the company will not automatically approve operating budget items for next fiscal year simply because they were approved in the past, and that all operating budget items for next fiscal year will need to be justified. Based on the above information, which one of the following budgeting systems is the company most likely using?

Zero-based budgeting.

A home building company offers its customers the choice of 1 of 12 home designs on lots located in several developing areas. During its 15-year existence, the company created its annual budget by adjusting the prior year's actual results for changes in inflation as well as in projected volume. During this time, the company's profit margins have been among the lowest of all of the local home builders. Ownership of the company recently changed. New management believes there has been significant unnecessary spending in many areas of the company, although they do not know exactly where or to what extent overspending occurred. To improve profitability, the type of budgeting system the company's new management should implement is

Zero-based budgeting.

A method of budgeting in which the cost of each program must be justified, starting with the one most vital to the company, is

Zero-based budgeting.

A continuous profit plan

Is a plan that is revised monthly or quarterly.

A continuous budget is one that

Is available for a specified future period by adding a period to the period that just ended.

The major appeal of zero-based budgeting is that it

Deals with some of the problems of the incremental approach to budgeting

The major appeal of zero-based budgeting is that it

Deals with some of the problems of the incremental approach to budgeting.

A company needs to expand its warehouse capacity and is concerned about how this project will impact the financial outlook. The company will hire a contractor to perform the work. Because the company's margins are small and cash is always tight, the company will need to use a bank loan to finance the project. The budget for this project, which is expected to take 6 months, should include the contractor's bid price plus which of the following? Interest expense on the bank loan. Incremental insurance expense. Incremental property tax expense.

I, II, and III.

A continuous (rolling) budget

Is a plan that is revised monthly or quarterly, dropping one period and adding another.

The use of the master budget throughout the year as a constant comparison with actual results signifies that the master budget is also a

Static budget.

The board of directors is concerned that the budget committee has fallen into the practice of applying a flat 3% growth to the prior year performance, placing too much emphasis on the past and not focusing on the future opportunities and related activities required to achieve them. The board would like the committee to take a different approach: Evaluate the activities needed to meet the strategic goals of the company and allocate resources accordingly, requiring management to justify each function and associated costs. Which budget methodology is the board recommending?

Zero-based budgeting.

The controller of Allenwood Steel Company has tasked the newly-hired budget manager with restructuring the company's budget system. The controller would like her to gather information from each unit on their activities and with top management, examine each unit's contributions to the company as a whole. Then, with the objective of eliminating inefficiency and waste, each unit's budget for the following year will be determined without regard to past budgets and with little regard for past operating results. This method of budget development is called

Zero-based budgeting.