Kallert Manufacturing currently uses the company's budget only as a planning tool.

Management has decided that the company would benefit by using budgets for control
purposes. In order to implement this additional use, the management accountant must:

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A. Appoint a budget director.
B. Organize a budget committee.
C. Report daily to operating management any deviations from plan.
D. Synchronize the budgeting and accounting system with the organizational structure.
Explanation

Choice "D" is correct. Control is a process of comparing actual outcome with planned
outcome. Budgets can be used for control purposes when management compares
actual results with the planned/budgeted outcomes. The responsibility centers and chart
of accounts used for budgeting should be the same as responsibility centers and chart
of accounts used for accounting. The responsibility centers used for budgeting should
be aligned with the organizational structure. This alignment enables management to
compare the budgeted amounts with the actual results.

The budgeting and accounting system must be synchronized with the organizational
structure to use budget as a control tool. If the budget is to be used for planning and
control, the management accountant must synchronize the budgeting and accounting
system with the organizational structure.

Choice "A" is incorrect. The company currently prepares budgets and most likely
already has a budget director.

Choice "B" is incorrect. The company currently prepares budgets and most likely
already has a budget committee.

Choice "C" is incorrect. Daily reports are not essential to a control system and
deviations tracked and reported on a daily basis are unlikely to be necessary.
The management of a company has just completed a thorough review of its strategic
goals and has formulated the companyʹs long-term plan and short-term objectives.
The most appropriate next step for the company is the development of a:

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A. Financial budget.
B. Operating budget.
C. Capital budget.
D. Master budget.
Explanation

Choice "D" is correct. The process of developing strategy, creating goals/objectives,

determining the operational needs to support goals/objectives, and budgeting for
operational, financial, and capital needs follows a specific order. A company should
begin with its overall long-term strategy from which goals and objectives can be
developed. To implement these goals and objectives, budgets must be developed. The
order in which budgets are developed is important, as some budgets drive the creation
of other budgets.

The master budget, also called a comprehensive budget, translates strategic plans and
implementation programs into period-specific operational plans to execute the overall
strategic plan. A master budget documents specific operating performance goals for a
period of time, normally one year or less. The master budget normally includes
operating budgets for sales, the components of cost of goods sold and selling and
administrative plans, and budgeting detailing for cash receipts and disbursements.
Operating, financial, and capital budgets are components of the master budget.

Choice "A" is incorrect. Financial budgets are part of the master budget.

Choice "B" is incorrect. Operating budgets are components of the master budget.

Choice "C" is incorrect. The capital budget will be part of the master budget.
The major objectives of budgeting are to:

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A. Foster the planning of operations, provide a framework for performance evaluation, and
promote communication and coordination among an organizationʹs segments.
B. Foster the planning of operations, facilitate the identification of blame for missed budget
predictions, and ensure goal congruence between superiors and subordinates.
C. Define responsibility centers, provide a framework for performance evaluation, and promote
communication and coordination among an organizationʹs segments.
D. Define responsibility centers, facilitate the identification of blame for missed budget
predictions, and ensure goal congruence between superiors and subordinates.
Explanation

Choice "A" is correct. When properly developed and administered, budgets are
beneficial in many respects. Communication of budgeted amounts and expectations are
improved, there are established processes in place regarding resource allocation,
personal ownership and participation/buy-in by employees is improved, and the
accuracy of information disseminated throughout the organization is improved.

The major objectives of the budgeting process include planning operations, providing a
framework for performance evaluation, and promoting coordination and communication
among the organizationʹs segments.

Choice "B" is incorrect. Budgets are used to help plan for the future operations and
promote the alignment of both individual and organization goals. However, facilitating
the identification of blame for missed budget predictions is not a major objective of
budgeting.

Choice "C" is incorrect. Budgets help provide a framework for performance evaluation
and promote communication and coordination among the organizationʹs segments.
However, defining responsibility centers is not a major objective of the budgeting
process.

Choice "D" is incorrect. Budgets are used to promote the alignment of both individual
and organizational goals. However, defining responsibility centers and facilitating blame
for missed projections are not major objectives of the budgeting process.
The process of creating a formal plan and translating goals into a quantitative format is:

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A. Process costing.
B. Budgeting.
C. Activity‐based costing.
D. Job order costing.
Explanation

Choice "B" is correct. A budget is a plan expressed in dollar terms.

Choice "A" is incorrect. Process costing is a method for collecting and assigning
manufacturing costs to units produced.

Choice "C" is incorrect. Activity-based costing is a method of assigning costs based on

the actual amount of a certain activity.

Choice "D" is incorrect. Job order costing is a method of assigning manufacturing costs
to batches of products.
Which of the following refers to a quantitative expression of proposed management
actions for a set period of time?

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A. Budgets
B. Cost of goods manufactured statements
C. Cost of goods sold statements
D. Financial statements
Explanation

Choice "A" is correct. A budget is a plan, expressed in financial terms, and is for a set
period of time.

Choice "B" is incorrect. Cost of goods manufactured statements are not quantitative
expressions of proposed management actions for a set period of time, but are actual
results over a period of time.

Choice "C" is incorrect. Cost of goods sold statements are not quantitative expressions
of proposed management actions for a set period of time, but are actual results over a
period of time.

Choice "D" is incorrect. Financial statements are not quantitative expressions of

proposed management actions for a set period of time, but are actual results at a
certain time or over a period of time.
Which of the following is not a main reason for budgeting?

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A. Improving communications within the organization.
B. Micromanaging an organization.
C. Effective evaluation of its employees.
D. Monitoring progress of an organization.
Explanation

Choice "B" is correct. There are four main reasons a company creates a budget:
planning (examining the future), improving communications and coordination of efforts
in the organization, monitoring the progress of the organization in meeting its goals, and
evaluation of key players and their performance in relation to the
budget. Micromanaging an organization is not one of the main reasons for budgeting, as
micromanagement is inefficient and ultimately counterproductive.

Choice "A" is incorrect. Improving communications within the organization is a main

reason for budgeting.

Choice "C" is incorrect. Effective evaluation of employees is a main reason for

budgeting.

Choice "D" is incorrect. Monitoring progress of an organization is a main reason for

budgeting.
During a planning process, which of the following activities would be completed last?

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A. Tactical goals
B. Operational plans
C. Strategic objectives
D. Vision and mission
Explanation

Choice "B" is correct. The logical order for the activities listed is: 1) vision and
mission; 2) strategic objectives; 3) tactical goals; and 4) operational plans. An
operational plan formulates specific goals for each strategic business unit (SBU), with
detailed revenue and expense budgets.

Choice "A" is incorrect. Tactical goals would not be completed last during a planning
process.

Choice "C" is incorrect. Strategic objectives would not be completed last during a
planning process.

Choice "D" is incorrect. Vision and mission would not be completed last during a
planning process.
In responsibility accounting a center's performance is measured by those costs which
are controllable. Controllable costs are best described as including:

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A. Direct material and direct labor, only.
B. Only those costs that the manager can influence in the current time period.
C. Only discretionary costs.
D. Those costs about which the manager is knowledgeable and informed.
Explanation

Choice "B" is correct. Responsibility accounting is a system of accounting that

recognizes various responsibility centers or decision centers throughout an
organization. Responsibility accounting is the process of identifying and classifying
revenues and expenses according to those revenues and expenses that can be
controlled by the manager and those revenues and expenses that cannot be controlled
by the manager.

Costs can be controllable or noncontrollable. A cost that can be influenced in the current
time period by the actions of the responsible manager is a controllable cost.
Noncontrollable costs are costs that the manager cannot influence in the current time
period because they are authorized at a different level in the organization.

Choice "A" is incorrect. Direct material and direct labor are controllable costs, but
controllable costs are not limited to direct material and direct labor.

Choice "C" is incorrect. Controllable cost includes discretionary costs as well as other
costs that a manager controls, such as supplies and materials.

Choice "D" is incorrect. The manager should be knowledgeable and informed about
costs that he or she can influence. The manager may also be knowledgeable and
informed about costs outside of his or her control.
If a manufacturing company uses responsibility accounting, which one of the following
items is least likely to appear in a performance report for a manager of an assembly
line?

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A. Supervisory salaries
B. Materials
C. Repairs and maintenance
D. Equipment depreciation
Explanation

Choice "D" is correct. Responsibility accounting is a system of accounting that

recognizes various responsibility or decision centers throughout an organization.
Responsibility accounting is the process of identifying and classifying revenues and
expenses according to those revenues and expenses that are controlled by the
manager and those revenues and expenses that are not controlled by the manager.
Controllable costs are only those costs that the manager can influence in the current
time period. Noncontrollable costs are costs that the manager cannot influence in the
current time period. Examples of noncontrollable costs are depreciation and allocations
of central costs.

Equipment depreciation is considered a noncontrollable cost because equipment

depreciation as an annual cost is based on the original purchase price and the length of
the useful life of the asset, which are elements authorized at a different level of the
organization and outside the control of a manager of an assembly line. Therefore,
depreciation would be excluded from a performance report that uses responsibility
accounting.

Choice "A" is incorrect. If a manufacturing company uses responsibility accounting,

supervisory salaries are likely to appear in a performance report for a manager of an
assembly line. This item is controllable by the manager and should be included on the
manager's performance report.

Choice "B" is incorrect. The cost of materials is controllable by the manager and is
included in the manager's performance report of a manufacturing company that uses
responsibility accounting.

Choice "C" is incorrect. If a manufacturing company uses responsibility accounting,

repairs and maintenance are likely to appear in a performance report for a manager of
an assembly line. This item is controllable to some extent by the manager and should
be included on the manager's performance report. The manager can influence when
repairs and maintenance are performed on equipment.
James Allen is the production manager for the division that produces KLT25. In setting
the product budget for KLT25 for the year, Allen incorporates $45,000 in fixed rental
overhead costs allocated to the product by the controller of the company. At year-end,
total fixed overhead costs for the company come in over budget and Allen's product is
allocated $49,500 in rental costs. The profit number for Allen's division is under budget
because of the additional $4,500 in fixed overhead, causing him to miss his goal and
lose his bonus. Which of the following best describes this scenario?

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A. Unfair to Allen, because profit numbers should not incorporate fixed costs.
B. Unfair to Allen, because Allen cannot control the original allocation of rental costs.
C. Fair to Allen, because all managers should assume ownership for company fixed overhead
costs.
D. Fair to Allen, because the goal is set; if the goal is not achieved, the bonus should be missed.
Explanation

Choice "B" is correct. Fixed overhead costs are costs incurred to support production
operations that do not vary based on the production or activity level. Controllable costs
like direct materials and direct labor are costs that a manager has some ability to
influence. In most cases, fixed overhead costs are considered uncontrollable costs.

The allocation of fixed overhead costs, and the incurrence of fixed costs above budget,
may not be controlled by Allen; therefore, his performance evaluation should not be
affected by fixed overhead costs.

Choice "A" is incorrect. Profit numbers should incorporate all costs, including fixed
costs.

Choice "C" is incorrect. Division managers should not assume ownership for company-
wide overhead costs, since the decision to incur the cost may have been made at a
corporate level.

Choice "D" is incorrect. From the fact pattern described, the reason the budget goal was
missed was because of something outside of Allen's control (allocated fixed overhead).
Holding Allen responsible for uncontrollable costs is unfair to Allen.
The Yummy Dog Bone Company is anticipating that a major supplier might experience
a strike this year. Because of the nature of the product and emphasis on quality, extra
production cannot be stored as finished goods inventory. When developing a
contingency budget that would anticipate a raw material buildup, the
two most significant items that will be affected are:

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A. Production volume and raw material.
B. Production and cash flow.
C. Raw material and cash flow.
D. Production volume and sales.
Explanation

Choice "C" is correct. Contingency planning is a planning for possible future events.

In the current case, the company cannot store excess finished products owing to quality
concerns. Since the company is expecting a supplier's strike, it needs to ensure that
sufficient raw material is available for production. Hence, the raw material budget would
be affected. Because the company would be purchasing excess raw material for future
contingency, it would need to pay additional cash. Hence, cash flow would be impacted.

Choice "A" is incorrect. Although raw material would be impacted, finished goods would
not be impacted because the company cannot store extra production. The company
would continue with existing production plans.

Choice "B" is incorrect. Although cash flow would be affected due to additional raw
material payments, production would not be affected.

Choice "D" is incorrect. The production would not be impacted. Sales would not be
impacted because they are demand-driven.
Upper management has a morale problem with middle management. Many middle
managers are getting poor performance appraisals, but these managers do
not think that they are to blame. Which of the following could best help this company out
of its situation?

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A. Base the performance appraisals only on variable costs.
B. Separate uncontrollable costs from controllable costs and judge managers only on the latter.
C. Separate product costs from period costs and judge managers only on the former.
D. Replace managers who get poor performance appraisals.
Explanation

Choice "B" is correct. Holding managers accountable for uncontrollable costs can be
unmotivating. However, controllable costs are useful for performance evaluations and
budgeting because managers perceive these as fair. Some fixed costs are controllable
costs.

Choice "A" is incorrect. The performance appraisals should not be based on variable
costs only, as managers have control over some fixed costs.

Choice "C" is incorrect. The performance appraisals should not be based on product
costs only, as managers have control over some period costs.

Choice "D" is incorrect. Before replacing managers, ensure that performance appraisals
are determined based on factors that managers can control.
Which one of the following statements concerning approaches for the budget
development process is correct?

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A. The authoritative approach to budgeting discourages strict 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. Because department managers have the most detailed knowledge about organizational
operations, they should use this information as the building blocks of the operating budget.
Explanation

Choice "D" is correct. Budgets are generally developed using one of two
approaches: authoritative or participative. Authoritative budgets are imposed from
the top down and while easy to implement, may be ineffective because employees
reject the budget. Participative budgets involve participating individuals developing
budget parameters as a means of formalizing the organization's tactics for
achieving its goals. Participative standards, while more time-consuming and costly,
are usually more effective.

Those closest to operations should participate in budget development; they are

most knowledgeable and can supply reliable information on budget inputs.

Choice "A" is incorrect. The authoritative approach to budgeting encourages strict

adherence to strategic organizational goals. Critics of the authoritative approach
note that when the focus is on compliance, flexibility and adaptability of operations
may be lost.

Choice "B" is incorrect. Budget goals should not be fixed. Business conditions are not
static and related business goals must be adaptable to be effective. Sales volume
drives all other budgetary decisions. Meaningful control of operations requires
adaptation of the budget to changing conditions, most critically, sales.

Choice "C" is incorrect. Budget content is highly relevant regardless of the medium that
is used to communicate it. The introduction of information technology does not change
the relevance or role of budget information, but it can impact the methods used to
communicate it timelier and effectively.
Which one of the following items would most likely cause the planning and
budgeting system to fail? The lack of:

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A. Historical financial data.
B. Input from several levels of management.
C. Top management support.
D. Adherence to rigid budgets during the year.
Explanation

Choice "C" is correct. Planning and budgeting systems are designed and implemented
by management as a means for achieving strategic objectives. Successful budgeting
efforts are generally characterized by management participation and direction
additionally supported by consistent budget policies and guidelines. Management
outlines current conditions and the parameters for budget development, including
required return on new spending, the basis for continued spending, and objectives for
current product lines.

Planning and budgeting systems will fail without the support of top management.

Choice "A" is incorrect. Although the availability of historical financial data is useful for
planning and budgeting, access to historical data is not as critical as the vision for the
organization and the basis for projections.

Choice "B" is incorrect. Participation of a wide range of individuals is beneficial to

budget development.

Choice "D" is incorrect. Although accountability for achievement of budget objectives

gives credibility to the underlying budget process, adherence to rigid budgets during the
year can be detrimental to budget systems. Systems for budget development focus on
the process of budget development and flexibility in achieving a range of
outcomes. Adherence to a rigid or static budget would undermine the flexibility needed
to use the budget as a management device.
When properly developed and administered, budgets provide the following advantages
to the organization except to:

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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.
Explanation

Choice "C" is correct. When properly developed and administered, budgets are
beneficial in many respects. Communication of budgeted amounts and expectations are
improved; there are established processes in place regarding resource allocation;
personal ownership and participation/buy-in by employees is improved; and the
accuracy of information disseminated throughout the organization is improved.

Budgets will provide structure for measuring performance during a period of time,
motivate employees, and promote the efficient allocation of resources. However, a
budget is not designed for the purposes of ensuring that an organization makes a profit.

Choice "A" is incorrect. Budgets are often used to measure performance. Managers and
other employees are often evaluated, in part, by evaluating actual results to the budget.

Choice "B" is incorrect. A budget can be used to motivate employees, as budgets can
be used as targets/goals. Employees and managers are motivated to keep costs and
expenses under the budget amounts and to achieve revenues greater than those
budgeted.

Choice "D" is incorrect. Budgets are guidelines that represent the expected state. The
budget sets the expectation for how resources will be allocated and for revenues to be
earned.
Which of the following is not a quality of a direct labor budget?

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A. A direct labor budget can smooth out production over the year to keep workforce size
consistent.
B. A direct labor budget allows firms with unions to notify the union before changes are needed.
C. A direct labor budget can be broken down into fixed and variable direct labor.
D. A direct labor budget can be broken down by categories such as semiskilled, unskilled, and
skilled.
Explanation

Choice "C" is correct. Direct labor budgets are not broken down into fixed and variable
direct labor because all direct labor is variable.

Choice "A" is incorrect. Smoothing out production over the year to keep workforce size
consistent is a quality of a direct labor budget.

Choice "B" is incorrect. Allowing firms with unions to notify the union before changes are
needed is a quality of a direct labor budget.

Choice "D" is incorrect. Breaking down labor into categories such as semiskilled,
unskilled, and skilled is a quality of a direct labor budget.
Which one of the following is generally not cited as being an advantage of a formal
budgetary process?

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A. It provides management with a means of dealing with uncertainty.
B. It serves as a coordination and communication device between management and subordinates.
C. It forces management to evaluate the reasonableness of assumptions used and goals identified
in the budgetary process.
D. It ensures improved cost control within the organization and prevents inefficiencies.
Explanation

Choice "D" is correct. A formal budgetary process does not ensure improved cost
control within the organization nor does it necessarily prevent inefficiencies. The formal
process is merely a tool that moves the organization in the directions of improved cost
control and efficiency.

Choice "A" is incorrect. Providing management with a means of dealing with uncertainty
is an advantage of a formal budgetary process.

Choice "B" is incorrect. Serving as a coordination and communication device between

management and subordinates is an advantage of a formal budgetary process.

Choice "C" is incorrect. Forcing management to evaluate the reasonableness of

assumptions used and goals identified in the budgetary process is an advantage of a
formal budgetary process.
Rainbow Incorporation recently appointed Margaret Joyce as vice president of
finance and asked her to design a new budgeting system. Joyce has changed to
a monthly budgeting system by dividing the company’s annual budget by twelve.
Joyce then prepared monthly budgets for each department and asked the
managers to submit monthly reports comparing actual to budget. A sample
monthly report for Department A is shown below.

Rainbow Incorporation
Monthly Report for Department A
Actual Budget Variance
Units 1,000 900 100F
Variable production costs

Direct material $2,800 $2,700 $100U

Direct labor 4,800 4,500 300U

Variable factory overhead 4,250 4,050 200U

Fixed costs

Depreciation 3,000 2,700 300U

Taxes 1,000 900 100U

Insurance 1,500 1,350 150U

Administration 1,100 990 110U
Marketing 1,000 900 100U

Total costs $19,450 $18,090 $1,360U

This monthly budget has been imposed from the top and will create behavior
problems. All of the following are causes of such problems except:

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A. The use of a flexible budget rather than a fixed budget.
B. Top management authoritarian attitude toward the budget process.
C. The inclusion of noncontrollable costs such as depreciation.
D. The lack of consideration for factors such as seasonality.
Explanation
National Telephone has been forced by competition to drastically cut operating costs,
which has resulted in a change from static budgeting to flexible budgeting. Which one of
the following steps will not help National Telephone gain maximum acceptance of the
proposed budgeting system?

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A. Implementing the change quickly.
B. Increasing communication with employees about the reasons for the change and the potential
benefits that will result from it.
C. Focusing departmental reports only on items that are under managers' control.
D. Demonstrating top management support for the change.
Explanation

Choice "A" is correct. Quick implementation will not allow management and employees
the time needed to "get on board" and accept (or "buy into") the new system.

Choice "B" is incorrect. Increasing communication with employees about the reasons for
the change and the potential benefits that will result from it will help National Telephone
gain maximum acceptance of the proposed budgeting system.

Choice "C" is incorrect. Focusing departmental reports only on items that are under
managers' control will help National Telephone gain maximum acceptance of the
proposed budgeting system.

Choice "D" is incorrect. Demonstrating top management support for the change will help
National Telephone gain maximum acceptance of the proposed budgeting system.
Each organization plans and budgets its operations for slightly different reasons. Which
one of the following is not a significant reason for planning?

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A. Promoting coordination among operating units.
B. Providing a basis for controlling operations.
C. Forcing managers to consider expected future trends and conditions.
D. Ensuring profitable operations.
Explanation

Choice "D" is correct. Planning does not ensure profitable operations. It is merely a tool
to move in the direction of improved profitability. As Russell Ackoff, professor emeritus
at the Wharton School, once said, "If you fail to plan, plan to fail."

Choice "A" is incorrect. Promoting coordination among operating units is a significant

reason for planning.

Choice "B" is incorrect. Providing a basis for controlling operations is a significant

reason for planning.

Choice "C" is incorrect. Forcing managers to consider expected future trends and
conditions is a significant reason for planning.
In developing the budget for the next year, which one of the following
approaches would most likely result in a successful budget with
the greatest amount of positive motivation and goal congruence?

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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.
Explanation

Choice "D" is correct. Positive motivation of team members and alignment or

congruence of team behaviors with the overall achievement of company-wide
goals are planned results of budget implementation. Leveraging the best efforts of
all involved will incorporate a genuine commitment to empowerment rather than
techniques designed to give the appearance of employee input.

Participation in budget preparation at all levels promotes acceptance of budgets.

Allowing those who implement plans to participate in the planning process is a
positive motivator and promotes the congruence of goals between senior and
divisional management.

Choice "A" is incorrect. Allowing divisional management to find a way to achieve

an imposed goal of higher profits is a method of authoritative budgeting.
Authoritative budgets tend to discourage rather than motivate.

Choice "B" is incorrect. Development and imposition of goals by senior

management, independent of the divisional managers, is an authoritative budget
process that discourages, rather than encourages, goal congruence.

Choice "C" is incorrect. Joint participation of divisional and senior management in the
development of goals that construct a corporation’s overall plan is an imposed budget
process, beyond the control of the divisional manager. The development of goals to
support the corporation’s overall plan dilutes the input of the divisional manager and
discourages goal congruence.
Each of the following represents an advantage to a participatory budget system except
for:

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A. Budgets are more likely to be realistic and attainable.
B. Employee motivation to achieve budget goals is higher due to involvement in the process.
C. The budget process may take longer due to needed participation by more employees.
D. Employees gain a better understanding of how their individual and departmental goals align
with overall organizational goals.
Explanation

Choice "C" is correct. A participatory budget system involves the individuals who will be
held accountable for meeting budget targets in the overall budget process. From top
management to nonsupervisory employees, active participation in the budgeting
process from all parties can be highly beneficial to an organization.

With a participatory budget system, it takes time to gain everyone's input and feedback.
The more people involved, the longer it takes. Employees working on the budget are not
working on products or services.

Choice "A" is incorrect. Involving people directly in budgeting activities they perform will
likely lead to more realistic and attainable budget targets.

Choice "B" is incorrect. Employees who are left out of the budget process can become
demoralized because they are held to standards they do not help to establish; involving
them in the process should help to increase motivation.

Choice "D" is incorrect. Involving employees in the budgeting process helps them
understand how their individual and departmental goals align with higher-level,
organizational goals.
The 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?

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A. Setting budget targets at attainable levels.
B. Utilization of management by exception.
C. Holding subordinates accountable for the items they control.
D. Having top management set budget levels.
Explanation

Choice "D" is correct. The budgeting process may involve decisions made either solely
by top management or by both management and employees. An authoritative budgeting
process is one in which senior management prepares goals and budget levels without
input from lower-level managers and other employees. The lower-level managers and
employees have less commitments to goals set under an authoritative budget because
their recommendations and suggestions are not considered by top management. Top
management not considering such recommendations and suggestions would
demotivate managers and employees.

Managers are least likely to be motivated to work toward organizational goals when only
top management sets budget levels. Managers are more likely to be motivated if they
participate in the budgeting process.

Choice "A" is incorrect. Managers are most likely to be motivated if budget targets are
set at attainable levels. Attainable budgeted levels represent realistic goals that
employees with appropriate training and experience can attain without extraordinary
effort. Provisions are made in the budget for normal spoilage and downtime.

Choice "B" is incorrect. Management by exception is most likely to motivate managers

because it focuses on the significant variances between actual and standard.
Management by exception will motivate managers to strive toward meeting standards.

Choice "C" is incorrect. Holding subordinates accountable for items they control is likely
to motivate managers.
Which one of the following best describes the role of top management in the budgeting
process? Top management:

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A. Should only be involved in the approval process.
B. Needs to be involved, including using the budget process to communicate goals.
C. Needs to separate the budgeting process and the business planning process into two separate
processes.
D. Lacks the detailed knowledge of the daily operations and should limit its involvement.
Explanation

Choice "B" is correct. Top management is ultimately responsible for the organization's
budget. To exercise this responsibility, top management ensures that all levels of
management understand and support the budgeting process and its relationship to
control and performance measurement.

Choice "A" is incorrect. "Top management should only be involved in the approval
process" does not best describe the role of top management in the budgeting process.

Choice "C" is incorrect. "Top management needs to separate the budgeting process
and the business planning process into two separate processes" does not best describe
the role of top management in the budgeting process.

Choice "D" is incorrect. "Top management lacks the detailed knowledge of the daily
operations and should limit its involvement" does not best describe the role of top
management in the budgeting process.
One of the primary criteria in evaluating a management control system is:

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A. How the system helps to achieve top management goals in a cost-beneficial manner.
B. How the system helps managers achieve their individual goals.
C. How much money the system saves relative to an alternative system.
D. How the system motivates management to enforce company policy.
Explanation

Choice "A" is correct. A management control system is a system that gathers

information to evaluate the performance of different departments within the
organization. Control systems are also used to provide feedback to managers on how
well the company and its employees are meeting company and top management goals
and identifies areas in which improvement is needed.

A management control system is used to help top management achieve its goals in a
cost-beneficial manner. Achieving these goals is one of the primary criteria in evaluating
a management control system.

Choice "B" is incorrect. While it is important that managers achieve their individual
goals, the primary criterion of the control system is achieving top management goals in
a cost-beneficial manner.

Choice "C" is incorrect. While it is important to save money, a management control

system is unlikely to be used to evaluate how much one management control system
saves as compared to another management control system. The management control
system gathers data from different departments within an organization rather than from
different management control systems.

Choice "D" is incorrect. A management control system is unlikely to be used to

determine how management should enforce company policy. The management control
system helps gather data but does not provide the information on how to enforce policy.
Which one of the following is the most important factor in a successful budgeting effort?

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A. Reliable forecasts and trend analysis
B. Top management support
C. Experienced analysts
D. Integrated budget software
Explanation

Choice "B" is correct. Top managers determine and significantly influence how budgets
are perceived in their companies. Top management initiates the planning and budgeting
process and approves policies and procedures regulating it, which makes the support a
crucial success factor for the budgeting process.

Choice "A" is incorrect. Having reliable forecasts and trend analysis is not the most
important factor to a successful budgeting effort.

Choice "C" is incorrect. Having experienced analysts is not the most important factor to
a successful budgeting effort.

Choice "D" is incorrect. Having integrated budget software is not the most important
factor to a successful budgeting effort.
Which one of the following best describes tactical profit plans?

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A. Broad, long‐term, broad responsibilities, qualitative
B. Detailed, short‐term, broad responsibilities, qualitative
C. Broad, short‐term, responsibilities at all levels, quantitative
D. Detailed, short‐term, responsibilities at all levels, quantitative
Explanation

Choice "D" is correct. Tactical profit plans or budgets should have the following
characteristics: detailed, short‐term, assigned responsibilities at all levels, and
quantified.

Choice "A" is incorrect. This answer does not best describe tactical profit plans, as
tactical profit plans do not have any of the listed characteristics.

Choice "B" is incorrect. This answer does not best describe tactical profit plans, as two
of the listed characteristics are inaccurate.

Choice "C" is incorrect. This answer does not best describe tactical profit plans, as one
of the listed characteristics is inaccurate.
When presenting a production budget aggregated to the quarterly level, which of the
following is true?

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A. Sales are totaled for the three months, but ending inventory counts only the last month and
beginning inventory counts only the first month.
B. Sales, beginning, and ending inventories are not totaled, but the last month's data is used for
the quarterly totals.
C. Sales are totaled, and beginning and ending inventories are averaged across the quarter.
D. Sales, beginning, and ending inventories are totaled for each of the three months.
Explanation

Choice "A" is correct. The sales totals are summed for the quarter, but beginning
inventory for the quarter is the same as the beginning inventory for the first
month and ending inventory for the quarter is the ending inventory for the last month of
the quarter.

Choice "B" is incorrect. When presenting a production budget aggregated to the

quarterly level, more than just the last month's data is used.

Choice "C" is incorrect. When presenting a production budget aggregated at the

quarterly level, sales and beginning and ending inventories are not averaged across the
quarter.

Choice "D" is incorrect. When presenting a production budget aggregated at the

quarterly level, beginning and ending inventory are not totaled for each of the three
months.
The starting point for creating a master budget for a private technical institute would be:

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A. Estimating salaries of the instructors.
B. Preparing the student recruiting budget.
C. Preparing a capital expenditure budget.
D. Forecasting enrollment.
Explanation

Choice "D" is correct. The master budget always begins with the forecast of sales.
Tuition from students is the revenue source in a private technical school.

Choice "A" is incorrect. The starting point for creating a master budget for a private
technical institute is not estimating salaries of the instructors.

Choice "B" is incorrect. The starting point for creating a master budget for a private
technical institute is not preparing the student recruiting budget.

Choice "C" is incorrect. The starting point for creating a master budget for a private
technical institute is not preparing a capital expenditure budget.
All of the following statements concerning standard costs are correct except that:

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A. Time and motion studies are often used to determine standard costs.
B. Standard costs are usually set for one year.
C. Standard costs can be used in costing inventory accounts.
D. Standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit
basis.
Explanation

Choice "D" is correct. Standards are typically developed by unit of activity assuming a
total budgeted level of activity and are in effect for an entire year. Development of
budgets may occur through consultation, quantitative analysis, or even formal time and
motion studies. Standard costs are sometimes referred to as per-unit budgets. Budgets
are totals and frequently represent a composite of standard rates multiplied by units of
output or volume.

Budgets are usually stated in total while standards are presented on a per unit basis,
not the other way around.

Choice "A" is incorrect. Time and motion studies are often used to determine standard
costs. Time and motion equate with activity levels of production at the lowest level and
are frequently used to determine allowable time for units of output.

Choice "B" is incorrect. Standard costs are usually set for one year. Standard costs are
sometimes referred to as per-unit budgets for the development of an annual budget.

Choice "C" is incorrect. Standard costs can be used to cost inventory accounts.
Standard cost systems anticipate costs based upon transaction or activity volume, and
serve as a basis for computation of variances from actual performance.
When compared with ideal standards, practical standards:

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A. Produce lower per-unit product costs.
B. Result in a less desirable basis for the development of budgets.
C. Incorporate very generous allowances for spoilage and worker inefficiencies.
D. Serve as a better motivating target for manufacturing personnel.
Explanation

Choice "D" is correct. Practical standards represent achievable targets for

manufacturing personnel and include allowances for downtime or delays commonly
associated with worker inefficiency, learning curves, and spoilage that are beyond the
control of individuals charged with achieving budgeted targets. Practical standards are
developed under actual working conditions and are a better target to motivate
manufacturing personnel. Ideal standards are those achieved under ideal working
conditions and are difficult to achieve under realistic working conditions.

Practical standards serve to more effectively motivate manufacturing personnel

because they can be attained with reasonable effort and focus personnel on the
variables that they can control.

Choice "A" is incorrect. Practical standards generally require lower production volume
and consequently produce higher, not lower, per-unit product costs.

Choice "B" is incorrect. Practical standards are a more desirable base for the
development of budgets because targets are realistic and achievable, and thereby
promote wider acceptance by workers held accountable for those standards and make
variances from budget more reliable.

Choice "C" is incorrect. Practical standards provide reasonable allowances for spoilage
and worker inefficiency. Allowances are reasonable, not generous.
A standard costing system is most often used by a firm in conjunction with:

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A. Management by objectives.
B. Participative management programs.
C. Flexible budgets.
D. Job order cost systems.
Explanation

Choice "C" is correct. Standards or per-unit costs and per-unit revenues are integral in
the development of flexible budgets. Flexible budgets focus on costs allowed for
necessary inputs, revenue expected, and project operating income at specified volumes
of sales and productions based on standards developed during the budget process. A
flexible budget is prepared at the end of an accounting period to facilitate variance
analysis and performance evaluation within the relevant range of production. A flexible
budget can be prepared at any level of production activity or sales activity and sets forth
both at the actual level of activity (production and/or sales) and the standard costs
allowed for that level of production and/or sales.

Standards represent per-unit costs that can be utilized in variance analysis, where
actual results are compared with budgeted standards built using standard costing. A
flexible budget is one in which the budgeted amounts are adjusted for the actual level of
activity (production and/or sales) using an understanding of standard costs.

Choice "A" is incorrect. Management by objectives simply requires that objectives be

defined before resources are used to achieve them and does not require the application
of standard costing.

Choice "B" is incorrect. Participative management programs bring together managers

and workers to participate in formulating management decisions in the development of
standards.

Choice "D" is incorrect. Job order cost systems may use standard costs or actual costs.
While standard costing can be used in job order cost systems, actual costs can be
used, as well. Therefore, this answer choice does not reflect the best answer choice.
All types of organizations can benefit from budgeting. A major difference between
governmental budgeting and business budgeting is that:

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A. Business budgeting is required by the SEC.
B. Governmental budgeting usually represents a legal limit on proposed expenditures.
C. Business budgeting can be used to measure progress in achieving company objectives,
whereas governmental budgeting cannot be used to measure progress in achieving objectives.
D. Governmental budgeting is usually done on a zero‐base.
Explanation

Choice "B" is correct. In governmental bodies, expenditures are based on legislative

appropriations. These appropriations create legal limits on expenditures.

Choice "A" is incorrect. Business budgeting is not required by the SEC.

Choice "C" is incorrect. Governmental budgeting can also be used to measure progress
in achieving objectives.

Choice "D" is incorrect. Governmental budgeting is not always done on a zero-base.

Richmond Enterprises is reviewing its policies and procedures in an effort to enhance
goal congruence throughout the organization. The processes that are most likely to
encourage this behavior are:

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A. Participatory budgeting, reciprocal cost allocation, and management-by-objective
performance evaluation.
B. Reciprocal cost allocation, zero-based budgeting, and standard costing.
C. Cost-based transfer pricing, management-by-objective performance evaluation, and
participatory budgeting.
D. Management-by-objective variance analysis, participatory budgeting, and negotiated transfer
pricing.
Explanation

Choice "C" is correct. Goal congruence is the agreement or consistency of employee

goals with company goals. Goal congruence is essential in an organization because it
helps ensure that employees are motivated to follow the organization's policies and
procedures.

Cost-based transfer pricing, management-by-objective performance evaluation, and

participatory budgeting are likely to encourage goal congruence.

 Cost-based transfer pricing: If the entity uses cost-based transfer pricing, this is
likely to enhance goal congruence because all divisions will transfer price at cost
(rather than some divisions at cost plus profit or negotiated price, etc.).
 Management-by-objective (MBO) performance evaluation: MBO goals are set by
participation, and individual goals are aligned with organizational objectives.
 Participatory budgeting: With participatory budgeting, management and the
employee participate in the decision-making process.

Choice "A" is incorrect. Reciprocal cost allocation is unlikely to enhance goal

congruence throughout the organization. If a company allocates common costs by
weighting the costs of each user as a separate entity, it is using reciprocal cost
allocation. This may not enhance goal congruence because managers may see the
allocation as unfair.

Choice "B" is incorrect. Reciprocal cost allocation is unlikely to enhance goal

congruence throughout the organization. If a company allocates common costs by
weighting the costs of each user as a separate entity, it is using reciprocal cost
allocation. This may not enhance goal congruence because managers may see the
allocation as unfair.

Choice "D" is incorrect. Negotiated transfer pricing is when division managers and
senior management negotiate a transfer price that is acceptable to all parties. This
Maximilian Computer Co. uses a comprehensive budgeting system in planning its
annual operations. Which of the following best describes the information needed in
order to determine the budgeted cost of circuit boards to be purchased for use in
building its laptop computer? Assume that one circuit board is used in each laptop.

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A. Begin with budgeted laptop production in units, add the desired ending inventory of circuit
boards, deduct the expected beginning inventory of circuit boards, and multiply the resulting
amount by the budgeted purchase cost per circuit board.
B. Begin with budgeted laptop sales in units, deduct the desired ending inventory of circuit
boards, add the expected beginning inventory of circuit boards, and multiply the resulting
amount by the purchase cost per circuit board.
C. Begin with budgeted laptop production in units, add the desired ending inventory of circuit
boards, add the expected beginning inventory of circuit boards, and multiply the resulting
amount by the budgeted purchase cost per circuit board.
D. Begin with budgeted laptop sales in units, add the desired ending inventory of circuit boards,
deduct the expected beginning inventory of circuit boards, and multiply the resulting amount
by the budgeted purchase cost per circuit board.
Explanation

Choice "A" is correct. To determine the budgeted cost of circuit boards, the number of
units to be produced should be adjusted by the change in inventory and then multiplied
by the budgeted purchase cost.

Choice "B" is incorrect. In order to determine the budgeted cost of circuit boards to be
purchased for use in building its laptop computer, Maximilian Computer Co. should use
production information, not sales information. Additionally, Maximilian must correctly
adjust for beginning and ending inventory.

Choice "C" is incorrect. In order to determine the budgeted cost of circuit boards to be
purchased for use in building its laptop computer, Maximilian Computer Co. must
correctly adjust for beginning and ending inventory.

Choice "D" is incorrect. In order to determine the budgeted cost of circuit boards to be
purchased for use in building its laptop computer, Maximilian Computer Co. should use
production information, not sales information.
After performing a thorough study of Michigan Company’s operations, an
independent consultant determined that the firm’s labor standards were
probably too tight. Which one of the following facts would be inconsistent with
the consultant’s conclusion?

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A. A review of performance reports revealed the presence of many unfavorable efficiency
variances.
B. Michigan’s budgeting process was well-defined and based on a bottom-up philosophy.
C. Management noted that minimal incentive bonuses have been paid in recent periods.
D. Production supervisors found several significant fluctuations in manufacturing volume, with
short-term increases on output being followed by rapid, sustained declines.
Explanation

Choice "B" is correct. Standards are typically classified as either ideal standards or
currently attainable standards.

 Ideal standards represent the costs that result from perfect efficiency and
effectiveness in job performance. Ideal standards can promote continuous
improvement but can be discouraging rather than motivating because they can
rarely be attained.
 Currently attainable standards represent costs that result from work performed by
employees with appropriate training and experience but without extraordinary
effort. Attainable standards can serve to motivate achievement of goals but are
criticized for being potentially negotiated and manipulated with excess budgetary
slack.

A well-defined budgeting process based upon a bottom-up philosophy will likely produce
realistic/currently attainable standards. The consultant's determination that the firm's
labor standards were probably too tight is not consistent with the participative approach
described in this choice.

Choice "A" is incorrect. The presence of many unfavorable efficiency variances

supports the consultant's conclusion that labor standards are too tight. Efficiency
variances are driven by the difference between actual hours used to produce output and
the standard quantity allowed. Unfavorable efficiency variances might indicate
inefficiency but might also indicate poor standards.

Choice "C" is incorrect. The absence of paid incentive bonuses supports the
consultant's conclusion that labor standards are too tight. Unearned incentives would
indicate that targets may be too high and, more importantly, are not motivating
achievement of production in excess of standards.

Choice "D" is incorrect. Short-term increases on output being followed by rapid,

sustained declines supports the consultant's conclusion that labor standards are too
The major disadvantage of a top‐down budgeting process is:

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A. Lack of involvement by upper‐level management.
B. Inconsistencies of goals with strategic plans.
C. Lack of buy‐in by middle and lower-level management.
D. The introduction of budgetary slack.
Explanation

Choice "C" is correct. In a top-down approach, upper-level management creates the

budget and communicates goals to managers at lower levels. Two advantages of this
method are lack of budgetary slack and consistency of goals with strategic plans. One
disadvantage is lack of buy-in from lower-level managers.

Choice "A" is incorrect. In a top-down budgeting process, upper-level management

creates the budget and communicates goals to managers at lower levels.

Choice "B" is incorrect. One advantage of the top-down budgeting process is a budget
containing goals consistent with strategic plans.

Choice "D" is incorrect. One advantage of the top-down budgeting process is a budget
lacking budgetary slack.
Which one of the following is an attribute of an authoritative approach to budgeting?

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A. Communication of product perspective to management.
B. Budget slack built into the budget.
C. Incorporation of strategic goals into budgets.
D. Expertise leads to informed budget decisions.
Explanation

Choice "C" is correct. In an authoritative budget (top‐down budget), top management

sets everything from strategic goals down to the individual items of the budget for each
department and expects lower managers and employees to adhere to the budget and
meet the goals.

Choice "A" is incorrect. Communication of product perspective to management is not an

attribute of an authoritative approach to budgeting.

Choice "B" is incorrect. Budget slack built into the budget is not an attribute of an
authoritative approach to budgeting.

Choice "D" is incorrect. Expertise leading to informed budget decisions is not always an
attribute of an authoritative approach to budgeting.
This year, a company reports poor sales because of a new and inexperienced sales
force. If this year's sales data is used to set next year's sales budget, which of the
following would be the most likely result?

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A. The budget would be set too low, and the sales force would be less motivated to achieve those
goals.
B. The budget would be set too high, and the sales force would be less motivated to achieve
those goals.
C. The budget would be set too high, and the sales force would be motivated to achieve those
goals.
D. The budget would be set too low, and the sales force would be less motivated to surpass those
goals.
Explanation

Choice "D" is correct. Employing prior year results as the following year's budget
provides no expectation for improvement. Another reason for not using historical results
as a budget is that past performance is not always indicative of future results. A budget
process attempts to predict and account for future changes, both positive and negative.
Relying only on raw historical data leads to a sense that the past year must always be
the benchmark.

Choice "A" is incorrect. It is true that the budget would be set too low; however, the
sales force would have motivation to at least achieve the goals set based on this year's
sales data.

Choice "B" is incorrect. The budget would not be set too high. Additionally, the sales
force would have motivation to at least achieve the goals set based on this year's sales
data.

Choice "C" is incorrect. The budget would not be set too high. However, it is true that
the sales force would have motivation to at least achieve the goals set based on this
year's sales data.
A manager develops direct labor standards for the upcoming fiscal year. Compared with
last year's budget, the standard direct labor cost has increased by 5 percent. Reviewing
the steps of the budget process, which of the following elements is the manager most
likely to identify as the cause of the increase?

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A. The overall product mix has remained consistent, with only minor tweaks to last year's
models.
B. Recent upgrades of production equipment have increased speeds and reduced maintenance
costs.
C. An increase in staff turnover and a tight labor market resulted in newer workers replacing
older, more experienced workers.
D. New workers joining the company are paid a lower hourly salary based on the average years
of experience than those who have left.
Explanation

Choice "C" is correct. Direct labor costs are associated with human work that can be
directly assigned to the production process. Establishing the standards for direct labor
costs involves planning the budget for these directly assigned costs. Factors that drive
the standard cost include the type of work involved, the complexity of the
products/services, the skill levels of the employees, the nature of the manufacturing
process, the type and condition of equipment used, the amount of time needed to
produce each unit, and the hourly rates for the personnel performing the work. Although
newer workers may get paid a lower average salary based on their experience, there
will be a learning curve to overcome and inefficiencies that will cause the average
number of hours needed for production to increase. The budget will reflect this increase
in hours per unit. This is the most likely cause of the overall increase.

Choice "A" is incorrect. With no significant changes in products, this factor is unlikely to
have caused the budget increase.

Choice "B" is incorrect. Equipment upgrades resulting in increased production speed

and lower maintenance costs (including machine downtime for maintenance) will
reduce, rather than increase, the direct labor budget.

Choice "D" is incorrect. Lower average salaries for new workers will reduce, rather than
increase, the direct labor budget.
Which of the following groups is most likely to introduce budget slack into a budget?

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A. Budget committee
B. Top management
C. Board of directors
D. Middle and lower management
Explanation

Choice "D" is correct. Middle and lower managers introduce budget slack by building in
some extra money for their budget to deal with the unexpected.

Choice "A" is incorrect. The budget committee is not likely to introduce budget slack into
a budget.

Choice "B" is incorrect. Top management is not likely to introduce budget slack into a
budget.

Choice "C" is incorrect. The board of directors is not likely to introduce budget slack into
a budget.
When budgets are used for performance evaluation and to set limits on spending, the
process will often result in departments adding something "extra" to ensure the budgets
will be met. This "extra" is called:

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A. Tactical planning.
B. Budgetary slack.
C. Management by objectives.
D. Continuous budgeting.
Explanation

Choice "B" is correct. An extra cushion built into the budget to protect against the
unexpected is called budgetary slack. It involves overbudgeting (or padding) expenses
and underbudgeting revenues to make the budget targets easier to meet.

Choice "A" is incorrect. The "extra" that departments add to ensure the budgets will be
met is not called tactical planning.

Choice "C" is incorrect. The "extra" that departments add to ensure the budgets will be
met is not called management by objectives.

Choice "D" is incorrect. The "extra" that departments add to ensure the budgets will be
met is not called continuous budgeting.
A company pays its production manager an annual bonus based on how well the
manager performs relative to the production departmentʹs annual budgets. The
production manager has been overestimating budgeted costs the past few years in
order to obtain a higher bonus payment. The production managerʹs actions
are best described as:

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A. Motivating employee effort.
B. Building budgetary slack.
C. Balancing production costs.
D. Setting budgeted performance.
Explanation

Choice "B" is correct. Budgetary slack is purposely overestimating budgeted expense to

hedge against the unexpected or to pad budgets to make objectives easier to achieve.
Budgetary slack can be defined as the difference between what the managers expect
the result will be and what the managers have budgeted the results to be.

When employees believe that they will be blamed for unfavorable variances or punished
by significant reduction in compensation for the period, they may be inclined to include a
certain amount of budgetary slack in their projections.

Building budgetary slack involves the intentional underestimation of revenues and/or the
intentional overestimation of expenses. The manager here has overstated budgeted
costs in order to increase the likelihood that actual costs will be less than budgeted
costs.

Choice "A" is incorrect. The actions of the production manager are not in line with
motivating employee effort. Intentional slack is being built into the budgeted amounts to
ensure that personal financial gains, in the form of annual bonuses, are achieved. This
would demotivate employees to work toward continuous improvement and meet long-
term objectives.

Choice "C" is incorrect. Balancing production costs is not a term used to describe the
management of production costs. The information in the fact pattern indicates the
production manager is overestimating budgeted costs.

Choice "D" is incorrect. Establishing budgeted performance is important, but in this

scenario the manager is intentionally overstating budgeted costs to earn a higher
bonus.
A company is having trouble with its budgeting process. Top management sets budgets,
but line managers often fail to meet their budgets or continue to make decisions that run
counter to the budgets. Which of the following would not explain these circumstances?

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A. Incentives are not provided to line managers.
B. Feedback is seldom given to line managers.
C. Budgetary slack is built into the line budget.
D. Line managers are accountable for both controllable and noncontrollable costs.
Explanation

Choice "C" is correct. Good budgetary systems would provide incentives to managers
who manage their controllable costs well. In addition, good budgetary systems provide
feedback regularly. If the firm's budget had slack built in, managers should be able to
meet the budget.

Choice "A" is incorrect. If incentives are not provided to line managers, this would
explain why line managers often fail to meet their budgets or continue to make
decisions that run counter to the budgets.

Choice "B" is incorrect. If feedback is seldom given to line managers, this would explain
why line managers often fail to meet their budgets or continue to make decisions that
run counter to the budgets.

Choice "D" is incorrect. If line managers are accountable for both controllable and
noncontrollable costs, this would explain why line managers often fail to meet their
budgets or continue to make decisions that run counter to the budgets.
A company allows its managers to regularly revise the budget whenever they think that
circumstances merit a change. Which of the following is not a risk for such a policy?

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A. Employees may not be motivated to work as hard toward their goals.
B. Employees may be confused due to less-clear operating guidelines.
C. Managers may set the threshold for revisions too low, and changes could occur too frequently.
D. Managers may anticipate changes and not prepare budgets carefully.
Explanation

Choice "B" is correct. Regular revisions usually provide clearer operating guidelines.
The other options are all risks of regular revisions.

Choice "A" is incorrect. Employees not motivated to work as hard toward their goals is a
risk that comes from allowing managers to regularly revise the budget whenever they
think that circumstances merit a change.

Choice "C" is incorrect. Managers setting the threshold for revisions too low and making
changes too frequently is a risk that comes from allowing managers to regularly revise
the budget whenever they think that circumstances merit a change.

Choice "D" is incorrect. Managers anticipating changes and not preparing budgets
carefully is a risk that comes from allowing managers to regularly revise the budget
whenever they think that circumstances merit a change.
All of the following statements regarding standards are accurate except:

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A. Standards allow for management to budget at a per unit level.
B. Ideal standards account for a minimal amount of normal spoilage.
C. Participative standards usually take longer to implement than authoritative standards.
D. Currently attainable standards take into account the level of training available to employees.
Explanation

Choice "B" is correct. Ideal standards do not make any provisions for normal spoilage or
downtime. They assume perfect efficiency and effectiveness, which is helpful as an
initial benchmark but is often unrealistic and unattainable.

Choice "A" is incorrect. Standards are thought of as per unit budgets.

Choice "C" is incorrect. Because they involve managers and their employees,
participative standards take longer to implement than authoritative standards which are
set solely by management.

Choice "D" is incorrect. Currently attainable standards assume an appropriate level of

training for the employees who are to be held accountable in achieving those standards.