ACCA MA Budgeting: practice questions with answers

Question 1

Bexley Ltd's budgeted sales of product Z for next quarter are 12,000 units. Inventory of finished units of Z is expected to rise from 1,500 units to 2,000 units over the quarter. Each unit of Z uses 3 kg of material Y, costing $2.40 per kg. Inventory of material Y is planned to fall from 6,000 kg to 4,200 kg. What is the budgeted cost of purchases of material Y for the quarter?

1. A $94,320
2. B $85,680
3. C $78,480
4. D $82,080

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Answer: B. Production budget: sales 12,000 + closing inventory 2,000 − opening inventory 1,500 = 12,500 units

Material usage: 12,500 × 3 kg = 37,500 kg

Material purchases: usage 37,500 + closing inventory 4,200 − opening inventory 6,000 = 35,700 kg

Cost of purchases = 35,700 × $2.40 = $85,680

Question 2

A project being evaluated by Thorne Ltd has a net present value of $23,500 at a discount rate of 10% and a net present value of −$8,900 at a discount rate of 18%. Using linear interpolation, what is the project's internal rate of return, to one decimal place?

1. A 22.9%
2. B 12.2%
3. C 15.8%
4. D 13.1%

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Answer: C. IRR = a + [NPVa / (NPVa − NPVb)] × (b − a)

- a = 10%, NPVa = $23,500
- b = 18%, NPVb = −$8,900
- NPVa − NPVb = 23,500 − (−8,900) = 32,400

IRR = 10% + (23,500 / 32,400) × 8% = 10% + 5.80% = 15.8%

If the IRR exceeds the company's cost of capital, the project is acceptable.

Question 3

Kerrow Ltd needs a one-year loan. Bank A charges interest at a nominal rate of 18% a year, compounded monthly. Bank B charges 19.4% a year, compounded annually. Which of the following is correct?

1. A Bank A's effective annual rate is 18.00%, so Bank A is cheaper
2. B Bank A's effective annual rate is 19.25%, so Bank A is cheaper
3. C Bank A's effective annual rate is 19.56%, so Bank A is cheaper
4. D Bank A's effective annual rate is 19.56%, so Bank B is cheaper

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Answer: D. Effective annual rate = (1 + r/n)^n − 1, where r is the nominal annual rate and n the number of compounding periods a year.

Bank A: (1 + 0.18 / 12)^12 − 1 = 1.015^12 − 1 = 1.1956 − 1 = 19.56%.

Bank B's effective rate is 19.4%, because it compounds only once a year. Bank B is therefore slightly cheaper.

Question 4

Harrowby Ltd is preparing its budgeted statement of financial position at 31 December. Budgeted purchases on credit are October $42,000, November $48,000 and December $54,000. Harrowby pays 40% of each month's purchases in the month after purchase and 60% two months after purchase. What is the budgeted trade payables balance at 31 December?

1. A $54,000
2. B $73,200
3. C $82,800
4. D $102,000

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Answer: C. Trade payables at 31 December are purchases not yet paid for:

| Month of purchase | Unpaid at 31 December | $ |
|---|---|---|
| December | 100% × 54,000 | 54,000 |
| November | 60% × 48,000 (paid in January) | 28,800 |
| October | Fully paid by December | 0 |
| Trade payables | | 82,800 |

Question 5

Ashwick Ltd's board has set its long-term objectives, evaluated alternative strategies, chosen a plan and turned it into an annual budget, which is now being implemented. According to the planning and control cycle, what is the next stage?

1. A Identify the organisation's objectives
2. B Measure actual results and compare them with the budget
3. C Identify alternative courses of action (strategies) for achieving the objectives
4. D Choose between the alternative courses of action

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Answer: B. The planning and control cycle:

Planning
1. Identify objectives
2. Identify potential strategies
3. Evaluate the strategies
4. Choose alternative courses of action
5. Implement the long-term plan (via annual budgets)

Control
6. Measure actual results and compare them with the plan
7. Respond to divergences from the plan (control action, or revising the plan)

Ashwick has completed stages 1 to 5, so the next stage is measuring actual results against the budget.

Question 6

Which of the following statements about budgetary control reports and the investigation of variances is correct?

1. A A variance should be investigated only if the expected benefit of investigating and correcting it is greater than the cost of the investigation
2. B Every adverse variance should be investigated, however small, so that no inefficiency goes uncorrected
3. C Favourable variances never need investigating, because they show that performance is better than planned
4. D A manager's control report should show all costs apportioned to the department, without distinguishing those the manager can influence

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Answer: A. Budgetary control reports should follow management by exception: attention is focused on significant variances.

Factors in deciding whether to investigate a variance include:

- its size, absolute and relative to budget
- whether it is part of a trend (adverse or favourable)
- whether it is controllable
- the cost of investigation compared with the expected benefit of correcting it

Reports should be timely, compare actual results with a flexed budget, and separate controllable from uncontrollable items.