Budgets and planning: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
Why would a business prepare budgets?
1 to communicate its plans
2 to enable it to control costs
3 to improve its products’ quality
4 to plan its operations
Answer: B.
Budgets are prepared to plan operations, to communicate those plans so every department knows what is expected, to coordinate the departments with each other, and to give a yardstick against which actual results can be measured and costs controlled. What a budget cannot do is raise the QUALITY of the product or tell the business what demand or supply will be; those are operational and market matters that a financial plan reports on rather than determines. So 1, 2 and 4 are reasons and 3 is not.
Question 2
A business is preparing this year’s budget by adding a percentage to last year’s budget.
Which statements are true?
1 Budget holders cannot be paid based on their performance.
2 Inefficiencies can always be eliminated.
3 Previous costs are carried forward into the next budget.
Answer: D.
3 only. Adding a percentage to last year's figures is INCREMENTAL budgeting, and its defining weakness is that whatever was in last year's budget is carried into this one without being questioned. Statement 2 says the opposite of what happens: inefficiencies are perpetuated rather than eliminated, because nothing forces anyone to justify the base. Statement 1 is simply untrue, since performance related pay can be operated under any budgeting method. Zero based budgeting is the alternative that makes each cost justify itself from nothing.
Question 3
Which statements concerning a budget are correct?
1 It is always based upon historic data.
2 It is always prepared for a year ahead.
3 It needs the full commitment of all managers in order to work well.
4 It is used for planning and control of a business.
Answer: D.
3 and 4. A budget is a plan against which actual results are compared, so planning and control is its purpose, and it only works if the managers held to it are committed to it, which is why participation matters so much. Statement 1 is wrong because zero based budgeting deliberately starts from nothing rather than from history. Statement 2 is wrong because budgets are prepared for whatever period suits, a month, a quarter or several years, not always a year.
Question 4
Which statement does not apply to an efficient system of business planning?
Answer: B.
B does not apply. A planning system is not something to reach for only when a business is losing money; it is used continuously, in good years and bad, and a business that only budgets in a crisis has no standard to compare against when things go well. The other three describe what efficient planning does: set achievable costs and revenues, set targets to monitor against, and report when standards are missed.
Question 5
What is not an advantage to a business of preparing budgets?
Answer: B.
B is not an advantage, because it is not true. A budget is a plan built on estimates and it cannot guarantee any outcome, least of all that the business will avoid a loss. The other three are genuine advantages: budgets motivate when targets are realistic, they coordinate and communicate between departments, and they give a standard for evaluating performance.
What this practice covers
These questions are drawn from past CIE 9706 Accounting papers and filtered to budgets and planning. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on budgets and planning, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Preparing budgets in the wrong order, or starting somewhere other than the principal budget factor.
- Adding opening inventory and deducting closing inventory in the production budget.
- Forgetting to convert production units into kilograms before adjusting for materials inventory.
- Putting sales in the cash budget in the month of sale.
- Including depreciation in the cash budget.
- Treating the master budget as an input to the process.
- Saying the cash budget shows profit. It shows liquidity.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Budgets and planning revision notes.