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IIA CIA Exam
Certified Internal Auditor Exam (Page 30 )

Updated On: 12-Jan-2026
Page 30 of 342
PDF with 1702 Questions

A manufacturing firm has certain peak seasons; namely the Christmas season, the summer season, and the last 2 weeks of February. During these periods of increased output, the firm leases additional production equipment and hires additional temporary employees. Which of the following budget techniques would best fit this firm's needs?

  1. Flexible budgeting.
  2. St atic budgeting_
  3. Zero-based budgeting.
  4. Project budgeting.

Answer(s): A

Explanation:

A flexible budget is a series of several budgets prepared for many levels of sales. It is designed to allow adjustment of the budget to the actual level of activity before comparing the budgeted activity with actual results. A firm with peak seasons may prefer flexible budgeting because of its difficulties in predicting the activity level.



The major feature of zero-based budgeting ZBB) is that it

  1. Takes the previous year's budgets and adjusts them for inflation.
  2. Questions each activity and determines whether it should be maintained as it is, reduced, or eliminated.
  3. Assumes all activities are legitimate and worthy of receiving budget increases to cover any increased costs.
  4. Focuses on planned capital outlays for property, plant, and equipment.

Answer(s): B

Explanation:

ZBB. is a planning process in which each manager must justify his/her department's full budget for each period. The purpose is to encourage periodic reexamination of all costs in the hope that some can be reduced or eliminated.



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

  1. Budgeting from the ground up as though the budget process were being initiated for the first time.
  2. Budgeting for cash inflows and outflows to time investments and borrowings in a way to maintain a bank account with a minimum balance.
  3. Using the prior year's budget as a base year and adjusting it based on the experiences of the prior year and the expectations for the coming year
  4. Developing budgeted costs from clear-cut measured relationships between inputs and outputs

Answer(s): A

Explanation:

Zero-based budgeting ZBB) is a planning process in which each manager must justify a department's entire budget every year or period). Under ZBB, a manager must build the budget every year from a base of zero. All expenditures must be justified regardless of the variances from previous years' budgets. The objective is to encourage periodic reexamination of all costs in the hope that some can be reduced or eliminated. Different levels of serve. e work effort) are evaluated for each activity, measures of work and performance are established, and activities are ranked prioritized) according to their
importance to the entity. For each budgetary unit, decision packages are prepared that describe various levels of service that may be provided, including at least one lower than the current one.



A company prepares a flexible budget each month for manufacturing costs. Formulas have been developed for all costs within a relevant range of 5, 000 to 15, 000 units per month. The budget for electricity a semivariable cost) is US $19, 800 at 9.000 units per month, and US $21, 000 at 10, 000 units per month. How much should be budgeted for electricity for the coming month if 12, 000 units are to be produced?

  1. US $26, 400
  2. US $25, 200
  3. US $23, 400
  4. US $22, 200

Answer(s): C

Explanation:

A flexible budget consists of a fixed cost component and a variable cost component. The fixed cost component can be expected to remain constant throughout the budgets relevant range. The variable cost component, however will change at a constant rate within the budget's range. The increase in budgeted cost of US $1, 200 $2'1.000 $19, 800) per 1, 000 units of production can therefore be calculated as the variable cost per unit of U'. $: 1I). r [ $21.000 $19, 800) 1.000] and the total fixed costs of US $9, 000 [$21, 000 - 10.000 $1_201] These cost can then be used to determine the total cost of using 12, 000 units of electricity [US $9, 000 FC + 12, 000 x $1.20)].



The major objectives of any budget system are to

  1. Define responsibility centers, provide a framework for performance evaluation, and promote communication and coordination among organization segments.
  2. Define responsibility centers, facilitate the fixing of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates.
  3. Foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among organization segments.
  4. Foster the planning of operations, facilitate the fixing of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates.

Answer(s): C

Explanation:

A budget is a realistic plan for the future expressed in quantitative terms. The process of budgeting forces a company to establish determine the resources necessary to achieve those goals, and anticipate future difficulties in their ache investment. 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 d. =.d performance by highlighting the work of effective managers. Moreover, the nature of the budgeting process fosters communications 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.



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