Planning, Budgeting and Management Control

Introduction and Context

Planning, budgeting and management control connect organisational strategy with day-to-day action. Strategy specifies where an organisation seeks to compete and how it intends to create value; budgets translate those intentions into quantified plans; management control monitors performance and enables corrective action. In contemporary organisations, budgeting is therefore more than an annual exercise in estimating revenues and costs. It is a system of resource allocation, coordination, communication, performance evaluation and behavioural influence.

A budget may be defined as a quantified plan for a future period. Management control is the process by which managers ensure that resources are obtained and used effectively and efficiently in pursuit of organisational objectives. The two concepts are related but not identical. A budget is a formal plan, whereas control includes planning, measurement, analysis, decision-making and learning.

Traditional budgeting remains important, particularly where organisations require financial discipline, coordination and accountability. However, fixed annual budgets can become dysfunctional when markets change rapidly. Modern organisations therefore supplement or replace conventional budgets with rolling forecasts, driver-based planning, incremental approaches and beyond-budgeting principles.

Learning Objectives

By the end of this chapter, you should be able to:

1. Explain the purpose and structure of operating, cash and capital budgets.
2. Prepare an integrated master budget.
3. Distinguish static and flexible budgets and calculate key variances.
4. Explain responsibility accounting and evaluate responsibility-centre performance.
5. Analyse transfer-pricing alternatives and their behavioural consequences.
6. Compare incremental, rolling, driver-based and beyond-budgeting approaches.
7. Evaluate the strategic, ethical and behavioural implications of management control systems.

1. The Planning and Control Architecture

The planning and control cycle normally includes the following activities:

1. Clarifying strategy and objectives.
2. Identifying value drivers, constraints and risks.
3. Preparing operational and financial plans.
4. Allocating resources and authorising action.
5. Measuring actual performance.
6. Comparing actual outcomes with plans or benchmarks.
7. Investigating significant deviations.
8. Taking corrective action and revising assumptions.
9. Learning from results and improving future plans.

Budgets support both feed-forward control and feedback control. Feed-forward control attempts to identify problems before they occur, for example by testing whether forecast cash balances are sufficient to finance planned expansion. Feedback control compares actual outcomes with planned or expected outcomes, for example by analysing an adverse labour-efficiency variance.

A sound control system should satisfy several criteria:

• Strategic alignment: measures and targets should support strategic priorities.
• Controllability: managers should primarily be assessed on factors they can influence.
• Timeliness: information should arrive early enough to support action.
• Comprehensiveness: financial and non-financial drivers should be considered.
• Cost-effectiveness: the value of information and control should exceed its cost.
• Behavioural acceptability: the system should encourage cooperation, integrity and learning.
• Adaptability: plans should be revisable when assumptions materially change.

2. The Master Budget

The master budget is an integrated set of budgets covering the organisation as a whole. It generally contains operating budgets and financial budgets.

2.1 Operating Budgets

Operating budgets describe planned activities and their expected revenues and costs. They commonly include:

• sales budget;
• production budget;
• direct-materials usage and purchases budget;
• direct-labour budget;
• manufacturing-overhead budget;
• selling and administrative expense budget; and
• budgeted income statement.

The sales budget is often the starting point because expected sales volumes influence production, purchasing, staffing and cash receipts. A sales budget should identify products, quantities, prices, markets, timing and relevant assumptions.

For a manufacturing organisation, the production budget is:

The formula assumes that finished-goods inventories are measured in consistent units and that production is the only source of finished goods. It is applicable when management has specified a desired ending inventory policy.

The materials-purchases budget is:

If the organisation uses more than one material, the calculation is performed separately for each material. Purchases may then be converted into monetary terms using expected purchase prices.

The direct-labour budget is:

This assumes a stable or specified labour standard and excludes indirect labour unless it is deliberately included in the relevant cost category.

2.2 Financial Budgets

Financial budgets show the financial consequences of operating plans. They include the cash budget, budgeted statement of financial position and budgeted statement of cash flows or income statement, depending on the organisation’s reporting system.

The cash budget is particularly important because a profitable organisation may experience a liquidity crisis if cash receipts occur after cash payments become due. A cash budget normally contains:

• opening cash balance;
• cash receipts;
• cash available;
• cash disbursements;
• cash surplus or deficit before financing;
• borrowing or repayment; and
• closing cash balance.

The basic relationship is:

All amounts must refer to the same time period and use a consistent cash basis. Depreciation, although an expense, is not a cash disbursement; credit sales are not cash receipts until collected.

2.3 Capital Budgets

A capital budget evaluates significant investments in long-lived assets, projects, technologies or strategic capabilities. Capital expenditure decisions are usually analysed using discounted cash flow, because money received or paid at different times does not have equal economic value.

The present value of a future cash flow is:

where PV is present value, CF_t is the cash flow at time t, r is the discount rate per period, and t is the number of periods. The formula assumes a constant rate per period and cash flows occurring at the end of each period.

Net present value is:

where C₀ is the initial cash investment and the summation includes all relevant future cash flows. Subject to risk, capital rationing and strategic considerations, a positive NPV indicates that the project is expected to add value at the selected discount rate.

For example, a project requires an initial investment of £100,000 and generates £60,000 in year 1 and £60,000 in year 2. At a discount rate of 10%:

NPV = 60,000/1.10 + 60,000/(1.10)² − 100,000

The present values are approximately £54,545 and £49,587. Therefore, NPV is approximately £4,132. The project appears financially attractive under the stated assumptions, although sensitivity analysis should examine sales volume, costs, timing and the discount rate.

Capital budgeting should include relevant incremental cash flows, opportunity costs, taxation, working-capital effects, terminal values and risks. Sunk costs are excluded because they cannot be changed by the decision. Financing costs are generally reflected in the discount rate rather than deducted again from project cash flows.

3. An Integrated Budget Example

Consider an illustrative manufacturer. It expects to sell 10,000 units in April at £50 each and 12,000 units in May at £50 each. Finished-goods inventory is planned at 20% of the following month’s sales. Beginning April inventory is 1,800 units, and June sales are forecast at 11,000 units.

April production is:

10,000 + (20% × 12,000) − 1,800 = 10,600 units

May production is:

12,000 + (20% × 11,000) − (20% × 12,000) = 11,800 units

If each unit requires 3 kilograms of material, April material required for production is 31,800 kilograms. If desired ending materials inventory is 10% of the following month’s production requirements and beginning April materials inventory is 3,000 kilograms, the materials-purchases calculation must incorporate the relevant May requirement. This illustrates why individual budgets cannot be prepared independently: sales forecasts affect production, production affects materials and labour, and all of these affect cash requirements.

A budget committee or finance business partner should challenge assumptions rather than merely consolidate departmental submissions. Useful questions include:

• What evidence supports the volume forecast?
• Which costs are genuinely variable and which are committed?
• What capacity constraints apply?
• Are customer-payment assumptions realistic?
• What happens if demand is 10% below plan?
• Which activities create customer value and which merely consume resources?

4. Flexible Budgets and Variance Analysis

A static budget is prepared for one planned activity level. It is useful for planning but can be misleading for performance evaluation when actual activity differs from planned activity. A flexible budget recalculates expected revenues and costs for the actual level of activity.

For a cost that is partly variable and partly fixed:

This formula assumes a linear cost relationship within the relevant range. It should not be used outside the range in which the cost behaviour is reasonably stable.

Variance analysis decomposes the difference between actual and budgeted results. For revenue:

The total variance can be separated into a flexible-budget variance and a sales-volume variance:

The flexible-budget variance compares actual revenue with revenue allowed for actual volume. The sales-volume variance compares revenue allowed for actual volume with revenue in the static budget.

For a variable cost with a standard cost per unit, the direct-material price variance is:

The material quantity variance is:

An adverse variance is normally positive in a cost formula and indicates that actual cost is higher than expected. A favourable variance is negative in a cost formula. Organisations should state their sign convention clearly, because some reports display favourable variances as positive amounts.

Worked Variance Example

A product has a standard material requirement of 2 kilograms per unit at a standard price of £4 per kilogram. Actual production is 1,000 units. Actual material usage is 2,200 kilograms purchased at £4.50 per kilogram.

Standard quantity allowed:

1,000 × 2 = 2,000 kg

Material price variance:

2,200 × (£4.50 − £4.00) = £1,100 adverse

Material quantity variance:

£4.00 × (2,200 − 2,000) = £800 adverse

Total material cost variance is therefore £1,900 adverse. The price variance may reflect supplier price increases, poor purchasing negotiation or a change in material quality. The quantity variance may reflect waste, defective inputs, inexperienced labour or an unrealistic standard. Variances identify signals for investigation; they do not by themselves prove managerial failure.

A flexible-budget system should distinguish planning variances, caused by inaccurate original assumptions, from operational variances, caused by performance during implementation. This distinction improves fairness and organisational learning.

5. Responsibility Accounting

Responsibility accounting assigns revenues, costs, assets or investments to managers who have authority over them. It is based on decentralisation and requires a clear definition of responsibility centres.

A central principle is controllability. A production manager may control labour scheduling and material usage but not a corporate property charge imposed by head office. Such charges may be reported for decision-making but should be interpreted carefully in performance evaluation.

Return on investment is:

ROI can be decomposed as:

The first component is operating margin and the second is asset turnover. This decomposition shows that ROI can improve through higher margins, better asset utilisation or both.

Residual income is:

Residual income can encourage managers to accept projects that earn more than the organisation’s required return, even when those projects reduce divisional ROI. However, both measures depend on accounting policies, asset valuation and the treatment of shared resources.

Non-financial measures are essential. Examples include defect rates, customer retention, employee turnover, delivery reliability, safety incidents, innovation cycle time and carbon emissions. A balanced scorecard approach may group measures under financial, customer, internal-process, and learning-and-growth perspectives. The purpose is not to create an unlimited dashboard but to identify a small set of strategically connected measures.

6. Transfer Pricing

Transfer pricing determines the price charged when one responsibility centre supplies goods or services to another within the same organisation. It affects divisional performance, motivation, tax exposure and resource allocation.

Common methods include:

1. Market-based transfer price: based on an observable external market price.
2. Cost-based transfer price: based on variable cost, full cost or cost plus a margin.
3. Negotiated transfer price: agreed between buying and selling divisions.
4. Dual pricing: different prices are recorded for the supplying and receiving divisions, with the difference reconciled centrally.

When the supplying division has spare capacity and no external opportunity, the minimum economically rational transfer price is usually the supplying division’s variable cost. When the supplying division must sacrifice an external sale, the opportunity cost must be added.

The opportunity cost is the contribution margin lost on external business displaced by the internal transfer. The receiving division’s maximum price is generally the external purchase price, assuming comparable quality, reliability and terms. A mutually acceptable range exists only if the seller’s minimum is no greater than the buyer’s maximum.

For example, Division A has variable cost of £30 per unit and spare capacity. Division B can buy externally for £46. The minimum transfer price is £30, and the maximum acceptable price for B is £46. If A is operating at full capacity and could sell externally for £46, with a £30 variable cost, the opportunity cost is £16. The minimum transfer price becomes £46.

Transfer pricing can create dysfunctional behaviour. A market-based price may be fair where a competitive market exists, but it may be inappropriate where the external market is imperfect. Cost-plus pricing can reward inefficiency because higher costs generate a higher transfer price. Negotiation may encourage autonomy but consume time and produce political outcomes. Tax regulations may require arm’s-length pricing for cross-border transactions, but management-control prices should also support internal decision-making.

7. Alternative Budgeting Approaches

Incremental Budgeting

Incremental budgeting begins with the existing budget or actual results and adjusts for expected changes. It is simple, relatively inexpensive and suitable where activities are stable. Its weaknesses include perpetuating inefficiency, embedding historical inequities and making it difficult to challenge established activities.

Zero-Based Budgeting

Zero-based budgeting requires activities to be justified from a zero base rather than automatically carried forward. It can expose low-value expenditure but may be costly, time-consuming and vulnerable to superficial justification exercises.

Rolling Budgets and Forecasts

A rolling budget continuously extends the planning horizon. When one month or quarter ends, another is added. A rolling forecast is usually a realistic prediction rather than a target or resource-authorisation document. Confusing forecasts with targets can discourage honest reporting.

Rolling systems improve responsiveness, but they require reliable data, disciplined forecasting and clear governance. They do not eliminate uncertainty; they make assumptions visible and subject to more frequent review.

Driver-Based Budgeting

Driver-based budgeting begins with operational drivers rather than accounting categories. Examples include customers served, transactions processed, machine hours, occupancy, headcount, delivery kilometres and production throughput.

A driver-based model might express support cost as:

The relationship is useful only if transaction volume is a valid causal driver and the relevant range is respected. Driver-based planning supports scenario analysis and helps managers understand how operational choices create financial consequences.

Beyond Budgeting

Beyond budgeting is a broader management philosophy that questions fixed annual targets, centralised resource allocation and hierarchical control. Its principles commonly include decentralised authority, relative performance evaluation, transparent information, adaptive planning and a strong focus on customer value.

The approach does not necessarily mean abandoning all budgets. Some organisations retain financial plans for cash management, investment approval and external commitments while replacing rigid performance contracts with relative targets and rolling forecasts. Its success depends on capable managers, reliable information, clear accountability and a culture of trust. Without these conditions, removing budgets may increase ambiguity rather than agility.

8. Strategy, Behaviour and Ethics

Control systems influence behaviour because people respond to targets, rewards and sanctions. A technically accurate budget can therefore produce poor outcomes if its incentives are dysfunctional.

Common dysfunctional behaviours include:

• budgetary slack, in which managers deliberately underestimate revenue or overstate costs;
• short-termism, such as cutting maintenance or training to meet an annual target;
• excessive production to spread fixed costs over more units;
• delaying necessary expenditure;
• manipulating timing or classification of transactions;
• rejecting profitable projects because they reduce a manager’s ROI; and
• withholding information from other departments.

These risks can be reduced through participative but evidence-based budgeting, independent challenge, transparent assumptions, balanced measures, post-implementation review and rewards that recognise long-term performance. Participation should not become an opportunity to negotiate easy targets. Nor should stretch targets become so unrealistic that employees rationally disengage or misreport.

Ethical governance requires accurate records, transparent assumptions, proper authorisation, segregation of duties and protection for whistle-blowers. Senior managers are responsible for the tone of the control environment. Budgets should never be used to justify unsafe work, misleading financial reporting, discriminatory resource allocation or concealment of adverse information.

The control system should distinguish errors from misconduct and bad outcomes from bad decisions. A manager who makes a transparent, evidence-based decision under uncertainty should not automatically be punished because the outcome was unfavourable. Conversely, achieving a target through deception should not be rewarded merely because the reported number is favourable.

9. Technology, Data and Contemporary Developments

Enterprise resource planning systems integrate sales, purchasing, inventory, production and finance data. Business-intelligence tools allow managers to compare actual results with budgets and operational drivers. Cloud platforms can support collaborative planning, while process-mining tools may identify bottlenecks and unusual transactions.

Artificial intelligence can assist with demand forecasting, anomaly detection, scenario generation and narrative variance reporting. However, AI outputs depend on data quality, model design and assumptions. A forecast is not objective merely because an algorithm produced it. Governance should address:

• data lineage and ownership;
• model validation and performance monitoring;
• bias and unfair allocation;
• explainability of significant recommendations;
• cybersecurity and access controls;
• human review of material decisions; and
• documentation of assumptions and overrides.

A useful principle is that automation should improve the speed and quality of managerial judgement, not eliminate accountability. Managers remain responsible for understanding the model’s limitations and challenging implausible outputs.

10. Illustrative Case: Meridian Medical Devices

Background

Meridian Medical Devices manufactures diagnostic equipment through two divisions. The Components Division produces sensor modules, while the Systems Division assembles and sells complete machines. The organisation uses annual budgets, divisional ROI targets and transfer prices based on full manufacturing cost plus 20%.

Problem

Demand for complete machines has increased unexpectedly. The Components Division is operating near full capacity and can sell sensor modules to an external customer for £120 each. Its variable cost is £70 per module. The Systems Division requires 1,000 modules and argues that the internal transfer price should remain at the existing standard of £96. The Components manager prefers the external customer because internal transfers at £96 appear less profitable.

At the same time, the annual budget assumes lower demand. The Systems Division is considering reducing preventive maintenance to protect its operating-profit target.

Analysis

The external contribution margin per module is:

£120 − £70 = £50

Because internal production displaces external sales, the opportunity cost is £50 per module. The minimum economically rational transfer price is therefore:

£70 + £50 = £120

The Systems Division should compare this with its external purchasing alternative. If an external supplier can provide equivalent modules for £125, an internal transfer price between £120 and £125 could support group optimisation. A transfer price of £96 would improve the Systems Division’s reported result but would reduce the Components Division’s reported contribution and could create conflict.

The existing full-cost-plus formula is also problematic. It does not reflect capacity opportunity cost and may encourage internal sourcing decisions that destroy group contribution. Corporate management should distinguish the price used for decision-making from the price used for divisional performance reporting. A dual-price system or negotiated price with a central adjustment may be appropriate.

The maintenance decision illustrates another control weakness. Reducing preventive maintenance may improve current profit but increase breakdown risk, warranty claims and customer dissatisfaction. The budget should therefore include equipment reliability, downtime, warranty cost and on-time delivery measures.

Approach and Solution

Meridian adopts the following actions:

1. Prepare a rolling forecast reflecting the demand increase.
2. Use relevant-cost analysis for the transfer decision.
3. Record a negotiated operating transfer price while providing a central reconciliation so that divisional managers are not penalised for value-creating internal trade.
4. Add capacity utilisation, defect rates, downtime and warranty claims to the performance dashboard.
5. Protect essential preventive maintenance through a governance rule requiring senior approval for reductions.
6. Separate forecast updates from target renegotiation so that managers have incentives to report realistic information.

Outcome

The revised system makes the opportunity cost visible, reduces divisional conflict and protects long-term operational capability. It also demonstrates that a budget is not a substitute for managerial judgement. The organisation must integrate financial analysis with capacity, quality, customer and risk information.

Learning Points

• Transfer prices should support organisational rather than merely divisional optimisation.
• Capacity conditions change the relevant transfer-price range.
• Fixed annual budgets can become obsolete when demand changes.
• Non-financial measures protect against short-term manipulation.
• Control systems should distinguish accountability from blame.

11. Implementation Guidelines

An effective planning and control system can be implemented through the following sequence:

1. Translate strategy into a limited number of measurable objectives.
2. Identify causal operational and financial drivers.
3. Clarify decision rights and responsibility-centre boundaries.
4. Establish data definitions, accounting policies and reporting calendars.
5. Build integrated operating, cash and capital budgets.
6. Test plans through sensitivity and scenario analysis.
7. Agree targets using external evidence and internal capability analysis.
8. Report actual results against both static and flexible expectations.
9. Investigate material variances using operational as well as financial evidence.
10. Review the control system itself at least annually.

Sensitivity analysis changes one assumption at a time, such as volume or price. Scenario analysis changes several linked assumptions, such as a recession scenario involving lower demand, delayed collections and higher borrowing costs. Stress testing examines extreme but plausible conditions, including supply disruption or a major cyber incident.

The most effective systems create a disciplined conversation. They do not simply produce more reports. A report is useful when it identifies a decision, an accountable owner, a time horizon and an evidence-based response.

Challenges and Limitations

Budgeting involves uncertainty. Forecast errors may arise from incomplete information, structural market changes, behavioural bias or unforeseen events. Accounting allocations can distort divisional performance when shared costs do not have clear causal relationships. Variance analysis may become backward-looking if managers focus on explaining the past rather than improving the future.

Financial targets can also dominate non-financial objectives. Excessive measurement creates administrative burden and encourages gaming. Conversely, a highly decentralised system may weaken coordination and allow local optimisation. No single budgeting approach is universally superior. The appropriate design depends on environmental uncertainty, organisational maturity, technology, regulation, strategy and culture.

Managers should therefore treat budgets as conditional models rather than unquestionable truths. Assumptions should be documented, material changes should trigger review, and performance evaluation should consider the information available when decisions were made.

Chapter Summary

Planning converts strategy into action, while management control compares results with intentions and supports corrective learning. The master budget integrates sales, production, materials, labour, overhead, cash and capital plans. The cash budget protects liquidity, and capital budgeting uses incremental cash flows and discounting to evaluate long-lived investments.

Flexible budgets improve performance evaluation by adjusting expectations to actual activity. Variance analysis separates price, quantity, efficiency, volume and planning effects, but variances are signals for investigation rather than automatic evidence of failure. Responsibility accounting aligns accountability with authority through cost, revenue, profit and investment centres. ROI and residual income provide useful but incomplete performance measures.

Transfer pricing must consider variable cost, opportunity cost, external alternatives, capacity and behavioural consequences. Incremental, rolling, driver-based and beyond-budgeting approaches respond differently to stability, uncertainty and organisational culture. Effective control systems align financial discipline with strategy, ethics, learning and long-term value. Technology and AI can improve forecasting and analysis, but they require strong governance and human accountability.

Key Terms

Budget: A quantified plan for a future period.

Master budget: An integrated set of operating and financial budgets.

Operating budget: A budget covering planned revenues and operating costs.

Cash budget: A schedule of expected cash receipts, payments and financing.

Capital budget: A plan and evaluation of long-term investment expenditure.

Flexible budget: A budget adjusted to the actual level of activity.

Static budget: A budget prepared for one planned activity level.

Variance analysis: The examination of differences between actual and expected results.

Responsibility accounting: A system assigning performance responsibility to managers and centres.

Cost centre: A unit accountable primarily for costs.

Profit centre: A unit accountable for revenues and controllable costs.

Investment centre: A unit accountable for profit and invested assets.

ROI: Operating income divided by average operating assets.

Residual income: Operating income less a capital charge on operating assets.

Transfer price: The internal price charged for goods or services transferred between units.

Opportunity cost: The benefit sacrificed by choosing one alternative over another.

Rolling forecast: A forecast continuously extended as periods end.

Driver-based budgeting: Planning based on operational causes of revenues and costs.

Beyond budgeting: A management philosophy emphasising adaptive planning, decentralisation and relative performance.

Budgetary slack: Deliberate understatement of expected performance or overstatement of expected resource requirements.

Review Questions

Short Answer Questions

1. What is the difference between a static budget and a flexible budget?
2. State the formula for units to be produced and explain its components.
3. What is meant by controllability in responsibility accounting?
4. Distinguish a rolling forecast from an annual budget.
5. Why is opportunity cost relevant to transfer pricing?

Long Answer Questions

1. Explain how an integrated master budget links operating budgets with the cash budget and capital budget.
2. Discuss the uses and limitations of variance analysis in managerial performance evaluation.
3. Compare cost centres, profit centres and investment centres, including appropriate performance measures.
4. Evaluate incremental, driver-based and beyond-budgeting approaches under conditions of environmental uncertainty.
5. Explain how budgeting and management control can produce dysfunctional behaviour and propose safeguards.

Analytical / Application Questions

1. A company plans to sell 8,000 units, wants ending inventory of 1,500 units and begins with 1,200 units. Calculate planned production and explain two assumptions underlying your answer.
2. A component has a variable cost of £40. Internal demand would displace external sales priced at £75; the external sale has no additional fixed cost. Determine the minimum economically rational transfer price and explain the result.
3. A division reports operating income of £300,000 and average operating assets of £2,000,000. The required return is 12%. Calculate ROI and residual income, then explain why the two measures might motivate different investment decisions.

Multiple Choice Questions with Answers

Question 1

Which budget normally provides the starting point for a manufacturing master budget?

A. Sales budget

B. Cash disbursements budget

C. Capital expenditure budget

D. Budgeted statement of financial position

Correct Answer: A. Sales budget

Question 2

A company plans sales of 5,000 units, desired ending inventory of 800 units and beginning inventory of 600 units. What is planned production?

A. 4,800 units

B. 5,000 units

C. 5,200 units

D. 5,600 units

Correct Answer: C. 5,200 units

Question 3

What is the principal purpose of a flexible budget?

A. To eliminate all fixed costs

B. To adjust budget expectations to the actual activity level

C. To replace the capital budget

D. To guarantee favourable variances

Correct Answer: B. To adjust budget expectations to the actual activity level

Question 4

A product has a standard material price of £6 per kilogram. Actual purchases are 1,000 kilograms at £6.50. What is the material price variance?

A. £500 favourable

B. £500 adverse

C. £6,000 adverse

D. £6,500 favourable

Correct Answer: B. £500 adverse

Question 5

Which responsibility centre is normally accountable for profit and invested assets?

A. Cost centre

B. Revenue centre

C. Profit centre

D. Investment centre

Correct Answer: D. Investment centre

Question 6

A supplying division has a variable cost of £30 and spare capacity. What is generally its minimum economically rational transfer price, ignoring other considerations?

A. £0

B. £15

C. £30

D. The full external selling price only

Correct Answer: C. £30

Question 7

Which item is normally included in project cash flows for capital budgeting?

A. A sunk research cost already incurred

B. An incremental working-capital investment

C. A non-cash accounting allocation with no tax effect

D. A historical book value that cannot change

Correct Answer: B. An incremental working-capital investment

Question 8

Which approach continuously extends the planning horizon as periods end?

A. Incremental budgeting

B. Rolling budgeting or forecasting

C. Static budgeting

D. Historical-cost budgeting

Correct Answer: B. Rolling budgeting or forecasting

Question 9

A division earns operating income of £200,000 and has average operating assets of £1,000,000. What is its ROI?

A. 5%

B. 10%

C. 20%

D. 50%

Correct Answer: C. 20%

Question 10

Which behaviour is an example of budgetary slack?

A. Reporting an evidence-based forecast using current data

B. Understating expected revenue to make a target easier to achieve

C. Investigating an adverse efficiency variance

D. Updating a forecast after a material market change

Correct Answer: B. Understating expected revenue to make a target easier to achieve