Test 3: Budget and Budgetary Control: answer key

Question 1 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Vikram Steels Ltd is preparing a cash budget for April to June 2027. Opening cash on 1 April is ₹1,20,000. Sales are: Jan ₹2,00,000; Feb ₹2,40,000; Mar ₹3,00,000; Apr ₹3,20,000; May ₹3,60,000; Jun ₹4,00,000. Cash sales are 20% of each month's sales. Credit sales are 80%. Debtors pay 50% in the month following sale, 30% in the second month and 18% in the third month; 2% is bad. Material purchases are 60% of the same month's sales. Creditors are paid 40% in the month of purchase and 60% in the next month. Wages are 25% of sales and are paid one month in arrears. Monthly overheads are ₹40,000, paid in the same month. Capital expenditure of ₹50,000 is planned in May. No other receipts or payments are expected. The company wants a month-wise receipts and payments budget. All amounts are in Indian rupees. Answer the following MCQs using the data above and round to the nearest rupee.

What are the total cash receipts in April 2027?

1. ₹2,80,000
2. ₹2,64,000
3. ₹2,70,400 (correct answer)
4. ₹2,76,000

Answer: C — ₹2,70,400

Explanation. April cash sales = 20% × ₹3,20,000 = ₹64,000. Credit collections: from March = 80% × ₹3,00,000 × 50% = ₹1,20,000; from February = 80% × ₹2,40,000 × 30% = ₹57,600; from January = 80% × ₹2,00,000 × 18% = ₹28,800. Total April receipts = ₹64,000 + ₹1,20,000 + ₹57,600 + ₹28,800 = ₹2,70,400. Option a omits third-month collections; option b uses only cash sales and March collections; option d ignores bad debts.

Where it goes wrong. Forgetting that April receipts include three lag months of credit sales, not just the immediately preceding month.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 2 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

What are the total cash payments in May 2027?

1. ₹3,21,600
2. ₹3,71,600 (correct answer)
3. ₹3,61,600
4. ₹3,81,600

Answer: B — ₹3,71,600

Explanation. May material purchases = 60% × ₹3,60,000 = ₹2,16,000. Creditors paid in May = 40% × ₹2,16,000 + 60% × April purchases ₹1,92,000 = ₹86,400 + ₹1,15,200 = ₹2,01,600. Wages paid in May are April wages = 25% × ₹3,20,000 = ₹80,000. Overheads = ₹40,000 and capital expenditure = ₹50,000. Total payments = ₹2,01,600 + ₹80,000 + ₹40,000 + ₹50,000 = ₹3,71,600. Option a omits capital expenditure; option c omits part of creditor payments; option d overstates wages.

Where it goes wrong. Using May wages instead of April wages, since wages are paid one month in arrears.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 3 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

What is the closing cash balance on 31 May 2027?

1. ₹24,440
2. ₹20,000
3. ₹35,560
4. ₹25,560 (correct answer)

Answer: D — ₹25,560

Explanation. April closing cash = opening ₹1,20,000 + April receipts ₹2,70,400 - April payments ₹2,99,800 = ₹90,600. April payments are creditors ₹1,84,800 + wages ₹75,000 + overheads ₹40,000. May closing = ₹90,600 + May receipts ₹3,06,560 - May payments ₹3,71,600 = ₹25,560. May receipts are cash sales ₹72,000 plus credit collections ₹2,34,560. Option a uses a wrong May receipt; option c omits capital expenditure; option b ignores April opening effect.

Where it goes wrong. Computing May closing balance without first correctly carrying forward the April closing cash balance.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 4 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

What is the amount collected from credit sales only in June 2027?

1. ₹2,64,000 (correct answer)
2. ₹3,44,000
3. ₹2,70,000
4. ₹2,40,000

Answer: A — ₹2,64,000

Explanation. June credit collections = 50% of May credit sales + 30% of April credit sales + 18% of March credit sales. May credit sales = 80% × ₹3,60,000 = ₹2,88,000, collection ₹1,44,000. April credit sales = ₹2,56,000, collection ₹76,800. March credit sales = ₹2,40,000, collection ₹43,200. Total = ₹1,44,000 + ₹76,800 + ₹43,200 = ₹2,64,000. Option b includes June cash sales; option c omits third-month collections; option d uses only May credit sales.

Where it goes wrong. Including June cash sales when the question asks only for collections from credit sales.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 5 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Zenith Consumer Care Ltd is preparing its 2027-28 budget using zero-based budgeting (ZBB). The budget committee has identified one mandatory package P1 and three discretionary packages P2, P3 and P4. P1 regulatory compliance costs ₹8,00,000 and must be funded. P2 quality training costs ₹5,00,000 and is expected to yield a cost saving of ₹7,00,000. P3 advertising costs ₹6,00,000 and is expected to yield incremental contribution of ₹10,00,000. P4 employee welfare costs ₹4,00,000 and is expected to yield a benefit of ₹4,80,000. The committee ranks discretionary packages by benefit-cost ratio before allocating scarce funds. Total funds available are ₹15,00,000. The existing traditional budget request for all four packages is ₹23,00,000. The company also wants to link performance budgeting to output measures for the training and advertising packages. All amounts are in Indian rupees. Answer the following MCQs using the data above. Round ratios to two decimal places.

Under ZBB, which discretionary package should be ranked first by benefit-cost ratio?

1. P1
2. P2
3. P4
4. P3 (correct answer)

Answer: D — P3

Explanation. Benefit-cost ratios: P2 = ₹7,00,000 ÷ ₹5,00,000 = 1.40; P3 = ₹10,00,000 ÷ ₹6,00,000 = 1.67; P4 = ₹4,80,000 ÷ ₹4,00,000 = 1.20. P3 has the highest discretionary ratio and is ranked first. P1 is mandatory but is not ranked with discretionary packages. Option b uses net benefit rather than ratio; option c has the lowest ratio; option a is the mandatory package.

Where it goes wrong. Ranking by absolute net benefit instead of the specified benefit-cost ratio.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 6 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

After funding the mandatory package, only ₹7,00,000 remains. Which discretionary package should be approved?

1. P2
2. P4
3. P3 (correct answer)
4. P2 and P4

Answer: C — P3

Explanation. Total funds are ₹15,00,000 and mandatory P1 costs ₹8,00,000, leaving ₹7,00,000. Discretionary ranking is P3 first, then P2, then P4. P3 costs ₹6,00,000 and fits within ₹7,00,000. P2 and P4 individually exceed the remaining ₹1,00,000 after P3, and neither can be combined. Therefore only P3 is approved. Option a is second-ranked but costs ₹5,00,000 and cannot fit after P3; option b is lowest ranked; option d exceeds available funds.

Where it goes wrong. Approving the second-ranked package even though the top-ranked package consumes most of the available funds.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 7 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

What is the total ZBB-approved budget and the saving against the traditional request of ₹23,00,000?

1. ₹23,00,000 approved; saving ₹0
2. ₹14,00,000 approved; saving ₹9,00,000 (correct answer)
3. ₹15,00,000 approved; saving ₹8,00,000
4. ₹18,00,000 approved; saving ₹5,00,000

Answer: B — ₹14,00,000 approved; saving ₹9,00,000

Explanation. Approved packages are mandatory P1 ₹8,00,000 and top-ranked discretionary P3 ₹6,00,000. Total approved = ₹14,00,000. Traditional request is ₹23,00,000. Saving = ₹23,00,000 - ₹14,00,000 = ₹9,00,000. Option a assumes all requests are funded; option c spends the full available funds even though no further package fits; option d funds a package that exceeds remaining funds. ZBB funds only justified and prioritised packages.

Where it goes wrong. Assuming the entire available fund of ₹15,00,000 must be spent even when the next package does not fit.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 8 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Which statement most suitable distinguishes ZBB from traditional budgeting?

1. Traditional budgeting begins with the prior year's cost; ZBB starts from zero and requires each cost to be justified. (correct answer)
2. Traditional budgeting starts from zero; ZBB begins with the prior year's cost and adds an inflation increase.
3. Both methods begin with the prior year's cost and differ only in report format.
4. ZBB automatically approves all existing activities and ranks only new projects.

Answer: A — Traditional budgeting begins with the prior year's cost; ZBB starts from zero and requires each cost to be justified.

Explanation. ZBB starts each activity from a zero base and requires justification of every cost element, whereas traditional budgeting generally begins with the previous year's expenditure and adjusts for inflation or incremental changes. Option b reverses the methods; option c ignores the zero-base principle; option d is incorrect because ZBB reviews existing and new activities together. The decision-package ranking in the scenario illustrates the ZBB approach.

Where it goes wrong. Confusing ZBB with incremental budgeting by assuming existing costs are automatically continued.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 9 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. A firm has credit sales: January ₹1,20,000; February ₹1,50,000; March ₹1,80,000. Debtors pay 40% in the month following sale and 60% in the second month. What cash is collected in March?

A firm has credit sales: January ₹1,20,000; February ₹1,50,000; March ₹1,80,000. Debtors pay 40% in the month following sale and 60% in the second month. What cash is collected in March?

1. ₹1,80,000
2. ₹1,50,000
3. ₹1,32,000 (correct answer)
4. ₹1,20,000

Answer: C — ₹1,32,000

Explanation. March collections = 40% of February credit sales + 60% of January credit sales = 40% × ₹1,50,000 + 60% × ₹1,20,000 = ₹60,000 + ₹72,000 = ₹1,32,000. Option a is March sales; option b is February sales; option d is January sales. The collection pattern means March does not collect March sales at all; it collects from the two preceding months.

Where it goes wrong. Including current-month sales in the collection when the policy starts only from the following month.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 10 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Purchases are: January ₹80,000; February ₹1,00,000; March ₹1,20,000. Creditors are paid 50% in the month of purchase and 50% in the next month. What is the payment to creditors in March?

Purchases are: January ₹80,000; February ₹1,00,000; March ₹1,20,000. Creditors are paid 50% in the month of purchase and 50% in the next month. What is the payment to creditors in March?

1. ₹1,00,000
2. ₹1,10,000 (correct answer)
3. ₹1,20,000
4. ₹1,30,000

Answer: B — ₹1,10,000

Explanation. March payment = 50% of March purchases + 50% of February purchases = 50% × ₹1,20,000 + 50% × ₹1,00,000 = ₹60,000 + ₹50,000 = ₹1,10,000. Option a omits the lag payment; option c is March purchases only; option d adds January purchases incorrectly. Only the current and immediately preceding month's purchases are relevant under this policy.

Where it goes wrong. Paying the entire current month's purchases without applying the 50% credit lag.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 11 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Wages are 20% of sales and are paid one month in arrears. Sales are February ₹3,00,000, March ₹4,00,000 and April ₹5,00,000. What wages are paid in April?

Wages are 20% of sales and are paid one month in arrears. Sales are February ₹3,00,000, March ₹4,00,000 and April ₹5,00,000. What wages are paid in April?

1. ₹80,000 (correct answer)
2. ₹1,00,000
3. ₹60,000
4. ₹20,000

Answer: A — ₹80,000

Explanation. Because wages are paid one month in arrears, April wages paid are based on March sales. March wages = 20% × ₹4,00,000 = ₹80,000. Option b is April wages; option c is February wages; option d is only 4% of April sales. The lag means the current month's sales affect next month's cash payment, not the current month's payment.

Where it goes wrong. Using April sales instead of March sales because the payment occurs in April.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 12 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Opening cash is ₹50,000. Cash receipts are ₹2,40,000 and cash payments are ₹2,65,000. What is the closing cash balance?

Opening cash is ₹50,000. Cash receipts are ₹2,40,000 and cash payments are ₹2,65,000. What is the closing cash balance?

1. ₹15,000
2. ₹20,000
3. ₹35,000
4. ₹25,000 (correct answer)

Answer: D — ₹25,000

Explanation. Closing cash = opening cash + receipts - payments = ₹50,000 + ₹2,40,000 - ₹2,65,000 = ₹25,000. Option a subtracts payments twice; option b omits opening cash; option c adds receipts and opening cash but ignores payments. The receipts and payments method rolls forward the opening balance by net cash flow.

Where it goes wrong. Forgetting to add the opening cash balance before deducting payments.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 13 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. A traditional budget would take the current cost of ₹5,00,000 and add 10%. A ZBB review approves only ₹4,60,000. What is the saving of ZBB over the traditional budget?

A traditional budget would take the current cost of ₹5,00,000 and add 10%. A ZBB review approves only ₹4,60,000. What is the saving of ZBB over the traditional budget?

1. ₹40,000
2. ₹50,000
3. ₹90,000 (correct answer)
4. ₹1,40,000

Answer: C — ₹90,000

Explanation. Traditional budget = ₹5,00,000 × 1.10 = ₹5,50,000. ZBB-approved amount = ₹4,60,000. Saving = ₹5,50,000 - ₹4,60,000 = ₹90,000. Option a is the 10% increment only; option b compares ZBB with the base cost; option d adds the increment to the ZBB amount. ZBB saving is measured against the incremental traditional budget, not against the base year alone.

Where it goes wrong. Comparing ZBB with the current cost instead of with the inflated traditional budget.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 14 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Which of the following is the most suitable example of an output indicator under performance budgeting for a training programme?

Which of the following is the most suitable example of an output indicator under performance budgeting for a training programme?

1. Number of employees certified competent after training (correct answer)
2. Training hours delivered
3. Number of trainers employed
4. Budgeted cost per trainee

Answer: A — Number of employees certified competent after training

Explanation. Performance budgeting relates inputs to outputs and outcomes. Employees certified competent measures the result or output of the training programme. Training hours and trainers employed are input or process measures, while cost per trainee is an input-cost measure. Option a most accurately reflects accomplishment against the programme objective. The other options describe resources consumed rather than results achieved.

Where it goes wrong. Treating activity or input measures such as training hours as if they were output measures.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 15 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Opening cash is ₹20,000; receipts are ₹1,80,000; payments are ₹2,30,000. The company wants a minimum closing cash balance of ₹30,000. How much borrowing is required?

Opening cash is ₹20,000; receipts are ₹1,80,000; payments are ₹2,30,000. The company wants a minimum closing cash balance of ₹30,000. How much borrowing is required?

1. ₹30,000
2. ₹60,000 (correct answer)
3. ₹90,000
4. ₹0

Answer: B — ₹60,000

Explanation. Closing cash before borrowing = ₹20,000 + ₹1,80,000 - ₹2,30,000 = -₹30,000. To reach the minimum balance of ₹30,000, borrowing required = ₹30,000 - (-₹30,000) = ₹60,000. Option a is only the minimum balance; option c adds an extra ₹30,000; option d ignores the deficit. Borrowing must cover both the deficit and the minimum desired balance.

Where it goes wrong. Borrowing only the deficit amount and forgetting to restore the minimum cash balance.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 16 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Credit sales are April ₹2,00,000 and May ₹2,50,000. Debtors pay 60% in the next month and 35% in the second month; 5% is bad. What is collected in June?

Credit sales are April ₹2,00,000 and May ₹2,50,000. Debtors pay 60% in the next month and 35% in the second month; 5% is bad. What is collected in June?

1. ₹2,00,000
2. ₹2,50,000
3. ₹2,10,000
4. ₹2,20,000 (correct answer)

Answer: D — ₹2,20,000

Explanation. June collection = 60% of May credit sales + 35% of April credit sales = 60% × ₹2,50,000 + 35% × ₹2,00,000 = ₹1,50,000 + ₹70,000 = ₹2,20,000. Option a is April sales; option b is May sales; option c omits part of the second-month collection. The 5% bad debt is already excluded because only 60% and 35% are collected.

Where it goes wrong. Including the 5% bad-debt portion as a collection or ignoring the second-month lag.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 17 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Opening creditors on 1 January are ₹40,000. Purchases are January ₹1,00,000 and February ₹1,20,000. Creditors are paid 60% in the month of purchase and 40% in the next month. What is paid to creditors in February?

Opening creditors on 1 January are ₹40,000. Purchases are January ₹1,00,000 and February ₹1,20,000. Creditors are paid 60% in the month of purchase and 40% in the next month. What is paid to creditors in February?

1. ₹1,12,000 (correct answer)
2. ₹1,20,000
3. ₹1,08,000
4. ₹1,00,000

Answer: A — ₹1,12,000

Explanation. February payment = 40% of January purchases + 60% of February purchases = 40% × ₹1,00,000 + 60% × ₹1,20,000 = ₹40,000 + ₹72,000 = ₹1,12,000. Opening creditors were already paid in January under the policy and are not paid again in February. Option b is February purchases; option c omits part of January; option d ignores February current payment.

Where it goes wrong. Adding opening creditors again in February even though they were settled in the previous month.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 18 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. A decision package costs ₹3,00,000 and is expected to yield a benefit of ₹4,20,000. What is its benefit-cost ratio under ZBB?

A decision package costs ₹3,00,000 and is expected to yield a benefit of ₹4,20,000. What is its benefit-cost ratio under ZBB?

1. 1.20
2. 1.30
3. 1.40 (correct answer)
4. 1.50

Answer: C — 1.40

Explanation. Benefit-cost ratio = expected benefit ÷ cost = ₹4,20,000 ÷ ₹3,00,000 = 1.40. Option a subtracts cost from benefit incorrectly; option b is a rounding or arithmetic slip; option d overstates the benefit. A ratio above 1 indicates benefit exceeds cost, but packages are ranked relative to one another by this ratio.

Where it goes wrong. Using net benefit instead of gross benefit in the numerator of the benefit-cost ratio.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 19 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Performance budgeting is considered synonymous with which of the following?

Performance budgeting is considered synonymous with which of the following?

1. Standard costing
2. Responsibility accounting (correct answer)
3. Marginal costing
4. Process costing

Answer: B — Responsibility accounting

Explanation. Performance budgeting fixes responsibility for results at various management levels and continuously appraises performance against expected outputs. This is why it is considered synonymous with responsibility accounting. Standard costing, marginal costing and process costing are cost ascertainment or decision techniques, not the responsibility-and-output framework of performance budgeting. Option b captures the responsibility and performance linkage.

Where it goes wrong. Confusing performance budgeting with standard costing because both use predetermined standards.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 20 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Material purchases are 50% of sales and are paid one month after purchase. Sales are January ₹4,00,000, February ₹5,00,000 and March ₹6,00,000. What is the payment for materials in March?

Material purchases are 50% of sales and are paid one month after purchase. Sales are January ₹4,00,000, February ₹5,00,000 and March ₹6,00,000. What is the payment for materials in March?

1. ₹2,00,000
2. ₹3,00,000
3. ₹3,50,000
4. ₹2,50,000 (correct answer)

Answer: D — ₹2,50,000

Explanation. March payment is for February purchases because purchases are paid one month after purchase. February purchases = 50% × ₹5,00,000 = ₹2,50,000. Option a uses January purchases; option b uses March purchases; option c is an arbitrary amount. The payment lag shifts the cash outflow to the following month, so current-month sales do not determine current-month material payments.

Where it goes wrong. Using March sales to compute March material payment even though payment is one month after purchase.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)