Budget

Wrong sales estimates can increase production and inventory. In exams, observe the interdependence of budgets carefully.

A cash budget focuses on actual cash receipts and payments. In exams, distinguish profit from cash.

Higher production can naturally increase cost. In exams, check activity level before comparing costs.

A flexible budget adjusts according to changing activity. In exams, connect fair comparison with flexible budget.

Relying only on the previous budget can continue wasteful spending. In exams, remember zero-based thinking in such cases.

Zero-based budgeting rechecks the usefulness of every activity. In exams, connect it with control of unnecessary expenses.

Cash surplus can be planned for use instead of being kept idle. In exams, connect cash surplus with cash management.

Sales quantity affects production and purchase budgets. In exams, treat sales budget as an initial base for many budgets.

Production budget should match capacity. In exams, connect resource capacity with realistic budgeting.

Expenditure on long-term assets is related to capital budget. In exams, connect investments like buildings and machines with capital budget.

Very easy targets do not show real capability. In exams, keep budget targets challenging but achievable.

Excessive rigidity can affect necessary work too. In exams, write balance between control and flexibility.

A budget committee coordinates different budgets. In exams, connect committee with coordination and review.

A major cost change can alter budget assumptions. In exams, connect major assumption change with revision.

Profit and cash flow may differ due to timing. In exams, understand the difference between accrual profit and cash flow.

Budget helps measure performance of responsibility centres. In exams, understand budget as an accountability tool.

The direct answer is C: both external causes and internal efforts should be examined. A sales shortfall means actual sales are lower than the planned figure, but this fact alone does not prove that the sales team performed badly. The total market may also have become smaller because of recession, competition, changing customer preferences, regulation, supply problems, or other outside conditions. First compare actual sales with budgeted sales. Next compare the actual market size with the expected market size. Then study the company’s market share, selling effort, distribution, price, promotion, product quality, and team performance. If the whole market declined but the company protected or increased its market share, external conditions may be the main reason. If the company lost more share than competitors, internal performance may also be responsible. Option A is wrong because immediate blame ignores evidence. Option B is wrong because variance analysis is necessary for corrective action. Option C is correct because fair analysis separates market effects from company efforts. Option D is wrong because one adverse result does not mean budgeting should always be abolished. Memory cue: a variance is a signal to investigate, not automatic proof of fault.

Cash budget gives advance warning of cash shortage. In exams, connect short-term finance with cash budget.

A master budget is the overall budget prepared for an organisation. It brings together important functional budgets, such as sales, production, purchases, expenses, cash, and sometimes capital expenditure. By combining these plans, it presents a complete picture of the organisation’s expected activities and financial position. It is therefore much broader than a single expense slip and does not mean stopping production.

Option B is correct because a master budget integrates the major budgets into one coordinated plan. For example, expected sales influence production, production influences material purchases, and these plans influence cash requirements. Looking at them together helps management coordinate departments, allocate resources, and evaluate overall performance. The term comprehensive budget is appropriate because it covers the organisation as a whole. The supplied answer accurately states its usefulness.

Budgetary slack may involve deliberately easy targets. In exams, connect slack with performance evaluation risk.

Past data gives a base but current conditions are also necessary. In exams, mention both past trend and current environment.

Shortage of raw material can disrupt production. In exams, check matching of purchase and production budgets.

Lower cost is not always good if quality falls. In exams, consider qualitative impact in budgetary control.

A rolling budget keeps planning updated under changing conditions. In exams, connect rolling budget with continuous planning.

Direct answer: Option A, lack of coordination and conflicting budgets. Preparing budgets is not an isolated activity. Sales, production, purchasing, labour and finance departments depend on one another. They must communicate assumptions, targets, timing and resource needs. If they do not communicate, one department may plan output that sales cannot support, purchasing may order materials that production does not need, or finance may not arrange enough cash. Thus budgets can contradict one another and coordination suffers. Option A is correct. Option B is wrong because poor communication cannot guarantee that cash will increase. Option C is wrong because silence and isolation do not make every budget accurate. Option D is wrong because a policy does not automatically end merely because departments fail to communicate. Memory cue: “No communication → no alignment → conflicting budgets.”