CME Financial Management & Budgeting 3

Question 1

Which budgeting approach ties resource allocation directly to measurable outcomes and performance metrics?

Accepted Answer

Performance-based budgeting

Answer

Performance-based budgeting links spending explicitly to achieving defined results or outcomes rather than to inputs or activities.

Question 2

A manager notices a favorable price variance but an unfavorable efficiency variance for direct materials. What does this most likely mean?

Accepted Answer

Materials were purchased cheaply but more was used than standard

Answer

A favorable price variance means actual cost per unit was below standard; an unfavorable efficiency variance means more material was consumed than the standard allowed.

Question 3

When computing a company's weighted average cost of capital (WACC), which component is adjusted for taxes?

Accepted Answer

Cost of debt

Answer

Interest on debt is tax-deductible, so the after-tax cost of debt [Kd × (1 − tax rate)] is used in the WACC calculation.

Question 4

A company is evaluating two mutually exclusive projects. Project A has a higher NPV; Project B has a higher IRR. Which should be selected and why?

Accepted Answer

Project A, because NPV directly measures added shareholder value in dollar terms

Answer

For mutually exclusive projects, NPV is the preferred criterion because it measures the absolute increase in firm value, whereas IRR can give conflicting signals.

Question 5

Under activity-based costing (ABC), overhead is allocated based on:

Accepted Answer

The cost drivers that actually cause overhead costs to vary

Answer

ABC assigns overhead costs using multiple cost drivers that reflect the actual consumption of resources by each activity.

(CME) Certified Management Executive Practice Test

(CME) Certified Management Executive Practice Test

CME Financial Management & Budgeting 3