CPM Financial Management & Budgeting 2 — Questions and Answers
Question 1: A manager notices that actual labor costs exceeded the budget by 12% for three consecutive months. Which corrective action addresses the root cause most directly?
- Reduce overtime approval thresholds
- Conduct a variance analysis to identify whether hours or rates drove the overage (Correct answer)
- Transfer funds from another budget line
- Request a budget increase for next quarter
Correct answer: Conduct a variance analysis to identify whether hours or rates drove the overage
Variance analysis separates rate variance from efficiency variance, revealing whether the cause is pay rates or excess hours worked.
Question 2: Which budgeting approach requires every expense to be justified from zero each budget cycle regardless of prior-year spending?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Rolling budget
- Flexible budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from a 'zero base' each period, requiring justification for all expenditures rather than simply adjusting prior figures.
Question 3: A department's fixed costs are $50,000/month and variable costs are $20 per unit. If 2,000 units are produced, what is the total cost?
- $40,000
- $90,000 (Correct answer)
- $70,000
- $50,000
Correct answer: $90,000
Total cost = $50,000 fixed + ($20 × 2,000) variable = $50,000 + $40,000 = $90,000.
Question 4: What does the current ratio measure in financial analysis?
- Profitability relative to equity
- Short-term liquidity by comparing current assets to current liabilities (Correct answer)
- Long-term solvency of the organization
- Efficiency of inventory management
Correct answer: Short-term liquidity by comparing current assets to current liabilities
The current ratio (current assets ÷ current liabilities) indicates an organization's ability to meet short-term obligations.
Question 5: A manager must choose between two projects: Project A yields $80,000 NPV and Project B yields $95,000 NPV but requires twice the capital. With limited funds, which principle guides the decision?
- Payback period minimization
- Capital rationing and profitability index (Correct answer)
- Break-even analysis
- Standard cost comparison
Correct answer: Capital rationing and profitability index
Capital rationing uses the profitability index (NPV ÷ investment) to rank projects when funds are limited, favoring the highest return per dollar invested.
Question 6: Which financial statement shows the organization's financial position at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (Correct answer)
- Budget variance report
Correct answer: Balance sheet
The balance sheet presents assets, liabilities, and equity as of a specific date, reflecting the organization's financial position at that moment.
Question 7: An unfavorable budget variance occurs when:
- Actual revenue exceeds budgeted revenue
- Actual expenses are lower than budgeted expenses
- Actual expenses exceed budgeted expenses or actual revenue falls short of budget (Correct answer)
- The organization exceeds its sales forecast
Correct answer: Actual expenses exceed budgeted expenses or actual revenue falls short of budget
An unfavorable variance means performance is worse than planned — spending more than budgeted or earning less than projected.
CPM Financial Management & Budgeting 2
A manager notices that actual labor costs exceeded the budget by 12% for three consecutive months.
Which corrective action addresses the root cause most directly?