CSM Financial Management & Budgeting 3 — Questions and Answers
Question 1: Which budgeting technique requires every expense to be justified from scratch each budget cycle, regardless of previous allocations?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Rolling-wave budgeting
- Parametric budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from a 'zero base' each period, requiring managers to justify all expenditures anew rather than adjusting prior-year figures.
Question 2: A software manager is preparing a capital expenditure request for a new development tool costing $200,000 with a 5-year useful life. Using straight-line depreciation, what is the annual depreciation expense?
- $20,000
- $40,000 (Correct answer)
- $50,000
- $100,000
Correct answer: $40,000
Straight-line depreciation divides the asset cost by useful life: $200,000 ÷ 5 years = $40,000 per year.
Question 3: In software project financial management, the term 'contingency reserve' refers to:
- Funds withheld by the customer until project completion
- Budget allocated to handle known-unknown risks identified during planning (Correct answer)
- A management reserve for completely unforeseen events
- Money set aside for scope changes approved through change control
Correct answer: Budget allocated to handle known-unknown risks identified during planning
Contingency reserves cover identified risks with quantified probability and impact, distinguishing them from management reserves which cover unknown risks.
Question 4: A software organization compares the discounted cash inflows to the initial investment of a project. When the NPV equals zero, the discount rate used is called the:
- Hurdle rate
- Weighted average cost of capital
- Internal Rate of Return (IRR) (Correct answer)
- Payback rate
Correct answer: Internal Rate of Return (IRR)
The IRR is the discount rate that makes the NPV of all cash flows equal to zero, representing the project's expected rate of return.
Question 5: Which cost classification would software license renewal fees MOST likely fall under in a project budget?
- Capital expenditure (CapEx)
- Direct variable cost
- Operating expenditure (OpEx) (Correct answer)
- Sunk cost
Correct answer: Operating expenditure (OpEx)
Recurring license renewal fees are operating expenditures because they are ongoing costs of running the business rather than investments in long-term assets.
Question 6: A software manager discovers that $500,000 has already been spent on a failing project. When deciding whether to continue, this $500,000 should be treated as:
- A recoverable asset to be factored into the continuation decision
- A sunk cost that should not influence the go-forward decision (Correct answer)
- A liability that must be offset before cancellation
- A capitalized cost to be depreciated over future years
Correct answer: A sunk cost that should not influence the go-forward decision
Sunk costs are past expenditures that cannot be recovered and should be excluded from forward-looking investment decisions to avoid escalation of commitment.
Question 7: In rolling-wave planning for a multi-year software program, near-term work packages are budgeted in detail while future phases use what type of estimate?
- Parametric estimates based on historical data
- Rough order of magnitude (ROM) estimates (Correct answer)
- Analogous estimates from a completed project
- Zero-based estimates built from scratch
Correct answer: Rough order of magnitude (ROM) estimates
Rolling-wave planning uses detailed estimates for imminent work and rough order of magnitude (typically ±50%) estimates for work that is not yet well-defined.
CSM Financial Management & Budgeting 3
Which budgeting technique requires every expense to be justified from scratch each budget cycle, regardless of previous allocations?