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ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement

A council library service spent $200,000 on staffing in the year, which was $20,000 less than budget for the same quality of staff. It lent 160,000 books against a budgeted 150,000, but its stated objective was to increase membership by 10% and membership actually rose by 4%. Which statement is correct?

The service was economical but not effective. Staffing cost was below budget for the same quality, which shows economy. However, its objective was a 10% membership increase and only 4% was achieved, so it failed on effectiveness even though book lending exceeded budget.

  1. AThe service was economical but not effective in meeting its membership objectiveCorrect
  2. BThe service was efficient but not economical
  3. CThe service was effective because lending exceeded budget
  4. DThe service was neither economical nor efficient

Explanation

Spending $20,000 below budget for the same quality shows economy. Effectiveness is judged against the stated objective, and a 4% rise in membership falls short of 10%, so it is not effective despite higher lending. The option claiming effectiveness uses the wrong measure, lending, instead of the stated objective.

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