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ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting

Dunmore Co ranks four decision packages under zero-based budgeting. The budget available is $90,000. The packages, with costs and benefit scores, are: P1 $30,000, 90 points; P2 $25,000, 60 points; P3 $20,000, 50 points; P4 $30,000, 54 points. Packages are funded in order of benefit per $ of cost (whole packages only) until funds run out. Which packages are funded?

P1, P2 and P3 are funded. Ranked by benefit per dollar, the order is P1 (3.0), P3 (2.5), P2 (2.4) and P4 (1.8). These three cost $75,000 in total, leaving $15,000, which is not enough to fund P4 at $30,000.

  1. AP1, P2 and P3Correct
  2. BP1, P2 and P4
  3. CP1, P3 and P4
  4. DP2, P3 and P4

Explanation

Benefit per $1,000: P1 3.0, P2 2.4, P3 2.5, P4 1.8. Ranking: P1, P3, P2, P4. Funding P1 ($30,000), P3 ($20,000) and P2 ($25,000) totals $75,000, leaving $15,000, which is insufficient for P4 at $30,000. So P1, P2 and P3 are funded. Ranking by total points instead would wrongly favour P4 over P3.

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