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ACCA Applied Knowledge · Management Accounting · Analytical techniques in budgeting and forecasting

Which of the following is a recognised limitation of using expected values in budgeting?

A key limitation is that the expected value is a long-run weighted average that may not match any real outcome and does not show the risk or range of results. It does use probabilities and can handle many outcomes.

  1. AThe expected value is always one of the possible outcomes
  2. BThe expected value ignores the probabilities of outcomes
  3. CThe expected value may not correspond to any actual outcome and gives no indication of riskCorrect
  4. DThe expected value can only be used when there are exactly two outcomes

Explanation

Expected value is a weighted average, so it may be a figure that can never actually occur, and it hides the spread of outcomes. It does use probabilities and works with any number of outcomes.

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