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Free SPHR Certification Practice Questions:

The economy has been in a recession for the last six months, and market analysts are still very uncertain about the timing of a potential turnaround. An organization is in a market niche that has been severely impacted by the change in economy.

Its sales revenue has decreased by 40%. The company is just beginning to look at its next year’s annual operating plan. Which of the following types of methods should this corporation utilize when budgeting for next year’s outlook?

A) Incremental budgeting

B) Formula budgeting

C) Zero-based budgeting

D) Benchmarking

  • [Ans: C]

  • Due to the harsh economy, the organization may need to make some radical changes. It needs to account for the value of every dollar spent. Therefore, the company should adopt a method that justifies each expense.

    Zero-base budgeting provides for the analysis of alternative methods of operation and various levels of effort. It places new objectives and operations on an equal footing with existing ones by requiring that program priorities be ranked, thereby providing a systematic basis for allocating resources.

    On the other hand, incremental budgeting bases the new budget on the utilization of the prior budget and the new needs and objectives for each program in the coming year.

    Formula budgeting applies a specific formula across the organization to calculate funding. For example, a corporation may decide to make 10% budget cuts across all departments. These two budgeting methods do not build accountability for allocating resources to programs that will maximize the return on investments spent, which is required in a recession economy.

    Finally, benchmarking does not have anything to do with budgeting. It is a means of assessing the best practices and performance goals out in the market amongst top competitors.

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