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S92-03

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S92-03 [#permalink]

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New post 16 Sep 2014, 00:46
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A bakery estimates its predicted yearly expenditures on ingredients when allocating its annual food budget by adding a correction factor of five percent to its costs from the previous year. This method allows the bakery to quickly and simply account for annual increases in the cost of raw ingredients.

Which of the following, if true, would most call into question the economic soundness of the bakery's method for estimating its food budget?


A. The bakery might repeatedly account for the use of a costly ingredient that it no longer uses.
B. Increases in the cost of raw materials have not varied considerably in the past decade.
C. This method of budgeting might discourage the bakery from developing new and innovative recipes.
D. The bakery might allocate too little money for its other operating expenses.
E. Some bakery executives do not believe this is the best practice.
[Reveal] Spoiler: OA

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New post 16 Sep 2014, 00:46
Official Solution:


A bakery estimates its predicted yearly expenditures on ingredients when allocating its annual food budget by adding a correction factor of five percent to its costs from the previous year. This method allows the bakery to quickly and simply account for annual increases in the cost of raw ingredients.

Which of the following, if true, would most call into question the economic soundness of the bakery's method for estimating its food budget?


A. The bakery might repeatedly account for the use of a costly ingredient that it no longer uses.
B. Increases in the cost of raw materials have not varied considerably in the past decade.
C. This method of budgeting might discourage the bakery from developing new and innovative recipes.
D. The bakery might allocate too little money for its other operating expenses.
E. Some bakery executives do not believe this is the best practice.


For the sake of convenience, a bakery adjusts its food budget by simply adding five percent to its costs from the previous year. We are asked to find a flaw in this method.

Choice A points to a potential problem. Under this system of budgeting, costs are carried over from year to year. So, continuing to budget for ingredients which are no longer used could lead to inaccuracies in the budget.

Choice B tells us that some price increases have been relatively stable. If anything that suggests that this model might have some merit. We're looking for a choice that's critical of the plan, so we can eliminate this choice.

Choice C is outside of the scope of this argument. We want a choice that shows why this method is questionable for estimating costs. At best, C points to a possible negative effect of the method on product development, but not one affecting the food budget.

Choice D is incorrect because it doesn't give a reason why this specific method of estimating food costs would be unsound. Operating expenses have nothing to do with expenditures on ingredients.

Finally, the opinion of "some bakery executives" does not prove that the policy is economically unsound.


Answer: A
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Re: S92-03 [#permalink]

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New post 13 Nov 2015, 17:59
Hi Bunuel,
Choice B, sounds more accurate to me..
If Raw materials cost have not increased since 10 years.. then adding 5% every year - won't it lead to incorrect budgeting?
Where am I going wrong
Could you please explain.

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Re: S92-03 [#permalink]

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Hi

I think that the bakery add 5% to its actual cost from the previous year. It's not like we have some x (our expenditures) and every year we add some % without looking at actual figures from the previous year.

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Re: S92-03 [#permalink]

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New post 16 Nov 2016, 21:50
The answer can only be B and not A. the figures are based on last year actuals + 5% correction. While its possible that there may be an error in the budget for one year when the bakery has no plans of using an ingredient used last year, in the current year - the error cannot be repeated or carried forward since the next years budget would be based on the previous years actual and not on previous year's budgeted figure

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Re: S92-03 [#permalink]

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New post 24 Apr 2017, 21:26
Option A definitely. Let's assume the bakery bought some expensive raw material to make a rare item having occasional demand. Hence compounding its cost year on year will be much more financially Detrimental to bakery than the fairly constant price of raw material which is useful.

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Re S92-03 [#permalink]

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New post 26 Nov 2017, 06:25
I think this is a poor-quality question and I don't agree with the explanation. Hi I chose D because no other option sounded correct either. The first which is the correct answer as per the moderator, seems wrong to me, because of the word "repeatedly". I agree that the budgeting for the first year may be inaccurate because last year's food budget would have been used as a base to make adjustments pertaining to rise in the cost of ingredients; but next year onwards, the budget would be based on last year's actual figures - so the business would not end up accounting for the cost of a costly ingredient repeatedly. For the first year as well - since it would be based on last year's actual - the budget would not be accurate, however, during the course of the first year - if the business decides to not use that ingredient - it would reflect in the total annual food budget at the end of the year.

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Re S92-03   [#permalink] 26 Nov 2017, 06:25
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