A bakery estimates its predicted yearly expenditures on

Question

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.

I disagree with the OA.  The OA is A, and the OE is:

I bolded the problem with this explanation and with answer choice A. Answer A says that the bakery will  REPEATEDLY  budget for ingredients that it no longer uses. But the passage says that the bakery estimates its costs "by adding a correction factor of five percent to  its costs from the previous year. " If the bakery stops using a certain ingredient, then yes, its budget for the next year will include costs for this ingredient - but not for any subsequent year. For example, if the bakery stops using ingredient X in 2010, then its budget for 2011 will include X, but the budget for 2012 WILL NOT, because it's based on the costs from 2011 - which did not include that ingredient. So the bakery cannot REPEATEDLY budget for obsolete ingredients.

I went for option B, which I think is a much better answer - if the costs of materials aren't going up, but the bakery is budgeting more and more money for them, then they will be over-budgeted for their materials and, therefore, under-budgeted for other things.

Thoughts?

bipinsingh · Answer

the answer is a clear A.
(A) The bakery might repeatedly account for the use of a costly ingredient that it no longer uses.
-----------------------------------------------------------
(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.  Supports the question statement so cannot weaken it 
(C) This method of budgeting might discourage the bakery from developing new and innovative recipes.  Off track 
(D) The bakery might allocate too little money for its other operating expenses. does not provide any evidence to question the method 
(E) Some bakery executives do not believe this is the best practice.
  this is an opinion and cannot be used to question a practice

piyushagarwal · Answer

IMO A.

@tehjay - I understand your concern. Will try to explain.

The budget is for a list of A-Z items of which costs are known. Every year when budgeting, folks at bakery adds correction factor of five percent to its costs from the previous year... This simply means that they use the same list of A-Z items with updates costs from last year and add 5%. It does not matter that a item X was actually bought/used last year. They still budget for it since nowhere its mentioned that the item is excluded or every year the budget is made only for the items used last year.

Hope that helps..

TehJay · Answer

It actually does say that the budget is made only based on the items used last year. The budget for every year is made by adding a correction factor to its costs from the previous year, not to the previous year's budget - so the budget is made based on the bakery's ACTUAL costs, not on the estimate.

amma4u · Answer

clear A....

If I allocate 100$ for the same old ingredients among which one ingredient now costs less this year.Of course by budgeting is incorrect.

TehJay · Answer

Anyone else get really sick of how often people reply to threads like this without reading anything in it?

Ok here's an example. This year, the bakery spent money on ingredients A, B, C and D. Next year, when creating their budget, they look at the money spent this year and say, "Okay, we spent X dollars on ingredients A, B, C and D, so we'll add our 5% to that amount to budget for next year." However, next year they no longer purchase ingredient D. So they're budgeted for all four, but they only actually purchase A, B and C.

The year after that, when creating the next budget, they look at their total costs for the year and say, "Okay, we spent Y dollars on ingredients A, B and C, so we'll add our 5% to that amount to budget for next year."

Where's the REPEATEDLY overbudgeting coming from? They can only overbudget once.

gauravnagpal · Answer

I go with B .... The budget is based on the assumption that there will be an increase of about 5% ..on historical cost 
imgaine a scenario where ---- at the time of budgeting it is known that raw material prices have increased by more than 10 % ( say )

I eliminated because it talks about only one of the raw material which is no longer used . we do not know what is the contribution of this material in the total raw natrial cost

I would have opted for A ... if it read 
The company has budegeted the cost on the basis of historical cost of raw materials. However majority of these raw material are no longer used .

regards

gauravnagpal · Answer

Anyone else get really sick of how often people reply to threads like this without reading anything in it? TehJay , lets not get into a war of words .....with anybody... I know you expected a detailed post along with reasons but just imagine ....what intrigues you and me ( talking abt the question ) , may be a simple question for somebody else cheer up man ..

devashish · Answer

Nice Question ... I also fell for Option B.

The only way that Option A makes sense is that consider the scenario, in which the inventory has:
Item A - 1000$
Item B - 1000$
Item C - 1000$
:
:
Item X - 1000$
Item Y - 10$
Item Z - 10$

Now if the bakery does not use the items A - X this year then it will  repeatedly  account for the use of a costly account ... simply because there are way too many of those Items.

Option B is Incorrect ... as if the variation in Prices is constant ( as the AC says there is little variation in the prices ), then well the Argument works perfectly fine.

Basically by POE, the only answer that makes relatively some sense is A .... I would say this is a debatable question not just a debatable OA.

Hope this helps !!

agdimple333 · Answer

yeh, even i dont' agree with A...

jakitt · Answer

I was hesitated between A and B and finally picked B, but came to read again it should be A.
"allocating its annual food budget by adding a correction factor of five percent to its costs from the previous year" means that the cost doesn't vary that much, or in other words,  "not vary considerably".   So, it matches with Op B saying that "Increases in the cost of raw materials have not varied considerably in the past decade". Therefore, B strengthens the argument.

mallya12 · Answer

Why is option B wrong? If the prices remain constant, aren't they allocating more budget?
And how do I eliminate other 3 options? If option D is true doesn't it weaken the conclusion?

ravigupta2912 · Answer

For people who are going for B, can you please explain how factoring in an extra 5% is inconsistent with "cost of RM have not varied  considerably "?

"have not varied considerably" means that there are no large swings, not that there are "no" swings. A 5% factors for those "inconsiderable" variations.

I went for D as that is logical. If you budget extra for cost A, it naturally leaves little room for other costs.

C was close if instead of innovation of recipe, the answer choice said, no innovation on cost control.

I don't agree with A since the Q steam says "from previous year". There will be no "repetitive" allocation to an ingredient that is not used in the previous year, since it won't show in previous year's actual costs.

VerbalBot · Answer

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A bakery estimates its predicted yearly expenditures on

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