CPWM Financial Planning & Budgeting 3 — Questions and Answers
Question 1: Which type of cost remains constant regardless of the volume of service provided, such as a monthly lease on a facility?
- Variable cost
- Marginal cost
- Fixed cost (Correct answer)
- Step cost
Correct answer: Fixed cost
Fixed costs do not change with service volume within a relevant range, making them predictable but inflexible budget elements.
Question 2: A public works department applies for a federal formula grant. Unlike discretionary grants, formula grants are distributed based on:
- Competitive scoring of submitted proposals
- Statutory criteria such as population or lane miles (Correct answer)
- Direct negotiation with the federal program office
- Demonstrated financial need determined annually
Correct answer: Statutory criteria such as population or lane miles
Formula grants allocate funds using predetermined statutory factors, giving eligible governments a predictable entitlement rather than requiring competitive application.
Question 3: Which cost allocation method distributes indirect costs to departments based on the proportion of a single measurable factor such as square footage or FTEs?
- Step-down allocation
- Direct allocation
- Single-rate allocation (Correct answer)
- Activity-based costing
Correct answer: Single-rate allocation
Single-rate allocation simplifies indirect cost distribution by using one allocation base, though it may be less accurate than multi-factor methods.
Question 4: A city's five-year capital improvement plan (CIP) projects a $2 million street resurfacing project in Year 3. The most important financial reason for including it in the CIP now is:
- To satisfy state reporting requirements immediately
- To allow time to secure funding and plan cash flow (Correct answer)
- To lock in current construction pricing
- To transfer the budget appropriation this fiscal year
Correct answer: To allow time to secure funding and plan cash flow
Early inclusion in the CIP enables the government to identify funding sources, apply for grants, and plan debt issuance well before the project must begin.
Question 5: When evaluating a lease-versus-purchase decision for a large piece of public works equipment, the analysis should include:
- Only the first-year cash outlay for each option
- Total life-cycle costs, financing costs, and tax implications (Correct answer)
- The vendor's preference and available inventory
- The equipment's resale value only at the end of useful life
Correct answer: Total life-cycle costs, financing costs, and tax implications
A proper lease-versus-purchase analysis discounts all future costs to present value and includes maintenance, interest, residual value, and fiscal constraints.
Question 6: Which fund type is used to account for resources legally restricted to paying principal and interest on long-term general obligation debt?
- Capital projects fund
- Debt service fund (Correct answer)
- Special revenue fund
- Internal service fund
Correct answer: Debt service fund
Debt service funds accumulate resources and record expenditures for repayment of governmental long-term debt principal and interest.
Question 7: A public works manager reviewing year-end financial statements notices that actual expenditures were 94% of appropriations. This variance most likely indicates:
- A material internal control weakness
- Projects were completed under budget or delayed (Correct answer)
- The department will receive a supplemental appropriation
- An error in the fund balance calculation
Correct answer: Projects were completed under budget or delayed
A 94% expenditure rate is common and typically reflects projects finishing under budget, timing lags, or vacancies — not a control problem.
CPWM Financial Planning & Budgeting 3
Which type of cost remains constant regardless of the volume of service provided, such as a monthly lease on a facility?