The order and design of relationships within a firm; consists of two or more people working together with a common objective and clarity of purpose.

• A. Informal Organization
• B. Formal Organization
• C. Division of Labor
• D. Managerial Hierarchy

Answer: (B)

The concept being tested is how relationships and authority are arranged within a company to coordinate work toward a shared goal. The formal organization is the system created intentionally with defined roles, responsibilities, authority, and communication channels. This structure puts order in how people interact: there’s a clear chain of command, specific job descriptions, and formal procedures that guide decisions and coordination. Because roles and procedures are explicitly laid out, everyone understands their part and what must be done to achieve the objective, which provides clarity of purpose and reduces ambiguity.

Informal organization, by contrast, forms from personal relationships and unwritten norms and doesn’t establish official channels of authority. Division of labor is about task specialization, not the overall arrangement of relationships and control. A managerial hierarchy is a component of the formal structure, but the best fits describes the formal organization as a whole, since it encompasses the design of relationships, authority, and coordination across the firm.