Final Exam: Chapters 1-14
ISV Managerial Accounting, 4e
Name ______________________________________
Instructor ___________________________________
Section # ______________ Date _______________
Part
Points
I
II
III
IV
V
Total
60
18
19
14
14
125
Score
PART I — MULTIPLE CHOICE (60 points)
Instructions: Designate the best answer for each of the following questions.
____
1. A responsibility center that incurs costs (and expenses) and generates revenues is classified as a(n)
a. cost center.
b. revenue center.
c. profit center.
d. investment center.
____
2. The most useful measure for evaluating a manager's performance in controlling revenues and costs in a profit center is
a. contribution margin.
b. contribution net income.
c. contribution gross profit.
d. controllable margin.
____
3. Ramsey Corporation desires to earn target net income of $90,000. If the selling price per unit is $30, unit variable cost is
$24, and total fixed costs are $360,000, the number of units that the company must sell to earn its target net income is
a. 30,000.
b. 75,000.
c. 45,000.
d. 60,000.
____
4. Shane Corporation uses a process cost accounting system. Given the following data, compute the number of units
transferred out during the current period.
Beginning Work in Process
Ending Work in Process
Started into Production
____
a. 125,000
b. 141,667
c. 145,000
d. 150,000
5. Witten Company applies overhead on the basis of machine hours. Given the following data, compute overhead applied
and the under- or overapplication of overhead for the period:
Estimated annual overhead cost
$1,200,000
Actual annual overhead cost
$1,150,000
Estimated machine hours
300,000
Actual machine hours
280,000
a.
b.
c.
d.
____
20,000 units (1/2 complete)
25,000 units (1/3 complete)
150,000 units
$1,120,000 applied and $30,000 underapplied
$1,200,000 applied and $30,000 overapplied
$1,120,000 applied and $30,000 overapplied
$1,150,000 applied and neither under- nor overapplied
6. The following data has been collected for use in analyzing the behavior of main-tenance costs of Ridell Corporation:
Month
January
Maintenance Costs
$121,000
Machine Hours
20,000
February
March
April
May
June
July
125,000
128,000
159,000
168,000
178,000
181,000
23,000
24,000
34,000
36,000
38,000
40,000
Using the high-low method to separate the maintenance costs into their variable and fixed cost components, these
components are
a. $5 per hour plus $20,000.
b. $5 per hour plus $30,000.
c. $4 per hour plus $41,000.
d. $3 per hour plus $61,000.
____
7. Given the following information for Hett Company, compute the company's ROI: Sales — $1,000,000; Controllable
Margin — $120,000; Average Operating Assets — $500,000.
a. 40%
b. 50%
c. 12%
d. 24%
____
8. Given the following data for Glennon Company, compute (A) total manufacturing costs and (B) costs of goods
manufactured:
Direct materials used
Direct labor
Manufacturing overhead
Operating expenses
____
$120,000
50,000
150,000
175,000
Beginning work in process
Ending work in process
Beginning finished goods
Ending finished goods
$20,000
10,000
25,000
15,000
(A)
(B)
a. $310,000
$330,000
b. $320,000
$310,000
c. $320,000
$330,000
d. $330,000
$340,000
9. The production cost report shows both quantities and costs. Costs are reported in three sections: (1) costs accounted for,
(2) unit costs, and (3) costs charged to department. The sections are listed in the following order:
a. (1), (2), (3).
b. (1), (3), (2).
c. (2), (1), (3).
d. (2), (3), (1).
____
10. The starting point of a master budget is the preparation of the
a. cash budget.
b. sales budget.
c. production budget.
d. budgeted balance sheet.
____
11. The most useful measure for evaluating the performance of the manager of an investment center is
a. contribution margin.
b. controllable margin.
c. return on investment.
d. income from operations.
____
12. Which of the following capital budgeting techniques explicitly takes the time value of money into consideration?
a. Annual rate of return
b. Internal rate of return
c. Net present value
d. Both (b) and (c) above
____
13. The cost classification scheme most relevant to responsibility accounting is
a. controllable vs. uncontrollable.
b. fixed vs. variable.
c. semivariable vs. mixed.
d. direct vs. indirect.
Use the following information for questions 14 and 15.
Grant Company estimates its sales at 60,000 units in the first quarter and that sales will increase by 6,000 units each quarter over the
year. It has, and desires, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the
credit customers pay within the quarter. The remainder is received in the quarter following sale.
____
14. Cash collections for the third quarter are budgeted at
a. $1,017,000.
b. $1,476,000.
c. $1,773,000.
d. $2,052,000.
____
15. Production in units for the third quarter should be budgeted at
a. 73,500.
b. 69,000.
c. 91,500.
d. 72,000.
16. Stine Company incurs the following costs in producing 50,000 units of product:
____
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$100,000
50,000
100,000
300,000
An outside supplier has offered to supply the 50,000 units at $7.00 each. All of Stine's related variable costs, but only
$200,000 of the fixed costs would be eliminated if the offer is accepted. Acceptance will result in a
a. savings of $200,000.
b. loss of $100,000.
c. savings of $100,000.
d. loss of $200,000.
____
17. Finney Company has a production process where two products result from a joint processing procedure; both can be sold
immediately or processed further. Given the following additional per unit information, determine which of the products
should be processed further.
Product
A
B
a.
b.
c.
d.
Allocated
Joint Cost
$100
60
Selling Price
$200
100
Additional
Processing Cost
$180
50
New
Selling Price
$400
160
A
B
Both
Neither
____
18. A flexible budget
a. is also called a static budget.
b. can be considered a series of related static budgets.
c. can be prepared for sales or production budgets, but not for an operating expense budget.
d. typically uses an activity index different from that used in developing the predetermined overhead rate.
____
19. Carey Company's equipment account increased $800,000 during the period; the related accumulated depreciation
increased $60,000. New equipment was purchased at a cost of $1,400,000 and used equipment was sold at a loss of
$40,000. Depreciation expense was $200,000. Proceeds from the sale of the used equipment were
a. $420,000.
b. $500,000.
c. $560,000.
d. $640,000.
____
20. Which of the following combinations presents correct examples of liquidity, profitability, and solvency ratios, respectively?
____
Liquidity
Profitability
Solvency
a. Inventory turnover
Inventory turnover
Times interest earned
b. Current ratio
Inventory turnover
Debt to total assets
c. Receivables turnover
Return on assets
Times interest earned
d. Quick ratio
Payout ratio
Return on assets
21. A company’s planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the
company budgeted the following manufacturing overhead costs:
Variable
Indirect materials
Indirect labor
Fixed
$60,000
80,000
Depreciation
Taxes
$25,000
5,000
Factory supplies
10,000
Supervision
20,000
A flexible budget prepared at the 90,000 machine hours level of activity would allow total manufacturing overhead costs of
a. $135,000.
b. $180,000.
c. $185,000.
d. $150,000.
____
22. A company developed the following per unit materials standards for its product: 3 gallons of direct materials at $5 per
gallon. If 4,000 units of product were produced last month and 12,500 gallons of direct materials were used, the direct
materials quantity variance was
a. $1,500 favorable.
b. $2,500 unfavorable.
c. $1,500 unfavorable.
d. $2,500 favorable.
____
23. The standard direct labor cost for producing one unit of product is 5 direct labor hours at a standard rate of pay of $8. Last
month, 5,000 units were produced and 24,500 direct labor hours were actually worked at a total cost of $180,000. The
direct labor quantity variance was
a. $4,000 unfavorable.
b. $6,000 unfavorable.
c. $6,000 favorable.
d. $4,000 favorable.
____
*24. Smythe Company applies overhead to products based on direct labor hours. Manufacturing overhead at the expected
normal level of activity is $50,000 per month plus $5 per direct labor hour. During June, actual manufacturing overhead
costs amounted to $85,000 when 6,100 actual direct labor hours were worked. The standard number of direct labor hours
that should have been worked for the output achieved was 6,000 direct labor hours. The overhead controllable variance
for June was
a. $4,500 unfavorable.
b. $3,400 favorable.
c. $5,000 unfavorable.
d. $5,000 favorable.
____
25. Under the time-and-material-pricing approach, the charges for any particular job include each of the following except the
a. labor charge.
b. charge for materials.
c. material loading charge.
d. overhead charge.
____
26. The transfer pricing approach that does not reflect the selling division’s true profit-ability is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time-and-material-pricing approach.
Use the following information for questions 27 and 28.
Robot Toy Company manufactures two products: X-O-Tron and Mechoman. Robot’s overhead costs consist of setting up machines,
$200,000; machining, $450,000; and inspecting, $150,000 Additional information on the two products is:
Direct labor hours
Machine setups
Machine hours
Inspections
X-O-Tron
15,000
600
24,000
800
____
27. Overhead applied to Mechoman using traditional costing is
a. $320,000.
b. $384,000.
c. $416,000.
d. $500,000.
____
28. Overhead applied to X-O-Tron using activity-based costing is
a. $300,000.
b. $384,000.
c. $416,000.
Mechoman
25,000
400
26,000
700
d.
$480,000.
____
29. An appropriate cost driver for an assembling cost pool is the number of
a. purchase orders.
b. setups.
c. parts.
d. direct labor hours.
____
30. Which of the following is included in the cost of goods manufactured under absorption costing but not under variable
costing?
a. Direct materials
b. Variable factory overhead
c. Fixed factory overhead
d. Direct labor
Instructions: Designate the terminology that best represents the definition or statement given below by placing the identifying letter(s)
in the space provided. No term should be used more than once.
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
Activity-based costing
Annual rate of return
Budgetary control
Contribution margin
Contribution margin ratio
Controllable costs
Absorption costing
Cost accounting
Cost centers
Cost of capital
Equivalent units of production
Fixed costs
Free cash flow
N.
O.
P.
Q.
*R.
*S.
T.
U.
V.
W.
X.
Y.
Z.
Job cost sheet
Noncontrollable costs
Non-value-added activity
Operating budgets
Overhead controllable variance
Overhead volume variance
Physical units
Process cost systems
Product costs
Profit center
Value-added activity
Variable costs
Variances
____
1. Costs that a manager has the authority to incur within a given period of time.
____
2. A form used to record the costs chargeable to a job.
____
3. A responsibility center that incurs costs and also generates revenues.
____
4. The difference between overhead budgeted for standard hours allowed and overhead incurred.
____
5. The amount of revenue remaining after deducting variable costs.
____
6. Used to apply costs to similar products that are mass produced in a continuous fashion.
____
7. Costs that vary in total directly and proportionately with changes in the activity level.
____
8. The differences between actual costs and standard costs.
____
9. Determines profitability of a capital expenditure by dividing expected net income by the average investment.
____
10. The rate a company must pay to obtain funds from creditors and stockholders.
____
11. Costs that are an integral part of producing the finished product.
____
12. Allocates overhead to multiple cost pools and assigns the cost pools to products by means of cost drivers.
____
13. Involves the measuring, recording, and reporting of product costs.
____
14. A measure of the work done during the period, expressed in fully completed units.
____
15. A costing approach in which all manufacturing costs are charged to the product.
____
16. Increase the worth of a product or service to customers.
____
17. The amount of cash from operations after deducting capital expenditures and cash dividends paid.
____
18. Individual budgets that culminate in a budgeted income statement.
The Olson Company developed the following standard costs for its product in 2008:
Direct materials
Direct labor
Manufacturing overhead
Variable
Fixed
Standard Cost Card
(5 pounds @ $4 per pound)
(4 hours @ $8 per hour)
Unit Standard Cost
$20
32
(4 hours @ $4 per hour)
(4 hours @ $3 per hour)
16
12
$80
The company planned to work 100,000 direct labor hours and produce 25,000 units of product in 2008. Actual results for 2008 are as
follows:




24,000 units of product were produced.
Actual direct materials purchased and used during the year amounted to 122,000 pounds at a cost of $475,800.
Actual direct labor costs were $779,000 for 95,000 direct labor hours worked.
Total actual manufacturing overhead incurred amounted to $685,500.
Instructions
Calculate the following variances showing all computations supporting your answers. Indicate if the variances are favorable (F) or
unfavorable (U).
(a) Direct materials price and direct materials quantity variances.
(b) Direct labor price and direct labor quantity variances.
*(c) Overhead controllable and overhead volume variances.
PART IV — RATIO ANALYSIS (14 points)
The condensed financial statements of Jenner Corporation for 2008 are presented below.
Jenner Corporation
Balance Sheet
December 31, 2008
Assets
Current assets
Cash and short-term
investments
Accounts receivable
Inventories
Total current assets
Property, plant, and
equipment (net)
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Long-term liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Jenner Corporation
Income Statement
For the Year Ended December 31, 2008
$ 30,000
70,000
140,000
240,000
760,000
$1,000,000
Revenues
Expenses
Cost of goods sold
Selling and administrative
expenses
Interest expense
Total expenses
Income before income taxes
Income tax expense
Net income
$2,000,000
960,000
740,000
50,000
1,750,000
250,000
100,000
$ 150,000
$ 100,000
350,000
550,000
$1,000,000
Additional data as of December 31, 2007: Inventory = $100,000; Total assets = $800,000; Stockholders' equity = $450,000.
Instructions: Compute the following ratios for 2008 showing supporting calculations.
(a)
Current ratio = __________________________________________________________________________.
(b)
Debt to total assets ratio = _________________________________________________________________.
(c)
Times interest earned = ___________________________________________________________________.
(d)
Inventory turnover = _____________________________________________________________________.
(e)
Profit margin = __________________________________________________________________________.
(f)
Return on stockholders' equity = ____________________________________________________________.
(g)
Return on assets = ______________________________________________________________________.
PART V — MISCELLANEOUS MANAGERIAL MINI-PROBLEMS (14 points)
Carson Corporation manufactures paper shredding equipment. You are requested to "audit" a sampling of computations made by
Carson's internal accountants via your independent recalculation of the information.
Instructions: Compute the requested information for each of the following independent situations (present supporting calculations).
(a)
Carson uses a process costing system. 2,000 units were in process at the beginning of the period, 60% complete. 20,000 units
were started into production during the period; 1,000 were in process at the end of the period, 60% complete. Compute equivalent
units for conversion costs.
(b)
Carson sells each unit for $500. Variable costs per unit equal $300. Total fixed costs equal $800,000. Carson is currently selling
5,000 units per period and would like to earn net income of $400,000. Compute: (1) break-even point in dollars; (2) sales units
necessary to attain desired income; and (3) margin of safety ratio for current operations.
(1)
Break-even point = $________________________________________________.
(2)
Desired sales = ___________________________________________ units.
(3)
Margin of safety = _____________________________________________%.
Solutions — Final Exam: Chapters 1-14
PART I — MULTIPLE CHOICE (60 points)
1.
2.
3.
4.
5.
6.
c
d
b
c
a
d
7.
8.
9.
10.
11.
12.
d
c
d
b
c
d
13.
14.
15.
16.
17.
18.
a
c
a
c
c
b
19.
20.
21.
22.
23.
*24.
a
c
c
b
d
c
V
A
H
K
G
16.
17.
18.
X
M
Q
25.
26.
27.
28.
29.
30.
d
a
d
c
c
c
PART II — MATCHING (18 points)
1.
2.
3.
*4.
5.
F
N
W
R
D
6.
7.
8.
9.
10.
U
Y
Z
B
J
11.
12.
13.
14.
15.
PART III — VARIANCE ANALYSIS (19 points)
(a)
Direct materials price and direct materials quantity variances.
Direct materials price variance
(122,000 × $3.90) – (122,000 × $4.00) = MPV
$475,800 – $488,000 = $12,200 F
Direct materials quantity variance
(122,000 × $4.00) – (120,000 × $4.00) = MQV
$488,000 – $480,000 = $8,000 U
(b)
Direct labor price and direct labor quantity variances.
Direct labor price variance
(Actual Hours × Actual Rate) – (Actual Hours × Standard Rate) = LPV
(95,000 × $8.20) – (95,000 × $8) = LPV
$779,000 – $760,000 = $19,000 U
Direct labor quantity variance
(Actual Hours × Standard Rate) – (Standard Hours × Standard Rate) = LQV
(95,000 × $8) – (96,000 × $8) = LQV
$760,000 – $768,000 = $8,000 F
*(c)
Overhead controllable variance
Actual overhead
Budgeted overhead — 24,000 × 4 =
Variable
$685,000
96,000
× $4
$384,000
300,000
Fixed — 100,000 × $3 =
Overhead volume variance
Budgeted overhead (see above)
Overhead applied (96,000 × $7)
684,000
$ 1,500 U
$684,000
672,000
$ 12,000 U
PART IV — RATIO ANALYSIS (14 points)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Current ratio =
$240,000
———— = 2.40:1.
$100,000
$450,000
————— = 45%.
$1,000,000
Debt to total assets ratio =
Times interest earned =
Inventory turnover =
Profit margin =
$300,000
———— = 6 times.
$50,000
$960,000
————— = 8 times.
$120,000
$150,000
————— = 7.5%.
$2,000,000
Return on stockholders' equity =
Return on assets =
$150,000
———— = 30%.
$500,000
$150,000
———— = 16.7%.
$900,000
PART V — MISCELLANEOUS MANAGERIAL MINI-PROBLEMS (14 points)
(a)
Units transferred out (20,000 + 2,000 – 1,000)............................................................................
Ending work in process (1,000 × 60%)........................................................................................
Equivalent units for conversion costs.................................................................................
PART II — MATCHING (18 points)
PART III — VARIANCE ANALYSIS (19 points)
(b)
$800,000
(1) Break-even point =
———— = $2,000,000.
.4
(2) Desired sales =
(3) Margin of safety =
$800,000 + $400,000
—————————— = 6,000 units.
200
$500,000
—————— = 20%.
$2,500,000
21,000
600
21,600
CHAPTER 9: RESPONSIBILITY ACCOUNTING
Multiple Choice
c 1. Goal congruence exists when
a. the goals of the company harmonize with each other.
b. the company's managers are pursuing their own goals
effectively.
c. the company's managers are pursuing the goals of the
company.
d. all of the above are true.
c 2. Goal congruence is most likely to result when
a. reports to managers include all costs.
b. managers' behavior is affected by the criteria used to
judge their performances.
c. performance evaluation criteria encourage behavior in
the company's best interests as well as in the
manager's best interests.
d. a manager knows the criteria used to judge his or her
performance.
d 3. In responsibility accounting the most relevant
classification of costs is
a. fixed and variable.
b. incremental and nonincremental.
c. discretionary and committed.
d. controllable and noncontrollable.
c 4. Which of the following is critically important for a
responsibility accounting system to be effective?
a. Each employee should receive a separate performance
report.
b. Service department costs should be allocated to the
operating departments that use the service.
c. Each manager should know the criteria used for
evaluating his or her performance.
d. The details on the performance reports for individual
managers should add up to the totals on the
report to their supervisor.
c 5. Which of the following items is LEAST likely to appear on
the performance report of the manager of a product
line?
a. Variable manufacturing costs for products in the line.
b. Selling expenses for the line.
c. A share of company-wide advertising.
d. Revenues from the line.
b 6. The sequence that reflects increasing breadth of
responsibility is
a. cost center, investment center, profit center.
b. cost center, profit center, investment center.
c. profit center, cost center, investment center.
d. investment center, cost center, profit center.
a 7. The criteria used for evaluating performance
a. should be designed to help achieve goal congruence.
b. can be used only with profit centers and investment
centers.
c. should be used to compare past performance with
current performance.
d. motivate people to work in the company's best interests.
b 8. A balanced scorecard approach to performance
measurement
a. can only be used in profit or investment centers.
b. balances financial measures with nonfinancial
measures.
c. uses only qualitative data to evaluate performance.
d. uses budgeted data rather than historical data.
b 9. If a company has a favorable sales volume variance, its
a. sales price variance is also favorable.
b. total contribution margin might be less than planned.
c. total contribution margin will be more than planned.
d. income will be positive.
c 10. Transfer prices
a. reduce employee turnover.
b. are necessary for investment centers.
c. should encourage the kinds of behavior that upper-level
management wants.
d. are not used for departments with high amounts of fixed
costs.
b 11. A transfer price is
a. an accounting device to turn profit centers into
investment centers.
b. the price charged by one segment of the company for
goods or services provided to another segment.
c. only useful in a segment that deals with outsiders as well
as with other segments of the same company.
d. the amount charged by a cost center for a service
performed for a profit center.
c 12. The cost allocation policy most likely to encourage use of
a service is based on
a. budgeted total costs of the service department.
b. actual total costs of the service department.
c. budgeted variable costs for the service department.
d. actual variable costs for the service department.
c 13. Which of the following statements is true?
a. A company changes its total income when it changes the
bases used to allocate indirect costs.
b. A company should select an allocation basis so as to
raise or lower reported income on given products.
c. A company's total income will remain unchanged no
matter how indirect costs are allocated.
d. Costs should be allocated on an "ability-to-bear" basis.
a 14. If a company allocates costs of a service department to
other departments, it should
a. consider the likely effects of the allocations on the use of
the services.
b. use the method that best reflects the relative sizes of the
departments.
c. turn the service department into an investment center.
d. allocate only the fixed costs of the service department.
a 15. If a computer department does work for other
departments, charging a flat price per hour, the
computer department is
a. an artificial profit center.
b. a cost center.
c. an investment center.
d. none of the above.
a 16. The WORST method of allocating service department
costs is
a. to allocate total actual costs based on actual use of the
service.
b. to allocate total budgeted costs based on long-term
expected use of the service.
c. to allocate total budgeted costs based on actual use of
the service.
d. none of the above, because all the above are equally
undesirable.
b 17. As a general rule, the best transfer price to use to
transfer the costs of a service center to an operating
department is
a. the price charged by an outside company for the same
service.
b. the price that encourages goal congruence.
c. one that is based on budgeted variable cost.
d. one that is based on budgeted total cost.
b 18. Which of the following costs is LEAST likely to appear on
the performance report for the foreman of a
production department?
a. Wages of direct laborers.
b. Rent on machinery used in department.
c. Repairs to machinery used in department.
d. Cost of materials used.
d 19. ABC Company operates a factory that makes
components for other ABC factories to assemble. The
factory could be treated as
a. a cost center.
b. an artificial profit center.
c. an investment center.
d. any of the above.
d 20. For reports to follow the principles of responsibility
accounting, which of the following must be true?
a. Each segment of the entity is an artificial profit center.
b. The company is decentralized.
c. The company uses transfer prices.
d. The reports show controllable costs separately from
noncontrollable costs.
c 21. The effective use of responsibility accounting requires
that performance reports for cost centers
a. show only variable costs.
b. show a fair share of allocated costs.
c. distinguish between controllable and noncontrollable
costs.
d. show a fair share of revenues attributable to the center.
b 22. Criteria for evaluating performance should be carefully
selected because
a. they must be approved by the IRS.
b. a manager's behavior can be affected by the criteria
used to judge his or her performance.
c. managers may find out what they are.
d. stockholders inquire about them at annual meetings.
d 23. Which of the following is NOT a good reason for
allocating indirect costs to operating departments?
a. To remind managers of the need to cover indirect costs.
b. So that operating managers will encourage service
department managers to keep costs down.
c. To encourage managers to use services wisely.
d. To determine the true costs of operating departments.
b 24. An artificial profit center
a. has no investment.
b. does not provide its goods or services outside the entity.
c. cannot control its costs.
d. could not be operated as a cost center.
c 25. A responsibility center is
a. any department.
b. any manager.
c. any area of activity for which a manager is responsible.
d. only large departments.
a 26. ABC's actual selling price was less than planned and
actual unit volume more than planned. Therefore,
a. ABC had a favorable sales volume variance.
b. ABC's total contribution margin was more than planned.
c. ABC had a favorable sales price variance.
d. ABC's actual total sales equaled planned total sales.
b 27. The term "dual rates" refers to
a. allocating costs to several operating departments.
b. allocating fixed costs based on capacity requirements
and variable costs based on use.
c. allocating both actual costs and budgeted costs.
d. using the budgeted rate to allocate some costs, the
actual rate to allocate others.
a 28. Which of the following methods of allocating the costs of
service departments provides the broadest
recognition of departments served?
a. Reciprocal allocation.
b. Step-down allocation.
c. Direct allocation.
d. Arbitrary allocation.
d 29. Which of the following is a good reason for allocating
indirect costs to operating departments?
a. The company could lose money if the operating
departments do not pay for the services they use.
b. To remind managers of the need to cover indirect costs.
c. To encourage managers to use more services.
d. To determine the true costs of operating departments.
b 30. When a manager takes an action that benefits his or her
responsibility center, but not the company as a whole,
a. it is a non-controllable action.
b. there is a lack of goal congruence.
c. the center must be an artificial profit center.
d. the manager should be fired.
d 31. Which of the following is a good reason for NOT
allocating indirect costs to operating departments?
a. The company saves money if the operating departments
do not pay for the services they use.
b. To remind managers of the need to cover indirect costs.
c. To encourage managers to use more services.
d. The costs are not controllable by the operating
departments.
d 32. Which of the following is a good reason for NOT
allocating indirect costs to operating departments?
a. To remind managers that revenues must cover indirect
costs.
b. To recognize that operating departments benefit from
the services.
c. To encourage managers to use services wisely.
d. Because allocating them might prompt operating
managers to use nonincremental costs in making
decisions.
b 33. A profit center is a responsibility center
a. that sells its output outside the company.
b. whose manager is responsible for both revenues and
costs.
c. that provides a service to other responsibility centers.
d. within an investment center.
d 34. An investment center is
a. larger than a cost center.
b. larger than a profit center.
c. seldom the responsibility of a single manager.
d. not truthfully characterized in any of the above
statements.
a 35. The managerial level at which a particular cost is
controllable
a. varies from company to company.
b. depends on whether the cost is fixed or variable.
c. depends on whether the cost is direct or indirect.
d. is irrelevant to the preparation of performance reports.
d 36. If at all possible, a manager's performance report should
a. consider the results that the manager can control.
b. consider only the results that the manager can control.
c. not be influenced by the results of decisions made by
other managers.
d. reflect all of the above characteristics.
d 37. Comparing budgeted and actual amounts is important in
evaluating the performance of
a. the manager of a cost center.
b. the manager of a profit center.
c. the manager of an investment center.
d. any manager.
c 38. Direct, step-down, and reciprocal are names for
a. the allocation methods most likely to produce goal
congruence.
b. transfer-pricing methods.
c. methods for allocating costs of service departments to
operating departments.
d. alternative organizational structures.
b 39. Cascade Company had the following results in June.
Planned
Actual
------------Sales
$80,000
$78,900
Variable costs
50,000
48,500
------------Contribution margin $30,000
$30,400
=======
=======
Planned sales were 10,000 units; actual sales were 9,700 units. The sales price variance is
a. $1,100 U.
b. $1,000 F.
c. $900 U.
d. $400 F.
c 40. Cascade Company had the following results in June.
Planned
Actual
------------Sales
$80,000
$78,900
Variable costs
50,000
48,500
------------Contribution margin $30,000
$30,400
=======
=======
Planned sales were 10,000 units, actual sales were 9,700 units. The sales volume variance is
a. $1,100 U.
b. $1,000 F.
c. $900 U.
d. $400 F.
b 41.
Certainty Stores has three stores and one service center. The percentage of services used in the current year are Store X,
35%; Store Y, 40%; and Store Z, 25%. The service center costs were budgeted at $160,000 fixed and $240,000 variable.
Actual fixed costs were $140,000 and actual variable costs were $270,000. Actual service center costs are allocated to the
stores based on actual usage of the service center. Service center costs allocated to Store Y are
a. $64,000.
b. $164,000.
c. $410,000.
d. some other number.
c 42.
Certainty Stores has three stores and one service center. The percentage of services used in the current year are Store X,
35%; Store Y, 40%; and Store Z, 25%. The service center costs were budgeted at $350,000 fixed and $250,000 variable.
Actual fixed costs were $370,000 and actual variable costs were $280,000. Budgeted service center costs are allocated to the
stores based on actual usage of the service center. Service center costs allocated to Store Y are
a. $140,000.
b. $148,000.
c. $240,000.
d. $260,000.
c 43.
Wabasha Co. has two service departments (A and B) and two producing departments (X and Y). Data provided are as follows:
Service Depts. Operating Depts.
-------------- --------------A
B
X
Y
------- ------ ------ -----Direct costs
$240 $400
Services performed by Dept. A
40% 40%
Services performed by Dept. B. 20%
70%
c 44.
20%
10%
Wabasha uses the direct method to allocate service department costs. The service department cost allocated to Department Y
is
a. $88.
b. $96.
c. $130.
d. $240.
Wabasha Co. has two service departments (A and B) and two producing departments (X and Y). Data provided are as follows:
Service Depts. Operating Depts.
-------------- --------------A
B
X
Y
------- ------ ------ -----Direct costs
$250 $400
Services performed by Dept. A
40% 40%
Services performed by Dept. B. 20%
70%
20%
10%
Wabasha uses the step-down method to allocate service department costs. Department A costs are allocated first. The service
department cost allocated to Department Y is
a. $90.
b. $97.50.
c. $112.50.
d. $130.
c 45.
Wabasha Co. has two service departments (A and B) and two producing departments (X and Y). Data provided are as follows:
Service Depts. Operating Depts.
-------------- --------------A
B
X
Y
------- ------ ------ -----Direct costs
$150 $300
Services performed by Dept. A
40% 40%
Services performed by Dept. B. 20%
70%
20%
10%
Wabasha uses the reciprocal method to allocate service department costs. The service department cost allocated to
Department Y is
a. $60.
b. $75.
c. $85.
d. $135.
d 46.
Olson Stores has three stores and one service center. The percentage of services used in the current year are Store A, 40%;
Store B, 25%; and Store C, 45%. The expected long-term budgeted usages are Store A, 30%; Store B, 30%; and Store C,
40%. The service center costs were budgeted at $450,000 fixed and $550,000 variable. Actual fixed costs were $430,000 and
actual variable costs were $570,000. Olson allocates the budgeted variable costs of the central purchasing unit based on
actual use of the unit's services, and allocates budgeted fixed costs based on expected long-term use of the unit's services.
Service center costs allocated to Store A are
a. $135,000.
b. $220,000.
c. $300,000.
d. $355,000.
b 47.
Olson Stores has three stores and one service center. The percentage of services used in the current year are Store A, 45%;
Store B, 35%; and Store C, 20%. The expected long-term budgeted usages are Store A, 30%; Store B, 40%; and Store C,
30%. The service center costs were budgeted at $450,000 fixed and $550,000 variable. Actual fixed costs were $430,000 and
actual variable costs were $570,000. Olson allocates the budgeted variable costs of the central purchasing unit based on
actual use of the unit's services, and allocates budgeted fixed costs based on expected long-term use of the unit's services.
Service center costs allocated to Store B are
a. $350,000.
b. $372,500.
c. $400,000.
d. $550,000.
d 48.
Basin Co. has two service departments (A and B) and two producing departments (X and Y). Data provided are as follows:
Service Depts. Operating Depts.
A
B
X
Y
------- ------ ------ -----Direct costs
$200 $400
Services performed by Dept. A
20% 40%
Services performed by Dept. B. 30%
60%
40%
10%
Basin uses the direct method to allocate service department costs. The service department cost allocated to Department X is
a. $280.
b. $300.
c. $320.
d. $443.
a 49.
Basin Co. has two service departments (A and B) and two producing departments (X and Y). Data provided are as follows:
Service Depts. Operating Depts.
A
B
X
Y
------- ------ ------ -----Direct costs
$200 $400
Services performed by Dept. A
20% 40%
Services performed by Dept. B. 30%
60%
40%
10%
Basin uses the step-down method to allocate service department costs. Department A costs are allocated first. The service
department cost allocated to Department X is
a. $457.
b. $443.
c. $320.
d. $300.
c 50.
Basin Co. has two service departments (A and B) and two producing departments (X and Y). Data provided are as follows:
Service Depts. Operating Depts.
A
B
X
Y
------- ------ ------ -----Direct costs
$200 $400
Services performed by Dept. A
20% 40%
40%
Services performed by Dept. B. 30%
60%
10%
Basin uses the reciprocal method to allocate service department costs. The service department cost allocated to Department
X is
a. $300.
b. $340.
c. $417.
d. $468.
True-False
F 1. All responsibility centers are either natural or artificial.
F 2. The sales volume variance is the difference between actual and planned unit sales multiplied by the actual contribution margin per
unit.
F 3. The principle of controllability is less important to the internal reporting for a centralized company than for a decentralized one.
F 4. Allocated costs are less important to the internal reporting for a centralized company than for a decentralized company.
F 5. Achieving goal congruence is less important in a centralized organization than in a decentralized one.
T 6. It is not always possible to separate the variable and fixed components of actual costs.
F 7. A profit center will always have sales to outside customers.
T 8. The sales price variance is the difference between the actual selling price and the planned selling price multiplied by actual units
sold.
T 9. The direct method of allocating service department costs ignores all of the interactions between service departments.
F 10. The reciprocal method of allocating service department costs considers only the usage by the producing departments in
determining the allocations.
Problems
1.
The following data are for Billings Stores, which has two stores and one service center.
Helena Butte
------- ----Percentage of services used in current year
20%
80%
Expected long-term use of services
30%
70%
Budgeted central purchasing costs were $225,000 fixed and $125,000 variable. Actual fixed costs were $240,000 and actual
variable costs were $115,000. The managers wish to allocate the actual central purchasing costs to the stores based on actual
use of the central purchasing service.
a. Compute the allocation to the Helena store.
b. Compute the allocation to the Butte store.
SOLUTION:
a.
To Helena: $71,000 [20% x ($240,000 + $115,000)]
b.
To Butte: $284,000 [80% x ($240,000 + $115,000)]
2.
The following data are for Billings Stores, which has two stores and one service center.
Helena Butte
------- ----Percentage of services used in current year
20%
80%
Expected long-term use of services
30%
70%
Budgeted central purchasing costs were $225,000 fixed and $125,000 variable. Actual fixed costs were $240,000 and actual
variable costs were $115,000. The company wishes to allocate the budgeted variable costs of the central purchasing unit based
on actual use of the unit's services and to allocate budgeted fixed costs based on expected long-term use of the unit's services.
a.
Compute the total cost allocated to the Helena store for the services of the central purchasing unit.
b.
Compute the total cost allocated to the Butte store for the services of the central purchasing unit.
SOLUTION:
a.
To Helena: $92,500 ($125,000 x 20% + $225,000 x 30%)
b.
To Butte: $257,500 ($125,000 x 80% + $225,000 x 70%)
3.
Following are data about Alphabet Co.'s two service departments and two operating departments.
Service Depts. Operating Depts.
-------------- --------------A
B
X
Y
------- ------ ------ -----Direct costs
$200 $500 $1,500 $2,000
Services performed by Dept. A
20% 40% 40%
Services performed by Dept. B. 10%
90%
a.
Alphabet allocates costs of its service departments using the direct method of allocation. Find the total cost that will be
allocated to Dept. X.
b.
Alphabet allocates the costs of its service departments using the step-down method, beginning with Dept. A. Find the total
amount of cost that will be allocated to Dept. X.
SOLUTION:
a.
Allocated to X: $600 [($200 x 40/(40 + 40)] + [$500 x (90/90)]
b.
Allocated to X: $620
A
B
X
Y
---- ---- ---- ---A's direct cost
$200
A's cost allocated (200) $ 40 $80
B's direct cost
500
----Total for allocating
$540
B's costs allocated
(540) 540
-----Allocated to X
$620
Allocated to Y
$80
4.
$80
0
Following are data about Alphabet Co.'s two service departments and two operating departments.
Service Depts. Operating Depts.
-------------- --------------A
B
X
Y
------- ------ ------ -----Direct costs
$400 $1,000 $3,000 $4,000
Services performed by Dept. A
20% 40% 40%
Services performed by Dept. B. 10%
90%
Alphabet allocates costs of its service departments using the reciprocal method of allocation. Find the total cost that will be
allocated to Dept. X.
SOLUTION:
Allocated to X: $1,195.92
A = $400 + .1B A = 510.20
B = $1,000 + .2A B = 1,102.04
A
B
X
Y
------- ------- ------- ------Direct costs
$400.00 $1,000.00
A's cost allocated (510.20) 102.04 $204.08
B's costs allocated 110.20 (1,102.04) 991.84
------- ------Allocated to X
$1,195.92
Allocated to Y
$204.08
5.
$204.08
0
The following data are for Lexington Stores, which has two stores and one service center.
Concord Graham
------- -----Percentage of services used in current year
40%
60%
Expected long-term use of services
30%
70%
Budgeted central purchasing costs were $100,000 fixed and $75,000 variable. Actual fixed costs were $140,000 and actual
variable costs were $105,000. The managers wish to allocate the actual central purchasing costs to the stores based on actual
use of the central purchasing service.
a. Compute the allocation to the Concord store.
b. Compute the allocation to the Graham store.
SOLUTION:
a.
To Concord: $98,000 [40% x ($140,000 + $105,000)]
b.
To Graham: $147,000 [60% x ($140,000 + $105,000)]
6.
The following data are for Lexington Stores, which has two stores and one service center.
Concord Graham
------- -----Percentage of services used in current year
40%
60%
Expected long-term use of services
30%
70%
Budgeted central purchasing costs were $100,000 fixed and $75,000 variable. Actual fixed costs were $140,000 and actual
variable costs were $105,000. The company wishes to allocate the budgeted variable costs of the central purchasing unit based
on actual use of the unit's services and to allocate budgeted fixed costs based on expected long-term use of the unit's services.
a.
Compute the total cost allocated to the Concord store for the services of the central purchasing unit.
b.
Compute the total cost allocated to the Graham store for the services of the central purchasing unit.
SOLUTION:
a.
To Concord: $60,000 ($75,000 x 40% + $100,000 x 30%)
b.
To Graham: $115,000 ($75,000 x 60% + $100,000 x 70%)
7.
Following are data about Hamilton Co.'s two service departments and two operating departments.
Service Depts. Operating Depts.
-------------- --------------A
B
X
Y
------- ------ ------ -----Direct costs
$400 $600 $2,000 $3,000
Services performed by Dept. A
30% 30% 40%
Services performed by Dept. B. 20%
70% 10%
a.
Hamilton allocates costs of its service departments using the direct method of allocation. Find the total cost that will be
allocated to each of the operating departments.
b.
Hamilton allocates the costs of its service departments using the step-down method, beginning with Dept. A. Find the total
amount of cost that will be allocated to each of the operating departments.
c.
Hamilton allocates costs of its service departments using the reciprocal method of allocation. Find the total cost that will be
allocated to each of the operating departments.
SOLUTION:
a.
Allocated to X: $696.43 {$400 x [30/(30 + 40)] + $600 x [70/(70 + 10)]}
Allocated to Y: $303.57 {$400 x [40/(30 + 40)] + $600 x [10/(70 + 10)]}
b.
Allocated to X: $750.00,
Allocated to Y: $250.00
A
B
X
Y
---- ---- ------- ------A's direct cost
$400
A's cost allocated (400) $120 $120.00 $160.00
B's direct cost
600
---Total for allocating
$720
B's costs allocated
(720) 630.00 90.00
------- -----Allocated to X
$750.00
Allocated to Y
$250.00
c.
Allocated to X: $702.13,
A = $400 + .2B A = 553.19
B = $600 + .3A B = 765.96
Allocated to Y: $297.87
A
B
X
Y
------- ------- ------- ------Direct costs
$400.00 $600.00
A's cost allocated (553.19) 165.96 $165.96
B's costs allocated 153.19 (765.96) 536.17
------- ------Allocated to X
$702.13
Allocated to Y
$297.87
$221.27
76.60
8. Following are data about Hawley Co.'s two service departments and three operating departments.
Service Depts.
Operating Depts.
-------------- ---------------------A
B
X
Y
Z
------- ------ ------ ------ -----Direct costs
$400 $600
Services performed by Dept. A
30% 40% 20% 10%
Services performed by Dept. B. 40%
20% 20% 20%
Hawley allocates costs of its service departments using the reciprocal method of allocation. Find the total costs that will be
allocated to each of the operating departments.
SOLUTION:
Allocated to x: $454.55, allocated to Y: $309.09, Allocated to Z: $236.36
A = $400 + .4B A = 727.27
B = $600 + .3A B = 818.18
A
B
X
Y
Z
------- ------- ------- ------- ------Direct costs
$400.00 $600.00
A's cost allocated (727.27) 218.18 $290.91 $145.45 $ 72.72
B's costs allocated 327.27 (818.18) 163.64 163.64 163.64
------- ------- ------Allocated to X
Allocated to Y
Allocated to Z
9.
$454.55
$309.09
$236.36
Following are data about Augusta Co.'s three service departments and two operating departments.
Service Depts.
Operating Depts.
--------------------- ---------------A
B
C
X
Y
------- ------ ------ ------ -----Direct costs
$150 $300 $350
Services performed by Dept. A
20% 30% 40% 10%
Services performed by Dept. B. 10%
20% 50% 20%
Services performed by Dept. C 30%
40%
15% 15%
a.
Augusta allocates costs of its service departments using the direct method of allocation. Find the total cost that will be
allocated to Dept. X.
b.
Augusta allocates the costs of its service departments using the step-down method, beginning with Dept. A followed by Dept.
B. Find the total amount of cost that will be allocated to Dept. X.
SOLUTION:
a.
Allocated to X: $509.29 {$150 x [40/(40 + 10)] + $300 x [50/(50 + 20)] + $350 x [15/(15 + 15)]}
b.
Allocated to X: $477.50
A
B
C
X
Y
---- ---- ------- ------- ------A's direct cost
$150
A's cost allocated (150) $ 30 $ 45.00 $ 60.00 $ 15.00
B's direct cost
300
---Total for allocating
$330
B's costs allocated
(330) 73.33 183.34 73.33
C's direct cost
350.00
------Total for allocating
$468.33
C's costs allocated
(468.33) 234.16 234.16
------ -----Allocated to X
$477.50
Allocated to Y
$322.50
10. Osseo Company had the following results in June.
Planned
Actual
--------------Sales
$160,000
$162,500
Variable costs at $5 per unit
100,000
102,500
--------------Contribution margin
$ 60,000
$ 60,000
========
========
Planned sales were 20,000 units, actual sales were 20,500 units.
a. Find the sales price variance. Indicate F or U
b. Find the sales volume variance. Indicate F or U
SOLUTION:
a. $1,500 U {20,500 x [($162,500/20,500) - $8]}
b. $1,500 F [$3 x (20,500 - 20,000)]
CHAPTER 10
BUDGETARY CONTROL AND
RESPONSIBILITY ACCOUNTING
Summary of Questions by STUDY Objectives and Bloom’s Taxonomy
sg
True-False Statements
1.
1
K
9.
3
2.
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Multiple Choice Questions
38.
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AP 81.
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AP
sg
Summary of Questions by STUDY Objectives and Bloom’s Taxonomy
Brief Exercises
158. 3
AP 161.
159. 3
AP 162.
160. 3
AP 163.
3
4
6
AP
AP
AP
164.
165.
166.
7
7
7
AP
AP
AP
167.
a
168.
a
169.
7
8
8
AN
AP
AP
Exercises
170. 2
171. 2,3
172. 3
173. 3
3
3
3
3
AP
AP
AP
AP
178.
179.
180.
181.
3
3
3,6
4,5
AP
AP
AP
AP
182.
183.
184.
185.
5
5
6
7
AN
AP
AN
AP
K
K
K
196.
197.
198.
4
4
4
K
K
K
199.
200.
201.
7
7
7
K
K
K
AP
AP
AP
AP
174.
175.
176.
177.
Completion Statements
190. 1
K
193. 3
191. 1
K
194. 3
192. 1
K
195. 4
186.
187.
188.
189.
7
7
7
7
AN
AN
AN
AN
Ite
Typ
Ite
Type
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Ite
Typ
Ite
Typ
Ite
Typ
Ite
Typ
Ite
Typ
TF
MC
MC
40.
41.
42.
MC
MC
MC
43.
44.
146.
MC
MC
MC
190.
191.
192.
C
C
C
TF
TF
TF
45.
46.
47.
MC
MC
MC
48.
49.
50.
MC
MC
MC
51.
52.
53.
MC
MC
MC
147.
148.
170.
MC
MC
Ex
171.
Ex
TF
TF
MC
MC
MC
MC
MC
MC
MC
60.
61.
62.
63.
64.
65.
66.
67.
68.
MC
MC
MC
MC
MC
MC
MC
MC
MC
69.
70.
71.
72.
73.
74.
75.
76.
77.
MC
MC
MC
MC
MC
MC
MC
MC
MC
78.
79.
80.
149.
150.
151.
152.
158.
159.
MC
MC
MC
MC
MC
MC
MC
BE
BE
160.
161.
171.
172.
173.
174.
175.
176.
177.
BE
BE
Ex
Ex
Ex
Ex
Ex
Ex
Ex
178.
179.
180.
193.
194.
Ex
Ex
Ex
C
C
TF
MC
MC
MC
MC
85.
86.
87.
88.
89.
MC
MC
MC
MC
MC
90.
91.
92.
93.
94.
MC
MC
MC
MC
MC
95.
96.
153.
154.
162.
MC
MC
MC
MC
BE
181.
195.
196.
197.
198.
Ex
C
C
C
C
TF
MC
98.
99.
MC
MC
100.
101.
MC
MC
181.
182.
Ex
Ex
183.
Ex
Study Objective 1
1.
2.
3.
TF
TF
TF
31.
38.
39.
Study Objective 2
4.
5.
6.
TF
TF
TF
7.
8.
32.
Study Objective 3
9.
10.
11.
12.
13.
14.
15.
16.
17.
TF
TF
TF
TF
TF
TF
TF
TF
TF
18.
33.
53.
54.
55.
56.
57.
58.
59.
Study Objective 4
19.
20.
21.
22.
23.
TF
TF
TF
TF
TF
34.
81.
82.
83.
84.
Study Objective 5
24.
25.
TF
TF
35.
97.
CHAPTER STUDY OBJECTIVES
1.
Describe the concept of budgetary control.
Budgetary control consists of (a) preparing periodic budget
reports that compare actual results with planned objectives, (b)
analyzing the differences to determine their causes, (c) taking
appropriate corrective action, and (d) modifying future plans, if
necessary.
2.
Evaluate the usefulness of static budget reports.
Static budget reports are useful in evaluating the progress
toward planned sales and profit goals. They are also
appropriate in assessing a manager's effectiveness in
controlling costs when (a) actual activity closely approximates
the master budget activity level, and/or (b) the behavior of the
costs in response to changes in activity is fixed.
3.
Explain the development of flexible budgets and
the usefulness of flexible budget reports. To develop the
flexible budget it is necessary to: (a) Identify the activity index
and the relevant range of activity; (b) Identify the variable
costs, and determine the budgeted variable cost per unit of
activity for each cost; (c) Identify the fixed costs, and determine
the budgeted amount for each cost; (d) Prepare the budget for
selected increments of activity within the relevant range.
Flexible budget reports permit an evaluation of a
manager's performance in controlling production and costs.
3.
Certain budget reports are prepared monthly,
whereas others are prepared more frequently depending on
the activities being monitored.
4.
The master budget is not used in the budgetary
control process.
5.
A master budget is most useful in evaluating a
manager's performance in controlling costs.
6.
A static budget is one that is geared to one level of
activity.
7.
A static budget is changed only when actual activity is
different from the level of activity expected.
8.
A static budget is most useful for evaluating a
manager's performance in controlling variable costs.
4
Describe the concept of responsibility
accounting. Responsibility accounting involves accumulating
and reporting revenues and costs on the basis of the individual
manager who has the authority to make the day-to-day
decisions about the items. The evaluation of a manager's
performance is based on the matters directly under the
manager's control. In responsibility accounting, it is necessary
to distinguish between controllable and noncontrollable fixed
costs and to identify three types of responsibility centers: cost,
profit, and investment.
5.
Indicate the features of responsibility reports for
cost centers. Responsibility reports for cost centers compare
actual costs with flexible budget data. The reports show only
controllable costs, and no distinction is made between variable
and fixed costs.
9.
A flexible budget can be prepared for each of the
types of budgets included in the master budget.
6.
Identify the content of responsibility reports for
profit centers. Responsibility reports show contribution
margin, controllable fixed costs, and controllable margin for
each profit center.
14.
The activity index used in preparing a flexible budget
should not influence the variable costs that are being
budgeted.
7.
Explain the basis and formula used in evaluating
performance in investment centers. The primary basis for
evaluating performance in investment centers is return on
investment (ROI). The formula for computing ROI for
investment centers is: Controllable margin ÷ Average operating
assets.
a
8.
Explain the difference between ROI and residual
income. ROI is controllable margin divided by average total
assets. Residual income is the income that remains after
subtracting the minimum rate of return on a company’s
average operating assets. ROI sometimes provides misleading
results because profitable investments are often rejected when
the investment reduces ROI but increases overall profitability.
TRUE-FALSE STATEMENTS
1.
Budget reports comparing actual results with planned
objectives should be prepared only once a year.
2.
If actual results are different from planned results, the
difference must always be investigated by management to
achieve effective budgetary control.
10.
A flexible budget is a series of static budgets at
different levels of activities.
11.
Flexible budgeting relies on the assumption that unit
variable costs will remain constant within the relevant range of
activity.
12.
Total budgeted fixed costs appearing on a flexible
budget will be the same amount as total fixed costs on the
master budget.
13.
A flexible budget is prepared before the master
budget.
15.
A formula used in developing a flexible budget is:
Total budgeted cost = fixed cost + (total variable cost per unit ×
activity level).
16.
Flexible budgets are widely used in production and
service departments.
17.
A flexible budget report will show both actual and
budget cost based on the actual activity level achieved.
18.
Management by exception means that management
will investigate areas where actual results differ from planned
results if the items are material and controllable.
19.
Policies regarding when a difference between actual
and planned results should be investigated are generally more
restrictive for noncontrollable items than for controllable items.
20.
A distinction should be made between controllable
and noncontrollable costs when reporting information under
responsibility accounting.
21.
Cost centers, profit centers, and investment centers
can all be classified as responsibility centers.
22.
More costs become controllable as one moves down
to each lower level of managerial responsibility.
23.
In a responsibility accounting reporting system, as
one moves up each level of responsibility in an organization,
the responsibility reports become more summarized and show
less detailed information.
24.
A cost center incurs costs and generates revenues
and cost center managers are evaluated on the profitability of
their centers.
25.
The terms "direct fixed costs" and "indirect fixed
costs" are synonymous with "traceable costs" and "common
costs," respectively.
a
30.
Residual income generates a dollar amount which
represents the increase in value to the company beyond the
cost necessary to pay for the financing of assets.
Additional True-False Questions
31.
Budget reports provide the feedback needed by
management to see whether actual operations are on course.
32.
A static budget is an effective means to evaluate a
manager's ability to control costs, regardless of the actual
activity level.
33.
The flexible budget report evaluates a manager's
performance in two areas: (1) pro-duction and (2) costs.
26.
Controllable margin is subtracted from controllable
fixed costs to get net income for a profit center.
34.
The terms controllable costs and noncontrollable
costs are synonymous with variable costs and fixed costs,
respectively.
27.
The denominator in the formula for calculating the
return on investment includes operating and nonoperating
assets.
35.
Most direct fixed costs are not controllable by the
profit center manager.
28.
The formula for computing return on investment is
controllable margin divided by average operating assets.
36.
The manager of an investment center can improve
ROI by reducing average operating assets.
a
a
37.
Residual income and ROI are used as performance
evaluation methods for profit center performance.
29.When evaluating residual income, the calculation tells
management what percentage return was generated by the
particular division being evaluated.
Answers to True-False Statements
Item
1.
2.
3.
4.
5.
6.
Ans.
F
F
T
F
F
T
Item
7.
8.
9.
10.
11.
12.
Ans.
F
F
T
T
T
T
Item
13.
14.
15.
16.
17.
18.
Ans.
F
F
T
T
T
T
MULTIPLE CHOICE QUESTIONS
38.
What is budgetary control?
a.
Another name for a flexible budget
b.
The degree to which the CFO controls the budget
c.
The use of budgets in controlling operations
d.
The process of providing information on budget
differences to lower level managers
39.
A major element in budgetary control is
a.
the preparation of long-term plans.
b.
the comparison of actual results with planned
objectives.
c.
the valuation of inventories.
d.
approval of the budget by the stockholders.
40.
Budget reports should be prepared
a.
daily.
b.
monthly.
c.
weekly.
d.
as frequently as needed.
41.
On the basis of the budget reports,
a.
management analyzes differences between actual
and planned results.
Item
19.
20.
21.
22.
23.
24.
Ans.
F
T
T
F
T
F
Item
25.
26.
27.
28.
a
29.
a
30.
Ans.
T
F
F
T
F
T
Item
31.
32.
33.
34.
35.
36.
Ans.
T
F
T
F
F
T
Item
a
37.
Ans.
F
b.
c.
d.
management may take corrective action.
management may modify the future plans.
all of these.
42.
is to
a.
b.
c.
d.
The purpose of the departmental overhead cost report
43.
a.
b.
c.
d.
control indirect labor costs.
control selling expense.
determine the efficient use of materials.
control overhead costs.
The purpose of the sales budget report is to
control selling expenses.
determine whether income objectives are being met.
determine whether sales goals are being met.
control sales commissions.
44.
The comparison of differences between actual and
planned results
a.
is done by the external auditors.
b.
appears on the company's external financial
statements.
c.
is usually done orally in departmental meetings.
d.
appears on periodic budget reports.
45.
A static budget
a.
should not be prepared in a company.
b.
is useful in evaluating a manager's performance by
comparing actual variable costs and planned variable costs.
c.
shows planned results at the original budgeted activity
level.
d.
is changed only if the actual level of activity is
different than originally budgeted.
46.
A static budget report
a.
shows costs at only 2 or 3 different levels of activity.
b.
is appropriate in evaluating a manager's effectiveness
in controlling variable costs.
c.
should be used when the actual level of activity is
materially different from the master budget activity level.
d.
may be appropriate in evaluating a manager's
effectiveness in controlling costs when the behavior of the
costs in response to changes in activity is fixed.
47.
A static budget is appropriate in evaluating a
manager's performance if
a.
actual activity closely approximates the master budget
activity.
b.
actual activity is less than the master budget activity.
c.
the company prepares reports on an annual basis.
d.
the company is a not-for-profit organization.
48.
When budgeted and actual results are not the same
amount, there is a budget
a.
error.
b.
difference.
c.
anomaly.
d.
by-product.
49.
Top management's reaction to a difference between
budgeted and actual sales often depends on
a.
whether the difference is favorable or unfavorable.
b.
whether management anticipated the difference.
c.
the materiality of the difference.
d.
the personality of the top managers.
50.
If costs are not responsive to changes in activity level,
then these costs can be best described as
a.
b.
c.
d.
mixed.
flexible.
variable.
fixed.
51.
Assume that actual sales results exceed the planned
results for the second quarter. This favorable difference is
greater than the unfavorable difference reported for the first
quarter sales. Which of the following statements about the
sales budget report on June 30 is true?
a.
The year-to-date results will show a favorable
difference.
b.
The year-to-date results will show an unfavorable
difference.
c.
The difference for the first quarter can be ignored.
d.
The sales report is not useful if it shows a favorable
and unfavorable difference for the two quarters.
52.
a.
b.
c.
d.
A static budget is appropriate for
variable overhead costs.
direct materials costs.
fixed overhead costs.
none of these.
53.
What is the primary difference between a static
budget and a flexible budget?
a.
The static budget contains only fixed costs, while the
flexible budget contains only variable costs.
b.
The static budget is prepared for a single level of
activity, while a flexible budget is adjusted for different activity
levels.
c.
The static budget is constructed using input from only
upper level management, while a flexible budget obtains input
from all levels of management.
d.
The static budget is prepared only for units produced,
while a flexible budget reflects the number of units sold.
54.
A flexible budget
a.
is prepared when management cannot agree on
objectives for the company.
b.
projects budget data for various levels of activity.
c.
is only useful in controlling fixed costs.
d.
cannot be used for evaluation purposes because
budgeted data are adjusted to reflect actual results.
55.The master budget of Benedict Company shows that the planned activity level for next year is expected to be 50,000 machine
hours. At this level of activity, the following manufacturing overhead costs are expected:
Indirect labor
$240,000
Machine supplies
60,000
Indirect materials
70,000
Depreciation on factory building
50,000
Total manufacturing overhead
$420,000
A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs of
a.
$494,000.
b.
$420,000.
c.
$504,000.
d.
$454,000
.
b.
The actual results for 65,000 units with a new budget
for 65,000 units.
56.
Rickets Crickets prepared a 2008 budget for 60,000
c.
The actual results for 65,000 units with last year's
units of product. Actual production in 2008 was 65,000 units.
actual results for 67,000 units
To be most useful, what amounts should a performance report
d.
It doesn't matter. All of these choices are equally
for this company compare?
useful.
a.
The actual results for 65,000 units with the original
budget for 60,000 units
57.
A department has budgeted monthly manufacturing
overhead cost of $270,000 plus $3 per direct labor hour. If a
flexible budget report reflects $522,000 for total budgeted
manu-facturing cost for the month, the actual level of activity
achieved during the month was
a.
264,000 direct labor hours.
b.
84,000 direct labor hours.
c.
174,000 direct labor hours.
d.
Cannot be determined from the information provided.
65.
Within the relevant range of activity, the behavior of
total costs is assumed to be
a.
linear and upward sloping.
b.
linear and downward sloping.
c.
curvilinear and upward sloping.
d.
linear to a point and then level off.
58.
Which one of the following would be the same total
amount on a flexible budget and a static budget if the activity
level is different for the two types of budgets?
a.
Direct materials cost
b.
Direct labor cost
c.
Variable manufacturing overhead
d.
Fixed manufacturing overhead
66.
Sales results that are evaluated by a static budget
might show
1.
favorable differences that are not
justified.
2.
unfavorable differences that are not
justified.
a.
1
b.
2
c.
both 1 and 2.
d.
neither 1 nor 2.
59.
In developing a flexible budget within a relevant range
of activity,
a.
only fixed costs are included.
b.
it is necessary to relate variable cost data to the
activity index chosen.
c.
it is necessary to prepare a budget at 1,000 unit
increments.
d.
variable and fixed costs are combined and are
reported as a total cost.
67.
The selection of levels of activity to depict a flexible
budget
1.will be within the relevant range.
2.is largely a matter of expediency.
3.is governed by generally accepted accounting principles.
a.
1
b.
2
c.
3
d.
1 and 2
60.
What budgeted amounts appear on the flexible
budget?
a.
Original budgeted amounts at the static budget
activity level
b.
Actual costs for the budgeted activity level
c.
Budgeted amounts for the actual activity level
achieved
d.
Actual costs for the estimated activity level
68.
Management by exception
a.
causes managers to be buried under voluminous
paperwork.
b.
means that all differences will be investigated.
c.
means that only unfavorable differences will be
investigated.
d.
means that material differences will be investigated.
61.The flexible budget
a.
is prepared before the master budget.
b.
is relevant both within and outside the relevant range.
c.
eliminates the need for a master budget.
d.
is a series of static budgets at different levels of
activity.
62.
A flexible budget can be prepared for which of the
following budgets comprising the master budget?
a.
Sales
b.
Overhead
c.
Direct materials
d.
All of these
63.
a.
b.
c.
d.
Another name for the static budget is
master budget.
overhead budget.
permanent budget.
flexible budget.
64.
If a company plans to sell 24,000 units of product but
sells 30,000, the most appropriate comparison of the cost data
associated with the sales will be by a budget based on
a.
the original planned level of activity.
b.
27,000 units of activity.
c.
30,000 units of activity.
d.
24,000 units of activity.
69.
Under management by exception, which differences
between planned and actual results should be investigated?
a.
Material and noncontrollable
b.
Controllable and noncontrollable
c.
Material and controllable
d.
All differences should be investigated
70.
Romano Roofing's budgeted manufacturing costs for
25,000 squares of shingles are:
Fixed manufacturing costs $15,000
Variable manufacturing costs
$20.00 per square
Romano produced 20,000 squares of shingles during March.
How much are budgeted total manufacturing costs in March?
a.
$400,000
b.
$515,000
c.
$500,000
d.
$415,000
71.
A flexible budget depicted graphically
a.
is identical to a CVP graph.
b.
differs from a CVP graph in the way that fixed costs
are shown.
c.
differs from a CVP graph in the way that variable
costs are shown.
d.
differs from a CVP graph in that sales revenue is not
shown.
72.
The activity index used in preparing the flexible
budget
a.
is prescribed by generally accepted accounting
principles.
b.
is only applicable to fixed manufacturing costs.
c.
is the same for all departments.
d.
should significantly influence the costs that are being
budgeted.
73.
A static budget is not appropriate in evaluating a
manager's effectiveness if a company has
a.
substantial fixed costs.
b.
substantial variable costs.
c.
planned activity levels that match actual activity
levels.
d.
no variable costs.
74.
Trepid Manufacturing Company prepared a static budget of 40,000 direct labor hours, with estimated overhead costs of
$200,000 for variable overhead and $60,000 for fixed overhead. Trepid then prepared a flexible budget at 38,000 labor hours. How
much is total overhead costs at this level of activity?
a.
$190,000
b.
$250,000
c.
$247,000
d.
$260,000
75.
For June, Mark Manufacturing estimated sales revenue at $200,000. It pays sales commissions that are 4% of sales. The
sales manager's salary is $95,000, estimated shipping expenses total 1% of sales, and miscellaneous selling expenses are $5,000.
How much are budgeted selling expenses for the month of July if sales are expected to be $180,000?
a.
$14,000
b.
$109,000
c.
$9,000
d.
$110,000
76.
Ziglar’s Sipit Company budgeted manufacturing costs for 25,000 sipits are:
Fixed manufacturing costs
$25,000 per month
Variable manufacturing costs
$12.00 per sipit
Ziglar’s produced 20,000 sipits during March. How much is the flexible budget for total manufacturing costs for March?
a.
$260,000
b.
$325,000
c.
$240,000
d.
$265,000
77.
True Masons budgeted costs for 25,000 linear feet of block are:
Fixed manufacturing costs
$12,000 per month
Variable manufacturing costs
$16.00 per linear
True Masons installed 20,000 linear feet of block during March. How much is budgeted total manufacturing costs in March?
a.
$320,000
b.
$412,000
c.
$400,000
d.
$332,000
78.
In the Klugman Company, indirect labor is budgeted for $36,000 and factory supervision is budgeted for $12,000 at
normal capacity of 80,000 direct labor hours. If 90,000 direct labor hours are worked, flexible budget total for these costs is
a.
$48,000.
b.
$54,000.
c.
$52,500.
d.
$49,500.
79.
Wayman Company uses flexible budgets. At normal capacity of 8,000 units, budgeted manufacturing overhead is:
$48,000 variable and $135,000 fixed. If Wayman had actual overhead costs of $187,500 for 9,000 units produced, what is the
difference between actual and budgeted costs?
a.
$1,500 unfavorable
b.
$1,500 favorable
c.
$4,500 unfavorable
d.
$6,000 favorable
Indirect labor
200,000
10,000
80.
A company's planned activity level for next year is
Factory supplies
20,000
expected to be 100,000 machine hours. At this level of activity,
Supervision
the company budgeted the following manufacturing overhead
A flexible budget prepared at the 80,000 machine hours level
costs:
of activity would show total manufacturing overhead costs of
Variable
a.
$288,000.
Fixed
b.
$360,000.
Indirect materials
$140,000
c.
$384,000.
Depreciation
d.
$408,000.
Taxe
50,00
81.
The accumulation of accounting data on the basis of
the individual manager who has the authority to make day-today decisions about activities in an area is called
a.
static reporting.
b.
flexible accounting.
c.
responsibility accounting.
d.
master budgeting.
82.
Cart Company recorded operating data for its shoe
division for the year.
Sales
Contribution margin
Controllable fixed costs
Average total operating assets
How much is controllable margin for the year?
a.
20%
b.
50%
c.
$150,000
d.
$60,000
83.
A cost is considered controllable at a given level of
managerial responsibility if
a.
the manager has the power to incur the cost within a
given time period.
b.
the cost has not exceeded the budget amount in the
master budget.
c.
it is a variable cost, but it is uncontrollable if it is a
fixed cost.
d.
it changes in magnitude in a flexible budget.
84.
As one moves up to each higher level of managerial
responsibility,
a.
fewer costs are controllable.
b.
the responsibility for cost incurrence diminishes.
c.
a greater number of costs are controllable.
d.
performance evaluation becomes less important.
85.
A responsibility report should
a.
be prepared in accordance with generally accepted
accounting principles.
b.
show only those costs that a manager can control.
c.
only show variable costs.
d.
only be prepared at the highest level of managerial
responsibility.
86.
a.
b.
c.
d.
Top management can control
only controllable costs.
only noncontrollable costs.
all costs.
some noncontrollable costs and all controllable costs.
87.
Not-for-profit entities
a.
do not use responsibility accounting.
b.
utilize responsibility accounting in trying to maximize
net income.
c.
utilize responsibility accounting in trying to minimize
the cost of providing services.
d.
have only noncontrollable costs.
88.
Which of the following is not a true statement?
a.
All costs are controllable at some level within a
company.
b.
Responsibility accounting applies to both profit and
not-for-profit entities.
c.
Fewer costs are controllable as one moves up to each
higher level of managerial responsibility.
d.
The term segment is sometimes used to identify
areas of responsibility in decentralized operations.
89.
Costs incurred indirectly and allocated to a
responsibility level are considered to be
a.
nonmaterial.
b.
mixed.
c.
controllable.
d.
noncontrollable.
$750,000
150,000 90.
Management by exception
90,000a.
is most effective at top levels of management.
300,000b.
can be implemented at each level of responsibility
within an organization.
c.
can only be applied when comparing actual results
with the master budget.
d.
is the opposite of goal congruence.
91.
Which responsibility centers generate both revenues
and costs?
a.
Investment and profit centers
b.
Profit and cost centers
c.
Cost and investment centers
d.
Only profit centers
92.
The linens department of a large department store is
not a responsibility center.
a profit center.
a cost center.
an investment center.
93.
The foreign subsidiary of a large corporation is
not a responsibility center.
a profit center.
a cost center.
an investment center.
a.
b.
c.
d.
a.
b.
c.
d.
94.The maintenance department of a manufacturing company
is a(n)
a.
segment.
b.
profit center.
c.
cost center.
d.
investment center.
95.
Which of the following is not a correct match?
1.Incurs costs
2.Generates revenue
3.Controls investment funds
a.Investment Center
1, 2, 3
b.Cost Center
1
c.Profit Center 1, 2, 3
d.All are correct matches.
96.
A cost center
a.
only incurs costs and does not directly generate
revenues.
b.
incurs costs and generates revenues.
c.
is a responsibility center of a company which incurs
losses.
d.
is a responsibility center which generates profits and
evaluates the investment cost of earning the profit.
97.
a.
A manager of a cost center is evaluated mainly on
the profit that the center generates.
b.
his or her ability to control costs.
c.
the amount of investment it takes to support the cost
center.
d.
the amount of revenue that can be generated.
98.
a.
b.
c.
d.
99.
a.
b.
c.
costs.
d.
Performance reports for cost centers compare actual
total costs with static budget data.
total costs with flexible budget data.
controllable costs with static budget data.
controllable costs with flexible budget data.
In the performance report for cost centers,
controllable and noncontrollable costs are reported.
fixed costs are not reported.
no distinction is made between fixed and variable
only materials and controllable costs are reported.
100.
Of the following choices, which contain both a
traceable fixed cost and a common fixed cost?
a.
Profit center manager's salary and timekeeping costs
for a responsibility center's employees.
b.
Company president's salary and company personnel
department costs.
c.
Company personnel department costs and
timekeeping costs for a responsibility center's employees.
d.
Depreciation on a responsibility center's equipment
and supervisory salaries for the center.
b.
success in meeting budgeted goals for controllable
costs.
c.
amount of controllable margin generated by the profit
center.
d.
amount of contribution margin generated by the profit
center.
104.Controllable margin is defined as
a.
sales minus variable costs.
b.
sales minus contribution margin.
c.
contribution margin less controllable fixed costs.
d.
contribution margin less noncontrollable fixed costs.
105.
a.
b.
c.
d.
Controllable margin is most useful for
external financial reporting.
preparing the master budget.
performance evaluation of profit centers.
break-even analysis.
106.
Which of the following will not result in an unfavorable
controllable margin difference?
a.
Sales exceeding budget; costs under budget
b.
Sales exceeding budget; costs over budget
c.
Sales under budget; costs under budget
d.
Sales under budget; costs over budget
101.Which of the following is not an indirect fixed cost?
a.
Company president's salary
b.
Depreciation on the company building housing
several profit centers
c.
Company personnel department costs
d.
Profit center supervisory salaries
102.
A profit center is
a.
a responsibility center that always reports a profit.
b.
a responsibility center that incurs costs and generates
revenues.
c.
evaluated by the rate of return earned on the
investment allocated to the center.
d.
referred to as a loss center when operations do not
meet the company's objectives.
103.
The best measure of the performance of the manager
of a profit center is the
a.
rate of return on investment.
107.
Given below is an excerpt from a management performance report:
Budget
Actual
Contribution margin
$1,000,000
$1,050,000
Controllable fixed costs
$ 500,000
$ 450,000
The manager's overall performance
a.
is 20% below expectations.
b.
is 20% above expectations.
c.
is equal to expectations.
d.
cannot be determined from information given.
108.Which of the following are financial measures of performance?
1.
Controllable margin
2.
Product quality
3.
Labor productivity
a.
1
b.
2
Difference
$50,000
$50,000
c.
3
d.
1 and 3
109.Given below is an excerpt from a management performance report:
Budget
Actual
Contribution margin$600,000$580,000$20,000 U
Controllable fixed costs$200,000$220,000$20,000 U
The manager's overall performance
a.
is 10% above expectations.
b.
is 10% below expectations.
c.
is equal to expectations.
d.
cannot be determined from the information provided.
Difference
110.A responsibility report for a profit center will
a.
not show controllable fixed costs.
b.
not show indirect fixed costs.
c.
show noncontrollable fixed costs.
d.
not show cumulative year-to-date results.
111.
a.
b.
c.
d.
The dollar amount of the controllable margin
is usually higher than the contribution margin.
is usually lower than the contribution margin.
is always equal to the contribution margin.
cannot be a negative figure.
112.
Garrison Company recorded operating data for its shoe division for the year. The company’s desired return is 5%.
Sales
$500,000
Contribution margin
100,000
Total direct fixed costs
60,000
Average total operating assets
200,000
Which one of the following reflects the controllable margin for the year?
a.
20%
b.
50%
c.
$30,000
d.
$40,000
113.
The area manager of the Steak House Restaurants is considering two possible expansion alternatives. The required
investments, expected controllable margins, and the ROIs of each are as follows:
Project
Investment
Controllable Margin
ROI
Charlotte $120,000
$30,000
25%
Richmond $540,000
$50,000
9.25%
The Steak House segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following
projects will increase the Steak House division’s ROI?
a.
Both the Charlotte and Richmond options
b.
Only the Charlotte option
c.
Only the Richmond option
d.
Neither the Charlotte nor the Richmond options
114.
Timex Corporation recorded operating data for its Cheap division for the year. Timex requires its return to be 10%.
Sales
$
700,000
Controllable margin
80,000
Total average assets
2,000,000
Fixed costs
50,000
What is the ROI for the year?
a.
4%
b.
35%
c.
–6%
d.
1.5%
115.Halpern Division’s operating results include: controllable margin of $150,000, sales totaling $1,200,000, and average operating
assets of $500,000. Halpern is considering a project with sales of $100,000, expenses of $86,000, and an investment of average
operating assets of $200,000. Halpern’s required rate of return is 9%. Should Halpern accept this project?
a.
Yes, ROI will drop by 6.6% which is still above the required rate of return.
b.
No, the return is less than the required rate of 9%.
c.
Yes, ROI still exceeds the cost of capital.
d.
No, ROI will decrease to 7%.
1 16.
Perot Manufacturing reported the following items for 2008:
Income tax expense
$ 30,000
Contribution margin
100,000
Controllable fixed costs
40,000
Interest expense
20,000
Total operating assets
325,000
How much is controllable margin?
a.
$100,000
b.
$60,000
c.
$30,000
d.
$10,000
117.Merck Pharmaceuticals is evaluating its Vioxx division, an investment center. The division has a $45,000 controllable margin and
$300,000 of sales. How much will Merck’s average operating assets be when its return on investment is 10%?
a.
$450,000
b.
$495,000
c.
$300,000
d.
$255,000
118.An investment center generated a contribution margin of $200,000, fixed costs of $100,000 and sales of $1,000,000. The center’s
average operating assets were $400,000. How much is the return on investment?
a.
25%
b.
175%
c.
50%
d.
75%
119.
Safety Seats Company recorded operating data for its auto accessories division for the year.
Sales
$375,000
Contribution margin
75,000
Total direct fixed costs
45,000
Average total operating assets
200,000
How much is ROI for the year if management is able to identify a way to improve the contribution margin by $15,000, assuming fixed
costs are held constant?
a.
45.0%
b.
22.5%
c.
15.0%
d.
12.0%
120.
The current controllable margin for Claremont Division is $62,000. Its current operating assets are $200,000. The division is
considering purchasing equipment for $60,000 that will increase annual controllable margin by an estimated $10,000. If the equipment
is purchased, what will happen to the return on investment for Claremont Division?
a.
An increase of 16.1%
b.
A decrease of 13.3%
c.
A decrease of 3.3%
d.
A decrease of 7.2%
121.
CinRich Corporation recorded operating data for its Waterhole division for the year. CinRich requires its return to be 9%.
Sales $500,000
Controllable margin 90,000
Total average assets 300,000
Fixed costs 30,000
How much is ROI for the year?
a.
10%
b.
16.7%
c.
20%
d.
30%
122.
Lou Alabassi is the North Division manager and his performance is evaluated by executive management based on Division
ROI. The current controllable margin for North Division is $46,000. Its current operating assets total $210,000. The division is
considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If
the equipment is purchased, what will happen to the return on investment for the division?
a.
An increase of 0.5%
b.
A decrease of 0.5%
c.
A decrease of 3.5%
d.
It will remain unchanged.
123.
Cruise Division of Harrah’s Company’s operating results include: controllable margin, $200,000; sales $2,200,000; and
operating assets, $800,000. The Cruise Division’s ROI is 25%. Management is considering a project with sales of $100,000, variable
expenses of $60,000, fixed costs of $40,000; and an asset investment of $150,000. Should management accept this new project?
a.
No, since ROI will be lowered.
b.
Yes, since ROI will increase.
c.
Yes, since additional sales always mean more customers.
d.
No, since a loss will be incurred.
124.
The Eastern Division of Flint Corp. had an ROI of 25% when sales were $1 million and controllable margin was $200,000.
What were the average operating assets?
a.
$50,000
b.
$250,000
c.
$800,000
d.
$4,000
125.Cart Company recorded operating data for its shoe division for the year.
Sales$500,000
Contribution margin 90,000
Total fixed costs 60,000
Average total operating assets 200,000
How much is ROI for the year if management is able to identify a way to improve the contribution margin by $20,000, assuming fixed
costs are held constant?
a.
25%
b.
18%
c.
45%
d.
12%
126.A distinguishing characteristic of an investment center is that
a.
revenues are generated by selling and buying stocks and bonds.
b.
interest revenue is the major source of revenues.
c.
the profitability of the center is related to the funds invested in the center.
d.
it is a responsibility center which only generates revenues.
127.
a.
b.
c.
d.
A measure frequently used to evaluate the performance of the manager of an investment center is
the amount of profit generated.
the rate of return on funds invested in the center.
the percentage increase in profit over the previous year.
departmental gross profit.
128.
a.
b.
c.
d.
Return on investment is calculated by dividing
contribution margin by sales.
controllable margin by sales.
contribution margin by average operating assets.
controllable margin by average operating assets.
129.Which one of the following will not increase return on
investment?
a.
Variable costs are increased
b.
An increase in sales
c.
Average operating assets are decreased
d.
Variable costs are decreased
130.
If an investment center has generated a controllable
margin of $75,000 and sales of $300,000, what is the return on
investment for the investment center if average operating
assets were $500,000 during the period?
a.
15%
b.
25%
c.
45%
d.
60%
131.
Which statement is true?
a.
An investment center is responsible for revenues and
expenses, as well as earning a return on assets.
b.
An investment center is only responsible for its
investments.
c.
An investment center is only responsible for revenues
and expenses.
d.
A profit center is evaluated using contribution margin,
while an investment center is evaluated using ROI.
132.
The denominator in the formula for return on
investment calculation is
a.
investment center controllable margin.
b.
dependent on the specific type of profit center.
c.
average investment center operating assets.
d.
sales for the period.
133.
a.
b.
c.
d.
In the formula for ROI, idle plant assets are
included in the calculation of controllable margin.
included in the calculation of operating assets.
excluded in the calculation of operating assets.
excluded from total assets.
134.In computing ROI, land held for future use
a.
will hurt the performance measurement of an
c.
is included in the calculation of operating assets.
investment center's manager.
d.
is considered a nonoperating asset.
b.
is important in evaluating the performance of a profit
center manager.
135.
Dodge City Parts has a current return on investment of 10% and the company has established an 8% minimum rate of return
for the division. The division manager has two investment projects available, for which the following estimates have been made:
Project A - Annual controllable margin = $24,000, operating assets = $400,000
Project B - Annual controllable margin = $60,000, operating assets = $550,000
Which project should be funded?
a.
Both projects
b.
Project A
c.
Project B
d.
Neither project
136.
If an investment center has a $45,000 controllable margin and $600,000 of sales, what average operating assets are needed
to have a return on investment of 10%?
a.
$60,000
b.
$105,000
c.
$450,000
d.
$600,000
137.
a.
b.
c.
d.
a
Which of the following valuations of operating assets is not readily available from the accounting records?
Cost
Book value
Market value
Both cost and market value
138.
The following information is available for Aggie Auto Sales:
Average operating assets
$800,000
Controllable margin
80,000
Contribution margin
200,000
Minimum rate of return
8%
How much is Aggie Auto’s residual income?
a.
$136,000
b.
$720,000
c.
$16,000
d.
$64,000
a.
To determine whether decentralization is possible or
a
139.
What is the goal of residual income?
not
a.
To maximize the amount of costs which are
b.
To motivate managers through possible termination
controllable
c.
To evaluate management performance
b.
To maximize profits
d.
To measure company profits
c.
To maximize the total amount of residual income
a
d.
To maximize controllable margin
143.
Niceville Company had sales of $400,000, variable
costs of $200,000, and direct fixed costs totaling $100,000.
a
140.
Which one of the following is a correct statement
The company’s operating assets total $800,000, and its
about residual income?
required return is 10%. How much is the residual income?
a.
Its goal is to maximize profits of an investment center.
a.
$120,000
b.
It is less effective for evaluating investment centers
b.
$20,000
than ROI.
c.
$80,000
c.
It is the ratio of controllable margin to the minimum
d.
$320,000
rate of return on average operating assets.
a
d.
It evaluates performance by comparing the return of
144.
Oxford Company earned controllable margin of
an investment center with the company’s minimum rate of
$125,000 on sales of $1,600,000. The division had average
return.
operating assets of $1,300,000. The company requires a return
on investment of at least 8%. How much is residual income?
a
141.
Which one of the following does not impact the
a.
$104,000
amount of residual income?
b.
$21,000
a.
Contribution margin
c.
$146,000
b.
Net income
d.
$128,000
c.
Sales
a
d.
Controllable costs
145.
The performance of the manager of Purina Division is
measured by residual income. Which of the following would
a
142.
For what purpose do companies calculate residual
decrease the manager’s performance measure?
income?
a.
Decrease in required rate of return
b.
Increase in amount of return on investment desired
c.
d.
Increase in sales
Increase in contribution margin
Additional Multiple Choice Questions
146. Which of the following would not be considered an
aspect of budgetary control?
a.
It assists in the determination of differences between
actual and planned results.
b.
It provides feedback value needed by management to
see whether actual operations are on course.
c.
It assists management in controlling operations.
d.
It provides a guarantee for favorable results.
147.
A static budget is usually appropriate in
evaluating a manager's effectiveness in controlling
a.
fixed manufacturing costs and fixed selling and
administrative expenses.
b.
variable manufacturing costs and variable selling and
administrative expenses.
c.
fixed manufacturing costs and variable selling and
administrative expenses.
d.
variable manufacturing costs and fixed selling and
administrative expenses.
148.
151.
a.
fixed manufacturing costs.
b.
fixed selling and administrative expenses.
c.
variable selling and administrative expenses.
d.
both fixed manufacturing costs and fixed selling and
administrative expenses.
149.
Weiser Company uses flexible budgets. At
normal capacity of 8,000 units, budgeted manufacturing
overhead is $64,000 variable and $180,000 fixed. If Weiser
had actual overhead costs of $250,000 for 9,000 units
produced, what is the difference between actual and budgeted
costs?
a.
$2,000 unfavorable
b.
$2,000 favorable
c.
$6,000 unfavorable
d.
$8,000 favorable
150.
To develop the flexible budget, management
takes all of the following steps except identify the
a.
activity index and the relevant range of activity.
b.
variable costs and determine the budgeted variable
cost per unit.
c.
fixed costs and determine the budgeted fixed cost per
unit.
d.
All of these options are steps in developing the
flexible budget.
A static budget report is appropriate for
A flexible budget is appropriate for
Direct Labor Costs
Manufacturing Overhead Costs
a.
No
No
b.
Yes
Yes
c.
Yes
No
d.
No
Yes
c.
An increase in sales
152.All of the following statements are correct about
d.
An increase in controllable fixed costs
management by exception except it
a.
enables top management to focus on problem areas
156.
Costs that relate specifically to one center and
that need attention.
are incurred for the sole benefit of that center are
b.
means that management has to investigate every
a.
common fixed costs.
budget difference.
b.
direct fixed costs.
c.
requires that there must be some guidelines for
c.
indirect fixed costs.
identifying an exception.
d.
noncontrollable fixed costs.
d.
means that top management's review of a budget
report is focused primarily on differences between actual
157.
If controllable margin is $300,000 and the
results and planned objectives.
average investment center operating assets are $1,000,000,
the return on investment is
153.
Controllable costs for responsibility accounting
a.
.33%.
purposes are those costs that are directly influenced by
b.
3.33%.
a.
a given manager within a given period of time.
c.
10%.
b.
a change in activity.
d.
30%.
c.
production volume.
d.
sales volume.
154.
All of the following statements are correct about
controllable costs except
a.
all costs are controllable at some level of
responsibility within a company.
b.
all costs are controllable by top management.
c.
fewer costs are controllable as one moves up to each
higher level of managerial responsibility.
d.
costs incurred directly by a level of responsibility are
controllable at that level.
155.
ROI?
a.
b.
Which of the following will cause an increase in
An increase in variable costs
An increase in average operating assets
Answers to Multiple Choice Questions
Ite
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
Ans
c
b
d
d
d
c
d
c
d
a
b
c
d
a
c
b
b
a
Ite
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
Ans
b
b
d
b
c
d
d
a
c
a
c
d
d
c
d
d
d
b
Ite
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
Ans
b
b
d
d
c
b
d
c
d
a
c
b
c
c
c
d
b
a
Ite
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
Ans
b
d
c
c
a
b
d
c
c
d
b
c
c
c
a
b
a
b
Ite
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
124.
125.
126.
127.
Ans
b
b
d
b
a
b
b
a
a
b
c
d
c
a
c
a
c
b
Item
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
a
138.
a
139.
a
140.
a
141.
a
142.
a
143.
a
144.
a
145.
Ans
d
a
a
a
c
c
d
c
c
c
c
c
d
b
c
b
b
b
Ite
146.
147.
148.
149.
150
.
151
.
152
.
153
.
154
.
155
.
156
.
157
.
Ans.
d
a
d
b
c
b
b
a
c
c
b
d
BRIEF EXERCISES
BE 158
Shirk Productions makes a single product. Expected manufacturing costs are as follows:
Variable costs
Direct materials
$6.50 per unit
Direct labor
2.40 per unit
Manufacturing overhead
1.10 per unit
Fixed costs per month
Supervisory salaries
$12,600
Depreciation
3,500
Other fixed costs
2,200
Instructions
Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month.
Solution 158 (4 min.)
[3,200 × ($6.50 + $2.40 + $1.10)] + ($12,600 + $3,500 + $2,200) = $50,300
BE 159
Sekine Company uses flexible budgets. Items from the budget for March in which 2,000 units were produced and sold appear below:
Direct materials
$18,000
Indirect materials - variable
2,000
Supervisor salaries
15,000
Depreciation on factory equipment
4,000
Direct labor
10,000
Property taxes on factory
1,000
Instructions
If Sekine prepares a flexible budget at 3,000 units, compute its total variable cost.
Solution 159 (4 min.)
Variable cost per unit: ($18,000 + $2,000 + $10,000) ÷ 2,000 = $15 per unit
Variable cost at 3,000 units: $15 × 3,000 = $45,000
BE 160
SugarTown’s manufacturing costs for August when production was 1,000 units appear below:
Direct material
$12 per unit
Direct labor
$6,500
Variable overhead
5,000
Factory depreciation
9,000
Factory supervisory salaries
7,800
Other fixed factory costs
2,500
Instructions
Compute the flexible budget manufacturing cost amount for a month when 800 units are produced.
Solution 160 (5 min.)
Direct material ($12 × 800)
Direct labor [($6,500 ÷ 1,000) × 800]
Variable overhead [($5,000 ÷ 1,000) × 800]
Factory depreciation—fixed
Factory supervisory salaries—fixed
Other fixed factory costs—fixed
Total
$ 9,600
5,200
4,000
9,000
7,800
2,500
$38,100
BE 161
Butterfly World’s budgeted sales for April were estimated at $500,000, sales commissions at 4% of sales, and the sales manager's
salary at $80,000. Shipping expenses were estimated at 1% of sales and miscellaneous selling expenses were estimated at $1,000,
plus 0.5% of sales.
Instructions
Determine the budgeted selling expenses on a flexible budget for April.
Solution 161 (5 min.)
Sales commissions
(4% × $500,000)
$ 20,000
Sales manager’s salary
80,000
Shipping expenses
(1% × $500,000)
5,000
Miscellaneous selling:
Fixed portion
1,000
Variable: (0.5% × $500,000)
2,500
Budgeted selling expenses $108,500
BE 162
Ranger Company produces men’s shirts. The following budgeted and actual amounts are for 2008:
Cost
Budget at 2,500 units
Actual Amounts at 2,900 units
Direct materials
$55,000
$65,500
Direct labor
70,000
81,000
Fixed overhead
35,000
34,500
Instructions
Prepare a performance report for Ranger Company for the year.
Solution 162 (5 min.)
RANGER COMPANY
Manufacturing Performance Budget Report
For the Year Ended December 31, 2008
Direct materials
Direct labor
Fixed overhead
Total costs
Budget
$ 63,800
81,200
35,000
$180,000
BE 163
Lincoln Inc. reported the following items for 2008:
Controllable fixed costs
$ 77,000
Actual
$ 65,500
81,000
34,500
$181,000
Differences
$1,700 U
200 F
500 F
$1,000 U
Contribution margin
Interest expense
Variable costs
Total assets
142,000
20,000
80,000
$925,000
Instructions
Compute the controllable margin for 2008.
Solution 163
(2 min.)
$142,000 – $77,000 = $65,000
BE 164
The data for an investment center is given below.
January 1, 2008
Current Assets
$ 400,000
Plant Assets
3,000,000
December 31, 2008
$ 800,000
4,000,000
The controllable margin is $615,000.
Instructions
Compute the return on investment for the center for 2008.
Solution 164
(4 min.)
Average current assets
($400,000 + $800,000) ÷ 2 = $600,000
Plant assets
($3,000,000 + $4,000,000) ÷ 2 = $3,500,000
ROI = Controllable Margin ÷ Average Operating Assets = $615,000 ÷ $4,100,000 = 15%
BE 165
Data for the Electric Division of Bowden Baseball Company which is operated as an investment center follows:
Sales
$6,000,000
Contribution Margin
800,000
Controllable Fixed Costs
500,000
Return on Investment
12%
Instructions
Calculate controllable margin and average operating assets.
Solution 165
(3 min.)
Controllable Margin ($800,000 – $500,000) = $300,000
Average Operating Assets ($300,000 ÷ .12) = $2,500,000
BE 166
Wimmer Division’s operating results include:

Controllable margin, $150,000

Sales revenue, $1,200,000

Operating assets, $500,000
Wimmer is considering a project with sales of $120,000, expenses of $84,000, and an investment of $180,000. Wimmer’s required rate
of return is 15%.
Instructions
Determine whether Wimmer should accept this project.
Solution 166 (5 min.)
Current ROI = $150,000 ÷ $500,000 = 30%
ROI of new project = $36,000 ÷ $180,000 = 20%
New ROI with project = [$150,000 + $36,000] ÷ [$500,000 + $180,000] = 27.4%
While ROI decreases, that does not make this a bad investment, since many projects cause total ROI to fall even though they increase
value of the division. The determination is based on how the ROI of the project compares to the required rate of return. The company is
not willing to accept any projects with an investment less than 15%, so the 20% project should be accepted.
BE 167
An investment center manager is considering three possible investments. The company’s required return is 10%. The required asset
investment, controllable margins, and the ROIs of each investment are as follows:
Project
Average Investment
Controllable Margin
ROI
Bud
$160,000
$32,000
20.0%
Wise
140,000
16,000
11.4%
Er
220,000
66,000
30%
The investment center is currently generating an ROI of 25% based on $1,200,000 in operating assets and a controllable margin of
$300,000.
Instructions
If the manager can select only one project, determine which one is the best choice to increase the investment center's ROI. Compute
how much the investment center’s ROI will be if the manager selects your recommendation.
Solution 167 (4 min.)
Er is the best choice because it increases the ROI (30% is greater than 25%).
Project
Bud
Wise
Er
a
New ROI
($300,000 + $32,000) ÷ ($1,200,000 + $160,000) = 24.4%
($300,000 + $16,000) ÷ ($1,200,000 + $140,000) = 23.6%
($300,000 + $66,000) ÷ ($1,200,000 + $220,000) = 25.8%
BE 168
The owner of Shrek Toys has recently expanded his business in order to add an additional product line. In addition to toys, the
company now sells shirts. The company has a minimum rate of return of 12%.
Toys
Shirts
Sales
$600,000
$200,000
Controllable margin
120,000
10,000
Average operating assets
900,000
200,000
Instructions
Compute the residual income for both investment centers.
Solution 168 (5 min.)
Toys
Controllable margin
$120,000
Average assets × 12%
108,000
Residual income
$ 12,000
a
Shirts
$ 10,000
24,000
$(14,000)
BE 169
A & B Flooring has 4 divisions. Its hardwood flooring division’s information follows for 2008:
Sales
$4,000,000
Controllable margin
250,000
Variable costs
60,000
Average operating assets
1,800,000
Instructions
A & B’s required rate of return is 9%. How much is residual income?
Solution 169 (4 min.)
$250,000 – (9% × $1,800,000) = $88,000
EXERCISES
Ex. 170
Doonan Company's master budget reflects budgeted sales information for the month of June, 2008, as follows:
Budgeted Quantity Budgeted Unit Sales Price
Product A
20,000
$7
Product B
24,000
$9
During June, the company actually sold 19,500 units of Product A at an average unit price of $7.10 and 24,800 units of Product B at an
average unit price of $8.90.
Instructions
Prepare a Sales Budget Report for the month of June for Doonan Company which shows whether the company achieved its planned
objectives.
Solution 170 (10–15 min.)
DOONAN COMPANY
Sales Budget Report
For the Month Ended June 30, 2008
Product Line
Budget
Actual
Difference
Product A
$140,000
$138,450
$1,550 U
Product B
216,000
220,720
4,720 F
Total sales
$356,000
$359,170
$3,170 F
Ex. 171
Colaw Manufacturing Co.'s static budget at 6,000 units of production includes $36,000 for direct labor and $6,000 for direct materials.
Total fixed costs are $24,000.
Instructions
a.
Determine how much would appear on Colaw's flexible budget for 2008 if 9,000 units are produced and sold.
b.
How would this comparison differ if a static budget were used instead of a flexible budget for performance evaluation?
Solution 171
a.
Direct materials
(8–10 min.)
6,000 Units
9,000 Units
Variable costs:
Direct labor
6,000
Fixed costs
Total costs
$36,000
1.00
42,000
24,000
$66,000
Unit Variable Cost
$6.00
9,000
$54,000
63,000
24,000
$87,000
b.
If a static budget were used, budgeted variable costs would be only $42,000 because they would be based on the static
budget level of 6,000 units. The company would appear way over budget since the costs incurred would be related to a higher level of
activity.
Ex. 172
Jenner Company developed its annual manufacturing overhead budget for its master budget for 2008 as follows:
Expected annual operating capacity
120,000 Direct Labor Hours
Variable overhead costs
Indirect labor
$420,000
Indirect materials
90,000
Factory supplies
30,000
Total variable
540,000
Fixed overhead costs
Depreciation
180,000
Supervision
120,000
Property taxes
96,000
Total fixed
396,000
Total costs
$936,000
The relevant range for monthly activity is expected to be between 8,000 and 12,000 direct labor hours.
Instructions
Prepare a flexible budget for a monthly activity level of 8,000 and 9,000 direct labor hours.
Solution 172 (15–20 min.)
JENNER COMPANY
Monthly Flexible Manufacturing Overhead Budget
Activity level
Direct labor hours
Variable costs
Indirect labor
Indirect materials
Factory supplies
Total variable
Fixed costs
Depreciation
Supervision
Property taxes
Total fixed
Total costs
8,000
9,000
$28,000
6,000
2,000
36,000
$31,500
6,750
2,250
40,500
15,000
10,000
8,000
33,000
$69,000
15,000
10,000
8,000
33,000
$73,500
Ex. 173
Dailey Company has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department:
DAILEY COMPANY
Monthly Flexible Manufacturing Overhead Budget
Mixing Department
Activity level
Direct labor hours
3,000
4,000
Variable costs
Indirect materials
$ 1,500
$ 2,000
Indirect labor
15,000
20,000
Factory supplies
4,500
6,000
Total variable
21,000
28,000
Fixed costs
Depreciation
20,000
20,000
Supervision
10,000
10,000
Property taxes
15,000
15,000
Total fixed
45,000
45,000
Total costs
$66,000
$73,000
Instructions
Prepare a flexible budget at the 5,000 direct labor hours of activity.
Solution 173 (15–20 min.)
DAILEY COMPANY
Monthly Flexible Manufacturing Overhead Budget
Mixing Department
Activity level
Direct labor hours
5,000
Variable costs
Indirect materials
Indirect labor
Factory supplies
Total variable
$ 2,500
25,000
7,500
35,000
Fixed costs
Total costs
Depreciation
Supervision
Property taxes
Total fixed
$80,000
20,000
10,000
15,000
45,000
Ex. 174
Fagan Company uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs
per machine hour are as follows:
Indirect labor
Indirect materials
Maintenance
Utilities
Fixed overhead costs per month are:
Supervision
Insurance
Property taxes
Depreciation
$5.00
2.50
.50
.30
$600
200
300
900
The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month.
Instructions
Prepare a flexible manufacturing overhead budget for the expected range of activity, using increments of 1,000 machine hours.
Solution 174 (15–20 min.)
FAGAN COMPANY
Monthly Flexible Manufacturing Overhead Budget
Activity level
Machine hours
Variable costs
Indirect labor
Indirect materials
Maintenance
Utilities
Total variable
Fixed costs
Supervision
Insurance
Property taxes
Depreciation
Total fixed
Total costs
2,000
3,000
4,000
$10,000
5,000
1,000
600
16,600
$15,000
7,500
1,500
900
24,900
$20,000
10,000
2,000
1,200
33,200
600
200
300
900
2,000
$18,600
600
200
300
900
2,000
$26,900
600
200
300
900
2,000
$35,200
Ex. 175
Dashboard Corporation's manufacturing costs for July when production was 1,000 units appears below:
Direct materials
$10 per unit
Factory depreciation
$8,000
Variable overhead
5,000
Direct labor
2,000
Factory supervisory salaries
5,800
Other fixed factory costs
1,500
Instructions
How much is the flexible budget manufacturing cost amount for a month when 1,100 units are produced?
Solution 175 (8–10 min.)
Direct materials ($10 × 1,100)
Direct labor [($2,000 ÷ 1,000) × 1,100]
Variable overhead [($5,000 ÷ 1,000) × 1,100]
Factory depreciation—fixed
Factory supervisory salaries—fixed
Other fixed factory costs
Total
$11,000
2,200
5,500
8,000
5,800
1,500
$34,000
Ex. 176
Fagan Company uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs
per machine hour are as follows:
Indirect labor
$5.00
Indirect materials
2.50
Maintenance
.50
Utilities
.30
Fixed overhead costs per month are:
Supervision
$600
Insurance
200
Property taxes
300
Depreciation
900
The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month. During the month of August,
2008, the company incurs the following manufacturing overhead costs:
Indirect labor
$14,000
Indirect materials
8,100
Maintenance
1,400
Utilities
950
Supervision
720
Insurance
200
Property taxes
300
Depreciation
930
Instructions
Prepare a flexible budget report, assuming that the company used 3,000 machine hours during August.
Solution 176 (20–25 min.)
FAGAN COMPANY
Manufacturing Overhead Budget Report (Flexible)
For the Month Ended August 31, 2008
Difference
Budget atActual at
3,000 hrs.
Favorable F
3,000 hrs.Unfavorable U
Variable costs
Indirect labor
$15,000
$14,000
$1,000 F
Indirect materials
7,500
8,100
600 U
Maintenance
1,500
1,400
100 F
Utilities
900
950
50 U
Total variable
24,900
24,450
450 F
Fixed Costs
Supervision
600
720
120 U
Insurance
200
200
—
Property taxes
300
300
—
Depreciation
900
930
30 U
Total fixed
2,000
2,150
150 U
Total costs
$26,900
$26,600
$ 300 F
Ex. 177
Molle Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $200,000 to $240,000.
Variable costs and their percentage relationships to sales are:
Sales commissions
Advertising
Traveling
Delivery
6%
4%
5%
1%
Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment $10,000.
Instructions
Prepare a flexible budget for increments of $20,000 of sales within the relevant range.
Solution 177 (17–22 min.)
MOLLE COMPANY
Monthly Flexible Selling Expense Budget
Activity level
Sales $200,000
Variable expenses
Sales commissions
Advertising
Traveling
Delivery
Total variable
Fixed expenses
Sales salaries
Depreciation
Total fixed
Total costs
$220,000
$240,000
$12,000
8,000
10,000
2,000
32,000
$13,200
8,800
11,000
2,200
35,200
$14,400
9,600
12,000
2,400
38,400
40,000
10,000
50,000
$82,000
40,000
10,000
50,000
$85,200
40,000
10,000
50,000
$88,400
Ex. 178
Molle Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $200,000 to $240,000.
Variable costs and their percentage relationships to sales are:
Sales commissions
Advertising
Traveling
Delivery
6%
4%
5%
1%
Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment $10,000.
Ex. 178
(cont.)
The actual selling expenses incurred in February, 2008, by Molle Company are as follows:
Sales commissions
Advertising
Traveling
Delivery
$13,700
8,000
11,300
1,600
Fixed selling expenses consist of sales salaries $41,000 and depreciation on delivery equipment $10,000.
Instructions
Prepare a flexible budget performance report, assuming that February sales were $220,000.
Solution 178 (17–22 min.)
MOLLE COMPANY
Selling Expense Budget Report (Flexible)
For the Month Ended February 29, 2008
Variable expenses
Sales commissions
Advertising
Traveling
Delivery
Total variable
Fixed expenses
Sales salaries
Depreciation
Total fixed
Total expenses
Difference
Favorable F
Unfavorable U
Budget
$220,000
Actual
$220,000
$13,200
8,800
11,000
2,200
35,200
$13,700
8,000
11,300
1,600
34,600
$ 500
800
300
600
600
40,000
10,000
50,000
$85,200
41,000
10,000
51,000
$85,600
1,000 U
—
1,000 U
$ 400 U
U
F
U
F
F
Ex. 179
A flexible budget graph for the Assembly Department shows the following:
1.
At zero direct labor hours, the total budgeted cost line intersects the vertical axis at $60,000.
2.
At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at
$180,000.
Instructions
Develop the budgeted cost formula for the Assembly Department and identify the fixed and variable costs.
Solution 179 (5 min.)
Budgeted Costs:
Assembly
$60,000 + $2.40.
Fixed costs are $60,000.
Variable costs are $2.40 per labor hour.
($180,000 – $60,000) ÷ 50,000.
Ex. 180
Pele Clothing Company's static budget at 2,000 units of production includes $8,000 for direct labor, $2,000 for utilities (variable), and
total fixed costs of $16,000. Actual production and sales for the year was 6,000 units, with an actual cost of $47,200.
Instructions
Determine if Pele Clothing is over or under budget.
Solution 180
(8–10 min.)
2,000 Units
Variable costs:
Direct labor
Utilities
Fixed costs
Total costs
$ 8,000
2,000
10,000
16,000
$26,000
Unit Variable Cost
6,000 Units
$4.00
1.00
$24,000
6,000
30,000
16,000
$46,000
The company is over budget by $1,200. The flexible budget amount allowed was $46,000, and the company incurred $47,200 of actual
costs.
Ex. 181
Colter Company produces men's ties. The following budgeted and actual amounts are for 2008:
Cost
Budget at 5,000 Units
Actual Amounts at 5,800 Units
Direct materials
$60,000
$71,000
Direct labor
75,000
86,500
Equipment depreciation
5,000
5,000
Indirect labor
7,500
8,600
Indirect materials
9,000
9,600
Rent and insurance
12,000
13,000
Instructions
Prepare a performance budget report for Colter Company for the year.
Solution 181 (8–10 min.)
COLTER COMPANY
Manufacturing Performance Budget Report
For the Year Ended December 31, 2008
Direct materials
Direct labor
Equipment depreciation
Indirect labor
Indirect materials
Budget
$ 69,600
87,000
5,000
8,700
10,440
Actual
$ 71,000
86,500
5,000
8,600
9,600
Differences
$1,400 U
500 F
0
100 F
840 F
Rent and insurance
Total costs
12,000
$192,740
13,000
$193,700
1,000 U
$ 960 U
Ex. 182
Data concerning manufacturing overhead for Friendly Company are presented below. The Mixing Department is a cost center.
An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that
50% of supervisory costs are controllable at the department level.
The flexible budget formula and the cost and activity for the months of July and August are as follows:
Flexible Budget Per
Direct Labor Hour
Actual Costs and Activity
July
August
Direct labor hours
6,000
7,000
Overhead costs
Variable
Indirect materials
$3.50
$ 20,500
$ 25,100
Indirect labor
6.00
39,500
40,700
Factory supplies
1.00
7,600
8,200
Fixed
Depreciation
$20,000
15,000
15,000
Supervision
25,000
23,000
26,000
Property taxes
10,000
12,000
12,000
Total costs
$117,600
$127,000
Instructions
(a)
Prepare the responsibility reports for the Mixing Department for each month.
(b)
Comment on the manager's performance in controlling costs during the two month period.
Solution 182 (20–25 min.)
(a)
FRIENDLY COMPANY
Mixing Department
Manufacturing Overhead Cost Responsibility Report
For the Months of July and August
July
Controllable Cost
Indirect materials
Indirect labor
Factory supplies
Supervision
Total costs
(b)
Budget
21,000
36,000
6,000
12,500
75,500
Actual
20,500
39,500
7,600
11,500
79,100
August
Difference
500
3,500
1,600
1,000
3,600
F
U
U
F
U
Budget
24,500
42,000
7,000
12,500
86,000
Actual
25,100
40,700
8,200
13,000
87,000
Difference
600
1,300
1,200
500
1,000
The manager did a better job of controlling costs in August ($1,000 U) than in July ($3,600 U).
Ex. 183
Gentry Company's manufacturing overhead budget for the first quarter of 2008 contained the following data:
Variable Costs
Indirect materials
$20,000
Indirect labor
12,000
Utilities
10,000
Maintenance
6,000
Fixed Costs
Supervisor's salary
$40,000
Depreciation
8,000
Property taxes
4,500
Actual variable costs for the first quarter were:
Indirect materials
$18,600
Indirect labor
13,200
Utilities
10,500
Maintenance
5,300
U
F
U
U
U
Actual fixed costs were as expected except for property taxes which were $4,500. All costs are considered controllable by the
department manager except for the supervisor's salary.
Instructions
Prepare a manufacturing overhead responsibility performance report for the first quarter.
Solution 183 (15–20 min.)
GENTRY COMPANY
Manufacturing Overhead Cost Responsibility Report
For the Quarter Ended March 31, 2008
Controllable Costs
Indirect materials
Indirect labor
Utilities
Maintenance
Depreciation
Property taxes
Total costs
Budget
$20,000
12,000
10,000
6,000
8,000
4,000
$60,000
Actual
$18,600
13,200
10,500
5,300
8,000
4,500
$60,100
Difference
$1,400 F
1,200 U
500 U
700 F
—
500 U
$ 100 U
Ex. 184
The Ace Division, a profit center of Berek Engineering Company, reported the following data for the first quarter of 2008:
Sales
$6,000,000
Variable costs
4,200,000
Controllable direct fixed costs
800,000
Noncontrollable direct fixed costs
530,000
Indirect fixed costs
200,000
Instructions
(a)
Prepare a performance report for the manager of the Ace Division.
(b)
What is the best measure of the manager's performance? Why?
(c)
How would the responsibility report differ if the division was an investment center?
Solution 184 (15–20 min.)
(a)
BEREK ENGINEERING COMPANY
Ace Division
Management Performance Report
For the Quarter Ended March 31, 2008
Sales.....................................................................................................................
Variable costs.......................................................................................................
Contribution margin..............................................................................................
Controllable fixed costs........................................................................................
Controllable margin..............................................................................................
$6,000,000
4,200,000
1,800,000
800,000
$1,000,000
(b)
Controllable margin is the best measure of the manager's performance because this amount equals the excess of controllable
revenues over controllable costs.
(c)
For an investment center, the responsibility report would also show the return on investment for the period.
Ex. 185
RTO Rental Company reported the following:
Beginning of year operating assets
End of year operating assets
Contribution margin
Sales
Controllable fixed costs
Its required return is 10%.
Instructions
$2,200,000
2,000,000
1,000,000
5,000,000
643,000
Compute the company’s ROI.
Solution 185 (3 min.)
($1,000,000 – $643,000) ÷ [($2,200,000 + $2,000,000) ÷ 2] = 17%
Ex. 186
Reese Company has two investment centers and has developed the following information:
Department A Department B
Departmental controllable margin
$120,000
?
Average operating assets
?
$400,000
Sales
800,000
250,000
ROI
10%
12%
Instructions
Answer the following questions about Department A and Department B.
1.
What was the amount of Department A's average operating assets?
$____________.
2.
What was the amount of Department B's controllable margin? $____________.
3.
If Department B is able to reduce its operating assets by $100,000, Department B's new ROI would be ____________.
4.
If Department A is able to increase its controllable margin by $60,000 as a result of reducing variable costs, Department A's new
ROI would be _________________.
Solution 186
(8–12 min.)
1.
$1,200,000 ($120,000 ÷ .10)
2.
$48,000 ($400,000 × .12)
3.
16% [$48,000 ÷ ($400,000 – $100,000)]
4.
15% [($120,000 + $60,000) ÷ $1,200,000]
Ex. 187
The Appliance Division of Malone Manufacturing Company reported the following results for 2008:
Sales
$4,000,000
Variable costs
3,200,000
Controllable fixed costs
300,000
Average operating assets
2,000,000
Management is considering the following independent alternative courses of action in 2009 in order to maximize the return on
investment for the division.
1.
2.
3.
Reduce controllable fixed costs by 20% with no change in sales or variable costs.
Reduce average operating assets by 20% with no change in controllable margin.
Increase sales $400,000 with no change in the contribution margin percentage.
Instructions
(a)
Compute the return on investment for 2008.
(b)
Compute the expected return on investment for each of the alternative courses of action.
Solution 187 (15–20 min.)
(a)
Controllable margin
Return on investment = ————————————
Average operating assets
$500,000
2008 ROI = —————— = 25%
$2,000,000
(b)
1.
$560,000 (a)
——————— = 28%
$2,000,000
2.
$500,000
———————— = 31.3%
$1,600,000 (b)
3.
$580,000 (c)
——————— = 29%
$2,000,000
(a)
$500,000 + ($300,000 × 20%) = $560,000.
(b)
$2,000,000 – ($2,000,000 × .20) = $1,600,000.
(c)
$4,000,000 – $3,200,000
Contribution margin 20% (————————————);
$4,000,000
$500,000 + ($400,000 × 20%) = $580,000.
Ex. 188
Data for the following subsidiaries of Timmons Company, which are operated as investment centers, are as follows:
Black Company
Greer Company
Sales
$3,000,000
$2,000,000
Controllable margin
(1)
(3)
Average operating assets
(2)
4,000,000
Contribution margin
1,200,000
800,000
Controllable fixed costs
500,000
200,000
Return on Investment
10%
(4)
Instructions
Compute the missing amounts using the ROI formula.
Solution 188
(9–14 min.)
(1)
Controllable margin ($1,200,000 – $500,000)
=
$700,000
(2)
Average operating assets ($700,000 ÷ .10)
=
$7,000,000
(3)
Controllable margin ($800,000 – $200,000)
=
$600,000
(4)
ROI ($600,000 ÷ $4,000,000)
=
15%
Ex. 189
The data for an investment center is given below.
Current assets
Plant assets
Idle plant assets
Land held for future use
1/1/08
$ 300,000
3,000,000
250,000
1,200,000
12/31/08
$ 500,000
4,000,000
330,000
1,200,000
The controllable margin is $780,000.
Instructions
What is the return on investment for the center for 2008?
Solution 189 (4–5 min.)
ROI = Controllable margin ÷ Average operating assets
Plant assets
Average current assets
($3,000,000 + $4,000,000) ÷ 2 =
($300,000 + $500,000) ÷ 2 =
$3,500,000
400,000
$3,900,000
Note: Idle plant assets and land held for future use are not included in average operating assets.
ROI = $780,000 ÷ $3,900,000 = 20%
COMPLETION STATEMENTS
190.
The use of budgets in controlling operations is known as ________________.
191.
A major aspect of budgeting control is the use of budget reports that compare _____________________ with
_______________________.
192.
In analyzing differences from planned objectives, management may take ___________________, or it could decide to modify
___________________.
193.
The master budget is a __________________ budget which is based on operating at one budgeted activity level.
194.
A __________________ budget projects budget data for various levels of activity.
195.
Total ________________ costs will be the same on the master budget and on a flexible budget which reflects the actual level
of activity.
196.
Under ___________________ accounting, the evaluation of a manager's performance is based on the costs and revenues
directly under that manager's control.
197.
A cost is __________________ at a given level of managerial responsibility if a manager has the authority to incur the cost in
a given time period.
198.
In general, costs ____________________ directly by the level of responsibility are _______________, whereas costs that are
____________________ to the responsibility level are __________________.
199.
Responsibility centers may be classified into three types: (1)____________________, (2)___________________ and,
(3)____________________.
200.
The primary basis for evaluating the performance of a manager of an investment center is _________________.
201.
Return on investment is calculated by dividing _________________________ by ________________________.
Answers to Completion Statements
190. budgetary control
191. actual results, planned objectives
192. corrective action, future plans
193. static
194. flexible
195. fixed
196. responsibility
197. controllable
198. incurred, controllable, allocated,
noncontrollable
199. cost centers, profit centers, investment centers
200. return on investment (ROI)
201. controllable margin, average operating assets
MATCHING
202.
Match the items below by entering the appropriate code letter in the space provided.
A.
B.
C.
D.
E.
F.
Budgetary control
Static budget
Flexible budget
Responsibility accounting
Controllable costs
Management by exception
G.
H.
I.
J.
K.
L.
Responsibility reporting system
Return on Investment
Profit center
Investment center
Indirect fixed costs
Direct fixed costs
____
1. The review of budget reports by top management directed entirely or primarily to differences between actual results and
planned objectives.
____
2. A part of management accounting that involves accumulating and reporting revenues and costs on the basis of the
individual manager who has the authority to make the day-to-day decisions about the items.
____
3. The preparation of reports for each level of responsibility shown in the company's organization chart.
____
4. A projection of budget data at one level of activity.
____
5. Costs that a manager has the authority to incur within a given period of time.
____
6. The use of budgets to control operations.
____
7. A projection of budget data for various levels of activity.
____
8. A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use.
____
9. Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.
____
10. A responsibility center that incurs costs and also generates revenues.
____
11. Costs which are incurred for the benefit of more than one profit center.
____
12. A measure of the profitability of an investment center computed by dividing controllable margin (in dollars) by average
operating assets.
Answers to Matching
1. F
2. D
3. G
4. B
5. E
6. A
7.
8.
9.
10.
11.
12.
C
J
L
I
K
H
CHAPTER 18
RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING
IN DECENTRALIZED ORGANIZATIONS
1.
Which of the following is more characteristic
of a decentralized than a centralized business structure?
a.
The firm’s environment is stable.
b.
There is little confidence in lower-level
management to make decisions.
c.
The firm grows very quickly.
d.
The firm is relatively small.
2.
c
EASY
Costs of decentralization include all of the following
except
a.
more elaborate accounting control systems.
b.
potential costs of poor decisions.
c.
additional training costs.
d.
slow response time to changes in local
conditions.
ANSWER:
3.
d
EASY
Transfer pricing is primarily incurred in
a.
b.
c.
U.S.
d.
b
EASY
4.
In a decentralized company in which
divisions may buy goods from one another, the transfer
pricing system should be designed primarily to
MULTIPLE CHOICE
ANSWER:
ANSWER:
foreign corporations exporting their products.
decentralized organizations.
multinational corporations domiciled in the
closely held corporations.
a.
increase the consolidated value of inventory.
b.
allow division managers to buy from
outsiders.
c.
minimize the degree of autonomy of division
managers.
d.
aid in the appraisal and motivation of
managerial performance.
ANSWER:
d
EASY
5.
When the majority of authority is maintained by top
management personnel, the organization is said to be
a.
b.
c.
d.
centralized.
decentralized.
composed of cost centers.
engaged in transfer pricing activities.
ANSWER:
a
EASY
6.
What term identifies an accounting system in
which the operations of the business are broken down into
reportable segments, and the control function of a
foreperson, sales manager, or supervisor is emphasized?
a.
b.
c.
responsibility accounting
operations-research accounting
control accounting
d.
budgetary accounting
ANSWER:
7.
ANSWER:
an organization
d
EASY
When used for performance evaluation, periodic
internal reports based on a responsibility accounting
system should not
ANSWER:
14.
a.
be related to the organization chart.
b.
include allocated fixed overhead.
c.
include variances between actual and
budgeted controllable costs.
d.
distinguish between controllable and
noncontrollable costs.
ANSWER:
b
a.
b.
c.
d.
10.
goal congruence.
centralization.
suboptimization.
maximization.
EASY
16.
c
a.
b.
c.
d.
In evaluating the performance of a profit center
manager, he/she should be evaluated on
a.
all revenues and costs that can be traced
directly to the unit.
b.
all revenues and costs under his/her control.
c.
the variable costs and the revenues of the
unit.
d.
the same costs and revenues on which the
unit is evaluated.
ANSWER:
b
13.
MEDIUM
d
MEDIUM
Performance evaluation measures in
17.
The most valid reason for using something
other than a full-cost-based transfer price between units of
a company is because a full-cost price
a.
is typically more costly to implement.
b.
does not ensure the control of costs of a
supplying unit.
c.
is not available unless market-based prices
are available.
d.
does not reflect the excess capacity of the
supplying unit.
EASY
If a division is set up as an autonomous profit center,
then goods should not be transferred
a.
b.
c
market value.
dual prices.
negotiated prices.
cost.
ANSWER:
12.
EASY
An internal reconciliation account is not required for
internal transfers based on
ANSWER:
EASY
c
it is easy to agree on a definition of cost.
costs can be measured accurately.
opportunity costs can be included.
they provide incentives to control costs.
ANSWER:
cost
revenue
responsibility
investment
ANSWER:
MEDIUM
A major benefit of cost-based transfers is that
a.
b.
c.
d.
The cost object under the control of a manager is
called a(n) __________________ center.
a.
b.
c.
d.
11.
15.
quality audit report
responsibility report
performance evaluation report
project report
b
a
A management decision may be beneficial for a given
profit center, but not for the entire company. From
the overall company viewpoint, this decision would
lead to
ANSWER:
ANSWER:
MEDIUM
EASY
9.
A ___________ is a document that reflects
the revenues and/or costs that are under the control of a
particular manager.
a.
b.
c.
d.
b
a.
affect the motivation of subunit managers to
transact with one another.
b.
always promote goal congruence.
c.
are less motivating to managers than overall
organizational goals.
d.
must be the same for all managers to
eliminate suboptimization.
fixed and variable costs.
prime and overhead costs.
administrative and nonadministrative costs.
controllable and noncontrollable costs.
ANSWER:
in or out at cost-based transfer price.
to other divisions in the same company.
EASY
In a responsibility accounting system, costs are
classified into categories on the basis of
a.
b.
c.
d.
8.
a
c.
d.
in at a cost-based transfer price.
out at a cost-based transfer price.
b
MEDIUM
18.
To avoid waste and maximize efficiency
when transferring products among divisions in a
competitive economy, a large diversified corporation
should base transfer prices on
24.
a.
b.
c.
d.
variable cost.
market price.
full cost.
production cost.
ANSWER:
19.
b
The minimum potential transfer price is determined by
a.
b.
c.
division.
d.
division.
MEDIUM
incremental costs in the selling division.
the lowest outside price for the good.
the extent of idle capacity in the buying
negotiations between the buying and selling
A transfer pricing system is also known as
ANSWER:
a.
b.
c.
d.
investment center accounting.
a revenue allocation system.
responsibility accounting.
a charge-back system.
ANSWER:
20.
d
25.
EASY
As the internal transfer price is increased,
ANSWER:
determined by the buying division.
set by the selling division.
influenced only by internal cost factors.
negotiated by the buying and selling division.
ANSWER:
21.
a
26.
The presence of idle capacity in the selling division
may increase
ANSWER:
a
MEDIUM
22.
Which of the following is a consistently
desirable characteristic in a transfer pricing system?
a.
system is very complex to be the most fair to
the buying and selling units
b.
effect on subunit performance measures is
not easily determined
c.
system should reflect organizational goals
d.
transfer price remains constant for a period
of at least two years
ANSWER:
c
a.
b.
c.
d.
ANSWER:
b
EASY
EASY
debiting accounts receivable.
crediting accounts payable.
debiting intracompany CGS.
crediting inventory.
ANSWER:
b
EASY
28.
Top management can preserve the
autonomy of division managers and encourage an optimal
level of internal transactions by
a.
b.
c.
a.
corporate management.
b.
both divisional managers.
c.
both divisional managers and corporate
management.
d.
corporate management and the manager of
the buying division.
d
In an internal transfer, the buying division records the
transaction by
MEDIUM
23.
With two autonomous division managers, the
price of goods transferred between the divisions needs to
be approved by
EASY
accounts receivable and CGS.
CGS and finished goods.
finished goods and accounts receivable.
finished goods and intracompany sales.
ANSWER:
27.
c
In an internal transfer, the selling division records the
event by crediting
a.
b.
c.
d.
EASY
a.
the incremental costs of production in the
selling division.
b.
the market price for the good.
c.
the price that a buying division is willing to
pay on an internal transfer.
d.
a negotiated transfer price.
EASY
a.
overall corporate profits increase.
b.
profits in the buying division increase.
c.
profits in the selling division increase.
d.
profits in the selling division and the overall
corporation increase.
The maximum of the transfer price negotiation range
is
a.
b.
c.
d.
a
d.
selecting performance evaluation measures
that are consistent with the achievement of
overall corporate goals.
selecting division managers who are most
concerned about their individual
performance.
prescribing transfer prices between
segments.
setting up all organizational units as revenue
centers.
ANSWER:
a
MEDIUM
individual departments, interdepartmental transfers of a
product should preferably be made at prices
a.
equal to the market price of the product.
b.
set by the receiving department.
c.
equal to fully-allocated costs of the
producing department.
30.
d.
equal to variable costs to the producing
department.
c.
d.
ANSWER:
ANSWER:
a
EASY
Allocating service department costs to revenueproducing departments is an alternative to
a.
b.
c.
d.
responsibility accounting.
the use of profit centers.
the use of cost centers.
a transfer pricing system.
ANSWER:
31.
d
MEDIUM
External factors considered in setting transfer prices
in multinational firms typically do not include
a.
the corporate income tax rates in host
countries of foreign subsidiaries.
b.
foreign monetary exchange risks.
c.
environmental policies of the host countries
of foreign subsidiaries.
d.
actions of competitors of foreign
subsidiaries.
ANSWER:
32.
c
MEDIUM
Corporate taxes and tariffs are particular transferpricing concerns of
a.
investment centers.
b.
multinational corporations.
c.
division managers.
d.
domestic corporations involved in importing
foreign goods.
ANSWER:
29.
b
33.
When managers attempt to cause actual
results to conform to planned results, this is known as
34.
EASY
Which of the following would not be considered a
critical success factor?
a.
b.
c.
d.
quality
cost control
customer service
all of the above are critical success factors
ANSWER:
35.
b
d
EASY
The costs of service departments can be assigned to
other divisions through the use of
a.
b.
cost centers.
transfer prices.
MEDIUM
Use the following information for questions 36–40.
Office Products Inc. manufactures and sells various high-tech
office automation products. Two divisions of Office Products
Inc. are the Computer Chip Division and the Computer
Division. The Computer Chip Division manufactures one
product, a “super chip,” that can be used by both the Computer
Division and other external customers.
The following
information is available on this month’s operations in the
Computer Chip Division:
SELLING PRICE PER CHIP
Variable costs per chip
Fixed production costs
Fixed SG&A costs
Monthly capacity
chips
External sales
chips
Internal sales
chips
$50
$20
$60,000
$90,000
10,000
6,000
0
Presently the Computer Division purchases no chips from the
Computer Chips Division, but instead pays $45 to an external
supplier for the 4,000 chips it needs each month.
36.
Assume that next month’s costs and levels
of operations in the Computer and Computer Chip
Divisions are similar to this month. What is the minimum
of the transfer price range for a possible transfer of the
super chip from one division to the other?
a.
b.
c.
d.
$50
$45
$20
$35
ANSWER:
efficiency.
effectiveness.
conformity.
goal congruence.
ANSWER:
d
EASY
To evaluate the performance of
a.
b.
c.
d.
goal congruence.
operational auditing techniques.
c
MEDIUM
37.
Assume that next month’s costs and levels
of operations in the Computer and Computer Chip
Divisions are similar to this month. What is the maximum
of the transfer price range for a possible transfer of the
chip from one division to the other?
a.
b.
c.
d.
$50
$45
$35
$30
ANSWER:
b
MEDIUM
38.
Two possible transfer prices (for 4,000 units)
are under consideration by the two divisions: $35 and $40.
Corporate profits would be ___________ if $35 is selected
as the transfer price rather than $40.
a.
b.
c.
$20,000 larger
$40,000 larger
$20,000 smaller
d.
the same
ANSWER:
39.
d
ANSWER:
MEDIUM
42.
super chips) of $40, total profits in the Computer Chip
division will
ANSWER:
43.
rise by $20,000 compared to the prior period.
drop by $40,000 compared to the prior
rise by $80,000 compared to the prior period.
d
MEDIUM
The Motor Division of Super Truck Co. uses 5,000 carburetors
per month in its production of automotive engines. It presently
buys all of the carburetors it needs from two outside suppliers
at an average cost of $100. The Carburetor Division of Super
Truck Co. manufactures the exact type of carburetor that the
Motor Division requires. The Carburetor Division is presently
operating at its capacity of 15,000 units per month and sells all
of its output to a foreign car manufacturer at $106 per unit. Its
cost structure (on 15,000 units) is:
44.
$0.50
$0.80
$0.95
$0.75
ANSWER:
45.
MEDIUM
$0.75
$2.10
$1.45
$1.60
ANSWER:
46.
c
A transfer price based on full production cost would
be set at ___________ per unit.
a.
b.
c.
d.
What is the maximum of the transfer price range for a
transfer between the two divisions?
$106
$100
$90
$70
A transfer price based on variable cost will be set at
___________ per unit.
a.
b.
c.
d.
$70
10
10
$250,000
Top-level managers are trying to determine how a transfer
price can be set on a transfer of 10,000 of the copper fittings
from the Plumbing Division to the Bathroom Products Division.
Assume that the Carburetor Division would not incur any
variable selling costs on units that are transferred internally.
a.
b.
c.
d.
MEDIUM
Total sales (all external)
Expenses (all on a unit base):
Variable manufacturing
Fixed manufacturing
Variable selling
Fixed selling
Variable G&A
Fixed G&A
Total
Use the following information for questions 41–43.
Variable selling costs
All fixed costs
c
Bigole Corp. produces various products used in the
construction industry. The Plumbing Division produces and
sells 100,000 copper fittings each month. Relevant information
for last month follows:
MEDIUM
VARIABLE PRODUCTION COSTS
MEDIUM
44–47.
no effect
$20,000 increase
$20,000 decrease
$90,000 increase
c
a
If the two divisions agree to transact with one another,
corporate profits will
ANSWER:
40.
Assume, for this question only, that the
Computer Chip Division is selling all that it can produce to
external buyers for $50 per unit. How would overall
corporate profits be affected if it sells 4,000 units to the
Computer Division at $45? (Assume that the Computer
Division can purchase the super chip from an outside
supplier for $45.)
ANSWER:
$96
$90
$70
$106
a.
drop by $30,000 per month.
b.
rise by $20,000 per month.
c.
rise by $50,000 per month.
d.
rise or fall by an amount that depends on the
level of the transfer price.
drop by $20,000 compared to the prior
ANSWER:
41.
What is the minimum of the transfer price range for a
transfer between the two divisions?
a.
b.
c.
d.
a.
b.
c.
d.
MEDIUM
If a transfer between the two divisions is
arranged next period at a price (on 4,000 units of
a.
b.
period.
c.
period.
d.
b
a
MEDIUM
A transfer price based on market price would be set at
___________ per unit.
$0.50
.25
.30
.40
.15
.50
$2.10
d.
a.
b.
c.
d.
$2.10
$2.50
$1.60
$2.25
ANSWER:
51.
ANSWER:
b
MEDIUM
Use the following information for questions
47.
If the Plumbing Division is operated as an
autonomous investment center and its capacity is
100,000 fittings per month, the per-unit transfer price
is not likely to be below
a.
b.
c.
d.
$0.75.
$1.60.
$2.10.
$2.50.
ANSWER:
d
MEDIUM
A’s variable cost per unit
A’s fixed costs
A’s annual sales to B
units
A’s annual sales to outsiders
units
c.
d.
ANSWER:
49.
53.
Payroll
yes
yes
no
no
ANSWER:
a
EASY
Indirect costs should be allocated for all of the
following reasons except to
a.
b.
c.
motivate managers.
determine the full cost of a product.
motivate general administration.
MEDIUM
a.
instill a consideration of support costs in
production managers.
b.
encourage production managers to help
service departments control costs.
c.
encourage the usage of certain services.
d.
determine divisional profitability.
ANSWER:
d
MEDIUM
54.
Which of the following is a reason for
allocating service department costs and thereby motivating
management?
a.
b.
c.
d.
MEDIUM
Production
no
yes
yes
no
c
All of the following objectives are reasons that service
department allocations can motivate managers
except to
A service department includes which of the following?
a.
b.
c.
d.
50.
d
EASY
All of the following objectives are reasons to allocate
service department costs to compute full cost except
to
ANSWER:
A is planning to raise its transfer price to $50 per unit.
Division B can purchase units at $40 each from outsiders,
but doing so would idle A’s facilities now committed to
producing units for B. Division A cannot increase its sales
to outsiders. From the perspective of the company as a
whole, from whom should Division B acquire the units,
assuming B’s market is unaffected?
outside vendors
Division A, but only at the variable cost per
unit
Division A, but only until fixed costs are
covered, then should purchase from outside
vendors
Division A, in spite of the increased transfer
price
d
a.
provide information on cost recovery.
b.
abide by regulations that may require full
costing in some instances.
c.
provide information on controllable costs.
d.
reflect production’s “fair share” of costs.
$30
$10,000
5,000
50,000
MEDIUM
purchasing
warehousing
distributing
manufacturing
ANSWER:
52.
c
A service department provides specific functional
tasks for other internal units. Which of the following
activities would not be engaged in by a service
department?
a.
b.
c.
d.
48.
A company has two divisions, A and B, each
operated as a profit center. A charges B $35 per unit for
each unit transferred to B. Other data follow:
a.
b.
compare alternatives for decision making.
provides for cost recovery
provides relevant information in determining
corporatewide profits generated by
alternative actions
meets regulations in some pricing instances
reflects usage of services on a fair and
equitable basis
ANSWER:
55.
d
MEDIUM
Service departments provide functional tasks for
which of the following?
a.
b.
c.
d.
Internal units
no
yes
no
yes
ANSWER:
b
External units
no
no
yes
yes
EASY
56.
After service department costs have been
allocated, what is the final step in determining full product
cost?
b.
c.
d.
ANSWER:
a.
determine direct material cost
b.
determine overhead application rates for
revenue-producing areas
c.
determine direct labor cost
d.
determine total service department costs
ANSWER:
57.
b
58.
a.
b.
c.
d.
step method
indirect method
algebraic method
direct method
ANSWER:
63.
MEDIUM
b.
c.
d.
ANSWER:
59.
d
a.
b.
c.
d.
MEDIUM
b
a.
b.
c.
d.
EASY
d
step method.
step method
direct method
indirect method
algebraic method
ANSWER:
a.
b.
c.
d.
EASY
61.
The overhead allocation method that
allocates service department costs without consideration
of services rendered to other service departments is the
a.
EASY
a
EASY
66.
The most accurate method for allocating service
department costs is the
step method
indirect method
algebraic method
direct method
ANSWER:
c
Step method
no
yes
yes
no
65.
Which of the following methods of assigning
indirect service department costs recognizes on a partial
basis the reciprocal relationships among the departments?
60.
Which service department cost allocation
method assigns costs directly to revenue-producing areas
with no other intermediate cost pools or allocations?
a.
b.
c.
d.
EASY
Algebraic method
no
no
yes
yes
ANSWER:
step method
indirect method
direct method
algebraic method
ANSWER:
c
64.
Which service department cost allocation
method assigns indirect costs to cost objects after
considering interrelationships of the cost objects?
Which of the following is not a method for allocating
service department costs?
a.
b.
c.
d.
EASY
algebraic method
indirect method
step method
direct method
ANSWER:
the ability of revenue-producing departments
to bear the allocated costs.
the benefits received by the revenueproducing department from the service
department.
a causal relationship between factors in the
revenue-producing department and costs
incurred in the service department.
all of the above are considerations.
a
Which service department cost allocation method
utilizes a “benefits-provided” ranking?
a.
b.
c.
d.
A rational and systematic allocation base for service
department costs should reflect the cost accountant’s
consideration of all of the following except
a.
EASY
EASY
a.
to reflect production’s “fair share” of costs
b.
to instill a consideration of support costs
c.
to reflect usage of services on a fair and
equitable basis
d.
to provide for cost recovery
c
b
62.
Which service department cost allocation
method assigns indirect costs to cost objects after
considering some of the interrelationships of the cost
objects?
Which of the following is not an objective for
computing full cost?
ANSWER:
direct method.
reciprocal method.
none of the above.
step method.
direct method.
algebraic method.
none of the above.
ANSWER:
67.
c
EASY
The criteria that are most often used to decide on
allocation bases are?
a.
b.
c.
d.
Benefits received
Causal relationships
yes
yes
no
no
Fairness
a.
b.
c.
d.
yes
yes
yes
no
step method
indirect method
algebraic method
direct method
ANSWER:
ANSWER:
68.
b
a.
does not have a cause-and-effect
relationship.
b.
has a cause-and-effect relationship.
c.
considers variable costs but not fixed costs.
d.
considers direct material and direct labor but
not manufacturing overhead.
b
b.
c.
d.
a.
b.
c.
d.
EASY
69.
The fixed costs of service departments
should be allocated to production departments based on
a.
actual short-run utilization based on
predetermined rates.
actual short-run units based on actual rates.
the service department’s expected costs
based on expected long-run use of capacity.
the service department’s actual costs based
on actual utilization of services.
74.
total labor hours incurred in the divisions.
value of production in the divisions.
direct labor costs incurred in the divisions.
machine hours used in the divisions.
ANSWER:
a
MEDIUM
The allocation of general overhead control costs to
operating departments can be least justified in
determining
a.
b.
c.
d.
income of a product or functional unit.
costs for making management’s decisions.
costs of products sold.
costs for government’s “cost-plus” contracts.
ANSWER:
ANSWER:
d
EASY
73.
An automotive company has three divisions.
One division manufactures new replacements parts for
automobiles, another rebuilds engines, and the third does
repair and overhaul work on a line of trucks. All three
divisions use the services of a central payroll department.
The best method of allocating the cost of the payroll
department to the various operating divisions is
To identify costs that relate to a specific product, an
allocation base should be chosen that
ANSWER:
c
MEDIUM
b
MEDIUM
MEDIUM
Use the following information for questions 75–84.
70.
Which service department cost allocation
method provides for reciprocal allocation of service costs
among the service department as well as to the revenue
producing departments?
a.
b.
c.
d.
algebraic method
indirect method
step method
direct method
ANSWER:
71.
a
EASY
The algebraic method
a.
b.
c.
d.
considers all interrelationships of the
departments and reflects these relationships
in equations.
does not consider interrelationships of the
departments nor reflect these relationships in
equations.
is also referred to as the “benefits-provided”
ranking method.
is not a service department cost allocation
method.
ANSWER:
a
EASY
72.
Which service department cost allocation
method considers all interrelationships of the departments
and reflects these relationships in equations?
Gates Co. has three production departments A, B, and C.
Gates also has two service departments, Administration and
Personnel. Administration costs are allocated based on value
of assets employed, and Personnel costs are allocated based
on number of employees.
Assume that Administration
provides more service to the other departments than does the
Personnel Department.
Dept.
Asset Value
Admin.
$450,000
Personnel
600,000
A
300,000
B
150,000
C
800,000
Direct Costs
Employees
$900,000
25
350,000
10
700,000
15
200,000
5
250,000
10
75.
Using the direct method, what amount of
Administration costs is allocated to A (round to the nearest
dollar)?
a.
b.
c.
d.
$216,000
$150,000
$288,000
$54,000
ANSWER:
a
MEDIUM
76.
Using the direct method, what amount of
Personnel costs is allocated to B (round to the nearest
dollar)?
a.
b.
c.
d.
77.
d
MEDIUM
Using the direct method, what amount of
Administration costs is allocated to C (round to the
nearest dollar)?
a.
b.
c.
d.
$576,000
$54,000
$108,000
$150,000
ANSWER:
a
MEDIUM
78.
Using the step method, what amount of
Administration costs is allocated to Personnel (round to
the nearest dollar)?
a.
b.
c.
d.
ANSWER:
a
MEDIUM
b
a.
b.
c.
d.
$213,964
$106,982
$430,000
$0
ANSWER:
c
MEDIUM
83.
Assume that Administration costs have been
allocated and the balance in Personnel is $860,000. What
amount is allocated to B (round to the nearest dollar)?
a.
b.
c.
d.
$213,964
$430,000
$106,982
$143,333
ANSWER:
d
MEDIUM
84.
Assume that Administration costs have been
allocated and the balance in Personnel is $860,000. What
amount is allocated to C (round to the nearest dollar)?
$72,973
$291,892
$145,946
$389,189
ANSWER:
$291,892
$72,973
82.
Assume that Administration costs have been
allocated and the balance in Personnel is $860,000. What
amount is allocated to A (round to the nearest dollar)?
$50,000
$43,750
$26,923
$58,333
ANSWER:
c.
d.
MEDIUM
79.
Using the step method, what amount of
Administration costs is allocated to A (round to the nearest
dollar)?
a.
b.
c.
d.
$213,964
$430,000
$286,667
$143,333
ANSWER:
c
MEDIUM
Use the following information for questions 85–90.
a.
b.
c.
d.
$72,973
$291,892
$145,946
$389,189
ANSWER:
c
MEDIUM
80.
Using the step method, what amount of
Administration costs is allocated to B (round to the nearest
dollar)?
a.
b.
c.
d.
a
X
Y
MEDIUM
81.
Using the step method, what amount of
Administration costs is allocated to C (round to the nearest
dollar)?
a.
b.
$389,189
$145,946
Direct costs
Hours of use
Admin/Per.
Data Pro.
$72,973
$291,892
$145,946
$389,189
ANSWER:
Brooks Co. has two service departments: Data Processing and
Administration/Personnel.
The company also has three
divisions: X, Y, and Z. Data Processing costs are allocated
based on hours of use and Administration/Personnel costs are
allocated based on number of employees.
Z
Employees
$400,000
3,300
850,000
1,100
450,000
1,800
300,000
2,200
550,000
4,500
Assume that Data Processing provides more service than
Administration/Personnel.
10
5
30
15
25
85.
Using the direct method, what amount of
Data Processing costs is allocated to X (round to the
nearest dollar)?
a.
b.
c.
d.
$180,000
$129,661
$0
$84,706
ANSWER:
a
90.
Assume that Data Processing costs have
been allocated and the balance in Administration is
$600,000. Using the step method, what amount is
allocated to Z?
a.
b.
c.
d.
$200,000
$112,500
$214,286
$225,000
MEDIUM
ANSWER:
86.
Using the direct method, what amount of
Data Processing costs is allocated to Y (round to the
nearest dollar)?
a.
b.
c.
d.
c
Direct costs
a
ANSWER:
b
8
12
20
$362,319
$637,681
$253,623
$446,377
a
MEDIUM
92.
Using the direct method, what amount of
Personnel costs is allocated to B (round to the nearest
dollar)?
a.
b.
c.
d.
$225,000
$128,571
$187,500
$200,000
15
91.
Using the direct method, what amount of
Data Processing costs is allocated to A (round to the
nearest dollar)?
ANSWER:
89.
Assume that Data Processing costs have
been allocated and the balance in Administration is
$600,000. Using the step method, what amount is
allocated to Y?
a.
b.
c.
d.
Pers.
a.
b.
c.
d.
MEDIUM
Employees
$1,000,000
$700,000
300,000
230,000
500,000
125,000
330,000
220,000
B
$257,143
$112,500
$200,000
$187,500
ANSWER:
Assets used
Data Pro.
A
$211,765
$0
$152,542
$450,000
ANSWER:
d
MEDIUM
88.
Assume that Data Processing costs have been
allocated and the balance in Administration is $600,000. Using
the step method, what amount is allocated to X?
a.
b.
c.
d.
Use the following information for questions 91 and 92.
MEDIUM
87.
Using the direct method, what amount of
Data Processing costs is allocated to Z (round to the
nearest dollar)?
a.
b.
c.
d.
MEDIUM
Blake Company has two service departments: Data Processing
and Personnel. Data Processing provides more service than
does Personnel. Blake also has two production departments:
A and B. Data Processing costs are allocated on the basis of
assets used while Personnel costs are allocated based on the
number of employees.
$158,475
$0
$220,000
$103,529
ANSWER:
c
$123,750
$206,250
$112,500
$187,500
ANSWER:
d
MEDIUM
MEDIUM
Use the following information for questions 93–96.
Hartwell Company distributes its service department overhead costs directly to producing departments without allocation to the other
service departments. Information for January is presented here.
Overhead costs incurred
Service provided to:
Maintenance Dept.
Maintenance
$18,700
Utilities
$9,000
10%
40%
Utilities Dept.
Producing Dept. A
Producing Dept. B
60%
20%
40%
d.
93.
The amount of Utilities Department costs
distributed to Dept. B for January should be (rounded to
the nearest dollar)
a.
b.
c.
d.
$3,600.
$4,500.
$5,400.
$6,000.
ANSWER:
94.
d
MEDIUM
b.
c.
Allocate maintenance expense to
Departments A and B.
Allocate maintenance expense to
Departments A and B and the Utilities
Department.
Allocate utilities expense to the Maintenance
Department and Departments A
and B.
None of the above.
ANSWER:
b
MEDIUM
95.
Using the step method, how much of
Hartwell’s Utilities Department cost is allocated between
Departments A and B?
a.
b.
c.
d.
Assume instead Hartwell Company distributes the
service department’s overhead costs based on the
step method. Maintenance provides more service
than does Utilities. Which of the following is true?
a.
30%
$9,900
$10,800
$12,740
$27,700
ANSWER:
c
MEDIUM
96.
Assume that Hartwell Company distributes
service department overhead costs based on the algebraic
method. What would be the formula to determine the total
maintenance costs?
a.
b.
c.
d.
M = $18,700 + .10U
M = $9,000 + .20U
M = $18,700 + .30U + .40A + .40B
M = $27,700 + .40A + .40B
ANSWER:
a
MEDIUM
Use the following information for questions 10–14.
Wire Division of XS Steel Corporation produces “bales” of steel wire that are used in various commercial applications. The bales sell
for an average of $20 each and Wire Division has the capacity to produce 10,000 bales per month. Consumer Products Division of XS
Steel uses approximately 2,000 bales of steel wire each month in its production of various appliances. The operating information for
Wire Division at its present level of operations (8,000 bales per month) follows:
Sales (all external)
Variable costs per bale:
Production
Selling
G&A
Fixed costs per bale (based on a 10,000 unit capacity):
Production
Selling
G&A
$160,000
$5
2
3
$2
3
4
Consumer Products Division currently pays $15 per bale for wire obtained from its external supplier.
10.
If 2,000 bales are transferred in one month to Consumer Products Division at $10 per bale, what would be the
profit/loss of Wire Products Division?
ANSWER:
The $10 per unit would equal the Division’s variable costs ($5 + 2 + 3 = $10), so the contribution margin per
unit is zero. Thus, only the 8,000 units of external sales would generate a contribution margin of $80,000 (8,000 × $10) to
cover fixed costs of $90,000 (10,000 × $9). So the Division would show a $10,000 loss.
MEDIUM
11.
For the Wire Products Division to operate at break-even level, what would it need to charge for the production and
transfer of 2,000 bales to the Consumer Products Division? Assume all variable costs indicated will be incurred by the Wire Division.
ANSWER:
Total fixed costs to Wire are:
Selling
$3 × 10,000 =
Production
30,000
$2 × 10,000 =
$20,000
G&A
$4 × 10,000 =
40,000
Total
Less: Contrib.Margin on Regular Business
[$20 – (5 + 2 + 3)] × 8,000
Unrecovered Fixed Costs
$90,000
(80,000 )
$10,000
which must be covered by CM of inside sales =
Trans.Price × Vol. = SP – [(5 + 2 + 3) × 2,000]
SP = $15
MEDIUM
12.
If Wire Products Division transferred 2,000 wire bales to the Consumer Products Division at 200 percent of full
absorption cost, what would be the transfer price?
ANSWER:
Full absorption cost:
Fixed Production Cost =
Total full absorption cost $
Doubled
Transfer price
Variable Production Cost =
2
7
× 2
$ 14
$ 5
MEDIUM
13.
If Consumer Products Division agrees to pay Wire Products Division $16 for 2,000 bales this month, what would be
Consumer’s change in total profits?
ANSWER:
Proposed transfer price per unit
Consumer’s current market purchase price per unit
Increase in cost per unit of wire to Consumer’s
Times units purchased
Decrease in profit due to increased costs
$
16
15
$
1
× 2,000
$2,000
MEDIUM
14.
Assuming, for this question only, that Wire Products Division would not incur any variable G&A costs on internal sales, what is
the minimum price that it would consider accepting for sales of bales to Consumer Products Division?
ANSWER:
Wire Division must cover its out of pocket costs or the relevant variable costs; the fixed costs are irrelevant
since they will be incurred regardless of this extra inside business. Thus, the total cost to be covered is $7 (production, $5;
selling, $2).
MEDIUM
Use the following information for questions 15–19.
Carpet Division of Building Products Inc. manufactures a single grade of residential grade carpeting. The division has the capacity to
produce 500,000 square yards of carpet each year. Its current costs and revenues are shown here:
Sales (400,000 square yards)
Variable costs per square yard:
Production
SG&A
Fixed costs per square yard (based on 500,000 yard capacity)
Production
SG&A
$2,000,000
$2.00
1.00
$0.50
1.00
The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the Carpet Division) each year at a cost
of $6.50 per square yard from an outside vendor.
15.
If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of 40,000 square yards of
carpeting, what is the maximum price that will be considered?
ANSWER:
The maximum price or ceiling is the current purchase price of the buying division or $6.50 per yard.
MEDIUM
16.
If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of 40,000 square yards of
carpeting, what is the Carpet Division’s minimum price?
ANSWER:
The minimum price acceptable to Carpet is its incremental cost of $3
($2 + $1) per square yard.
MEDIUM
17.
If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards of carpet at a price of $4.50
per square yard, how will the profits of the Housing Division be affected?
ANSWER:
Current external purchase price
Proposed transfer price
Reduction in purchase price per yard
Times yards acquired
Increase in profits
$6.50
4.50
$2.00
×40,000
$80,000
MEDIUM
18.
If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards of carpet at a price of $4.00
per square yard, how will overall corporate profits be affected?
ANSWER:
Current outside purchase price per square yard
Carpet’s variable cost per square yard
Savings per square yard to Housing Division
& corporate
Times number square yards bought
Savings to corporate and increase in profits
$6.50
3.00
$3.50
× 40,000
$140,000
MEDIUM
19.
Assume, for this question only, that Carpet Division is producing and selling 500,000 square yards of carpet to
external buyers at a price of $5 per square yard. What would be the effect on overall corporate profits if Carpet Division reduces
external sales of carpet by 40,000 square yards and transfers the 40,000 square yards of carpet to the Housing Division?
ANSWER:
Since Carpet is operating at full capacity, it would lose the contribution margin on the 40,000 square yards.
However, the Housing Division would not have to buy externally. Thus,
Lost CM
($2 × 40,000 yd) =
Gained CM
($3.50 × 40,000 yd) =
Net increase in corporate profits
$(80,000 )
140,000
$ 60,000
MEDIUM
Use the following information for questions 20 and 21.
XY Corporation is comprised of two divisions: X and Y. X currently produces and sells a gear assembly used by the automotive
industry in electric window assemblies. X is currently selling all of the units it can produce (25,000 per year) to external customers for
$25 per unit. At this level of activity, X’s per unit costs are:
Variable:
Production
SG&A
$7
2
Production
SG&A
6
5
Fixed:
Y Division wants to purchase 5,000 gear assemblies per year from X Division. Y Division currently purchases these units from an
outside vendor at $22 each.
20.
What is the minimum price per unit that X Division could accept from Y Division for 5,000 units of the gear assembly
and be no worse off than currently?
ANSWER:
X Division is operating and selling outside at full capacity so minimum price is equal to the variable cost to
make and sell plus the lost contribution margin from outside sales:
VC: Production
$7
SGA
Contribution margin
Selling price
2
16
$25
$ 9
MEDIUM
21.
What will be the effect on overall corporate profits if the two divisions agree to an internal transfer of 5,000 units?
ANSWER:
Corporate profits will decrease by forcing the transfer.
CM per units earned by X is from external sales $25 – [$7 + $2]
Times units to be sold
Decrease in CM to X and XY Corp.
Net savings to buy internally
rather than externally [$22 – $9]
Times units to be purchased
Savings by buying internally
Net effect on XY Corp. profits
$16
×5,000
$ 80,000
$13
× 5,000
$ 65,000
$ (15,000 )
MEDIUM
Use the following information for questions 22 and 23.
Savings
Third Savings and Loan of Dallas has three departments that
generate revenue: loans, checking accounts, and savings
accounts.
Third S & L has two service departments:
Administration/Personnel and Maintenance.
The service
departments provide service in the order of their listing. The
following information is available for direct costs.
Administration/ Personnel costs are best allocated based on
number of employees while Maintenance costs are best
allocated based on square footage occupied.
Department
Direct costs
Footage
$530,000
30,000
450,000
16,500
900,000
45,000
600,000
10,000
240,500
42,000
Admin./Pers.
Maintenance
Loans
Checking
Savings
Employees
10
8
15
6
5
22.
Using the direct method, compute the
amount allocated to each department from
Administration/Personnel.
ANSWER:
Loans
Checking
15/26 ×
6/26 ×
$530,000 =
530,000 =
$305,769
122,308
5/26 ×
530,000 =
101,923
MEDIUM
23.
Using the step method, compute the amount
allocated to each department from Maintenance.
ANSWER:
To allocate Admin./Pers. to Maintenance
8/34 × $530,000 = $124,706(rounded)
Then, Maintenance balance is $450,000 + $124,706 =
$574,706
Then, allocate Maintenance :
Loans
Checking
Savings
MEDIUM
45/97 ×
10/97 ×
42/97 ×
$574,706 =
574,706 =
574,706 =
$266,616
59,248
248,842
MULTIPLE CHOICE QUESTIONS
1. When managers of subunits throughout an
organization strive to achieve the goals set by top
management, the result is:
A. goal congruence.
B. planning and control.
C. responsibility accounting.
D. delegation of decision making.
E. strategic control.
Answer: A LO: 1 Type: RC
2. Which of the following is not an example of a
responsibility center?
A. Cost center.
B. Revenue center.
C. Profit center.
D. Investment center.
E. Contribution center.
Answer: E LO: 2 Type: RC
3. A manufacturer's raw-material purchasing department
would likely be classified as a:
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer: A LO: 2 Type: N
4. Hitchcock Corporation is in the process of overhauling
the performance evaluation system for its Los
Angeles manufacturing division, which produces and
sells parts that are popular in the aerospace industry.
Which of the following is least likely to be chosen to
evaluate the overall operations of the Los Angeles
division?
A. Cost center.
B. Responsibility center.
C. Profit center.
D. Investment center.
E. The profit center and investment center are
equally unlikely to be chosen.
Answer: A LO: 2 Type: N
5. A cost center manager:
A. does not have the ability to produce revenue.
B. may be involved with the sale of new marketing
programs to clients.
C. would normally be held accountable for
producing an adequate return on invested
capital.
D. often oversees divisional operations.
E. may be the manager who oversees the
operations of a retail store.
Answer: A LO: 2 Type: N
6. The Telemarketing Department of a residential
remodeling company would most likely be evaluated
as a:
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer: B LO: 2 Type: RC
7. If the head of a hotel's food and beverage operation is
held accountable for revenues and costs, the food
and beverage operation would be considered a(n):
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer: C LO: 2 Type: RC
8. Which of the following would have a low likelihood of
being organized as a profit center?
A. A movie theater of a company that operates a
chain of theaters.
B. A maintenance department that charges users
for its services.
C. The billing department of an Internet Services
Provider (ISP).
D. The mayor's office in a large city.
E. Both "C" and "D" above.
Answer: E LO: 2 Type: N
9. Easy-to-Use Software operates stores within five regions.
Regional managers are held accountable for marketing,
advertising, and sales decisions, and all costs incurred
within their region. In addition, regional managers decide
whether new stores will open, where the stores will be
located, and whether the stores will lease or purchase the
facilities. Store managers, in contrast, are accountable for
marketing, advertising, and sales decisions, and costs
incurred within their stores. Ideally, on the basis of this
information, what type of responsibility center should the
software company use to evaluate its regions and stores?
Regions
Stores
A.
Profit center
Profit center
B.
Profit center
Cost center
C.
Profit center
Revenue center
D.
Investment center
Profit center
E.
Investment center
Cost center
Answer: D LO: 2 Type: N
10. Decentralized firms can delegate authority by
structuring an organization into responsibility centers.
Which of the following organizational segments is
most like a totally independent, standalone business
where managers are expected to "make it on their
own"?
A. Cost center.
B. Revenue center.
C. Profit center.
D. Investment center.
E. Contribution center.
given to a department manager versus that reported to a
company vice-president?
Department Manager
Company Vice-President
A.
Somewhat detailed
Somewhat detailed
B.
Somewhat detailed
Somewhat summarized
C.
Somewhat summarized
Somewhat detailed
D.
Somewhat summarized
Somewhat summarized
E.
None of the above because department managers do not
Answer: D LO: 2 Type: N
11. A responsibility center in which the manager is held
accountable for the profitable use of assets and
capital is commonly known as a(n):
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer: B LO: 3 Type: N
16.
Answer: D LO: 2 Type: RC
12. The Asian Division of a multinational manufacturing
organization would likely be classified as a:
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer: D LO: 2 Type: N
13. Performance reports help managers:
A. use management by exception and effectively
control operations.
B. decide whether a cost, profit, or investment
center framework is appropriate.
C. design their organizational hierarchy.
D. pinpoint trouble spots.
E. by assisting with functions "A" and "D."
Answer: E LO: 3 Type: RC
14. Consider the following statements about performance
reports:
I.
II.
III.
Performance reports provide feedback to
managers and allow them to better control
operations.
Many performance reports have budget,
actual, and variance data.
Performance reports are often structured
around a firm's organizational hierarchy—that
is, data relating to lower-level units (e.g.,
departments) are combined and flow into
higher-level units (e.g., stores).
Which of the above statements is (are) true?
A. I only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
Answer: E LO: 3 Type: RC
15. Aloha Hotels owns numerous hotels on each of the
Hawaiian Islands. The company's performance reporting
system is structured around the firm's organizational
structure, with information flowing from operating
departments at a particular property and later respectively
grouped by individual hotel, island operation (i.e.,
division), and the company as a whole. Which of the
following best depicts the detail level of the information
Leisure Time owns six hotels in Hawaii, collectively
known as the Hawaiian Division. The various hotels,
including the Surf & Sun, have operating departments
(such as Maintenance, Housekeeping, and Food and
Beverage) that are evaluated as either cost centers or
profit centers. The Food and Beverage Department,
for example, is a profit center, with activities divided
into three segments: Banquets and Catering,
Restaurants, and Kitchen. If Leisure Time uses a
performance-reporting system that is based on
responsibility accounting, which of the following
disclosures is likely to occur?
A. The detailed operating costs of the Surf & Sun's
Kitchen Department will appear on the Hawaiian
Division's performance report.
B. The Food and Beverage Department's profit will
appear on Kitchen's performance report.
C. The profit of the Surf & Sun hotel will appear on
the Hawaiian Division's performance report.
D. The Food and Beverage profit at the Surf & Sun
will appear on Leisure Time's performance report.
E. The profit of the Surf & Sun hotel will appear on
Food and Beverage's performance report.
Answer: C LO: 3 Type: N
17. A cost pool is:
A. a collection of homogeneous costs to be
assigned.
B. the combined result of decisions made by
different responsibility center managers.
C. the primary function of a responsibility
accounting system.
D. the amount of cost that has been allocated, say,
10%, to a user department.
E. the tool used to allocate cost dollars to user
departments.
Answer: A LO: 4 Type: RC
18. A cost object is:
A. a collection of costs to be assigned.
B. a responsibility center, product, or service to
which cost is to be assigned.
C. the tool used to charge cost dollars to user
departments.
D. the primary function of a responsibility
accounting system.
E. a common cost.
Answer: B LO: 4 Type: RC
19. Kelly Corporation, with operations throughout the
country, will soon allocate corporate overhead to the
firm's various responsibility centers. Which of the
following is definitely not a cost object in this
situation?
A. The maintenance department.
B. Product no. 675.
C. Kelly Corporation.
D. The Midwest division.
E. The telemarketing center.
Answer: C LO: 4 Type: N
20. An allocation base for a cost pool should ideally be:
A. machine hours.
B. a cost object.
C. a common cost.
D. a cost driver.
E. direct labor, either cost or hours.
Answer: D LO: 4 Type: RC
21. Which of the following is an appropriate base to
distribute the cost of building depreciation to
responsibility centers?
A. Number of employees in the responsibility
centers.
B. Budgeted sales dollars of the responsibility
centers.
C. Square feet occupied by the responsibility
centers.
D. Budgeted net income of the responsibility
centers.
E. Total budgeted direct operating costs of the
responsibility centers.
Answer: C LO: 4 Type: N
22. David Corporation is in the process of selecting allocation
bases so that selected costs can be charged to responsibility
centers. Would the number of employees likely be a good
base to use to allocate the costs of Human Resources,
Building and Grounds, and Repairs and Maintenance to
user centers?
Human
Buildings and
Repairs and
Resources
Grounds
Maintenance
A.
Yes
Yes
Yes
B.
Yes
No
Yes
C.
Yes
No
No
D.
No
Yes
Yes
E.
No
Yes
No
Answer: C LO: 4 Type: N
23. Cost pools should be charged to responsibility centers
by using:
A. budgeted amounts of allocation bases because
the cost allocation to one responsibility center
should influence the allocations to others.
B. budgeted amounts of allocation bases because
the cost allocation to one responsibility center
should not influence the allocations to others.
C. actual amounts of allocation bases because the
cost allocation to one responsibility center should
influence the allocations to others.
D. actual amounts of allocation bases because the
cost allocation to one responsibility center should
not influence the allocations to others.
E. some other approach.
Answer: B LO: 4 Type: RC
Use the following to answer questions 24-25:
Management of Children Are Precious (CAP), an operator of
day-care facilities, wants the firm's profit to be subdivided by
center. The firm's accountant has provided the following data:
Center
Downtown
Irvine
H Beach
Totals
Actual
Revenue
$ 340,200
534,600
745,200
$1,620,000
Budgeted
Revenue
$ 320,000
560,000
720,000
$1,600,000
CAP's advertising, which is handled by the home office, is not
reflected in the preceding figures and amounted to $60,000.
24. If advertising expense were allocated to centers
based on actual center profitability, how much
advertising would be allocated to Irvine?
A. $19,800.
B. $21,000.
C. $30,000.
D. $40,543.
E. Some other amount.
Answer: D LO: 4 Type: A
25. Assume that management used the allocation base
that is most influenced by advertising effort and
consistent with sound managerial accounting
practices. How much advertising would be allocated
to Irvine?
A. $17,838.
B. $19,800.
C. $20,000.
D. $20,400.
E. $21,000.
Answer: E LO: 4 Type: A, N
26. Responsibility accounting systems strive to:
A. place blame on guilty individuals.
B. provide information to managers.
C. hold managers accountable for both controllable
and noncontrollable costs.
D. identify unfavorable variances.
E. provide information so that managers can make
decisions that are in the best interest of their
individual centers rather than in the best interests
of the firm as a whole.
Answer: B LO: 4 Type: RC
27. Controllable costs, as used in a responsibility
accounting system, consist of:
A. only fixed costs.
B. only direct materials and direct labor.
C. those costs that a manager can influence in the
time period under review.
D. those costs about which a manager has some
knowledge.
E. those costs that are influenced by parties
external to the organization.
Actua
Direc
Costs
$ 300,0
440,
740,
$1,480,
E.
Items "C" and "D" above.
Answer: C LO: 4 Type: RC
Answer: D LO: 5 Type: N
28. For a company that uses responsibility accounting,
which of the following costs is least likely to appear on
a performance report of an assembly-line supervisor?
A. Direct materials used.
B. Departmental supplies.
C. Assembly-line labor.
D. Repairs and maintenance.
E. Assembly-line facilities depreciation.
Answer: E LO: 4 Type: N
29. Common costs:
A. are not easily related to a segment's activities.
B. are easily related to a segment's activities.
C. are charged to the operating segments of a
company.
D. are not charged to the operating segments of a
company.
E. are best described by characteristics "A" and "D"
above.
Answer: E LO: 5 Type: RC
30. Harris Company is preparing a segmented income
statement, subdivided into departments (billing,
purchasing, and telemarketing). Which of the
following choices correctly describes the accounting
treatment of the firm's compensation cost for key
executives (president and vice-presidents)?
A. The cost is charged to the departments.
B. The cost is not charged to the departments
because, although easily traceable to the
departments, it is not controllable at the
departmental level.
C. The cost is not charged to the departments
because, although controllable at the
departmental level, it is not easily traceable to
the departments.
D. The cost is not charged to the departments
because it is both easily traceable to the
departments and controllable by the
departments.
E. The cost is not charged to the departments
because it is neither easily traceable to the
departments nor controllable by the departments.
Answer: E LO: 5 Type: N
31.
West Coast Electronics (WCE) operates 87 stores
and has three divisions: California, Oregon, and
Washington. Which of the following costs would not
appear on Oregon's portion of WCE's segmented
income statement?
A.
Costs related to statewide advertising
contracts, negotiated by Oregon's divisional
manager.
B.
Variable sales commissions paid to Oregon's
salespeople.
C.
Compensation paid to Oregon's chief
operating officer, as determined by WCE's
management.
D.
Oregon's allocated share of general WCE
corporate overhead.
32. The difference between the profit margin controllable
by a segment manager and the segment profit margin
is caused by:
A. variable operating expenses.
B. allocated common expenses.
C. fixed expenses controllable by the segment
manager.
D. fixed expenses traceable to the segment but
controllable by others.
E. other revenue.
Answer: D LO: 5 Type: RC
33. The profit margin controllable by the segment
manager would not include:
A. variable operating expenses.
B. fixed expenses controllable by the segment
manager.
C. a share of the company's common fixed
expenses.
D. income tax expense.
E. items "C" and "D" above.
Answer: E LO: 5 Type: RC
34. A segment contribution margin would reflect the
impact of:
A. variable operating expenses.
B. fixed expenses controllable by the segment
manager.
C. fixed expenses traceable to the segment but
controllable by others.
D. common fixed expenses.
E. items "A," "B," and "C" above.
Answer: A LO: 5 Type: RC
35. Gathersburg Retail has three stores in Maryland.
Which of the following costs would likely be excluded
when computing the profit margin controllable by
store no. 3's manager?
A. Hourly labor costs incurred by personnel at store
no. 3.
B. Property taxes attributable to store no. 3.
C. The salary of Gathersburg's president.
D. The salary of store no. 3's manager.
E. Items "B," "C," and "D" above.
Answer: E LO: 5 Type: N
36. Which of the following measures would reflect the variable
costs incurred by a business segment?
Segment
Profit Margin
Segment
Contribution
Controllable
Profit
Margin
by Segment
Margin
Manager
A.
Yes
No
No
B.
Yes
No
Yes
C.
Yes
Yes
No
D.
Yes
Yes
Yes
E.
No
Yes
Yes
Answer: D LO: 5 Type: RC
37. Which of the following measures would reflect the fixed
costs controllable by a segment manager?
Segment
Profit Margin
Segment
Contribution
Controllable
Profit
Margin
by Segment
Margin
Manager
A.
Yes
No
No
B.
Yes
No
Yes
C.
Yes
Yes
No
D.
Yes
Yes
Yes
E.
No
Yes
Yes
Answer: E LO: 5 Type: RC
38. Which of the following would be the best measure on
which to base a segment manager's performance
evaluation for purposes of granting a bonus?
A. Segment sales revenue.
B. Segment contribution margin.
C. Profit margin controllable by the segment
manager.
D. Segment profit margin.
E. Segment net income.
Answer: C LO: 5 Type: N
39. Sands Corporation operates two stores: J and K. The
following information relates to store J:
Variable operating expenses
Fixed expenses:
Traceable to A and controllable by A
Traceable to A and controllable by others
A's segment profit margin is:
A. $105,000.
B. $225,000.
C. $380,000.
D. $500,000.
E. $505,000.
Answer: A LO: 5 Type: A
41. The following data relate to Department no. 3 of Tsay
Corporation:
Segment contribution margin
Profit margin controllable by the
segment manager
Segment profit margin
$540,000
310,000
150,000
On the basis of this information, Department no. 3's
variable operating expenses are:
A. $80,000.
B. $160,000.
C. $230,000.
D. $390,000.
E. not determinable.
Answer: E LO: 5 Type: A
Sales revenue
Variable operating expenses
Fixed expenses:
Traceable to J and controllable by J
Traceable to J and controllable by others
J's segment contribution margin is:
A. $345,000.
B. $425,000.
C. $620,000.
D. $700,000.
E. $745,000.
Answer: D LO: 5 Type: A
40. Thompson Corporation operates two stores: A and B.
The following information relates to store A:
42. The following data relate to Department no. 2 of
Young Corporation:
Segment contribution margin
Profit margin controllable by the
segment manager
Segment profit margin
Answer: A LO: 5 Type: A
The following information was taken from the segmented income statement of Restin, Inc., and the company's three divisions:
Los
Bay
Central
Restin,
Angeles
Area
Valley
Inc.
Division
Division
Division
Revenues
$750,000
$200,000
$235,000
$325,000
Variable operating expenses
410,000
110,000
120,000
180,000
Controllable fixed expenses
210,000
65,000
75,000
70,000
Noncontrollable fixed expenses
60,000
15,000
20,000
25,000
43. Bay Area's segment profit margin is:
A. $14,000.
110,000
On the basis of this information, fixed costs traceable
to Department no. 2 but controllable by others are:
A. $120,000.
B. $140,000.
C. $250,000.
D. $370,000.
E. not determinable.
Sales revenue
Use the following to answer questions 43-47:
In addition, the company incurred common fixed costs of
$18,000.
$480,000
230,000
B.
C.
D.
E.
$18,000.
$20,000.
$40,000.
$115,000.
Answer: C LO: 5 Type: A
44. The profit margin controllable by the Central Valley
segment manager is:
A. $32,000.
B. $44,000.
C. $50,000.
D. $75,000.
E. $145,000.
Answer: D LO: 5 Type: A
45. Assuming use of a responsibility accounting system,
which of the following amounts should be used to
evaluate the performance of the Los Angeles division
manager?
A. $4,000.
B. $8,000.
C. $10,000.
D. $25,000.
E. $90,000.
D.
E.
Prevention cost.
Appraisal cost.
Answer: C LO: 6 Type: RC
50. Which of the following costs is often considered the
hardest to measure?
A. Prevention costs.
B. Appraisal costs.
C. Internal failure costs.
D. External failure costs.
E. The cost of lost sales.
Answer: E LO: 6 Type: RC
51. Which of the following costs would be classified as a
prevention cost on a quality report?
A. Reliability engineering.
B. Materials inspection.
C. Rework.
D. Warranty repairs.
E. Out-of-court liability settlements.
Answer: D LO: 5 Type: A, N
Answer: A LO: 6 Type: RC
46. Which of the following amounts should be used to
evaluate whether Restin, Inc., should continue to
invest company resources in the Los Angeles
division?
A. $4,000.
B. $8,000.
C. $10,000.
D. $25,000.
E. $90,000.
52. Which of the following costs would be classified as an
appraisal cost on a quality report?
A. Reliability engineering.
B. Materials inspection.
C. Rework.
D. Warranty repairs.
E. Out-of-court liability settlements.
Answer: B LO: 6 Type: RC
Answer: C LO: 5 Type: A, N
47. Assume that the Los Angeles division increases its
promotion expense, a controllable fixed cost, by
$10,000. As a result, revenues increase by $50,000.
If variable expenses are tied directly to revenues, the
new Los Angeles segment profit margin is:
A. $12,500.
B. $22,500.
C. $32,500.
D. $50,000.
E. $60,000.
Answer: B LO: 5 Type: A
48. Quality of conformance refers to:
A. the extent to which a product meets the
specifications of its design.
B. the extent to which a product adds value to a
firm's product line.
C. the extent to which a product is designed for its
intended use.
D. the extent to which a product maximizes nonvalue-added activities in the production process.
E. a cost control that is achievable.
Answer: A LO: 6 Type: RC
49. Which of the following is not a cost of quality?
A. External failure cost.
B. Internal failure cost.
C. Production inefficiency cost.
53. If goods are inspected and found to be defective, any
rework costs related to these units before the units
are transferred to the finished-goods warehouse
would be classified as a(n):
A. external failure cost.
B. internal failure cost.
C. production inefficiency cost.
D. prevention cost.
E. appraisal cost.
Answer: B LO: 6 Type: RC
54. Which of the following costs would be classified as an
internal failure cost on a quality report?
A. Reliability engineering.
B. Materials inspection.
C. Rework.
D. Warranty repairs.
E. Out-of-court liability settlements.
Answer: C LO: 6 Type: RC
55. The cost of servicing a unit under a warranty
agreement is known as a(n):
A. external failure cost.
B. internal failure cost.
C. production inefficiency cost.
D. prevention cost.
E. appraisal cost.
Answer: A LO: 6 Type: RC
D. Warranty repairs.
56. Which of the following costs would be classified as an
E. Pilot studies/focus-group sessions.
external failure cost on a quality report?
A. Reliability engineering.
Answer: D LO: 6 Type: RC
B. Materials inspection.
C. Rework.
57. Which of the following choices correctly depicts a prevention cost and an external failure cost?
Prevention Cost
External Failure Cost
A.
Inspection of work in process
Warranty costs
B.
Quality training
Product liability lawsuits
C.
In-house rework of defective units
Transportation costs to customer sites
D.
Customer complaints
Reliability engineering
E.
Choices "A" and "B" above.
Answer: B LO: 6 Type: RC
machine breakdowns
58.
Elizabeth, Inc., was having significant quality
problems in its manufacturing plant. To remedy
the situation, management implemented various upfront procedures and programs that were expected
to reduce the production of bad units to acceptable
(normal) levels and benefit the firm financially. If
the procedures and programs functioned as
intended, what is likely true about the amounts the
company incurred for prevention cost, internal
failure cost, and external failure cost?
Internal
External
Prevention
Failure
Failure
Cost
Cost
Cost
A. Increase
Increase
Increase
B. Increase
Increase
Decrease
C. Increase
Decrease
Increase
D. Increase
Decrease
Decrease
E. Decrease
Decrease
Decrease
Answer: D LO: 6 Type: N
59. The costs that follow appeared on Omaha's
quality cost report:
Warranty costs
Raw-materials
inspection
Quality training
Customer complaints
Rework of defective
units
$15,000
10,000
31,000
5,500
12,800
The sum of Lexington’s prevention and external failure costs
is:
A. $40,000.
B. $49,000.
C. $59,000.
D. $63,100.
E. some other amount.
Answer: D LO: 6 Type: A
61. Under the contemporary view of product quality, companies
should strive to:
A. balance failure costs with the sum of prevention and
appraisal costs.
B. increase total quality costs.
C. achieve zero defects in manufacturing.
D. inspect after-the-fact rather than install a series of
preventative manufacturing controls.
E. operate at the top of the total quality cost curve.
Answer: C LO: 7 Type: RC
62. Which of the following is a helpful tool in identifying the
frequency of quality-control problems?
A. Decision trees.
B. Scatter diagrams.
C. Pareto diagrams.
D. Flowcharts.
E. Decision tables.
Answer: C LO: 7 Type: RC
The sum of Omaha's appraisal and internal
failure costs is:
A. $10,000.
B. $12,800.
C. $22,800.
D. $68,800.
E. some other amount.
Answer: C LO: 6 Type: A
60. The costs that follow appeared on Lexington’s
quality cost report:
Warranty costs
Raw-materials inspection
Quality training
Customer complaints
Production stoppages from
$19,000
9,000
40,000
4,100
7,800
63. Many companies (especially those in Europe) now require
their suppliers to meet specified quality guidelines issued by
the:
A. International Standards Organization (ISO).
B. Quality Assurance Institute (QAI).
C. Taguchi Standards Association (TSA).
D. Pareto Standards Institute (PSI).
E. an organization other than those mentioned above.
Answer: A LO: 7 Type: RC
64. All of the following concepts are related to environmental
management (cost and otherwise) except:
A. dynamic programming efforts.
B. sustainable development.
C. monitoring costs.
D. abatement costs.
E.
remediation costs.
Answer: A LO: 8 Type: RC
65. Costs incurred to reduce or eliminate pollution
are commonly known as:
A. monitoring costs.
B. abatement costs.
C. on-site remediation costs.
D. off-site remediation costs.
E. hidden costs.
2. What practice is present when divisional managers
throughout an organization work together in an effort to
achieve the organization's goals?
A. Participatory management.
B. Goal attainment.
C. Goal congruence.
D. Centralization of objectives.
E. Negotiation by subordinates.
Answer: C LO: 1 Type: RC
3. Consider the following statements about goal congruence:
Answer: B LO: 8 Type: RC
I.
66. Clean-up costs are commonly classified as:
A. monitoring costs.
B. abatement costs.
C. remediation costs.
D. internal failure costs.
E. external failure costs.
II.
III.
Goal congruence is obtained when managers of
subunits throughout an organization strive to achieve
the goals set by top management.
Managers are often more concerned about the
performance of their own subunits rather than the
performance of the entire organization.
Achieving goal congruence in most organizations is
relatively straightforward and easy to accomplish.
Answer: C LO: 8 Type: N
67. Which of the following fail to be captured and
reported by a company's accounting system
as an environmental cost?
A. Monitoring costs.
B. Abatement costs.
C. Hidden costs.
D. On-site remediation costs.
E. Off-site remediation costs.
Answer: C LO: 8 Type: RC
68. A company that strives to maximize the value
of its pollution-related activities would follow
a(n):
A. process improvement strategy.
B. prevention strategy.
C. end-of-pipe strategy.
D. visible cost strategy.
E. matrix strategy.
Answer: B LO: 8 Type: RC
MULTIPLE CHOICE QUESTIONS
1. The biggest challenge in making a
decentralized organization function effectively
is:
A. earning maximum profits through fair
practices.
B. minimizing losses.
C. taking advantage of the specialized
knowledge and skills of highly talented
managers.
D. obtaining goal congruence among
division managers.
E. developing an adequate budgetary
control system.
Answer: D LO: 1 Type: RC
Which of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
Answer: C LO: 1 Type: RC
4. Which of the following performance measures is (are) used
to evaluate the financial success or failure of investment
centers?
A. Residual income.
B. Return on investment.
C. Number of suppliers.
D. Economic value added.
E. All of the above measures are used except "C."
Answer: E LO: 1 Type: RC
5. ROI is most appropriately used to evaluate the performance
of:
A. cost center managers.
B. revenue center managers.
C. profit center managers.
D. investment center managers.
E. both profit center managers and investment center
managers.
Answer: D LO: 2 Type: RC
6. Which of the following is not considered in the calculation of
divisional ROI?
A. Divisional income.
B. Earnings velocity.
C. Capital turnover.
D. Sales margin.
E. Sales revenue.
Answer: B LO: 2 Type: RC
7. Which of the following is the correct mathematical expression
for return on investment?
A. Sales margin ÷ capital turnover.
B.
C.
D.
E.
Sales margin + capital turnover.
Sales margin - capital turnover.
Sales margin x capital turnover.
Capital turnover ÷ sales margin.
A.
B.
C.
D.
E.
13.33%.
83.33%.
120.00%.
750.00%.
some other figure.
Answer: D LO: 2 Type: RC
Answer: A LO: 2 Type: A
8. The ROI calculation will indicate:
A. the percentage of each sales dollar that is
invested in assets.
B. the sales dollars generated from each
dollar of income.
C. how effectively a company used its
invested capital.
D. the invested capital generated from each
dollar of income.
E. the overall quality of a company's
earnings.
Answer: C LO: 2 Type: RC
9. A company's sales margin:
A. must, by definition, be greater than the
firm's net sales.
B. has basically the same meaning as the
term "contribution margin."
C. is computed by dividing sales revenue
into income.
D. is computed by dividing income into sales
revenue.
E. shows the sales dollars generated from
each dollar of income.
Answer: C LO: 2 Type: RC
10. Which of the following is the correct
mathematical expression to derive a
company's capital turnover?
A. Sales revenue ÷ invested capital.
B. Contribution margin ÷ invested capital.
C. Income ÷ invested capital.
D. Invested capital ÷ sales revenue
E. Invested capital ÷ income
Answer: A LO: 2 Type: RC
11. Capital turnover shows:
A. the amount of income generated by each
dollar of capital investment.
B. the number of sales dollars generated by
each dollar of capital investment.
C. the amount of contribution margin
generated by each dollar of capital
investment.
D. the amount of capital investment
generated by each sales dollar.
E. the amount of capital investment
generated by each dollar of income.
Answer: B LO: 2 Type: RC
12. Webster Company had sales revenue and
operating expenses of $5,000,000 and
$4,200,000, respectively, for the year just
ended. If invested capital amounted to
$6,000,000, the firm's ROI was:
13. Zang Enterprises had a sales margin of 7%, sales of
$5,000,000, and invested capital of $4,000,000. The
company's ROI was:
A. 5.60%.
B. 8.75%.
C. 11.43%.
D. 17.86%.
E. some other figure.
Answer: B LO: 2 Type: A
14. Mission, Inc., reported a return on investment of 12%, a
capital turnover of 5, and income of $180,000. On the basis
of this information, the company's invested capital was:
A. $300,000.
B. $900,000.
C. $1,500,000.
D. $7,500,000.
E. some other amount.
Answer: C LO: 2 Type: A
15. The information that follows relates to Katz Corporation:
Sales margin: 7.5%
Capital turnover: 2
Invested capital: $20,000,000
On the basis of this information, the company's sales
revenue is:
A. $1,500,000.
B. $3,000,000.
C. $10,000,000.
D. $40,000,000.
E. some other amount.
Answer: D LO: 2 Type: A
16. A division's return on investment may be improved by
increasing:
A. cost of goods sold and expenses.
B. sales margin and cost of capital.
C. sales revenue and cost of capital.
D. capital turnover or sales margin.
E. capital turnover or cost of capital.
Answer: D LO: 3 Type: RC
17. All of the following actions will increase ROI except:
A. an increase in sales revenues.
B. a decrease in operating expenses.
C. a decrease in a company's invested capital.
D. a decrease in the number of units sold.
E. an improvement in manufacturing efficiency.
Answer: D LO: 3 Type: N
18. Which of the following is used in the calculation of both return
on investment and residual income?
A. Total stockholders' equity.
B. Retained earnings.
C. Invested capital.
D. Total liabilities.
E. The cost of capital.
Answer: C LO: 2 Type: RC
19. Consider the following statements about
residual income:
I.
II.
III.
Residual income incorporates a firm's
cost of acquiring investment capital.
Residual income is a percentage
measure, not a dollar measure.
If used correctly, residual income may
result in division managers making
decisions that are in their own best
interest and not in the best interest of
the entire firm.
22. The Fitzhugh Division of General Enterprises has a negative
residual income of $540,000. Fitzhugh's management is
contemplating an investment opportunity that will reduce this
negative amount to $400,000. The investment:
A. should be pursued because it is attractive from both the
divisional and corporate perspectives.
B. should be pursued because it is attractive from the
divisional perspective although not from the corporate
perspective.
C. should be pursued because it is attractive from the
corporate perspective although not from the divisional
perspective.
D. should not be pursued because it is unattractive from
both the divisional and corporate perspectives.
E. should not be pursued because it is unattractive from
the divisional perspective although it is attractive from
the corporate perspective.
Answer: A LO: 4 Type: N
23.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I and III.
The Magellan Division of Global Corporation, which has
income of $250,000 and an asset investment of $1,562,500,
is studying an investment opportunity that will cost $450,000
and yield a profit of $67,500. Assuming that Global uses an
imputed interest charge of 14%, would the investment be
attractive to:
1—Divisional management if ROI is used to evaluate
divisional performance?
2—Divisional management if residual income (RI) is
used to evaluate divisional performance?
3—The management of Global Corporation?
Answer: A LO: 2, 4 Type: RC
20. The basic idea behind residual income is to
have a division maximize its:
A. earnings per share.
B. income in excess of a corporate imputed
interest charge.
C. cost of capital.
D. cash flows.
E. invested capital.
Answer: B LO: 2, 4 Type: N
21. Sunrise Corporation has a return on
investment of 15%. A Sunrise division, which
currently has a 13% ROI and $750,000 of
residual income, is contemplating a massive
new investment that will (1) reduce divisional
ROI and (2) produce $120,000 of residual
income. If Sunrise strives for goal
congruence, the investment:
A. should not be acquired because it
reduces divisional ROI.
B. should not be acquired because it
produces $120,000 of residual income.
C. should not be acquired because the
division's ROI is less than the corporate
ROI before the investment is considered.
D. should be acquired because it produces
$120,000 of residual income for the
division.
E. should be acquired because after the
acquisition, the division's ROI and
residual income are both positive
numbers.
Answer: D LO: 4 Type: N
A.
B.
C.
D.
E.
Attractive to
Magellan: ROI
Yes
Yes
Yes
No
No
Attractive to
Magellan: RI
Yes
No
No
Yes
Yes
Attractive to
Global
Yes
No
Yes
Yes
No
Answer: D LO: 4 Type: A, N
24. The Georgia Division of Carter Companies currently reports a
profit of $3.4 million. Divisional invested capital totals $12.5
million; the imputed interest rate is 14%. On the basis of this
information, Georgia's residual income is:
A. $476,000.
B. $1,274,000.
C. $1,650,000.
D. $1,750,000.
E. some other amount.
Answer: C LO: 2 Type: A
25. The following information relates to the Mountain Division of
Adler Enterprises:
Income for the period just ended: $1,500,000
Invested capital: $12,000,000
If the firm has an imputed interest rate of 11%, Mountain's
residual income would be:
A. $165,000.
B. $180,000.
C.
D.
E.
$187,500.
some other dollar amount.
a percentage greater than 11%.
Answer: B LO: 2 Type: A
26. Extron Division reported a residual income of
$200,000 for the year just ended. The division
had $8,000,000 of invested capital and
$1,000,000 of income. On the basis of this
information, the imputed interest rate was:
A. 2.5%.
B. 10.0%.
C. 12.5%.
D. 20.0%.
E. some other figure.
Answer: B LO: 2 Type: A
27. Barber Corporation uses an imputed interest
rate of 13% in the calculation of residual
income. Division X, which is part of Barber,
had invested capital of $1,200,000 and an ROI
of 16%. On the basis of this information, X's
residual income was:
A. $24,960.
B. $36,000.
C. $156,000.
D. $192,000.
E. some other amount.
Answer: B LO: 2 Type: A, N
E.
40%.
Answer: A LO: 2 Type: A
30. The ROI is:
A. 6%.
B. 15%.
C. 20%.
D. 30%.
E. 40%.
Answer: C LO: 2 Type: A
31. The residual income is:
A. $30,000.
B. $36,000.
C. $42,000.
D. $54,000.
E. $82,800.
Answer: D LO: 2 Type: A
32. For the period just ended, United Corporation's Delta Division
reported profit of $31.9 million and invested capital of $220
million. Assuming an imputed interest rate of 12%, which of
the following choices correctly denotes Delta's return on
investment (ROI) and residual income?
Return on
Residual
Investment
Income
A.
12.0%
$(5.5) million
B.
12.0%
$5.5 million
C.
14.5%
$(5.5) million
D.
14.5%
$5.5 million
E.
14.5%
$26.4 million
Answer: D LO: 2 Type: A
Use the following to answer questions 28-31:
The following information pertains to Bingo Concrete:
Sales revenue
Gross margin
Income
Invested capital
$1,500,000
600,000
90,000
450,000
33. For the period just ended, Price Corporation's Ohio Division
reported profit of $49 million and invested capital of $350
million. Assuming an imputed interest rate of 16%, which of
the following choices correctly denotes Ohio's return on
investment (ROI) and residual income?
Return on
Residual
Investment
Income
A.
14%
$7 million
B.
14%
$(7) million
C.
16%
$7 million
D.
$7 million
14%
E.
None of the above choices shows both the correct
ROI and residual income.
The company's imputed interest rate is 8%.
Answer: B LO: 2 Type: A
28. The capital turnover is:
A. 3.33.
B. 5.00.
C. 16.67.
D. 20.00.
E. 30.00.
Answer: A LO: 2 Type: A
29. The sales margin is:
A. 6%.
B. 15%.
C. 20%.
D. 30%.
34. Which of the following elements is not used when calculating
the weighted-average cost of capital?
A. Before-tax cost of debt capital.
B. After-tax cost of debt capital.
C. Cost of equity capital.
D. Market value of debt capital.
E. Market value of equity capital.
Answer: A LO: 2 Type: RC
35. The following information relates to the Atlantic Division of
Ocean Enterprises:
Interest rate on debt capital: 8%
Cost of equity capital: 12%
Market value of debt capital: $50
million
Market value of equity capital: $80
million
Income tax rate: 30%
On the basis of this information, Atlantic's
weighted-average cost of capital is:
A. 7.3%.
B. 8.3%.
C. 9.5%.
D. 10.8%.
E. some other figure.
weighted-average cost of capital. Assets total $7,000,000
and current liabilities total $1,800,000. On the basis of this
information, Carolina's economic value added is:
A. $2,408,000.
B. $2,732,000.
C. $3,668,000.
D. $3,992,000.
E. some other amount.
Answer: B LO: 2 Type: A
40. The following information relates to Houston, Inc.:
Total assets
After-tax operating income
Current liabilities
$9,000,000
1,500,000
800,000
Answer: C LO: 2 Type: A
36.
The market value of Glendale’s debt and
equity capital totals $180 million, 80% of which
is equity related. An analysis conducted by
the company’s finance department revealed a
7% after-tax cost of debt capital and a 10%
cost of equity capital. On the basis of this
information, Glendale’s weighted-average cost
of capital:
A. is 7.6%.
B. is 8.5%.
C. is 9.4%.
D. cannot be determined based on the data
presented because the cost of debt capital
must be stated on a before-tax basis.
E. cannot be determined based on the data
presented because the cost of equity
capital must be stated on an after-tax
basis.
If the company has a 10% weighted-average cost of capital,
its economic value added would be:
A. $(200,000).
B. $530,000.
C. $680,000.
D. $970,000.
E. some other amount.
Answer: C LO: 2 Type: A
41. Given that ROI measures performance over a period of time,
invested capital would most appropriately be figured by
using:
A. beginning-of-year assets.
B. average assets.
C. end-of-year assets.
D. total assets.
E. only current assets.
Answer: B LO: 5 Type: RC
Answer: C LO: 2 Type: A, N
37. Which of the following measures of
performance is, in part, based on the
weighted-average cost of capital?
A. Return on investment.
B. Capital turnover.
C. Book value.
D. Economic value added (EVA).
E. Gross margin.
42. When an organization allows divisional managers to be
responsible for short-term loans and credit, the division's
invested capital should be measured by
A. total assets minus total liabilities.
B. average total assets minus average current liabilities.
C. average total assets minus average total liabilities.
D. average total liabilities minus average current assets.
E. average total liabilities minus total assets.
Answer: B LO: 5 Type: RC
Answer: D LO: 2 Type: RC
38. Which of the following elements is not used in
the calculation of economic value added for an
investment center?
A. An investment center's after-tax operating
income.
B. An investment center's total assets.
C. An investment center's return on
investment.
D. An investment center's current liabilities.
E. A company's weighted-average cost of
capital.
Answer: C LO: 2 Type: RC
39. Carolina Corporation has an after-tax
operating income of $3,200,000 and a 9%
43. Hayes Division has been stagnant over the past five years,
neither growing nor contracting in size and profitability.
Investments in new property, plant, and equipment have
been minimal. Would the division's use of total assets
(valued at net book value) when measuring ROI result in (1)
using numbers that are consistent with those on the balance
sheet and (2) a rising ROI over time?
Consistent with
Produce a Rising
Numbers
Return on
on the Balance
Investment Over
Sheet?
Time?
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
E.
Yes
Need more
information
to judge
basis of this information, which of the following statements is
most correct?
A.
The profit reported by New York will increase and
the profit reported by Arizona will decrease.
B.
The profit reported by New York will increase, the
profit reported by Arizona will decrease, and Thurmond’s
profit will be unaffected.
C.
The profit reported by New York will decrease, the
profit reported by Arizona will increase, and Thurmond’s
profit will be unaffected.
D.
The profit reported by New York will increase and
the profit reported by Arizona will increase.
E.
The profit reported by New York and the profit
reported by Arizona will be unaffected.
Answer: A LO: 5 Type: RC
44. The income calculation for a division
manager's ROI should be based on:
A. divisional contribution margin.
B. profit margin controllable by the division
manager.
C. profit margin traceable to the division.
D. divisional income before interest and
taxes.
E. divisional net income.
Answer: B LO: 5 Type: RC
Answer: B LO: 6 Type: RC, N
45. To partially eliminate the problems that are
associated with the short-term focus of return
on investment, residual income, and EVA, the
performance of a division's major investments
is commonly evaluated through:
A. postaudits.
B. sensitivity analysis.
C. performance operating plans.
D. horizontal analysis.
E. segmented reporting.
49.
Which of the following describes the goal that should be
pursued when setting transfer prices?
A. Maximize profits of the buying division.
B. Maximize profits of the selling division.
C. Allow top management to become actively involved
when calculating the proper dollar amounts.
D. Establish incentives for autonomous division managers
to make decisions that are in the overall organization's
best interests (i.e., goal congruence).
E. Minimize opportunity costs.
Answer: A LO: 5 Type: RC
Answer: D LO: 6 Type: RC
46. The amounts charged for goods and services
exchanged between two divisions are known
as:
A. opportunity costs.
B. transfer prices.
C. standard variable costs.
D. residual prices.
E. target prices.
Answer: B LO: 6 Type: RC
47. Nevada, Inc., has two divisions, one located in
Las Vegas and the other located in Reno. Las
Vegas sells selected goods to Reno for use in
various end-products. Assuming that the
transfer prices set by Las Vegas do not
influence the decisions made by the two
divisions, which of the following correctly
describes the impact of the transfer prices on
divisional profits and overall company profit?
Las Vegas Profit
Reno Profit
A.
Affected
Affected
B.
Affected
Affected
C.
Affected
Not affected
D.
Not affected
Not affected
E.
Not affected
Not affected
50. A general calculation method for transfer prices that achieves
goal congruence begins with the additional outlay cost per
unit incurred because goods are transformed and then
A. adds the opportunity cost per unit to the organization
because of the transfer.
B. subtracts the opportunity cost per unit to the
organization because of the transfer.
C. adds the sunk cost per unit to the organization because
of the transfer.
D. subtracts the sunk cost per unit to the organization
because of the transfer.
E. adds the sales revenue per unit to the organization
because of the transfer.
Answer: A LO: 6 Type: RC
51. Suddath Corporation has no excess capacity. If the firm
desires to implement the general transfer-pricing rule,
opportunity cost would be equal to:
A. zero.
B. the direct expenses incurred in producing the goods.
C. the total difference in the cost of production between two
divisions.
D. the contribution margin forgone from the lost external
sale.
E. the summation of variable cost plus fixed cost.
Answer: B LO: 6 Type: RC
Answer: D LO: 6 Type: RC
48.
Thurmond, Inc., has two divisions, one located
in New York and the other located in Arizona.
New York sells a specialized circuit to Arizona
and just recently raised the circuit’s transfer
price. This price hike had no effect on the
volume of circuits transferred nor on Arizona’s
option of acquiring the circuit from either New
York or from an external supplier. On the
52. Tulsa Corporation has excess capacity. If the firm desires to
implement the general transfer-pricing rule, opportunity cost
would be equal to:
A. zero.
B. the direct expenses incurred in producing the goods.
C. the total difference in the cost of production between two
divisions.
D.
E.
the contribution margin forgone from the
lost external sale.
the summation of variable cost plus fixed
cost.
Answer: A LO: 6 Type: RC
53. McKenna's Florida Division is currently
purchasing a part from an outside supplier.
The company's Alabama Division, which has
excess capacity, makes and sells this part for
external customers at a variable cost of $22
and a selling price of $34. If Alabama begins
sales to Florida, it (1) will use the general
transfer-pricing rule and (2) will be able to
reduce variable cost on internal transfers by
$4. If sales to outsiders will not be affected,
Alabama would establish a transfer price of:
A. $18.
B. $22.
C. $30.
D. $34.
E. some other amount.
D.
E.
$2.90.
$3.00.
Answer: A LO: 6 Type: A
56. Assume the Bottle Division has no excess capacity and could
sell everything it produced externally. Using the general rule,
the transfer price from the Bottle Division to the Cologne
Division would be:
A. $2.00.
B. $2.10.
C. $2.60.
D. $2.90.
E. $3.00.
Answer: D LO: 6 Type: A
57. The maximum amount the Cologne Division would be willing
to pay for each bottle transferred would be:
A. $2.00.
B. $2.10.
C. $2.60.
D. $2.90.
E. $3.00.
Answer: A LO: 6 Type: A
Answer: C LO: 6 Type: A
54. AutoTech's Northern Division is currently
purchasing a part from an outside supplier.
The company's Southern Division, which has
no excess capacity, makes and sells this part
for external customers at a variable cost of $19
and a selling price of $31. If Southern begins
sales to Northern, it (1) will use the general
transfer-pricing rule and (2) will be able to
reduce variable cost on internal transfers by
$3. On the basis of this information, Southern
would establish a transfer price of:
A. $16.
B. $19.
C. $28.
D. $31.
E. some other amount.
Answer: C LO: 6 Type: A
58. Transfer prices can be based on:
A. variable cost.
B. full cost.
C. an external market price.
D. a negotiated settlement between the buying and selling
divisions.
E. all of the above.
Answer: E LO: 7 Type: RC
59. Which of the following transfer-pricing methods can lead to
dysfunctional decision-making behavior by managers?
A. Variable cost.
B. Full cost.
C. External market price.
D. A professionally negotiated, amicable settlement
between the buying and selling divisions.
E. None of the above.
Use the following to answer questions 55-57:
Answer: B LO: 7 Type: RC
Laissez Faire has two divisions: the Cologne Division
and the Bottle Division. The Bottle Division produces
containers that can be used by the Cologne Division.
The Bottle Division's variable manufacturing cost is $2,
shipping cost is $0.10, and the external sales price is
$3. No shipping costs are incurred on sales to the
Cologne Division, and the Cologne Division can
purchase similar containers in the external market for
$2.60.
55. The Bottle Division has sufficient capacity to
meet all external market demands in addition
to meeting the demands of the Cologne
Division. Using the general rule, the transfer
price from the Bottle Division to the Cologne
Division would be:
A. $2.00.
B. $2.10.
C. $2.60.
60. The Pro Division of Custom Industries is in need of a
particular service. The service can be obtained from another
division of Custom at "cost," with cost defined as the
summation of variable cost ($9) and fixed cost ($3).
Alternatively, Pro can secure the service from a source
external to Custom for $10. Which of the following
statements is true?
A. Pro should compare $10 vs. $3 in deciding where to
acquire the service.
B. Pro should compare $10 vs. $9 in deciding where to
acquire the service.
C. Pro should compare $10 vs. $12 in deciding where to
acquire the service.
D. From Custom's perspective, the proper decision is
reached by comparing $10 vs. $9.
E. Both "C" and "D" are true.
Answer: E LO: 7 Type: A, N
what type of transfer price should be set for the
subassembly?
Division A
Division B
Transfer
Income
Income
Price
A.
Low
Low
Low
B.
Low
High
Low
C.
Low
High
High
D.
High
Low
High
E.
High
High
Low
61. Division A transfers item no. 78 to Division B.
Consider the following situations:
1—A is located in Texas and B is
located in California.
2—A is located in Texas and B is
located in Mexico.
Assuming that item no. 78 is unavailable in the
open market, which of the following choices
Answer: B LO: 7 Type: N
correctly depicts the probable importance of
federal income taxes when determining the
63. Consider the following statements about transfer pricing:
transfer price that is established for item no.
78?
I.
Income taxes and import duties are an important
Situation 1
Situation 2
consideration when setting a transfer price for
A.
Important
Important
companies that pursue international commerce.
B.
Important
Not important
II.
Transfer prices cannot be used by organizations in
C.
Not important
Important
the service industry.
D.
Not important
Not important
III.
Transfer prices are totally cost-based in nature, not
E.
It is not possible to judge based on the information presented.
market-based.
Answer: C LO: 7 Type: N
Which of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
62. Division A transfers a profitable subassembly
to Division B, where it is assembled into a final
product. A is located in a European country
that has a high tax rate; B is located in an
Asian country that has a low tax rate. Ideally,
(1) what type of before-tax income should
each division report from the transfer and (2)
EXERCISES
Answer: A LO: 7 Type: RC
Components of Return on Investment
64. The following data pertain to Corkscrew Corporation:
Income
Sales revenue
Average invested capital
$ 8,000,000
40,000,000
50,000,000
Required:
Calculate Corkscrew Corporation's sales margin, capital turnover, and return on investment.
LO: 2 Type: A
Answer:
Sales margin: $8,000,000 ÷ $40,000,000 = 20%
Capital turnover: $40,000,000 ÷ $50,000,000 = 0.8
Return on investment: $8,000,000 ÷ $50,000,000 = 16%
Components of ROI and Residual Income: Working Backward
65. Midland Division, which is part of Courtyard Enterprises, recently reported a sales margin of 30%, ROI of 21%, and residual
income of $220,000. Courtyard uses an imputed interest rate of 10%.
Required:
A. Briefly define sales margin, capital turnover, and return on investment.
B. Compute Midland's capital turnover and invested capital.
C. Ignoring your work in requirement "B," assume that invested capital amounted to $2,500,000. On the basis of this
information, calculate Midland's income and sales revenue.
LO: 2 Type: A, N
Answer:
A. Sales margin—the income generated from each sales dollar.
Computed as: Income ÷ sales revenue.
Capital turnover—the sales dollars produced from each dollar of invested capital. Computed as: Sales revenue ÷
invested capital.
Return on investment—the income generated from each dollar of invested capital. Computed as: Income ÷ invested
capital, or sales margin x capital turnover.
B.
Capital turnover:
Capital turnover x sales margin = ROI
Capital turnover x 30% = 21%
Capital turnover = 0.7
Invested capital:
ROI = Income ÷ invested capital
21% = Income ÷ invested capital
Income = Invested capital x 21%
Residual income = Income - (invested capital x imputed interest rate)
$220,000 = Income - (invested capital x 10%)
$220,000 = (Invested capital x 21%) - (invested capital x 10%)
$220,000 = Invested capital x 11%
Invested capital = $2,000,000
C.
Income:
ROI = Income ÷ invested capital
21% = Income ÷ $2,500,000
Income = $525,000
Sales revenue:
Sales margin = Income ÷ sales revenue
30% = $525,000 ÷ sales revenue
Sales revenue = $1,750,000
Economic Value Added, Weighted-Average Cost of Capital
66. The following data pertain to Dana Industries:
Interest rate on debt capital: 9%
Cost of equity capital: 12%
Before-tax operating income: $35 million
Market value of debt capital: $60 million
Market value of equity capital: $120 million
Total assets: $150 million
Income tax rate: 30%
Total current liabilities: $15 million
Required:
A. Compute Dana’s weighted-average cost of capital.
B. Compute Dana’s economic value added.
C. Briefly explain the meaning of economic value added.
LO: 2 Type: RC, A
Answer:
A. WACC = [(9% x 70%) x $60,000,000) + (12% x $120,000,000)] ÷ ($60,000,000 + $120,000,000)
WACC = ($3,780,000 + $14,400,000) ÷ $180,000,000
WACC = 10.1%
B.
EVA = ($35,000,000 x 70%) - [($150,000,000 - $15,000,000) x 10.1%]
EVA = $24,500,000 - $13,635,000
EVA = $10,865,000
C.
Economic value added (EVA) measures the amount of shareholder wealth being created from a company’s activities and
operations. To expand, debt and equity capital are used to fund activities—activities that are hopefully conducted in a
profitable manner. Profits cover the cost of the related capital, with shareholders benefiting from the residual (i.e., EVA).
Improving Return on Investment
67. The following data pertain to Norris Company for 20x1:
Sales revenue
Cost of goods sold
Operating expenses
Average invested capital
$1,000,000
550,000
400,000
500,000
Required:
A. Calculate the company's sales margin, capital turnover, and return on investment for 20x1.
B. If the sales and average invested capital remain the same, to what level would total costs and expenses have to be
reduced in 20x2 to achieve a 15% return on investment?
C. Assume that costs and expenses are reduced, as calculated in requirement "B." Calculate the firm's new sales margin.
D. Suggest two possible actions that will improve the company's capital turnover.
LO: 2, 3 Type: A, N
Answer:
A. Sales revenue
Less: Cost of goods sold
Operating expenses
Operating income
$1,000,000
$550,000
400,000
$
950,000
50,000
Sales margin: $50,000 ÷ $1,000,000 = 5%
Capital turnover: $1,000,000 ÷ $500,000 = 2
Return on investment: $50,000 ÷ $500,000 = 10%
B.
New income level: $500,000 x 15% = $75,000
Sales revenue
Less: Income
Costs and expenses
$1,000,000
75,000
$ 925,000
Therefore, total costs and expenses must be reduced from $950,000 ($550,000 + $400,000) to
$925,000 in order to achieve a 15% ROI.
C.
Sales margin: $75,000 ÷ $1,000,000 = 7.5%
D.
Capital turnover can be improved by increasing sales revenue and reducing invested capital.
Return on Investment and Residual Income: Calculation and Analysis
68. The following data pertain to the Oxnard Division of Kemp Company:
Divisional contribution margin
Profit margin controllable by the divisional manager
Profit margin traceable to the division
Average asset investment
$ 700,000
320,000
294,400
1,280,000
The company uses responsibility accounting concepts when evaluating performance, and Oxnard's division manager is
contemplating the following three investments. He can invest up to $400,000.
Cost
Expected income
No. 1
$250,000
50,000
No. 2
$300,000
54,000
No. 3
$400,000
96,000
Required:
A. Calculate the ROIs of the three investments.
B. What is the division manager's current ROI, computed by using responsibility accounting concepts?
C. Which of the three investments would be selected if the manager's focus is on Oxnard's divisional performance? Why?
D. If Kemp has an imputed interest charge of 22%, compute the residual income of investment no. 3. Is this investment
attractive from Oxnard's perspective? From Kemp's perspective? Why?
LO: 2, 4 Type: A, N
Answer:
A.
No. 1: $50,000 ÷ $250,000 = 20%
No. 2: $54,000 ÷ $300,000 = 18%
No. 3: $96,000 ÷ $400,000 = 24%
B.
Controllable profit margin ($320,000) ÷ asset investment ($1,280,000) = 25%
C.
None, as all will lower the current ROI.
D.
Residual income: $96,000 - ($400,000 x 22%) = $8,000
This investment is attractive from both Oxnard and Kemp's perspectives. The positive residual
income indicates that the investment income covers the imputed interest charge.
ROI and Residual Income, Investment Evaluation
69. Jasper Corporation is organized in three separate divisions. The three divisional managers are evaluated at year-end, and
bonuses are awarded based on ROI. Last year, the overall company produced a 12% return on its investment.
Managers of Jasper's Iowa Division recently studied an investment opportunity that would assist in the division's future growth.
Relevant data follow.
Income
Invested capital
Iowa
Division
$12,800,000
80,000,000
Investment
Opportunity
$ 4,200,000
30,000,000
Required:
A. Compute the current ROI of the Iowa Division and the division's ROI if the investment opportunity is pursued.
B. What is the likely reaction of divisional management toward the acquisition? Why?
C. What is the likely reaction of Jasper's corporate management toward the investment? Why?
D. Assume that Jasper uses residual income to evaluate performance and desires an 11% minimum return on invested
capital. Compute the current residual income of the Iowa Division and the division's residual income if the investment is
made. Will divisional management likely change its attitude toward the acquisition? Why?
LO: 2, 4 Type: A, N
Answer:
A.
ROI = Income ÷ invested capital
Current: $12,800,000 ÷ $80,000,000 = 16%
If investment is made: ($12,800,000 + $4,200,000) ÷ ($80,000,000 + $30,000,000) = 15.45%
B.
Divisional management will likely be against the acquisition because ROI will be lowered from 16% to
15.45%. Since bonuses are awarded on the basis of ROI, the acquisition will result in less
compensation. However, before a final decision is made, additional insights are needed concerning
how the investment will assist in future growth and in what magnitude.
C.
An examination of the investment reveals a 14% ROI ($4,200,000 ÷ $30,000,000). Corporate
management would probably favor the acquisition. Jasper has been earning a 12% return, and the
investment will help the organization as a whole.
D.
Current residual income of Iowa Division:
Divisional income
Less: Imputed interest charge ($80,000,000 x 11%)
Residual income
$12,800,000
8,800,000
$ 4,000,000
Residual income if investment is made:
Divisional income ($12,800,000 + $4,200,000)
Less: Imputed interest charge [($80,000,000 + $30,000,000) x 11%]
Residual income
$17,000,000
12,100,000
$ 4,900,000
Residual income will increase by $900,000 ($4,900,000 - $4,000,000) from the acquisition. The RI
measure focuses on the corporate perspective, not the divisional perspective, by integrating the firm's
required return on invested capital.
Using ROI and Residual Income in Operating Decisions
70. Deborah Lewis, general manager of the Northwest Division of Berkshire Enterprises, has significant authority over pricing
decisions as well as programs that involve cost reduction/control. The data that follow relate to upcoming divisional
operations:
Average invested capital: $15,000,000
Annual fixed costs: $3,900,000
Variable cost per unit: $80
Number of units expected to be sold: 120,000
Required:
A. Top management will promote Deborah if she can earn a 14% return on investment for the year. What unit selling price
should she establish to get her promotion?
B. Independent of part "A," assume the unit selling price is $132 and that Berkshire has a 16% imputed interest charge. Top
management will promote Deborah to corporate headquarters if her division can generate $200,000 of residual income. If
Deborah desires to move to corporate, what must the division do to the amount of annual fixed costs incurred? Show
your calculations.
LO: 2, 4 Type: A, N
Answer:
A. A 14% return on investment will require the Division to produce income of $2,100,000 ($15,000,000 x 14%). If X = selling
price, then:
120,000X - (120,000 x $80) - $3,900,000 = $2,100,000
120,000X - $9,600,000 - $3,900,000 = $2,100,000
120,000X = $15,600,000
X = $130
B.
If X = fixed cost, then:
[($132 - $80) x 120,000] - X - ($15,000,000 x 16%) = $200,000
$6,240,000 - X - $2,400,000 = $200,000
X = $3,640,000
To achieve her promotion, Deborah must reduce fixed costs by $260,000 ($3,900,000 - $3,640,000).
Basic Transfer Pricing: General Rule
71. Bronx Corporation's Gauge Division manufactures and sells product no. 24, which is used in refrigeration systems. Per-unit
variable manufacturing and selling costs amount to $20 and $5, respectively. The Division can sell this item to external
domestic customers for $36 or, alternatively, transfer the product to the company's Refrigeration Division. Refrigeration is
currently purchasing a similar unit from Taiwan for $33. Assume use of the general transfer-pricing rule.
Required:
A. What is the most that the Refrigeration Division would be willing to pay the Gauge Division for one unit?
B. If Gauge had excess capacity, what transfer price would the Division's management set?
C. If Gauge had no excess capacity, what transfer price would the Division's management set?
D. Repeat part "C," assuming that Gauge was able to reduce the variable cost of internal transfers by $4 per unit.
LO: 6 Type: A
Answer:
A. Refrigeration would be willing to pay a maximum of $33, its current outside purchase price.
B.
The general rule holds that the transfer price be set at the sum of outlay cost and opportunity cost. Thus, ($20 + $5) + $0
= $25.
C.
In this case, the transfer price would amount to $36: ($20 + $5) + ($36 - $20 - $5).
D.
The transfer price would be $32: ($20 + $5 - $4) + ($36 - $20 - $5).
E.
Basic Transfer Pricing
72. Gamma Division of Vaughn Corporation produces electric motors, 20% of which are sold to Vaughan's Omega Division and
80% to outside customers. Vaughn treats its divisions as profit centers and allows division managers to choose whether to
sell to or buy from internal divisions. Corporate policy requires that all interdivisional sales and purchases be transferred at
variable cost. Gamma Division's estimated sales and standard cost data for the year ended December 31, based on a
capacity of 60,000 units, are as follows:
Sales
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating income (loss)
Unit sales
Omega
$ 660,000
660,000
$ ---175,000
$ (175,000)
12,000
Outsiders
$5,760,000
2,640,000
$3,120,000
900,000
$2,220,000
48,000
Gamma has an opportunity to sell the 12,000 units shown above to an outside customer at $80 per unit. Omega can purchase
the units it needs from an outside supplier for $92 each.
Required:
A. Assuming that Gamma desires to maximize operating income, should it take on the new customer and discontinue sales
to Omega? Why? (Note: Answer this question from Gamma's perspective.)
B. Assume that Vaughn allows division managers to negotiate transfer prices. The managers agreed on a tentative price of
$80 per unit, to be reduced by an equal sharing of the additional Gamma income that results from the sale to Omega of
12,000 motors at $80 per unit. On the basis of this information, compute the company's new transfer price.
LO: 6, 7 Type: A
Answer:
A. Yes. Gamma is currently selling motors to Omega at a transfer price of $55 per unit ($660,000 ÷ 12,000 units). A price of
$80 to the new customer will increase Gamma Division's operating income by $300,000 [($80 - $55) x 12,000 units].
B.
The additional operating income to Gamma is $300,000 [($80 - $55) x 12,000 units]. Splitting this amount equally results
in a new transfer price of $67.50, calculated as follows:
Transfer price before reduction
Less: Omega's per-unit share of additional income
[($300,000 x 50%) ÷ 12,000 units]
New transfer price
$80.00
12.50
$67.50
Transfer Pricing: Selling Internally or Externally
73. Sonoma Corporation is a multi-divisional company whose managers have been delegated full profit responsibility and
complete autonomy to accept or reject transfers from other divisions. Division X produces 2,000 units of a subassembly that
has a ready market. One of these subassemblies is currently used by Division Y for each final product manufactured, the
latter of which is sold to outsiders for $1,600. Y's sales during the current period amounted to 2,000 completed units. Division
X charges Division Y the $1,100 market price for the subassembly; variable costs are $850 and $600 for Divisions X and Y,
respectively.
The manager of Division Y feels that X should transfer the subassembly at a lower price because Y is currently unable to
make a profit.
Required:
A. Calculate the contribution margins (total dollars and per unit) of Divisions X and Y, as well as the company as a whole, if
transfers are made at market price.
B. Assume that conditions have changed and X can sell only 1,000 units in the market at $900 per unit. From the company's
perspective, should X transfer all 2,000 units to Y or sell 1,000 in the market and transfer the remainder? Note: Y's sales
would decrease to 1,000 units if the latter alternative is pursued.
LO: 6, 7 Type: A
Answer:
A.
Division X
Sales at $1,600
Transfers at $1,100
Less: Variable costs
at $850
at $600
Contribution margin
Unit contribution margin
B.
Division Y
$ 3,200,000
(2,200,000)
Company
$ 3,200,000
$ 500,000
(1,200,000)
$ (200,000)
(2,900,000)
$ 300,000
$
$
$
$ 2,200,000
(1,700,000)
250
(100)
150
Alternative no. 1: Transfer 2,000 units to Division Y:
Company sales (2,000 x $1,600)
Less: Variable costs [2,000 x $850) + (2,000 x $600)]
Contribution margin
$3,200,000
2,900,000
$ 300,000
Alternative no. 2: Sell 1,000 units in the open market and transfer 1,000 units to Y:
Company sales [(1,000 x $900) + (1,000 x $1,600)]
Less: Variable costs [(2,000 x $850) + (1,000 x $600)]
Contribution margin
$2,500,000
2,300,000
$ 200,000
Division X should transfer all 2,000 units to Division Y to produce an additional $100,000
($300,000 - $200,000) of contribution margin.
Transfer Pricing; Negotiation
74. Kendall Corporation has two divisions: Phoenix and Tucson. Phoenix currently sells a condenser to manufacturers of cooling
systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability
to supply the marketplace.
Kendall is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be
made by Tucson. Related information about the refrigeration system follows.
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs required: $820
Transfer price of condenser: $490
Top management is anxious to introduce the refrigeration system; however, unless the transfer is made, an introduction will
not be possible because of the difficulty of obtaining condensers in the quality and quantity desired. The company uses
responsibility accounting and ROI in measuring divisional performance, and awards bonuses to divisional management.
Required:
A. How would Phoenix's divisional manager likely react to the decision to transfer condensers to Tucson? Show
computations to support your answer.
B. How would Tucson's divisional management likely react to the $490 transfer price? Show computations to support your
answer.
C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price?
D. From a contribution margin perspective, does Kendall benefit more if it sells the condensers externally or transfers the
condensers to Tucson? By how much?
LO: 6, 7 Type: A, N
Answer:
A.
The Phoenix divisional manager will likely be opposed to the transfer. Currently, the division is selling
all the units it produces at $520 each. With transfers taking place at $490, Phoenix will suffer a $30
drop in sales revenue and profit on each unit that is sent to Tucson.
B.
Although Tucson is receiving a $30 "price break" on each unit purchased from Phoenix, the $490
transfer price would probably be deemed too high. The reason: Tucson will lose $25 on each
refrigeration system produced and sold.
Sales revenue
Less: Variable manufacturing costs
$1,285
$820
Transfer price paid to Phoenix
Income (loss)
490
$
1,310
(25)
C.
Kendall uses a responsibility accounting system, awarding bonuses based on divisional performance.
The two divisional managers (or their representatives) should negotiate a mutually agreeable price.
D.
Kendall would benefit more if it sells the condenser externally. Observe that the transfer price is
ignored in this evaluation—one that looks at the firm as a whole.
Produce Condenser;
Sell Externally
Sales revenue
Less: Variable cost
$380; $380 + $820
Contribution margin
$520
Produce Condenser;
Transfer; Sell Refrigeration
System
$1,285
380
$140
1,200
$ 85
were set. Given the difference in tax rates,
should Walker attempt to generate the majority of
its income in Pennsylvania or Germany? Why?
Basic Transfer Pricing: Domestic and International
Implications
75.
Walker, Inc., has a Pennsylvania-based division that
produces electronic components, with a very strong
domestic market for circuit no. 222. The variable
production cost is $140, and the division can sell its
entire output for $190. Walker is subject to a 30%
income tax rate.
LO: 6, 7 Type: RC, A
Alternatively, the Pennsylvania division can ship the
circuit to a division that is located in Mississippi, to be
used in the manufacture of a global positioning
system (GPS). Information about the global
positioning system and Mississippi's costs follow.
B.
Pennsylvania: $160 - $140 = $20; $20 - ($20 x
30%) = $14
Mississippi: $380 - $10 - $120 - $160 = $90; $90
- ($90 x 30%) = $63
Walker, Inc.: $14 + $63 = $77
Selling price: $380
Circuit shipping and handling fees to
C.
Walker's income is unaffected, as the transfer
price is a wash between the divisions. In other
words, Pennsylvania's revenue is offset by
Mississippi's cost.
D.
Pennsylvania: $180 - $140 = $40; $40 - ($40 x
30%) = $28
Germany: $450 - $20 - $150 - $180 - ($180 x
10%) = $82; $82 - ($82 x 45%) = $45.10
Walker, Inc.: $28.00 + $45.10 = $73.10
E.
Tax rates are lower in the U.S. than in Germany
(30% vs. 45%). Thus, Walker would benefit if it
generated the majority of its income in
Pennsylvania.
Answer:
A. The manager would be unhappy, as the division
is being forced to take a "hit" of $30 per circuit
($190 vs. $160).
Mississippi: $10
Labor, overhead, and additional material
costs of GPS: $120
Required:
A. Assume that the transfer price for the circuit was
$160. How would Pennsylvania's divisional
manager likely react to a corporate decision to
transfer the circuits to Mississippi? Why?
B. Calculate Pennsylvania income, Mississippi
income, and income for the company as a whole
if the transfer took place at $160 per circuit.
C. Assuming that transfers took place at a price
higher than $160, would the revised price
increase, decrease, or have no effect on Walker's
income? Briefly explain.
D. Assume that Walker moved its GPS production
facility to a division located in Germany, which is
subject to a 45% tax rate. The transfer took
place at $180. Shipping fees (absorbed by the
overseas division) doubled to $20; the German
division paid an import duty equal to 10% of the
transfer price; and labor, overhead, and
additional material costs were $150 per GPS. If
the German selling price of the GPS amounted to
$450, calculate Pennsylvania income, German
income, and income for Walker as a whole.
E. Suppose that U.S. and German tax authorities
allowed some discretion in how transfer prices
Basic Transfer Pricing: International
76. Cheney Corporation produces goods in the United
States, to be sold by a separate division located in
Italy. More specifically, the Italian division imports
units of product X34 from the U.S. and sells them for
$950 each. (Imports of similar goods sell for $850.)
The Italian division is subject to a 40% tax rate
whereas the U.S. tax rate is only 30%. The
manufacturing cost of product X34 in the United
States is $720. Furthermore, there is a 10% import
duty, computed on the transfer price, that will be paid
by the Italian division and is deductible when
computing Italian income.
Tax laws of the two countries allow transfer prices to
be set at U.S. manufacturing cost or the selling prices
of comparable imports in Italy.
Required:
Analyze the profitability of the U.S. division and the
Italian division to determine whether Cheney as a
whole would be better off if transfers took place at (1)
U.S. manufacturing cost or (2) the selling price of
comparable imports.
C.
LO: 6, 7 Type: A
Answer:
Alternative no. 1: Transfer at U.S. manufacturing cost
United States: $720 - $720 = $0
Italy: $950 - $720 - ($720 x 10%) = $158; $158 ($158 x 40%) = $94.80
Cheney Corporation: $0 + $94.80 = $94.80
Alternative no. 2: Transfer at selling price of
comparable imports
United States: $850 - $720 = $130; $130 - ($130
x 30%) = $91
Italy: $950 - $850 - ($850 x 10%) = $15; $15 ($15 x 40%) = $9
Cheney Corporation: $91 + $9 = $100
LO: 6, 7 Type: A, N
Answer:
A. Courtesy of the shipping fee and import duty,
both of which can be avoided, it is cheaper to
purchase in Switzerland at $125. The shipping
fee and import duty raise the cost to acquire parts
from the U.S. operation to $141 ($110 + $20 +
$11).
B.
Alternative no. 2 would be more profitable: $100.00
vs. $94.80.
Alternatively, Cunningham can ship the part to a
division that is located in Switzerland, to be used in a
product that the Swiss division will distribute
throughout Europe. Information about the Swiss
product and the division's operating environment
follows.
Selling price of final product: $400
Shipping fees to import part no. 54: $20
Labor, overhead, and additional material
costs of final product: $230
Import duties levied on part no. 54 (to be paid
by the Swiss division): 10% of transfer
price
Swiss tax rate: 40%
Based on U.S. and Swiss tax laws, the company has
established a transfer price for part no. 54 equal to
the U.S. market price. Assume that the Swiss division
can obtain part no. 54 in Switzerland for $125.
Required:
A. If you were the head of the Swiss division, would
you be better off to conduct business with your
U.S. division or buy part no. 54 locally? Why?
Show computations.
B. Cunningham's accounting department has
Yes. Cunningham will make $76 ($49 + $27) if
no transfer takes place and part no. 54 is sold in
the U.S.
U.S. operation: $110 - $40 = $70; $70 ($70 x 30%) = $49
Swiss operation: $400 - $125 - $230 =
$45; $45 - ($45 x 40%) = $27
International Transfer Pricing; Analysis of Operations
77. Cunningham, Inc., which produces electronic parts in
the United States, has a very strong local market for
part no. 54. The variable production cost is $40, and
the company can sell its entire supply domestically for
$110. The U.S. tax rate is 30%.
figured that the firm will make $66.40 for each
unit transferred and used in the Swiss division's
product. Rather than proceed with the transfer,
would Cunningham be better off to sell its goods
domestically and allow the Swiss division to
acquire part no. 54 in Switzerland? Show
computations for both U.S. and Swiss operations
to support your answer.
Generally speaking, when tax rates differ
between countries, what income strategy should
a company use in setting its transfer prices? If
the seller is in a low tax-rate country, what type of
price should it set? Why?
When tax rates differ, companies should strive to
generate more income in low tax-rate countries,
and vice versa. Thus, if the seller is in a low taxrate country, it should set a high transfer price
(within allowed limits) to increase that country's
income.
DISCUSSION QUESTIONS
C.
Disadvantages of Return on Investment and Residual
Income
78. Return on investment (ROI) and residual income (RI)
are popular measures of divisional performance. Like
any measure, there are disadvantages or
weaknesses that are an inherent part of these tools.
Briefly discuss a major weakness associated with
each tool.
LO: 4 Type: RC
Answer:
Divisions with high ROIs apparently are very
successful. Top management would therefore like
these managers to aggressively seek additional
investment opportunities. However, the managers will
often reject opportunities that are attractive to the
company as a whole but that have a lower ROI than a
division's current return.
Residual income (RI) does not have the same
weakness as described above for ROI. However, it is
difficult to compare divisions of different sizes since RI
is not a percentage.
Return on Investment: Asset Valuation
79. Return on investment (ROI) is a very popular tool to
evaluate performance. The measurement of ROI is
dependent, in part, on whether fixed assets are
valued at acquisition cost or net book value.
List several advantages of acquisition cost and net
book value as ways to value long-lived assets.
LO: 5 Type: RC
Answer:
Acquisition cost:


The investment base is not affected
by the choice of an arbitrary depreciation method.
The investment base does not
shrink over time because of accumulated
depreciation. This avoids misleading increases
in ROI or residual income.
Net book value:


Consistency with the balance sheet
is maintained.
Consistency with the definition of
income is maintained, as both the numerator and
denominator will reflect depreciation amounts.
General Transfer-Pricing Rule
80. One element of the general transfer-pricing rule is
opportunity cost. Briefly define the term "opportunity
cost" and then explain how it is computed for (1)
companies that have excess capacity and (2)
companies that have no excess capacity.
LO: 6 Type: RC
Answer:
Opportunity cost is the benefit forgone by taking a
particular action. Technically, companies that have
excess capacity are not forgoing profits from business
that has been rejected; thus, the opportunity cost is
zero. In contrast, if a transfer is made in a firm that
has no excess capacity, the firm will have to give up
profits on selected outside transactions. These profits
are measured by computing the contribution margin
on lost sales in external marketplaces.
Negotiated Transfer Prices
81. Although the general rule for transfer prices is the
outlay cost plus opportunity cost, many companies
instead use negotiated prices to price their goods and
services. When are negotiated transfer prices used?
Are such prices consistent or inconsistent with
responsibility accounting? Explain.
LO: 7 Type: RC, N
Answer:
Negotiated transfer prices can be used when no
market price exists for the transferred product or
when a buying division can obtain a cheaper price
outside of the organization.
Negotiated prices are typically consistent with
responsibility accounting; they generally do not
require intervention by top management and thus help
to preserve divisional autonomy. This is important
since the divisional structure is predicated on the
advantage of giving managers a high degree of
responsibility for their unit operations.