CHAPTER 10
BUDGETARY CONTROL AND
RESPONSIBILITY ACCOUNTING
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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This question also appears in the Study Guide.
This question also appears in a self-test at the student companion website.
This question covers a topic in an Appendix to the chapter.
10 - 2
Test Bank for ISV Managerial Accounting, Fourth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY
Brief Exercises
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Exercises
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Completion Statements
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SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
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TF
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TF
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Type
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Study Objective 1
MC
43. MC
190.
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44. MC
191.
MC
146. MC
192.
Study Objective 2
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48. MC
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Study Objective 3
MC
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Study Objective 4
MC
90. MC
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93. MC
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94. MC
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Study Objective 5
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100. MC
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101. MC
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Type
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BE
BE
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BE
BE
Ex
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BE
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195.
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C
Budgetary Control and Responsibility Accounting
10 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
26.
102.
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TF
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Note: TF = True-False
MC = Multiple Choice
Study Objective 6
MC
110. MC
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112. MC
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Study Objective 7
MC
128. MC
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129. MC
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131. MC
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132. MC
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133. MC
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Study Objective 8a
MC
141. MC
143.
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142. MC
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MC
BE
Ex
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MC
MC
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BE
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BE
BE = Brief Exercise
Ex = Exercise
C = Completion
The chapter also contains one set of twelve Matching questions and four Short-Answer Essay
questions.
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.
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.
10 - 4
Test Bank for ISV Managerial Accounting, Fourth Edition
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.
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.
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.
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.
9.
A flexible budget can be prepared for each of the types of budgets included in the master
budget.
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.
Budgetary Control and Responsibility Accounting
10 - 5
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.
14.
The activity index used in preparing a flexible budget should not influence the variable
costs that are being budgeted.
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.
26.
Controllable margin is subtracted from controllable fixed costs to get net income for a
profit center.
27.
The denominator in the formula for calculating the return on investment includes operating
and nonoperating assets.
28.
The formula for computing return on investment is controllable margin divided by average
operating assets.
10 - 6
a
Test Bank for ISV Managerial Accounting, Fourth Edition
29.
When evaluating residual income, the calculation tells management what percentage
return was generated by the particular division being evaluated.
a
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.
30.
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) production and (2) costs.
34.
The terms controllable costs and noncontrollable costs are synonymous with variable
costs and fixed costs, respectively.
35.
Most direct fixed costs are not controllable by the profit center manager.
36.
The manager of an investment center can improve ROI by reducing average operating
assets.
a
37.
Residual income and ROI are used as performance evaluation methods for profit center
performance.
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.
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16.
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18.
Ans.
F
F
T
T
T
T
Item
19.
20.
21.
22.
23.
24.
Ans.
Item
Ans.
F
T
T
F
T
F
25.
26.
27.
28.
a
29.
a
30.
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
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.
Budgetary Control and Responsibility Accounting
10 - 7
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.
b. management may take corrective action.
c. management may modify the future plans.
d. all of these.
42.
The purpose of the departmental overhead cost report is to
a. control indirect labor costs.
b. control selling expense.
c. determine the efficient use of materials.
d. control overhead costs.
43.
The purpose of the sales budget report is to
a. control selling expenses.
b. determine whether income objectives are being met.
c. determine whether sales goals are being met.
d. 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.
10 - 8
Test Bank for ISV Managerial Accounting, Fourth Edition
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. mixed.
b. flexible.
c. variable.
d. 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 static budget is appropriate for
a. variable overhead costs.
b. direct materials costs.
c. fixed overhead costs.
d. 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.
Budgetary Control and Responsibility Accounting
55.
10 - 9
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
Machine supplies
Indirect materials
Depreciation on factory building
Total manufacturing overhead
$240,000
60,000
70,000
50,000
$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.
56.
Rickets Crickets prepared a 2008 budget for 60,000 units of product. Actual production in
2008 was 65,000 units. To be most useful, what amounts should a performance report for
this company compare?
a. The actual results for 65,000 units with the original budget for 60,000 units
b. The actual results for 65,000 units with a new budget for 65,000 units.
c. The actual results for 65,000 units with last year's actual results for 67,000 units
d. It doesn't matter. All of these choices are equally useful.
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 manufacturing 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.
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
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.
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
10 - 10 Test Bank for ISV Managerial Accounting, Fourth Edition
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.
Another name for the static budget is
a. master budget.
b. overhead budget.
c. permanent budget.
d. 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.
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.
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.
b.
c.
d.
67.
1
2
both 1 and 2.
neither 1 nor 2.
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.
b.
c.
d.
1
2
3
1 and 2
Budgetary Control and Responsibility Accounting
10 - 11
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.
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
Variable manufacturing costs
$15,000
$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
10 - 12 Test Bank for ISV Managerial Accounting, Fourth Edition
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
Variable manufacturing costs
$25,000 per month
$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
Variable manufacturing costs
$12,000 per month
$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
Budgetary Control and Responsibility Accounting
80.
10 - 13
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
Fixed
Indirect materials
$140,000
Depreciation
$60,000
Indirect labor
200,000
Taxes
10,000
Factory supplies
20,000
Supervision
50,000
A flexible budget prepared at the 80,000 machine hours level of activity would show total
manufacturing overhead costs of
a. $288,000.
b. $360,000.
c. $384,000.
d. $408,000.
81.
The accumulation of accounting data on the basis of the individual manager who has the
authority to make day-to-day 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
$750,000
150,000
90,000
300,000
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.
10 - 14 Test Bank for ISV Managerial Accounting, Fourth Edition
86.
Top management can control
a. only controllable costs.
b. only noncontrollable costs.
c. all costs.
d. 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.
90.
Management by exception
a. is most effective at top levels of management.
b. 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
a. not a responsibility center.
b. a profit center.
c. a cost center.
d. an investment center.
93.
The foreign subsidiary of a large corporation is
a. not a responsibility center.
b. a profit center.
c. a cost center.
d. an investment center.
Budgetary Control and Responsibility Accounting
10 - 15
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 manager of a cost center is evaluated mainly on
a. 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.
Performance reports for cost centers compare actual
a. total costs with static budget data.
b. total costs with flexible budget data.
c. controllable costs with static budget data.
d. controllable costs with flexible budget data.
99.
In the performance report for cost centers,
a. controllable and noncontrollable costs are reported.
b. fixed costs are not reported.
c. no distinction is made between fixed and variable costs.
d. 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.
10 - 16 Test Bank for ISV Managerial Accounting, Fourth Edition
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.
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.
Controllable margin is most useful for
a. external financial reporting.
b. preparing the master budget.
c. performance evaluation of profit centers.
d. 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
107.
Given below is an excerpt from a management performance report:
Contribution margin
Controllable fixed costs
Budget
$1,000,000
$ 500,000
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.
Actual
$1,050,000
$ 450,000
Difference
$50,000
$50,000
Budgetary Control and Responsibility Accounting
108.
10 - 17
Which of the following are financial measures of performance?
1. Controllable margin
2. Product quality
3. Labor productivity
a.
b.
c.
d.
109.
1
2
3
1 and 3
Given below is an excerpt from a management performance report:
Contribution margin
Controllable fixed costs
Budget
$600,000
$200,000
Actual
$580,000
$220,000
Difference
$20,000 U
$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.
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.
The dollar amount of the controllable margin
a. is usually higher than the contribution margin.
b. is usually lower than the contribution margin.
c. is always equal to the contribution margin.
d. 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
Contribution margin
Total direct fixed costs
Average total operating assets
$500,000
100,000
60,000
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
Charlotte
Richmond
Investment
$120,000
$540,000
Controllable Margin
$30,000
$50,000
ROI
25%
9.25%
10 - 18 Test Bank for ISV Managerial Accounting, Fourth Edition
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
Controllable margin
Total average assets
Fixed costs
$ 700,000
80,000
2,000,000
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%.
116.
Perot Manufacturing reported the following items for 2008:
Income tax expense
Contribution margin
Controllable fixed costs
Interest expense
Total operating assets
$ 30,000
100,000
40,000
20,000
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
Budgetary Control and Responsibility Accounting
10 - 19
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.
10 - 20 Test Bank for ISV Managerial Accounting, Fourth Edition
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
Contribution margin
Total fixed costs
Average total operating assets
$500,000
90,000
60,000
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 measure frequently used to evaluate the performance of the manager of an investment
center is
a. the amount of profit generated.
b. the rate of return on funds invested in the center.
c. the percentage increase in profit over the previous year.
d. departmental gross profit.
128.
Return on investment is calculated by dividing
a. contribution margin by sales.
b. controllable margin by sales.
c. contribution margin by average operating assets.
d. controllable margin by average operating assets.
Budgetary Control and Responsibility Accounting
10 - 21
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.
In the formula for ROI, idle plant assets are
a. included in the calculation of controllable margin.
b. included in the calculation of operating assets.
c. excluded in the calculation of operating assets.
d. excluded from total assets.
134.
In computing ROI, land held for future use
a. will hurt the performance measurement of an investment center's manager.
b. is important in evaluating the performance of a profit center manager.
c. is included in the calculation of operating assets.
d. is considered a nonoperating asset.
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
10 - 22 Test Bank for ISV Managerial Accounting, Fourth Edition
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.
Which of the following valuations of operating assets is not readily available from the
accounting records?
a. Cost
b. Book value
c. Market value
d. Both cost and market value
a
138. The following information is available for Aggie Auto Sales:
Average operating assets
Controllable margin
Contribution margin
Minimum rate of return
$800,000
80,000
200,000
8%
How much is Aggie Auto’s residual income?
a. $136,000
b. $720,000
c. $16,000
d. $64,000
a
139. What is the goal of residual income?
a. To maximize the amount of costs which are controllable
b. To maximize profits
c. To maximize the total amount of residual income
d. To maximize controllable margin
a
140. Which one of the following is a correct statement about residual income?
a. Its goal is to maximize profits of an investment center.
b. It is less effective for evaluating investment centers than ROI.
c. It is the ratio of controllable margin to the minimum rate of return on average operating
assets.
d. It evaluates performance by comparing the return of an investment center with the
company’s minimum rate of return.
a
141. Which one of the following does not impact the amount of residual income?
a. Contribution margin
b. Net income
c. Sales
d. Controllable costs
a
142. For what purpose do companies calculate residual income?
a. To determine whether decentralization is possible or not
b. To motivate managers through possible termination
c. To evaluate management performance
d. To measure company profits
Budgetary Control and Responsibility Accounting
10 - 23
a
143. Niceville Company had sales of $400,000, variable costs of $200,000, and direct fixed
costs totaling $100,000. The company’s operating assets total $800,000, and its required
return is 10%. How much is the residual income?
a. $120,000
b. $20,000
c. $80,000
d. $320,000
a
144. Oxford Company earned controllable margin of $125,000 on sales of $1,600,000. The
division had average operating assets of $1,300,000. The company requires a return on
investment of at least 8%. How much is residual income?
a. $104,000
b. $21,000
c. $146,000
d. $128,000
a
145. The performance of the manager of Purina Division is measured by residual income.
Which of the following would decrease the manager’s performance measure?
a. Decrease in required rate of return
b. Increase in amount of return on investment desired
c. Increase in sales
d. 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.
A static budget report is appropriate for
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
10 - 24 Test Bank for ISV Managerial Accounting, Fourth Edition
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.
151.
A flexible budget is appropriate for
a.
b.
c.
d.
Direct Labor Costs
No
Yes
Yes
No
Manufacturing Overhead Costs
No
Yes
No
Yes
152.
All of the following statements are correct about management by exception except it
a. enables top management to focus on problem areas that need attention.
b. means that management has to investigate every budget difference.
c. requires that there must be some guidelines for identifying an exception.
d. means that top management's review of a budget report is focused primarily on
differences between actual results and planned objectives.
153.
Controllable costs for responsibility accounting purposes are those costs that are directly
influenced by
a. a given manager within a given period of time.
b. a change in activity.
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.
Which of the following will cause an increase in ROI?
a. An increase in variable costs
b. An increase in average operating assets
c. An increase in sales
d. An increase in controllable fixed costs
156.
Costs that relate specifically to one center and are incurred for the sole benefit of that
center are
a. common fixed costs.
b. direct fixed costs.
c. indirect fixed costs.
d. noncontrollable fixed costs.
Budgetary Control and Responsibility Accounting
157.
10 - 25
If controllable margin is $300,000 and the average investment center operating assets are
$1,000,000, the return on investment is
a. .33%.
b. 3.33%.
c. 10%.
d. 30%.
Answers to Multiple Choice Questions
Item
Ans.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
c
b
d
d
d
c
d
c
d
a
b
c
d
a
c
b
b
a
Item
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
Ans.
Item
b
b
d
b
c
d
d
a
c
a
c
d
d
c
d
d
d
b
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
b
b
d
d
c
b
d
c
d
a
c
b
c
c
c
d
b
a
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
b
d
c
c
a
b
d
c
c
d
b
c
c
c
a
b
a
b
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
124.
125.
126.
127.
b
b
d
b
a
b
b
a
a
b
c
d
c
a
c
a
c
b
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.
d
a
a
a
c
c
d
c
c
c
c
c
d
b
c
b
b
b
Item
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
Direct labor
Manufacturing overhead
Fixed costs per month
Supervisory salaries
Depreciation
Other fixed costs
$6.50 per unit
2.40 per unit
1.10 per unit
$12,600
3,500
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
10 - 26 Test Bank for ISV Managerial Accounting, Fourth Edition
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
Indirect materials - variable
Supervisor salaries
Depreciation on factory equipment
Direct labor
Property taxes on factory
$18,000
2,000
15,000
4,000
10,000
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
Direct labor
Variable overhead
Factory depreciation
Factory supervisory salaries
Other fixed factory costs
$12 per unit
$6,500
5,000
9,000
7,800
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.
Budgetary Control and Responsibility Accounting
Solution 161
10 - 27
(5 min.)
Sales commissions
(4% × $500,000)
Sales manager’s salary
Shipping expenses
(1% × $500,000)
Miscellaneous selling: Fixed portion
Variable: (0.5% × $500,000)
Budgeted selling expenses
$ 20,000
80,000
5,000
1,000
2,500
$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
Contribution margin
Interest expense
Variable costs
Total assets
Instructions
Compute the controllable margin for 2008.
Solution 163
(2 min.)
$142,000 – $77,000 = $65,000
$ 77,000
142,000
20,000
80,000
$925,000
Actual
$ 65,500
81,000
34,500
$181,000
Differences
$1,700 U
200 F
500 F
$1,000 U
10 - 28 Test Bank for ISV Managerial Accounting, Fourth Edition
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.
Budgetary Control and Responsibility Accounting
Solution 166
10 - 29
(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
Bud
Wise
Er
Average Investment
$160,000
140,000
220,000
Controllable Margin
$32,000
16,000
66,000
ROI
20.0%
11.4%
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
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%
a
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.
10 - 30 Test Bank for ISV Managerial Accounting, Fourth Edition
Solution 168
(5 min.)
Toys
$120,000
108,000
$ 12,000
Controllable margin
Average assets × 12%
Residual income
Shirts
$ 10,000
24,000
$(14,000)
a
BE 169
A & B Flooring has 4 divisions. Its hardwood flooring division’s information follows for 2008:
Sales
Controllable margin
Variable costs
Average operating assets
$4,000,000
250,000
60,000
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
Product A
Product B
Total sales
Budget
$140,000
216,000
$356,000
Actual
$138,450
220,720
$359,170
Difference
$1,550 U
4,720 F
$3,170 F
Budgetary Control and Responsibility Accounting
10 - 31
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
(8–10 min.)
a.
Variable costs:
Direct labor
Direct materials
Fixed costs
Total costs
b.
6,000 Units
Unit Variable Cost
9,000 Units
$36,000
6,000
42,000
24,000
$66,000
$6.00
1.00
$54,000
9,000
63,000
24,000
$87,000
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
Variable overhead costs
Indirect labor
Indirect materials
Factory supplies
Total variable
Fixed overhead costs
Depreciation
Supervision
Property taxes
Total fixed
Total costs
120,000 Direct Labor Hours
$420,000
90,000
30,000
540,000
180,000
120,000
96,000
396,000
$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.
10 - 32 Test Bank for ISV Managerial Accounting, Fourth Edition
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
Variable costs
Indirect materials
Indirect labor
Factory supplies
Total variable
Fixed costs
Depreciation
Supervision
Property taxes
Total fixed
Total costs
3,000
4,000
$ 1,500
15,000
4,500
21,000
$ 2,000
20,000
6,000
28,000
20,000
10,000
15,000
45,000
$66,000
20,000
10,000
15,000
45,000
$73,000
Instructions
Prepare a flexible budget at the 5,000 direct labor hours of activity.
Budgetary Control and Responsibility Accounting
Solution 173
10 - 33
(15–20 min.)
DAILEY COMPANY
Monthly Flexible Manufacturing Overhead Budget
Mixing Department
Activity level
Direct labor hours
Variable costs
Indirect materials
Indirect labor
Factory supplies
Total variable
Fixed costs
Depreciation
Supervision
Property taxes
Total fixed
Total costs
5,000
$ 2,500
25,000
7,500
35,000
20,000
10,000
15,000
45,000
$80,000
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.
10 - 34 Test Bank for ISV Managerial Accounting, Fourth Edition
Solution 174
(15–20 min.)
FAGAN COMPANY
Monthly Flexible Manufacturing Overhead Budget
Activity level
Machine hours
2,000
3,000
4,000
Variable costs
Indirect labor
Indirect materials
Maintenance
Utilities
Total variable
$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
Fixed costs
Supervision
Insurance
Property taxes
Depreciation
Total fixed
Total costs
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
Budgetary Control and Responsibility Accounting
10 - 35
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
Insurance
Property taxes
Depreciation
$600
200
300
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
Budget at
3,000 hrs.
Actual at
3,000 hrs.
Difference
Favorable F
Unfavorable U
Variable costs
Indirect labor
Indirect materials
Maintenance
Utilities
Total variable
$15,000
7,500
1,500
900
24,900
$14,000
8,100
1,400
950
24,450
$1,000
600
100
50
450
F
U
F
U
F
Fixed Costs
Supervision
Insurance
Property taxes
Depreciation
Total fixed
Total costs
600
200
300
900
2,000
$26,900
720
200
300
930
2,150
$26,600
120
—
—
30
150
$ 300
U
U
U
F
10 - 36 Test Bank for ISV Managerial Accounting, Fourth Edition
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
Variable expenses
Sales commissions
Advertising
Traveling
Delivery
Total variable
Fixed expenses
Sales salaries
Depreciation
Total fixed
Total costs
$200,000
$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.
Budgetary Control and Responsibility Accounting
Ex. 178
10 - 37
(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.
10 - 38 Test Bank for ISV Managerial Accounting, Fourth Edition
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
Variable costs:
Direct labor
Utilities
Fixed costs
Total costs
(8–10 min.)
2,000 Units
Unit Variable Cost
6,000 Units
$ 8,000
2,000
10,000
16,000
$26,000
$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
Direct materials
Direct labor
Equipment depreciation
Indirect labor
Indirect materials
Rent and insurance
Budget at 5,000 Units
$60,000
75,000
5,000
7,500
9,000
12,000
Actual Amounts at 5,800 Units
$71,000
86,500
5,000
8,600
9,600
13,000
Instructions
Prepare a performance budget report for Colter Company for the year.
Budgetary Control and Responsibility Accounting
Solution 181
10 - 39
(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
Rent and insurance
Total costs
Budget
$ 69,600
87,000
5,000
8,700
10,440
12,000
$192,740
Actual
$ 71,000
86,500
5,000
8,600
9,600
13,000
$193,700
Differences
$1,400 U
500 F
0
100 F
840 F
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.
10 - 40 Test Bank for ISV Managerial Accounting, Fourth Edition
Solution 182
(20–25 min.)
(a)
FRIENDLY COMPANY
Mixing Department
Manufacturing Overhead Cost Responsibility Report
For the Months of July and August
Controllable Cost
Indirect materials
Indirect labor
Factory supplies
Supervision
Total costs
(b)
Budget
21,000
36,000
6,000
12,500
75,500
July
Actual
20,500
39,500
7,600
11,500
79,100
Difference
500 F
3,500 U
1,600 U
1,000 F
3,600 U
Budget
24,500
42,000
7,000
12,500
86,000
August
Actual
Difference
25,100
600 U
40,700
1,300 F
8,200
1,200 U
13,000
500 U
87,000
1,000 U
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
Indirect labor
Utilities
Maintenance
$20,000
12,000
10,000
6,000
Fixed Costs
Supervisor's salary
Depreciation
Property taxes
$40,000
8,000
4,500
Actual variable costs for the first quarter were:
Indirect materials
Indirect labor
Utilities
Maintenance
$18,600
13,200
10,500
5,300
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.
Budgetary Control and Responsibility Accounting
Solution 183
10 - 41
(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
Variable costs
Controllable direct fixed costs
Noncontrollable direct fixed costs
Indirect fixed costs
$6,000,000
4,200,000
800,000
530,000
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
(a)
(15–20 min.)
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.
10 - 42 Test Bank for ISV Managerial Accounting, Fourth Edition
Ex. 185
RTO Rental Company reported the following:
Beginning of year operating assets
End of year operating assets
Contribution margin
Sales
Controllable fixed costs
$2,200,000
2,000,000
1,000,000
5,000,000
643,000
Its required return is 10%.
Instructions
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:
Departmental controllable margin
Average operating assets
Sales
ROI
Department A
$120,000
?
800,000
10%
Department B
?
$400,000
250,000
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
1.
2.
3.
4.
(8–12 min.)
$1,200,000 ($120,000 ÷ .10)
$48,000 ($400,000 × .12)
16% [$48,000 ÷ ($400,000 – $100,000)]
15% [($120,000 + $60,000) ÷ $1,200,000]
Budgetary Control and Responsibility Accounting
10 - 43
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. Reduce controllable fixed costs by 20% with no change in sales or variable costs.
2. Reduce average operating assets by 20% with no change in controllable margin.
3. 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
(a)
(15–20 min.)
Controllable margin
Return on investment = ————————————
Average operating assets
$500,000
2008 ROI = —————— = 25%
$2,000,000
(b)
$560,000 (a)
1. ——————— = 28%
$2,000,000
$500,000
2. ———————— = 31.3%
$1,600,000 (b)
$580,000 (c)
3. ——————— = 29%
$2,000,000
(a)
$500,000 + ($300,000 × 20%) = $560,000.
(b)
$2,000,000 – ($2,000,000 × .20) = $1,600,000.
(c)
Contribution margin 20%
$4,000,000 – $3,200,000
(————————————
);
$4,000,000
$500,000 + ($400,000 × 20%) = $580,000.
10 - 44 Test Bank for ISV Managerial Accounting, Fourth Edition
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
(1)
(2)
(3)
(4)
(9–14 min.)
Controllable margin ($1,200,000 – $500,000) = $700,000
Average operating assets ($700,000 ÷ .10) = $7,000,000
Controllable margin ($800,000 – $200,000) = $600,000
ROI ($600,000 ÷ $4,000,000)
=
15%
Ex. 189
The data for an investment center is given below.
1/1/08
$ 300,000
3,000,000
250,000
1,200,000
Current assets
Plant assets
Idle plant assets
Land held for future use
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 = $3,500,000
($300,000 + $500,000) ÷ 2 =
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%
Budgetary Control and Responsibility Accounting
10 - 45
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
___________________, or it could decide to modify ___________________.
take
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.
191.
192.
193.
194.
195.
196.
budgetary control
actual results, planned objectives
corrective action, future plans
static
flexible
fixed
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
10 - 46 Test Bank for ISV Managerial Accounting, Fourth Edition
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.
2.
3.
4.
5.
6.
F
D
G
B
E
A
7.
8.
9.
10.
11.
12.
C
J
L
I
K
H
Budgetary Control and Responsibility Accounting
10 - 47
SHORT-ANSWER ESSAY QUESTIONS
S-A E 203
The master budget and flexible budgets are important aids to management in performing the
management functions of planning and control. Briefly describe how planning and control are
facilitated by preparing a master budget and flexible budgets. How are these two types of budgets
interrelated with planning and control?
Solution 203
The system of responsibility reporting begins with the lowest level of responsibility and moves up
through each level. At the lowest level each manager receives detailed information concerning
the controllable costs for which they are responsible. At higher levels of responsibility the detail of
the lower levels may be omitted but the report encompasses all the areas for which the higher
level has responsibility. For example, a plant manager will receive reports concerning the
controllable costs of each of the plant departments.
Management by exception is possible in such a system because, if management at the higher
levels of responsibility identifies a significant variance, they can receive detailed reports for each
lower level of responsibility. This allows management to investigate causes and remedies for
variances as they feel necessary.
S-A E 204
Managers are motivated to accomplish objectives if they feel that their efforts will be fairly
evaluated. Explain why an organization may use different bases for evaluating the performance of
managers of different types of responsibility centers.
Solution 204
Because a manager should only be evaluated based on the performance results of matters that
are controllable by the manager, it is necessary to use different bases for evaluation. An
investment center manager can control the investment funds available as well as costs and
revenues. Return on investment is therefore an appropriate basis for evaluation. A profit center,
however, controls only revenues and expenses but not investment, so controllable margin is a
more appropriate basis relating only to the areas controllable by the profit center. Similarly,
because only costs are controllable for a cost center, such a center is evaluated only on the basis
of its controllable costs.
S-A E 205 (Ethics)
Howard Corporation evaluates its managers based on return on investment (ROI). Ann Wilsen
and Jill Reese, managers of the electronics and housewares departments respectively, have
recently suffered from declining profits in their departments. Over lunch, they discuss the
problem, and how they could improve performance. Most of the discussion centers around ways
to increase sales. Near the end of the lunch period, however, Jill remarks that there are two
components to consider, and that they have considered only one. She wonders whether there is
some way to reduce investment, and by decreasing the denominator of the ROI fraction, to
improve the final result.
10 - 48 Test Bank for ISV Managerial Accounting, Fourth Edition
S-A E 205 (cont.)
Back at work, Ann continues to mull over Jill's remarks. She decides to pursue the matter further,
and before the end of the quarter she has sold quite a bit of older equipment and replaced it with
equipment obtained with a short-term lease. Her performance, measured by ROI, is markedly
improved, although sales continue to be disappointing.
Required:
1. Who are the stakeholders in this situation?
2. Is Ann's action ethical? Briefly explain.
Solution 205
1. The stakeholders include
Ann Wilsen
Jill Reese
managers of Howard Corporation
shareholders of Howard Corporation
2. Ann's action is probably not ethical. It appears that she has replaced equipment that had been
purchased only because such a move would improve her ROI. Of course, it is possible that
the leased equipment will allow her department to function better, resulting in a benefit for the
company. Any action to promote one's own benefit at the expense of the company's welfare is
unethical.
S-A E 206 (Communication)
Clara County Electronics manufactures circuit boards for computer-controlled appliances for the
home. The sales have been very volatile, sometimes stressing the plant's capacity, and
sometimes depressingly slow. During a recent slow period, Mike Farmer, a production supervisor,
complained to Sue Stein, accounting manager, about the flexible budget.
"I try as hard as I can to meet the budget," he says, "and then I find out that just meeting the
budget's not good enough. Last month, when we sold 8,000 units, I was $10,000 under my
budget, and then you all blow me out of the water with your report that I actually was $5,000 over,
because sales were slow. I thought this responsibility accounting business was supposed to
mean we are held accountable just for things we can control. How do we control sales? At the
beginning of the year, you gave us all targets. Mine says that for an average month of 10,000 unit
sales, I should spend about $82,000. I spend less, and get an unfavorable budget report. What
gives?"
Required:
Write a short memo to respond to Mr. Farmer.
Budgetary Control and Responsibility Accounting
Solution 206
TO:
Mike Farmer
FROM: Sue Stein
RE:
Budget results
I appreciate your coming to me with your questions about the budget. I understand
that the new procedures can be frustrating, especially when you receive an
unfavorable report that you were not expecting.
Actually, the flexible budget does mean that you are held accountable only for the
costs that you can control. Last month, we calculated the cost of producing 8,000
units that were actually sold (and not the 10,000 that were estimated to be sold).
Your costs were greater than that, although still less than the amount you would
have been allowed had the full 10,000 been sold. Please check the individual items
on your budget report. We noted which ones exceeded the budget. You can then
focus attention on those items for cost control.
Please contact the Accounting Department if you have further questions.
(signed)
10 - 49