CHAPTER 11BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item SO BT Item SO BT 1. 2. 3. 4. 5. 6. 7. 8. 1 1 1 2 2 2 2 2 K C K K C K K C 40. 41. 42. 43. 44. 45. 46. 47. 7 3 3 3 3 3 7 2,3 48. Item S O BT 9. 10. 11. 12. 13. 14. 15. 16. 3 3 3 3 3 3 3 3 C K K C C C K K AN AP AP AP AP AN AP AN 66. 67. 68. 69. 70. 71. 72. 73. 3 3 3 2 3 3 2 3 C C C K C K C C 92. 93. 94. 95. 96. 97. 98. 99. 4 4 5 5 5 5 5 6 K K C C C C K C 1 C 74. 3 K 100. 6 K 49. 1 K 75. 3 K 101. 6 C 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 1 1 1 1 2 2 2 2 2 2 2 C K K K C C C K C C C 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 3 3 2 4 4 4 4 4 4 4 4 C C C K C C C K C C C 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 6 6 6 6 6 6 6 6 6 6 6 61. 62. 63. 64. 65. 2 3 3 3 3 C C AP AP C 87. 88. 89. 90. 91. 4 4 4 4 4 C C C C C 113. 114. 115. 116. 117. 7 7 7 7 7 170. 7 AP 174. 4,5 AP 178. 3 AP 171. 172. *173. 6 7 8 AP AP AP 175. 176. 177. 3 3 7 AP AP AN 179. 180. 181. 3 3 3 AP AP AP 190. 191. 5 3 AP AP 194. 195. 3,5 3 AP AP 198. 199. Item SO BT Item SO BT 5 5 6 7 7 8 8 8 K C K K K K C C 33. 34. 35. 36. 37. 38. *39. 4 4 4 7 7 7 8 K K K K K C K 7 7 7 7 7 7 7 8 C C K C AP K C AP 144. 145. 146. 147. 148. *149. 150. *151. 7 7 6 7 4 8 4 8 C K K AN K C K C 8 K 152. 7 AP True-False Statements 17. 18. 19. 20. 21. 22. 23. 24. 3 3 4 4 4 4 4 4 K K C C C C C K 25. 26. 27. 28. 29. *30. *31. *32. Multiple Choice Questions 8 C *153. 8 K C AP C AP C C K K C K C 118. 119. 120. 121. 122. 123. 124. *125 . *126 . *127 . 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 2 3 3 3 2,3 7 6 7 8 7 4 C AP K AP C E AP AP K AN K *154. 155. 156. *157. *158. 159. 160. 161. 162. 163. 164. AP AN AP AP AN E K C C C C K K C AP C 139. 140. 141. 142. 143. 4 7 7 7 7 C AN AP AP AN 165. 166. 167. 168. 169. 8 7 7 8 8 7 1 2 3 1 3,5, 6 4,5 5,6 7 8 7,8 *182 . 183. 184. 185. 8 AP 186. 3 AP 3 7 7 AP AN AP 187. 188. 189. 3 5 6 AP AP AP 202. 203. 6,7 7 AP AN 206. 207. 7 4 AP C C K C C C Brief Exercises Exercises 6 3 AP AP Budgetary Control and Responsibility Accounting Item SO BT Item SO BT 192. 193. 6 4,5 AP AP 196. 197. 3 3,6 AP AP 211. 212. 213. 1 1 1 K K K 214. 215. 216. 1 3 3 K K K 223. 1-7 K 224. 1-4 E Item 200. 201. S O 5 5 BT Item SO BT Item SO BT AP AN 204. 205. 7 4 AN C 208. 209. 210. 7 8 3,4,6 AP AP AN 220. 221. 222. 4 7 7 K K K 227. 1-7 E Completion Statements 217. 218. 219. 4 4 4 K K K Matching Short Answer 225. 1-4 E 226. 11-2 1-3 *This topic is dealt with in an Appendix to the chapter. E Budgetary Control and Responsibility Accounting 11-3 SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type Item Type Item Type Item Type Item Type C Ma Es 225. 226. 227. Es Es Es 160. 163. MC MC MC MC MC Ma 224. 226. 227. 161. Es Es Es MC BE BE BE BE Ex Ex C C Ma Es Es Es Es 43. 45. 162. 164. 210. MC MC MC MC Ex Ex Ex Ex Ex 197. 199. 215. 216. 223. 224. 225. 226. 227. MC MC MC MC BE Ex 205. 207. 217. 218. 219. 220. Ex C C C C C 223. 224. 225. 227. 165. 210. Ma Es Es Es MC Ex Ex Ma Es 164. 165. 166. MC MC MC 188. BE MC BE Ex Ex 198. 202. 223. 227. Ex Ex Ma Es 164. 166. 189. 210. MC MC BE Ex MC MC MC MC MC BE BE 177. 184. 185. 202. 203. 204. 206. BE BE BE Ex Ex Ex Ex 221. 222. 223. 227. 167. 169. 208. C C Ma Es MC MC Ex 209. MC Study Objective 1 1. 2. 3. TF TF TF 48. 49. 50. MC MC MC 51. 52. 53. MC MC MC 4. 5. 6. 7. TF TF TF TF 8. 47. 54. 55. TF MC MC MC 56. 57. 58. 59. MC MC MC MC 9. 10. 11. 12. 13. 14. 15. 16. 17. TF TF TF TF TF TF TF TF TF 18. 41. 42. 44. 47. 62. 63. 64. 65. TF MC MC MC MC MC MC MC MC 66. 67. 68. 70. 71. 73. 74. 75. 76. MC MC MC MC MC MC MC MC MC 211. 212. 213. C C C 214. 223. 224. Study Objective 2 60. 61. 69. 72. MC MC MC MC 78. 128. 132. 223. Study Objective 3 77. 129. 130. 131. 132. 175. 176. 178. 179. MC MC MC MC MC BE BE BE BE 180. 191. 183. 186. 187. 191. 194. 195. 196. BE Study Objective 4 19. 20. 21. 22. 23. 24. TF TF TF TF TF TF 33. 34. 35. 79. 80. 81. TF TF TF MC MC MC 82. 83. 84. 85. 86. 87. MC MC MC MC MC MC 88. 89. 90. 91. 92. 93. MC MC MC MC MC MC 138. 139. 148. 150. 174. 193. 25. 26. 94. TF TF MC 95. 96. 97. MC MC MC 98. 174. 190. MC 27. 99. 100. 101. TF MC MC MC 102. 103. 104. 105. MC MC MC MC 106. 107. 108. 109. MC MC MC MC 28. 29. 36. 37. 38. 40. 46. TF TF TF TF TF MC MC 113. 114. 115. 116. 117. 118. 119. MC MC MC MC MC MC MC 120. 121. 122. 123. 124. 133. 135. MC MC MC MC MC MC MC *30. *31. TF TF TF MC *127. *149. MC MC *154. *157. MC MC *173. *182. BE BE *153. 168. MC MC *32. TF *39. *125 . *126 . MC *151. MC *158. MC *136. MC 169. MC Study Objective 5 193. 201. Ex 194. Ex 223. BE Ex 200. Ex 227. Study Objective 6 110. 111. 112. 134. MC MC MC MC 146. 171. 192. 197. Study Objective 7 137. 140. 141. 142. 143. 144. 145. MC MC MC MC MC MC MC 147. 152. 155. 156. 159. 170. 172. Study Objective *8 Note: TF = True-False MC = Multiple Choice C = Completion BE = Brief Exercise Ex = Exercise Ma = Matching Es = Essay 3. and (d) modifying future plans. 7. 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. To develop the flexible budget. 2. it is necessary to distinguish between controllable and noncontrollable fixed costs and to identify three types of responsibility centres: cost. . Responsibility reports for cost centres compare actual costs with flexible budget data. and no distinction is made between variable and fixed costs. Responsibility reports show contribution margin. Budgetary control consists of (a) preparing periodic budget reports that compare actual results with planned objectives. it is necessary to: (1) Identify the activity index and the relevant range of activity. Explain the development of flexible budgets and the usefulness of flexible budget reports. 6. Third Canadian Edition CHAPTER STUDY OBJECTIVES 1. Describe the concept of budgetary control. Identify the content of responsibility reports for profit centres. and investment. Evaluate the usefulness of static budget reports. (2) Identify the variable costs. The evaluation of a manager's performance is based on the matters directly under the manager's control. 4. 5. and determine the budgeted variable costs per unit of activity for each cost. and controllable margin for each profit centre.11-4 Test Bank for Managerial Accounting. They are also appropriate in assessing a manager's effectiveness in controlling fixed costs and expenses when (a) actual activity closely approximates the master budget activity level and/or (b) the behaviour of the costs in response to changes in activity is fixed. In responsibility accounting. Explain the basis and formula that are used for evaluating performance in investment centres. profit. and determine the budgeted amount for each cost. Flexible budget reports permit an evaluation of a manager's performance in controlling production and costs. (3) Identify the fixed costs. (c) taking appropriate corrective action. The reports show only controllable costs. Describe the concept of responsibility accounting. The primary basis for evaluating performance in investment centres is return on investment (ROI). (4) Prepare the budget for selected increments of activity within the relevant range. controllable fixed costs. Static budget reports are useful in evaluating the progress toward planned sales and profit goals. Indicate the features of responsibility reports for cost centres. (b) analyzing the differences to determine their causes. if necessary. The formula for computing ROI for investment centres is: Controllable margin (in dollars) ÷ Average operating assets. .Budgetary Control and Responsibility Accounting *8. ROI is controllable margin divided by average total assets. 11-5 Explain the difference between ROI and residual income. 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. . 5. 6. If actual results are different from planned results by a large amount. 11. Third Canadian Edition TRUE-FALSE STATEMENTS 1. The amount of fixed costs which appear on the flexible budget is the same as those appearing on the master budget. A flexible budget is based on the master budget. 14. 12. 4. 2. A static budget considers that actual activity is often different from the level of activity expected. whereas others are prepared less frequently depending on the activities being monitored. The activity index used in preparing a flexible budget should be the basis of the variable costs that are being budgeted. 3. 9.11-6 Test Bank for Managerial Accounting. 7. Cash budget reports are often prepared daily. 13. Budget reports comparing actual results with planned objectives should be prepared weekly to be most effective. Evaluating a manager's performance in controlling variable costs is effectively achieved using a static budget. 10. A flexible budget is more useful in evaluating a manager's performance than a static budget. A static budget is one that is geared to the most profitable level of activity for a company. Flexible budgeting relies on the assumption that unit fixed costs will remain constant within the relevant range of activity. The master budget is the basis of developing flexible budgets. A static budget is a series of flexible budgets at different levels of activities. A flexible budget should be prepared for each of the types of budgets included in the master budget. the difference should be investigated by management to achieve effective budgetary control. 8. More costs become controllable as one moves up to each higher level of managerial responsibility. “The buck stops here” implies that all costs and revenues are controllable at some level of responsibility within a company. 26. 25. the responsibility reports become more detailed. 21. 22. 24. 23. . 27. Direct fixed costs are synonymous with common costs. 18. Flexible budgets are widely used in production departments. In a responsibility accounting reporting system. Policies regarding when a difference between actual and planned results should be investigated are generally more restrictive for controllable items than for non-controllable items. all fixed costs are controllable by its manager.Budgetary Control and Responsibility Accounting 11-7 15. 20. 16. 19. A flexible budget report will compare actual costs with the budgeted costs at the actual activity level achieved. A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost ÷ activity level). Under responsibility accounting. both controllable and non-controllable costs receive the same attention. Cost centre managers are evaluated on the profitability of their centres. as one moves up each level of responsibility in an organization. Since a profit centre is an independent entity. Cost centres are not classified as responsibility centres since there is no revenue responsibility. Management by exception means that management will investigate all areas where actual results are greater than planned results. 17. and least used in service departments. Residual income and ROI are used as performance evaluation methods for profit centre performance. Decreasing the average operating assets can increase ROI. 34. 29. 37. 35.11-8 Test Bank for Managerial Accounting. *39. *30. Third Canadian Edition 28. 33. Investment centres generate a return on operating assets. 36. Residual income is the income that remains after subtracting controllable costs from controllable margin. 38. When ROI is calculated. When evaluating residual income. Operating assets include all those listed under Assets on an investment centre’s balance sheet. 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. *32. Investment centres rarely generate revenues by selling products. the calculation tells management what percentage return was generated by the particular division being evaluated. Return on investment is the primary basis for evaluating profit and investment centre managers. *31. Investment and profit centres generate both revenues and costs. . Increasing either controllable margin or the average operating assets can raise ROI. management would prefer a high percentage. 33. 13. *39. Ans. 17. 7. Ans. Ans. 2. 38. T F T F F F F Item 29. 21. 6. *31. T F T F . 26. 18. 37. F F T F T F F Item 22. *30. 19. 34. Ans.Budgetary Control and Responsibility Accounting 11-9 ANSWERS TO TRUE-FALSE STATEMENTS Item 1. 24. 10. Ans. 12. 5. 4. 25. 9. Ans. *32. 27. 20. F F F T F T T Item 36. 3. 16. 23. 28. 14. F T T T T F F Item 8. 11. 35. F T F F T T T Item 15. 000 Variable Overhead 1.000 $700.000 41.000 ROI 33. $7.000.938 d.000 c.57% The Steak House segment has currently $5. $210.500. $7.03/machine hour b.000 hours Direct Materials $475. What is the budgeted Direct Labour cost at the actual level of activity? a.000 Fixed Overhead 2. What is the budgeted Fixed Overhead at the actual level of activity? a. Only the Winnipeg option c.000 in invested capital and a controllable margin of $1.83/machine hour 42.000 Fixed Overhead 2. Neither the Winnipeg nor the Regina options Use the following information to answer questions 41 to 45 EKPN Company prepared the following data in its static budget based on 150. Which one of following projects will increase the Steak House division’s ROI? a. $2.150. $19.000.000 43. $240. $20.000 Direct Labour 245.33% 28.000 Actual Results: Machine Hours 160.11-10 Test Bank for Managerial Accounting. The area manager of the Steak House Restaurants is considering two possible expansion alternatives.000 Variable Overhead 1. Only the Regina option d. Both the Winnipeg and Regina options b.000 $100. Third Canadian Edition MULTIPLE CHOICE QUESTIONS 40. and the ROIs of each are as follows: Project Winnipeg Regina Investment Controllable Margin $300. The required investments.53/machine hour d.125. expected controllable margins.50/marchine hour c.000 .000 machine hours: Direct Materials $ 450.000 b.000 $200.000 Direct Labour 225.100. $20. What was the budgeted variable costs per machine hour for variable overhead.110. rounded to the nearest whole cent? a.100. $245. Which one of the following statements describes a budget report? a.260. The actual results for 41. $125.000 44.000 $3. It is voted on and approved by the stockholders.000 units with a new budget for 41.000 How much is controllable margin? a. $85.000 units of product.000 125. Kilroy Manufacturing prepared a 2012 budget for 40. EKPN Company’s actual machine hours were greater than the budgeted amount. Perot Manufacturing reported the following items for 2012: Income tax expense Contribution margin Controllable fixed costs Interest expense Total operating assets $ 40. . $5. 11-11 $2.110.000 $2. c.000 units with the previous year’s actual results for 44. c. It doesn’t matter.000 b. d. d.Budgetary Control and Responsibility Accounting b. $95. The actual results for 41. It is the preparation of long-term plans. 48. All of these choices are equally useful. EKPN Company’s actual machine hours were less than the budgeted amount.000 30.000 10. The actual results for 41.000 d. It is a comparison of actual results with planned objectives. b. Which one of the following is the most useful comparison for this company? a. $25.000 47. It includes the valuation of inventories.000 c.240.000 units. EKPN Company spent more on fixed costs than it expected.000 units d. What possible reason could explain the difference between the actual fixed overhead costs and the budgeted fixed overhead costs? a. $25. Actual production in 2012 was 41. d. b.000 unfavourable b.000 units with the original budget for 40.000 favourable d. $45. 46.000 favourable 45.000 units c. What was the difference between the actual and budgeted Direct Material costs at the actual level of activity? a.000 475.000 units b. EKPN Company spent less on fixed costs than expected. c.000 favourable c. $5. Annually is sufficient if the company is profitable d. Modification actions necessary 51. When is a static budget most appropriate in evaluating a manager's performance? a. The static budget is not appropriate for evaluating managers. What is the purpose of the sales budget report? a. It is prepared at the end of the accounting period once actual results are known. Monthly to be sure the company is operating successfully 50. To determine the cause of any misuse of costs d. The cause of differences between actual and projected amounts b. c. Third Canadian Edition 49. As often as demanded by the stockholders b. Which one of the following do budget reports provide for managers? a. When the company performed at the same activity level as the static budget level d. 53. Which one of the following is true concerning a static budget? a. How often should a company prepare budget reports? a. Which statement is true concerning a static budget report? . It reflects the level of activity at which the company will be most profitable. The difference must be reported on external financial statements. d. It is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs. b. When the actual activity is less than the master budget activity c. When the actual costs incurred equal the amounts in the budget b. It shows planned results at the original budgeted activity level. d. 55. It reflects information from the static budget. Which one of the statements below is correct concerning the comparison of differences between actual and planned results? a. To determine why sales goals were met or not met d. As often as deemed necessary c. To assess whether the company is profitable or not c. It enables managers to take corrective action when differences are material. To allocate uncontrollable costs c. c. To identify differences between planned and actual and take corrective action if necessary. Feedback on operations d. To control corporate labour costs b. To control the cost of selling products in a company b. 54.11-12 Test Bank for Managerial Accounting. b. To control overhead costs 52. The nature of corrective action needed c. What is the purpose of a departmental overhead cost report? a. 56. The differences always require investigation. This amount exceeded the amount of an unfavourable difference reported for January sales. An excess profit 58. It is appropriate in evaluating a manager's effectiveness in controlling fixed costs. What are these costs? a. d. 61. b. c. Manufacturing costs c. Fixed overhead costs d. Mixed b. A budgeting error b. d. A manager determined that certain costs were not responsive to changes in activity level. 59. The difference for February can be ignored since it is favourable. It depends on management personalities. An unfavourable difference d. c. The differences for the two months will offset each other so the differences should not be a concern.Budgetary Control and Responsibility Accounting a. The differences for both months should be investigated if the amounts are material. It is most effective when evaluating a manager's effectiveness in controlling variable costs. c. Which one of the following statements about the sales budget report for the two months ending February 28 is true? a. Dunellon Company’s actual sales results exceeded the planned results for February. A favourable difference c. b. The sales report is not useful since it shows a favourable and unfavourable difference for the two months. Uncontrollable costs b. The difference should be investigated if it is unfavourable. 11-13 It considers performance at numerous activity levels. Variable overhead costs 62. Flexible c. It should be used when the actual level of activity is materially different from the master budget activity level. 57. d. Which one of the following is true of a flexible budget? . The difference should be ignored since economic conditions affect sales and cannot be controlled by the company’s managers. b. Fixed 60. What exists when budgeted costs exceed actual results? a. For which of the following costs is a static budget most appropriate? a. Variable d. What should be the reaction of upper level managers when a difference between budgeted and actual sales exists? a. It depends on whether the difference is material or not. Haroot Company’s master budget shows that the planned activity level for next year is expected to be 20. Total variable costs should be adjusted based on the activity index chosen.000 direct labour hours b. b. 63. It is prepared when managers are unsure of activity levels. It is prepared once the actual activity level is determined.000 direct labour hours d. b.000 64. d.000 $85. Costs cannot increase when different levels of activity exist. Fixed manufacturing overhead d. Third Canadian Edition a. It projects budget data at a pre-planned level of activity. $73. Indirect labour cost c. The budget must reflect a fixed level of activity.000 direct labour hours c. how much is allowed on a flexible budget for manufacturing overhead costs? a. Fixed costs are not reported. 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.11-14 Test Bank for Managerial Accounting. Variable manufacturing overhead 66. Cannot be determined 65.500 d. Which one of the following statements is true in developing a flexible budget within a relevant range of activity? a. c. A department has budgeted monthly manufacturing overhead cost of $40. The flexible budget report reflects $120. What is the budgeted level of activity to be achieved during the month? a.000 machine hours. 24.000 plus $5 per direct labour hour.250 b. 67. $85. Direct labour cost b. c. . $89. $88. 16.000 4.000 for total budgeted manufacturing cost for the month. 32. the following manufacturing overhead costs are expected: Indirect labour Factory supplies Indirect materials Depreciation on factory building Total manufacturing overhead $45. Which one of the following statements is true concerning a flexible budget? a. It shows no differences between actual and budgeted amounts because it is prepared after the actual results are determined. It is useful in controlling variable and fixed costs.000 21.000 machine hours. At this level of activity. d.000 If the company operates at 21.000 15.500 c. The activity level should be the same as actually achieved. Operating budget c. Master budget 70. however the actual number sold totalled 23. Surf N Waves planned to sell 27. Only the income statement budget c. Which of the following situations might result? a. Horizontal 72. Which statement is true concerning the selection of the level of activity used in the flexible budget? a. 11-15 It is relevant both within and outside the relevant range. Unfavourable differences that are not justified c. Permanent budget d. For which of the budgets in the master budget will a company prepare a flexible budget? a. A budget of 27. Only the sales budget b. b.Budgetary Control and Responsibility Accounting b. Which one of the following provides the best comparison of the cost data associated with the sales? a. Either favourable or unfavourable differences that are not justified d. Which one of the following is another name for the static budget? a. Favourable differences that are not justified b. What assumption about the behaviour of total costs occurs within the relevant range of activity? a. Which statement is true concerning management by exception? . d. c. Curvilinear and upward sloping d. The activity level should be the level which maximizes profit. c. Only the budgets that reflect operations d. 68. The master budget level of activity 71. A budget based on the original planned level of activity b. Linear and downward sloping c. Yellow Card Company compared its actual sales results with a static budget.000 units of activity c.000 units of activity d. Actual differences that are justified 73. The activity level should be the same as found in the master budget. Any activity level can be used in the flexible budget.000. 74. Linear and upward sloping b. Flexible budget b. All of the budgets 69.000 surfboards. A budget of 23. d. It is one of the financial budgets. It replaces a master budget. 75. Fixed costs appear differently. Moving up to higher levels of managerial responsibility . c. c. b. d. It applies only to fixed manufacturing costs. It requires management to investigate only unfavourable differences. Master budgeting analysis 80. Those that are controllable and non-controllable c. Only when the manager has the power to incur the cost within a given time period b. 78. 79. Variable costs appear differently. The company has substantial fixed costs. Which one of the following decreases the controllability of a particular cost? a. The company has substantial variable costs. Only when it is a variable cost d. 77. Static reporting b. Nextel Communications uses management by exception. b. d. b.11-16 Test Bank for Managerial Accounting. It significantly influences the variable costs that are being budgeted. Those that are material and controllable d. It requires investigation of all material differences whether favourable or not. How does a graph of a flexible budget compare to a CVP graph? a. All differences should be investigated. The planned activity levels match actual activity levels. Sales revenues are not shown on a flexible budget graph. It causes employee morale problems. Only when the amount changes based on different activity levels 81. c. Only if the cost is less than the budget amount c. c. The two are graphed identically. 76. The company has no fixed costs. Which statement is true about the activity index used in preparing the flexible budget? a. b. What is the preparation of reports for each level of responsibility in the company’s organization chart called? a. Which differences between planned and actual results will it investigate? a. Exception reporting d. d. d. Those that are material and non-controllable b. It is irrelevant to total costs. In what situations will a static budget be most effective in evaluating a manager's effectiveness? a. Responsibility reporting c. It is the same for all departments of the company. When is a cost considered to be controllable? a. Third Canadian Edition a. It requires that all differences will be investigated. More costs are controllable as one moves downward in management levels. d. An area of responsibility in decentralized operations c. It shows all costs that relate to a particular manager’s division. It allows managers to decide when they want to use budget guidelines. b. d. Which type of centre is the toy department in a Wal-Mart store? a. A division which contains both controllable and non-controllable costs 87. An investment centre . 86. b. Cost centres d.Budgetary Control and Responsibility Accounting b. When large amounts of uncontrollable costs exist b. d. In which situation is responsibility accounting especially valuable? a. c. In not-for-profit companies c. Which of the following is a true statement? a. 88. In cost centres 85. It allows managers to concentrate on the uncontrollable costs. b. c. Investment centres b. What centres receive responsibility reports containing budgeted and actual controllable revenues and costs? a. All costs are controllable at some level with a company. A non-controllable cost b. Which statement is true concerning management by exception? a. It shows only the variable costs in a manager’s division. 11-17 An increase in the responsibility for costs incurred A greater number of costs in a manager’s division Moving down to lower levels of management 82. What is a segment? a. Investment. c. An exception centre b. A cost centre d. and cost centres 84. Responsibility accounting applies to only profitable divisions and segments. profit. c. A profit centre c. It is most effective on uncontrollable costs. Which one of the following describes a responsibility report? a. 83. It enables management to focus on problem areas. A cost is controllable if it is incurred in a manager’s division or segment. In decentralized companies d. d. Another name for a cost centre d. Profit centres c. It is prepared at the highest level of managerial responsibility. It is prepared using the CVP income statement format. Third Canadian Edition 89. The amount of return the centre’s assets generate d. Which of the following correctly indicates the responsibilities of the respective centre? a. Profit centre manager's salary . 92. His or her ability to control costs c. Compare actual controllable costs with static budget data. The profit that the centre generates b. Compare actual controllable costs with flexible budget data. Only costs controllable by the managers of the centre d. An investment centre 91. Of the following choices. Both controllable and non-controllable costs b. A cost centre incurs costs. but not fixed costs c.11-18 Test Bank for Managerial Accounting. An investment centre 90. Which one of the following is a suitable way to evaluate cost centres? a. c. Only material and labour costs 96. Which type of centre is the theme park division of Walt Disney Company? a. A profit centre c. None of these indicate the correct responsibilities. d. The amount of revenue that can be generated 94. Not a responsibility centre b. c. A cost centre d. It incurs costs and generates revenues. It is evaluated most effectively using ROI. b. It is usually a production or service department. b. which one contains a common fixed cost? a. Compare actual total costs with flexible budget data. A profit centre incurs costs and controls investment funds. An investment centre incurs costs. A profit centre c. b. On what is a manager of a profit centre evaluated? a. Which statement is true concerning a cost centre? a. 95. It only exists in companies in which costs exceed revenues. Which type of centre is the housekeeping department of a manufacturing company? a. and controls investment funds. d. d. c. Compare the actual profit generated with expected profit. 93. What would you expect to find in a performance report for a cost centre? a. Variable. A segment b. A cost centre d. Contribution margin less controllable fixed costs b.000 420. Depreciation on the company’s building which houses several profit centres c. Break-even analysis d. Profit centre supervisory salaries 98. costs over budget 103. costs under budget d. costs over budget c. It is used to evaluate investment centres. Given below is a portion of Swinging Tunes.000 $1. Amount of controllable margin generated d. Sales exceeding budget.040. d. 11-19 Sales clerks’ salaries Costs from a central payroll department to create paycheques for a cost centre's employees Depreciation on a responsibility centre's equipment 97. Amount of residual income generated 100.000 $20. Sales under budget. 99. Sales minus contribution margin d. Performance evaluation of profit centres c. Sales under budget. costs under budget b. c. b. A distinction is made between variable and fixed costs. d.000 Controllable fixed costs 430. It contains controllable and non-controllable costs. Which of the following is an indirect fixed cost? a. Evaluating cost centres 102.000 . Inc. Depreciation on a profit centre’s machinery b.Budgetary Control and Responsibility Accounting b. Which one of the following is a measure of the performance of the manager of a profit centre? a. c. Health insurance costs for employees d. Sales minus variable costs c.020. ROI b. Sales exceeding budget.’s management performance report: Budget Actual Difference Contribution margin $1. What is controllable margin? a. Preparing the master budget b. For what purpose is controllable margin most useful? a.000 10. Success in meeting budgeted goals for non-controllable costs c. Which of the following will most likely result in a favourable controllable margin difference? a. but not cost or profit centres. It compares actual costs with static budget data. Contribution margin less all fixed costs 101. Which one of the statements about a responsibility report is correct? a. A responsibility centre that incurs costs and generates revenues c. but not for a profit centre? a. Third Canadian Edition Which statement is true about the manager’s overall performance? a. $40. The manager’s performance is below expectations.000 $580. Controllable costs 105.000 $20. How do controllable margin and contribution margin differ? a. $20. Equal to expectations d. b. d. 108. Controllable margin b. Revenues d. They are synonymous terms. c. No indirect fixed costs c. Controllable margin is used for profit centres.000 $220. The manager’s performance is above expectations. Controllable margin 107. while contribution margin is used for cost centres. Which one of the following is a performance indicator for an investment centre. What will you expect to find on a responsibility report for a profit centre? a. Asset utilization effectiveness c. The ROI needs to be known for a total assessment.000 Controllable fixed costs $200.11-20 Test Bank for Managerial Accounting. The amount of the controllable margin is larger than contribution margin. The manager was under budget on all controllable amounts. What is a profit centre? a. b. A division of the company that has fewer costs than the other divisions .000 below expectations b.000 $20. The amount of the contribution margin is usually higher than the controllable margin. Only direct costs b.000 How well did the manager perform overall? a. 104. A division of a company that has never incurred a loss b. d. A centre evaluated by the rate of return earned on the assets allocated to the centre d.000 below expectations c. c. All fixed costs—both controllable and non-controllable d. The manager's overall performance cannot be determined from information given. 106. Given below is an excerpt from a management performance report for a profit centre: Budget Actual Difference Contribution margin $600. $495. They also called traceable costs. Controllable margin d. All fixed costs are deducted from controllable margin. A negative effect b.000 cash. d. A segment fixed cost d. Which one of the following statements about a profit centre responsibility report is correct? a. To assess performance of an investment centre d. SuitCity purchased an operating asset expected to benefit the company for 10 years for a cost of $100. What is another name for an indirect fixed cost? a A traceable fixed cost b. Profit centre managers are not able to control them. No effect since cash replaces the asset sold d. Non-controllable fixed costs are reported.000 controllable margin and $300. b.000 of sales. What is the purpose of determining return on investment? a. A common fixed cost 112. 113. A positive effect c. To assess a company’s controllable margin b.000 d. b. How much will Merck’s average operating assets be when its return on investment is 10%? a. The old operating asset was fully depreciated and was kept in operations. c. To determine which costs are controllable c. an investment centre. $255. It provides the same information as a cost centre responsibility report.000 b. It shows budgeted and actual controllable revenues and costs. Merck Pharmaceuticals is evaluating its Vioxx division. Which statement is true concerning direct fixed costs? a. The division has a $45. The often apply to more than one centre.Budgetary Control and Responsibility Accounting 11-21 109. d. Which one of the following is not controllable by a profit centre manager? a.000 115. They are deducted from controllable margin on a responsibility report. Assets used by the centre 110. A controllable fixed cost c. 111. More information is needed to determine the effect .000 c. To determine profitability of a profit centre 114. $450. c. $300. Sales c. What effect will acquiring this asset have on the performance measurement of an investment centre? a. Variable costs b. 11-22 Test Bank for Managerial Accounting, Third Canadian Edition 116. What effects do increases in plant assets have on ROI? a. An increase in controllable margin which increases ROI b. A reduction of ROI c. An increase in ROI d. Unable to determine without the dollar amount of controllable margin known 117. Which one 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 118. Which one of the following is a distinguishing characteristic of an investment centre? a. It includes significant uncontrollable fixed costs. b. Performance can be evaluated with both profitability and return on utilizing assets. c. This type of responsibility centre only generates revenues. d. Revenues are rarely generated by selling products. 119. Which one of the following measures is frequently used to evaluate the performance of the manager of an investment centre, but not profit centres? a. The amount of profit generated b. The percentage increase in profit over the previous year c. Controllable margin d. The rate of return on funds invested in the centre 120. What is included in operating assets for purposes of calculating ROI? a. All assets which appear on a segment’s balance sheet b. All depreciable assets c. All current assets plus plant assets used in operations d. All assets which are invested in stocks and bonds 121. Which one of the following will increase return on investment? a. Variable costs are increased b. An increase in sales c. Average operating assets are increased d. Fixed costs are increased 122. An investment centre generated a contribution margin of $200,000, fixed costs of $100,000 and sales of $1,000,000. The centre’s average operating assets were $400,000. How much is the return on investment? a. 25% b. 175% c. 50% d. 75% Budgetary Control and Responsibility Accounting 123. How can the manager of an investment centre improve ROI? a. By decreasing average operating assets b. By increasing controllable fixed costs c. By decreasing contribution margin d. By increasing variable costs 124. Behavioural principles are often included in performance evaluation. What does this mean? a. The human factor should be considered when evaluating performance. b. Top management should evaluate lower managers. c. The evaluation process must allow managers to respond to their evaluation. d. Evaluation should identify only poor performance. 11-23 *125. The following information is available for Aggie Auto Sales: Average operating assets Controllable margin Contribution margin Minimum rate of return $750,000 90,000 175,000 10% How much is Aggie Auto’s residual income? a. $125,000 b. $640,000 c. $15,000 d. $85,000 *126. 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 *127. Which one of the following is a correct statement about residual income? a. Its goal is to maximize profits of an investment centre. b. It is less effective for evaluating investment centres 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 centre with the company’s minimum rate of return. 128. Which one of the following is a reason that a company may have significant deviations from budgeted performance? a. Actual results were compared to flexible budget amounts instead of static budget amounts. b. The budget was approved by the budget committee. c. Economic conditions may have changed since the plan was developed. 11-24 Test Bank for Managerial Accounting, Third Canadian Edition d. A company has substantial variable costs. 129. Roasted Toasters prepared a 2012 budget for 40,000 units of product. Actual production in 2012 was 45,000 units. To be most useful, what amounts should a performance report for this company compare? a. The actual results for 45,000 units with the original budget for 40,000 units b. The actual results for 45,000 units with a new budget for 45,000 units c. The actual results for 45,000 units with last year’s actual results for 47,000 units d. It doesn’t matter. All of these choices are equally useful. 130. 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 131. TrueMasons’ budgeted costs for 25,000 linear metres of block are: Fixed manufacturing costs Variable manufacturing costs $12,000 per month $16.00 per linear metre True Masons installed 20,000 linear metres of block during March. How much is budgeted total manufacturing costs in March? a. $320,000 b. $412,000 c. $400,000 d. $332,000 132. 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. Use the following information to answer questions 133 to 136. EKPN Company recorded the following operating data: Sales $1,250,000 Contribution margin 485,000 Total direct fixed costs 400,300 Total operating assets Jan. 1, 2012 750,000 Total operating assets Dec. 31, 2012 790,000 Budgetary Control and Responsibility Accounting EKPN Company’s desired return 11-25 12% 133.000 d. $790. ($10.700 b. and assets d.000 d. $2. Investment B c. rounded to the nearest whole number? a. What is EKPN Company’s controllable margin? a. Invested assets. $$84. Beach Road’s required rate of return is 10%.200 b. profits. What is EKPN Company’s ROI. since both investments generate a positive return. Investment A Investment B 11. $150. For which of the following is a profit centre manager responsible? a.000 134.000 c.000 b. What is EKPN Company’s residual income? a. ($7. d. Invested assets. and invested assets c. 138.5% Which of the following should Beach Road choose? a. 55% *136. invested assets. What is EKPN Company’s average operating assets for 2012? a. $410.700 135. and costs b. Sales. 11% b.200) c. $770. $750. Both.5% 9. Revenues and costs 139. Investment A b.700) d. It depends on which investment generates the larger profits. For which of the following is an investment centre manager responsible? a. Beach Road Foods calculated the following for two potential investments.000 c. Sales. $849. and costs . $765. sales. 12% c. 53% d. sales. ($2.100) 137. B. Project A.000 that will increase annual controllable margin by an estimated $10.000 How much is ROI for the year? a. CinRich requires its return to be 9%. 20% d.000 C $375.000 50.1% b. d.11-26 Test Bank for Managerial Accounting. Its current operating assets are $200. Which projects would add value to the company? Project Average Operating Assets A $500. 140. A decrease of 7.000 300.000 a.000 30. invested assets.000 . The division is considering purchasing equipment for $60. and D b. C. and D Controllable Margin $40.3% d. what will happen to the return on investment for Claremont Division? a. and invested assets Sales. Third Canadian Edition b. profits. and D c. Projects A. Inc.3% c. 30% 143.000 30.7% c. c. 16. Sales.000 141. A decrease of 3. Projects C and D d. Sales Controllable margin Total average assets Fixed costs Residual income $500.000 B $450.000. If the equipment is purchased.000 $30.2% 142.000 D $425. CinRich requires a 9% rate of return. CinRich Corporation recorded operating data for its Waterhole division for the year. C.000 90.000.000 $32. A decrease of 13.000 50. CinRich Corporation recorded operating data for its Waterhole division for the year.000.000 90. and assets Revenues and costs Frame.000 $40. 10% b. Sales Controllable margin Total average assets Fixed costs Residual income $500. The current controllable margin for Claremont Division is $62. A.000 300. requires a return for the Picture Division totalling 8%. B. An increase of 16. By buying more plant assets b. The new ROI is still above the required ROI. 144. b. Will the new ROI be acceptable? a. Yes. A profit centre is evaluated using residual income. Fleur de Lys Segment of Windy’s restaurants is an investment centre. The required investments. Both Power and Super b. The manager is considering two possible expansion alternatives. The ROI will remain at 30% which exceeds the required ROI. d.000 56. Which one of following projects will increase Fleur de Lys Segment’s ROI? a. Yes. Which responsibility centres generate both revenues and costs? a. each in separate divisions.000 330. Interest expense on corporate company debt 147.000 Controllable Margin $15. c. By increasing expenses 145. c. controllable margins. Indirect labour of the Eastern plant c. while an investment centre is evaluated using ROI. only Super d. Which one of the following would you not expect to find on a responsibility report for the VP of production of the company’s Eastern plant? a. How can management improve the return on investment? a. and a separate corporate office. b.Budgetary Control and Responsibility Accounting 11-27 Suppose CinRich experiences an increase of $50.000 in operating assets and a controllable margin of $105. No. By reducing sales d. Ginder Company operates four plants. 146. d.000. Neither Super nor Power 148. Material costs for the Eastern plant b. An investment centre is only responsible for revenues and expenses. Investment and profit centres . The ROI drops to less than 9%. An investment centre is responsible for revenues and expenses as well as earning a return on assets. Asset maintenance costs of factory equipment in the Eastern plant d. Which statement is true? a. only Power c. By reducing inventory levels c. There is not enough information to determine.000 in controllable fixed costs. and the ROIs of each expansion project are as follows: Project Power Super Investment $ 75.100 ROI 20% 17% The investment centre is currently generating an ROI of 15% based on $700. An investment centre is only responsible for its investments. 000 . To motivate managers through possible termination c. How much is the residual income? a. and direct fixed costs totalling $100. b. *154. The company’s operating assets total $800.000.11-28 Test Bank for Managerial Accounting.000. Less than the prior year’s due to both the change in assets and variable costs *153. No change between years d.000. To determine whether decentralization is possible or not b. For what purpose do companies calculate residual income? a. What is a weakness of residual income? a. It can be misleading when comparing divisions of different sizes. Controllable costs 152. Third Canadian Edition b. Contribution margin b. and its required return is 10%. To measure company profits 150. Workers’ compensation insurance expense for his cashiers b. d. d. Installation of a corporate-wide satellite dish system for book signings by selected authors c. $120. c. Colour selection of logo merchandise *151.000 How much is the current year’s return on investment? a. It discourages goal congruence. variable costs of $200. Profit and cost centres Cost and investment centres Only profit centres *149. PEI: Average assets increased by $100. It routinely results in managers rejecting investment opportunities that would be advantageous to the company as a whole. The following information was extracted from the accounting records of the City of Charlottetown. Costs of printing signs for local promotions d. c. Sales d. Niceville Company had sales of $400. Less than the prior year’s due to the change in variable costs b. Which one of the following does not impact the amount of residual income? a. Ed is the manager of the Montreal location of Books Galore.000. It does not take cost of capital into consideration. Which one of the following would most likely be an uncontrollable cost for Ed? a. Less than the prior year’s due to the change in average assets c. Net income c. To evaluate management performance d.000 Variable costs increased by $50. 000. fixed costs of $50. Management is considering a project with sales of $125. $21. what will happen to the return on investment for the division? a. 11-29 $20. Cruise Division of Harrah’s Company’s operating results include: controllable margin. operating assets = $400. 155. Lou Alabassi is the Northwest Territories Division manager and his performance is evaluated by executive management based on Division ROI.000.000 that will increase sales by an estimated $10. The Division is considering purchasing equipment for $40. Should management accept this new project? .annual controllable margin = $24. The performance of the manager of Purina Division is measured by residual income.000 Which project should be funded? a.000. Increase in sales d. Both projects b.000 b.600. operating assets = $550. The Cruise Division’s ROI is 20%. Project B d.000. $104.300. Project A c.5% c.Budgetary Control and Responsibility Accounting b.000 Jasper Recording Studio has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division.000 Project B . The division had average operating assets of $1. $150. The current controllable margin for Northwest Territories Division is $46. Increase in amount of return on investment desired c.000.000 d. $750.000. The company requires a return on investment of at least 8%.000. Its current operating assets total $210.000 on sales of $1. How much is residual income? a. d. It will remain unchanged *157. $1. Waterloo Company earned controllable margin of $125.000.750. with annual depreciation of $10. An increase of 0.5% d. Which of the following would decrease the manager's performance measure? a.000 *158.annual controllable margin = $60.000 $80.5% b. If the equipment is purchased. for which the following estimates have been made: Project A . A decrease of 0.000. $146.000. $128. A decrease of 3.000. Decrease in required rate of return b. The division manager has two investment projects available. sales.000 c.000.000. Neither project 156. c. Increase in contribution margin 159. and operating assets. variable expenses of $75. and an asset investment of $90.000.000 $320.000. b. d. Flexible budgets imply a. 160. That a firm will have different levels of activity and costs during a year. Fixed selling costs are established at the start of the budget process. A static budget offers management the best results when a. d. since additional sales always mean more customers. No. A characteristic of a good budget is a. That the budget can be changed during the year to reflect actual results. c. since ROI will be lowered.11-30 Test Bank for Managerial Accounting. 161. Budgetary control means a. That once a budget is agreed to the controller of the company is now in charge of cost and profit controls. Fixed manufacturing costs are established at the start of the budget process. c. d. That management is satisfied that it will provide shareholders with an adequate return on their investment. The impact of inflation on the budget in the year to come. The expected profit that a firm requires. Third Canadian Edition a. Yes. since a loss will be incurred. That it is easy to understand by top management. The expected return that the shareholders or owners require. Managers are expected to control all direct costs and the contribution margin that they provide. b. No. 163. selling and administrative costs are established at the start of the budget process. Managers are expected to control all costs and sales from their division. b. 165. That once a budget is agreed to by management there can be no deviation from it. c. Variable material costs are fixed by suppliers to the company. since ROI will increase. That it is easy to understand and communicate to all within the firm. d. d. When setting a flexible budget it is important to know a. Fixed manufacturing. The budget process may not be accurate at the beginning of the budget year. b. 162. c. c. c. That is encompasses every account in the firm’s accounting system. c. The relevant ranges of activity and cost. d. Yes. Each manager is free to change the budget as the year progresses. b. 164. d. . b. That sales managers can have a wide latitude in modifying prices during the year. Managers are expected to control all costs. In a cost centre a. Managers are expected to control costs directly under their control. That the difference between actual results and budgeted results are reported and assessed over time. including allocated costs from head office. b. Both a minimum and a maximum rate of expected return must be established. d. 167. May tend to underestimate the level of investment required in their division. . b. Managers who are evaluated on their Return on Investment a. May tend to overestimate the value of new product lines. d. Senior management must ensure that there is adequate capital investment in the firm in the long term. May tend to overestimate the level of investment required in their division. c. profit and investment centres. May tend to underestimate the value of new product lines. Only include investment centres. d. Responsibility centres in a decentralized organization a. c. b. Do not include profit centres. 168. Include cost. Management must be clear in recognizing that each method has strengths and weaknesses. When comparing performance tools such as Return on Investment and Residual Income. ROI is superior to RI. 169. RI is superior to ROI. c. Blending ROI and RI will eliminate the weaknesses inherent in both methods. b. Senior management must ensure an adequate return for the shareholders. Do not include cost centres. When using a reporting system based on Residual Income a. Unprofitable divisions must be either sold off or improved. c. b. a. d.Budgetary Control and Responsibility Accounting 11-31 166. b c c b b a c d b d c a d a a d . 129. *126. 144. 100. 162. 164. 117. 122. b b b a d c b a b b c d d d c c b b c 59. 89. 86. 130. 132. 69. 54. 66. 51. 160. 55. 134. 137. 138. 50. 82. Item Ans . 128. 142. 101. 109. 40. 45. 80. 52. 95. 133. Item Ans . 74. d d c c c c c b a d d c a c a d c c c 78. *127. 152. 81. b c c a b a b b b d b b d a d a c a a 116. 62. 167. 70. 112. 104. 107. 94. 114. 105. 48. 96. 57. 166. 98. 68. 99. 90. 47. 64. 169. 159. b c b d c b a a a c c d c b c d b a d 135. 56. *125. Item Ans . a c a a d b c d b b a d a a c b b d b *154. 168. 145. 77. 92. 58. 113. 139. 42. c b a d a b c a b b b d c b d a d c c 97. 141. 60. 41. 120. 121. 119. 115. 131. 91. 123. *158. 79. 83. *157. 43. *149.11-32 Test Bank for Managerial Accounting. Item Ans . 165. 46. Item Ans . *136. 88. 124. 76. 63. 103. 102. 71. 111. 84. 93. 108. 75. 67. 49. 73. 161. 163. 147. 118. 53. 140. *151. 156. *153. 87. 155. 150. 44. 143. 65. Third Canadian Edition ANSWERS TO MULTIPLE CHOICE QUESTIONS Item Ans . 146. 72. 106. 110. 85. 148. Item Ans . 61. 000 = $179.000 2.690. Current Assets Plant Assets January 1.$56.000 ROI = Controllable Margin ÷ Average Operating Assets = $680.000 – $400.700.600.000 Average Operating Assets ($500.000 1.500.10) = $5.000 157.000.000 Controllable fixed costs Contribution margin Interest expense Variable costs Total assets How much is controllable margin? Solution Brief Exercise 171 $235.000 $ 900.000 Average plant assets ($2.000 + $2.000 + $900.000 2.Budgetary Control and Responsibility Accounting 11-33 BRIEF EXERCISES Brief Exercise 170 Data for the Electric Division of Bowden Baseball Company which is operated as an investment centre follows: Sales Contribution Margin Controllable Fixed Costs Return on Investment $2.000) ÷ 2 = $800.600.000.000 35.000 400.750. How much is the return on investment for the centre for 2012? Solution Brief Exercise 172 Average current assets ($700.000 900.000 Brief Exercise 171 Clark Inc.000) = $500. 2012 $ 700.000 Brief Exercise 172 The data for an investment centre is given below.700.000 The controllable margin is $680.000 ÷ .000+$2. Solution Brief Exercise 170 Controllable Margin ($900. reported the following items for 2012: $ 56.500.000) = 20% .000) ÷ 2 = $2.000 ÷ ($800.000 . 2012 December 31.000 10% Calculate controllable margin and average operating assets.000 235. 900 units $65.000 $15. 2.000) ÷ 80.000 70.000 Average operating assets 750. Identify the total fixed costs and the variable costs per unit.000 35.000 $ 307.500 Prepare a performance report for Flames Company for the year.000 35.75 per direct labour hour .000 – $75.000 15. Third Canadian Edition *Brief Exercise 173 The owner of Shrek Toys has recently expanded his business in order to add an additional product line.000 $180. Solution Brief Exercise 174 Direct materials Direct labour Fixed overhead Total costs Flames Company Manufacturing Performance Budget Report For the Year Ending December 31.500 $180.000.200 U 200 F 500 F $ 500 U Brief Exercise 175 A flexible budget graph for the waxing department shows the following: 1. 2012 Budget Actual $ 63. At normal capacity of 80.000 = $0. In addition to toys.000) Controllable margin Average assets × 11% Residual income Brief Exercise 174 Flames Company produces men’s ties. Toys Shirts Sales $540.200 81.000 direct labour hours.000 Variable costs = ($135.800 $ 65. The following budgeted and actual amounts are for 2012: Cost Direct materials Direct labour Fixed overhead Budget at 2.000 81.000 300. The company has a minimum rate of return of 11%.000.500 Differences $1. At zero direct labour hours.11-34 Test Bank for Managerial Accounting.500 33.000 34.500 units $55.000 Actual Amounts at 2.000 82.500 $ (18.000 Calculate the residual income for both investment centres.000 $326. the line drawn from the total budgeted cost line intersects the vertical axis at $135. Solution Brief Exercise 173 Toys Shirts $390.000 34. Solution Brief Exercise 175 Fixed costs = $75. the company will now sell shirts.000 81. the total budgeted cost line intersects the vertical axis at $75.000 Controllable margin 390. 200.200 units per month.40 + $1.300 . so the 20% project should be accepted.000] = 27.00 1.000 48.000 = 30% ROI of new project = $36. How much would appear on Hastings’s flexible budget for 2012 if 9.000]/[$500.000 = 20% New ROI with project = [$150.000 24. The company is not willing to accept any projects with an investment less than 15%.000 for materials. The determination is based on how the ROI of the project compares to the required rate of return.000 6.000 Operating assets. and an investment of $180.200 Determine the amount of manufacturing costs for a flexible budget level of 3. Should Wimmer accept this project? Solution Brief Exercise 177 Current ROI = $150.000 units of production includes $42.00 $63.10) + ($12.000/$180.'s static budget at 6.600 3.500 2. $150.000 24.Budgetary Control and Responsibility Accounting 11-35 Brief Exercise 176 Hastings Manufacturing Co. since many projects cause total ROI to fall even though they increase value of the division.000 Wimmer is considering a project with sales of $120.000 $72.000 Units Unit Variable Cost 9. that does not make this a bad investment. Brief Exercise 178 Shirk Productions makes a single product. Expected manufacturing costs are as follows: Variable costs Direct materials Direct labour Manufacturing overhead Fixed costs per month Supervisory salaries Depreciation Other fixed costs $6. Wimmer’s required rate of return is 15%.000.50 + $2.000 + $180.000 units are produced and sold? Solution Brief Exercise 176 Variable costs: Direct labour Direct materials Total variable costs Fixed costs Total costs 6.500 + $2.000/$500. Total fixed costs are $24.600 + $3.50 per unit 2.200) = $50.000 Units $42.40 per unit 1.000 Sales revenue.000.000.000 $7.000 $96.000 72. $500.4% While ROI decreases.000 9.000 + $36.10 per unit $12.000 for direct labour and $6. $1.000. Solution Brief Exercise 178 3.200 x ($6. expenses of $84.000 Brief Exercise 177 Wimmer Division’s operating results include: Controllable margin. how much will its total variable cost be? Solution Brief Exercise 179 Variable cost per unit: ($18.variable Supervisor salaries Depreciation on factory equipment Direct labour Property taxes on factory $18.600 5.000 4.800 2.200 4.000 units: $15 x 3.000)*800] Variable overhead [($5.000 units.000.000 9.000 15.800 2.000)/2.000 7.100 Brief Exercise 181 Butterfly World budgeted sales for April were estimated at $500.000)*800] Factory depreciation -fixed Factory supervisory salaries .000 2.000 1.500 5.fixed Total $9.000 units appears below: Direct material Direct labour Variable overhead Factory depreciation Factory supervisory salaries Other fixed factory costs $12 per unit $6. How much are budgeted selling expenses on a flexible budget for April? .000 + $2.000 + $10.000/1.000 = $15 per unit Variable cost at 3. The cost of shipping expenses was estimated at 1% of sales and miscellaneous selling expenses were estimated at $1.000 9.000 7.000 = $45.fixed Other fixed factory costs .000 10.000 If Sekine prepares a flexible budget at 3.000.11-36 Test Bank for Managerial Accounting. sales commissions at 4% of sales.000 Brief Exercise 180 SugarTown’s manufacturing costs for August when production was 1.5% of sales.000 plus 0.500 $38. and the sales manager's salary at $80.500 How much is the flexible budget manufacturing cost amount for a month when 800 units are produced? Solution Brief Exercise 180 Direct material ($12*800) Direct labour [($6. Third Canadian Edition Brief Exercise 179 Sekine Company uses flexible budgets.000 units were produced and sold appear below: Direct materials Indirect materials . Items from the budget for March in which 2.500/1. It is currently generating an ROI of 13% based on $130.600 + $4.10)] + ($8. Expected manufacturing costs are as follows (in dozens): Variable costs per dozen Direct materials Direct labour Production overhead Fixed costs per month Management salaries Depreciation Other fixed costs $0.000 5.600 4. eggs.000 in operating assets and a controllable margin of $16.80 + $2. Its hardwood flooring division’s information follows for 2012: Sales Controllable margin Variable costs Average operating assets $4. Would it be in EKPN’s best interests to make the investment? Solution Brief Exercise 184 .80 2.000] = $88.000.500 1. Solution Brief Exercise 183 [3.000 80.000 Variable: 0.Budgetary Control and Responsibility Accounting Solution Brief Exercise 181 Sales commissions Sales manager’s salary Shipping expenses Miscellaneous selling: Budgeted selling expenses 11-37 4% x $500.000 2.10 $8.200 dozen per month.000 1% x $500.000 1.000 A & B’s required rate of return is 9%. The Winnipeg division of EKPN is operating as an investment centre.000.500 $108.000 $20.500 *Brief Exercise 182 A & B Flooring has 4 divisions. Would it be in the Winnipeg manager’s best interests to make the investment? 2. How much is residual income? Solution Brief Exercise 182 $250.200 × ($0.800.000 60.200 Determine the amount of manufacturing costs for a production level of 3.000 – [9% x $1.420 Brief Exercise 184 EKPN Company is currently generating an ROI of 10%.500 + $1.600.800. 1.20 1.20 + $1.000 Brief Exercise 183 Good Chicken Farms produces a single product.5% x $500.000 250. and generate a controllable margin of $3.900.000 Fixed portion 1.200) = $27. The manager of the Winnipeg division has an opportunity to invest in an asset that will cost $30. 400.000 + $30.000] X 10%) = $4.900 + $3.000 Direct labour 1. Is the investment opportunity attractive to the Winnipeg division if the division is evaluated based on residual income? Solution Brief Exercise 185 Current residual income: $16. or 12%.650 4. $2.000/500 x 550] Factory depreciation -fixed Factory supervisory salaries .000 Variable overhead 4.000 for direct labour. it would lower the ROI. and generate a controllable margin of $3. the investment is attractive for EKPN.500 Factory supervisory salaries 5.500 $32.600 – ([$130.500 The investment is attractive to the Winnipeg division. The ROI on the investment is $3.600 / $30.500 How much is the flexible budget manufacturing cost amount for a month when 550 units are produced? Solution Brief Exercise 186 Direct material ($20 x 550) Direct labour [($1.000 X 10%) = $3. The manager of the Winnipeg division has an opportunity to invest in an asset that will cost $30.900. 2.8%.000 + $30.900 Residual income after investment: $16. with an actual cost of $52.000 units.500/500) x 550] Variable overhead [$4. New ROI = ($16. Solution Brief Exercise 187 .000 1.000. as it will increase its residual income. Third Canadian Edition 1.fixed Total $11.900 – ($130.11-38 Test Bank for Managerial Accounting.800 1.000. Actual production and sales for the year was 6. The ROI on the investment of 12% is above EKPN’s current ROI of 10%. Brief Exercise 186 Custom Air Corporation’s manufacturing costs for July when production was 500 units appears below: Direct material $20 per unit Factory depreciation $8. Since that is less than the Winnipeg’s current ROI of 13%. It is currently generating an ROI of 13% based on $130.350 Brief Exercise 187 New Clothing’s static budget at 2. and total fixed costs of $16. The investment is not attractive for the Winnipeg division.000 units of production includes $10. and therefore it would raise the company’s ROI.800 Other fixed factory costs 1. * Brief Exercise 185 EKPN Company’s required rate of return is 10%. The Winnipeg division of EKPN is operating as an investment centre.000.000 for utilities (variable).400 8.000 5. Determine if New is over or under budget.fixed Other fixed factory costs .600) / ($130.600.000 in operating assets and a controllable margin of $16. Accordingly.900 + $3.000) or 12. 000 units Variable costs: Direct labour Utilities Fixed costs Total costs $10.000 2. Solution Brief Exercise 188 In a cost centre. determine which costs would be under the control of the Vancouver branch manager. Solution Brief Exercise 189 .000 Unit Variable Cost $ 5. In this example it would be direct and indirect materials. administration costs and factory overhead. Brief Exercise 188 Back 2 Front Company makes products for the fashion industry. and the company incurred $52.000 The company is over budget by $400.000 6. factory labour.000 units $30. Brief Exercise 189 Back 2 Front Company is considering having each of its branches operate as a profit centre.000 $28.000 36. All selling. Required: If the changes are made to how the company operates.000 16. The company dictates that each branch complete an Income Statement with the following headings: Sales to Customers Direct materials Indirect materials Factory labour Administration costs Factory overhead Head office allocated costs Selling costs Interest expense (allocated) The Canadian branch has its offices in Vancouver.Budgetary Control and Responsibility Accounting 2. It will still allocate only certain head office costs to the branches.000 16.000 12. Required: At an annual meeting to discuss results. determine which costs would be under the control of the Vancouver branch manager as a result.00 1. All designs are made in the head office and sent to the branches where it is then the responsibility to manufacture the products and ship them to a warehouse. The products then get sent to stores whenever the sales department in Paris gets orders. but all products will be designed in the branches. The flexible budget amount allowed was $52.000 $52.400. The head office is in Paris and it has branches in all the major cities in the world. interest and any allocated head office charges would not be considered as being under the control of the manager.000.00 11-39 6. the manager would only be responsible for those items directly under his or her control. It would be thought that the Vancouver manager would now be responsible for any new capital investment decisions as well as the interest cost associated with running the branch. Third Canadian Edition All costs except for the allocated head office charges and the interest expense if it is still allocated from Paris. .11-40 Test Bank for Managerial Accounting. 000 12. Determine how much would appear on Cranium’s flexible budget for 2012 if 6.000 units of production includes $60.500 10.000 114.000 Actual Amounts at 7. Variable costs: Direct labour Direct materials Fixed costs Total costs 5.000 95.000 for direct labour and $35.200 Differences $3.000 units are produced and sold.) a. Instructions a.000 10.700 14.500 units $64.000 5.100 Instructions Prepare a performance report for Ashley Sofa Store for the year.'s static budget at 5.000 5.000 12.000 $159.000 42.500 49.000 Direct labour 52.000 5. Total fixed costs are $12. How would this comparison differ if a static budget were used instead of a flexible budget for performance evaluation? Solution Exercise 191 (7-9 mins.600 14.000 Units $60.000 15.700 Indirect materials 15.000 $107.000 49.000 10.900 Rent and insurance 15.100 Total costs $166. Solution Exercise 190 (6-8 mins.000 14.000 units $63. The following budgeted and actual amounts are for 2012: Cost Direct materials Direct labour Equipment depreciation Indirect labour Indirect materials Rent and insurance Budget at 7.000 F 0 300 F 100 F 100 U $6. b.500 Equipment depreciation 10.500 $64.000 35.000 $126.Budgetary Control and Responsibility Accounting 11-41 EXERCISES Exercise 190 Ashley Sofa Store produces sofas.000 15.000 for materials.000.000 .) Ashley Sofa Store Manufacturing Performance Budget Report For the Year Ending December 31.000 Unit Variable Cost $12 7 6.000 Units $72.800 F Exercise 191 Cranium Co.000 49.000 Indirect labour 6.500 F 3. 2012 Budget Actual Direct materials $67.900 15. 000kilograms $0.250 6. The company would appear over budget since the costs incurred would be correlated to a higher level of activity.000kilograms $0.000 $604.000 $32. 2012.000 27.75 per kilogram Boiling potatoes 20. Exercise 192 Cheatem Trading Company's master budget reflects budgeted sales information for the month of March.000 72.73 per kilogram and 17. If a static budget were used.010 5.000kilograms of baking potatoes at an average price of $0.000 and 100. Instructions Prepare a Sales Budget Report for the month of March for Cheatem Trading Company which shows whether the company achieved its planned objectives. 2012 Product Line Baking potatoes Boiling potatoes Total sales Budget $26.) Cheatem Trading Company Sales Budget Report For the Month Ended March 31. budgeted variable costs would be less because they would be based on the static budget level of 5.440 $32.32 per kilogram.000 154.000 63.11-42 Test Bank for Managerial Accounting. the company actually sold 37. Solution Exercise 192 (6–8 min.000 450. as follows: Budgeted Quantity Budgeted Unit Sales Price Baking potatoes 35.000kilograms of boiling potatoes at an average price of $0.000 The relevant range for monthly activity is expected to be between 80. Instructions .000 Direct Labour Hours Variable overhead costs Indirect labour Indirect materials Factory supplies Total variable costs Fixed overhead costs Depreciation Supervision Property taxes Total fixed costs Total costs $360.000 70.000 units.000 12.30 per kilogram During March.000 direct labour hours.450 Difference $760 F 560 U $200 F Exercise 193 Toto Dog Toys developed its annual manufacturing overhead budget for its master budget for 2012 as follows: Expected annual operating capacity: 90.250 Actual $27. Third Canadian Edition b. 750 Instructions Prepare a flexible budget at 4.600 17.700 Units Lip Sync Department Variable overhead costs: Indirect labour Indirect materials Factory supplies Total variable costs Fixed overhead costs: Depreciation Supervision Property taxes Total fixed costs Total costs $ 37.000 direct labour hours.700 units of activity. Solution Exercise 194 (8–10 min.) Toto Dog Toys Monthly Flexible Manufacturing Overhead Budget at 85.Budgetary Control and Responsibility Accounting Prepare a flexible budget for a monthly activity level of 85.250 $135.000 Exercise 194 Jessica Simpson Music Company has prepared the following monthly flexible manufacturing overhead budget for its Lip Sync Department: Indirect labour Indirect materials Factory supplies Depreciation Supervision Property taxes Total costs 4.700 42.500 1.600 51.750 $155.000 44.000 5.000 70.000 5.500 1.000 5.500 425.000 Units $32.) Jessica Simpson Music Company Monthly Flexible Manufacturing Overhead Budget at 4.000 45.000 72.000 36.000 12.000 55. Solution Exercise 193 (8–10 min.000 17.000 154.000 Units $40.350 11-43 .000 25.250 23.000 17.500 59.300 131.000 Direct Labour Hours Variable overhead costs: Indirect labour Indirect materials Factory supplies Total variable costs Fixed overhead costs: Depreciation Supervision Property taxes Total fixed costs Total costs $340.250 $163.000 $579.500 1.750 5. 025 Fixed overhead costs Supervision 900 Insurance 700 Property Taxes 400 Depreciation 600 Total fixed costs 2.20 Budgeted fixed overhead costs per month are: Supervision $4.34 0.000 Property taxes 1.625 Indirect Materials 3.25 1.500 Studio Hours Variable overhead costs Indirect Labour $10.15 Fixed overhead costs per month are: Supervision Insurance Property Taxes Depreciation $900 700 400 600 The company believes it will normally operate in a range of 2.000 .000 studio hours per month.000 Depreciation 9.600 Total costs $17. Instructions Prepare a flexible manufacturing overhead budget for 2.50 Indirect materials 1.000 Insurance 2. Third Canadian Edition Exercise 195 Usher Music Company uses a flexible budget for overhead based on studio hours.27 0.11-44 Test Bank for Managerial Accounting. Variable overhead costs per studio hour are as follows: Indirect Labour Indirect Materials Maintenance Utilities $ 4.40 Utilities .50 Maintenance . Solution Exercise 195 (8–10 min.000 to 4.) Usher Music Company Monthly Flexible Manufacturing Overhead Budget at 2.625 Exercise 196 Outkast Company uses a flexible budget for manufacturing overhead based on machine hours.175 Maintenance 850 Utilities 375 Total variable costs 15. Variable manufacturing overhead costs per machine hour is as follows: Indirect labour $0.500 studio hours. 000 Hours Difference F or U $15.Budgetary Control and Responsibility Accounting 11-45 The company believes it will normally operate in a range of 28.000 2. During the month of August.600 15.600 Instructions Prepare a flexible budget report. .800 44. 2012 Variable overhead costs Indirect Labour Indirect Materials Maintenance Utilities Total variable costs Fixed overhead costs Supervision Insurance Property Taxes Depreciation Total fixed costs Total costs Budget at 31.000 of sales.200 80.200 2. Instructions Prepare a flexible budget for $420.600 F Exercise 197 Eastwood Music uses flexible budgets to control its selling expenses.100 800 8. assuming that the company used 31.600 4.200 2.000 6.000 and depreciation on stage and production equipment totalling $12. Monthly sales are expected to be from $400.000 9.300 $ 700 F 2.000 12.000 machine hours during August.600 $14.500 4.000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery 8% 5% 15% 2% Fixed selling expenses consist of sales salaries of $50.000 12.000 machine hours per month. 2012.000 Hours Actual at 31.000.000 $96.300 F 4.000 6. Solution Exercise 196 (10–12 min.000 200 U 100 U 200 F 400 F 300 F $3.) Outkast Company Manufacturing Overhead Budget Report (Flexible) For the Month Ended August 31.000 1.500 F 400 F 300 U 3.000 to 35.000 to $450.500 12.000 16.400 6.800 44.100 800 8.700 $93.500 46.500 77. the company incurred the following manufacturing overhead costs: Indirect Labour Indirect Materials Maintenance Utilities Supervision Insurance Property Taxes Depreciation $14. ) Eastwood Music Monthly Flexible Selling Expense Budget at $420.11-46 Test Bank for Managerial Accounting.400 126.000 of Sales Variable costs Sales commissions Advertising Traveling Delivery Total variable costs Fixed costs Sales salaries Depreciation Total fixed costs Total costs $33.000 12.000.000 Exercise 198 Westwood Music uses flexible budgets to control its selling expenses.000 63.200 Fixed selling expenses consist of sales salaries of $48.000.600 21.000 $188. Solution Exercise 198 (10–12 min.000 Delivery 8. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery 8% 5% 15% 2% Fixed selling expenses consist of sales salaries of $50.400 U 19.000 and depreciation on stage and production equipment totalling $12.000 62.000 Actual at Difference $420. assuming that March sales were $420. 2012. The actual selling expenses incurred in March.000 $33.000 $35. by Westwood Music are as follows: Sales commissions $35.000 Advertising 19.000 50. Expected and actual sales are the same.000 to $450.000 8.000.200 F .) Westwood Music Selling Expense Budget Report (Flexible) For the Month Ended March 31. Instructions Prepare a flexible budget performance report.000 $1. Third Canadian Edition Solution Exercise 197 (7–9 min.000. 2012 Variable costs Sales commissions Advertising Budget at $420.800 Traveling 64. Monthly sales are expected to be from $400.800 and depreciation on delivery equipment totalling $11.600 21.800 1. 784 23.400 2.000 2.000 8.960 2.500 $45.440 Indirect materials Indirect labour Utilities Total variable costs Rent Depreciation Insurance Total fixed costs Total costs 10.000 $14.200 Utilities 2.000 8.000 5.000 6.000 8.880 24.600 and the following costs were incurred: Indirect materials $13.000 11.000 11-47 .200 Indirect labour 16.000 5. 2012 Variable costs: Indirect materials Indirect labour Utilities Total variable costs Fixed costs: Rent $13.940 12.) Sinclair Components Flexible Budget at 11.400 7.664 10.900 Depreciation 7.200 F F F F Exercise 199 Sinclair Components uses flexible budgeting to control manufacturing overhead.000 $188.980 During the month of June.200 1.400 126.000 5.500 23.500 Rent 9.600 2.200 127.000 59.000 8.000 64.920 6.20 0 0 6.000 U 200 F 1.000 U 1. the company used direct labour hours totalling 11.200 $1.800 Insurance 5.000 8.800 $186.000 $12.200 Instructions Prepare a flexible budget that could be used for performance evaluation of this company.000 12.00 $13.200 2.800 11.Budgetary Control and Responsibility Accounting Traveling Delivery Total variable costs Fixed Costs Sales salaries Depreciation Total fixed costs Total costs 63.500 23.000 48.640 20.600 Units For the Month Ended June 30. The budget below was prepared for the month ending June 30.000 50.500 $43. 2012. Solution Exercise 199 (8-9 min.480 10.900 10.800 1.500 $47.000 62.400 22. Direct Labour Hours 10.500 23. only 40% of supervisory costs are controllable at the department level.000 4. The packaging department is a cost centre. Third Canadian Edition Depreciation Insurance Total fixed costs Total costs 8.600 400 F Total costs $16. Exercise 201 Ozzie Osborne Manufacturing Company’s overhead budget for the first quarter of 2012 contained the following data: Variable Costs Indirect Materials Indirect Labour $12.800 15. All of the costs were under budget and none look materially out of line.00 3. Comment on the manager's performance in controlling costs during the month.164 Exercise 200 Data concerning manufacturing overhead for Wilson Audio are presented below.000 $200 F Indirect labour 4.600 Direct Labour Hours For the Month of August Controllable Costs Budget Actual Difference Indirect materials $ 3.000 .000 4.800 $15. An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the packaging department.00 0.000 $37. Solution Exercise 200 (9–12 min.000 20.000 5. Wilson Audio Packaging Department Manufacturing Overhead Cost Responsibility Report at 1.000 7. b.500 23.600 12.500 300 F Factory supplies 800 750 50 F Supervision 8.600 direct labour hours follows: Variable Indirect materials Indirect labour Factory supplies Fixed Depreciation Supervision Property taxes Total costs Flexible Budget Actual August Activity $2. The flexible budget formula and the cost and activity for the month of August while operating at 1.850 Instructions a.) a. and.000 7.11-48 Test Bank for Managerial Accounting. Prepare the responsibility reports for the packaging department for August. The manager did a good job of controlling costs in August. out of fixed costs.500 $47.850 $950 F b.000 2.000 $42.200 $ 3.500 750 $7.50 $ 3.800 4. however its budget was based on 1.600 5.200.050 5.100 units.200 3.000 5.000. a profit centre of Hurricane Weather Company. Prepare a performance report for the manager of the Maritime Division.Budgetary Control and Responsibility Accounting Utilities Maintenance Fixed Costs Supervisor's Salary Depreciation Property taxes $21.000 Actual fixed costs were as expected except for property taxes which were $3.000 units.000 $34. b.500 5.000 3.000 Controllable direct fixed costs 200.100 $34.) a.400 Actual $13.100 Units For the Quarter Ended March 31. The company manufactured and sold 1.000 3.600 11-49 3.300 4.250 Difference $100 U 200 F 250 F 100 U — 100 U $150 F Exercise 202 Maritime Division.) Ozzie Ozborne Manufacturing Company Manufacturing Overhead Cost Responsibility Report at 1. Maritime Division of Hurricane Weather Company Management Performance Report .000 Controllable indirect fixed costs 40.300 4.000 Variable costs 1.100. reported the following data for the first quarter of 2012: Sales $2. Instructions Prepare a manufacturing overhead responsibility performance report for the first quarter.000 5. How would the responsibility report differ if the division was an investment centre? Solution Exercise 202(5–6 min.200 3.000 Non-controllable direct fixed costs 150.000 Actual variable costs for the first quarter were: Indirect Materials Indirect Labour Utilities Maintenance $13.200 4. All costs are considered controllable by the department manager except for the supervisor's salary.400 3.000 Instructions a. Solution Exercise 201 (8–9 min.050 5.000 3.300 5. 2012 Controllable Costs Indirect materials Indirect labour Utilities Maintenance Depreciation Property taxes Total costs Budget $13. .000X60% j70......000 e 75000a 42............000-20.000 + 50...000+300....000 e500......000 h850.....000 800.....................000 i70.000 + 50... Controllable fixed costs ... Contribution margin ..............000 $ 560... Variable costs ...000c 35.......000 f425....000...000 and a contribution margin ratio of 15%........000 c125...... Sales Variable Costs Contribution Margin Controllable Fixed Costs Controllable Margin Other Fixed Costs Net Income Company $850.......000 g 725...............000 h 300........ The fruits division had sales of $500.000 or 300............ b....................000 240.......................11-50 Test Bank for Managerial Accounting...000X40% Vegetable s $350..000 50..000 28.............000 Fruits $500................000f 125..000 ...000..........200.....000b 70....... Instructions Prepare an income statement for Myrna’s Market in total and for its two divisions.000....000-75. the responsibility report would also show the return on investment for the period.....000+125......000i $33........000 g725..00 0 425..................) Myrna’s Market Income Statement For the period ending..000 d55..000 Italic numbers given a $500.......000 For an investment centre.......000 1.....000-70. The vegetables division had a contribution margin of $50...........000 and variable costs of $300.......... $2.....000 X15% b75............ Exercise 203 Myrna’s Market has two divisions: fruits and vegetables........ Solution Exercise 203(6–8 min.......... Controllable margin ...000d $20...000 55......... 2012 Sales .. Third Canadian Edition For the Quarter Ended March 31. Myrna’s Market’s net income was $20......000j $22. Controllable fixed costs in total were $70......000..........000-500..... with the fruits division having 60% of the total. Calculate the return on investment for 2012.000. b.000 = $330.000. 3.000 − ($100.000 x 50%) − $420.000 ————— = 7% $4.000 × 70% = $2. Controllable margin Return on investment = ———————————— Average operating assets 2012 ROI = b.25% New operating assets = $4.800.000 2. 1. 1.000.000 3.38% *$380.5% contribution margin Exercise 205 .000 4.000 $2.000 $280. Calculate the expected return on investment for each of the alternative courses of action. Reduce controllable fixed costs by 50% with no change in sales or variable costs Reduce average operating assets by 30% with no change in controllable margin Increase sales $200.000 $330. New controllable margin = $800.000 = 10% New controllable margin = $800.000. $280.Budgetary Control and Responsibility Accounting 11-51 Exercise 204 The Candle Division of Dax Wax Company reported the following results for 2012: Sales Variable costs Controllable fixed costs Average operating assets $800.000 Management is considering the following independent alternative courses of action in 2013 in order to maximize the return on investment for the division.000 = $375.000 100.800.000 = 9.000 = 47. Solution Exercise 204 (6–8 min.000 with no change in the contribution margin percentage Instructions a.000 x *47.000 − $420.000 $4.000 420. = 8.) a.000 $375.000 + ($200.5%)− $100.000 $4. 2.000 / $800.000. 05 0. Lower level management is responsible for implementing such decisions. local information at all levels of the organization.($500. training and evaluation. Therefore e = $2.000 X 25%) = ($25. which.000. decisions are both made and implemented by various levels of management.000 (b) = $30.000 Margin (b) 0.20.000 (g)$2. decisions are made at the top levels of management. In decentralized decision-making.000 0 $150.000 / a = 4.00 Operating Assets (a) (f) 0 Net Operating $100.000 = 120% (d) $30.000 / $25. Exercise 206 Complete the missing information in the columns below: A B C $100.000 / e = 0.05.000 . Therefore a = $25.000. motivation and enhanced competition among sub-units.000.00 Income $30.000 (e)$100.000 / $500.11-52 Test Bank for Managerial Accounting. have been forced on them.000) . Third Canadian Edition Compare and contrast centralized and decentralized decision-making. ability of central management to focus attention on corporate level decision-making.000 (f)$100.00 Sales 0 (e) (i) $1.000.000 / f = 0. in effect. In centralized decision-making. Therefore b = 30% (c ) 4 X 30% = 120% or $30.2 Return On Investment (c ) 20% (j) Required Rate Of Return 20% 25% (k) Residual Income (d) (h) $10. Therefore f = $500.000 . by contrast.000 = 4 (h) $100.000 X 20%) = $25.($25.000 / $100.000 Solution Exercise 206 (a) $100. Various reasons for decentralizing include access to relevant. more timely response times. Why would any firm decentralize its operations? Solution Exercise 205 Decentralization is the delegation of decision-making authority to lower levels of management.125 Turnover 4 (g) 1. in the same position.000 ÷ 600. Further. or $150.000.000 (k)$150.000 . and without a vested interest in the company.000 – ($2.000 = 20.($1.000.000.Budgetary Control and Responsibility Accounting 11-53 (i) $150.000.000 X k) = $10.000 $125. and how can stock options impact goal congruence? Solution Exercise 207 (a) Managers are human.000.125 = . Therefore i = $1.2 X 0.000 What is the company’s Return on Investment for the year? Solution Exercise 208 2. managers may try to use company resources for their own personal gain.8% Exercise 209 In addition to the information above. Therefore k = 14% Exercise 207 (a) What problems do owners encounter in encouraging the goal congruence of their management body? (b) What is a stock option.15. Properly structured incentive systems can alleviate these issues.000 / $1. whereas owners desire managers to work as hard as owners would themselves. to achieve their personal objectives. Dromedille Company has the following results for the year just ended: Asset turnover Company interest rate 5 times per year 6% What is the company’s Residual Income for the year? Solution Exercise 209 $125.000 / g = 0.000 ÷ 5 x 6%) = $101.000 $600. Exercise 208 Dromedrille Company has the following results for the year just ended: Sales Net Income Capital Investment $2.000 (j)1.000.000 ÷ 2.200.125.000 x 125.000 .000. they will often work only as hard as they have to. (b) A stock option is the right to buy a given amount of company stock at a known price. It can encourage unified objectives (goal congruence) between the company owners and managers by giving managers an ownership interest. The controller of the company provides you with the following information” Costs per passenger per trip: Fuel $5 Driver $4 Selling $2 Admin $1 In addition.000 60.000 and Selling and Admin Overhead was $78.000 $240.000 200.000 40.615 U . between Kenora and Thunder Bay.000. Prepare a flexible budget report for the year.000 Variable Costs Fuel 5 100.000 Selling 2 40.415 and selling and admin variable costs were $41. c) Discuss the results of the year and what action should be taken in the future as a result. A new route. Fuel costs were $123.000 per year and that each ticket would be $25 per trip.000 Admin 1 20.000 150.000 Passenger Trips__________ Flexible Budgeted Cost Flexible Budget Per Passenger Actual Budget Variance 22.250 11.250 respectively.000 30.000 50.000 50. Solution Exercise 210 a) Budgeted Cost Passenger Trips_____________ Per Passenger 20. Because of the availability of buses to service the route.000 _______________________________________________________________ Sales $25 $500.000 $110. The sales manager has come up with a series of possible passengers that would use the route in the upcoming year. driver costs were $95.000. Facility Costs were $125.500 and $17.415 89.475.000 Contribution Margin $13 Fixed Costs Facility Costs Selling & Admin Operating Income b) 260.000 $370.450 U Variable Costs Fuel 5 123.000 520. runs a series of bus routes between cities across Canada.000 120.000 and Selling and Admin Overhead will be $50.000 80. regardless of the number of trips made in the year.000 100.450 22.000 160.225 U Driver 4 95.000 $750.450 22.000.000 $1.000 Driver 4 80.000.000 100.450 _______________________________________________________________ Sales $25 $538. the estimated passengers would be in increments of 10.450 passengers who used the bus this year and sales totaled $538.800 $561. Required a) Prepare a flexible budget for the company based on the above information b) Assume that there were actually 22. she informs you that Facility Overhead will be $100.000 30.800.250 $22. Third Canadian Edition Exercise 210 Candle Light Bus Lines Ltd.000 40.475 112.000 100.11-54 Test Bank for Managerial Accounting.800 5.000 50. has been planned for next year. She tells you that passengers could range between 20.000 390.000 and 40. 500 17.000 U $83.160 291.160 100.690 U 125.450 3.Budgetary Control and Responsibility Accounting Selling Admin c) 2 1 41.000 $58.000 78. First off.000 50. perhaps there is an internal allocation from the accounting department that should be looked into.900 22. though fuel costs would likely have gone up as a result of general price increases. the manager must investigate why selling prices were reduced by $1 per trip per year.850 25.250 44. The large unfavourable variances for fuel and drivers must also be investigated. . The costs to operate the facility are up dramatically as are the fixed selling and admin overhead costs.000 U 28.200 F Contribution Margin $13 Fixed Costs Facility Costs Selling & Admin Operating Income 261.400 F 5.850 30.690 U 11-55 The budget is showing unfavourable variances right through most of the major items.000 $141. Return on investment is calculated by dividing _________________________ by ________________________. Under ___________________ accounting. 215. the evaluation of a manager's performance is based on the costs and revenues directly under that manager's control. The master budget is a __________________ budget which is based on operating at one budgeted activity level. 216. 212. A __________________ budget projects budget data for various levels of activity. 219. management may take ___________________. In general. 217. Responsibility centres may be classified into three types: (1)___________________. In analyzing differences from planned objectives. 213. or it could decide to modify ___________________. 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. Third Canadian Edition COMPLETION STATEMENTS 211. (3)____________________. 221. A major aspect of budgeting control is the use of budget reports that compare _____________________ with _______________________. . 220. The primary basis for evaluating the performance of a manager of an investment centre is _________________. 214. 222. Total ________________ costs will be the same on the master budget and on a flexible budget which reflects the actual level of activity. (2)___________________ and. whereas costs that are ____________________ to the responsibility level are __________________. 218. costs ____________________ directly by the level of responsibility are _______________. The budget is prepared within the framework of a _______________________.11-56 Test Bank for Managerial Accounting. incurred. allocated. fixed 217. profit centres. actual results. corrective action. responsibility 218. return on investment (ROI) 222.Budgetary Control and Responsibility Accounting ANSWERS TO COMPLETION STATEMENTS 211. controllable 219. sales forecast 212. planned objectives 213. static 215. flexible 216. future plans 214. cost centres. non-controllable 220. controllable margin. controllable. investment centres 221. average operating assets 11-57 . B. ____ 2. C. A measure of the profitability of an investment centre calculated by dividing controllable margin (in dollars) by average operating assets. Costs that a manager has the authority to incur within a given period of time. ____ 10. ____ 7. D. A projection of budget data at one level of activity. generates revenues. Responsibility reporting system Return on Investment Profit centre Investment centre Indirect fixed costs Direct fixed costs ____ 1. A. . Budgetary control Static budget Flexible budget Responsibility accounting Controllable costs Management by exception G. Costs which are incurred for the benefit of more than one profit centre. Third Canadian Edition MATCHING 223. Costs that relate specifically to a responsibility centre and are incurred for the sole benefit of the centre.11-58 Test Bank for Managerial Accounting. ____ 9. I. ____ 12. The use of budgets to control operations. ____ 5. Match the items below by entering the appropriate code letter in the space provided. K. ____ 8. L. A responsibility centre that incurs costs. ____ 11. and has control over the investment funds available for use. ____ 6. ____ 4. H. A projection of budget data for various levels of activity. F. The preparation of reports for each level of responsibility shown in the company's organization chart. A responsibility centre that incurs costs and also generates revenues. J. The review of budget reports by top management directed entirely or primarily to differences between actual results and planned objectives. ____ 3. 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. E. B 5. G 4. I 10. F 2. H 12. C 7. E 6. D 3. K 11. J 8. L 9.Budgetary Control and Responsibility Accounting ANSWERS TO MATCHING 1. A 11-59 . Solution Short Answer Essay 224 The system of responsibility reporting begins with the lowest level of responsibility and moves up through each level. 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. a plant manager will receive reports concerning the controllable costs of each of the plant departments. 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. This allows management to investigate causes and remedies for variances as they feel necessary. if management at the higher levels of responsibility identifies a significant variance. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centres. have recently suffered from declining profits in their departments. and how they could improve performance. managers of the electronics and housewares departments respectively. Sara remarks that there are two components to consider. and by decreasing the denominator of the ROI fraction. such a centre is evaluated only on the basis of its controllable costs. Management by exception is possible in such a system because. Her performance. however. A profit centre. and that they have considered only one. although sales continue to be disappointing. Return on investment is therefore an appropriate basis for evaluation.11-60 Test Bank for Managerial Accounting. Back at work. to improve the final result. Short Answer Essay 226 (Ethics) Edwards Corporation evaluates its managers based on return on investment (ROI). measured by ROI. it is necessary to use different bases for evaluation. they discuss the problem. At the lowest level each manager receives detailed information concerning the controllable costs for which they are responsible. She decides to pursue the matter further. however. they can receive detailed reports for each lower level of responsibility. Kim continues to mull over Sara's remarks. is markedly improved. Required: . Over lunch. Similarly. Solution Short Answer Essay 225 Because a manager should only be evaluated based on the performance results of matters that are controllable by the manager. An investment centre manager can control the investment funds available as well as costs and revenues. Near the end of the lunch period. Short Answer Essay 225 Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. so controllable margin is a more appropriate basis relating only to the areas controllable by the profit centre. Most of the discussion centres around ways to increase sales. Third Canadian Edition SHORT-ANSWER ESSAY QUESTIONS Short Answer Essay 224 How does the system of responsibility reporting work? What occurs at each level? Is management by exception possible in a responsibility reporting system? Explain. Kim Tilley and Sara Trane. controls only revenues and expenses but not investment. For example. She wonders whether there is some way to reduce investment. because only costs are controllable for a cost centre. especially when you receive an unfavourable report that you were not expecting. and get an unfavourable budget report. Solution Short Answer Essay 227 TO: Earl Linton FROM: Ann Royer RE: Budget results I appreciate your coming to me with your questions about the budget. The sales have been very volatile.000 unit sales.000 under my budget.000 been sold. because sales were slow. complained to Ann Royer. Linton. about the flexible budget. 2. "and then I find out that just meeting the budget's not good enough. During a recent slow period. resulting in a benefit for the company. Short Answer Essay 227 (Communication) Clara County Electronics manufactures circuit boards for computer-controlled appliances for the home. Of course. Please check the individual . "I try as hard as I can to meet the budget. I understand that the new procedures can be frustrating. Last month. Your costs were greater than that. and then you all blow me out of the water with your report that I actually was $5. Earl Linton. Kim's actions are probably not ethical. the flexible budget does mean that you are held accountable only for the costs that you can control.Budgetary Control and Responsibility Accounting 1. I was $10. and sometimes depressingly slow. What gives?" Required: Write a short memo to respond to Mr.000 units. Last month.000. when we sold 8. sometimes stressing the plant's capacity. accounting manager. 11-61 Who are the stakeholders in this situation? Are Kim's actions ethical? Briefly explain.000 units that were actually sold (and not the 10." he says. you gave us all targets. Mine says that for an average month of 10.000 that were estimated to be sold). It appears that she has replaced equipment that had been purchased only because such a move would improve her ROI. Any action to promote one's own benefit at the expense of the company's welfare is unethical. How do we control sales? At the beginning of the year. The stakeholders include Kim Tilley Sara Trane managers of Edwards Corporation shareholders of Edwards Corporation 2. it is possible that the leased equipment will allow her department to function better. I spend less.000 over. I thought this responsibility accounting business was supposed to mean we are held accountable just for things we can control. Actually. although still less than the amount you would have been allowed had the full 10. Solution Short Answer Essay 226 1. I should spend about $82. we calculated the cost of producing 8. a production supervisor. You can then focus attention on those items for cost control. We noted which ones exceeded the budget. Please contact the Accounting Department if you have further questions.11-62 Test Bank for Managerial Accounting. Third Canadian Edition items on your budget report. .