Solution WileyPlus COMM 305 / ACCO 240

CHAPTER 11 BUDGETARY 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.

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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.


*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.


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

11-4

Test Bank for Managerial Accounting, Third Canadian Edition

CHAPTER STUDY OBJECTIVES 1.

Describe the concept of budgetary control. Budgetary control consists of (a) preparing periodic budget reports that compare actual results with planned objectives, (b) analyzing the differences to determine their causes, (c) taking appropriate corrective action, and (d) modifying future plans, if necessary.

2.

Evaluate the usefulness of static budget reports. Static budget reports are useful in evaluating the progress toward planned sales and profit goals. They are also appropriate in assessing a manager's effectiveness in controlling 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.

3.

Explain the development of flexible budgets and the usefulness of flexible budget reports. To develop the flexible budget, it is necessary to: (1) Identify the activity index and the relevant range of activity. (2) Identify the variable costs, and determine the budgeted variable costs per unit of activity for each cost. (3) Identify the fixed costs, and determine the budgeted amount for each cost. (4) Prepare the budget for selected increments of activity within the relevant range. Flexible budget reports permit an evaluation of a manager's performance in controlling production and costs.

4.

Describe the concept of responsibility accounting. Responsibility accounting involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the day-to-day decisions about the items. The evaluation of a manager's performance is based on the matters directly under the manager's control. In responsibility accounting, it is necessary to distinguish between controllable and noncontrollable fixed costs and to identify three types of responsibility centres: cost, profit, and investment.

5.

Indicate the features of responsibility reports for cost centres. Responsibility reports for cost centres compare actual costs with flexible budget data. The reports show only controllable costs, and no distinction is made between variable and fixed costs.

6.

Identify the content of responsibility reports for profit centres. Responsibility reports show contribution margin, controllable fixed costs, and controllable margin for each profit centre.

7.

Explain the basis and formula that are used for evaluating performance in investment centres. The primary basis for evaluating performance in investment centres is return on investment (ROI). The formula for computing ROI for investment centres is: Controllable margin (in dollars) ÷ Average operating assets.


*8.

11-5

Explain the difference between ROI and residual income. ROI is controllable margin divided by average total assets. Residual income is the income that remains after subtracting the minimum rate of return on a company’s average operating assets. ROI sometimes provides misleading results because profitable investments are often rejected when the investment reduces ROI but increases overall profitability.

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TRUE-FALSE STATEMENTS 1.

Budget reports comparing actual results with planned objectives should be prepared weekly to be most effective.

2.

If actual results are different from planned results by a large amount, the difference should be investigated by management to achieve effective budgetary control.

3.

Cash budget reports are often prepared daily, whereas others are prepared less frequently depending on the activities being monitored.

4.

The master budget is the basis of developing flexible budgets.

5.

A flexible budget is more useful in evaluating a manager's performance than a static budget.

6.

A static budget is one that is geared to the most profitable level of activity for a company.

7.

A static budget considers that actual activity is often different from the level of activity expected.

8.

Evaluating a manager's performance in controlling variable costs is effectively achieved using a static budget.

9.

A flexible budget should be prepared for each of the types of budgets included in the master budget.

10.

A static budget is a series of flexible budgets at different levels of activities.

11.

Flexible budgeting relies on the assumption that unit fixed costs will remain constant within the relevant range of activity.

12.

The amount of fixed costs which appear on the flexible budget is the same as those appearing on the master budget.

13.

A flexible budget is based on the master budget.

14.

The activity index used in preparing a flexible budget should be the basis of the variable costs that are being budgeted.


11-7

15.

A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost ÷ activity level).

16.

Flexible budgets are widely used in production departments, and least used in service departments.

17.

A flexible budget report will compare actual costs with the budgeted costs at the actual activity level achieved.

18.

Management by exception means that management will investigate all areas where actual results are greater than planned results.

19.

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.

20.

Under responsibility accounting, both controllable and non-controllable costs receive the same attention.

21.

Cost centres are not classified as responsibility centres since there is no revenue responsibility.

22.

More costs become controllable as one moves up to each higher level of managerial responsibility.

23.

In a responsibility accounting reporting system, as one moves up each level of responsibility in an organization, the responsibility reports become more detailed.

24.

“The buck stops here” implies that all costs and revenues are controllable at some level of responsibility within a company.

25.

Direct fixed costs are synonymous with common costs.

26.

Cost centre managers are evaluated on the profitability of their centres.

27.

Since a profit centre is an independent entity, all fixed costs are controllable by its manager.

11-8


28.

Return on investment is the primary basis for evaluating profit and investment centre managers.

29.

Operating assets include all those listed under Assets on an investment centre’s balance sheet.

*30.

Residual income is the income that remains after subtracting controllable costs from controllable margin.

*31.

When evaluating residual income, the calculation tells management what percentage return was generated by the particular division being evaluated.

*32.

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.

33.

Investment centres rarely generate revenues by selling products.

34.

Investment and profit centres generate both revenues and costs.

35.

Investment centres generate a return on operating assets.

36.

Decreasing the average operating assets can increase ROI.

37.

Increasing either controllable margin or the average operating assets can raise ROI.

38.

When ROI is calculated, management would prefer a high percentage.

*39.

Residual income and ROI are used as performance evaluation methods for profit centre performance.


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ANSWERS TO TRUE-FALSE STATEMENTS Item 1. 2. 3. 4. 5. 6. 7.

Ans. F T T T T F F

Item 8. 9. 10. 11. 12. 13. 14.

Ans. F T F F T T T

Item 15. 16. 17. 18. 19. 20. 21.

Ans. F F T F T F F

Item 22. 23. 24. 25. 26. 27. 28.

Ans. T F T F F F F

Item 29. *30. *31. *32. 33. 34. 35.

Ans. F F F T F T T

Item 36. 37. 38. *39.

Ans. T F T F

11-10


MULTIPLE CHOICE QUESTIONS 40. The area manager of the Steak House Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows: Project Winnipeg Regina

Investment Controllable Margin $300,000 $100,000 $700,000 $200,000

ROI 33.33% 28.57%

The Steak House segment has currently $5,000,000 in invested capital and a controllable margin of $1,500,000. Which one of following projects will increase the Steak House division’s ROI? a. Both the Winnipeg and Regina options b. Only the Winnipeg option c. Only the Regina option d. 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 150,000 machine hours: Direct Materials $ 450,000 Direct Labour 225,000 Variable Overhead 1,125,000 Fixed Overhead 2,100,000 Actual Results: Machine Hours 160,000 hours Direct Materials $475,000 Direct Labour 245,000 Variable Overhead 1,150,000 Fixed Overhead 2,110,000 41.

What was the budgeted variable costs per machine hour for variable overhead, rounded to the nearest whole cent? a. $7.03/machine hour b. $7.50/marchine hour c. $19.53/machine hour d. $20.83/machine hour

42.

What is the budgeted Direct Labour cost at the actual level of activity? a. $245,000 b. $240,000 c. $210,938 d. $20,000

43.

What is the budgeted Fixed Overhead at the actual level of activity? a. $2,100,000


b. c. d.

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$2,110,000 $2,240,000 $3,260,000

44.

What was the difference between the actual and budgeted Direct Material costs at the actual level of activity? a. $25,000 unfavourable b. $25,000 favourable c. $5,000 favourable d. $5,000 favourable

45.

What possible reason could explain the difference between the actual fixed overhead costs and the budgeted fixed overhead costs? a. EKPN Company’s actual machine hours were greater than the budgeted amount. b. EKPN Company’s actual machine hours were less than the budgeted amount. c. EKPN Company spent more on fixed costs than it expected. d. EKPN Company spent less on fixed costs than expected.

46.

Perot Manufacturing reported the following items for 2012: Income tax expense Contribution margin Controllable fixed costs Interest expense Total operating assets

$ 40,000 125,000 30,000 10,000 475,000

How much is controllable margin? a. $125,000 b. $95,000 c. $85,000 d. $45,000 47.

Kilroy Manufacturing prepared a 2012 budget for 40,000 units of product. Actual production in 2012 was 41,000 units. Which one of the following is the most useful comparison for this company? a. The actual results for 41,000 units with a new budget for 41,000 units b. The actual results for 41,000 units with the original budget for 40,000 units c. The actual results for 41,000 units with the previous year’s actual results for 44,000 units d. It doesn’t matter. All of these choices are equally useful.

48.

Which one of the following statements describes a budget report? a. It is the preparation of long-term plans. b. It is a comparison of actual results with planned objectives. c. It includes the valuation of inventories. d. It is voted on and approved by the stockholders.

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49.

How often should a company prepare budget reports? a. As often as demanded by the stockholders b. As often as deemed necessary c. Annually is sufficient if the company is profitable d. Monthly to be sure the company is operating successfully

50.

Which one of the following do budget reports provide for managers? a. The cause of differences between actual and projected amounts b. The nature of corrective action needed c. Feedback on operations d. Modification actions necessary

51.

What is the purpose of a departmental overhead cost report? a. To control corporate labour costs b. To allocate uncontrollable costs c. To determine the cause of any misuse of costs d. To control overhead costs

52.

What is the purpose of the sales budget report? a. To control the cost of selling products in a company b. To assess whether the company is profitable or not c. To determine why sales goals were met or not met d. To identify differences between planned and actual and take corrective action if necessary.

53.

Which one of the statements below is correct concerning the comparison of differences between actual and planned results? a. The difference must be reported on external financial statements. b. The differences always require investigation. c. It reflects information from the static budget. d. It enables managers to take corrective action when differences are material.

54.

Which one of the following is true concerning a static budget? a. It is prepared at the end of the accounting period once actual results are known. b. It is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs. c. It shows planned results at the original budgeted activity level. d. It reflects the level of activity at which the company will be most profitable.

55.

When is a static budget most appropriate in evaluating a manager's performance? a. When the actual costs incurred equal the amounts in the budget b. When the actual activity is less than the master budget activity c. When the company performed at the same activity level as the static budget level d. The static budget is not appropriate for evaluating managers.

56.

Which statement is true concerning a static budget report?


a. b. c. d.

11-13

It considers performance at numerous activity levels. It is appropriate in evaluating a manager's effectiveness in controlling fixed costs. It should be used when the actual level of activity is materially different from the master budget activity level. It is most effective when evaluating a manager's effectiveness in controlling variable costs.

57.

What exists when budgeted costs exceed actual results? a. A budgeting error b. A favourable difference c. An unfavourable difference d. An excess profit

58.

What should be the reaction of upper level managers when a difference between budgeted and actual sales exists? a. The difference should be investigated if it is unfavourable. b. The difference should be ignored since economic conditions affect sales and cannot be controlled by the company’s managers. c. It depends on whether the difference is material or not. d. It depends on management personalities.

59.

A manager determined that certain costs were not responsive to changes in activity level. What are these costs? a. Mixed b. Flexible c. Variable d. Fixed

60.

Dunellon Company’s actual sales results exceeded the planned results for February. This amount exceeded the amount of an unfavourable difference reported for January sales. Which one of the following statements about the sales budget report for the two months ending February 28 is true? a. The sales report is not useful since it shows a favourable and unfavourable difference for the two months. b. The differences for the two months will offset each other so the differences should not be a concern. c. The difference for February can be ignored since it is favourable. d. The differences for both months should be investigated if the amounts are material.

61.

For which of the following costs is a static budget most appropriate? a. Uncontrollable costs b. Manufacturing costs c. Fixed overhead costs d. Variable overhead costs

62.

Which one of the following is true of a flexible budget?

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a. b. c. d.

63.

It is prepared when managers are unsure of activity levels. It projects budget data at a pre-planned level of activity. It is useful in controlling variable and fixed costs. It shows no differences between actual and budgeted amounts because it is prepared after the actual results are determined.

Haroot Company’s master budget shows that the planned activity level for next year is expected to be 20,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected: Indirect labour Factory supplies Indirect materials Depreciation on factory building Total manufacturing overhead

$45,000 4,000 21,000 15,000 $85,000

If the company operates at 21,000 machine hours, how much is allowed on a flexible budget for manufacturing overhead costs? a. $89,250 b. $73,500 c. $88,500 d. $85,000 64.

A department has budgeted monthly manufacturing overhead cost of $40,000 plus $5 per direct labour hour. The flexible budget report reflects $120,000 for total budgeted manufacturing cost for the month. What is the budgeted level of activity to be achieved during the month? a. 32,000 direct labour hours b. 24,000 direct labour hours c. 16,000 direct labour hours d. Cannot be determined

65.

Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets? a. Direct labour cost b. Indirect labour cost c. Fixed manufacturing overhead d. Variable manufacturing overhead

66.

Which one of the following statements is true in developing a flexible budget within a relevant range of activity? a. The budget must reflect a fixed level of activity. b. Total variable costs should be adjusted based on the activity index chosen. c. Costs cannot increase when different levels of activity exist. d. Fixed costs are not reported.

67.

Which one of the following statements is true concerning a flexible budget? a. It is prepared once the actual activity level is determined.


b. c. d.

11-15

It is relevant both within and outside the relevant range. It replaces a master budget. It is one of the financial budgets.

68.

For which of the budgets in the master budget will a company prepare a flexible budget? a. Only the sales budget b. Only the income statement budget c. Only the budgets that reflect operations d. All of the budgets

69.

Which one of the following is another name for the static budget? a. Flexible budget b. Operating budget c. Permanent budget d. Master budget

70.

Surf N Waves planned to sell 27,000 surfboards, however the actual number sold totalled 23,000. Which one of the following provides the best comparison of the cost data associated with the sales? a. A budget based on the original planned level of activity b. A budget of 27,000 units of activity c. A budget of 23,000 units of activity d. The master budget level of activity

71.

What assumption about the behaviour of total costs occurs within the relevant range of activity? a. Linear and upward sloping b. Linear and downward sloping c. Curvilinear and upward sloping d. Horizontal

72.

Yellow Card Company compared its actual sales results with a static budget. Which of the following situations might result? a. Favourable differences that are not justified b. Unfavourable differences that are not justified c. Either favourable or unfavourable differences that are not justified d. Actual differences that are justified

73.

Which statement is true concerning the selection of the level of activity used in the flexible budget? a. The activity level should be the same as actually achieved. b. The activity level should be the same as found in the master budget. c. Any activity level can be used in the flexible budget. d. The activity level should be the level which maximizes profit.

74.

Which statement is true concerning management by exception?

11-16


a. b. c. d.

It causes employee morale problems. It requires that all differences will be investigated. It requires management to investigate only unfavourable differences. It requires investigation of all material differences whether favourable or not.

75.

Nextel Communications uses management by exception. Which differences between planned and actual results will it investigate? a. Those that are material and non-controllable b. Those that are controllable and non-controllable c. Those that are material and controllable d. All differences should be investigated.

76.

How does a graph of a flexible budget compare to a CVP graph? a. Fixed costs appear differently. b. Variable costs appear differently. c. Sales revenues are not shown on a flexible budget graph. d. The two are graphed identically.

77.

Which statement is true about the activity index used in preparing the flexible budget? a. It applies only to fixed manufacturing costs. b. It is the same for all departments of the company. c. It significantly influences the variable costs that are being budgeted. d. It is irrelevant to total costs.

78.

In what situations will a static budget be most effective in evaluating a manager's effectiveness? a. The company has substantial fixed costs. b. The company has substantial variable costs. c. The planned activity levels match actual activity levels. d. The company has no fixed costs.

79.

What is the preparation of reports for each level of responsibility in the company’s organization chart called? a. Static reporting b. Responsibility reporting c. Exception reporting d. Master budgeting analysis

80.

When is a cost considered to be controllable? a. Only when the manager has the power to incur the cost within a given time period b. Only if the cost is less than the budget amount c. Only when it is a variable cost d. Only when the amount changes based on different activity levels

81.

Which one of the following decreases the controllability of a particular cost? a. Moving up to higher levels of managerial responsibility


b. c. d.

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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.

Which one of the following describes a responsibility report? a. It is prepared using the CVP income statement format. b. It shows all costs that relate to a particular manager’s division. c. It shows only the variable costs in a manager’s division. d. It is prepared at the highest level of managerial responsibility.

83.

What centres receive responsibility reports containing budgeted and actual controllable revenues and costs? a. Investment centres b. Profit centres c. Cost centres d. Investment, profit, and cost centres

84.

In which situation is responsibility accounting especially valuable? a. When large amounts of uncontrollable costs exist b. In not-for-profit companies c. In decentralized companies d. In cost centres

85.

Which of the following is a true statement? a. All costs are controllable at some level with a company. b. Responsibility accounting applies to only profitable divisions and segments. c. A cost is controllable if it is incurred in a manager’s division or segment. d. More costs are controllable as one moves downward in management levels.

86.

What is a segment? a. A non-controllable cost b. An area of responsibility in decentralized operations c. Another name for a cost centre d. A division which contains both controllable and non-controllable costs

87.

Which statement is true concerning management by exception? a. It is most effective on uncontrollable costs. b. It enables management to focus on problem areas. c. It allows managers to decide when they want to use budget guidelines. d. It allows managers to concentrate on the uncontrollable costs.

88.

Which type of centre is the toy department in a Wal-Mart store? a. An exception centre b. A profit centre c. A cost centre d. An investment centre

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89.

Which type of centre is the theme park division of Walt Disney Company? a. Not a responsibility centre b. A profit centre c. A cost centre d. An investment centre

90.

Which type of centre is the housekeeping department of a manufacturing company? a. A segment b. A profit centre c. A cost centre d. An investment centre

91.

Which of the following correctly indicates the responsibilities of the respective centre? a. An investment centre incurs costs, and controls investment funds. b. A cost centre incurs costs. c. A profit centre incurs costs and controls investment funds. d. None of these indicate the correct responsibilities.

92.

Which statement is true concerning a cost centre? a. It incurs costs and generates revenues. b. It only exists in companies in which costs exceed revenues. c. It is evaluated most effectively using ROI. d. It is usually a production or service department.

93.

On what is a manager of a profit centre evaluated? a. The profit that the centre generates b. His or her ability to control costs c. The amount of return the centre’s assets generate d. The amount of revenue that can be generated

94.

Which one of the following is a suitable way to evaluate cost centres? a. Compare the actual profit generated with expected profit. b. Compare actual total costs with flexible budget data. c. Compare actual controllable costs with static budget data. d. Compare actual controllable costs with flexible budget data.

95.

What would you expect to find in a performance report for a cost centre? a. Both controllable and non-controllable costs b. Variable, but not fixed costs c. Only costs controllable by the managers of the centre d. Only material and labour costs

96.

Of the following choices, which one contains a common fixed cost? a. Profit centre manager's salary


b. c. d.

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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.

Which of the following is an indirect fixed cost? a. Depreciation on a profit centre’s machinery b. Depreciation on the company’s building which houses several profit centres c. Health insurance costs for employees d. Profit centre supervisory salaries

98.

Which one of the statements about a responsibility report is correct? a. It contains controllable and non-controllable costs. b. It compares actual costs with static budget data. c. A distinction is made between variable and fixed costs. d. It is used to evaluate investment centres, but not cost or profit centres.

99.

Which one of the following is a measure of the performance of the manager of a profit centre? a. ROI b. Success in meeting budgeted goals for non-controllable costs c. Amount of controllable margin generated d. Amount of residual income generated

100.

What is controllable margin? a. Contribution margin less controllable fixed costs b. Sales minus variable costs c. Sales minus contribution margin d. Contribution margin less all fixed costs

101.

For what purpose is controllable margin most useful? a. Preparing the master budget b. Performance evaluation of profit centres c. Break-even analysis d. Evaluating cost centres

102.

Which of the following will most likely result in a favourable controllable margin difference? a. Sales exceeding budget; costs under budget b. Sales exceeding budget; costs over budget c. Sales under budget; costs under budget d. Sales under budget; costs over budget

103.

Given below is a portion of Swinging Tunes, Inc.’s management performance report: Budget Actual Difference Contribution margin $1,040,000 $1,020,000 $20,000 Controllable fixed costs 430,000 420,000 10,000

11-20


Which statement is true about the manager’s overall performance? a. The manager’s performance is above expectations. b. The manager’s performance is below expectations. c. The manager was under budget on all controllable amounts. d. The manager's overall performance cannot be determined from information given. 104.

Which one of the following is a performance indicator for an investment centre, but not for a profit centre? a. Controllable margin b. Asset utilization effectiveness c. Revenues d. Controllable costs

105.

Given below is an excerpt from a management performance report for a profit centre: Budget Actual Difference Contribution margin $600,000 $580,000 $20,000 Controllable fixed costs $200,000 $220,000 $20,000 How well did the manager perform overall? a. $20,000 below expectations b. $40,000 below expectations c. Equal to expectations d. The ROI needs to be known for a total assessment.

106.

What will you expect to find on a responsibility report for a profit centre? a. Only direct costs b. No indirect fixed costs c. All fixed costs—both controllable and non-controllable d. Controllable margin

107.

How do controllable margin and contribution margin differ? a. The amount of the controllable margin is larger than contribution margin. b. The amount of the contribution margin is usually higher than the controllable margin. c. They are synonymous terms. d. Controllable margin is used for profit centres, while contribution margin is used for cost centres.

108.

What is a profit centre? a. A division of a company that has never incurred a loss b. A responsibility centre that incurs costs and generates revenues c. A centre evaluated by the rate of return earned on the assets allocated to the centre d. A division of the company that has fewer costs than the other divisions


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109.

Which one of the following is not controllable by a profit centre manager? a. Variable costs b. Sales c. Controllable margin d. Assets used by the centre

110.

Which statement is true concerning direct fixed costs? a. They also called traceable costs. b. Profit centre managers are not able to control them. c. The often apply to more than one centre. d. They are deducted from controllable margin on a responsibility report.

111.

What is another name for an indirect fixed cost? a A traceable fixed cost b. A controllable fixed cost c. A segment fixed cost d. A common fixed cost

112.

Which one of the following statements about a profit centre responsibility report is correct? a. It shows budgeted and actual controllable revenues and costs. b. Non-controllable fixed costs are reported. c. It provides the same information as a cost centre responsibility report. d. All fixed costs are deducted from controllable margin.

113.

What is the purpose of determining return on investment? a. To assess a company’s controllable margin b. To determine which costs are controllable c. To assess performance of an investment centre d. To determine profitability of a profit centre

114.

Merck Pharmaceuticals is evaluating its Vioxx division, an investment centre. The division has a $45,000 controllable margin and $300,000 of sales. How much will Merck’s average operating assets be when its return on investment is 10%? a. $450,000 b. $495,000 c. $300,000 d. $255,000

115.

SuitCity purchased an operating asset expected to benefit the company for 10 years for a cost of $100,000 cash. The old operating asset was fully depreciated and was kept in operations. What effect will acquiring this asset have on the performance measurement of an investment centre? a. A negative effect b. A positive effect c. No effect since cash replaces the asset sold d. More information is needed to determine the effect

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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%


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.

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*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.

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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


EKPN Company’s desired return

11-25

12%

133.

What is EKPN Company’s average operating assets for 2012? a. $770,000 b. $750,000 c. $790,000 d. $150,000

134.

What is EKPN Company’s controllable margin? a. $849,700 b. $765,000 c. $410,000 d. $$84,700

135.

What is EKPN Company’s ROI, rounded to the nearest whole number? a. 11% b. 12% c. 53% d. 55%

*136. What is EKPN Company’s residual income? a. $2,200 b. ($2,200) c. ($7,700) d. ($10,100) 137.

Beach Road Foods calculated the following for two potential investments. Beach Road’s required rate of return is 10%. Investment A Investment B

11.5% 9.5%

Which of the following should Beach Road choose? a. Investment A b. Investment B c. Both, since both investments generate a positive return. d. It depends on which investment generates the larger profits. 138.

For which of the following is an investment centre manager responsible? a. Invested assets, sales, and costs b. Sales, profits, and invested assets c. Sales, invested assets, and assets d. Revenues and costs

139.

For which of the following is a profit centre manager responsible? a. Invested assets, sales, and costs

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b. c. d. 140.

Sales, profits, and invested assets Sales, invested assets, and assets Revenues and costs

Frame, Inc. requires a return for the Picture Division totalling 8%. Which projects would add value to the company? Project Average Operating Assets A $500,000 B $450,000 C $375,000 D $425,000 a. A, B, C, and D b. Projects A, C, and D c. Projects C and D d. Project A, B, and D

Controllable Margin $40,000 $30,000 $32,000 $40,000

141.

The current controllable margin for Claremont Division is $62,000. Its current operating assets are $200,000. The division is considering purchasing equipment for $60,000 that will increase annual controllable margin by an estimated $10,000. If the equipment is purchased, what will happen to the return on investment for Claremont Division? a. An increase of 16.1% b. A decrease of 13.3% c. A decrease of 3.3% d. A decrease of 7.2%

142.

CinRich Corporation recorded operating data for its Waterhole division for the year. CinRich requires its return to be 9%. Sales Controllable margin Total average assets Fixed costs Residual income

$500,000 90,000 300,000 30,000 50,000

How much is ROI for the year? a. 10% b. 16.7% c. 20% d. 30% 143.

CinRich Corporation recorded operating data for its Waterhole division for the year. CinRich requires a 9% rate of return. Sales Controllable margin Total average assets Fixed costs Residual income

$500,000 90,000 300,000 30,000 50,000


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Suppose CinRich experiences an increase of $50,000 in controllable fixed costs. Will the new ROI be acceptable? a. Yes. The ROI will remain at 30% which exceeds the required ROI. b. Yes. The new ROI is still above the required ROI. c. No. The ROI drops to less than 9%. d. There is not enough information to determine. 144.

How can management improve the return on investment? a. By buying more plant assets b. By reducing inventory levels c. By reducing sales d. By increasing expenses

145.

Which statement is true? a. An investment centre is responsible for revenues and expenses as well as earning a return on assets. b. An investment centre is only responsible for its investments. c. An investment centre is only responsible for revenues and expenses. d. A profit centre is evaluated using residual income, while an investment centre is evaluated using ROI.

146.

Ginder Company operates four plants, each in separate divisions, and a separate corporate office. 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. Material costs for the Eastern plant b. Indirect labour of the Eastern plant c. Asset maintenance costs of factory equipment in the Eastern plant d. Interest expense on corporate company debt

147.

Fleur de Lys Segment of Windy’s restaurants is an investment centre. The manager is considering two possible expansion alternatives. The required investments, controllable margins, and the ROIs of each expansion project are as follows: Project Power Super

Investment $ 75,000 330,000

Controllable Margin $15,000 56,100

ROI 20% 17%

The investment centre is currently generating an ROI of 15% based on $700,000 in operating assets and a controllable margin of $105,000. Which one of following projects will increase Fleur de Lys Segment’s ROI? a. Both Power and Super b. only Power c. only Super d. Neither Super nor Power 148.

Which responsibility centres generate both revenues and costs? a. Investment and profit centres

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b. c. d.

Profit and cost centres Cost and investment centres Only profit centres

*149. For what purpose do companies calculate residual income? a. To determine whether decentralization is possible or not b. To motivate managers through possible termination c. To evaluate management performance d. To measure company profits 150.

Ed is the manager of the Montreal location of Books Galore. Which one of the following would most likely be an uncontrollable cost for Ed? a. Workers’ compensation insurance expense for his cashiers b. Installation of a corporate-wide satellite dish system for book signings by selected authors c. Costs of printing signs for local promotions d. Colour selection of logo merchandise

*151. Which one of the following does not impact the amount of residual income? a. Contribution margin b. Net income c. Sales d. Controllable costs 152.

The following information was extracted from the accounting records of the City of Charlottetown, PEI: Average assets increased by $100,000 Variable costs increased by $50,000 How much is the current year’s return on investment? a. Less than the prior year’s due to the change in variable costs b. Less than the prior year’s due to the change in average assets c. No change between years d. Less than the prior year’s due to both the change in assets and variable costs

*153. What is a weakness of residual income? a. It discourages goal congruence. b. It can be misleading when comparing divisions of different sizes. c. It routinely results in managers rejecting investment opportunities that would be advantageous to the company as a whole. d. It does not take cost of capital into consideration. *154. Niceville Company had sales of $400,000, variable costs of $200,000, and direct fixed costs totalling $100,000. The company’s operating assets total $800,000, and its required return is 10%. How much is the residual income? a. $120,000


b. c. d. 155.

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$20,000 $80,000 $320,000

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. The division manager has two investment projects available, for which the following estimates have been made: Project A - annual controllable margin = $24,000, operating assets = $400,000 Project B - annual controllable margin = $60,000, operating assets = $550,000 Which project should be funded? a. Both projects b. Project A c. Project B d. Neither project

156.

Lou Alabassi is the Northwest Territories Division manager and his performance is evaluated by executive management based on Division ROI. The current controllable margin for Northwest Territories Division is $46,000. Its current operating assets total $210,000. The Division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, what will happen to the return on investment for the division? a. An increase of 0.5% b. A decrease of 0.5% c. A decrease of 3.5% d. It will remain unchanged

*157. Waterloo Company earned controllable margin of $125,000 on sales of $1,600,000. The division had average operating assets of $1,300,000. The company requires a return on investment of at least 8%. How much is residual income? a. $104,000 b. $21,000 c. $146,000 d. $128,000 *158. The performance of the manager of Purina Division is measured by residual income. Which of the following would decrease the manager's performance measure? a. Decrease in required rate of return b. Increase in amount of return on investment desired c. Increase in sales d. Increase in contribution margin 159.

Cruise Division of Harrah’s Company’s operating results include: controllable margin, $150,000; sales, $1,750,000; and operating assets, $750,000. The Cruise Division’s ROI is 20%. Management is considering a project with sales of $125,000, variable expenses of $75,000, fixed costs of $50,000; and an asset investment of $90,000. Should management accept this new project?

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a. b. c. d.

No, since ROI will be lowered. Yes, since ROI will increase. Yes, since additional sales always mean more customers. No, since a loss will be incurred.

160.

Budgetary control means a. That once a budget is agreed to by management there can be no deviation from it. b. That once a budget is agreed to the controller of the company is now in charge of cost and profit controls. c. That the difference between actual results and budgeted results are reported and assessed over time. d. That the budget can be changed during the year to reflect actual results.

161.

A static budget offers management the best results when a. Variable material costs are fixed by suppliers to the company. b. Fixed selling costs are established at the start of the budget process. c. Fixed manufacturing costs are established at the start of the budget process. d. Fixed manufacturing, selling and administrative costs are established at the start of the budget process.

162.

Flexible budgets imply a. That sales managers can have a wide latitude in modifying prices during the year. b. That a firm will have different levels of activity and costs during a year. c. The budget process may not be accurate at the beginning of the budget year. d. Each manager is free to change the budget as the year progresses.

163.

A characteristic of a good budget is a. That it is easy to understand by top management. b. That is encompasses every account in the firm’s accounting system. c. That management is satisfied that it will provide shareholders with an adequate return on their investment. d. That it is easy to understand and communicate to all within the firm.

164.

When setting a flexible budget it is important to know a. The expected profit that a firm requires. b. The expected return that the shareholders or owners require. c. The relevant ranges of activity and cost. d. The impact of inflation on the budget in the year to come.

165.

In a cost centre a. Managers are expected to control costs directly under their control. b. Managers are expected to control all costs, including allocated costs from head office. c. Managers are expected to control all direct costs and the contribution margin that they provide. d. Managers are expected to control all costs and sales from their division.


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166.

Responsibility centres in a decentralized organization a. Do not include cost centres. b. Do not include profit centres. c. Only include investment centres. d. Include cost, profit and investment centres.

167.

Managers who are evaluated on their Return on Investment a. May tend to underestimate the level of investment required in their division. b. May tend to overestimate the level of investment required in their division. c. May tend to underestimate the value of new product lines. d. May tend to overestimate the value of new product lines.

168.

When using a reporting system based on Residual Income a. Senior management must ensure that there is adequate capital investment in the firm in the long term. b. Senior management must ensure an adequate return for the shareholders. c. Unprofitable divisions must be either sold off or improved. d. Both a minimum and a maximum rate of expected return must be established.

169.

When comparing performance tools such as Return on Investment and Residual Income, a. ROI is superior to RI. b. RI is superior to ROI. c. Blending ROI and RI will eliminate the weaknesses inherent in both methods. d. Management must be clear in recognizing that each method has strengths and weaknesses.

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ANSWERS TO MULTIPLE CHOICE QUESTIONS Item

Ans .

Item

Ans .

Item

Ans .

Item

Ans .

Item

Ans .

Item

Ans .

Item

Ans .

40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58.

b b b a d c b a b b c d d d c c b b c

59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.

d d c c c c c b a d d c a c a d c c c

78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96.

c b a d a b c a b b b d c b d a d c c

97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115.

b c c a b a b b b d b b d a d a c a a

116. 117. 118. 119. 120. 121. 122. 123. 124. *125. *126. *127. 128. 129. 130. 131. 132. 133. 134.

b c b d c b a a a c c d c b c d b a d

135. *136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. *149. 150. *151. 152. *153.

a c a a d b c d b b a d a a c b b d b

*154. 155. 156. *157. *158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169.

b c c b b a c d b d c a d a a d


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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

$2,750,000 900,000 400,000 10%

Calculate controllable margin and average operating assets. Solution Brief Exercise 170 Controllable Margin ($900,000 – $400,000) = $500,000 Average Operating Assets ($500,000 ÷ .10) = $5,000,000 Brief Exercise 171 Clark Inc. reported the following items for 2012: $ 56,000 235,000 35,000 157,000 1,690,000

Controllable fixed costs Contribution margin Interest expense Variable costs Total assets How much is controllable margin? Solution Brief Exercise 171 $235,000 - $56,000 = $179,000 Brief Exercise 172 The data for an investment centre is given below.

Current Assets Plant Assets

January 1, 2012 December 31, 2012 $ 700,000 $ 900,000 2,500,000 2,700,000

The controllable margin is $680,000. How much is the return on investment for the centre for 2012? Solution Brief Exercise 172 Average current assets ($700,000 + $900,000) ÷ 2 = $800,000 Average plant assets ($2,500,000 + $2,700,000) ÷ 2 = $2,600,000 ROI = Controllable Margin ÷ Average Operating Assets = $680,000 ÷ ($800,000+$2,600,000) = 20%

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*Brief Exercise 173 The owner of Shrek Toys has recently expanded his business in order to add an additional product line. In addition to toys, the company will now sell shirts. The company has a minimum rate of return of 11%. Toys Shirts Sales $540,000 $326,000 Controllable margin 390,000 15,000 Average operating assets 750,000 300,000 Calculate the residual income for both investment centres. Solution Brief Exercise 173 Toys Shirts $390,000 $15,000 82,500 33,000 $ 307,500 $ (18,000)

Controllable margin Average assets × 11% Residual income

Brief Exercise 174 Flames Company produces men’s ties. The following budgeted and actual amounts are for 2012: Cost Direct materials Direct labour Fixed overhead

Budget at 2,500 units $55,000 70,000 35,000

Actual Amounts at 2,900 units $65,000 81,000 34,500

Prepare a performance report for Flames Company for the year. Solution Brief Exercise 174

Direct materials Direct labour Fixed overhead Total costs

Flames Company Manufacturing Performance Budget Report For the Year Ending December 31, 2012 Budget Actual $ 63,800 $ 65,000 81,200 81,000 35,000 34,500 $180,000 $180,500

Differences $1,200 U 200 F 500 F $ 500 U

Brief Exercise 175 A flexible budget graph for the waxing department shows the following: 1. At zero direct labour hours, the total budgeted cost line intersects the vertical axis at $75,000. 2. At normal capacity of 80,000 direct labour hours, the line drawn from the total budgeted cost line intersects the vertical axis at $135,000. Identify the total fixed costs and the variable costs per unit. Solution Brief Exercise 175 Fixed costs = $75,000 Variable costs = ($135,000 – $75,000) ÷ 80,000 = $0.75 per direct labour hour


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Brief Exercise 176 Hastings Manufacturing Co.'s static budget at 6,000 units of production includes $42,000 for direct labour and $6,000 for materials. Total fixed costs are $24,000. How much would appear on Hastings’s flexible budget for 2012 if 9,000 units are produced and sold? Solution Brief Exercise 176 Variable costs: Direct labour Direct materials Total variable costs Fixed costs Total costs

6,000 Units

Unit Variable Cost

9,000 Units

$42,000 6,000 48,000 24,000 $72,000

$7.00 1.00

$63,000 9,000 72,000 24,000 $96,000

Brief Exercise 177 Wimmer Division’s operating results include:  Controllable margin, $150,000  Sales revenue, $1,200,000  Operating assets, $500,000 Wimmer is considering a project with sales of $120,000, expenses of $84,000, and an investment of $180,000. Wimmer’s required rate of return is 15%. Should Wimmer accept this project? Solution Brief Exercise 177 Current ROI = $150,000/$500,000 = 30% ROI of new project = $36,000/$180,000 = 20% New ROI with project = [$150,000 + $36,000]/[$500,000 + $180,000] = 27.4% While ROI decreases, that does not make this a bad investment, since many projects cause total ROI to fall even though they increase value of the division. The determination is based on how the ROI of the project compares to the required rate of return. The company is not willing to accept any projects with an investment less than 15%, so the 20% project should be accepted. 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

$6.50 per unit 2.40 per unit 1.10 per unit $12,600 3,500 2,200

Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month. Solution Brief Exercise 178 3,200 x ($6.50 + $2.40 + $1.10) + ($12,600 + $3,500 + $2,200) = $50,300

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Brief Exercise 179 Sekine Company uses flexible budgets. Items from the budget for March in which 2,000 units were produced and sold appear below: Direct materials Indirect materials - variable Supervisor salaries Depreciation on factory equipment Direct labour Property taxes on factory

$18,000 2,000 15,000 4,000 10,000 1,000

If Sekine prepares a flexible budget at 3,000 units, how much will its total variable cost be? Solution Brief Exercise 179 Variable cost per unit: ($18,000 + $2,000 + $10,000)/2,000 = $15 per unit Variable cost at 3,000 units: $15 x 3,000 = $45,000 Brief Exercise 180 SugarTown’s manufacturing costs for August when production was 1,000 units appears below: Direct material Direct labour Variable overhead Factory depreciation Factory supervisory salaries Other fixed factory costs

$12 per unit $6,500 5,000 9,000 7,800 2,500

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 [($6,500/1,000)*800] Variable overhead [($5,000/1,000)*800] Factory depreciation -fixed Factory supervisory salaries - fixed Other fixed factory costs - fixed Total

$9,600 5,200 4,000 9,000 7,800 2,500 $38,100

Brief Exercise 181 Butterfly World budgeted sales for April were estimated at $500,000, sales commissions at 4% of sales, and the sales manager's salary at $80,000. The cost of shipping expenses was estimated at 1% of sales and miscellaneous selling expenses were estimated at $1,000 plus 0.5% of sales. How much are budgeted selling expenses on a flexible budget for April?


Solution Brief Exercise 181 Sales commissions Sales manager’s salary Shipping expenses Miscellaneous selling: Budgeted selling expenses

11-37

4% x $500,000

$20,000 80,000 1% x $500,000 5,000 Fixed portion 1,000 Variable: 0.5% x $500,000 2,500 $108,500

*Brief Exercise 182 A & B Flooring has 4 divisions. Its hardwood flooring division’s information follows for 2012: Sales Controllable margin Variable costs Average operating assets

$4,000,000 250,000 60,000 1,800,000

A & B’s required rate of return is 9%. How much is residual income? Solution Brief Exercise 182 $250,000 – [9% x $1,800,000] = $88,000 Brief Exercise 183 Good Chicken Farms produces a single product, eggs. 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

$0.80 2.20 1.10 $8,600 4,500 1,200

Determine the amount of manufacturing costs for a production level of 3,200 dozen per month. Solution Brief Exercise 183 [3,200 × ($0.80 + $2.20 + $1.10)] + ($8,600 + $4,500 + $1,200) = $27,420 Brief Exercise 184 EKPN Company is currently generating an ROI of 10%. The Winnipeg division of EKPN is operating as an investment centre. It is currently generating an ROI of 13% based on $130,000 in operating assets and a controllable margin of $16,900. The manager of the Winnipeg division has an opportunity to invest in an asset that will cost $30,000, and generate a controllable margin of $3,600. 1. Would it be in the Winnipeg manager’s best interests to make the investment? 2. Would it be in EKPN’s best interests to make the investment? Solution Brief Exercise 184

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1. The ROI on the investment is $3,600 / $30,000, or 12%. Since that is less than the Winnipeg’s current ROI of 13%, it would lower the ROI. The investment is not attractive for the Winnipeg division. New ROI = ($16,900 + $3,600) / ($130,000 + $30,000) or 12.8%. 2. The ROI on the investment of 12% is above EKPN’s current ROI of 10%, and therefore it would raise the company’s ROI. Accordingly, the investment is attractive for EKPN. * Brief Exercise 185 EKPN Company’s required rate of return is 10%. The Winnipeg division of EKPN is operating as an investment centre. It is currently generating an ROI of 13% based on $130,000 in operating assets and a controllable margin of $16,900. The manager of the Winnipeg division has an opportunity to invest in an asset that will cost $30,000, and generate a controllable margin of $3,600. 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: $16,900 – ($130,000 X 10%) = $3,900 Residual income after investment: $16,900 + $3,600 – ([$130,000 + $30,000] X 10%) = $4,500 The investment is attractive to the Winnipeg division, as it will increase its residual income. 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 $8,000 Variable overhead 4,000 Direct labour 1,500 Factory supervisory salaries 5,800 Other fixed factory costs 1,500 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 [($1,500/500) x 550] Variable overhead [$4,000/500 x 550] Factory depreciation -fixed Factory supervisory salaries - fixed Other fixed factory costs - fixed Total

$11,000 1,650 4,400 8,000 5,800 1,500 $32,350

Brief Exercise 187 New Clothing’s static budget at 2,000 units of production includes $10,000 for direct labour, $2,000 for utilities (variable), and total fixed costs of $16,000. Actual production and sales for the year was 6,000 units, with an actual cost of $52,400. Determine if New is over or under budget. Solution Brief Exercise 187


2,000 units Variable costs: Direct labour Utilities Fixed costs Total costs

$10,000 2,000 12,000 16,000 $28,000

Unit Variable Cost $ 5.00 1.00

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6,000 units $30,000 6,000 36,000 16,000 $52,000

The company is over budget by $400. The flexible budget amount allowed was $52,000, and the company incurred $52,400. Brief Exercise 188 Back 2 Front Company makes products for the fashion industry. The head office is in Paris and it has branches in all the major cities in the world. 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. 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. Required: At an annual meeting to discuss results, determine which costs would be under the control of the Vancouver branch manager. Solution Brief Exercise 188 In a cost centre, the manager would only be responsible for those items directly under his or her control. In this example it would be direct and indirect materials, factory labour, administration costs and factory overhead. All selling, interest and any allocated head office charges would not be considered as being under the control of the manager. Brief Exercise 189 Back 2 Front Company is considering having each of its branches operate as a profit centre. It will still allocate only certain head office costs to the branches, but all products will be designed in the branches. Required: If the changes are made to how the company operates, determine which costs would be under the control of the Vancouver branch manager as a result. Solution Brief Exercise 189

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All costs except for the allocated head office charges and the interest expense if it is still allocated from Paris. 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.


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EXERCISES Exercise 190 Ashley Sofa Store produces sofas. 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 units $63,000 49,000 10,000 5,600 14,000 15,000

Actual Amounts at 7,500 units $64,000 49,500 10,000 5,700 14,900 15,100

Instructions Prepare a performance report for Ashley Sofa Store for the year. Solution Exercise 190 (6-8 mins.) Ashley Sofa Store Manufacturing Performance Budget Report For the Year Ending December 31, 2012 Budget Actual Direct materials $67,500 $64,000 Direct labour 52,500 49,500 Equipment depreciation 10,000 10,000 Indirect labour 6,000 5,700 Indirect materials 15,000 14,900 Rent and insurance 15,000 15,100 Total costs $166,000 $159,200

Differences $3,500 F 3,000 F 0 300 F 100 F 100 U $6,800 F

Exercise 191 Cranium Co.'s static budget at 5,000 units of production includes $60,000 for direct labour and $35,000 for materials. Total fixed costs are $12,000. Instructions a. Determine how much would appear on Cranium’s flexible budget for 2012 if 6,000 units are produced and sold. b. How would this comparison differ if a static budget were used instead of a flexible budget for performance evaluation? Solution Exercise 191 (7-9 mins.) a. Variable costs: Direct labour Direct materials Fixed costs Total costs

5,000 Units $60,000 35,000 95,000 12,000 $107,000

Unit Variable Cost $12 7

6,000 Units $72,000 42,000 114,000 12,000 $126,000

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b. If a static budget were used, budgeted variable costs would be less because they would be based on the static budget level of 5,000 units. The company would appear over budget since the costs incurred would be correlated to a higher level of activity. Exercise 192 Cheatem Trading Company's master budget reflects budgeted sales information for the month of March, 2012, as follows: Budgeted Quantity Budgeted Unit Sales Price Baking potatoes 35,000kilograms $0.75 per kilogram Boiling potatoes 20,000kilograms $0.30 per kilogram During March, the company actually sold 37,000kilograms of baking potatoes at an average price of $0.73 per kilogram and 17,000kilograms of boiling potatoes at an average price of $0.32 per kilogram. Instructions Prepare a Sales Budget Report for the month of March for Cheatem Trading Company which shows whether the company achieved its planned objectives. Solution Exercise 192 (6–8 min.) Cheatem Trading Company Sales Budget Report For the Month Ended March 31, 2012 Product Line Baking potatoes Boiling potatoes Total sales

Budget $26,250 6,000 $32,250

Actual $27,010 5,440 $32,450

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: 90,000 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 27,000 63,000 450,000 72,000 70,000 12,000 154,000 $604,000

The relevant range for monthly activity is expected to be between 80,000 and 100,000 direct labour hours. Instructions


Prepare a flexible budget for a monthly activity level of 85,000 direct labour hours. Solution Exercise 193 (8–10 min.) Toto Dog Toys Monthly Flexible Manufacturing Overhead Budget at 85,000 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

$340,000 25,500 59,500 425,000 72,000 70,000 12,000 154,000 $579,000

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

4,000 Units $32,000 44,000 36,000 17,000 5,500 1,250 $135,750

5,000 Units $40,000 55,000 45,000 17,000 5,500 1,250 $163,750

Instructions Prepare a flexible budget at 4,700 units of activity. Solution Exercise 194 (8–10 min.) Jessica Simpson Music Company Monthly Flexible Manufacturing Overhead Budget at 4,700 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

$ 37,600 51,700 42,300 131,600 17,000 5,500 1,250 23,750 $155,350

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Exercise 195 Usher Music Company uses a flexible budget for overhead based on studio hours. Variable overhead costs per studio hour are as follows: Indirect Labour Indirect Materials Maintenance Utilities

$ 4.25 1.27 0.34 0.15

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 to 4,000 studio hours per month. Instructions Prepare a flexible manufacturing overhead budget for 2,500 studio hours. Solution Exercise 195 (8–10 min.) Usher Music Company Monthly Flexible Manufacturing Overhead Budget at 2,500 Studio Hours Variable overhead costs Indirect Labour $10,625 Indirect Materials 3,175 Maintenance 850 Utilities 375 Total variable costs 15,025 Fixed overhead costs Supervision 900 Insurance 700 Property Taxes 400 Depreciation 600 Total fixed costs 2,600 Total costs $17,625 Exercise 196 Outkast Company uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour is as follows: Indirect labour $0.50 Indirect materials 1.50 Maintenance .40 Utilities .20 Budgeted fixed overhead costs per month are: Supervision $4,000 Insurance 2,000 Property taxes 1,000 Depreciation 9,000


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The company believes it will normally operate in a range of 28,000 to 35,000 machine hours per month. During the month of August, 2012, the company incurred the following manufacturing overhead costs: Indirect Labour Indirect Materials Maintenance Utilities Supervision Insurance Property Taxes Depreciation

$14,800 44,000 12,000 6,500 4,200 2,100 800 8,600

Instructions Prepare a flexible budget report, assuming that the company used 31,000 machine hours during August. Solution Exercise 196 (10–12 min.) Outkast Company Manufacturing Overhead Budget Report (Flexible) For the Month Ended August 31, 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 Hours

Actual at 31,000 Hours

Difference F or U

$15,500 46,500 12,400 6,200 80,600

$14,800 44,000 12,000 6,500 77,300

$ 700 F 2,500 F 400 F 300 U 3,300 F

4,000 2,000 1,000 9,000 16,000 $96,600

4,200 2,100 800 8,600 15,700 $93,000

200 U 100 U 200 F 400 F 300 F $3,600 F

Exercise 197 Eastwood Music uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $400,000 to $450,000. 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 and depreciation on stage and production equipment totalling $12,000. Instructions Prepare a flexible budget for $420,000 of sales.

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Solution Exercise 197 (7–9 min.) Eastwood Music Monthly Flexible Selling Expense Budget at $420,000 of Sales Variable costs Sales commissions Advertising Traveling Delivery Total variable costs Fixed costs Sales salaries Depreciation Total fixed costs Total costs

$33,600 21,000 63,000 8,400 126,000 50,000 12,000 62,000 $188,000

Exercise 198 Westwood Music uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $400,000 to $450,000. 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 and depreciation on stage and production equipment totalling $12,000. The actual selling expenses incurred in March, 2012, by Westwood Music are as follows: Sales commissions $35,000 Advertising 19,800 Traveling 64,000 Delivery 8,200 Fixed selling expenses consist of sales salaries of $48,800 and depreciation on delivery equipment totalling $11,000. Instructions Prepare a flexible budget performance report, assuming that March sales were $420,000. Expected and actual sales are the same. Solution Exercise 198 (10–12 min.) Westwood Music Selling Expense Budget Report (Flexible) For the Month Ended March 31, 2012 Variable costs Sales commissions Advertising

Budget at $420,000 $33,600 21,000

Actual at Difference $420,000 $35,000 $1,400 U 19,800 1,200 F


Traveling Delivery Total variable costs Fixed Costs Sales salaries Depreciation Total fixed costs Total costs

63,000 8,400 126,000

64,000 8,200 127,000

50,000 12,000 62,000 $188,000

48,800 11,000 59,800 $186,800

1,000 U 200 F 1,000 U 1,200 1,000 2,200 $1,200

F F F F

Exercise 199 Sinclair Components uses flexible budgeting to control manufacturing overhead. The budget below was prepared for the month ending June 30, 2012. Direct Labour Hours 10,000 11,000 $12,00 $13,20 0 0 6,000 6,600 2,400 2,640 20,400 22,440

Indirect materials Indirect labour Utilities Total variable costs Rent Depreciation Insurance Total fixed costs Total costs

10,000 8,000 5,500 23,500 $43,900

10,000 8,000 5,500 23,500 $45,940

12,000 $14,400 7,200 2,880 24,480 10,000 8,000 5,500 23,500 $47,980

During the month of June, the company used direct labour hours totalling 11,600 and the following costs were incurred: Indirect materials $13,200 Indirect labour 16,200 Utilities 2,500 Rent 9,900 Depreciation 7,800 Insurance 5,200 Instructions Prepare a flexible budget that could be used for performance evaluation of this company. Solution Exercise 199 (8-9 min.) Sinclair Components Flexible Budget at 11,600 Units For the Month Ended June 30, 2012 Variable costs: Indirect materials Indirect labour Utilities Total variable costs Fixed costs: Rent

$13,920 6,960 2,784 23,664 10,000

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Depreciation Insurance Total fixed costs Total costs

8,000 5,500 23,500 $47,164

Exercise 200 Data concerning manufacturing overhead for Wilson Audio are presented below. The packaging department is a cost centre. An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the packaging department, and, out of fixed costs, only 40% of supervisory costs are controllable at the department level. The flexible budget formula and the cost and activity for the month of August while operating at 1,600 direct labour hours follows: Variable Indirect materials Indirect labour Factory supplies Fixed Depreciation Supervision Property taxes Total costs

Flexible Budget

Actual August Activity

$2.00 3.00 0.50

$ 3,000 4,500 750

$7,000 20,000 2,000 $37,800

15,000 7,600 12,000 $42,850

Instructions a. Prepare the responsibility reports for the packaging department for August. b. Comment on the manager's performance in controlling costs during the month. Solution Exercise 200 (9–12 min.) a. Wilson Audio Packaging Department Manufacturing Overhead Cost Responsibility Report at 1,600 Direct Labour Hours For the Month of August Controllable Costs Budget Actual Difference Indirect materials $ 3,200 $ 3,000 $200 F Indirect labour 4,800 4,500 300 F Factory supplies 800 750 50 F Supervision 8,000 7,600 400 F Total costs $16,800 $15,850 $950 F b.

The manager did a good job of controlling costs in August. All of the costs were under budget and none look materially out of line.

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

$12,000 4,000


Utilities Maintenance Fixed Costs Supervisor's Salary Depreciation Property taxes

$21,000 5,000 3,000

Actual variable costs for the first quarter were: Indirect Materials Indirect Labour Utilities Maintenance

$13,300 4,200 3,050 5,600

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3,000 5,000

Actual fixed costs were as expected except for property taxes which were $3,100. All costs are considered controllable by the department manager except for the supervisor's salary. The company manufactured and sold 1,100 units, however its budget was based on 1,000 units. Instructions Prepare a manufacturing overhead responsibility performance report for the first quarter. Solution Exercise 201 (8–9 min.) Ozzie Ozborne Manufacturing Company Manufacturing Overhead Cost Responsibility Report at 1,100 Units For the Quarter Ended March 31, 2012 Controllable Costs Indirect materials Indirect labour Utilities Maintenance Depreciation Property taxes Total costs

Budget $13,200 4,400 3,300 5,500 5,000 3,000 $34,400

Actual $13,300 4,200 3,050 5,600 5,000 3,100 $34,250

Difference $100 U 200 F 250 F 100 U — 100 U $150 F

Exercise 202 Maritime Division, a profit centre of Hurricane Weather Company, reported the following data for the first quarter of 2012: Sales $2,000,000 Variable costs 1,200,000 Controllable direct fixed costs 200,000 Non-controllable direct fixed costs 150,000 Controllable indirect fixed costs 40,000 Instructions a. Prepare a performance report for the manager of the Maritime Division. b. How would the responsibility report differ if the division was an investment centre? Solution Exercise 202(5–6 min.) a. Maritime Division of Hurricane Weather Company Management Performance Report

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For the Quarter Ended March 31, 2012 Sales ........................................................................................... Variable costs .............................................................................. Contribution margin ..................................................................... Controllable fixed costs ............................................................... Controllable margin ..................................................................... b.

$2,000,000 1,200,000 800,000 240,000 $ 560,000

For an investment centre, the responsibility report would also show the return on investment for the period.

Exercise 203 Myrna’s Market has two divisions: fruits and vegetables. The fruits division had sales of $500,000 and a contribution margin ratio of 15%. The vegetables division had a contribution margin of $50,000 and variable costs of $300,000. Controllable fixed costs in total were $70,000, with the fruits division having 60% of the total. Myrna’s Market’s net income was $20,000. Instructions Prepare an income statement for Myrna’s Market in total and for its two divisions. Solution Exercise 203(6–8 min.) Myrna’s Market Income Statement For the period ending....

Sales Variable Costs Contribution Margin Controllable Fixed Costs Controllable Margin Other Fixed Costs Net Income

Company $850,000 g 725,000f 125,000b 70,000 55,000c 35,000d $20,000

Fruits $500,00 0 425,000 e 75000a 42,000i $33,000

Italic numbers given a $500,000 X15% b75,000 + 50,000 c125,000-70,000 d55,000-20,000 e500,000-75,000 f425,000+300,000 g725,000+125,000 h850,000-500,000 or 300,000 + 50,000 i70,000X60% j70,000X40%

Vegetable s $350,000 h 300,000 50,000 28,000j $22,000


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Exercise 204 The Candle Division of Dax Wax Company reported the following results for 2012: Sales Variable costs Controllable fixed costs Average operating assets

$800,000 420,000 100,000 4,000,000

Management is considering the following independent alternative courses of action in 2013 in order to maximize the return on investment for the division. 1. 2. 3.

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 with no change in the contribution margin percentage

Instructions a. Calculate the return on investment for 2012. b. Calculate the expected return on investment for each of the alternative courses of action. Solution Exercise 204 (6–8 min.) a. Controllable margin Return on investment = ———————————— Average operating assets 2012 ROI = b. 1.

New controllable margin = $800,000 − ($100,000 x 50%) − $420,000 = $330,000 $330,000 $4,000,000

2.

=

8.25%

New operating assets = $4,000,000 × 70% = $2,800,000 $280,000 $2,800,000

3.

$280,000 ————— = 7% $4,000,000

=

10%

New controllable margin = $800,000 + ($200,000 x *47.5%)− $100,000 − $420,000 = $375,000 $375,000 $4,000,000

=

9.38%

*$380,000 / $800,000 = 47.5% contribution margin Exercise 205

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Compare and contrast centralized and decentralized decision-making. Why would any firm decentralize its operations? Solution Exercise 205 Decentralization is the delegation of decision-making authority to lower levels of management. In centralized decision-making, decisions are made at the top levels of management. Lower level management is responsible for implementing such decisions, which, in effect, have been forced on them. In decentralized decision-making, by contrast, decisions are both made and implemented by various levels of management. Various reasons for decentralizing include access to relevant, local information at all levels of the organization, more timely response times, ability of central management to focus attention on corporate level decision-making, training and evaluation, motivation and enhanced competition among sub-units. Exercise 206 Complete the missing information in the columns below: A B C $100,00 Sales 0 (e) (i) $1,000,00 Operating Assets (a) (f) 0 Net Operating $100,00 Income $30,000 0 $150,000 Margin (b) 0.05 0.125 Turnover 4 (g) 1.2 Return On Investment (c ) 20% (j) Required Rate Of Return 20% 25% (k) Residual Income (d) (h) $10,000 Solution Exercise 206 (a) $100,000 / a = 4. Therefore a = $25,000 (b) = $30,000 / $100,000. Therefore b = 30% (c ) 4 X 30% = 120% or $30,000 / $25,000 = 120% (d) $30,000 - ($25,000 X 20%) = $25,000 (e)$100,000 / e = 0.05. Therefore e = $2,000,000 (f)$100,000 / f = 0.20. Therefore f = $500,000 (g)$2,000,000 / $500,000 = 4 (h) $100,000 - ($500,000 X 25%) = ($25,000)


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(i) $150,000 / g = 0.125. Therefore i = $1,200,000 (j)1.2 X 0.125 = .15, or $150,000 / $1,000,000 (k)$150,000 - ($1,000,000 X k) = $10,000. 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, and how can stock options impact goal congruence? Solution Exercise 207 (a) Managers are human, and without a vested interest in the company, they will often work only as hard as they have to, to achieve their personal objectives, whereas owners desire managers to work as hard as owners would themselves, in the same position. Further, managers may try to use company resources for their own personal gain. Properly structured incentive systems can alleviate these issues. (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. Exercise 208 Dromedrille Company has the following results for the year just ended: Sales Net Income Capital Investment

$2,000,000 $125,000 $600,000

What is the company’s Return on Investment for the year? Solution Exercise 208 2,000,000 ÷ 600,000 x 125,000 ÷ 2,000,000 = 20.8% Exercise 209 In addition to the information above, 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 – ($2,000,000 ÷ 5 x 6%) = $101,000

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Exercise 210 Candle Light Bus Lines Ltd. runs a series of bus routes between cities across Canada. A new route, between Kenora and Thunder Bay, has been planned for next year. The sales manager has come up with a series of possible passengers that would use the route in the upcoming year. She tells you that passengers could range between 20,000 and 40,000 per year and that each ticket would be $25 per trip. Because of the availability of buses to service the route, the estimated passengers would be in increments of 10,000. 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, she informs you that Facility Overhead will be $100,000 and Selling and Admin Overhead will be $50,000, regardless of the number of trips made in the year. Required a) Prepare a flexible budget for the company based on the above information b) Assume that there were actually 22,450 passengers who used the bus this year and sales totaled $538,800. Fuel costs were $123,475, driver costs were $95,415 and selling and admin variable costs were $41,500 and $17,250 respectively. Facility Costs were $125,000 and Selling and Admin Overhead was $78,000. Prepare a flexible budget report for the year. c) Discuss the results of the year and what action should be taken in the future as a result. Solution Exercise 210 a) Budgeted Cost Passenger Trips_____________ Per Passenger 20,000 30,000 40,000 _______________________________________________________________ Sales $25 $500,000 $750,000 $1,000,000 Variable Costs Fuel 5 100,000 150,000 200,000 Driver 4 80,000 120,000 160,000 Selling 2 40,000 60,000 80,000 Admin 1 20,000 30,000 40,000 Contribution Margin $13 Fixed Costs Facility Costs Selling & Admin Operating Income b)

260,000

390,000

520,000

100,000 50,000 $110,000

100,000 50,000 $240,000

100,000 50,000 $370,000

Passenger Trips__________ Flexible Budgeted Cost Flexible Budget Per Passenger Actual Budget Variance 22,450 22,450 22,450 _______________________________________________________________ Sales $25 $538,800 $561,250 $22,450 U Variable Costs Fuel 5 123,475 112,250 11,225 U Driver 4 95,415 89,800 5,615 U


Selling Admin

c)

2 1

41,500 17,250

44,900 22,450

3,400 F 5,200 F

Contribution Margin $13 Fixed Costs Facility Costs Selling & Admin Operating Income

261,160

291,850

30,690 U

125,000 78,000 $58,160

100,000 50,000 $141,850

25,000 U 28,000 U $83,690 U

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The budget is showing unfavourable variances right through most of the major items. First off, the manager must investigate why selling prices were reduced by $1 per trip per year. The large unfavourable variances for fuel and drivers must also be investigated, though fuel costs would likely have gone up as a result of general price increases. The costs to operate the facility are up dramatically as are the fixed selling and admin overhead costs; perhaps there is an internal allocation from the accounting department that should be looked into.

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COMPLETION STATEMENTS 211.

The budget is prepared within the framework of a _______________________.

212.

A major aspect of budgeting control is the use of budget reports that compare _____________________ with _______________________.

213.

In analyzing differences from planned objectives, management may take ___________________, or it could decide to modify ___________________.

214.

The master budget is a __________________ budget which is based on operating at one budgeted activity level.

215.

A __________________ budget projects budget data for various levels of activity.

216.

Total ________________ costs will be the same on the master budget and on a flexible budget which reflects the actual level of activity.

217.

Under ___________________ accounting, the evaluation of a manager's performance is based on the costs and revenues directly under that manager's control.

218.

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.

219.

In general, costs ____________________ directly by the level of responsibility are _______________, whereas costs that are ____________________ to the responsibility level are __________________.

220.

Responsibility centres may be classified into three types: (1)___________________, (2)___________________ and, (3)____________________.

221.

The primary basis for evaluating the performance of a manager of an investment centre is _________________.

222.

Return on investment is calculated by dividing _________________________ by ________________________.


ANSWERS TO COMPLETION STATEMENTS 211.

sales forecast

212.

actual results, planned objectives

213.

corrective action, future plans

214.

static

215.

flexible

216.

fixed

217.

responsibility

218.

controllable

219.

incurred, controllable, allocated, non-controllable

220.

cost centres, profit centres, investment centres

221.

return on investment (ROI)

222.

controllable margin, average operating assets

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MATCHING 223.

Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.

Budgetary control Static budget Flexible budget Responsibility accounting Controllable costs Management by exception

G. H. I. J. K. L.

Responsibility reporting system Return on Investment Profit centre Investment centre Indirect fixed costs Direct fixed costs

____

1. A projection of budget data for various levels of activity.

____

2. A responsibility centre that incurs costs, generates revenues, and has control over the investment funds available for use.

____

3. Costs that relate specifically to a responsibility centre and are incurred for the sole benefit of the centre.

____

4. A responsibility centre that incurs costs and also generates revenues.

____

5. Costs which are incurred for the benefit of more than one profit centre.

____

6. A measure of the profitability of an investment centre calculated by dividing controllable margin (in dollars) by average operating assets.

____

7. The review of budget reports by top management directed entirely or primarily to differences between actual results and planned objectives.

____

8. 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.

____

9. The preparation of reports for each level of responsibility shown in the company's organization chart.

____ 10. A projection of budget data at one level of activity. ____ 11. Costs that a manager has the authority to incur within a given period of time. ____ 12. The use of budgets to control operations.


ANSWERS TO MATCHING 1.

C

7.

F

2.

J

8.

D

3.

L

9.

G

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B

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11.

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6.

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12.

A

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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. Solution Short Answer Essay 224 The system of responsibility reporting begins with the lowest level of responsibility and moves up through each level. At the lowest level each manager receives detailed information concerning the controllable costs for which they are responsible. At higher levels of responsibility the detail of the lower levels may be omitted but the report encompasses all the areas for which the higher level has responsibility. For example, a plant manager will receive reports concerning the controllable costs of each of the plant departments. Management by exception is possible in such a system because, if management at the higher levels of responsibility identifies a significant variance, they can receive detailed reports for each lower level of responsibility. This allows management to investigate causes and remedies for variances as they feel necessary. Short Answer Essay 225 Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centres. 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, it is necessary to use different bases for evaluation. An investment centre manager can control the investment funds available as well as costs and revenues. Return on investment is therefore an appropriate basis for evaluation. A profit centre, however, controls only revenues and expenses but not investment, so controllable margin is a more appropriate basis relating only to the areas controllable by the profit centre. Similarly, because only costs are controllable for a cost centre, such a centre is evaluated only on the basis of its controllable costs. Short Answer Essay 226 (Ethics) Edwards Corporation evaluates its managers based on return on investment (ROI). Kim Tilley and Sara Trane, managers of the electronics and housewares departments respectively, have recently suffered from declining profits in their departments. Over lunch, they discuss the problem, and how they could improve performance. Most of the discussion centres around ways to increase sales. Near the end of the lunch period, however, Sara remarks that there are two components to consider, and that they have considered only one. She wonders whether there is some way to reduce investment, and by decreasing the denominator of the ROI fraction, to improve the final result. Back at work, Kim continues to mull over Sara's remarks. She decides to pursue the matter further, and before the end of the quarter she has sold quite a bit of older equipment and replaced it with equipment obtained with a short-term lease. Her performance, measured by ROI, is markedly improved, although sales continue to be disappointing. Required:


1. 2.

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Who are the stakeholders in this situation? Are Kim's actions ethical? Briefly explain.

Solution Short Answer Essay 226 1. The stakeholders include Kim Tilley Sara Trane managers of Edwards Corporation shareholders of Edwards Corporation 2.

Kim's actions are probably not ethical. It appears that she has replaced equipment that had been purchased only because such a move would improve her ROI. Of course, it is possible that the leased equipment will allow her department to function better, resulting in a benefit for the company. Any action to promote one's own benefit at the expense of the company's welfare is unethical.

Short Answer Essay 227 (Communication) Clara County Electronics manufactures circuit boards for computer-controlled appliances for the home. The sales have been very volatile, sometimes stressing the plant's capacity, and sometimes depressingly slow. During a recent slow period, Earl Linton, a production supervisor, complained to Ann Royer, accounting manager, about the flexible budget. "I try as hard as I can to meet the budget," he says, "and then I find out that just meeting the budget's not good enough. Last month, when we sold 8,000 units, I was $10,000 under my budget, and then you all blow me out of the water with your report that I actually was $5,000 over, because sales were slow. I thought this responsibility accounting business was supposed to mean we are held accountable just for things we can control. How do we control sales? At the beginning of the year, you gave us all targets. Mine says that for an average month of 10,000 unit sales, I should spend about $82,000. I spend less, and get an unfavourable budget report. What gives?" Required: Write a short memo to respond to Mr. Linton. 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. I understand that the new procedures can be frustrating, especially when you receive an unfavourable report that you were not expecting. Actually, the flexible budget does mean that you are held accountable only for the costs that you can control. Last month, we calculated the cost of producing 8,000 units that were actually sold (and not the 10,000 that were estimated to be sold). Your costs were greater than that, although still less than the amount you would have been allowed had the full 10,000 been sold. Please check the individual

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items on your budget report. We noted which ones exceeded the budget. You can then focus attention on those items for cost control. Please contact the Accounting Department if you have further questions.

Solution WileyPlus COMM 305 / ACCO 240

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