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BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING

TRUE-FALSE STATEMENTS
1. Budget reports comparing actual results with planned objectives should be prepared only once a year. If actual results are different from planned results, the difference must always be investigated by management to achieve effective budgetary control. Certain budget reports are prepared monthly whereas others are prepared more frequently depending on the activities being monitored. The master budget is not used in the budgetary control process. A master budget is most useful in evaluating a manager's performance in controlling costs. A static budget is one that is geared to one level of activity. A static budget is changed only when actual activity is different from the level of activity expected. A static budget is most useful for evaluating a manager's performance in controlling variable costs. A flexible budget can be prepared for each of the types of budgets included in the master budget. A flexible budget is a series of static budgets at different levels of activities. Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity. Total budgeted fixed costs appearing on a flexible budget will be the same amount as total fixed costs on the master budget. A flexible budget is prepared before the master budget. The activity index used in preparing a flexible budget should not influence the variable costs that are being budgeted. A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost per unit X activity level). Flexible budgets are widely used in production and service departments. A flexible budget report will show both actual and budget cost based on the actual activity level achieved.

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Test Bank for Managerial Accounting, Second Edition Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable. Policies regarding when a difference between actual and planned results should be investigated are generally more restrictive for noncontrollable items than for controllable items. A distinction should be made between controllable and noncontrollable costs when reporting information under responsibility accounting. Cost centers, profit centers, and investment centers can all be classified as responsibility centers. More costs become controllable as one moves down to each lower level of managerial responsibility. In a responsibility accounting reporting system, as one moves up each level of responsibility in an organization the responsibility reports become more summarized and show less detailed information. A cost item is considered to be controllable if there is not a large difference between actual cost and budgeted cost for that item. The terms "direct fixed costs" and "indirect fixed costs" are synonymous with "traceable costs" and "common costs," respectively. A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers. Controllable margin is subtracted from controllable fixed costs to get net income for a profit center. The formula for computing return on investment is controllable margin divided by average operating assets. The denominator in the formula for calculating the return on investment includes operating and nonoperating assets. Residual income is the income that remains after subtracting from controllable margin the minimum rate of return on a companys average operating assets.

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Answers to True-False Statements


Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. 2. 3. 4. 5.

F F T F F

6. 7. 8. 9. 10.

T F F T T

11. 12. 13. 14. 15.

T T F F T

16. 17. 18. 19. 20.

T T T F T

21. 22. 23. 24. 25.

T F T F T

26. 27. 28. 29. *30.

F F T F T

Budgetary Control and Responsibility Accounting

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Test Bank for Managerial Accounting, Second Edition

MULTIPLE CHOICE QUESTIONS


31. A major element in budgetary control is a. the preparation of long-term plans. b. the comparison of actual results with planned objectives. c. the valuation of inventories. d. approval of the budget by the stockholders. Budget reports should be prepared a. daily. b. monthly. c. weekly. d. as frequently as needed. On the basis of the budget reports, a. management analyzes differences between actual and planned results. b. management may take corrective action. c. management may modify the future plans. d. all of these. The purpose of the departmental overhead cost report is to a. control indirect labor costs. b. control selling expense. c. determine the efficient use of materials. d. control overhead costs. The purpose of the sales budget report is to a. control selling expenses. b. determine whether income objectives are being met. c. determine whether sales goals are being met. d. control sales commissions. The comparison of differences between actual and planned results a. is done by the external auditors. b. appears on the company's external financial statements. c. is usually done orally in departmental meetings. d. appears on periodic budget reports. A static budget a. should not be prepared in a company. b. is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs. c. shows planned results at the original budgeted activity level. d. is changed only if the actual level of activity is different than originally budgeted. A static budget report a. shows costs at only 2 or 3 different levels of activity. b. is appropriate in evaluating a manager's effectiveness in controlling variable costs. c. should be used when the actual level of activity is materially different from the master budget activity level. d. may be appropriate in evaluating a manager's effectiveness in controlling costs when the behavior of the costs in response to changes in activity is fixed.

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Budgetary Control and Responsibility Accounting 39. A static budget is appropriate in evaluating a manager's performance if a. actual activity closely approximates the master budget activity. b. actual activity is less than the master budget activity. c. the company prepares reports on an annual basis. d. the company is a not-for-profit organization When budgeted and actual results are not the same amount, there is a budget a. error. b. difference. c. anomaly. d. by-product.

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Top management's reaction to a difference between budgeted and actual sales often depends on a. whether the difference is favorable or unfavorable. b. whether management anticipated the difference. c. the materiality of the difference. d. the personality of the top managers. If costs are not responsive to changes in activity level, then these costs can be best described as a. mixed. b. flexible. c. variable. d. fixed. Assume that actual sales results exceed the planned results for the second quarter. This favorable difference is greater than the unfavorable difference reported for the first quarter sales. Which of the following statements about the sales budget report on June 30 is true? a. The year-to-date results will show a favorable difference. b. The year-to-date results will show an unfavorable difference. c. The difference for the first quarter can be ignored. d. The sales report is not useful if it shows a favorable and unfavorable difference for the two quarters. A static budget is appropriate for a. variable overhead costs. b. direct material costs. c. fixed overhead costs. d. none of these. A flexible budget a. is prepared when management can't agree on objectives for the company. b. projects budget data for various levels of activity. c. is only useful in controlling fixed costs. d. cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results.

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Test Bank for Managerial Accounting, Second Edition The master budget of Benedict Company shows that the planned activity level for next year is expected to be 50,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected: Indirect labor Machine supplies Indirect materials Depreciation on factory building Total manufacturing overhead $360,000 90,000 105,000 75,000 $630,000

A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs of a. $741,000. b. $630,000. c. $756,000. d. $681,000. 47. A department has budgeted monthly manufacturing overhead cost of $90,000 plus $3 per direct labor hour. If a flexible budget report reflects $174,000 for total budgeted manufacturing cost for the month, the actual level of activity achieved during the month was a. 88,000 direct labor hours. b. 28,000 direct labor hours. c. 58,000 direct labor hours. d. cannot be determined. Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets? a. Direct materials cost b. Direct labor cost c. Variable manufacturing overhead d. Fixed manufacturing overhead In developing a flexible budget within a relevant range of activity, a. only fixed costs are included. b. it is necessary to relate variable cost data to the activity index chosen. c. it is necessary to prepare a budget at 1,000 unit increments. d. variable and fixed costs are combined and are reported as a total cost. The flexible budget a. is prepared before the master budget. b. is relevant both within and outside the relevant range. c. eliminates the need for a master budget. d. is a series of static budgets at different levels of activity. A flexible budget can be prepared for which of the following budgets comprising the master budget? a. Sales b. Overhead c. Direct materials d. All of these

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Budgetary Control and Responsibility Accounting 52. Another name for the static budget is a. master budget. b. overhead budget. c. permanent budget. d. flexible budget.

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If a company plans to sell 16,000 units of product but sells 20,000, the most appropriate comparison of the cost data associated with the sales will be by a budget based on a. the original planned level of activity. b. 18,000 units of activity. c. 20,000 units of activity. d. 16,000 units of activity. Within the relevant range of activity, the behavior of total costs is assumed to be a. linear and upward sloping. b. linear and downward sloping. c. curvilinear and upward sloping. d. linear to a point and then level off. Sales results that are evaluated by a static budget might show 1. favorable differences that are not justified. 2. unfavorable differences that are not justified. a. b. c. d. 1 2 both 1 and 2. neither 1 nor 2.

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The selection of levels of activity to depict a flexible budget 1. will be within the relevant range. 2. is largely a matter of expediency. 3. is governed by generally accepted accounting principles. a. b. c. d. 1 2 3 1 and 2

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Management by exception a. causes managers to be buried under voluminous paperwork. b. means that all differences will be investigated. c. means that only unfavorable differences will be investigated. d. means that material differences will be investigated. Under management by exception, which differences between planned and actual results should be investigated? a. Material and noncontrollable b. Controllable and noncontrollable c. Material and controllable d. All differences should be investigated

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Test Bank for Managerial Accounting, Second Edition A flexible budget depicted graphically a. is identical to a CVP graph. b. differs from a CVP graph in the way that fixed costs are shown. c. differs from a CVP graph in the way that variable costs are shown. d. differs from a CVP graph in that sales revenue is not shown. The activity index used in preparing the flexible budget a. is prescribed by generally accepted accounting principles. b. is only applicable to fixed manufacturing costs. c. is the same for all departments. d. should significantly influence the costs that are being budgeted. A static budget is not appropriate in evaluating a manager's effectiveness if a company has a. substantial fixed costs. b. substantial variable costs. c. planned activity levels that match actual activity levels. d. no variable costs. The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called a. static reporting. b. flexible accounting. c. responsibility accounting. d. master budgeting. A cost is considered controllable at a given level of managerial responsibility if a. the manager has the power to incur the cost within a given time period. b. the cost has not exceeded the budget amount in the master budget. c. it is a variable cost, but it is uncontrollable if it is a fixed cost. d. it changes in magnitude in a flexible budget. As one moves up to each higher level of managerial responsibility, a. fewer costs are controllable. b. the responsibility for cost incurrence diminishes. c. a greater number of costs are controllable. d. performance evaluation becomes less important. A responsibility report should a. be prepared in accordance with generally accepted accounting principles. b. show only those costs that a manager can control. c. only show variable costs. d. only be prepared at the highest level of managerial responsibility. Top management can control a. only controllable costs. b. only noncontrollable costs. c. all costs. d. some noncontrollable costs and all controllable costs.

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Budgetary Control and Responsibility Accounting 67. Not-for-profit entities a. do not use responsibility accounting. b. utilize responsibility accounting in trying to maximize net income. c. utilize responsibility accounting in trying to minimize the cost of providing services. d. have only noncontrollable costs.

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Which of the following is not a true statement? a. All costs are controllable at some level with a company. b. Responsibility accounting applies to both profit and not-for-profit entities. c. Fewer costs are controllable as one moves up to each higher level of managerial responsibility. d. The term segment is sometimes used to identify areas of responsibility in decentralized operations. Costs incurred indirectly and allocated to a responsibility level are considered to be a. nonmaterial. b. mixed. c. controllable. d. noncontrollable. Management by exception a. is most effective at top levels of management. b. can be implemented at each level of responsibility within an organization. c. can only be applied when comparing actual results with the master budget. d. is the opposite of goal congruence. The linens department of a large department store is a. not a responsibility center. b. a profit center. c. a cost center. d. an investment center. The foreign subsidiary of a large corporation is a. not a responsibility center. b. a profit center. c. a cost center. d. an investment center. The maintenance department of a manufacturing company is a(n) a. segment. b. profit center. c. cost center. d. investment center. Which of the following is not a correct match? 1. Incurs costs 2. Generates revenue 3. Controls investment funds a. b. c. d. Investment Center 1, 2, 3 Cost Center 1 Profit Center 1, 2, 3 All are correct matches.

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Test Bank for Managerial Accounting, Second Edition A cost center a. only incurs costs and does not directly generate revenues. b. incurs costs and generates revenues. c. is a responsibility center of a company which incurs losses. d. is a responsibility center which generates profits and evaluates the investment cost of earning the profit. A manager of a cost center is evaluated mainly on a. the profit that the center generates. b. his or her ability to control costs. c. the amount of investment it takes to support the cost center. d. the amount of revenue that can be generated. Performance reports for cost centers compare actual a. total costs with static budget data. b. total costs with flexible budget data. c. controllable costs with static budget data. d. controllable costs with flexible budget data. In the performance report for cost centers, a. controllable and noncontrollable costs are reported. b. fixed costs are not reported. c. no distinction is made between fixed and variable costs. d. only material and controllable costs are reported. Of the following choices, which contain both a traceable fixed cost and a common fixed cost? a. Profit center manager's salary and timekeeping costs for a responsibility center's employees. b. Company president's salary and company personnel department costs. c. Company personnel department costs and timekeeping costs for a responsibility center's employees. d. Depreciation on a responsibility center's equipment and supervisory salaries for the center. Which of the following is not an indirect fixed cost? a. Company president's salary b. Depreciation on the company building housing several profit centers c. Company personnel department costs d. Profit center supervisory salaries All of the following statements about a responsibility report are correct except that a. only controllable costs are included. b. it compares actual costs with flexible budget data. c. a distinction is made between variable and fixed costs. d. it continues the concept of management by exception. The best measure of the performance of the manager of a profit center is the a. rate of return on investment. b. success in meeting budgeted goals for controllable costs. c. amount of controllable margin generated by the profit center. d. amount of contribution margin generated by the profit center.

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Budgetary Control and Responsibility Accounting 83. Controllable margin is defined as a. sales minus variable costs. b. sales minus contribution margin. c. contribution margin less controllable fixed costs. d. contribution margin less noncontrollable fixed costs. Controllable margin is most useful for a. external financial reporting. b. preparing the master budget. c. performance evaluation of profit centers. d. break-even analysis. Which of the following will not result in an unfavorable controllable margin difference? a. Sales exceeding budget; costs under budget b. Sales exceeding budget; costs over budget c. Sales under budget; costs under budget d. Sales under budget; costs over budget Given below is an excerpt from a management performance report: Contribution margin Controllable fixed costs Budget $1,000,000 $ 500,000 Actual $1,050,000 $ 450,000 Difference $50,000 $50,000

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The manager's overall performance a. is 20% below expectations. b. is 20% above expectations. c. is equal to expectations. d. cannot be determined from information given. 87. Which of the following are financial measures of performance? 1. Controllable margin 2. Product quality 3. Labor productivity a. b. c. d. 88. 1 2 3 1 and 3

Given below is an excerpt from a management performance report: Contribution margin Controllable fixed costs Budget $600,000 $200,000 Actual $580,000 $220,000 Difference $20,000 U $20,000 U

The manager's overall performance a. is 10% above expectations. b. is 10% below expectations. c. is equal to expectations. d. cannot be determined from the information provided.

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Test Bank for Managerial Accounting, Second Edition A responsibility report for a profit center will a. not show controllable fixed costs. b. not show indirect fixed costs. c. show noncontrollable fixed costs. d. not show cumulative year-to-date results. The dollar amount of the controllable margin a. is usually higher than the contribution margin. b. is usually lower than the contribution margin. c. is always equal to the contribution margin. d. cannot be a negative figure. A profit center is a. a responsibility center that always reports a profit. b. a responsibility center that incurs costs and generates revenues. c. evaluated by the rate of return earned on the investment allocated to the center. d. referred to as a loss center when operations do not meet the company's objectives. Each of the following are controllable by a profit center manager except a. variable costs. b. sales. c. indirect fixed costs. d. all of these options are controllable. Direct fixed costs are a. also called common costs. b. not controllable by a profit center manager. c. costs that apply to more than one center. d. deducted from contribution margin on a responsibility report. An indirect fixed cost is also called a a. common fixed cost. b. controllable fixed cost. c. direct fixed cost. d. traceable fixed cost. All of the following statements about a profit center responsibility report are correct except that a. controllable fixed costs are deducted from controllable margin. b. it shows budgeted and actual controllable revenues and costs. c. noncontrollable fixed costs are not reported. d. it may include cumulative year-to-date results. The denominator in the formula for return on investment calculation is a. investment center controllable margin. b. dependent on the specific type of profit center. c. average investment center operating assets. d. sales for the period. In the formula for ROI, idle plant assets are a. included in the calculation of controllable margin. b. included in the calculation of operating assets. c. excluded in the calculation of operating assets. d. excluded from total assets.

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Budgetary Control and Responsibility Accounting 98. In computing ROI, land held for future use a. will hurt the performance measurement of an investment center's manager. b. is important in evaluating the performance of a profit center manager. c. is included in the calculation of operating assets. d. is considered a nonoperating asset.

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If an investment center has a $15,000 controllable margin and $200,000 of sales, what average operating assets are needed to have a return on investment of 10%? a. $20,000. b. $25,000. c. $150,000. d. $200,000. Which of the following valuations of operating assets are not readily available from the accounting records? a. Cost b. Book value c. Market value d. Both cost and market value A distinguishing characteristic of an investment center is that a. revenues are generated by selling and buying stocks and bonds. b. interest revenue is the major source of revenues. c. the profitability of the center is related to the funds invested in the center. d. it is a responsibility center which only generates revenues. A measure frequently used to evaluate the performance of the manager of an investment center is a. the amount of profit generated. b. the rate of return on funds invested in the center. c. the percentage increase in profit over the previous year. d. departmental gross profit. Return on investment is calculated by dividing a. contribution margin by sales. b. controllable margin by sales. c. contribution margin by average operating assets. d. controllable margin by average operating assets. Which one of the following will not increase return on investment? a. Variable costs are increased b. An increase in sales c. Average operating assets are decreased d. Variable costs are decreased If an investment center has generated a controllable margin of $60,000 and sales of $300,000, what is the return on investment for the investment center if average operating assets were $500,000 during the period? a. 12% b. 20% c. 48% d. 60%

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Test Bank for Managerial Accounting, Second Edition The manager of an investment center can improve ROI by increasing a. average operating assets. b. controllable fixed costs. c. controllable margin. d. variable costs. Behavioral principles included in performance evaluation include all of the following except that the a. evaluation should be based entirely on matters that are controllable by the manager being evaluated. b. top management should support the evaluation process. c. evaluation process must allow managers to respond to their evaluation. d. evaluation should identify only poor performance.

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*108. The following information is available for Louie Company: Average operating assets Controllable margin Contribution margin Minimum rate of return Louies residual income is a. $70,000. b. $40,000. c. $30,000. d. $10,000. *109. Residual income is defined as a. contribution margin less controllable fixed costs. b. contribution margin less the minimum rate of return on average operating assets. c. controllable margin less the minimum rate of return on average operating assets. d. controllable margin divided by average operating assets. *110. All of the following are correct statements about residual income except that a. its goal is to maximize the total amount of residual income. b. it ignores the fact that one divisions operating assets might be substantially lower than another divisions assets. c. it is the difference between contribution margin and the minimum rate of return on average operating assets. d. it evaluates performance using a companys minimum rate of return. $500,000 70,000 100,000 12%

Budgetary Control and Responsibility Accounting Answers to Multiple Choice Questions


Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item

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Ans.

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42.

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

43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.

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

55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66.

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

67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78.

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

79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

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

91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102.

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

103. 104. 105. 106. 107. *108. *109. *110.

d a a c d d c c

EXERCISES
Ex. 111 Golden Company's master budget reflects budgeted sales information for the month of June, 2002, as follows: Budgeted Quantity Budgeted Unit Sales Price Product A 15,000 $7 Product B 18,000 $9 During June, the company actually sold 13,900 units of Product A at an average unit price of $7.30 and 18,800 units of Product B at an average unit price of $8.90. Instructions Prepare a Sales Budget Report for the month of June for Golden Company which shows whether the company achieved its planned objectives.

Solution 111 (1015 min.) GOLDEN COMPANY Sales Budget Report For the Month Ended June 30, 2002 Product Line Difference Product A Product B Total sales Budget $105,000 162,000 $267,000 Actual $101,470 167,320 $268,790 $3,530 5,320 $1,790 U F F

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Test Bank for Managerial Accounting, Second Edition

Ex. 112 Heerey Company developed its annual manufacturing overhead budget for its master budget for 2002 as follows: 120,000 Direct Expected annual operating capacity Labor Hours Variable overhead costs Indirect labor $ 480,000 Indirect materials 90,000 Factory supplies 60,000 Total variable costs 630,000 Fixed overhead costs Depreciation 180,000 Supervision 144,000 Property taxes 96,000 Total fixed costs 420,000 Total costs $1,050,000 The relevant range for monthly activity is expected to be between 8,000 and 12,000 direct labor hours. Instructions Prepare a flexible budget for a monthly activity level of 8,000 and 9,000 direct labor hours.

Solution 112 (1520 min.) HEEREY COMPANY Monthly Flexible Manufacturing Overhead Budget Activity level Direct labor hours Variable costs Indirect labor Indirect materials Factory supplies Total variable costs Fixed costs Depreciation Supervision Property taxes Total fixed costs Total costs

8,000 $32,000 6,000 4,000 42,000 15,000 12,000 8,000 35,000 $77,000

9,000 $36,000 6,750 4,500 47,250 15,000 12,000 8,000 35,000 $82,250

Budgetary Control and Responsibility Accounting Ex. 113

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Eaton Company has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department: EATON COMPANY Monthly Flexible Manufacturing Overhead Budget Mixing Department Activity level Direct labor hours Variable costs Indirect materials Indirect labor Factory supplies Total variable costs Fixed costs Depreciation Supervision Property taxes Total fixed costs Total costs

3,000 $ 2,100 15,000 6,900 24,000 20,000 10,000 15,000 45,000 $69,000

4,000 $ 2,800 20,000 9,200 32,000 20,000 10,000 15,000 45,000 $77,000

Instructions Prepare a flexible budget at the 5,000 direct labor hours of activity.

Solution 113 (1520 min.) EATON COMPANY Monthly Flexible Manufacturing Overhead Budget Mixing Department Activity level Direct labor hours Variable costs Indirect materials Indirect labor Factory supplies Total variable costs Fixed costs Depreciation Supervision Property taxes Total fixed costs Total costs

5,000 $ 3,500 25,000 11,500 40,000 20,000 10,000 15,000 45,000 $85,000

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Test Bank for Managerial Accounting, Second Edition

Ex. 114 Drennon Company uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows: Indirect Labor Indirect Materials Maintenance Utilities Fixed overhead costs per month are: Supervision Insurance Property Taxes Depreciation $8.00 2.50 .80 .30

$600 200 300 900

The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month. Instructions Prepare a flexible manufacturing overhead budget for the expected range of activity, using increments of 1,000 machine hours.

Solution 114 (1520 min.) DRENNON COMPANY Monthly Flexible Manufacturing Overhead Budget Activity level Machine hours Variable costs Indirect labor Indirect materials Maintenance Utilities Total variable costs Fixed costs Supervision Insurance Property taxes Depreciation Total fixed costs Total costs

2,000

3,000

4,000

$16,000 5,000 1,600 600 23,200

$24,000 7,500 2,400 900 34,800

$32,000 10,000 3,200 1,200 46,400

600 200 300 900 2,000 $25,200

600 200 300 900 2,000 $36,800

600 200 300 900 2,000 $48,400

Budgetary Control and Responsibility Accounting Ex. 115

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Drennon Company uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour as follows: Indirect Labor $8.00 Indirect Materials 2.50 Maintenance .80 Utilities .30 Fixed overhead costs per month are: Supervision Insurance Property Taxes Depreciation $600 200 300 900

The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month. During the month of August, 2002, the company incurs the following manufacturing overhead costs: Indirect Labor $22,000 Indirect Materials 8,100 Maintenance 2,500 Utilities 950 Supervision 720 Insurance 200 Property Taxes 300 Depreciation 950 Instructions Prepare a flexible budget report, assuming that the company used 3,000 machine hours during August. The company expected to use 3,000 machine hours.

Solution 115

(2025 min.) DRENNON COMPANY Manufacturing Overhead Budget Report (Flexible) For the Month Ended August 31, 2002

Machine hours Expected Actual

3,000 3,000

Budget at 3,000 hrs. $24,000 7,500 2,400 900 34,800 600 200 300 900 2,000 $36,800

Actual at 3,000 hrs. $22,000 8,100 2,500 950 33,550 720 200 300 950 2,170 $35,720

Difference Favorable F Unfavorable U $2,000 600 100 50 1,250 120 50 170 $1,080 F U U U F U

Variable costs Indirect labor Indirect materials Maintenance Utilities Total variable costs Fixed Costs Supervision Insurance Property taxes Depreciation Total fixed costs Total costs

U U F

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Test Bank for Managerial Accounting, Second Edition

Ex. 116 Jeltz Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery 6% 4% 5% 1%

Fixed selling expenses consist of Sales Salaries $40,000 and Depreciation on Delivery Equip-ment $10,000. Instructions Prepare a flexible budget for increments of $30,000 of sales within the relevant range.

Solution 116 (1722 min.) JELTZ COMPANY Monthly Flexible Selling Expense Budget Activity level Sales Variable expenses Sales commissions Advertising Traveling Delivery Total variable costs Fixed expenses Sales salaries Depreciation Total fixed costs Total costs

$300,000

$330,000

$360,000

$ 18,000 12,000 15,000 3,000 48,000 40,000 10,000 50,000 $ 98,000

$ 19,800 13,200 16,500 3,300 52,800 40,000 10,000 50,000 $102,800

$ 21,600 14,400 18,000 3,600 57,600 40,000 10,000 50,000 $107,600

Ex. 117 Jeltz Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery 6% 4% 5% 1%

Fixed selling expenses consist of Sales Salaries $40,000 and Depreciation on Delivery Equipment $10,000.

Budgetary Control and Responsibility Accounting Ex. 117 (cont.) The actual selling expenses incurred in February, 2002, by Jeltz Company are as follows: Sales commissions Advertising Traveling Delivery $20,600 12,000 16,900 2,400

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Fixed selling expenses consist of Sales Salaries $41,500 and Depreciation on Delivery Equip-ment $10,000. Instructions Prepare a flexible budget performance report, assuming that February sales were $330,000. Expected and actual sales are the same.

Solution 117 (1722 min.) JELTZ COMPANY Selling Expense Budget Report (Flexible) For the Month Ended February 28, 2002 Difference Favorable F Unfavorable U

Activity level Expected $330,000 Actual 330,000 Variable expenses Sales commissions Advertising Traveling Delivery Total variable costs Fixed expenses Sales salaries Depreciation Total fixed costs Total expenses

Budget $330,000 $ 19,800 13,200 16,500 3,300 52,800 40,000 10,000 50,000 $102,800

Actual $330,000 $ 20,600 12,000 16,900 2,400 51,900 41,500 10,000 51,500 $103,400

800 1,200 400 900 900

U F U F F

1,500 U 1,500 U $ 600 U

Ex. 118 A flexible budget graph for the Assembly Department shows the following: 1. At zero direct labor hours, the total budgeted cost line intersects the vertical axis at $60,000. 2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $180,000. Instructions Develop the budgeted cost formula for the Assembly Department and identify the fixed and variable costs.

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Test Bank for Managerial Accounting, Second Edition

Solution 118 (5 min.) Budgeted Costs: Assembly $60,000 + $2.40. Fixed costs are $60,000. Variable costs are $2.40 per labor hour. ($180,000 $60,000) 50,000.

Ex. 119 Duncan Company uses flexible budgeting to control manufacturing overhead. The budget below was prepared for the month ending June 30, 2003. Direct Labor Hours 15,000 $45,000 $ 11,250 7,500 63,700 10,000 8,000 5,500 23,500 $87,250

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

12,000 $36,000 9,000 6,000 51,600 10,000 8,000 5,500 23,500 $74,500

18,000 54,000 13,500 9,000 76,500

10,000 8,000 5,500 23,500 $100,000

During the month of June, 16,200 direct labor hours were worked and the following costs were incurred: Indirect materials $49,200 Indirect labor 11,980 Utilities 7,800 Rent 10,000 Depreciation 8,200 Insurance 5,620 Instructions a. Prepare a flexible budget at the 16,200 direct labor hour level of activity. b. Prepare a manufacturing overhead budget at the 16,200 direct labor hour level of activity.

Budgetary Control and Responsibility Accounting Solution 119 (15 min.) a. DUNCAN COMPANY Flexible Budget For the Month Ended June 30, 2003 Indirect materials Indirect labor Utilities Total variable costs Rent Depreciation Insurance Total fixed costs Total Costs b. DUNCAN COMPANY Manufacturing Overhead Budget Report For the Month Ended June 30, 2003 16,200 DLH @ $3.00 = $48,600 16,200 DLH @$ .75 = 12,150 16,200 DLH @$ .50 = 8,100 68,850 $10,000 8,000 5,500 23,500 $92,350

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Manufacturing Costs Variable costs Indirect materials Indirect labor Utilities Total variable costs Fixed costs Rent Depreciation Insurance Total fixed costs Total costs

Budget $48,600 12,150 8,100 68,850

Actual $49,200 11,980 7,800 68,980

Difference Favorable F Unfavorable U $600 170 300 130 U F F U

10,000 8,000 5,500 23,500 $92,350

10,000 8,200 5,620 23,820 $92,800

0 200 120 320 $450

U U U U

Ex. 120 Data concerning manufacturing overhead for Friendly Company are presented below. The Mixing Department is a cost center. An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that 50% of supervisory costs are controllable at the department level. The flexible budget formula and the cost and activity for the months of July and August are as follows:

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Test Bank for Managerial Accounting, Second Edition

Ex. 120 (cont.) Flexible Budget Per Direct Labor Hour Direct labor hours Overhead costs Variable Indirect materials Indirect labor Factory supplies Fixed Depreciation Supervision Property taxes Total costs Actual Costs and Activity July August 6,000 7,000

$3.00 6.00 1.00 $20,000 24,000 5,000

$ 17,600 39,500 8,600 15,000 21,600 12,000 $114,300

$ 21,500 40,700 8,500 15,000 25,000 12,000 $122,700

Instructions (a) Prepare the responsibility reports for the Mixing Department for each month. (b) Comment on the manager's performance in controlling costs during the two month period.

Solution 120 (2025 min.) (a) FRIENDLY COMPANY Mixing Department Manufacturing Overhead Cost Responsibility Report For the Months of July and August July Controllable Cost Indirect materials Indirect labor Factory supplies Supervision Total costs (b) August Budget 18,000 36,000 6,000 12,000 72,000 Actual 17,600 39,500 8,600 10,800 76,500 Difference 400 F 3,500 U 2,600 U 1,200 F 4,500 U Budget 21,000 42,000 7,000 12,000 82,000 Actual 21,500 40,700 8,500 12,500 83,200 Difference 500 U 1,300 F 1,500 U 500 U 1,200 U

The manager did a much better job of controlling costs in August ($1,200 U) than in July ($4,500 U).

Ex. 121 Dreer Company's manufacturing overhead budget for the first quarter of 2002 contained the following data: Variable Costs Indirect Materials Indirect Labor Utilities

$25,000 12,000 14,000

Budgetary Control and Responsibility Accounting Maintenance Ex. 121 (cont.) Fixed Costs Supervisor's Salary Depreciation Property taxes Actual variable costs for the first quarter were: Indirect Materials Indirect Labor Utilities Maintenance 6,000

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$40,000 8,000 4,000

$23,300 13,200 14,600 5,300

Actual fixed costs were as expected except for property taxes which were $4,800. All costs are considered controllable by the department manager except for the supervisor's salary. Instructions Prepare a manufacturing overhead responsibility performance report for the first quarter.

Solution 121 (1520 min.) DREER COMPANY Manufacturing Overhead Cost Responsibility Report For the Quarter Ended March 31, 2002 Controllable Costs Indirect materials Indirect labor Utilities Maintenance Depreciation Property taxes Total costs Budget $25,000 12,000 14,000 6,000 8,000 4,000 $69,000 Actual $23,300 13,200 14,600 5,300 8,000 4,800 $69,200 Difference $1,700 F 1,200 U 600 U 700 F 800 U $ 200 U

Ex. 122 The Ace Division, a profit center of Crowe Engineering Company, reported the following data for the first quarter of 2002: Sales Variable costs Controllable direct fixed costs Noncontrollable direct fixed costs Indirect fixed costs $6,000,000 4,500,000 600,000 400,000 150,000

Instructions (a) Prepare a performance report for the manager of the Ace Division. (b) What is the best measure of the manager's performance? Why? (c) How would the responsibility report differ if the division was an investment center?

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Test Bank for Managerial Accounting, Second Edition

Solution 122 (1520 min.) (a) CROWE ENGINEERING COMPANY Ace Division Management Performance Report For the Quarter Ended March 31, 2002 Sales .......................................................................................... Variable costs ............................................................................ Contribution margin .................................................................... Controllable fixed costs .............................................................. Controllable margin .................................................................... (b) $6,000,000 4,500,000 1,500,000 600,000 $ 900,000

Controllable margin is the best measure of the manager's performance because this amount equals the excess of controllable revenues over controllable costs. For an investment center, the responsibility report would also show the return on investment for the period.

(c)

Ex. 123 Reese Company has two investment centers and has developed the following information: Department A Department B Departmental controllable margin $150,000 ? Average operating assets ? $500,000 Sales 800,000 250,000 ROI 10% 12% Instructions Answer the following questions about Department A and Department B. 1. 2. 3. What was the amount of Department A's average operating assets? $____________. What was the amount of Department B's controllable margin? $____________. If Department B is able to reduce its operating assets by $100,000, Department B's new ROI would be ____________. If Department A is able to increase its controllable margin by $30,000 as a result of reducing variable costs, Department A's new ROI would be _________________.

4.

Solution 123 (812 min.) 1. 2. 3. 4. $1,500,000 ($150,000 .10) $60,000 ($500,000 .12) 15% [$60,000 ($500,000 $100,000)] 12% [($150,000 + $30,000) $1,500,000]

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Ex. 124 The Appliance Division of Malone Manufacturing Company reported the following results for 2002: Sales Variable costs Controllable fixed costs Average operating assets $4,000,000 3,200,000 200,000 3,000,000

Management is considering the following independent alternative courses of action in 2003 in order to maximize the return on investment for the division. 1. Reduce controllable fixed costs by 15% with no change in sales or variable costs. 2. Reduce average operating assets by 20% with no change in controllable margin. 3. Increase sales $600,000 with no change in the contribution margin percentage. Instructions (a) Compute the return on investment for 2002. (b) Compute the expected return on investment for each of the alternative courses of action.

Solution 124 (1520 min.) (a) Controllable margin Return on investment = Average operating assets $600,000 2002 ROI = = 20% $3,000,000 (b) $630,000 (a) 1. = 21% $3,000,000 $600,000 2. = 25% $2,400,000 (b) $720,000 (c) 3. = 24% $3,000,000 (a) (b) (c) $600,000 + ($200,000 15%) = $630,000. $3,000,000 ($3,000,000 .20) = $2,400,000. Contribution margin 20%

();
$4,000,000

$4,000,000 $3,200,000

$600,000 + ($600,000 20%) = $720,000.

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Test Bank for Managerial Accounting, Second Edition

Ex. 125 Data for the following subsidiaries of Timmons Company which are operated as investment centers are as follows: Black Company Greer Company Sales $3,000,000 $2,000,000 Controllable Margin (1) (3) Average Operating Assets (2) 6,000,000 Contribution Margin 900,000 900,000 Controllable Fixed Costs 400,000 150,000 Return on Investment 10% (4) Instructions Compute the missing amounts using the ROI formula.

Solution 125 (914 min.) (1) (2) (3) (4) Controllable Margin ($900,000 $400,000) Average Operating Assets ($500,000 .10) Controllable Margin ($900,000 $150,000) ROI ($750,000 $6,000,000) $500,000 $5,000,000 $750,000 12.5%

Ex. 126 The data for an investment center is given below. Current Assets Plant Assets Idle Plant Assets Land held for future use $ 1/1/02 400,000 3,000,000 250,000 1,200,000 $ 12/31/02 600,000 4,000,000 330,000 1,200,000

The controllable margin is $960,000. What is the return on investment for the center for 2002?

Solution 126 (711 min.) Controllable Margin Average Operating Assets Average current assets Plant assets ($400,000 + $600,000) 2 = $500,000 ($3,000,000 + $4,000,000) 2 = $3,500,000

Note: Idle plant assets and land held for future use are not included in average operating assets. ROI = $960,000 $4,000,000 = 24%

Budgetary Control and Responsibility Accounting Ex. 127

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The owner of Bronx Bagels has recently expanded his business in order to add additional product lines. In addition to bagels, Bronx Bagels now sells muffins and sandwiches. The company has a minimum rate of return of 16%. Bagels Muffins Sandwiches Sales $1,000,000 $75,000 $ 900,000 Controllable margin 350,000 15,750 270,000 Average operating costs 1,750,000 105,000 1,500,000 Instructions a. Compute the return on investment (ROI) for each investment center. b. Compute the residual income for each investment center.

Solution 127 (10 min.) a. Return on investment: Bagels $350,000 $1,750,000 = 20% Muffins $15,750 $105,000 = 15% Sandwiches $270,000 $1,500,000 = 18% b. Controllable margin Average assets 16% Residual income Bagels $350,000 280,000 $ 70,000 Muffins $15,750 16,800 $ (1,050) Sandwiches $270,000 240,000 $ 30,000

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Test Bank for Managerial Accounting, Second Edition

COMPLETION STATEMENTS
128. A major aspect of budgeting control is the use of budget reports that compare _____________________ with _______________________. 129. In analyzing differences from planned objectives, management may ___________________, or it could decide to modify ___________________. take

130. The master budget is a __________________ budget which is based on operating at one budgeted activity level. 131. A __________________ budget projects budget data for various levels of activity. 132. Total ________________ costs will be the same on the master budget and on a flexible budget which reflects the actual level of activity. 133. Under ___________________ accounting, the evaluation of a manager's performance is based on the costs and revenues directly under that manager's control. 134. 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. 135. In general, costs ____________________ directly by the level of responsibility are _______________, whereas costs that are ____________________ to the responsibility level are __________________. 136. Responsibility centers may be classified into three types: (1)____________________, (2)___________________ and, (3)____________________. 137. The primary basis for evaluating the performance of a manager of an investment center is _________________. 138. Return on investment is calculated by dividing _________________________ by ________________________.

Answers to Completion Statements 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. actual results, planned objectives corrective action, future plans static flexible fixed responsibility controllable incurred, controllable, allocated, noncontrollable cost centers, profit centers, investment centers return on investment (ROI) controllable margin, average operating assets

Budgetary Control and Responsibility Accounting

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MATCHING
139. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F. ____ Budgetary control Static budget Flexible budget Responsibility accounting Controllable costs Management by exception G. H. I. J. K. L. Responsibility reporting system Return on Investment Profit center Investment center Indirect fixed costs Direct fixed costs

1. The review of budget reports by top management directed entirely or primarily to differences between actual results and planned objectives. 2. A part of management accounting that involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the day-to-day decisions about the items. 3. The preparation of reports for each level of responsibility shown in the company's organization chart. 4. A projection of budget data at one level of activity. 5. Costs that a manager has the authority to incur within a given period of time. 6. The use of budgets to control operations. 7. A projection of budget data for various levels of activity. 8. A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use. 9. Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.

____

____

____ ____ ____ ____ ____

____

____ 10. A responsibility center that incurs costs and also generates revenues. ____ 11. Costs which are incurred for the benefit of more than one profit center. ____ 12. A measure of the profitability of an investment center computed by dividing controllable margin (in dollars) by average operating assets.

Answers to Matching 1. 2. 3. 4. 5. 6. F D G B E A 7. 8. 9. 10. 11. 12. C J L I K H

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SHORT-ANSWER ESSAY QUESTIONS


S-A E 140 The master budget and flexible budgets are important aids to management in performing the management functions of planning and control. Briefly describe how planning and control are facilitated by preparing a master budget and flexible budgets. How are these two types of budgets interrelated with planning and control? Solution 140 The system of responsibility reporting begins with the lowest level of responsibility and moves up through each level. At the lowest level each manager receives detailed information concerning the controllable costs for which they are responsible. At higher levels of responsibility the detail of the lower levels may be omitted but the report encompasses all the areas for which the higher level has responsibility. For example, a plant manager will receive reports concerning the controllable costs of each of the plant departments. Management by exception is possible in such a system because, if management at the higher levels of responsibility identifies a significant variance, they can receive detailed reports for each lower level of responsibility. This allows management to investigate causes and remedies for variances as they feel necessary. S-A E 141 Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centers. Solution 141 Because a manager should only be evaluated based on the performance results of matters that are controllable by the manager, it is necessary to use different bases for evaluation. An investment center manager can control the investment funds available as well as costs and revenues. Return on investment is therefore an appropriate basis for evaluation. A profit center, however, controls only revenues and expenses but not investment, so controllable margin is a more appropriate basis relating only to the areas controllable by the profit center. Similarly, because only costs are controllable for a cost center, such a center is evaluated only on the basis of its controllable costs.

S-A E 142 (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 centers 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.

Budgetary Control and Responsibility Accounting S-A E 142 (cont.)

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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. Who are the stakeholders in this situation? 2. Is Kim's action ethical? Briefly explain.

Solution 142 1. The stakeholders include Kim Tilley Sara Trane managers of Edwards Corporation shareholders of Edwards Corporation 2. Kim's action is probably not ethical. It appears that she has replaced equipment that had been purchased only because such a move would improve her ROI. Of course, it is possible that the leased equipment will allow her department to function better, resulting in a benefit for the company. Any action to promote one's own benefit at the expense of the company's welfare is unethical.

S-A E 143 (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 unfavorable budget report. What gives?" Required: Write a short memo to respond to Mr. Linton.

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Test Bank for Managerial Accounting, Second Edition

Solution 143

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 unfavorable report that you were not expecting. Actually, the flexible budget does mean that you are held accountable only for the costs that you can control. Last month, we calculated the cost of producing 8,000 units that were actually sold (and not the 10,000 that were estimated to be sold). Your costs were greater than that, although still less than the amount you would have been allowed had the full 10,000 been sold. Please check the individual items on your budget report. We noted which ones exceeded the budget. You can then focus attention on those items for cost control. Please contact the Accounting Department if you have further questions. (signed)