ACC 121 CHAPTER 10 test bank solution correct answers
ACC 121 CHAPTER 10 test bank solution correct answers
CHAPTER LEARNING OBJECTIVES
1. Describe the concept of budgetary control. Budgetary control consists of (a) preparing periodic budget reports that compare actual results with planned objectives, (b) analyzing the differences to determine their causes, (c) taking appropriate corrective action, and (d) modifying future plans, if necessary.
2. Evaluate the usefulness of static budget reports. Static budget reports are useful in evaluating the progress toward planned sales and profit goals. They are also appropriate in assessing a manager's effectiveness in controlling costs when (a) actual activity closely approximates the master budget activity level, and/or (b) the behavior of the costs in response to changes in activity is fixed.
3. Explain the development of flexible budgets and the usefulness of flexible budget reports. To develop the flexible budget, it is necessary to: (a) Identify the activity index and the relevant range of activity. (b) Identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost. (c) Identify the fixed costs, and determine the budgeted amount for each cost. (d) Prepare the budget for selected increments of activity within the relevant range. Flexible budget reports permit an evaluation of a manager's performance in controlling production and costs.
4 Describe the concept of responsibility accounting. Responsibility accounting involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the day-to-day decisions about the items. The evaluation of a manager's performance is based on the matters directly under the manager's control. In responsibility accounting, it is necessary to distinguish between controllable and noncontrollable fixed costs and to identify three types of responsibility centers: cost, profit, and investment.
5. Indicate the features of responsibility reports for cost centers. Responsibility reports for cost centers compare actual costs with flexible budget data. The reports show only controllable costs, and no distinction is made between variable and fixed costs.
6. Identify the content of responsibility reports for profit centers. Responsibility reports show contribution margin, controllable fixed costs, and controllable margin for each profit center.
7. Explain the basis and formula used in evaluating performance in investment centers. The primary basis for evaluating performance in investment centers is return on investment (ROI). The formula for computing ROI for investment centers is: Controllable margin ÷ Average operating assets.
a8. Explain the difference between ROI and residual income. ROI is controllable margin divided by average operating 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.
1. Budget reports comparing actual results with planned objectives should be prepared only once a year.
2. If actual results are different from planned results, the difference must always be investigated by management to achieve effective budgetary control.
3. Certain budget reports are prepared monthly, whereas others are prepared more frequently depending on the activities being monitored.
4. The master budget is not used in the budgetary control process.
5. A master budget is most useful in evaluating a manager's performance in controlling costs.
6. A static budget is one that is geared to one level of activity.
7. A static budget is changed only when actual activity is different from the level of activity expected.
8. A static budget is most useful for evaluating a manager's performance in controlling variable costs.
9. A flexible budget can be prepared for each of the types of budgets included in the master budget.
10. A flexible budget is a series of static budgets at different levels of activities.
11. Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity.
12. Total budgeted fixed costs appearing on a flexible budget will be the same amount as total fixed costs on the master budget.
13. A flexible budget is prepared before the master budget.
14. The activity index used in preparing a flexible budget should not influence the variable costs that are being budgeted.
15. A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost per unit × activity level).
16. Flexible budgets are widely used in production and service departments.
17. A flexible budget report will show both actual and budget cost based on the actual activity level achieved.
18. Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.
19. Policies regarding when a difference between actual and planned results should be investigated are generally more restrictive for noncontrollable items than for controllable items.
20. A distinction should be made between controllable and noncontrollable costs when reporting information under responsibility accounting.
21. Cost centers, profit centers, and investment centers can all be classified as responsibility centers.
22. More costs become controllable as one moves down to each lower level of managerial responsibility.
23. In a responsibility accounting reporting system, as one moves up each level of responsibility in an organization, the responsibility reports become more summarized and show less detailed information.
24. A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers.
25. The terms "direct fixed costs" and "indirect fixed costs" are synonymous with "traceable costs" and "common costs," respectively.
26. Controllable margin is subtracted from controllable fixed costs to get net income for a profit center.
27. The denominator in the formula for calculating the return on investment includes operating and nonoperating assets.
28. The formula for computing return on investment is controllable margin divided by average operating assets.
a29. When evaluating residual income, the calculation tells management what percentage return was generated by the particular division being evaluated.
a30. 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.
31. Budget reports provide the feedback needed by management to see whether actual operations are on course.
32. A static budget is an effective means to evaluate a manager's ability to control costs, regardless of the actual activity level.
33. The flexible budget report evaluates a manager's performance in two areas: (1) production and (2) costs.
34. The terms controllable costs and noncontrollable costs are synonymous with variable costs and fixed costs, respectively.
35. Most direct fixed costs are not controllable by the profit center manager.
36. The manager of an investment center can improve ROI by reducing average operating assets.
37. Residual income and ROI are used as performance evaluation methods for profit center performance
MULTIPLE CHOICE QUESTIONS
38. What is budgetary control?
a. Another name for a flexible budget
b. The degree to which the CFO controls the budget
c. The use of budgets in controlling operations
d. The process of providing information on budget differences to lower level managers
39. A major element in budgetary control is
a. the preparation of long-term plans.
b. the comparison of actual results with planned objectives.
c. the valuation of inventories.
d. approval of the budget by the stockholders.
40. Budget reports should be prepared
d. as frequently as needed.
41. On the basis of the budget reports,
a. management analyzes differences between actual and planned results.
b. management may take corrective action.
c. management may modify the future plans.
d. All of these.
42. The purpose of the departmental overhead cost report is to
a. control indirect labor costs.
b. control selling expense.
c. determine the efficient use of materials.
d. control overhead costs.
43. The purpose of the sales budget report is to
a. control selling expenses.
b. determine whether income objectives are being met.
c. determine whether sales goals are being met.
d. control sales commissions.
44. The comparison of differences between actual and planned results
a. is done by the external auditors.
b. appears on the company's external financial statements.
c. is usually done orally in departmental meetings.
d. appears on periodic budget reports.
45. A static budget
a. should not be prepared in a company.
b. is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs.
c. shows planned results at the original budgeted activity level.
d. is changed only if the actual level of activity is different than originally budgeted.
46. A static budget report
a. shows costs at only 2 or 3 different levels of activity.
b. is appropriate in evaluating a manager's effectiveness in controlling variable costs.
c. should be used when the actual level of activity is materially different from the master budget activity level.
d. may be appropriate in evaluating a manager's effectiveness in controlling costs when the behavior of the costs in response to changes in activity is fixed.
47. A static budget is appropriate in evaluating a manager's performance if
a. actual activity closely approximates the master budget activity.
b. actual activity is less than the master budget activity.
c. the company prepares reports on an annual basis.
d. the company is a not-for-profit organization.
48. When budgeted and actual results are not the same amount, there is a budget
49. Top management's reaction to a difference between budgeted and actual sales often depends on
a. whether the difference is favorable or unfavorable.
b. whether management anticipated the difference.
c. the materiality of the difference.
d. the personality of the top managers.
50. If costs are not responsive to changes in activity level, then these costs can be best described as
51. Assume that actual sales results exceed the planned results for the second quarter. This favorable difference is greater than the unfavorable difference reported for the first quarter sales. Which of the following statements about the sales budget report on June 30 is true?
a. The year-to-date results will show a favorable difference.
b. The year-to-date results will show an unfavorable difference.
c. The difference for the first quarter can be ignored.
d. The sales report is not useful if it shows a favorable and unfavorable difference for the two quarters.
52. A static budget is appropriate for
a. variable overhead costs.
b. direct materials costs.
c. fixed overhead costs.
d. None of these.
53. What is the primary difference between a static budget and a flexible budget?
a. The static budget contains only fixed costs, while the flexible budget contains only variable costs.
b. The static budget is prepared for a single level of activity, while a flexible budget is adjusted for different activity levels.
c. The static budget is constructed using input from only upper level management, while a flexible budget obtains input from all levels of management.
d. The static budget is prepared only for units produced, while a flexible budget reflects the number of units sold.
54. Another name for the static budget is
a. master budget.
b. overhead budget.
c. permanent budget.
d. flexible budget.
55. The master budget of Windy Co. 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 $720,000
Machine supplies 180,000
Indirect materials 210,000
Depreciation on factory building 150,000
Total manufacturing overhead $1,260,000
A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs of
56. Boland Manufacturing prepared a 2013 budget for 120,000 units of product. Actual production in 2013 was 130,000 units. To be most useful, what amounts should a performance report for this company compare?
a. The actual results for 130,000 units with the original budget for 120,000 units.
b. The actual results for 130,000 units with a new budget for 130,000 units.
c. The actual results for 130,000 units with last year's actual results for 134,000 units.
d. It doesn't matter. All of these choices are equally useful.
57. A department has budgeted monthly manufacturing overhead cost of $540,000 plus $3 per direct labor hour. If a flexible budget report reflects $1,044,000 for total budgeted manufacturing cost for the month, the actual level of activity achieved during the month was
a. 528,000 direct labor hours.
b. 168,000 direct labor hours.
c. 348,000 direct labor hours.
d. Cannot be determined from the information provided.
58. Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets?
a. Direct materials cost
b. Direct labor cost
c. Variable manufacturing overhead
d. Fixed manufacturing overhead
59. In developing a flexible budget within a relevant range of activity,
a. only fixed costs are included.
b. it is necessary to relate variable cost data to the activity index chosen.
c. it is necessary to prepare a budget at 1,000 unit increments.
d. variable and fixed costs are combined and are reported as a total cost.
60. What budgeted amounts appear on the flexible budget?
a. Original budgeted amounts at the static budget activity level
b. Actual costs for the budgeted activity level
c. Budgeted amounts for the actual activity level achieved
d. Actual costs for the estimated activity level
61. The flexible budget
a. is prepared before the master budget.
b. is relevant both within and outside the relevant range.
c. eliminates the need for a master budget.
d. is a series of static budgets at different levels of activity.
62. A flexible budget can be prepared for which of the following budgets comprising the master budget?
c. Direct materials
d. All of these.
63. A flexible budget
a. is prepared when management cannot agree on objectives for the company.
b. projects budget data for various levels of activity.
c. is only useful in controlling fixed costs.
d. cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results.
64. If a company plans to sell 48,000 units of product but sells 60,000, 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. 54,000 units of activity.
c. 60,000 units of activity.
d. 48,000 units of activity.
65. Within the relevant range of activity, the behavior of total costs is assumed to be
a. linear and upward sloping.
b. linear and downward sloping.
c. curvilinear and upward sloping.
d. linear to a point and then level off.
66. Sales results that are evaluated by a static budget might show
1. favorable differences that are not justified.
2. unfavorable differences that are not justified.
c. both 1 and 2.
d. neither 1 nor 2.
67. The selection of levels of activity to depict a flexible budget
1. will be within the relevant range.
2. is largely a matter of expediency.
3. is governed by generally accepted accounting principles.
d. 1 and 2
68. Management by exception
a. causes managers to be buried under voluminous paperwork.
b. means that all differences will be investigated.
c. means that only unfavorable differences will be investigated.
d. means that material differences will be investigated.
69. Under management by exception, which differences between planned and actual results should be investigated?
a. Material and noncontrollable
b. Controllable and noncontrollable
c. Material and controllable
d. All differences should be investigated
70. Best Shingle's budgeted manufacturing costs for 50,000 squares of shingles are:
Fixed manufacturing costs $12,000
Variable manufacturing costs $16.00 per square
Best produced 40,000 squares of shingles during March. How much are budgeted total manufacturing costs in March?
71. A flexible budget depicted graphically
a. is identical to a CVP graph.
b. differs from a CVP graph in the way that fixed costs are shown.
c. differs from a CVP graph in the way that variable costs are shown.
d. differs from a CVP graph in that sales revenue is not shown.
72. The activity index used in preparing the flexible budget
a. is prescribed by generally accepted accounting principles.
b. is only applicable to fixed manufacturing costs.
c. is the same for all departments.
d. should significantly influence the costs that are being budgeted.
73. A static budget is not appropriate in evaluating a manager's effectiveness if a company has
a. substantial fixed costs.
b. substantial variable costs.
c. planned activity levels that match actual activity levels.
d. no variable costs.
74. Shane Industries prepared a fixed budget of 60,000 direct labor hours, with estimated overhead costs of $300,000 for variable overhead and $90,000 for fixed overhead. Shane then prepared a flexible budget at 57,000 labor hours. How much is total overhead costs at this level of activity?
75. For June, Gold Corp. estimated sales revenue at $600,000. It pays sales commissions that are 4% of sales. The sales manager's salary is $285,000, estimated shipping expenses total 1% of sales, and miscellaneous selling expenses are $15,000. How much are budgeted selling expenses for the month of July if sales are expected to be $540,000?
76. Nikoto Steel Co. budgeted manufacturing costs for 50,000 tons of steel are:
Fixed manufacturing costs $50,000 per month
Variable manufacturing costs $12.00 per ton of steel
Nikoto produced 40,000 tons of steel during March. How much is the flexible budget for total manufacturing costs for March?
77. Smart Manufacturing budgeted costs for 50,000 linear feet of block are:
Fixed manufacturing costs $24,000 per month
Variable manufacturing costs $16.00 per linear foot
Smart installed 40,000 linear feet of block during March. How much is budgeted total manufacturing costs in March?
78. In the Dichter Co., indirect labor is budgeted for $72,000 and factory supervision is budgeted for $24,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is
79. Stone Industries uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $48,000 variable and $270,000 fixed. If Stone had actual overhead costs of $321,000 for 18,000 units produced, what is the difference between actual and budgeted costs?
a. $3,000 unfavorable
b. $3,000 favorable
c. $9,000 unfavorable
d. $12,000 favorable
80. A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:
Indirect materials $140,000 Depreciation $60,000
Indirect labor 200,000 Taxes 10,000
Factory supplies 20,000 Supervision 50,000
A flexible budget prepared at the 80,000 machine hours level of activity would show total manufacturing overhead costs of
81. In the Goblette Manufacturing Company, indirect labor is budgeted for $108,000 and factory supervision is budgeted for $36,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is:
82. Chambers, Inc. uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $64,000 variable and $180,000 fixed. If Chambers had actual overhead costs of $250,000 for 18,000 units produced, what is the difference between actual and budgeted costs?
a. $2,000 unfavorable.
b. $2,000 favorable.
c. $6,000 unfavorable.
d. $8,000 favorable.
83. A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:
Indirect materials $120,000 Depreciation $50,000
Indirect labor 160,000 Taxes 10,000
Factory supplies 20,000 Supervision 40,000
A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of
84. Kevin Jarvis Industries produced 192,000 units in 90,000 direct labor hours. Production for the period was estimated at 198,000 units and 99,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at
a. 96,000 hours and 99,000 hours.
b. 99,000 hours and 90,000 hours.
c. 96,000 hours and 90,000 hours.
d. 90,000 hours and 90,000 hours.
85. A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:
Indirect materials $90,000 Depreciation $37,500
Indirect labor 120,000 Taxes 7,500
Factory supplies 15,000 Supervision 30,000
A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of
86. Kathleen Corp. produced 320,000 units in 150,000 direct labor hours. Production for the period was estimated at 330,000 units and 165,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at
a. 160,000 hours and 165,000 hours.
b. 165,000 hours and 150,000 hours.
c. 160,000 hours and 150,000 hours.
d. 150,000 hours and 150,000 hours.
87. At zero direct labor hours in a flexible budget graph, the total budgeted cost line intersects the vertical axis at $30,000. At 15,000 direct labor hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $90,000. Fixed and variable costs may be expressed as:
a. $30,000 fixed plus $4 per direct labor hour variable.
b. $30,000 fixed plus $6 per direct labor hour variable.
c. $60,000 fixed plus $2 per direct labor hour variable.
d. $60,000 fixed plus $4 per direct labor hour variable.
88. At 18,000 direct labor hours, the flexible budget for indirect materials is $36,000. If $37,400 are incurred at 18,400 direct labor hours, the flexible budget report should show the following difference for indirect materials:
a. $1,400 unfavorable.
b. $1,400 favorable.
c. $600 favorable.
d. $600 unfavorable.
89. 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.
90. Power Manufacturing recorded operating data for its shoe division for the year.
Contribution margin 300,000
Controllable fixed costs 180,000
Average total operating assets 600,000
How much is controllable margin for the year?
91. 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.
92. 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.
93. 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.
94. Top management can control
a. only controllable costs.
b. only noncontrollable costs.
c. all costs.
d. some noncontrollable costs and all controllable costs.
95. 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.
96. Which of the following is not a true statement?
a. All costs are controllable at some level within a company.
b. Responsibility accounting applies to both profit and not-for-profit entities.
c. Fewer costs are controllable as one moves up to each higher level of managerial responsibility.
d. The term segment is sometimes used to identify areas of responsibility in decentralized operations.
97. Costs incurred indirectly and allocated to a responsibility level are considered to be
98. 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.
99. Which responsibility centers generate both revenues and costs?
a. Investment and profit centers
b. Profit and cost centers
c. Cost and investment centers
d. Only profit centers
100. 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.
101. 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.
102. The maintenance department of a manufacturing company is a(n)
b. profit center.
c. cost center.
d. investment center.
103. Which of the following is not a correct match?
1. Incurs costs
2. Generates revenue
3. Controls investment funds
a. Investment Center 1, 2, 3
b. Cost Center 1
c. Profit Center 1, 2, 3
d. All are correct matches.
104. 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.
105. 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.
106. 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.
107. In the performance report for cost centers,
a. controllable and noncontrollable costs are reported.
b. fixed costs are not reported.
c. no distinction is made between fixed and variable costs.
d. only materials and controllable costs are reported.
108. 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.
109. 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
110. 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.
111. 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.
112. 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.
113. 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.
114. 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
115. Given below is an excerpt from a management performance report:
Budget Actual Difference
Contribution margin $1,000,000