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Budgetary Control and Responsibility Accounting: True-False Statements
Budgetary Control and Responsibility Accounting: True-False Statements
RESPONSIBILITY ACCOUNTING
TRUE-FALSE STATEMENTS
1. Budget reports comparing actual results with planned objectives should be prepared only
once a year.
2. If actual results are different from planned results, the difference must always be
investigated by management to achieve effective budgetary control.
3. Certain budget reports are prepared monthly whereas others are prepared more frequently
depending on the activities being monitored.
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.
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.
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 X 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.
7-2 Test Bank for Managerial Accounting, Second Edition
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 item is considered to be controllable if there is not a large difference between actual
cost and budgeted cost for that item.
25. The terms "direct fixed costs" and "indirect fixed costs" are synonymous with "traceable
costs" and "common costs," respectively.
26. A cost center incurs costs and generates revenues and cost center managers are evaluated
on the profitability of their centers.
27. Controllable margin is subtracted from controllable fixed costs to get net income for a profit
center.
28. The formula for computing return on investment is controllable margin divided by average
operating assets.
29. The denominator in the formula for calculating the return on investment includes operating
and nonoperating assets.
*30. Residual income is the income that remains after subtracting from controllable margin the
minimum rate of return on a company’s average operating assets.
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. T 11. T 16. T 21. T 26. F
2. F 7. F 12. T 17. T 22. F 27. F
3. T 8. F 13. F 18. T 23. T 28. T
4. F 9. T 14. F 19. F 24. F 29. F
5. F 10. T 15. T 20. T 25. T *30. T
Budgetary Control and Responsibility Accounting 7-3
7-4 Test Bank for Managerial Accounting, Second Edition
40. When budgeted and actual results are not the same amount, there is a budget
a. error.
b. difference.
c. anomaly.
d. by-product.
41. 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.
42. 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.
43. 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.
46. 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 $360,000
Machine supplies 90,000
Indirect materials 105,000
Depreciation on factory building 75,000
Total manufacturing overhead $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.
48. 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
51. 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
Budgetary Control and Responsibility Accounting 7-7
53. 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.
54. 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.
55. 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. 1
b. 2
c. both 1 and 2.
d. neither 1 nor 2.
58. 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
7-8 Test Bank for Managerial Accounting, Second Edition
61. 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.
62. 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.
69. Costs incurred indirectly and allocated to a responsibility level are considered to be
a. nonmaterial.
b. mixed.
c. controllable.
d. noncontrollable.
79. 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.
81. 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.
82. 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.
Budgetary Control and Responsibility Accounting 7-11
85. 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
92. 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.
93. 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.
94. An indirect fixed cost is also called a
a. common fixed cost.
b. controllable fixed cost.
c. direct fixed cost.
d. traceable fixed cost.
95. 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.
96. 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.
97. 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.
Budgetary Control and Responsibility Accounting 7-13
99. 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.
100. 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
102. 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.
104. 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
105. 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%
7-14 Test Bank for Managerial Accounting, Second Edition
107. 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.
*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 division’s operating assets might be substantially lower than
another division’s 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 company’s minimum rate of return.
Budgetary Control and Responsibility Accounting 7-15
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
31. b 43. a 55. c 67. c 79. c 91. c 103. d
32. d 44. c 56. d 68. c 80. d 92. c 104. a
33. d 45. b 57. d 69. d 81. c 93. d 105. a
34. d 46. a 58. c 70. b 82. c 94. a 106. c
35. c 47. b 59. d 71. b 83. c 95. a 107. d
36. d 48. d 60. d 72. d 84. c 96. c *108. d
37. c 49. b 61. b 73. c 85. a 97. c *109. c
38. d 50. d 62. c 74. c 86. b 98. d *110. c
39. a 51. d 63. a 75. a 87. a 99. c
40. b 52. a 64. c 76. b 88. b 100. c
41. c 53. c 65. b 77. d 89. b 101. c
42. d 54. a 66. c 78. c 90. b 102. b
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.
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.
Activity level
Direct labor hours 8,000 9,000
Variable costs
Indirect labor $32,000 $36,000
Indirect materials 6,000 6,750
Factory supplies 4,000 4,500
Total variable costs 42,000 47,250
Fixed costs
Depreciation 15,000 15,000
Supervision 12,000 12,000
Property taxes 8,000 8,000
Total fixed costs 35,000 35,000
Total costs $77,000 $82,250
Budgetary Control and Responsibility Accounting 7-17
Ex. 113
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 3,000 4,000
Variable costs
Indirect materials $ 2,100 $ 2,800
Indirect labor 15,000 20,000
Factory supplies 6,900 9,200
Total variable costs 24,000 32,000
Fixed costs
Depreciation 20,000 20,000
Supervision 10,000 10,000
Property taxes 15,000 15,000
Total fixed costs 45,000 45,000
Total costs $69,000 $77,000
Instructions
Prepare a flexible budget at the 5,000 direct labor hours of activity.
Activity level
Direct labor hours 5,000
Variable costs
Indirect materials $ 3,500
Indirect labor 25,000
Factory supplies 11,500
Total variable costs 40,000
Fixed costs
Depreciation 20,000
Supervision 10,000
Property taxes 15,000
Total fixed costs 45,000
Total costs $85,000
7-18 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:
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.
Activity level
Machine hours 2,000 3,000 4,000
Variable costs
Indirect labor $16,000 $24,000 $32,000
Indirect materials 5,000 7,500 10,000
Maintenance 1,600 2,400 3,200
Utilities 600 900 1,200
Total variable costs 23,200 34,800 46,400
Fixed costs
Supervision 600 600 600
Insurance 200 200 200
Property taxes 300 300 300
Depreciation 900 900 900
Total fixed costs 2,000 2,000 2,000
Total costs $25,200 $36,800 $48,400
Budgetary Control and Responsibility Accounting 7-19
Ex. 115
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 $600
Insurance 200
Property Taxes 300
Depreciation 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.
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 6%
Advertising 4%
Traveling 5%
Delivery 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.
Activity level
Sales $300,000 $330,000 $360,000
Variable expenses
Sales commissions $ 18,000 $ 19,800 $ 21,600
Advertising 12,000 13,200 14,400
Traveling 15,000 16,500 18,000
Delivery 3,000 3,300 3,600
Total variable costs 48,000 52,800 57,600
Fixed expenses
Sales salaries 40,000 40,000 40,000
Depreciation 10,000 10,000 10,000
Total fixed costs 50,000 50,000 50,000
Total costs $ 98,000 $102,800 $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 6%
Advertising 4%
Traveling 5%
Delivery 1%
Fixed selling expenses consist of Sales Salaries $40,000 and Depreciation on Delivery Equipment
$10,000.
Budgetary Control and Responsibility Accounting 7-21
Instructions
Prepare a flexible budget performance report, assuming that February sales were $330,000.
Expected and actual sales are the same.
Difference
Activity level Favorable F
Expected $330,000 Budget Actual Unfavorable U
Actual 330,000 $330,000 $330,000
Variable expenses
Sales commissions $ 19,800 $ 20,600 $ 800 U
Advertising 13,200 12,000 1,200 F
Traveling 16,500 16,900 400 U
Delivery 3,300 2,400 900 F
Total variable costs 52,800 51,900 900 F
Fixed expenses
Sales salaries 40,000 41,500 1,500 U
Depreciation 10,000 10,000 —
Total fixed costs 50,000 51,500 1,500 U
Total expenses $102,800 $103,400 $ 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.
7-22 Test Bank for Managerial Accounting, Second Edition
Ex. 119
Duncan Company uses flexible budgeting to control manufacturing overhead. The budget below
was prepared for the month ending June 30, 2003.
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 7-23
b.
DUNCAN COMPANY
Manufacturing Overhead Budget Report
For the Month Ended June 30, 2003
Difference
Favorable F
Manufacturing Costs Budget Actual Unfavorable U
Variable costs
Indirect materials $48,600 $49,200 $600 U
Indirect labor 12,150 11,980 170 F
Utilities 8,100 7,800 300 F
Total variable costs 68,850 68,980 130 U
Fixed costs
Rent 10,000 10,000 0
Depreciation 8,000 8,200 200 U
Insurance 5,500 5,620 120 U
Total fixed costs 23,500 23,820 320 U
Total costs $92,350 $92,800 $450 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:
7-24 Test Bank for Managerial Accounting, Second Edition
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.
July
August
Controllable Cost Budget Actual Difference Budget Actual Difference
Indirect materials 18,000 17,600 400 F 21,000 21,500 500 U
Indirect labor 36,000 39,500 3,500 U 42,000 40,700 1,300 F
Factory supplies 6,000 8,600 2,600 U 7,000 8,500 1,500 U
Supervision 12,000 10,800 1,200 F 12,000 12,500 500 U
Total costs 72,000 76,500 4,500 U 82,000 83,200 1,200 U
(b) 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 $25,000
Indirect Labor 12,000
Utilities 14,000
Budgetary Control and Responsibility Accounting 7-25
Maintenance 6,000
Ex. 121 (cont.)
Fixed Costs
Supervisor's Salary $40,000
Depreciation 8,000
Property taxes 4,000
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.
Ex. 122
The Ace Division, a profit center of Crowe Engineering Company, reported the following data for
the first quarter of 2002:
Sales $6,000,000
Variable costs 4,500,000
Controllable direct fixed costs 600,000
Noncontrollable direct fixed costs 400,000
Indirect fixed costs 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?
7-26 Test Bank for Managerial Accounting, Second Edition
(b) Controllable margin is the best measure of the manager's performance because this amount
equals the excess of controllable revenues over controllable costs.
(c) For an investment center, the responsibility report would also show the return on investment
for the period.
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. What was the amount of Department A's average operating assets? $____________.
3. If Department B is able to reduce its operating assets by $100,000, Department B's new ROI
would be ____________.
Ex. 124
The Appliance Division of Malone Manufacturing Company reported the following results for 2002:
Sales $4,000,000
Variable costs 3,200,000
Controllable fixed costs 200,000
Average operating assets 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.
$600,000
2002 ROI = ————— = 20%
$3,000,000
$630,000 (a)
(b) 1. —————— = 21%
$3,000,000
$600,000
2. ——————— = 25%
$2,400,000 (b)
$720,000 (c)
3. —————— = 24%
$3,000,000
$4,000,000 – $3,200,000
(c) Contribution margin 20% (————————————);
$4,000,000
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.
Ex. 126
The data for an investment center is given below.
1/1/02 12/31/02
Current Assets $ 400,000 $ 600,000
Plant Assets 3,000,000 4,000,000
Idle Plant Assets 250,000 330,000
Land held for future use 1,200,000 1,200,000
The controllable margin is $960,000. What is the return on investment for the center for 2002?
Note: Idle plant assets and land held for future use are not included in average operating assets.
Ex. 127
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.
COMPLETION STATEMENTS
128. A major aspect of budgeting control is the use of budget reports that compare
_____________________ with _______________________.
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.
137. The primary basis for evaluating the performance of a manager of an investment center is
_________________.
MATCHING
139. Match the items below by entering the appropriate code letter in the space provided.
____ 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.
____ 5. Costs that a manager has the authority to incur within a given period of time.
____ 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. F 7. C
2. D 8. J
3. G 9. L
4. B 10. I
5. E 11. K
6. A 12. H
7-32 Test Bank for Managerial Accounting, Second Edition
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.
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.
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.
"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.
7-34 Test Bank for Managerial Accounting, Second Edition
Solution 143
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.
(signed)