BUDGETARY CONTROL AND

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.

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 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.
 Budgetary Control and Responsibility Accounting 7-3

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.

32. Budget reports should be prepared

a. daily.
b. monthly.
c. weekly.
d. as frequently as needed.

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.

38. 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.
7-4 Test Bank for Managerial Accounting, Second Edition

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

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.

44. A static budget is appropriate for

a. variable overhead costs.
b. direct material costs.
c. fixed overhead costs.
d. none of these.

45. 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.
 Budgetary Control and Responsibility Accounting 7-5

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

49. 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.

50. 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.

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
7-6 Test Bank for Managerial Accounting, Second Edition

52. Another name for the static budget is

a. master budget.
b. overhead budget.
c. permanent budget.
d. flexible budget.

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.

56. 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. 1
b. 2
c. 3
d. 1 and 2

57. 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.

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
 Budgetary Control and Responsibility Accounting 7-7

59. 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.

60. 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.

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.

63. 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.

64. 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.

65. 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.

66. Top management can control

a. only controllable costs.
b. only noncontrollable costs.
c. all costs.
d. some noncontrollable costs and all controllable costs.
7-8 Test Bank for Managerial Accounting, Second Edition

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.

68. 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.

69. Costs incurred indirectly and allocated to a responsibility level are considered to be
a. nonmaterial.
b. mixed.
c. controllable.
d. noncontrollable.

70. 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.

71. 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.

72. 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.

73. The maintenance department of a manufacturing company is a(n)

a. segment.
b. profit center.
c. cost center.
d. investment center.

74. 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.
 Budgetary Control and Responsibility Accounting 7-9

75. 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.

76. 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.

77. 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.

78. 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.

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.

80. 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

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.
7-10 Test Bank for Managerial Accounting, Second Edition

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.

84. 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.

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

86. Given below is an excerpt from a management performance report:

Budget Actual Difference
Contribution margin $1,000,000 $1,050,000 $50,000
Controllable fixed costs $ 500,000 $ 450,000 $50,000
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. 1
b. 2
c. 3
d. 1 and 3

88. Given below is an excerpt from a management performance report:

Budget Actual Difference
Contribution margin $600,000 $580,000 $20,000 U
Controllable fixed costs $200,000 $220,000 $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.
 Budgetary Control and Responsibility Accounting 7-11

89. 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.

90. 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.

91. 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.

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.
7-12 Test Bank for Managerial Accounting, Second Edition

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.

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

101. 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.

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.

103. 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.

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%
 Budgetary Control and Responsibility Accounting 7-13

106. 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.

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.

*108. The following information is available for Louie Company:

Average operating assets $500,000
Controllable margin 70,000
Contribution margin 100,000
Minimum rate of return 12%
Louie’s 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 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.