Académique Documents
Professionnel Documents
Culture Documents
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.
5.
6.
7.
A static budget is changed only when actual activity is different from the level of activity
expected.
8.
9.
A flexible budget can be prepared for each of the types of budgets included in the master
budget.
10.
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.
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.
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.
7-2
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.
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.
24.
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 companys average operating assets.
1.
2.
3.
4.
5.
Ans
.
F
F
T
F
F
Item
6.
7.
8.
9.
10.
Ans
.
T
F
F
T
T
Item
11.
12.
13.
14.
15.
Ans
.
T
T
F
F
T
Item
16.
17.
18.
19.
20.
Ans
.
T
T
T
F
T
Item
21.
22.
23.
24.
25.
Ans
.
Item
Ans.
T
F
T
F
T
26.
27.
28.
29.
*30.
F
F
T
F
T
7-3
32.
33.
34.
35.
36.
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.
7-4
39.
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.
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.
7-5
46.
$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.
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.
50.
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
52.
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.
56.
1
2
both 1 and 2.
neither 1 nor 2.
1
2
3
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
7-7
59.
60.
61.
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.
64.
65.
66.
7-8
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.
69.
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.
72.
73.
74.
Investment Center
1, 2, 3
Cost Center
1
Profit Center
1, 2, 3
All are correct matches.
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.
77.
78.
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.
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
83.
84.
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.
Budget
$1,000,000
$ 500,000
Actual
$1,050,000
$ 450,000
Difference
$50,000
$50,000
88.
1
2
3
1 and 3
Budget
$600,000
$200,000
Actual
$580,000
$220,000
Difference
$20,000 U
$20,000 U
7-11
89.
90.
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.
93.
94.
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.
97.
7-12
98.
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.
102.
103.
104.
105.
7-13
106.
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.
$500,000
70,000
100,000
12%
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.
7-14
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
Ans
.
b
d
d
d
c
d
c
d
a
b
c
d
Item
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
Ans
.
Item
a
c
b
a
b
d
b
d
d
a
c
a
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
Ans
.
c
d
d
c
d
d
b
c
a
c
b
c
Item
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
Ans
.
c
c
d
b
b
d
c
c
a
b
d
c
Item
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
Ans
.
Item
Ans
.
Item
Ans.
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
Product A
Product B
Total sales
Budget
$105,000
162,000
$267,000
Actual
$101,470
167,320
$268,790
Difference
$3,530 U
5,320 F
$1,790 F
7-15
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
9,000
$32,000
6,000
4,000
42,000
$36,000
6,750
4,500
47,250
15,000
12,000
8,000
35,000
$77,000
15,000
12,000
8,000
35,000
$82,250
7-16
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
Variable costs
Indirect materials
Indirect labor
Factory supplies
Total variable costs
Fixed costs
Depreciation
Supervision
Property taxes
Total fixed costs
Total costs
3,000
4,000
$ 2,100
15,000
6,900
24,000
$ 2,800
20,000
9,200
32,000
20,000
10,000
15,000
45,000
$69,000
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
7-17
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
$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
2,000
3,000
4,000
Variable costs
Indirect labor
Indirect materials
Maintenance
Utilities
Total variable costs
$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
Fixed costs
Supervision
Insurance
Property taxes
Depreciation
Total fixed costs
Total costs
600
200
300
900
2,000
$25,200
600
200
300
900
2,000
$36,800
600
200
300
900
2,000
$48,400
7-18
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
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
Budget at
3,000 hrs.
Actual at
3,000 hrs.
Difference
Favorable F
Unfavorable U
Variable costs
Indirect labor
Indirect materials
Maintenance
Utilities
Total variable costs
$24,000
7,500
2,400
900
34,800
$22,000
8,100
2,500
950
33,550
$2,000
600
100
50
1,250
F
U
U
U
F
Fixed Costs
Supervision
Insurance
Property taxes
Depreciation
Total fixed costs
Total costs
600
200
300
900
2,000
$36,800
720
200
300
950
2,170
$35,720
120
50
170
$1,080
3,000
3,000
U
U
F
7-19
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 Equipment $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
$ 19,800
13,200
16,500
3,300
52,800
$ 21,600
14,400
18,000
3,600
57,600
40,000
10,000
50,000
$ 98,000
40,000
10,000
50,000
$102,800
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.
7-20
$20,600
12,000
16,900
2,400
Fixed selling expenses consist of Sales Salaries $41,500 and Depreciation on Delivery Equipment $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
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
Difference
Favorable F
Unfavorable U
Budget
$330,000
Actual
$330,000
$ 19,800
13,200
16,500
3,300
52,800
$ 20,600
12,000
16,900
2,400
51,900
$ 800
1,200
400
900
900
40,000
10,000
50,000
$102,800
41,500
10,000
51,500
$103,400
1,500 U
1,500 U
$ 600 U
U
F
U
F
F
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.
7-21
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.
Indirect materials
Indirect labor
Utilities
Total variable costs
12,000
$36,000
9,000
6,000
51,600
Rent
Depreciation
Insurance
Total fixed costs
Total costs
10,000
8,000
5,500
23,500
$74,500
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.
7-22
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
Manufacturing Costs
Variable costs
Indirect materials
Indirect labor
Utilities
Total variable costs
Budget
Actual
Difference
Favorable F
Unfavorable U
$48,600
12,150
8,100
68,850
$49,200
11,980
7,800
68,980
$600
170
300
130
U
F
F
U
Fixed costs
Rent
Depreciation
Insurance
Total fixed costs
Total costs
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:
7-23
Ex. 120 (cont.)
$3.00
6.00
1.00
$ 17,600
39,500
8,600
$ 21,500
40,700
8,500
$20,000
24,000
5,000
15,000
21,600
12,000
$114,300
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
Controllable Cost
Indirect materials
Indirect labor
Factory supplies
Supervision
Total costs
(b)
Budget
18,000
36,000
6,000
12,000
72,000
July
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
August
Actual
Difference
21,500
500 U
40,700
1,300 F
8,500
1,500 U
12,500
500 U
83,200
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
Maintenance
$25,000
12,000
14,000
6,000
7-24
$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?
7-25
Solution 122
(1520 min.)
(a)
$6,000,000
4,500,000
1,500,000
600,000
$ 900,000
(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 ADepartment 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? $____________.
2.
3.
If Department B is able to reduce its operating assets by $100,000, Department B's new
ROI would be ____________.
4.
Solution 123
1.
2.
3.
4.
(812 min.)
7-26
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
Solution 124
(a)
(1520 min.)
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)
$4,000,000 $3,200,000
(
);
$4,000,000
7-27
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
(1)
(2)
(3)
(4)
(914 min.)
$500,000
$5,000,000
$750,000
12.5%
Ex. 126
The data for an investment center is given below.
1/1/02
$ 400,000
3,000,000
250,000
1,200,000
Current Assets
Plant Assets
Idle Plant Assets
Land held for future use
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.)
Note: Idle plant assets and land held for future use are not included in average operating assets.
ROI = $960,000 $4,000,000 = 24%
7-28
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.
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
7-29
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
________________________.
7-30
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.
____
____
____
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.
2.
3.
4.
5.
6.
F
D
G
B
E
A
7.
8.
9.
10.
11.
12.
C
J
L
I
K
H
7-31
7-32
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.
7-33
Solution 143
TO:
Earl Linton
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)