CHAPTER 23

BUDGETARY CONTROL AND

RESPONSIBILITY ACCOUNTING

CHAPTER LEARNING OBJECTIVES

1. Describe budgetary control and static budget reports. 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.

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.

2. Prepare flexible budget reports. To develop the flexible budget it is necessary to do the following: (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.

3. Apply responsibility accounting to cost and profit centers. 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.

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. Responsibility reports show contribution margin, controllable fixed costs, and controllable margin for each profit center.

4. Evaluate performance in investment centers. The primary basis for evaluating performance in investment centers is return on investment (ROI). The equation for computing ROI for investment centers is Controllable margin ÷ Average operating assets.

^a5. 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.

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, every difference must be investigated by management to achieve effective budgetary control.

3. Certain budget reports are prepared monthly while 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 prepared for one level of activity.

7. A static budget is changed only when actual activity differs from the expected level of activity.

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 total variable costs that are being budgeted.

15. One calculation 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 shows both actual and budgeted 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. Differences between actual and planned results are generally more likely to be investigated 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 calculate net income for a profit center.

27. The denominator in the equation for calculating the return on investment includes operating and nonoperating assets.

28. The calculation for computing return on investment is controllable margin divided by average operating assets.

^a29. Residual income is a measure of the percentage return generated by the particular division being evaluated.

^a30. Residual income generates a dollar amount that is the increase in net income to the company beyond the cost necessary to pay for the financing of assets.

31. Budget reports provide feedback needed by management to see whether actual operations are on course.

32. A static budget is an effective means of evaluating 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.

^a37. 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

a. daily.

b. monthly.

c. weekly.

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 answers are correct.

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. A 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 two or three 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

a. error.

b. difference.

c. anomaly.

d. by-product.

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

a. mixed.

b. flexible.

c. variable.

d. fixed.

51. Assume that actual sales exceed the budgeted sales 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 answers are correct.

53. What is the primary difference between a static budget and a flexible budget?

a. The static budget includes only fixed costs while the flexible budget includes 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 the

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

a. $1,482,000.

b. $1,260,000.

c. $1,512,000.

d. $1,362,000.

56. Boland Manufacturing prepared a 2022 budget for 120,000 units of product. Actual production in 2022 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. All of these comparisons 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 amounts appear on a flexible budget report?

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?

a. Sales

b. Overhead

c. Direct materials

d. All of these answers are correct.

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 units, 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.

a. 1

b. 2

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 judgement.

3. is governed by generally accepted accounting principles.

a. 1

b. 2

c. 3

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 of the following 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 as follows:

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?

a. $640,000

b. $812,000

c. $800,000

d. $652,000

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. If Shane prepares a flexible budget at 57,000 direct labor hours, what is the total overhead costs at this level of activity?

a. $285,000

b. $375,000

c. $370,500

d. $390,000

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 for the month are expected to be $15,000. If Gold prepares a flexible budget for the month of June, how much are budgeted selling expenses for the month of July if sales are expected to be $540,000?

a. $297,000

b. $327,000

c. $270,000

d. $330,000

76. Nikoto Steel Co. budgeted manufacturing costs for 50,000 tons of steel are as follows:

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. What is the flexible budget for total manufacturing costs for March?

a. $520,000

b. $650,000

c. $480,000

d. $530,000

77. Smart Manufacturing budgeted costs for 50,000 linear feet of block are as follows:

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. What amount would be reported on a flexible budget for total manufacturing costs in March?

a. $640,000

b. $824,000

c. $800,000

d. $664,000

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, the flexible budget total for these costs is

a. $96,000.

b. $108,000.

c. $105,000.

d. $99,000.

79. Stone Industries uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is $48,000 for variable costs and $270,000 for fixed costs. 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:

Variable Fixed

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

a. $458,000.

b. $360,000.

c. $384,000.

d. $408,000.

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, the flexible budget total for these costs is

a. $144,000.

b. $162,000.

c. $157,500.

d. $148,500.

82. Chambers, Inc. uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is $64,000 for variable costs and $180,000 for fixed costs. 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:

Variable Fixed

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

a. $270,000.

b. $360,000.

c. $370,000.

d. $300,000.

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:

Variable Fixed

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

a. $202,500.

b. $270,000.

c. $277,500.

d. $225,000.

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. Total fixed costs and unit variable costs are

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 totaled $36,000. If $37,400 are incurred at 18,400 direct labor hours, the flexible budget report should show a difference for indirect materials of

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 as follows:

Sales $1,500,000

Contribution margin 300,000

Controllable fixed costs 180,000

Average total operating assets 600,000

What is the controllable margin for the year?

a. 20%

b. 50%

c. $300,000

d. $120,000

91. A cost is considered controllable at a given level of managerial responsibility if

a. the manager has the power to manage 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

a. nonmaterial.

b. mixed.

c. controllable.

d. noncontrollable.

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 types of 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. a revenue center.

b. a profit center.

c. a cost center.

d. an investment center.

101. A foreign subsidiary of a large corporation is

a. a revenue center.

b. a profit center.

c. a cost center.

d. an investment center.

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

a. loss center.

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 costs.

b. total costs with flexible budget costs.

c. controllable costs with static budget costs.

d. controllable costs with flexible budget costs.

107. In a performance report for a cost center,

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 a profit center manager is the

a. rate of return on investment.

b. success in meeting budgeted goals for controllable costs.

c. controllable margin generated by the profit center.

d. 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 $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.

116. 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

117. 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.

118. 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.

119. 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.

120. Pippen Co. recorded operating data for its shoe division for the year. The company’s desired return is 5%.

Sales $1,000,000

Contribution margin 200,000

Total direct fixed costs 120,000

Average total operating assets 400,000

What is the controllable margin for the year?

a. 20%

b. 50%

c. $60,000

d. $80,000

121. Las Sendas, Inc. had average operating assets of $4,000,000 and sales of $2,000,000 in 2022. If the controllable margin was $600,000, the ROI was

a. 60%

b. 50%

c. 30%

d. 15%

122. Trails and Paths, Inc. had average operating assets of $6,000,000 and sales of $3,000,000 in 2022. If the controllable margin was $600,000, the ROI was

a. 50%

b. 40%

c. 20%

d. 10%

123. The area manager of the Red, White, and Brew Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows:

Project Investment Controllable Margin ROI

Phoenix $120,000 $30,000 25%

Chicago $540,000 $50,000 9.25%

The Red, White, and Brew segment has currently $2,000,000 in average operating assets and a controllable margin of $250,000. Which one of following projects will increase the Red, White, and Brew division’s ROI?

a. Both the Phoenix and Chicago options

b. Only the Phoenix option

c. Only the Chicago option

d. Neither the Phoenix nor the Chicago options

124. Bogey Co. recorded operating data for its Cheap division for the year as follows:

Sales $ 1,400,000

Controllable margin 160,000

Total average assets 4,000,000

Fixed costs 100,000

Bogey requires its return to be 10%. What is the ROI for the year?

a. 4%

b. 35%

c. 6%

d. 1.5%

125. Dingo Division’s operating results include controllable margin of $150,000, sales totaling $1,200,000, and average operating assets of $500,000. Dingo is considering a project with sales of $100,000, expenses of $86,000, and an investment of average operating assets of $200,000. Dingo’s required rate of return is 9%. Should Dingo accept this project?

a. Yes, ROI will drop by 6.6% which is still above the minimum required rate of return.

b. No, the return is less than the required rate of 9%.

c. Yes, ROI still exceeds the cost of capital.

d. No, ROI will decrease to 7%.

Ex. 180

Clark Company’s master budget reflects budgeted sales information for the month of June, 2022 as follows:

Budgeted Quantity Budgeted Unit Sales Price

Product A 40,000 $7

Product B 48,000 $9

During June, the company actually sold 39,000 units of Product A at an average unit selling price of $7.10 and 49,600 units of Product B at an average unit price of $8.90.

Instructions

Prepare a Sales Budget Report for the month of June for Clark Company which shows whether the company achieved its planned objectives.

Ex. 181

Beal Manufacturing Co.’s static budget at 12,000 units of production includes $72,000 for direct labor and $12,000 for direct materials. Total fixed costs are $48,000.

Instructions

a. Determine the total costs on Beal’s flexible budget for 2022 if 18,000 units are produced and sold.

b. How would this comparison differ if a static budget were used instead of a flexible budget for performance evaluation?

Ex. 182

Cody Co. developed its annual manufacturing overhead budget for its master budget for 2022 as follows:

Expected annual operating capacity 120,000 Direct Labor Hours

Variable overhead costs

Indirect labor $600,000

Indirect materials 120,000

Factory supplies 60,000

Total variable 780,000

Fixed overhead costs

Depreciation 240,000

Supervision 120,000

Property taxes 96,000

Total fixed 456,000

Total costs $1,236,000

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.

Ex. 183

Copper Manufacturing has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department:

COPPER MANUFACTURING

Monthly Flexible Manufacturing Overhead Budget

Mixing Department

Activity level

Direct labor hours 3,000 4,000

Variable costs

Indirect materials $ 3,000 $ 4,000

Indirect labor 15,000 20,000

Factory supplies 4,500 6,000

Total variable 22,500 30,000

Fixed costs

Depreciation 20,000 20,000

Supervision 12,000 12,000

Property taxes 15,000 15,000

Total fixed 47,000 47,000

Total costs $69,500 $77,000

Instructions

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

Ex. 184

Berne, Inc. uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows:

Indirect labor $5.00

Indirect materials 2.50

Maintenance .80

Utilities .30

Fixed overhead costs per month are:

Supervision $800

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.

Instructions

Prepare a flexible manufacturing overhead budget for the expected range of activity using increments of 1,000 machine hours.

Ex. 185

Telemark Production’s budged manufacturing costs for July when production was projected to be 2,000 units appears below:

Direct materials $10 per unit

Factory depreciation $16,000

Variable overhead 10,000

Direct labor 4,000

Factory supervisory salaries 11,600

Other fixed factory costs 3,000

Instructions

What is the total flexible budget manufacturing cost for a month when 2,200 units are produced?

Ex. 186

Webb, Inc. uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows:

Indirect labor $5.00

Indirect materials 2.50

Maintenance .50

Utilities .30

Fixed overhead costs per month are:

Supervision $1,200

Insurance 400

Property taxes 600

Depreciation 1,800

The company believes it will normally operate in a range of 4,000 to 8,000 machine hours per month. During the month of August, 2022, the company incurs the following manufacturing overhead costs:

Indirect labor $28,000

Indirect materials 16,200

Maintenance 2,800

Utilities 1,900

Supervision 1,440

Insurance 400

Property taxes 600

Depreciation 1,860

Instructions

Prepare a flexible budget report, assuming that the company used 6,000 machine hours during August.

Ex. 187

Lapp Manufacturing uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $400,000 to $480,000. 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 $80,000 and depreciation on delivery equipment $20,000.

Instructions

Prepare a flexible budget for increments of $40,000 of sales within the relevant range.

Ex. 188

Cadiz Co. 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 5%

Advertising 4%

Traveling 7%

Delivery 1%

Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment $10,000.

The actual selling expenses incurred in February, 2022, by Cadiz are as follows:

Sales commissions $17,200

Advertising 12,000

Traveling 23,700

Delivery 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.

Ex. 189

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 $120,000.

2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000.

Instructions

Develop the budgeted cost calculation for the Assembly Department and identify the fixed and variable costs.

Ex. 190

Ace Production Co. has two production departments, Fabricating and Assembling. At a department managers’ meeting, the controller uses flexible budget graphs to explain total budgeted costs. Separate graphs based on direct labor hours are used for each department. The graphs show the following.

1. At zero direct labor hours, the total budgeted cost line and the fixed cost line intersect the vertical axis at $100,000 in the Fabricating Department and $80,000 in the Assembling Department.

2. At normal capacity of 100,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000 in the Fabricating Department and $290,000 in the Assembling Department.

Instructions

(a) State the total budgeted cost calculation for each department.

(b) Compute the total budgeted cost for each department, assuming actual direct labor hours worked were 106,000 and 94,000, in the Fabricating and Assembling Departments, respectively.

Ex. 191

Hubbard, Inc.’s static budget at 3,000 units of production includes $12,000 for direct labor, $3,000 for utilities (variable), and total fixed costs of $24,000. Actual production and sales for the year was 9,000 units, with an actual cost of $70,800.

Instructions

Determine if Hubbard is over or under budget.

Ex. 192

Campbell Clothing produces men’s athletic socks. The following budgeted and actual amounts are for 2022:

Cost Budget at 5,000 Units Actual Amounts at 5,800 Units

Direct materials $60,000 $71,000

Direct labor 75,000 86,500

Equipment depreciation 5,000 5,000

Indirect labor 7,500 8,600

Indirect materials 9,000 9,600

Rent and insurance 12,000 13,000

Instructions

Prepare a flexible budget report for Campbell Clothing for the year.

Ex. 193

Data concerning manufacturing overhead for Wilson Industries 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 calculation and the cost and activity for the months of July and August are as follows:

Flexible Budget per

Direct Labor Hour Actual Costs and Activity

July August

Direct labor hours 6,000 7,000

Overhead costs

Variable

Indirect materials $3.50 $ 20,500 $ 25,100

Indirect labor 6.00 39,500 40,700

Factory supplies 1.00 7,600 8,200

Fixed

Depreciation $20,000 15,000 15,000

Supervision 25,000 23,000 26,000

Property taxes 10,000 12,000 12,000

Total costs $117,600 $127,000

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.

Ex. 194

Strickland Corp.’s manufacturing overhead budget for the first quarter of 2022 contained the following data:

Variable Costs

Indirect materials $40,000

Indirect labor 24,000

Utilities 20,000

Maintenance 12,000

Fixed Costs

Supervisor’s salary $80,000

Depreciation 16,000

Property taxes 8,000

Actual variable costs for the first quarter were:

Indirect materials $37,200

Indirect labor 26,400

Utilities 21,000

Maintenance 10,600

Actual fixed costs were as expected except for property taxes which were $9,000. All costs are considered controllable by the department manager except for the supervisor’s salary.

Instructions

Prepare a manufacturing overhead responsibility report for the first quarter.

Ex. 195

The Deluxe Division, a profit center of Riley Manufacturing Company, reported the following data for the first quarter of 2022:

Sales $9,000,000

Variable costs 6,300,000

Controllable direct fixed costs 1,200,000

Noncontrollable direct fixed costs 530,000

Indirect fixed costs 300,000

Instructions

(a) Prepare a responsibility report for the manager of the Deluxe 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?

Ex. 196

Danner Kicks Co. has three divisions which are operated as profit centers. Actual operating data for the divisions listed alphabetically are as follows.

Operating Data Women’s Shoes Men’s Shoes Children’s Shoes

Contribution margin $280,000 (3) $220,000

Controllable fixed costs 130,000 (4) (5)

Controllable margin (1) $ 90,000 96,000

Sales 800,000 480,000 (6)

Variable costs (2) 330,000 250,000

Instructions

(a) Compute the missing amounts. Show computations.

(b) Prepare a responsibility report for the Women’s Shoe Division assuming (1) the data are for the month ended June 30, 2022, and (2) all actual data equal budgeted data except variable costs which are $20,000 over budget.

Ex. 197

The Real Estate Products Division of McKenzie Co. is operated as a profit center. Sales for the division were budgeted for 2022 at $1,250,000. The only variable costs budgeted for the division were cost of goods sold ($610,000) and selling and administrative ($80,000). Fixed costs were budgeted at $130,000 for cost of goods sold, $120,000 for selling and administrative costs, and $95,000 for noncontrollable fixed costs. Actual results for these items were as follows:

Sales $1,175,000

Cost of goods sold

Variable 545,000

Fixed 140,000

Selling and administrative

Variable 82,000

Fixed 100,000

Noncontrollable fixed 105,000

Instructions

(a) Prepare a responsibility report for the Real Estate Products Division for 2022.

(b) Compute ROI assuming the division is an investment center, and average operating assets were $1,200,000.

Ex. 198

The Pacific Division of Henson Industries reported the following data for the current year:

Sales $4,000,000

Variable costs 2,600,000

Controllable fixed costs 800,000

Average operating assets 5,000,000

Top management is unhappy with the investment center’s return on investment. It asks the manager of the Pacific Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action.

1. Increase sales by $400,000 with no change in the contribution margin percentage.

2. Reduce variable costs by $120,000.

3. Reduce average operating assets by 4%

Instructions

(a) Compute the return on investment for the current year.

(b) Compute the ROI under each of the proposed courses of action. (Round to one decimal.)

Ex. 199

The Medford Burkett Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports.

Recently, the company was the victim of a computer virus that deleted portions of the company’s accounting records. This was discovered when the current period’s responsibility reports were being prepared. The actual operating results appeared as follows.

Ex. 199 (Cont’d)

Instructions

Determine the missing pieces of information above.

Ex. 200

Perez Corp. reported the following:

Beginning of year operating assets $3,200,000

End of year operating assets 3,000,000

Contribution margin 1,000,000

Sales 5,000,000

Controllable fixed costs 643,000

Its required return is 10%.

Instructions

Compute the company’s ROI.

Ex. 201

Lombard, Inc. has two investment centers and has developed the following information:

Instructions

1. What was the amount of Department A’s average operating assets? $____________.

2. What was the amount of Department B’s controllable margin? $____________.

3. If Department B is able to reduce its operating assets by $100,000, Department B’s new ROI would be ____________.

4. If Department A is able to increase its controllable margin by $60,000 as a result of reducing variable costs, Department A’s new ROI would be _________________.

Ex. 202

The Atlantic Division of Stark Productions Company reported the following results for 2022:

Sales $4,000,000

Variable costs 3,200,000

Controllable fixed costs 300,000

Average operating assets 2,500,000

Management is considering the following independent alternative courses of action in 2023 in order to maximize the return on investment for the division.

1. Reduce controllable fixed costs by 10% with no change in sales or variable costs.

2. Reduce average operating assets by 10% with no change in controllable margin.

3. Increase sales $500,000 with no change in the contribution margin percentage.

Instructions

(a) Compute the return on investment for 2022.

(b) Compute the expected return on investment for each of the alternative courses of action.

Ex. 203

Data for the following subsidiaries of Olive Manufacturing, which are operated as investment centers, are as follows:

Fleming Company Oak Company

Sales $3,000,000 $2,000,000

Controllable margin (1) (3)

Average operating assets (2) 4,000,000

Contribution margin 1,200,000 800,000

Controllable fixed costs 500,000 200,000

Return on Investment 10% (4)

Instructions

Compute the missing amounts using the ROI calculation.

Ex. 204

The data for an investment center is given below.

1/1/22 12/31/22

Current assets $ 300,000 $ 700,000

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 $760,000.

Instructions

What is the return on investment for the center for 2022?