Ross 1st Edition Test Bank Docx

Chapter 1 – Financial Planning and Management

1. The four functions of management are planning, organizing, leading, and controlling. Which function does not require financial competence?

A. Planning

B. Organizing

C. Leading

D. Controlling

E. All four functions require financial competence

2. Budgeting competency requires the ability to

1. Define the production system
2. Quantify expected operations in dollars
3. Analyze actual results in light of the budget to determine where costs were better or worse than expected
4. All of the above

3. Managers are generally the most knowledgeable about which aspect of budgeting?

1. Defining the production system, i.e., how goods and services are produced
2. Quantifying expected operations in dollars, i.e., building a budget
3. Analyzing potential capital investments to determine whether they are financially advantageous
4. Analyzing actual results in light of the budget to determine where costs were better or worse than expected

4. The objective of the prospective phase of the budgeting process is to

1. Estimate revenue and expenses for the upcoming fiscal year or quantify the amount of resources that should be consumed
2. Estimate revenue and expenses for the upcoming fiscal year or control resources as they are consumed
3. Facilitate and control processes or control resources as they are consumed
4. Facilitate and control processes or examine the resources that were consumed
5. Evaluate processes or examine the resources that were consumed

5. The objective of the concurrent phase of the budgeting process is to

1. Estimate revenue and expenses for the upcoming fiscal year or quantify the amount of resources that should be consumed
2. Estimate revenue and expenses for the upcoming fiscal year or control resources as they are consumed
3. Facilitate and control processes or control resources as they are consumed
4. Facilitate and control processes or examine the resources that were consumed
5. Evaluate processes or examine the resources that were consumed

6. Evaluating the resources consumed and the performance of management is the objective of the

A. Prospective phase of budgeting

B. Concurrent phase of budgeting

C. Retrospective phase of budgeting

D. All phases of budgeting

7. Which of the following groups are primarily tasked with focusing on the work of departments and ensuring their effectiveness?

1. Senior management
2. Finance
3. Operating managers
4. Planning
5. Marketing

8. The role of senior management is to

A. Provide vision and set organizational goals

B. Determine organizational constraints and highlight trade-offs

C. Ensure the effectiveness and efficiency of production processes

D. All of the above

9. The three economic questions are

A. What to produce, how to produce, and who receives output?

B. What to produce, how to produce, and who receives profit?

C. What to produce, how much to charge, and who receives profit?

D. What to produce, how much to produce, and how much to charge?

10. Which of the following activities does NOT occur during the budget estimation process?

1. Forecasting quantity of output
2. Estimating total revenue
3. Estimating total expense
4. Evaluating the feasibility of the budget
5. Identifying accountability when actual revenues or expenses fall short of budget targets

11. Which of the following activities does NOT occur during the budget facilitation and control process phase?

1. Communicating organization goals and resource constraints
2. Continuous monitoring of performance
3. Initiating corrective action when budget targets are not realized
4. Establishing accountability when actual revenues or expenses fall short of budget targets

12. The part of a system where resources enter the production system is

1. Input
2. Throughput
3. Output
4. Outcome

13. The two parts of a system that managers have the greatest control over are

1. Inputs and throughputs
2. Inputs and outputs (in a non-healthcare industry where inputs can be screened and rejected, patients cannot be turned away)
3. Throughputs and outputs
4. Outputs and outcomes
5. Throughputs and outcomes

14. During the throughput process

1. Inputs are transformed into outputs
2. Inputs enter into the production processes
3. Goods and services are produced
4. Results are realized
5. Deviations from expected or desired results are recognized and communicated to other parts of the system

15. The best budget to use if managers want to control throughputs is

1. An incremental budget
2. A flexible budget
3. A zero-base budget
4. A program budget
5. An activity-based budget

16. Activity-based budgets are best if managers want to focus attention and control on

1. Inputs
2. Throughputs
3. Outputs
4. Outcomes
5. Feedback

17. The primary focus of a flexible budget is

1. Input use
2. Control of production processes
3. Efficiency
4. Effectiveness

18. According to the balanced scorecard perspective, the primary objective of an organization is to

1. Maximize the value of the organization, i.e., earn a sufficient profit
2. Maximize customer satisfaction
3. Maximize the effectiveness and efficiency of internal processes
4. Maximize the learning and growth of employees by providing access to information and tools
5. All of the above

19. Which part of the balanced scorecard is focused on maximizing the effectiveness and efficiency of internal processes?

1. The financial perspective
2. The customer perspective
3. The internal perspective
4. The learning and growth perspective

20. In the balanced scorecard, what is the foundation from which all the other parts of the balanced scorecard are built?

1. The financial perspective
2. The customer perspective
3. The internal perspective
4. The learning and growth perspective

21. Maximizing the value of the organization should be the objective for

1. For-profits
2. Non-profits
3. Public agencies
4. All organizations

22. True/False Financial skills are only needed by personnel working in accounting, finance, and senior management.

23. True/False The primary purpose of a budget is to provide estimates of future revenues and expenses.

24. True/False The primary purpose of a budget is to provide an operating plan to facilitate management.

25. True/False In the long run, organizations must be effective and efficient to survive.

26. True/False The role of management and the budget is to maximize the value of the organization.

Chapter 2 – Accounting and Economics

1. Uncertainty is

1. The ability to predict a future state using a probability distribution
2. The state in which insufficient evidence exists to construct a probability distribution of the future outcome
3. The inability to reach optimal decisions due to the inherent limitations of the human mind, incomplete information, and time constraints
4. Non-socially optimal results driven by self-interested actions of individuals

2. Bounded rationality is

1. The ability to predict a future state using a probability distribution
2. The state in which insufficient evidence exists to construct a probability distribution of the future outcome
3. The inability to reach optimal decisions due to the inherent limitations of the human mind, incomplete information, and time constraints
4. Non-socially optimal results driven by self-interested actions of individuals

3. Non-socially optimal results driven by self-interested actions of individuals is

1. Opportunism
2. Bounded rationality
3. Uncertainty
4. Risk

4. Which of the following is NOT a reason for government intervention in markets?

1. Public goods
2. Externalities
3. Uncertainty
4. Income redistribution

5. When revenue exceeds expenses, an organization’s net worth

1. Should increase
2. Should decrease
3. Should remain unchanged
4. Cannot be predicted

6. Viability is

1. Assets greater than liabilities
2. Assets less than liabilities
3. Revenues greater than expenses
4. Revenues less than expenses

7. Budgeting is challenging due to

A. Lack of financial training

B. The amounts of money involved

C. The different skills needed to produce any good or service

D. All of the above

8. Profit equals

A. Total revenue – total expense

B. (P*Q) – (AVC*Q) – TFC

C. (P-AVC) * Q –TFC

D. All of the above

9. In capital budgeting managers should invest in

1. All projects with a positive ROI
2. All projects with ROI greater than the cost of capital
3. The highest ROI projects until the spending constraint is reached
4. The highest ROI projects with returns over the cost of capital until the spending constraint is reached

10. In a capital rationing situation managers should invest in

1. All projects with a positive ROI
2. All projects with ROI greater than the cost of capital
3. The highest ROI projects until the spending constraint is reached
4. The highest ROI projects with returns over the cost of capital until the spending constraint is reached

11. Marginal revenue product is the change in

A. Total cost resulting from producing one additional output

B. Total output resulting from employing one additional input

C. Total revenue from producing one additional output

D. Total revenue from employing one additional input

12. Which type of cost has an unchanging total expense and a decreasing average expense as output increases?

1. Fixed cost
2. Variable cost
3. Step cost
4. Variable cost with fixed component

13. Which type of cost has an increasing total expense and a constant average expense as output increases?

1. Fixed cost
2. Variable cost
3. Step cost
4. Variable cost with fixed component

14. An input whose cost is determined by the quantity of input consumed is a

1. Fixed cost
2. Variable cost
3. Step cost
4. Variable cost with fixed component

15. An input whose cost is based on a flat fee and use is a

1. Fixed cost
2. Variable cost
3. Step cost
4. Variable cost with fixed component

16. Average fixed cost

1. Increases when output increases
2. Is unaffected by changes in output
3. Decreases when output increases
4. Is stable over a range of output and increases when output reaches defined threshold

17. Total variable cost

1. Increases when output increases
2. Is unaffected by changes in output
3. Decreases when output increases
4. Is stable over a range of output and increases when output reaches defined threshold

18. Diminishing marginal returns occur when

1. The percentage change in output is greater than the percentage change in input use
2. The percentage change in output is equal to the percentage change in input use
3. The percentage change in output is less than the percentage change in input use
4. Total input use increases

19. An organization is operating under constant returns to scale when average total cost (ATC)

1. Does not change when output increases
2. Falls as output increases
3. Increases as output increases
4. Decreases as output increases

20. An organization is operating under economies of scale when average total cost (ATC)

1. Does not change when output increases
2. Falls when output increases and increases when output decreases
3. Increases when output increases and falls when output decreases
4. Decreases when output increases or decreases

21. To reduce average total cost if an organization is operating under economies of scale, managers should

1. Attempt to increase sales and output
2. Attempt to decrease sales and output
3. Attempt to increase sales and reduce output
4. Attempt to decrease sales and increase output
5. Do nothing

22. Which of the following variables does a manager of an expense center have control over?

1. Mix of inputs
2. Product mix
3. Output prices
4. Capital investments

23. In what type of situation does a managers’ authority include the input mix, the product mix, and output prices?

1. Cost centers
2. Expense centers
3. Revenue centers
4. Profit centers
5. Investment centers

24. Flexible or activity-based budgets are most appropriate for

1. Cost and expense centers
2. Expense and revenue centers
3. Revenue and profit centers
4. Profit and investment centers

25. True/False The choice to rely on a functional organizational structure is based on the belief that technical expertise is more important than customer specific knowledge.

26. True/False Silo-thinking is employees refusing to recognize events and information arising outside their organizations.

27. True/False The income statement reports the assets and liabilities of an organization.

28. True/False Pro forma financial statements report the actual results of business transactions.

29. True/False An economies of scale exists when the percentage increase in output exceeds the percentage increase in average total cost.

Chapter 3 – Budget Incentives and Strategies

1. In the market exchange model, conflicting interests are balanced because

1. Consumers are simultaneously purchasers of outputs and suppliers of inputs
2. Producers are simultaneously purchasers of output and suppliers of inputs
3. Regulators simultaneously control input and output markets
4. All of the above

2. In a subsidized market, inefficiency arises because

1. Subsidized consumers will consume excess amounts of a good or service
2. Producers have less incentive to reduce production costs
3. Suppliers of resources may have little direct control over output
4. All of the above

3. A healthcare good or service that earns high profits but does not meet a pressing community needs is a

A. Star

B. Cash cow

C. Samaritan

D. Dog

4. What group of individuals fall outside the Iron Triangle?

A. People receiving goods and service

B. People providing resources to produce the goods and services

C. People producing the goods and services

D. People deciding what goods and services will be produced

5. According to Bureaucrats in Business (World Bank, 1995), reform of state-owned enterprises requires political desirability, political feasibility, and credibility; political desirability requires

1. A change in leadership and/or a crisis
2. A change in leadership and the ability to neutralize opponents of reform
3. A crisis and the ability to neutralize opponents of reform
4. A crisis and a track record of following through on promises
5. The ability to neutralize opponents of reform and a history of following through on promises

6. Approving the budget is the responsibility of

1. Operating managers, finance, and senior management
2. Finance and senior management
3. Senior management and the board of directors
4. The board of directors and regulators

7. Due to the time required to construct, manage, and evaluate budgets, how many different budget years may a manager be required to work on at one time?

1. One budget year
2. Two budget years
3. Three budget years
4. Four or more budget years

8. Which of the following may NOT be a legitimate reason for a budget increase?

1. Increase in output
2. Backlog
3. Increase in input prices
4. Cost increasing change in production technology
5. Improving the quality of a good or service

9. The most common reason why budgets increase from one year to the next is

1. Increase in output
2. Increase in input prices
3. Increase in the quality of the good or service produced
4. Adoption of cost increasing production technology

10. Which of the following is NOT an All-Purpose budget strategy?

1. Cultivate a clientele
2. Cultivate confidence
3. Obfuscate
4. New programs

11. Which of the following strategies attempts to overwhelm budget reviewers with detail to circumvent short circuit budget review?

1. Policy trap
2. Exclusive terminology
3. Chrome plating
4. Flattery
5. Numbers

12. Cultivating the confidence of budget reviewers attempts to minimize budget reviews by

1. Demonstrating the need for the department and its funding
2. Demonstrating the effectiveness and/or efficiency of current operations
3. Shrouding current operations in mystery
4. Demonstrating the need for program expansion

13. Which of the following strategies could be both a legitimate and an illegitimate reason for a budget increase?

1. Over-estimation of output
2. Rounding up
3. Sprinkling
4. Backlogs

14. Mislabeling a proposed expenditure in order to fund a new program involves

1. Repackaging old programs as new programs
2. Deliberately starting a new program with inadequate funding
3. Claiming the expenditure will create cost savings in excess of the expenditure
4. Claiming the expenditure will generate revenue in excess of the expenditure
5. Deliberately misstating the purpose of the expenditure

15. Which of the following strategies is designed to delay budget cuts until they may no longer be necessary?

1. Propose a study
2. Cut popular programs
3. Predict dire consequences
4. All or nothing
5. You pick

16. Which of the following is the budget cutter’s strategy equivalent to “You pick” used by managers to prevent budget reductions?

1. Across-the-board reductions
2. Employ restructuring consultants
3. Cut expansions of existing programs
4. Cut “luxury” items
5. Cut funding to poorly performing managers

17. Which of the following strategies are used to create a public outcry to prevent budget cuts?

A. Propose a study and cut popular programs

B. Cut popular programs and predict dire consequences

C. Predict dire consequences and present the budget cut as an all-or-nothing choice

D. Present the budget cut as an all-or-nothing choice and shift the responsibility for any reductions to the budget cutters

E. Shift the responsibility for any reductions to the budget cutters and challenge the understanding of budget cutters

18. Which of the following is the most commonly used strategy to reduce budgets?

1. Across-the-board reductions
2. Cut new programs
3. Cut expansions of existing programs
4. Cut “luxury” items
5. Cut funding to poorly performing managers

19. According to the author, which is the most sensible strategy to reduce budgets?

1. Across-the-board reductions
2. Cut new programs
3. Cut expansions of existing programs
4. Cut low value departments
5. Cut funding to poorly performing managers

20. The purpose of the financial review of a budget requests is to determine

1. If it is consistent with the goals of the organization
2. If it complies with budget instructions
3. Whether it is complete
4. Whether any arithmetic errors have been made
5. All of the above

21. A budget is best described as

A. A financial plan

B. A means of assuring that past practices are continued

C. A means to reduce expenses

D. An information system

22. True/False A primary difference between for-profit and non-profit organizations and public agencies is demand, determined by market transactions in the former and by the ballot box in the latter.

23. True/False The primary source of funds in public agencies arises from the sale of output.

24. True/False The purpose of a cash cow is to meet a pressing community need and subsidize low-profit programs.

25. True/False The primary role of finance in the budget process is to approve the final budget.

26. True/False A budget is a means of understanding an organization, its priorities, operations, and incentive structures.

Chapter 4 – Output Forecasts and Revenue Budgets

1. The lean waste of over processing focuses on

A. Producing unneeded or unwanted goods and services

B. Using too many steps or building in too many features into a good or service

C. Holding an excessive amount of supplies

D. Failure to assign staff to duties they are capable of completing

E. Allowing staff or other resources to be idle

2. The most important variable that must be estimated to create a budget is

1. Output
2. Output price
3. Average variable cost
4. Total fixed cost

3. A durable good is

1. A product with an expected life of less than one year
2. A product with an expected life of more than one year
3. A product with an expected life of more than five years
4. A non-physical product

4. Which of the following personal consumption expenditures demonstrates the least variability?

1. Durable goods
2. Non-durable goods
3. Services
4. Residential housing

5. Which of the following types of care typically demonstrate the least variability?

1. Curative care
2. Chronic care
3. Preventive care
4. Cosmetic care

6. The forecasting method that bases estimates on the relationship between two variables, i.e., the amount of one variable is based on the amount of a different variable, is

A. Compound growth rates

B. Moving average

C. Exponential smoothing

D. Regression

7. The formula used to create a moving average forecast is

1. Y = (Y_-1+Y_-2+Y_-3)/3
2. Y = α*Y_-1actual + (1-α)*Y_-1budget
3. r = (X/Y)^(1/n)-1
4. Y = α + (β*X)

8. In a regression forecast, β indicates

1. The change in the dependent forecast variable due to a one unit change in the independent variable
2. The value of the dependent forecast variable when the independent variable is zero
3. The change in the independent variable due to a one unit change in the dependent forecast variable
4. The value of the independent variable when the dependent forecast variable is zero

9. Producers operating within which type of markets have the greatest control over the price of their product?

1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly

10. Producers in which type of market have the least control over the price of their product?

1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly

11. Which of the following will reduce the price elasticity of a good or service?

1. The item is a luxury rather than a necessity
2. The item comprises a small percentage of a purchaser’s budget
3. Changes to behavior can be completed in a short period of time
4. The item has many close substitutes

12. In response to a price increase, the quantity of an inelastic product sold will

1. Decrease by more than the percentage change in price
2. Decrease by approximately the same percentage change in price
3. Decrease by less than the percentage change in price
4. Increase by less than the percentage change in price

13. If price is increased, the total revenue generated by a product with elastic demand

1. Will increase
2. Will decrease
3. Will remain the same
4. Cannot be determined

14. If price elasticity for a product equals -0.75, the demand for it is

1. Elastic
2. Unitary elastic
3. Inelastic
4. Rigidly elastic

15. A price reduction will increase total revenue if the demand for a product is

1. Elastic
2. Unitary elastic
3. Inelastic
4. Sub-elastic

16. Which of the following types of healthcare services has demonstrated the greatest variability in demand over time?

A. Inpatient discharges

B. Physician visits

C. Long-term care services

D. Cosmetic surgery

17. Which of the following reimbursement systems is most advantageous, i.e., provides the institution with the greatest latitude over its revenue, to a hospital?

1. Percent of charge
2. Per case
3. Per diem
4. Capitation
5. Cost

18. Which of the following reimbursement systems provides an incentive to reduce hospital admissions?

1. Percent of charge
2. Per case
3. Per diem
4. Capitation
5. Cost

19. Which of the following reimbursement systems provides an incentive to reduce the length of stay of hospital admissions?

1. Percent of charge and cost
2. Cost and per case
3. Per case and per diem
4. Per diem and capitation

20. Which of the following reimbursement systems allow hospitals to increase their profitability by increasing prices?

1. Percent of charge
2. Per case
3. Per diem
4. Capitation
5. Cost

21. True/False The most important variable in a budget is the estimate of total revenue.

22. True/False The revenue budget is completely dependent on the output forecast and estimate of output prices.

23. True/False Sales of durable goods are more dependent on the overall economic climate than either non-durables goods or services.

24. True/False Diagnostic related groups (DRGs) summarize medical treatments by body system.

25. True/False The primary assumption of a composite forecast that gives equal weight to each forecasting method is no method is more accurate than another.

26. True/False The primary assumption quantitative forecasting methods make is future demand can be determined by examining history.

Chapter 5 – Scratch Budgeting

1. The difficulty in preparing a scratch budget is knowing

1. How much output will be demanded
2. What types of resources are needed to produce a product
3. How much of a resource is needed to complete production
4. All of the above

2. If the price of labor increases, an organization would most likely shift from

A. Individual processing to mass production

B. A batch processing method to continuous production

C. A labor-intensive production method to a capital-intensive method

D. Start to finish production to purchase and assembly

3. Which of the following expenses would be best estimated based on output?

1. Management salaries
2. Staff salaries
3. Health insurance
4. Supplies
5. Rent

4. Which of the following expenses is most likely to be a fixed cost?

A. Rent

B. Utilities

C. Salaries and wages

D. Supplies

E. Postage and shipping

5. Which method should be used to estimate health insurance expenses?

1. Fixed cost
2. Variable cost based on output
3. Variable cost based on another expense
4. Variable cost based on revenue

6. Which method should be used to estimate supply expenses?

1. Fixed cost
2. Variable cost based on output
3. Variable cost based on another expense
4. Variable cost based on revenue

7. Assume a lab test requires 15 minutes of a technician’s time to draw one vial of blood and lab techs work 2080 hours per year. If 56,000 lab tests are forecasted for the upcoming year, the total man hours (FTEs) needed to complete these tests will be

A. Less than 8320 hours (< 4 FTEs)

B. 8320 hours plus or minus 100 hours (4 FTEs +/-)

C. More than 8320 hours (> 4 FTEs)

D. Cannot be determined

8. Assume a lab test requires 15 minutes of a technician’s time to draw one vial of blood, each vial costs $0.50, and 56,000 lab tests are forecasted for the upcoming year. What should the supply expense be for the collection vials?

A. Less than $28,000

B. $28,000 plus or minus $100

C. More than $28,000

D. Cannot be determined

9. Assume a start-up business has forecasted that expenses will exceed revenues during the first year of operation. Which of the following actions can owners/managers enact to improve operating results?

1. Increase price
2. Extend operating hours to increase sales
3. Reduce variable costs
4. Reduce fixed costs
5. All of the above

10. The breakeven formula is

A. Total cost/price

B. Total variable cost/(Price – average fixed cost)

C. Total fixed cost/(Price – average variable cost)

D. Total cost/(Price – average variable cost)

11. An increase in average variable cost will

1. Increase breakeven quantity
2. Have no impact on breakeven quantity
3. Decrease breakeven quantity
4. Have an indeterminate impact on breakeven quantity

12. An increase in average variable cost and a reduction in fixed cost will

1. Increase breakeven quantity
2. Have no impact on breakeven quantity
3. Decrease breakeven quantity
4. Have an indeterminate impact on breakeven quantity

13. An increase in price and a reduction in fixed cost will

1. Increase breakeven quantity
2. Have no impact on breakeven quantity
3. Decrease breakeven quantity
4. Have an indeterminate impact on breakeven quantity

14. Which of the following will decrease breakeven quantity?

1. An increase in price and decreases in average variable and total fixed costs
2. An increase in price and average variable cost and a reduction in total fixed costs
3. An increase in price and total fixed costs and a reduction in average variable costs
4. Increases in price, average variable cost, and total fixed cost
5. Decreases in price, average variable cost, and total fixed costs

15. The contribution margin is

A. The change in total revenue resulting from selling one additional unit of output

B. The change in total cost resulting from producing one additional unit of output

C. The change in profit resulting from selling one additional unit of output

D. The change in total variable cost from producing one additional unit of output

16. The formula for the contribution margin is

1. Price – average variable cost, P-AVC
2. Price – average fixed cost, P-AFC
3. Price – average total cost, P-ATC
4. Total revenue – total cost, TR-TC

17. Assume an organization must invest $100,000 in fixed costs to produce a product that sells for $100 and requires $50 in variable costs to produce one unit. What is the organization’s breakeven volume?

1. 1000 units
2. 1500 units
3. 2000 units
4. 2500 units
5. None of the above

18. Assume an organization must invest $700,000 in fixed costs to produce a product that sells for $75 and requires $40 in variable costs to produce one unit. What is the organization’s breakeven volume?

1. 9333 units
2. 17,500 units
3. 20,000 units
4. 24,667 units
5. None of the above

19. Assume an organization must invest $700,000 in fixed costs to produce a product that sells for $75 and requires $40 in variable costs to produce one unit. How many units of output must be sold to earn a $50,000 profit?

1. 17,500 units
2. 20,000 units
3. 21,428 units
4. 24,667 units
5. None of the above

20. An organization should shut down immediately if

1. Price does not cover average total cost
2. Price does not cover average variable cost
3. The contribution margin is zero
4. The contribution margin is greater than zero but less than $100
5. All of the above

21. An organization should shut down in the long run if

1. Price does not cover average total cost
2. Price does not cover average variable cost
3. The contribution margin is zero
4. The contribution margin is greater than zero but less than $100
5. All of the above

22. True/False The purpose of the chart of accounts is to organize financial transactions to facilitate management.

23. True/False The advantage of substituting capital for labor in a production is it reduces average variable costs and can be quickly reduced when demand falls.

24. True/False Depreciation records the actual loss of value on equipment and building due to the wear and tear of production.

25. True/False One problem that arises when expenses are estimated based on output or other expenses is the incentive to over-estimate these variables to increase budget allocations.

26. True/False The purpose of breakeven analysis is to determine the approximate quantity of output needed to be sold to recoup fixed costs.

Chapter 6 – Incremental Budgeting

1. The focus of an incremental budget is on

1. Control of inputs
2. Control over processes
3. Efficiency
4. Effectiveness
5. All of the above

2. Which of the following assumptions are NOT made in incremental budgeting?

1. Production processes are effective
2. Production processes are efficient
3. Inputs are fully employed
4. Output is unstable and unpredictable
5. The product produced is needed or desired by consumers

3. The problem with using current year-to-date expenses as the expenditure base for the budget is

A. It does not provide a complete year of information

B. The information it provides is up to two years out-of-date

C. It is forecasted information rather than actual expenses

D. All of the above

4. Incremental budgeting requires identifying input price increases, based on the Producer Price Index. Which of the following statements best describes recent inflation rates in health care?

1. Producer prices have increased at similar rates as other industries
2. Producer prices have increased at similar rates for all types of healthcare providers
3. Producer prices have increased at different rates for different types of healthcare providers but at similar rates for the same type of providers, e.g., physicians and hospitals
4. Producer prices have increased at different rates between different types of providers and within particular provider groups

5. Which expenditure base provides the most up-to-date information to construct a budget?

1. Current year-to-date actual
2. Current year budget
3. Last full year actual
4. A combination of year-to-date actual, current year budget, and the last full year actual

6. The problem with using the last full year actual as the expenditure base is

1. Changes in output
2. Changes in input prices
3. Evolution in production technology
4. All of the above

7. When current year-to-date expenditures encompassing the first seven months of the fiscal year are used as the expenditure base and $35,000 was expended, the projected actual for the entire year would be

1. $60,000
2. $70,000
3. $84,000
4. $100,000
5. None of the above

8. Assume projected actual for labor expense in the current year is $1,000,000 and a 5.0% across-the-board salary increase will be given to employees on the first day of the new fiscal year. How much should be budgeted for salaries and wages in the next fiscal year?

1. $1,000,000
2. $1,000,500
3. $1,005,000
4. $1,050,000
5. None of the above

9. Assume 100,000 units of an input currently costing $2.00 per unit are required to produce the forecasted output and a 10% price increase is expected in the sixth month of the budget year. How much should be budgeted for input for the next fiscal year?

1. $200,000
2. $205,000
3. $210,000
4. $220,000
5. None of the above

9. Assume 30,000 units of an input currently costing $2.00 per unit were consumed to produce 6000 outputs in the first six months of the fiscal year. How much should be budgeted for the next year assuming output remains at 1,000 units per month and a 10% price increase is expected in the first month of the budget year?

1. $66,000
2. $120,000
3. $132,000
4. $220,000
5. None of the above

10. Which of the following can a budget manager do to increase their budget in an incremental budgeting system?

1. Select the expenditure base that produces the highest possible starting point for estimating the next year’s budget
2. Select the highest possible inflation factor for estimating next year’s input prices
3. Incorporate input price increases in the first month of the budget year
4. All of the above

11. Before a budget is submitted, the budget preparer should

A. Recheck their math to ensure it is free of error

B. Review to ensure it meets budget directives

C. Review the request to ensure increases are reasonable

D. All of the above

12. Which of the following cannot be considered a strength of incremental budgeting?

1. Provides a fixed target for managers to work toward
2. Ease of preparation
3. Focuses managerial attention on use of inputs
4. Focuses managerial attention on the short run
5. All of the above are strengths of incremental budgeting

13. Which of the following cannot be considered a weakness of incremental budgeting?

1. Provides a fixed target for managers to work toward
2. Budget allocations are independent of work performed
3. Institutionalizes past spending patterns
4. Encourages short-term thinking in managers
5. Encourages managers to over-estimate budget year output

14. The idea behind gain sharing is

1. Employees will work harder to reduce costs if they receive a portion of the cost savings
2. Employees will work harder to reduce costs if they receive a portion of profits
3. Employees will work harder if they are paid for piece work rather than on salary
4. Employees will work harder if all employees receive equal wages
5. All of the above

15. An effective gain-sharing program requires all of the following EXCEPT

1. An easy to understand gain-sharing formula
2. Gain-sharing payments are a supplement of (rather than replacement for) current compensation
3. Employees are given a say in establishing targets and gain-sharing payments
4. The majority of cost savings be distributed to workers (rather than owners)

16. The primary measure of superior performance when an incremental budget is used

1. Are total actual expenses less than or equal to the budget
2. Is actual cost per output less than or equal to the budget
3. Is marginal cost per output less than or equal to the budget
4. Is actual cost per outcome less or equal to the budget

17. The primary drawback of incremental budgeting is it encourages mangers to

1. Spend more than they are budgeted
2. Spend their entire budget
3. Adopt cost-increasing technology
4. All of the above

18. Medicare expenditures since 2000 have

1. Increased at a slower rate than GDP
2. Increased at approximately the same rate (plus or minus 0.5%) as GDP
3. Increased at twice the rate of GDP
4. Increased at more than three times the rate of GDP

19. Which component of Medicare has increased at the fastest rate since 2006?

1. Hospital expenditures, Part A
2. Physician and outpatient expenditures, Part B
3. Nursing home expenditures, Part C
4. Pharmaceutical expenditures, Part D

20. An incremental budget is most appropriate when

1. Output and revenue have been stable and are expected to remain stable in the future
2. Operations are relatively efficient
3. Production technology is stable
4. All of the above

21. Which of the following is NOT a challenge of incremental budgeting?

1. Historical expenditures may not capture all necessary expenses
2. Current year expenditures do not reflect full year expenditures
3. Identifying appropriate input price increases for the coming year
4. The emergence of new expenses

22. True/False Incremental budgets are also known as fixed or static budget.

23. True/False Incremental budgets are re-adjusted if actual output does not match forecasted output.

24. True/False Incremental budgets encourage managers to over-estimate output to increase their budgets.

25. True/False Incremental budgets encourage managers to spend less than they are budgeted.

26. True/False A master budget indicates what revenues and expenses will be if budget assumptions are met.

Chapter 7 – Flexible Budgeting

1. The focus of a flexible budget is on

1. Control of inputs
2. Control over processes
3. Efficiency
4. Effectiveness

2. The part of a system that flexible budgeting focuses on is

A. Inputs

B. Throughputs

C. Outputs

D. Outcomes

E. Feedback

3. Differences between actual and budgeted expenditures can arise due to changes in input prices, efficiency, intensity, and output volume. A flexible budget accounts for which of these four variables?

1. Input prices
2. Efficiency
3. Intensity
4. Output volume

4. When a flexible budget is used and actual output exceeds forecasted output, the percentage change in total expenses in the restated or flexed budget will be

1. Greater than the percentage increase in output
2. Equal to the percentage increase in output
3. Less than the percentage increase in output
4. Zero

5. The primary metric used in flexible budgeting is

A. Total cost

B. Cost per input

C. Cost per output

D. Cost per outcome

E. Total profit

6. If 500 units of supplies are consumed when output is at its high of 200, and 300 supply units are consumed during the low month when 150 units of output were produced, the variable component using the high/low method is

1. 2.00
2. 2.50
3. 3.33
4. 4.00
5. None of the above

7. If 500 units of supplies are consumed when output is at its high of 200, and 300 supply units are consumed during the low month when 150 units of output were produced, what will be the predicted consumption of supplies when output is 175 units using the high/low method?

1. 350
2. 375
3. 400
4. 450
5. None of the above

8. If 500 units of supplies are consumed when output is at its high of 200, and 300 supply units are consumed during the low month when 150 units of output were produced, what will be the predicted supply expense if output is 175 and the average supply cost is $12 per unit using the high/low method?

1. $4200
2. $4500
3. $4800
4. $5400
5. None of the above

9. Which two methods for determining productivity standards produce fixed and variable estimates for input use?

1. Simple average and benchmarks
2. Benchmarks and time and motion studies
3. Time and motion studies and the high/low method
4. The high/low method and regression
5. Regression and simple average

10. A productivity standard specifies the

1. Number of inputs needed per output
2. Cost of inputs consumed during the expenditure base
3. Cost of inputs expected during the budget year
4. Per output profit expected during the budget year

11. When regression is used to calculate a productivity standard, input = f(output),

1. α estimates the change in input use expected from an increase in output
2. α estimates the change in output expected from increasing inputs
3. β estimates the change in input use expected from an increase in output
4. β estimates the change in output expected from increase inputs

12. Frank Gilbreth categorized work into four groups: essential, preparation, incidental, and unnecessary. Essential work includes

1. Assembly, disassembly, or use
2. Loading, transporting, unloading, and set-up
3. Searching, finding, selecting, and inspecting
4. Planning, thinking, and rest

13. Frank Gilbreth categorized work into four groups: essential, preparation, incidental, and unnecessary. Incidental work includes

1. Assembly, disassembly, or use
2. Loading, transporting, unloading, and set-up
3. Searching, finding, selecting, and inspecting
4. Planning, thinking, and rest

14. Frank Gilbreth categorized work into four groups: essential, preparation, incidental, and unnecessary. Work that transforms material and meets a need was called

1. Essential
2. Preparation
3. Incidental
4. Unnecessary

15. The category of work Frank Gilbreth thought should be minimized is

1. Essential
2. Preparation
3. Incidental
4. Unnecessary

16. According to the Five S’s system, to organize work and optimize output, sort requires

1. Decluttering and arranging
2. Establishing a place for everything and putting everything in its place
3. Cleaning the work area
4. Establishing best practices
5. Ensuring improvements are continued

17. According to the Five S’s system, to organize work and optimize output, standardize requires

1. Decluttering and arranging
2. Establishing a place for everything and putting everything in its place
3. Cleaning the work area
4. Establishing best practices
5. Ensuring improvements are continued

18. According to the Five S’s system, to organize work and optimize output, establishing a place for everything and putting everything in its place is called

1. Sort
2. Store
3. Shine
4. Standardize
5. Sustain

19. Which of the following is NOT a strength of flexible budgeting?

1. Ties input use to actual output produced
2. Encourages efficiency
3. Provides clear and stable monetary target for managers
4. Produces more realistic budgets
5. Establishes appropriate incentives and empowers managers

20. Which of the following is NOT a weakness of flexible budgeting?

1. Requires more time and cost to prepare and revise than an incremental budget
2. Budgets shrink with decreases in output
3. Does not produce a fixed budget since the actual budget can only be determined retrospectively after actual output is known
4. May not be feasible for organizations whose output is not tied to revenue
5. Does not encourage efficiency

21. True/False The use of a flexible budgeting system is appropriate when revenue is tied directly to output produced.

22. True/False Flexible budgets are restated (or flexed) at the close of each budget period to account for changes in input prices and output volume.

23. True/False When actual output is 10% greater than forecasted output a flexible budget will increase by 10%.

24. True/False Flexible budgets are easier to prepare than incremental budgets.

25. True/False Flexible budgets require greater manager diligence and response to changes in output to ensure actual expenditures are less than or equal to the end-of-period, restated budget.

Chapter 8 – Zero-Base Budgeting

1. The primary focus of a zero-base budget is on

1. Control of inputs
2. Control over processes
3. Efficiency
4. Effectiveness

2. The part of a system that zero-base budgeting focuses on is the

A. Inputs

B. Throughputs

C. Outputs

D. Outcomes

E. Feedback

3. The major difference between a flexible and zero-base budget is that the metric used by flexible budgeting is

1. Total cost while zero-base budgeting focuses on average cost
2. Average cost while zero-base budgeting focuses on total cost
3. Average cost while zero-base budgeting focuses on marginal cost
4. Marginal cost while zero-base budgeting focuses on average cost
5. Total cost while zero-base budgeting focuses on marginal cost

4. Austin and Cheek identified and diagrammed the three primary questions zero-base budgeting addresses as objectives, methods, and scale. Method is concerned with

1. Planning
2. How operations are run
3. How funds are allocated
4. Alternatives considered and rejected

5. Austin and Cheek identified and diagrammed the three primary questions zero-base budgeting addresses as objectives, methods, and scale. Scale is concerned with

1. Planning
2. How operations are run
3. How funds are allocated
4. Alternatives considered and rejected

6. According to Austin and Cheek, questions such as should current objectives be continued and/or should new objectives be pursued in zero-base budgeting are

1. Planning decisions
2. Organization decisions
3. Allocation decisions
4. Evaluation decisions

7. According to Austin and Cheek, questions such as should current funding be reduced, maintained, or increased in zero-base budgeting are

1. Planning decisions
2. Organization decisions
3. Allocation decisions
4. Evaluation decisions

8. A zero-base decision package describes

1. An activity and its goals
2. How the activity is accomplished and alternative ways of accomplishing the activity
3. The resources the activity requires
4. The benefits of the activity
5. All of the above

9. Which of the following is NOT a component of a zero-base decision package?

1. Activity descriptions and goals
2. Details on how the activity is accomplished and alternative ways of accomplishing the activity
3. The resources the activity requires
4. The benefits of the activity
5. A line item budget

10. The final zero-base budget is determined by ranking decision packages on

1. Total cost per output
2. Average cost per output
3. Average cost per outcome
4. Marginal cost per output
5. Marginal cost per outcome

11. Determining the marginal cost of output (or different activity levels) requires dividing

1. % total output by the % funding at that activity level
2. % total output at that activity level by the % change in funding from the previous activity level
3. % change in total output from the previous activity level by the % funding at that activity level
4. % change in total output from the previous activity level by the % change in funding from the previous activity level

12. Ranking of decision packages in zero-base budgeting is designed to

1. Shift resources from low value-adding activities to higher value activities
2. Encourage managers to focus on the needs of their customers or clients and improve the effectiveness of their operations
3. Encourage managers to focus on alternative production techniques and increase the efficiency of their operations
4. All of the above

13. The cost effectiveness ratio for the current level of the activity below is

1. 1.25
2. 1.00
3. 0.91
4. 0.67
5. 0.40

14. Assume each decision package costs $10,000 and you have a budget of $50,000. Based on the cost effectiveness ratios below, which five decision packages should be funded?

1. The expended level of activity A and the minimal level for activity B
2. The current level of activity A and up to the reduced level for activity B
3. The reduced level of activity A and the current level of activity B
4. The minimal level of activity A and the expanded level of activity B

15. Which of the following can a budget manager do to increase their budget in a zero-base budgeting system?

1. Selecting the expenditure base that produces the highest possible starting point for estimating the next year’s budget
2. Selecting the highest possible inflation factor for estimating the next year’s input prices
3. Incorporating input price increases in the first month of the budget year
4. Over-estimating the cost of output in the minimal level decision package and under-stating the cost of subsequent output increases

16. Which of the following zero-base budgeting techniques is designed to be performed on a rolling basis, e.g., reviews are staggered and every department is reviewed every five years?

A. Zero-base budgeting

B. Target-base budgeting

C. Zero-base review

D. Zero-base performance audits

17. Target-base budgeting focuses on

A. All department expenditures

B. Only discretionary expenditures

C. Only mandatory expenditures

D. Only capital expenditures

E. Only operating expenditures

18. Which of the following is NOT a strength of zero-base budgeting?

1. Formalizes organizational priorities
2. Develops operational data; what is done, how it is done, and alternative methods
3. Identifies redundant activities
4. Creates competition between programs and an incentive to produce the greatest outcomes at the lowest cost
5. All of the above are strengths of zero-base budgeting

19. Which of the following is NOT a weakness of zero-base budgeting?

A. Requires extensive paperwork and time to prepare

B. Ineffective when managers have limited ability to reduce or eliminate programs

C. Does not produce a fixed budget since the actual budget can only be determined retrospectively after actual output is known

D. Encourages gaming by inflating the cost to provide minimum level and reducing the marginal cost of expansions

20. The primary shift between zero-base budgeting and flexible budgeting is

1. Zero-base budgeting choices are based on average cost per output and presents the possibility of major shifts in resource allocation
2. Zero-base budgeting choices are based on marginal cost per output and presents the possibility of major shifts in resource allocation
3. Zero-base is externally focused while flexible budgeting is internally focused
4. Zero-base budgeting is internally focused while flexible budgeting is externally focused

21. True/False The primary difference between zero-base budgeting and incremental and flexible budgeting is zero-base budgeting does not assume that operations should be continued because they were performed in the past.

22. True/False Zero-base budgeting focuses on department activities as a whole rather than as a set of discrete activities and outputs.

23. True/False Zero-base budgeting is more concerned with the results activities produce outside the organization than either incremental or flexible budgeting.

24. True/False Decision packages in zero-base budgeting are cumulative, lower order decision packages must be funded before higher order packages can be funded, i.e., the minimum package must be funded before a reduced package.

25. True/False Zero-base budgets rely upon average cost per output to rank decision packages.

26. True/False Zero-base budgets are more geared toward planning and senior management than operations and department managers.

27. True/False Zero-base budgets are particularly useful to illuminate budget choices in areas where output is not easily measured in dollars, e.g., expense centers.

Chapter 9 – Program Budgeting

1. The primary focus of a program budget is on

1. Control of inputs
2. Control over processes
3. Efficiency
4. Effectiveness

2. The part of a system that a program budget focuses on is

A. Inputs

B. Throughputs

C. Outputs

D. Outcomes

E. Feedback

3. The metric used in program budgeting is

1. Total cost
2. Cost per output
3. Marginal cost
4. Cost per outcome
5. Cost per activity

4. Which of the following is NOT one of the five questions program budgeting answers according to Ruta et al. (2005)?

1. What is the total funding constraint?
2. What is the marginal cost of expanding output?
3. What new funding opportunities have arisen?
4. Can existing services be provided more efficiently?
5. Should existing services be reduced to fund desired expansions?

5. Which if the following elements is primarily found in program budgeting (compared to other budgeting systems)?

1. Opportunity cost
2. Diminishing marginal returns
3. Equity
4. Efficiency

6. In 2009, what percentage of total healthcare expenditures was consumed by the top 10% of healthcare consumers?

1. 0%–19%
2. 20%–39%
3. 40%–59%
4. 60%–79%
5. 80%–99%

7. The method of allocating resources that maximizes outcome of interest is

1. Equal shares
2. Need-based allocation
3. Equalizing of marginal products
4. Historical allocation

8. In the English National Health System, resources are allocation based on

1. Primary or public health focus, patient age, and medical specialty
2. Patient age, medical specialty, and the cost of treatment
3. Medical specialty, the cost of treatment, and the effectiveness of treatment
4. The cost of treatment, the effectiveness of treatment, and whether treatment is focused on primary or public health

9. A program in program budgeting

1. Specifies the major goal of an organization
2. Satisfies one end or objective of a major goal
3. Is alternative means to an end
4. Provide variations on alternative means to an end

10. An element in program budgeting

1. Specifies the major goal of an organization
2. Satisfies one end or objective of a major goal
3. Is alternative means to an end
4. Provide variations on alternative means to an end

11. The formula for cost effectiveness analysis is

1. Benefit ($)/Cost ($)
2. Cost ($)/Benefit ($)
3. Benefit (non-monetary)/Cost ($)
4. Cost ($)/Benefit (non-monetary)
5. Cost (non-monetary)/Benefit (non-monetary)

12. Which of the following can managers do to minimize the reported cost per outcome?

1. Ignore costs generated outside the department
2. Select less relevant but larger outcome measure
3. Divide costs over multiple simultaneously produced outcomes
4. Minimize allocated overhead costs
5. All of the above

13. Which of the following is NOT a strength of program budgeting?

A. Defines, measures, and focuses employee attention on outcomes

B. Encourages allocative and technical efficiency

C. Introduces competition for resources

D. Focuses on input use

14. Which of the following is NOT a weakness of program budgeting?

A. Administrative problems arising from differences in program boundaries and managerial responsibilities

B. Measuring and achieving outcomes

C. Allocation of costs when programs fulfill more than one goal

D. Allocation of overhead costs

E. Requires preparation of multiple budgets

15. To fundamentally change Medicaid in Oregon, the Oregon Health Plan ranked health problems and placed the lowest funding priority on

1. Fatal and full recovery conditions
2. Fatal but incomplete recovery conditions
3. Maternity
4. Conditions where no improvement was expected
5. High-cost conditions

16. In the initial years of the Oregon Health Plan experiment, which of the following did NOT occur?

1. Medicaid coverage for people under the poverty line increased
2. The uninsured rate decreased
3. Total Medicaid spending decreased
4. All of the above

17. True/False Cost benefit analysis quantifies the benefits and costs of a program in dollars to compare different programs and allocate resources.

18. True/False Quality adjusted life years are designed to provide a common metric to assess the value of different health interventions that extend life expectancy by a different number of years.

19. True/False Quality adjusted life years are designed to provide a common metric to assess the value of different health interventions based on how long they extend life expectancy and patient’s evaluation of the value of those additional years.

20. True/False The difference between voice of the consumer surveys and patient satisfaction surveys is voice of the consumer surveys are more focused on patients desires while patient satisfaction surveys focus on their view of currently provided services.

21. True/False Program budgeting, more than any other budgeting system, focuses on the outcome achieved outside the organization.

Chapter 10 – Activity-Based Budgeting

1. The primary focus of an activity-based budget is

1. Control of inputs
2. Control over processes
3. Efficiency
4. Effectiveness

2. The part of a system that an activity-based budget focuses on is the

A. Inputs

B. Throughputs

C. Outputs

D. Outcomes

E. Feedback

3. The metric used in activity-based budgeting is

1. Total cost
2. Cost per output
3. Marginal cost
4. Cost per outcome
5. Cost per activity

4. Specialization increases productivity by reducing the

1. Time needed to shift from one task using one set of tools in one location to another
2. Opportunity for workers to take more the necessary time to shift tasks
3. Time needed to achieve proficiency after starting a new task
4. All of the above

5. The goal of activity-based costing is

1. Allocate costs to products
2. Trace costs to activities and activities to products
3. Produce more accurate financial statements
4. Ensure proper stewardship of resources

6. Which component of the ABC cross-examines the who or what activities are undertaken for?

1. Resources
2. Resource cost assignment
3. Activities
4. Activity cost assignment
5. Cost objects

7. Which component of the ABC cross-examines the cost per activity?

1. Resources
2. Resource cost assignment
3. Activities
4. Activity cost assignment
5. Cost objects

8. The first step of the activity-based cost tracing process, resources, examines

1. Cost per input
2. Inputs per activity
3. Efficiency of activity performed
4. Number of activities performed
5. The who or what activities are performed for

9. Activity cost assignment examines

1. Cost per input
2. Inputs per activity
3. Efficiency of activity performed
4. Number of activities performed
5. The who or what activities are performed for

10. The management (horizontal) axis is designed to facilitate all of the following EXCEPT

1. Control cost drivers
2. Control the cost of inputs
3. Control the range and number of activities undertaken
4. Improve how work is performed

11. Frederick Taylor and the scientific management movement constructed cost estimates using time studies that included all of the following steps EXCEPT

1. Dividing jobs into elementary movement
2. Discarding useless movements and selecting the best movements
3. Recording the performance of skilled workers
4. Adding additional time for unavoidable delays, rest time, and new workers
5. All of the above steps were used to construct cost estimates

12. Which of the following is NOT a benefit of activity-based costing?

1. Provides a process view of work
2. Places responsibility on employees to manage their activities
3. Identifies variation in activity and its impact on cost
4. Relies on the standard traditional accounting chart of accounts view
5. Highlights excess or insufficient capacity

13. Identifying resources, the first step in the activity-based budgeting process, is designed to fulfill all of the following EXCEPT

1. Identify the number of resources available, e.g., total employees
2. Identify total expense associated with the resources employed, e.g., total salary and wages
3. Identify the average cost per resource employed, e.g., average salary per hour
4. Identify the average cost per activity e.g., average salary medicine dispensed

14. Comparing available and required resources, the final step in the activity-based budgeting process, is designed to

1. Determine if too many or too few resources are employed based on the output produced
2. Determine the number of required activities to produce an output
3. Calculate the number of outputs required
4. Calculate the total resource cost

15. Which of the following is a strength of activity-based budgeting?

1. Provides the most realistic view of operations
2. Is primarily concerned with outcomes
3. Formalizes organizational priorities
4. Is easy to prepare

16. Which of the following is a weakness of activity-based budgeting?

1. Budget allocations are independent of work performed
2. Institutionalizes past spending patterns
3. Requires voluminous data to create
4. Does not encourage efficiency
5. Allocation of overhead costs

17. One of the primary lessons of the activity-based costing project at Cleveland Clinic was

1. Success requires mapping a large number of processes
2. Accurate mapping of processes required personnel experienced in mapping and finance
3. Healthcare costs can be reduced by identifying redundant activities
4. All of the above were noted in the case

18. Which budgeting system focuses on the use of inputs?

1. Incremental budgeting
2. Flexible budgeting
3. Zero-base budgeting
4. Program budgeting
5. Activity-based budgeting

19. Which budgeting system relies on the marginal cost of output for budget allocation decisions?

1. Incremental budgeting
2. Flexible budgeting
3. Zero-base budgeting
4. Program budgeting
5. Activity-based budgeting

20. Which budgeting systems are primarily concerned with output and the cost of output?

1. Incremental and flexible budgeting
2. Flexible and program budgeting
3. Flexible and zero-base budgeting
4. Zero-base and program budgeting
5. Activity-based and incremental budgeting

21. True/False Activity-based budgeting focuses on how products are produced rather than what inputs are purchased and how much output is produced.

22. True/False Activity-based budgeting is driven by the cost per output.

23. True/False Traditional activity-based costing relies on time estimates to calculate cost per output.

24. True/False The primary weakness with traditional activity-based costing that relies on time estimates to determine cost per output is employees routinely over-estimate the percentage of time they spend on productive activities.

25. True/False Absorption costing assumes all outputs are identical and thus have the same cost.

Chapter 11 – Variance Analysis

1. The two questions variance analysis focuses on are

1. Is output greater than or less than expected and is the difference a matter of concern
2. Is financial performance better or worse than expected and is the difference a matter of concern
3. Is output greater than or less than expected and are managers responsible for the difference
4. Is financial performance better or worse than expected and are managers responsible for the difference

2. The purpose of variance analysis is to

1. Explain differences in actual and budgeted expenses
2. Determine if managers can control the factors driving differences between actual and budgeted expenses
3. Hold managers accountable for changes that negatively impact an organization
4. Determine if and how operations need to be altered

3. Managers should be credited or praised when

1. Budget variances are favorable and the factors driving the variance are controllable
2. Budget variances are unfavorable and the factors driving the variance are controllable
3. Budget variances are favorable and the factors driving the variance are uncontrollable
4. Budget variances are unfavorable and the factors driving the variance are uncontrollable

4. Managers should be held accountable for

1. Favorable budget variances are favorable when the factors driving the variance are controllable
2. Unfavorable budget variances are unfavorable when the factors driving the variance are controllable
3. Favorable budget variances are favorable when the factors driving the variance are uncontrollable
4. Unfavorable budget variances are unfavorable when the factors driving the variance are uncontrollable

5. A cost variance includes the impact of all the following factors EXCEPT

1. Changes in price of inputs
2. Changes in productivity
3. Changes in amount of activities needed to produce an output due to changes in the type of output produced
4. Change in the quantity of output produced

6. A price variance examines the difference between

1. The budgeted and actual per unit cost of inputs
2. The budgeted and actual number of inputs used to complete an activity
3. The budgeted and actual number of activities used to produce an output
4. The budgeted and actual number of outputs produced

7. An intensity variance examines the difference between

1. The budgeted and actual per unit cost of inputs
2. The budgeted and actual number of inputs used to complete an activity
3. The budgeted and actual number of activities used to produce an output
4. The budgeted and actual number of outputs produced

8. The variance that examines the difference between the budgeted and actual number of outputs produced is

1. Cost variance
2. Volume variance
3. Price variance
4. Efficiency variance
5. Intensity variance

9. The variance that examines the difference between the budgeted and actual activities taken to produce an output is

1. Cost variance
2. Volume variance
3. Price variance
4. Efficiency variance
5. Intensity variance

10. The formula for the volume variance is

1. (Actual output-Budgeted output)*Budgeted cost/output
2. ((Actual cost/Actual input)-(Budgeted cost/Budgeted input))*Actual quantity of input used
3. (Actual inputs/Actual activity-Budgeted inputs/Budgeted activity)*Budgeted cost/input* Actual activities produced
4. (Actual activity/Actual output-Budgeted activity/Budgeted output)*Budgeted cost per activity*Actual output

11. The formula for the efficiency variance is

1. (Actual output – Budgeted output)*Budgeted cost/output
2. ((Actual cost/Actual input) – (Budgeted cost/Budgeted input))*Actual quantity of input used
3. (Actual inputs/Actual activity – Budgeted inputs/Budgeted activity)*Budgeted cost/input * Actual activities produced
4. (Actual activity/Actual output – Budgeted activity/Budgeted output)*Budgeted cost per activity*Actual output

12. The cost variance is the sum of the

1. Volume, price, and efficiency variances
2. Price, efficiency, and intensity variances
3. Efficiency, intensity, and volume variances
4. Intensity, volume, and price variances

13. An increase in the proportion of older and sicker patients in a provider’s patient mix would be identified by a larger

1. Price variance
2. Efficiency variance
3. Intensity variance
4. Volume variance

14. An increase in the time necessary to complete an activity, e.g., take a history and physical, would be identified by a larger

1. Price variance
2. Efficiency variance
3. Intensity variance
4. Volume variance

15. A decrease in the number of patients treated would create

1. Unfavorable volume variance
2. Favorable volume variance
3. Unfavorable price variance
4. Favorable price variance

16. Which of the following would NOT increase the intensity of care needed by a patient and the amount of resources required to deliver the care?

1. Improving the quality of care delivered
2. Sicker patient populations
3. Increase in the number of patients treated
4. Legislative mandates

17. Which of the following would create an unfavorable price variance beyond the control of the manager?

1. An increase in demand and/or reduction in supply of an input
2. Unnecessary use of overtime
3. An increase in the number of activities, i.e., test or procedures ordered
4. An increase in the number of activities, i.e., tests and procedures that must be redone due to errors

18. Which variance is least likely to be in the control of healthcare managers?

1. Price variance
2. Efficiency variance
3. Intensity variance
4. Volume variance

19. Which variance is most likely to be in the control of healthcare managers?

1. Price variance
2. Efficiency variance
3. Intensity variance
4. Volume variance

20. The variance analysis decision rule that minimizes the number of expenses or object codes that must be examined is

1. A dollar threshold
2. A percentage threshold
3. The AND combination rule
4. The OR combination rule

21. The chief weakness with using the dollar threshold decision rule to determine which variances to investigate is

1. Although the dollar amount may be large it could be a very low percentage of total outlays for an input
2. It would require investigation of small dollar variance that are a high percentage of the total outlay for an input
3. It may allow expenses to over-run their budgets by large dollars amounts or percentages and not be examined
4. It maximizes the number of line items that must be examined
5. All of the above

22. Variance reporting is used to

1. Improve operations
2. Evaluate manager’s performance
3. Evaluate the accuracy of planning and forecasting processes
4. Evaluate the accuracy of expense estimation processes
5. All of the above

23. True/False To avoid going over budget, managers postpone discretionary until the end of the year.

24. True/False The total variance must always equal the sum of the price, efficiency, intensity, and volume variances.

25. True/False The total variance must always equal the sum of the price, efficiency, and intensity variances.

26. True/False Over-production would create an unfavorable and non-controllable volume variance.

27. True/False Performance improvement requires that only unfavorable variances be examined.

28. True/False The primary difference between monthly and year-end variance reports is monthly reports are used to evaluate management performance and year-end reports are designed to identify and correct excessive resource consumption.

Chapter 12 – Ratio Analysis and Operating Indicators

1. The purpose of accounting ratios is to

1. Assess financial performance by relating one financial variable to another
2. Compare the performance of one organization to that of other organizations
3. Drill down into operations to identify the reason for poor financial performance
4. Determine why actual performance does not match the budget

2. When assessing the profitability ratios of an organization’s ratios, which of the following should be considered?

1. Assets employed, size of organization
2. Type of organization
3. Historical returns
4. Should earn
5. All of the above

3. The category of ratios that assesses the ability to meet short-term obligation is

1. Profitability
2. Liquidity
3. Capital structure
4. Turnover

4. Turnover ratio

1. Measures the ability of management to generate more revenues than expenses
2. Measures the productivity of assets
3. Measures the ability of the organization to meet its short-term financial obligations
4. Measures how assets are financed and the ability of the organization to meet all its financial obligations

5. The profitability ratio that assesses the ability of the organization to create value for owners is

1. Operating margin
2. Total margin
3. Return on equity
4. Return on assets

6. The formula for return on assets is

1. Profit/Equity
2. Profit/Total assets
3. Profit/Total revenue
4. Net operating income/Net operating revenue

7. The liquidity ratio that measures the number of days an organization can meet its current expenses with its existing cash and marketable securities is

1. Current ratio
2. Acid ratio
3. Days in accounts receivable
4. Days cash on hand
5. Average payment period

8. Average payment period measures

1. The number of days an organization can meet its current expenses with it existing cash and marketable securities
2. How quickly short-term liabilities are paid
3. The time lag between production of a good or service and receipt of payment for this work
4. The ability to meet short-term obligations with current assets

9. The formula for days in accounts receivable are

1. Current assets/Current liabilities
2. (Cash + Marketable securities + Accounts receivable)/Current liabilities
3. (Cash + Marketable securities)/((Annual expenses – Depreciation)/365)
4. Accounts receivable/(Operating revenue/365)
5. Current liabilities/((Annual expense – Depreciation)/365)

10. The formula for the acid ratio is

1. Current assets/Current liabilities
2. (Cash + Marketable securities + Accounts receivable)/Current liabilities
3. (Cash + Marketable securities)/((Annual expenses - Depreciation)/365)
4. Accounts receivable/(Operating revenue/365)
5. Current liabilities/((Annual expense – Depreciation)/365)

11. Which of the following would indicate a reduced ability to meet short-term obligations?

1. An increase in the current ratio
2. A reduction in days in accounts receivable
3. An increase in average payment period
4. An increase in days cash on hand

12. The capital structure ratio that measures ________ shows the proportion of total assets financed by the owners of the organization.

1. Long-term debt to equity
2. Equity financing ratio
3. Times interest earned
4. Debt coverage
5. Capital expense

13. Debt service coverage measures

1. The proportion of total assets financed by the owners of the organization
2. How much of total expense the organization devotes to using funds
3. The ability of the organization to meet its an annual interest payments
4. The ability of the organization to meet its annual interest and principle payments
5. The percentage of assets permanently financed by debt and ignores short-term liabilities

14. The formula for debt service coverage is

1. (Profit + Depreciation)/(Current liabilities + Long-term debt)
2. (Profit (Loss) + Interest expense + Depreciation)/(Interest expense + Principal)
3. (Interest expense + Depreciation + Amortization)/Total expense
4. Long-term debt/Equity
5. Equity/Total assets

15. Which of the following indicates an improvement in an organization’s capital structure?

1. A decrease in the equity financing ratio
2. A decrease in debt service coverage
3. A decrease in capital expense
4. A decrease in times interest earned
5. A decrease in total asset turnover

16. The DuPont Analysis formula is

1. Total margin * Total asset turnover * Equity multiplier
2. Operating margin * Total asset turnover * Long-term debt to equity
3. Operating margin * Fixed asset turnover * Equity multiplier
4. Total margin * Fixed asset turnover * Long-term debt to equity
5. Total margin * Current asset turnover * Equity multiplier

17. The product of the DuPont Analysis formula is

1. ROA
2. ROE
3. Operating margin
4. Total margin

18. Which of the following scenarios would increase ROE using the DuPont formula?

1. An increase in profit, a decrease in total assets, and a reduction in equity
2. An increase in profit, an increase in total assets, and an increase in equity
3. An increase in profit, an increase in total assets, and a reduction in equity
4. A decrease in profit, a decrease in total assets, and a reduction in equity
5. A decrease in profit, a decrease in total assets, and an increase in equity

19. The purpose of benchmarking is to

1. Determine if an organization’s or department’s performance is better or worse than referent
2. Determine if an organization’s or department’s performance is improving, deteriorating, or stable
3. Provide credible improvement targets
4. All of the above

20. The easiest and fastest form of benchmarking is

1. Internal or historical
2. Industry average or best-in-class performance
3. Competitive
4. Functional

21. The form of benchmarking that seeks to meet or exceed the performance of organizations pursuing the same customers is

1. Internal or historical
2. Industry average or best-in-class performance`
3. Competitive
4. Functional

22. Which of the following is NOT essential to establishing an effective benchmarking program?

1. Senior management commitment
2. Consistency between the organization’s goals and the benchmarking program
3. Clear improvement targets taken from a best-in-class performer
4. An open and willing desire to change organizational culture
5. Widespread understanding of customer desires and organizational processes

23. True/False Profitability ratios examine how much money is earned from operations based on invested equity, assets employed, and sales.

24. True/False Turnover ratios assess the overall effectiveness of management.

25. True/False The three major types of ratios included in the DuPont Analysis formula are profitability, turnover, and liquidity.

26. True/False The three major types of ratios included in the DuPont Analysis formula are profitability, turnover, and capital structure.

27. True/False Profit indicators identify the level of profit earned in inpatient and outpatient areas.

28. True/False Efficiency indicators examine the productivity of labor.

29. True/False Functional benchmarking identifies industry leaders to establish performance targets.

30. True/False Benchmarking is a one-time process to elevate an organization’s performance to the industry average or level of the industry leader.

Chapter 13 – Capital Budgeting

1. Monies received in the future are less valuable than the same amount of cash received because

1. Inflation reduces the purchasing power of money and people demand more compensation to postpone consumption
2. Inflation increases the purchasing power of money and people demand less compensation to postpone consumption
3. Inflation reduces the purchasing power of money and people demand less compensation to postpone consumption
4. Inflation reduces the purchasing power of money and people demand more compensation to postpone consumption

2. The present value of a cash flow is higher when the

1. Interest rate is higher and the earlier it is received
2. Interest rate is higher and the later it is received
3. Interest rate is lower and the earlier it is received
4. Interest rate is lower and the later it is received

3. Which of the following cash flows has the highest present value?

1. $1000 received two years in the future when the interest rate is 4%
2. $1000 received two years in the future when the interest rate is 6%
3. $1000 received three years in the future when the interest rate is 4%
4. $1000 received three years in the future when the interest rate is 6%

4. The formula to calculate the discounted value of a single payment received in the future is

1. PV = FV/(1+i)ⁿ
2. FV = PV * (1+i)ⁿ
3. PV = FV * (1-(1/(1+i)ⁿ)/i
4. FV = PV * ((1+i)ⁿ -1)/i

5. The future value of a cash flow is higher when the

1. Interest rate is higher and the earlier it is received
2. Interest rate is higher and the later it is received
3. Interest rate is lower and the earlier it is received
4. Interest rate is lower and the later it is received

6. Which of the following cash flows has the highest future value?

1. $1000 invested for two years in the future when the interest rate is 4%
2. $1000 invested for two years in the future when the interest rate is 6%
3. $1000 invested for three years in the future when the interest rate is 4%
4. $1000 invested for three years in the future when the interest rate is 6%

7. An ordinary annuity is

1. A series of unequal payments received at the beginning of each year
2. A series of equal payments received at the beginning of each year
3. A series of unequal payments received at the end of each year
4. A series of equal payments received at the end of each year

8. The formula to calculate the compounded value of a series of equal payment invested over time is

1. PV = FV/(1+i)ⁿ
2. FV = PV * (1+i)ⁿ
3. PV = FV * (1-(1/(1+i)ⁿ)/i
4. FV = PV * ((1+i)ⁿ -1)/i

9. If the cost of debt is 5%, the cost of equity is 10%, and 70% of assets are financed by equity, the weighted average cost of capital is

1. 5.0%
2. 7.5%
3. 8.5%
4. 10.0%
5. None of the above

10. Net present value

1. Divides investment by average cash inflow to determine if a capital expenditure should be made
2. Discounts and totals cash inflows and subtracts the investment to determine if a capital expenditure should be
3. Discounts and totals cash inflows and divides by the investment to determine if a capital expenditure should be made
4. Calculates the discount rate that equates the present value of the cash inflows with the initial investment to determine if a capital expenditure should be made

11. Which of the following investment evaluation methods calculates the interest rate that equates the net cash inflows (revenues) with the present value of the outflow (the investment)?

1. Payback period
2. Net present value
3. Benefit cost ratio
4. Internal rate of return

12. The decision rule for net present value when unlimited funds are available is

1. Pursue any investment with an NPV < X years
2. Pursue any investment with an NPV ≥ 0.0
3. Pursue any investment with an NPV ≥ 1.0
4. Pursue any investment with an NPV ≥ discount rate

13. Assuming the cost of capital is 10.0%, which of the following results indicates an investment should be made?

1. The net present value is between 0.80 and 0.90
2. The benefit cost ratio is between 1.5 and 1.6
3. The internal rate of return is between 8.0% and 9.0%
4. The payback period is between 10 and 11 years

14. Assuming the cost of capital is 10.0%, which of the following results indicates the investment should NOT be made?

1. The net present value is 0.0
2. The benefit cost ratio is 0.5
3. The internal rate of return is greater than the cost of capital
4. The payback period is three years

15. Assuming the cost of capital is 10.0%, which of the following results indicates the investment should NOT be made?

1. The net present value is less than 0.0
2. The benefit cost ratio is less than 1.0
3. The internal rate of return is 8%
4. The payback period is 10 years
5. All of the above indicate the investment should not be made

16. Capital investments are handled differently than operating expenditures because

1. Capital budget expenditures are high cost outlays
2. Capital investments are infrequent decisions
3. Capital investments have long lives
4. All of the above

17. Which of the following is not TRUE concerning capital budgeting decisions?

1. Capital investments per input are more expensive than operating expenditures
2. Managers are equally knowledgeable of operating expenditures and capital expenditures due to the frequency each type of decision is made
3. Altering capital investments requires more time than operating expenditures
4. All of the above

18. The type of capital expenditures that requires the least scrutiny is

1. Mandatory investments
2. Discretionary investments replacing existing assets
3. Discretionary investments expanding the size of current operations
4. Discretionary investments that push the organization into new products or markets

19. The riskiest type of capital expenditures are

1. Mandatory investments
2. Discretionary investments replacing existing assets
3. Discretionary investments expanding the size of current operations
4. Discretionary investments that push the organization into new products or markets

20. True/False The interest rate used to discount cash received in the future is determined by inflation and time preference.

21. True/False An annuity is series of equal payments.

22. True/False An ordinary annuity is a series of equal payments received at the beginning of each year.

23. True/False Sensitivity analysis is used to estimate a variable, such as net income, given fixed estimates of other variables.

24. True/False Sensitivity analysis is used to determine how much a variable, such as net income, will change given changes in other variables.

Chapter 14 – Cost-Benefit Analysis, Cost-Effectiveness Analysis, and Program Evaluation

1. If n = 10,000, screening costs $7.50 per test, early treatment costs $10,000 per case, and late treatment costs $30,000 per case, P_o-o-c must be

1. Greater than 3.75 to make prevention costs less than late treatment costs
2. Equal to 3.75 to make prevention costs equal to late treatment costs
3. Less than 3.75 to make prevention costs greater than late treatment costs
4. All of the above

2. If n = 10,000, screening costs $7.50 per test, early treatment costs $10,000 per case, and late treatment costs $30,000 per case, P_o-o-c must be

1. Less than 1.00 to make prevention cheaper than late treatment costs
2. Between 1.00 and 3.75 to make prevention cheaper than late treatment costs
3. Greater than 3.75 to make prevention cheaper than late treatment costs
4. None of the above

3. If prevention is cheaper than late treatment, which of the following will increase the desirability of screening and prevention?

1. A reduction in screening costs
2. A reduction in early treatment costs
3. An increase in late treatment costs
4. An increase in prevalence
5. All of the above

4. If prevention is cheaper than late treatment, which of the following will increase the desirability of screening and prevention?

1. An increase in screening costs
2. A reduction in early treatment costs
3. A reduction in late treatment costs
4. A reduction in prevalence

5. Cost benefit analysis is used to determine

1. If an activity will create greater benefits than its cost
2. The lowest cost approach to achieving a goal
3. Whether an existing activity is running according to plan and/or achieving the desired goals
4. Whether a capital investment will generate more revenue than its cost

6. Which of the following formulas is appropriate for cost benefit analysis?

1. Cost of activity/Change in non-monetary outcome
2. (Cost of activity₁ – Cost activity₂)/(Outcome₁– Outcome₂)
3. Total revenue/Total cost
4. Actual cost/Budgeted cost

7. What size facility should be built based on the table below to maximize marginal benefit?

1. 100
2. 200
3. 300
4. 400
5. 500

8. Which of the following techniques is used to determine if the benefits of an activity exceed its costs?

1. Cost benefit analysis
2. Cost effectiveness analysis
3. Program evaluation
4. Capital budgeting

9. Which of the following techniques is used to evaluate the desirability of an activity in which its benefits cannot be measured in dollars?

1. Cost benefit analysis
2. Cost effectiveness analysis
3. Program evaluation
4. Capital budgeting

10. Which of the following situations comes closest to the true meaning of cost effectiveness?

1. An activity that reduces cost or achieves a desired goal
2. An activity that achieves a desired goal or achieves a goal and produces cost savings
3. An activity that achieves a desired goal and produces cost savings or produces a marginal benefit that exceeds its marginal cost
4. An activity that produces a marginal benefit that exceeds its marginal cost or reduces costs

11. Which of the following situations is most desirable?

1. 5 additional years of life in perfect health, QALY = 1.00
2. 6 additional years of life with mild impairment, QALY = 0.90
3. 7 additional years of life with moderate impairment, QALY = 0.80
4. 8 additional years of life with severe impairment, QALY = 0.60
5. 10 additional years of life confined to a hospital, QALY = 0.50

12. The method of determining the quality of life or preferences between health states that asks individuals to determine how many years of perfect health they would accept for a higher number of years in diminished health is

1. The rating scale method
2. The standard gamble method
3. The time trade-off method
4. The cost benefit method

13. Which of the following interventions would be least desirable under cost effectiveness analysis?

1. An intervention that reduces cost and increases QALY by more than one year
2. An intervention that reduces cost and increases QALY by less than one year
3. A low-cost intervention that increases QALY by more than one year
4. A high-cost intervention that increases QALY by more than one year

14. Which of the following formulas should be used to calculate an incremental cost effectiveness ratio?

1. (Cost of intervention – Averted costs)/QALYS gained
2. (Cost of intervention₁ – Cost intervention₂)/(QALYs₁ – QALY₂)
3. Total benefit/Total cost
4. Actual cost/Budgeted cost

15. Which of the following techniques is used to determine if an activity is operating according to plan and achieving its objective?

1. Cost benefit analysis
2. Cost effectiveness analysis
3. Program evaluation
4. Capital budgeting

16. The starting point for program evaluation is to

1. Identify the location and size of a problem or opportunity
2. Identify the effectiveness of potential interventions
3. Implement the intervention
4. Assess the impact of the intervention on the desired outcome
5. Assess if the program will or did create value

17. Assessing the evidence between the desired goal of a program and possible interventions occurs in

1. Program need
2. Program design
3. Program implementation and management
4. Program outcome
5. Resource use

18. Which of the following questions is inappropriate when assessing program design?

1. Are objectives well defined and feasible?
2. Can the target population be defined?
3. Are processes capable of achieving the desired goal?
4. Does the program have sufficient resources?
5. Were resources used appropriately?

19. Which of the following questions is inappropriate for assessing program utilization, management, and client satisfaction?

1. Is the good or service volume greater than, equal to, or less than expected?
2. Are the intended targets receiving goods or services?
3. Were the delivered goods or services capable of meeting the desired goal?
4. Did the program comply with governing directives?
5. Was the need or goal worthy?

20. Measuring the outcome of a program is complicated by

1. The variable of interest, i.e., the intended outcome, may have been changing before the program was implemented
2. Other factors may impact the target population during the life of the program
3. Outcomes may be measured months or years after the program had ended
4. All of the above

21. True/False QALYs are the change in life expectancy multiplied by the value of the additional life years.

22. True/False QALYs are used in cost benefit analysis.

23. True/False QALYs produce consistent evaluations of the value of different health states.

Chapter 15 – Financial Functions in Finance

1. The purpose of financial reporting is

1. To inform internal stakeholders
2. To inform external stakeholders
3. To compile information to support decision-making
4. To compile information to complete required tax forms

2. The three major sections of the cash flow statement are

1. Revenues, expenses, and profit
2. Assets, liabilities, and equity
3. Operations, investment, and financing
4. Assets, investment, and equity

3. In the cash flow statement under operating activities, which of the following is not a source of cash?

1. Profit
2. Accounts receivable
3. Accounts payable
4. Depreciation

4. Which of the following reduce cash?

1. An increase in profit
2. A decrease in accounts receivable
3. A decrease in accounts payable
4. Sale of assets
5. Borrowing money

5. Which of the following statements is true?

1. The cost of capital declines as more debt is added to the capital structure
2. The cost of capital increases as more debt is added to the capital structure
3. Equity is generally cheaper than debt
4. Debt is generally cheaper than equity

6. Capital structure is

1. The mix of equity and debt used to finance assets
2. The mix of short-term and long-term assets
3. The mix of short-term and long-term debt
4. The mix of operating and non-operating income

7. Business risk includes all of the following EXCEPT:

1. Changing consumer tastes
2. Higher interest rates
3. Increased competition
4. Higher input prices
5. Changes in technology

8. In a for-profit organization where profit is taxed and the cost of debt is less than ROE, an increase in debt financing will

1. Reduce after-tax income and ROE
2. Reduce after-tax income and increase ROE
3. Increase after-tax income and reduce ROE
4. Increase after-tax income and ROE

9. If the cost of debt is 5% and equity is 10% and 40% of assets are financed by debt and 60% are financed by equity, the cost of capital is

1. 5.0%
2. 7.0%
3. 7.5%
4. 8.0%
5. 10.0%

10. Revenue cycle, the function that adds the most days to the payment processing and collection cycle, is

1. Accumulating charges during a patient stay
2. Billing the accumulated charges after patient discharge
3. Receiving payment from the patient and/or their insurer
4. Depositing payments into the bank after they are received

11. The cash budget reflects

1. When an obligation is created to pay for a good or service received or provided
2. When actual payments are made for a good or service received or provided
3. The total amount of payments expected to be received from the delivery of goods or services
4. The total amount of payments expected to be made for goods or services received

12. Which of the following metrics does NOT assess the effectiveness of the billing process?

1. Percentage of correct diagnostic codes
2. Days between discharge and billing
3. Percentage of claims without error
4. Percentage of claims rejected

13. Actuarial (occurrence) risk arises from the

1. Use of inputs and/or number of services delivered
2. Price of inputs
3. Need for care
4. Price of outputs

14. The risk associated with inefficient use of inputs or over-provision of services is

1. An actuarial risk
2. A utilization risk
3. A cost risk
4. A financial risk

15. Which reimbursement system places cost, utilization, and actuarial risk on the insurer?

1. Cost
2. Per diem
3. Per case
4. Capitation

16. In per case reimbursement

1. All risk resides with the insurer
2. Cost risk resides with provider and utilization and actuarial risk resides with the insurer
3. Cost and utilization risk resides with provider and actuarial risk resides with the insurer
4. All risk resides with the provider

17. Which reimbursement system shifts actuarial risk to healthcare providers?

1. Charge/Percent of charge
2. Cost
3. Per diem
4. Per case
5. Capitation

18. In which reimbursement system will increasing prices increase revenue?

1. Charge/Percent of charge
2. Per diem
3. Per case
4. Capitation
5. In every system increasing prices increases revenue

19. In which reimbursement system will increasing admissions reduce net income?

1. Charge/Percent of charge
2. Cost
3. Per diem
4. Per case
5. Capitation

20. Risk can be handled in multiple ways, when risk is accepted and minimized by re-insurance it is called

1. Risk avoidance
2. Risk transfer
3. Risk retention
4. Risk forecasting

21. True/False Issuing debt reduces cash balances.

22. True/False Purchasing equipment reduces cash balances.

23. True/False Business risk is the risk inherent in an organization’s operations that may reduce profit, including changing consumer tastes, increased competition, and increased input prices.

24. True/False Business risk is the risk associated with meeting contracted interest and principal payments on debt.

Chapter 16 – Strategic Financial Planning

1. The phase of strategic management that addresses issues and challenges the organization is facing is

1. Data collection
2. Analysis
3. Strategy formulation and selection
4. Implementation

2. Strategy formulation and selection deals with

1. What the organization is facing
2. Examining data and determining what it means
3. Examining data and determining how it affects what the organization should do
4. Keeping an organization on track after direction has been set

3. Internal analysis is

1. The process of identifying and evaluating an organization’s key strengths and weaknesses
2. The process of identifying the set of activities and resources an organization uses to deliver a product to customers
3. The process of identifying the things an organization does better than its rivals that are valued by customers
4. The process of identifying and evaluating the opportunities and threats in an organization’s operating environment

4. External analysis involves assessing the general environment, the healthcare industry, the organization, and the specific product and services delivered. At the organizational level, analysis focuses on identifying

1. Factors that will have a disproportionate impact on the healthcare industry
2. Factors that impact the entire society
3. Factors that impact the market where the organization operates
4. Factors that affect the demand and cost of individual products

5. A strong organization operating in a threatening environment would be in the

1. Future quadrant of the SWOT diagram
2. Internal fix-it quadrant of the SWOT diagram
3. External fix-it quadrant of the SWOT diagram
4. Survival quadrant of the SWOT diagram

6. Which of the following is an inappropriate strategy for an organization operating in the Future quadrant of the SWOT diagram?

1. Penetration
2. Vertical or horizontal integration
3. Market or product development
4. Harvesting
5. Related diversification

7. Which of the following is an inappropriate strategy for an organization operating in the Survival quadrant of the SWOT diagram?

1. Liquidation
2. Divestiture
3. Market or product development
4. Harvesting
5. Retrenchment

8. The strategy where more product is pushed into existing markets is

1. Penetration
2. Vertical or horizontal integration
3. Market development
4. Product development
5. Enhancement

9. Achieving sustainable growth requires

1. The change in assets to equal or exceed the change in revenue
2. The change in assets to equal or exceed the change in expenses
3. The change in assets to equal or exceed the change in equity
4. The change in revenue to equal or exceed the change in expenses
5. The change in revenue to equal or exceed the change in output

10. Sustainable growth is the maximum rate of growth in assets an organization can maintain without increasing

1. The total asset turnover ratio
2. The debt to equity ratio
3. The times interest earned ratio
4. The average payment period

11. When organizational strategy is built around expansion through acquiring other organizations, the role of finance in formulating and implementing strategy revolves around

1. Defining where funds will come from to complete expected transactions
2. Ensuring the organization does not pay more than necessary for the acquisition
3. Identifying areas for improvement
4. Identifying where new investments should be minimized, reduced, or eliminated

Chapter 17 – Financial Management and Health Care

1. Henry Ford demonstrated the impact a manager can have on productivity. His introduction of the assembly line reduced the time to assemble a car chassis by

1. 37.5%
2. 50.0%
3. 62.5%
4. 75.0%
5. 87.5%

2. Budgeting rests primarily on

1. Accounting, finance, and economics
2. Management, marketing, and economics
3. Finance, operations management, and economics
4. Accounting, management, and marketing
5. Accounting, finance, and marketing

3. The economic concepts that guide budgeting include marginalism, opportunity costs, and efficient markets. Efficient markets holds that

1. Expanding an activity will eventually lead to diminishing returns
2. Every activity undertaken necessitates foregoing other alternatives
3. People always seek to maximize their own well-being so unexploited profit opportunities will be short-lived
4. Market failure does not occur.

4. The first step in building a budget is

1. Collecting data
2. Forecasting output
3. Estimating revenue
4. Estimating expenses
5. Identifying the type of budget to be constructed

5. The last step in building a budget is

1. Assessing feasibility
2. Forecasting output
3. Estimating revenue
4. Estimating expenses
5. Identifying the type of budget to be constructed

6. The budgeting systems that are most appropriate for operating managers are

1. Incremental, activity-based, and flexible budgeting
2. Activity-based, flexible, and zero-base budgeting
3. Flexible, zero-base, and program budgeting
4. Program, incremental, and activity-based budgeting

7. The two budgeting systems that are most appropriate for senior management are

1. Incremental and flexible budgeting
2. Flexible and activity-based budgeting
3. Activity-based and zero-base budgeting
4. Zero-base and program budgeting
5. Program and activity-based budgeting

8. The primary interaction operating managers have with finance is

1. Budgeting
2. Capital investment
3. Financial reporting
4. Financing capital structure

9. Which of the following was NOT identified as a supporting skill needed by all managers?

A. Finance, including budgeting and variance analysis

B. Human resource, including interpersonal skill

C. Legal, including the ability to interpret regulations

D. Information technology, including the ability to extract data from databases

10. The primary use of ratios and operating indicators is

A. To construct budgets

B. To determine why actual operations differ from the budget

C. To assess where an organization should be

D. To evaluate the effectiveness of managers

11. The cost per admission in community hospitals since 1991 has been

A. Similar for all hospitals

B. Lower for for-profit hospitals compared to non-profit and public hospitals

C. Lower for non-profit hospitals compared to for-profit and public hospitals

D. Lower for public hospitals compared to for-profit and non-profit hospitals

12. U.S. health expenditures between 2000 and 2015

A. Whether measured in dollars or as a percentage of GDP have increased each year

B. Measured as a percent of GDP have been stable, while when measured in dollars have increased each year

C. Measured in dollars have been stable, while when measure as a percent of GDP have increased each year

D. Measured in dollars have increased each year, while when measured as a percent of GDP have increased overall but has experienced multiple years of relative stability

13. Which of the following was NOT given as a reason for the growth in percentage of GDP consumed by health expenditures?

1. An increase in the elderly population
2. A labor-intensive production process
3. Excessive wages for healthcare wages
4. Cost-increasing technology

14. Which of the following was given as a reason for the growth in percentage of GDP consumed by health expenditures?

1. An increase in malpractice claims
2. A labor-intensive production process
3. Excessive wages for healthcare wages
4. High profits of health insurers

15. Value equals

1. Output/input
2. Output/throughput
3. Output/cost
4. Output/outcome

16. Value in health care can be increased by

1. Increasing output and maintaining current costs
2. Maintaining current output and reducing costs
3. Increasing output at a faster rate than the increase in costs
4. Reducing output at a slower rate than the decrease in cost
5. All of the above

17. Value is determined by

A. What is produced and how it is produced

B. What is produced, i.e., output

C. Production cost

D. The price of the output produced

18. Which of the following is NOT required to maximize the effectiveness and efficiency of healthcare resources?

1. Budgets that focus employee attention on output and outcomes
2. Accurate output forecasts
3. Budgets that are used to manage operations
4. The incorporation of budget into employee evaluation and compensation processes

19. Which of the following is NOT required to control the rate of increase in healthcare costs?

1. Cost must be better understood
2. Budgets must provide incentives to control costs
3. Employees must internalize the idea that value is output/cost
4. Cost must be a key component of future electronic health records

20. Which of the following is NOT required to control the rate of increase in healthcare costs?

1. Cost must be better understood
2. Budgets must provide incentives to control costs
3. Employees must internalize the idea that value is output/cost
4. All of the preceding must occur to control future healthcare costs

21. True/False The objective and appropriate budget system changes as managers climb the organization.

22. True/False Managers are only promoted after they have mastered the skills needed to succeed in the new, higher position.

23. True/False Budgeting is a science where definitive relationships exist between variables and can be used to create accurate revenue and expenses estimates.

24. True/False All managers are responsible for an organization’s financial performance.

25. True/False Ratios provide more insight into organizational performance than operating indicators.

26. True/False As managers advance in an organization their financial skills must broaden beyond budgeting, variance analysis, and capital budgeting.