Budgetary-control-and-responsibilty-accounting (Management Advisory Service) PDF

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Summary

esponsibility accounting involves the separate reporting of revenues and expenses for each responsibility center in a business. Doing so improves the management of operations. For example, the cost of rent can be assigned to the person who negotiates and signs the lease, while the cost of an employe...

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BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING TRUE-FALSE STATEMENTS 1.

Budget reports comparing actual results with planned objectives should be prepared only once a year.

2.

If actual results are different from planned results, the difference must always be investigated by management to achieve effective budgetary control.

3.

Certain budget reports are prepared monthly whereas others are prepared more frequently depending on the activities being monitored.

4.

The master budget is not used in the budgetary control process.

5.

A master budget is most useful in evaluating a manager's performance in controlling costs.

6.

A static budget is one that is geared to one level of activity.

7.

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

8.

A static budget is most useful for evaluating a manager's performance in controlling variable costs.

9.

A flexible budget can be prepared for each of the types of budgets included in the master budget.

10.

A flexible budget is a series of static budgets at different levels of activities.

11.

Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity.

12.

Total budgeted fixed costs appearing on a flexible budget will be the same amount as total fixed costs on the master budget.

13.

A flexible budget is prepared before the master budget.

14.

The activity index used in preparing a flexible budget should not influence the variable costs that are being budgeted.

15.

A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost per unit X activity level).

16.

Flexible budgets are widely used in production and service departments.

17.

A flexible budget report will show both actual and budget cost based on the actual activity level achieved.

Test Bank for Managerial Accounting, Second Edition

7-2 18.

Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.

19.

Policies regarding when a difference between actual and planned results should be investigated are generally more restrictive for noncontrollable items than for controllable items.

20.

A distinction should be made between controllable and noncontrollable costs when reporting information under responsibility accounting.

21.

Cost centers, profit centers, and investment centers can all be classified as responsibility centers.

22.

More costs become controllable as one moves down to each lower level of managerial responsibility.

23.

In a responsibility accounting reporting system, as one moves up each level of responsibility in an organization the responsibility reports become more summarized and show less detailed information.

24.

A cost item is considered to be controllable if there is not a large difference between actual cost and budgeted cost for that item.

25.

The terms "direct fixed costs" and "indirect fixed costs" are synonymous with "traceable costs" and "common costs," respectively.

26.

A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers.

27.

Controllable margin is subtracted from controllable fixed costs to get net income for a profit center.

28.

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

29.

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

*30.

Residual income is the income that remains after subtracting from controllable margin the minimum rate of return on a company’s average operating assets.

Answers to True-False Statements Item

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1. 2. 3. 4. 5.

F F T F F

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6. 7. 8. 9. 10.

T F F T T

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11. 12. 13. 14. 15.

T T F F T

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16. 17. 18. 19. 20.

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26. 27. 28. 29. *30.

F F T F T

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21. 22. 23. 24. 25.

T F T F T

7-3

Budgetary Control and Responsibility Accounting

7-4

Test Bank for Managerial Accounting, Second Edition

MULTIPLE CHOICE QUESTIONS 31.

A major element in budgetary control is a. the preparation of long-term plans. b. the comparison of actual results with planned objectives. c. the valuation of inventories. d. approval of the budget by the stockholders.

32.

Budget reports should be prepared a. daily. b. monthly. c. weekly. d. as frequently as needed.

33.

On the basis of the budget reports, a. management analyzes differences between actual and planned results. b. management may take corrective action. c. management may modify the future plans. d. all of these.

34.

The purpose of the departmental overhead cost report is to a. control indirect labor costs. b. control selling expense. c. determine the efficient use of materials. d. control overhead costs.

35.

The purpose of the sales budget report is to a. control selling expenses. b. determine whether income objectives are being met. c. determine whether sales goals are being met. d. control sales commissions.

36.

The comparison of differences between actual and planned results a. is done by the external auditors. b. appears on the company's external financial statements. c. is usually done orally in departmental meetings. d. appears on periodic budget reports.

37.

A static budget a. should not be prepared in a company. b. is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs. c. shows planned results at the original budgeted activity level. d. is changed only if the actual level of activity is different than originally budgeted.

38.

A static budget report a. shows costs at only 2 or 3 different levels of activity. b. is appropriate in evaluating a manager's effectiveness in controlling variable costs. c. should be used when the actual level of activity is materially different from the master budget activity level. d. may be appropriate in evaluating a manager's effectiveness in controlling costs when the behavior of the costs in response to changes in activity is fixed.

Budgetary Control and Responsibility Accounting

7-5 39.

A static budget is appropriate in evaluating a manager's performance if a. actual activity closely approximates the master budget activity. b. actual activity is less than the master budget activity. c. the company prepares reports on an annual basis. d. the company is a not-for-profit organization

40.

When budgeted and actual results are not the same amount, there is a budget a. error. b. difference. c. anomaly. d. by-product.

41.

Top management's reaction to a difference between budgeted and actual sales often depends on a. whether the difference is favorable or unfavorable. b. whether management anticipated the difference. c. the materiality of the difference. d. the personality of the top managers.

42.

If costs are not responsive to changes in activity level, then these costs can be best described as a. mixed. b. flexible. c. variable. d. fixed.

43.

Assume that actual sales results exceed the planned results for the second quarter. This favorable difference is greater than the unfavorable difference reported for the first quarter sales. Which of the following statements about the sales budget report on June 30 is true? a. The year-to-date results will show a favorable difference. b. The year-to-date results will show an unfavorable difference. c. The difference for the first quarter can be ignored. d. The sales report is not useful if it shows a favorable and unfavorable difference for the two quarters.

44.

A static budget is appropriate for a. variable overhead costs. b. direct material costs. c. fixed overhead costs. d. none of these.

45.

A flexible budget a. is prepared when management can't agree on objectives for the company. b. projects budget data for various levels of activity. c. is only useful in controlling fixed costs. d. cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results.

7-6 46.

Test Bank for Managerial Accounting, Second Edition The master budget of Benedict Company shows that the planned activity level for next year is expected to be 50,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected: Indirect labor Machine supplies Indirect materials Depreciation on factory building Total manufacturing overhead

$360,000 90,000 105,000 75,000 $630,000

A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs of a. $741,000. b. $630,000. c. $756,000. d. $681,000. 47.

A department has budgeted monthly manufacturing overhead cost of $90,000 plus $3 per direct labor hour. If a flexible budget report reflects $174,000 for total budgeted manufacturing cost for the month, the actual level of activity achieved during the month was a. 88,000 direct labor hours. b. 28,000 direct labor hours. c. 58,000 direct labor hours. d. cannot be determined.

48.

Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets? a. Direct materials cost b. Direct labor cost c. Variable manufacturing overhead d. Fixed manufacturing overhead

49.

In developing a flexible budget within a relevant range of activity, a. only fixed costs are included. b. it is necessary to relate variable cost data to the activity index chosen. c. it is necessary to prepare a budget at 1,000 unit increments. d. variable and fixed costs are combined and are reported as a total cost.

50.

The flexible budget a. is prepared before the master budget. b. is relevant both within and outside the relevant range. c. eliminates the need for a master budget. d. is a series of static budgets at different levels of activity.

51.

A flexible budget can be prepared for which of the following budgets comprising the master budget? a. Sales b. Overhead c. Direct materials d. All of these

Budgetary Control and Responsibility Accounting

7-7 52.

Another name for the static budget is a. master budget. b. overhead budget. c. permanent budget. d. flexible budget.

53.

If a company plans to sell 16,000 units of product but sells 20,000, the most appropriate comparison of the cost data associated with the sales will be by a budget based on a. the original planned level of activity. b. 18,000 units of activity. c. 20,000 units of activity. d. 16,000 units of activity.

54.

Within the relevant range of activity, the behavior of total costs is assumed to be a. linear and upward sloping. b. linear and downward sloping. c. curvilinear and upward sloping. d. linear to a point and then level off.

55.

Sales results that are evaluated by a static budget might show 1. favorable differences that are not justified. 2. unfavorable differences that are not justified. a. b. c. d.

56.

1 2 both 1 and 2. neither 1 nor 2.

The selection of levels of activity to depict a flexible budget 1. will be within the relevant range. 2. is largely a matter of expediency. 3. is governed by generally accepted accounting principles. a. b. c. d.

1 2 3 1 and 2

57.

Management by exception a. causes managers to be buried under voluminous paperwork. b. means that all differences will be investigated. c. means that only unfavorable differences will be investigated. d. means that material differences will be investigated.

58.

Under management by exception, which differences between planned and actual results should be investigated? a. Material and noncontrollable b. Controllable and noncontrollable c. Material and controllable d. All differences should be investigated

7-8

Test Bank for Managerial Accounting, Second Edition

59.

A flexible budget depicted graphically a. is identical to a CVP graph. b. differs from a CVP graph in the way that fixed costs are shown. c. differs from a CVP graph in the way that variable costs are shown. d. differs from a CVP graph in that sales revenue is not shown.

60.

The activity index used in preparing the flexible budget a. is prescribed by generally accepted accounting principles. b. is only applicable to fixed manufacturing costs. c. is the same for all departments. d. should significantly influence the costs that are being budgeted.

61.

A static budget is not appropriate in evaluating a manager's effectiveness if a company has a. substantial fixed costs. b. substantial variable costs. c. planned activity levels that match actual activity levels. d. no variable costs.

62.

The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called a. static reporting. b. flexible accounting. c. responsibility accounting. d. master budgeting.

63.

A cost is considered controllable at a given level of managerial responsibility if a. the manager has the power to incur the cost within a given time period. b. the cost has not exceeded the budget amount in the master budget. c. it is a variable cost, but it is uncontrollable if it is a fixed cost. d. it changes in magnitude in a flexible budget.

64.

As one moves up to each higher level of managerial responsibility, a. fewer costs are controllable. b. the responsibility for cost incurrence diminishes. c. a greater number of costs are controllable. d. performance evaluation becomes less important.

65.

A responsibility report should a. be prepared in accordance with generally accepted accounting principles. b. show only those costs that a manager can control. c. only show variable costs. d. only be prepared at the highest level of managerial responsibility.

66.

Top management can control a. only controllable costs. b. only noncontrollable costs. c. all costs. d. some noncontrollable costs and all controllable costs.

Budgetary Control and Responsibility Accounting

7-9 67.

Not-for-profit entities a. do not use responsibility accounting. b. utilize responsibility accounting in trying to maximize net income. c. utilize responsibility accounting in trying to minimize the cost of providing services. d. have only noncontrollable costs.

68.

Which of the following is not a true statement? a. All costs are controllable at some level with a company. b. Responsibility accounting applies to both profit and not-for-profit entities. c. Fewer costs are controllable as one moves up to each higher level of managerial responsibility. d. The term segment is sometimes used to identify areas of responsibility in decentralized operations.

69.

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

70.

Management by exception a. is most effective at top levels of management. b. can be implemented at each level of responsibility within an organization. c. can only be applied when comparing actual results with the master budget. d. is the opposite of goal congruence.

71.

The linens department of a large department store is a. not a responsibility center. b. a profit center. c. a cost center. d. an investment center.

72.

The foreign subsidiary of a large corporation is a. not a responsibility center. b. a profit center. c. a cost center. d. an investment center.

73.

The maintenance department of a manufacturing company is a(n) a. segment. b. profit center. c. cost center. d. investment center.

74.

Which of the following is not a correct match? 1. Incurs costs 2. Generates revenue 3. Controls investment funds a. b. c. d.

Investment Center 1, 2, 3 Cost Center 1 Profit Center 1, 2, 3 All are correct matches.

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Test Bank for Managerial Accounting, Second Edition

75.

A cost center a. only incurs costs and does not directly generate revenues. b. incurs costs and generates revenues. c. is a responsibility center of a company which incurs losses. d. is a responsibility center which generates profits and evaluates the investment cost of earning the profit.

76.

A manager of a cost center is evaluated mainly on a. the profit that the center generates. b. his or her ability to control costs. c. the amount of investment it takes to support the cost center. d. the amount of revenue that can be generated.

77.

Performance reports for cost centers compare actual a. total costs with static budget data. b. total costs with flexible budget data. c. controllable costs with static budget data. d. controllable costs with flexible budget data.

78.

In the performance report for cost centers, a. controllable and noncontrollable costs are reported. b. fixed costs are not reported. c. no distinction is made between fixed and variable costs. d. only material and controllable costs are reported.

79.

Of the following choices, which contain both a traceable fixed cost and a common fixed cost? a. Profit center manager's salary and timekeeping costs for a responsibility center's employees. b. Company president's salary and company personnel department costs. c. Company personnel department costs and timekeeping costs for a responsibility center's employees. d. Depreciation on a responsibility center's equipment and supervisory salaries for the center.

80.

Which of the following is not an indirect fixed cost? a. Company president's salary b. Depreciation on the company building housing several profit centers c. Company personnel department costs d. Profit center supervisory salaries

81.

All of the following statements about a responsibility report are correct except that a. only controllable costs are included. b. it compares actual costs with flexible budget data. c. a distinction is made between variable and fixed costs. d. it continues the concept of management by exception.

82.

The best measure of the performance of the manager of a profit center is t...