Budgetary Control and Responsibilty Accounting

BUDGETARY CONTROL ANDRESPONSIBILITY 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

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 Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.1. F 6. T 11. T 16. T 21. T 26. F2. F 7. F 12. T 17. T 22. F 27. F3. T 8. F 13. F 18. T 23. T 28. T4. F 9. T 14. F 19. F 24. F 29. F5. F 10. T 15. T 20. T 25. T *30. T

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Budgetary Control and Responsibility Accounting7-3


MULTIPLE CHOICE QUESTIONS

31. A major element in budgetary control isa. 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 prepareda. 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 toa. 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 toa. 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 resultsa. 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 budgeta. 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 reporta. 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.

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Budgetary Control and Responsibility Accounting

39. A static budget is appropriate in evaluating a manager's performance ifa. 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 budgeta. error.b. difference.c. anomaly.d. by-product.

41. Top management's reaction to a difference between budgeted and actual sales often depends ona. 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 asa. 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 fora. variable overhead costs.b. direct material costs.c. fixed overhead costs.d. none of these.

45. A flexible budgeta. 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.

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46. The master budget of Benedict Company shows that the planned activity level for next year is expected to be 50,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected:

Indirect labor $360,000Machine supplies 90,000Indirect materials 105,000Depreciation on factory building 75,000Total manufacturing overhead $630,000

A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs ofa. $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 wasa. 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 costb. Direct labor costc. Variable manufacturing overheadd. 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 budgeta. 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. Salesb. Overheadc. Direct materialsd. All of these

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52. Another name for the static budget isa. 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 ona. 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 bea. 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. 1b. 2c. both 1 and 2.d. neither 1 nor 2.

56. The selection of levels of activity to depict a flexible budget

1. will be within the relevant range.2. is largely a matter of expediency.3. is governed by generally accepted accounting principles.

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

57. Management by exceptiona. 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 noncontrollableb. Controllable and noncontrollablec. Material and controllabled. All differences should be investigated

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59. A flexible budget depicted graphicallya. 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 budgeta. 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 hasa. 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 calleda. static reporting.b. flexible accounting.c. responsibility accounting.d. master budgeting.

63. A cost is considered controllable at a given level of managerial responsibility ifa. 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 shoulda. 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 controla. only controllable costs.b. only noncontrollable costs.c. all costs.d. some noncontrollable costs and all controllable costs.

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67. Not-for-profit entitiesa. 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 bea. nonmaterial.b. mixed.c. controllable.d. noncontrollable.

70. Management by exceptiona. 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 isa. not a responsibility center.b. a profit center.c. a cost center.d. an investment center.

72. The foreign subsidiary of a large corporation isa. 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 costs2. Generates revenue3. Controls investment funds

a. Investment Center 1, 2, 3b. Cost Center 1c. Profit Center 1, 2, 3d. All are correct matches.

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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 ona. 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 actuala. 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 salaryb. Depreciation on the company building housing several profit centersc. Company personnel department costsd. Profit center supervisory salaries

81. All of the following statements about a responsibility report are correct except thata. 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 thea. rate of return on investment.b. success in meeting budgeted goals for controllable costs.c. amount of controllable margin generated by the profit center.d. amount of contribution margin generated by the profit center.

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83. Controllable margin is defined asa. sales minus variable costs.b. sales minus contribution margin.c. contribution margin less controllable fixed costs.d. contribution margin less noncontrollable fixed costs.

84. Controllable margin is most useful fora. external financial reporting.b. preparing the master budget.c. performance evaluation of profit centers.d. break-even analysis.

85. Which of the following will not result in an unfavorable controllable margin difference?a. Sales exceeding budget; costs under budgetb. Sales exceeding budget; costs over budgetc. Sales under budget; costs under budgetd. Sales under budget; costs over budget

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

Budget Actual DifferenceContribution margin $1,000,000 $1,050,000 $50,000Controllable fixed costs $ 500,000 $ 450,000 $50,000

The manager's overall performancea. is 20% below expectations.b. is 20% above expectations.c. is equal to expectations.d. cannot be determined from information given.

87. Which of the following are financial measures of performance?

1. Controllable margin2. Product quality3. Labor productivity

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

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

Budget Actual DifferenceContribution margin $600,000 $580,000 $20,000 UControllable fixed costs $200,000 $220,000 $20,000 U

The manager's overall performancea. is 10% above expectations.b. is 10% below expectations.c. is equal to expectations.d. cannot be determined from the information provided.

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89. A responsibility report for a profit center willa. not show controllable fixed costs.b. not show indirect fixed costs.c. show noncontrollable fixed costs.d. not show cumulative year-to-date results.

90. The dollar amount of the controllable margina. is usually higher than the contribution margin.b. is usually lower than the contribution margin.c. is always equal to the contribution margin.d. cannot be a negative figure.

91. A profit center isa. a responsibility center that always reports a profit.b. a responsibility center that incurs costs and generates revenues.c. evaluated by the rate of return earned on the investment allocated to the center.d. referred to as a loss center when operations do not meet the company's objectives.

92. Each of the following are controllable by a profit center manager excepta. variable costs.b. sales.c. indirect fixed costs.d. all of these options are controllable.

93. Direct fixed costs area. also called common costs.b. not controllable by a profit center manager.c. costs that apply to more than one center.d. deducted from contribution margin on a responsibility report.

94. An indirect fixed cost is also called aa. common fixed cost.b. controllable fixed cost.c. direct fixed cost.d. traceable fixed cost.

95. All of the following statements about a profit center responsibility report are correct except thata. controllable fixed costs are deducted from controllable margin.b. it shows budgeted and actual controllable revenues and costs.c. noncontrollable fixed costs are not reported.d. it may include cumulative year-to-date results.

96. The denominator in the formula for return on investment calculation isa. investment center controllable margin.b. dependent on the specific type of profit center.c. average investment center operating assets.d. sales for the period.

97. In the formula for ROI, idle plant assets area. included in the calculation of controllable margin.b. included in the calculation of operating assets.c. excluded in the calculation of operating assets.d. excluded from total assets.

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98. In computing ROI, land held for future usea. will hurt the performance measurement of an investment center's manager.b. is important in evaluating the performance of a profit center manager.c. is included in the calculation of operating assets.d. is considered a nonoperating asset.

99. If an investment center has a $15,000 controllable margin and $200,000 of sales, what average operating assets are needed to have a return on investment of 10%?a. $20,000.b. $25,000.c. $150,000.d. $200,000.

100. Which of the following valuations of operating assets are not readily available from the accounting records?a. Costb. Book valuec. Market valued. Both cost and market value

101. A distinguishing characteristic of an investment center is thata. revenues are generated by selling and buying stocks and bonds.b. interest revenue is the major source of revenues.c. the profitability of the center is related to the funds invested in the center.d. it is a responsibility center which only generates revenues.

102. A measure frequently used to evaluate the performance of the manager of an investment center isa. the amount of profit generated.b. the rate of return on funds invested in the center.c. the percentage increase in profit over the previous year.d. departmental gross profit.

103. Return on investment is calculated by dividinga. contribution margin by sales.b. controllable margin by sales.c. contribution margin by average operating assets.d. controllable margin by average operating assets.

104. Which one of the following will not increase return on investment?a. Variable costs are increasedb. An increase in salesc. Average operating assets are decreasedd. Variable costs are decreased

105. If an investment center has generated a controllable margin of $60,000 and sales of $300,000, what is the return on investment for the investment center if average operating assets were $500,000 during the period?a. 12%b. 20%c. 48%d. 60%

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106. The manager of an investment center can improve ROI by increasinga. average operating assets.b. controllable fixed costs.c. controllable margin.d. variable costs.

107. Behavioral principles included in performance evaluation include all of the following except that thea. evaluation should be based entirely on matters that are controllable by the manager

being evaluated.b. top management should support the evaluation process.c. evaluation process must allow managers to respond to their evaluation.d. evaluation should identify only poor performance.

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

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

Louie’s residual income isa. $70,000.b. $40,000.c. $30,000.d. $10,000.

*109. Residual income is defined asa. contribution margin less controllable fixed costs.b. contribution margin less the minimum rate of return on average operating assets.c. controllable margin less the minimum rate of return on average operating assets.d. controllable margin divided by average operating assets.

*110. All of the following are correct statements about residual income except thata. its goal is to maximize the total amount of residual income.b. it ignores the fact that one division’s operating assets might be substantially lower than

another division’s assets.c. it is the difference between contribution margin and the minimum rate of return on

average operating assets.d. it evaluates performance using a company’s minimum rate of return.

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Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.31. b 43. a 55. c 67. c 79. c 91. c 103. d32. d 44. c 56. d 68. c 80. d 92. c 104. a33. d 45. b 57. d 69. d 81. c 93. d 105. a34. d 46. a 58. c 70. b 82. c 94. a 106. c35. c 47. b 59. d 71. b 83. c 95. a 107. d36. d 48. d 60. d 72. d 84. c 96. c *108. d37. c 49. b 61. b 73. c 85. a 97. c *109. c38. d 50. d 62. c 74. c 86. b 98. d *110. c39. a 51. d 63. a 75. a 87. a 99. c40. b 52. a 64. c 76. b 88. b 100. c41. c 53. c 65. b 77. d 89. b 101. c42. d 54. a 66. c 78. c 90. b 102. b

EXERCISES

Ex. 111

Golden Company's master budget reflects budgeted sales information for the month of June, 2002, as follows:

Budgeted Quantity Budgeted Unit Sales PriceProduct A 15,000 $7Product B 18,000 $9

During June, the company actually sold 13,900 units of Product A at an average unit price of $7.30 and 18,800 units of Product B at an average unit price of $8.90.

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

Solution 111 (10–15 min.)

GOLDEN COMPANYSales Budget Report

For the Month Ended June 30, 2002

Product Line Budget Actual Difference Product A $105,000 $101,470 $3,530 UProduct B 162,000 167,320 5,320 F

Total sales $267,000 $268,790 $1,790 F

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Ex. 112

Heerey Company developed its annual manufacturing overhead budget for its master budget for 2002 as follows:

120,000 DirectExpected annual operating capacity Labor Hours Variable overhead costs

Indirect labor $ 480,000Indirect materials 90,000Factory supplies 60,000

Total variable costs 630,000Fixed overhead costs

Depreciation 180,000Supervision 144,000Property taxes 96,000

Total fixed costs 420,000Total costs $1,050,000

The relevant range for monthly activity is expected to be between 8,000 and 12,000 direct labor hours.

InstructionsPrepare a flexible budget for a monthly activity level of 8,000 and 9,000 direct labor hours.


HEEREY COMPANYMonthly Flexible Manufacturing Overhead Budget

Activity levelDirect labor hours 8,000 9,000

Variable costsIndirect labor $32,000 $36,000Indirect materials 6,000 6,750Factory supplies 4,000 4,500

Total variable costs 42,000 47,250Fixed costs

Depreciation 15,000 15,000Supervision 12,000 12,000Property taxes 8,000 8,000

Total fixed costs 35,000 35,000Total costs $77,000 $82,250

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Ex. 113

Eaton Company has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department:

EATON COMPANYMonthly Flexible Manufacturing Overhead Budget

Mixing Department

Activity levelDirect labor hours 3,000 4,000

Variable costsIndirect materials $ 2,100 $ 2,800Indirect labor 15,000 20,000Factory supplies 6,900 9,200

Total variable costs 24,000 32,000Fixed costs

Depreciation 20,000 20,000Supervision 10,000 10,000

Property taxes 15,000 15,000Total fixed costs 45,000 45,000

Total costs $69,000 $77,000

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


EATON COMPANYMonthly Flexible Manufacturing Overhead Budget

Mixing Department

Activity levelDirect labor hours 5,000

Variable costsIndirect materials $ 3,500Indirect labor 25,000Factory supplies 11,500

Total variable costs 40,000Fixed costs

Depreciation 20,000Supervision 10,000Property taxes 15,000

Total fixed costs 45,000Total costs $85,000

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Ex. 114

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

Indirect Labor $8.00Indirect Materials 2.50Maintenance .80Utilities .30

Fixed overhead costs per month are:Supervision $600Insurance 200Property Taxes 300Depreciation 900

The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month.

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


DRENNON COMPANYMonthly Flexible Manufacturing Overhead Budget

Activity levelMachine hours 2,000 3,000 4,000

Variable costsIndirect labor $16,000 $24,000 $32,000Indirect materials 5,000 7,500 10,000Maintenance 1,600 2,400 3,200Utilities 600 900 1,200

Total variable costs 23,200 34,800 46,400

Fixed costsSupervision 600 600 600Insurance 200 200 200Property taxes 300 300 300Depreciation 900 900 900

Total fixed costs 2,000 2,000 2,000Total costs $25,200 $36,800 $48,400

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Ex. 115

Drennon Company uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour as follows:

Indirect Labor $8.00Indirect Materials 2.50Maintenance .80Utilities .30

Fixed overhead costs per month are:Supervision $600Insurance 200Property Taxes 300Depreciation 900

The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month. During the month of August, 2002, the company incurs the following manufacturing overhead costs:

Indirect Labor $22,000Indirect Materials 8,100Maintenance 2,500Utilities 950Supervision 720Insurance 200Property Taxes 300Depreciation 950

InstructionsPrepare a flexible budget report, assuming that the company used 3,000 machine hours during August. The company expected to use 3,000 machine hours.


DRENNON COMPANYManufacturing Overhead Budget Report (Flexible)

For the Month Ended August 31, 2002Machine hours Difference

Expected 3,000 Budget at Actual at Favorable FActual 3,000 3,000 hrs. 3,000 hrs. Unfavorable U

Variable costsIndirect labor $24,000 $22,000 $2,000 FIndirect materials 7,500 8,100 600 UMaintenance 2,400 2,500 100 UUtilities 900 950 50 U

Total variable costs 34,800 33,550 1,250 F

Fixed CostsSupervision 600 720 120 UInsurance 200 200 —Property taxes 300 300 —Depreciation 900 950 50 U

Total fixed costs 2,000 2,170 170 UTotal costs $36,800 $35,720 $1,080 F

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Ex. 116

Jeltz Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are:

Sales commissions 6%Advertising 4%Traveling 5%Delivery 1%

Fixed selling expenses consist of Sales Salaries $40,000 and Depreciation on Delivery Equip-ment $10,000.

InstructionsPrepare a flexible budget for increments of $30,000 of sales within the relevant range.


JELTZ COMPANYMonthly Flexible Selling Expense Budget

Activity levelSales $300,000 $330,000 $360,000

Variable expensesSales commissions $ 18,000 $ 19,800 $ 21,600Advertising 12,000 13,200 14,400Traveling 15,000 16,500 18,000Delivery 3,000 3,300 3,600

Total variable costs 48,000 52,800 57,600Fixed expenses

Sales salaries 40,000 40,000 40,000Depreciation 10,000 10,000 10,000

Total fixed costs 50,000 50,000 50,000Total costs $ 98,000 $102,800 $107,600

Ex. 117

Jeltz Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are:

Sales commissions 6%Advertising 4%Traveling 5%Delivery 1%

Fixed selling expenses consist of Sales Salaries $40,000 and Depreciation on Delivery Equipment $10,000.

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Ex. 117 (cont.)

The actual selling expenses incurred in February, 2002, by Jeltz Company are as follows:

Sales commissions $20,600Advertising 12,000Traveling 16,900Delivery 2,400

Fixed selling expenses consist of Sales Salaries $41,500 and Depreciation on Delivery Equip-ment $10,000.

InstructionsPrepare a flexible budget performance report, assuming that February sales were $330,000. Expected and actual sales are the same.


JELTZ COMPANYSelling Expense Budget Report (Flexible)For the Month Ended February 28, 2002

DifferenceActivity level Favorable F

Expected $330,000 Budget Actual Unfavorable UActual 330,000 $330,000 $330,000

Variable expensesSales commissions $ 19,800 $ 20,600 $ 800 UAdvertising 13,200 12,000 1,200 FTraveling 16,500 16,900 400 UDelivery 3,300 2,400 900 F

Total variable costs 52,800 51,900 900 FFixed expenses

Sales salaries 40,000 41,500 1,500 UDepreciation 10,000 10,000 —

Total fixed costs 50,000 51,500 1,500 UTotal expenses $102,800 $103,400 $ 600 U

Ex. 118

A flexible budget graph for the Assembly Department shows the following:

1. At zero direct labor hours, the total budgeted cost line intersects the vertical axis at $60,000.

2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $180,000.

InstructionsDevelop the budgeted cost formula for the Assembly Department and identify the fixed and variable costs.

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Solution 118 (5 min.)

Budgeted Costs:

Assembly $60,000 + $2.40.

Fixed costs are $60,000.Variable costs are $2.40 per labor hour.($180,000 – $60,000) ÷ 50,000.

Ex. 119

Duncan Company uses flexible budgeting to control manufacturing overhead. The budget below was prepared for the month ending June 30, 2003.

Direct Labor Hours 12,000 15,000 18,000

Indirect materials $36,000 $45,000 $ 54,000Indirect labor 9,000 11,250 13,500Utilities 6,000 7,500 9,000

Total variable costs 51,600 63,700 76,500

Rent 10,000 10,000 10,000Depreciation 8,000 8,000 8,000Insurance 5,500 5,500 5,500

Total fixed costs 23,500 23,500 23,500Total costs $74,500 $87,250 $100,000

During the month of June, 16,200 direct labor hours were worked and the following costs were incurred:

Indirect materials $49,200Indirect labor 11,980Utilities 7,800Rent 10,000Depreciation 8,200Insurance 5,620

Instructionsa. Prepare a flexible budget at the 16,200 direct labor hour level of activity.b. Prepare a manufacturing overhead budget at the 16,200 direct labor hour level of activity.

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a.DUNCAN COMPANY

Flexible BudgetFor the Month Ended June 30, 2003

Indirect materials 16,200 DLH @ $3.00 = $48,600Indirect labor 16,200 DLH @ $ .75 = 12,150Utilities 16,200 DLH @ $ .50 = 8,100

Total variable costs 68,850Rent $10,000Depreciation 8,000Insurance 5,500

Total fixed costs 23,500Total Costs $92,350

b.DUNCAN COMPANY

Manufacturing Overhead Budget ReportFor the Month Ended June 30, 2003

DifferenceFavorable F

Manufacturing Costs Budget Actual Unfavorable UVariable costs

Indirect materials $48,600 $49,200 $600 UIndirect labor 12,150 11,980 170 FUtilities 8,100 7,800 300 F

Total variable costs 68,850 68,980 130 U

Fixed costsRent 10,000 10,000 0Depreciation 8,000 8,200 200 UInsurance 5,500 5,620 120 U

Total fixed costs 23,500 23,820 320 UTotal costs $92,350 $92,800 $450 U

Ex. 120

Data concerning manufacturing overhead for Friendly Company are presented below. The Mixing Department is a cost center.

An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that 50% of supervisory costs are controllable at the department level.

The flexible budget formula and the cost and activity for the months of July and August are as follows:

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Ex. 120 (cont.)

Flexible Budget Per Direct Labor Hour Actual Costs and Activity

July August Direct labor hours 6,000 7,000Overhead costs

VariableIndirect materials $3.00 $ 17,600 $ 21,500Indirect labor 6.00 39,500 40,700Factory supplies 1.00 8,600 8,500

FixedDepreciation $20,000 15,000 15,000Supervision 24,000 21,600 25,000Property taxes 5,000 12,000 12,000

Total costs $114,300 $122,700

Instructions(a) Prepare the responsibility reports for the Mixing Department for each month.(b) Comment on the manager's performance in controlling costs during the two month period.


(a) FRIENDLY COMPANYMixing Department

Manufacturing Overhead Cost Responsibility ReportFor the Months of July and August

July August Controllable Cost Budget Actual Difference Budget Actual Difference Indirect materials 18,000 17,600 400 F 21,000 21,500 500 UIndirect labor 36,000 39,500 3,500 U 42,000 40,700 1,300 FFactory supplies 6,000 8,600 2,600 U 7,000 8,500 1,500 USupervision 12,000 10,800 1,200 F 12,000 12,500 500 UTotal costs 72,000 76,500 4,500 U 82,000 83,200 1,200 U

(b) The manager did a much better job of controlling costs in August ($1,200 U) than in July ($4,500 U).

Ex. 121

Dreer Company's manufacturing overhead budget for the first quarter of 2002 contained the following data:

Variable CostsIndirect Materials $25,000Indirect Labor 12,000Utilities 14,000Maintenance 6,000

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Ex. 121 (cont.)

Fixed CostsSupervisor's Salary $40,000Depreciation 8,000Property taxes 4,000

Actual variable costs for the first quarter were:Indirect Materials $23,300Indirect Labor 13,200Utilities 14,600Maintenance 5,300

Actual fixed costs were as expected except for property taxes which were $4,800. All costs are considered controllable by the department manager except for the supervisor's salary.

InstructionsPrepare a manufacturing overhead responsibility performance report for the first quarter.


DREER COMPANYManufacturing Overhead Cost Responsibility Report

For the Quarter Ended March 31, 2002

Controllable Costs Budget Actual DifferenceIndirect materials $25,000 $23,300 $1,700 FIndirect labor 12,000 13,200 1,200 UUtilities 14,000 14,600 600 UMaintenance 6,000 5,300 700 FDepreciation 8,000 8,000 —Property taxes 4,000 4,800 800 U

Total costs $69,000 $69,200 $ 200 U

Ex. 122

The Ace Division, a profit center of Crowe Engineering Company, reported the following data for the first quarter of 2002:

Sales $6,000,000Variable costs 4,500,000Controllable direct fixed costs 600,000Noncontrollable direct fixed costs 400,000Indirect fixed costs 150,000

Instructions(a) Prepare a performance report for the manager of the Ace Division.(b) What is the best measure of the manager's performance? Why?(c) How would the responsibility report differ if the division was an investment center?

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(a) CROWE ENGINEERING COMPANYAce Division

Management Performance ReportFor the Quarter Ended March 31, 2002

Sales ............................................................................................. $6,000,000Variable costs ............................................................................... 4,500,000Contribution margin ...................................................................... 1,500,000Controllable fixed costs ................................................................ 600,000Controllable margin ....................................................................... $ 900,000

(b) Controllable margin is the best measure of the manager's performance because this amount equals the excess of controllable revenues over controllable costs.

(c) For an investment center, the responsibility report would also show the return on investment for the period.

Ex. 123

Reese Company has two investment centers and has developed the following information:Department A Department B

Departmental controllable margin $150,000 ?Average operating assets ? $500,000Sales 800,000 250,000ROI 10% 12%

InstructionsAnswer the following questions about Department A and Department B.

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

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

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

4. If Department A is able to increase its controllable margin by $30,000 as a result of reducing variable costs, Department A's new ROI would be _________________.


1. $1,500,000 ($150,000 ÷ .10)2. $60,000 ($500,000 × .12)3. 15% [$60,000 ÷ ($500,000 – $100,000)]4. 12% [($150,000 + $30,000) ÷ $1,500,000]

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Ex. 124

The Appliance Division of Malone Manufacturing Company reported the following results for 2002:

Sales $4,000,000Variable costs 3,200,000Controllable fixed costs 200,000Average operating assets 3,000,000

Management is considering the following independent alternative courses of action in 2003 in order to maximize the return on investment for the division.

1. Reduce controllable fixed costs by 15% with no change in sales or variable costs.2. Reduce average operating assets by 20% with no change in controllable margin.3. Increase sales $600,000 with no change in the contribution margin percentage.

Instructions(a) Compute the return on investment for 2002.(b) Compute the expected return on investment for each of the alternative courses of action.


(a) Controllable marginReturn on investment = ————————————

Average operating assets

$600,0002002 ROI = ————— = 20%

$3,000,000

$630,000 (a)(b) 1. —————— = 21%

$3,000,000

$600,0002. ——————— = 25%

$2,400,000 (b)

$720,000 (c)3. —————— = 24%

$3,000,000

(a) $600,000 + ($200,000 × 15%) = $630,000.

(b) $3,000,000 – ($3,000,000 × .20) = $2,400,000.

$4,000,000 – $3,200,000(c) Contribution margin 20% (————————————); $4,000,000

$600,000 + ($600,000 × 20%) = $720,000.

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Ex. 125

Data for the following subsidiaries of Timmons Company which are operated as investment centers are as follows:

Black Company Greer CompanySales $3,000,000 $2,000,000Controllable Margin (1) (3)Average Operating Assets (2) 6,000,000Contribution Margin 900,000 900,000Controllable Fixed Costs 400,000 150,000Return on Investment 10% (4)

InstructionsCompute the missing amounts using the ROI formula.


(1) Controllable Margin ($900,000 – $400,000) $500,000(2) Average Operating Assets ($500,000 ÷ .10) $5,000,000(3) Controllable Margin ($900,000 – $150,000) $750,000(4) ROI ($750,000 ÷ $6,000,000) 12.5%

Ex. 126

The data for an investment center is given below.

1/1/02 12/31/02 Current Assets $ 400,000 $ 600,000Plant Assets 3,000,000 4,000,000Idle Plant Assets 250,000 330,000Land held for future use 1,200,000 1,200,000

The controllable margin is $960,000. What is the return on investment for the center for 2002?


Controllable Margin ÷ Average Operating Assets

Average current assets ($400,000 + $600,000) ÷ 2 = $500,000Plant assets ($3,000,000 + $4,000,000) ÷ 2 = $3,500,000

Note: Idle plant assets and land held for future use are not included in average operating assets.

ROI = $960,000 ÷ $4,000,000 = 24%

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Ex. 127

The owner of Bronx Bagels has recently expanded his business in order to add additional product lines. In addition to bagels, Bronx Bagels now sells muffins and sandwiches. The company has a minimum rate of return of 16%.

Bagels Muffins SandwichesSales $1,000,000 $75,000 $ 900,000Controllable margin 350,000 15,750 270,000Average operating costs 1,750,000 105,000 1,500,000

Instructionsa. Compute the return on investment (ROI) for each investment center.b. Compute the residual income for each investment center.


a. Return on investment:Bagels $350,000 ÷ $1,750,000 = 20%Muffins $15,750 ÷ $105,000 = 15%Sandwiches $270,000 ÷ $1,500,000 = 18%

b. Bagels Muffins SandwichesControllable margin $350,000 $15,750 $270,000Average assets × 16% 280,000 16,800 240,000Residual income $ 70,000 $ (1,050) $ 30,000

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COMPLETION STATEMENTS

128. A major aspect of budgeting control is the use of budget reports that compare

_____________________ with _______________________.

129. In analyzing differences from planned objectives, management may take

___________________, or it could decide to modify ___________________.

130. The master budget is a __________________ budget which is based on operating at one

budgeted activity level.

131. A __________________ budget projects budget data for various levels of activity.

132. Total ________________ costs will be the same on the master budget and on a flexible

budget which reflects the actual level of activity.

133. Under ___________________ accounting, the evaluation of a manager's performance is

based on the costs and revenues directly under that manager's control.

134. A cost is __________________ at a given level of managerial responsibility if a manager

has the authority to incur the cost in a given time period.

135. In general, costs ____________________ directly by the level of responsibility are

_______________, whereas costs that are ____________________ to the responsibility

level are __________________.

136. Responsibility centers may be classified into three types: (1)____________________,

(2)___________________ and, (3)____________________.

137. The primary basis for evaluating the performance of a manager of an investment center is

_________________.

138. Return on investment is calculated by dividing _________________________ by

________________________.

Answers to Completion Statements

128. actual results, planned objectives129. corrective action, future plans130. static131. flexible132. fixed133. responsibility134. controllable135. incurred, controllable, allocated, noncontrollable136. cost centers, profit centers, investment centers137. return on investment (ROI)138. controllable margin, average operating assets

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MATCHING

139. Match the items below by entering the appropriate code letter in the space provided.

A. Budgetary control G. Responsibility reporting systemB. Static budget H. Return on InvestmentC. Flexible budget I. Profit centerD. Responsibility accounting J. Investment centerE. Controllable costs K. Indirect fixed costsF. Management by exception L. Direct fixed costs

____ 1. The review of budget reports by top management directed entirely or primarily to differences between actual results and planned objectives.

____ 2. A part of management accounting that involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the day-to-day decisions about the items.

____ 3. The preparation of reports for each level of responsibility shown in the company's organization chart.

____ 4. A projection of budget data at one level of activity.

____ 5. Costs that a manager has the authority to incur within a given period of time.

____ 6. The use of budgets to control operations.

____ 7. A projection of budget data for various levels of activity.

____ 8. A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use.

____ 9. Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.

____ 10. A responsibility center that incurs costs and also generates revenues.

____ 11. Costs which are incurred for the benefit of more than one profit center.

____ 12. A measure of the profitability of an investment center computed by dividing controllable margin (in dollars) by average operating assets.

Answers to Matching

1. F 7. C2. D 8. J3. G 9. L4. B 10. I5. E 11. K6. A 12. H

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SHORT-ANSWER ESSAY QUESTIONSS-A E 140

The master budget and flexible budgets are important aids to management in performing the management functions of planning and control. Briefly describe how planning and control are facilitated by preparing a master budget and flexible budgets. How are these two types of budgets interrelated with planning and control?

Solution 140

The system of responsibility reporting begins with the lowest level of responsibility and moves up through each level. At the lowest level each manager receives detailed information concerning the controllable costs for which they are responsible. At higher levels of responsibility the detail of the lower levels may be omitted but the report encompasses all the areas for which the higher level has responsibility. For example, a plant manager will receive reports concerning the controllable costs of each of the plant departments.

Management by exception is possible in such a system because, if management at the higher levels of responsibility identifies a significant variance, they can receive detailed reports for each lower level of responsibility. This allows management to investigate causes and remedies for variances as they feel necessary.

S-A E 141

Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centers.

Solution 141

Because a manager should only be evaluated based on the performance results of matters that are controllable by the manager, it is necessary to use different bases for evaluation. An investment center manager can control the investment funds available as well as costs and revenues. Return on investment is therefore an appropriate basis for evaluation. A profit center, however, controls only revenues and expenses but not investment, so controllable margin is a more appropriate basis relating only to the areas controllable by the profit center. Similarly, because only costs are controllable for a cost center, such a center is evaluated only on the basis of its controllable costs.

S-A E 142 (Ethics)

Edwards Corporation evaluates its managers based on return on investment (ROI). Kim Tilley and Sara Trane, managers of the electronics and housewares departments respectively, have recently suffered from declining profits in their departments. Over lunch, they discuss the problem, and how they could improve performance. Most of the discussion centers around ways to increase sales. Near the end of the lunch period, however, Sara remarks that there are two components to consider, and that they have considered only one. She wonders whether there is some way to reduce investment, and by decreasing the denominator of the ROI fraction, to improve the final result.

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S-A E 142 (cont.)

Back at work, Kim continues to mull over Sara's remarks. She decides to pursue the matter further, and before the end of the quarter she has sold quite a bit of older equipment and replaced it with equipment obtained with a short-term lease. Her performance, measured by ROI, is markedly improved, although sales continue to be disappointing.

Required:1. Who are the stakeholders in this situation?2. Is Kim's action ethical? Briefly explain.

Solution 142

1. The stakeholders includeKim TilleySara Tranemanagers of Edwards Corporationshareholders of Edwards Corporation

2. Kim's action is probably not ethical. It appears that she has replaced equipment that had been purchased only because such a move would improve her ROI. Of course, it is possible that the leased equipment will allow her department to function better, resulting in a benefit for the company. Any action to promote one's own benefit at the expense of the company's welfare is unethical.

S-A E 143 (Communication)

Clara County Electronics manufactures circuit boards for computer-controlled appliances for the home. The sales have been very volatile, sometimes stressing the plant's capacity, and sometimes depressingly slow. During a recent slow period, Earl Linton, a production supervisor, complained to Ann Royer, accounting manager, about the flexible budget.

"I try as hard as I can to meet the budget," he says, "and then I find out that just meeting the budget's not good enough. Last month, when we sold 8,000 units, I was $10,000 under my budget, and then you all blow me out of the water with your report that I actually was $5,000 over, because sales were slow. I thought this responsibility accounting business was supposed to mean we are held accountable just for things we can control. How do we control sales? At the beginning of the year, you gave us all targets. Mine says that for an average month of 10,000 unit sales, I should spend about $82,000. I spend less, and get an unfavorable budget report. What gives?"

Required:Write a short memo to respond to Mr. Linton.

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Solution 143

TO: Earl Linton

FROM: Ann Royer

RE: Budget results

I appreciate your coming to me with your questions about the budget. I understand that the new procedures can be frustrating, especially when you receive an unfavorable report that you were not expecting.

Actually, the flexible budget does mean that you are held accountable only for the costs that you can control. Last month, we calculated the cost of producing 8,000 units that were actually sold (and not the 10,000 that were estimated to be sold). Your costs were greater than that, although still less than the amount you would have been allowed had the full 10,000 been sold. Please check the individual items on your budget report. We noted which ones exceeded the budget. You can then focus attention on those items for cost control.

Please contact the Accounting Department if you have further questions.

(signed)

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Budgetary Control and Responsibilty Accounting

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