Responsibility Accounting and Reporting 1

Chapter 17

RESPONSIBILITY ACCOUNTING AND REPORTING

MULTIPLE CHOICE

Question Nos. 8, 10, 1113, and 16-24 are AICPA adapted.

Question No. 21 is ICMA adapted.
Question No. 9 is CIA adapted.

E 1. Internal reports prepared under the responsibility accounting approach should highlight:
A. cost properly allocable to the cost center under generally accepted accounting
principles
B. fixed cost of production
C. variable cost of production
D. conversion cost
E. controllable cost

C 2. A company has three producing departments and one service department. Due to a
scheduling error in the service department, an unfavorable variance was created. A sound
responsibility accounting system would dictate that the variance be:
A. ignored
B. allocated to producing departments, but not on the same basis as ordinary charges
for use of the service
C. charged to the service department causing the variance and not allocated to other
departments
D. allocated to both producing and service departments
E. allocated to producing departments on the basis of usage

A 3. The control of service department costs at the source level is accomplished by means of:
A. predetermining service requirements in user departments
B. allocating service usage on the basis of priority of need
C. limiting the number of hours of service used
D. organizing maintenance labor
E. limiting the number of hours of service provided

B 4. The rate used to distribute service hours to recipient departments is denoted by all of the
following terms ​except:
A. sold-hour rate
B. burden rate

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C. charging rate
D. transfer rate
E. billing rate

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E 5. The cost item least likely to appear in a performance report based on responsibility
accounting techniques for the supervisor of an assembly line in a large manufacturing situation
is:
A. materials
B. repairs and maintenance
C. direct labor
D. other indirect labor
E. supervisor's salary

D 6. Responsibility reports should possess all of the following characteristics ​except:

A. being issued with regularity
B. fitting the organization chart
C. being consistent in form and content each time they are issued
D. being stated only in dollars for operating management
E. comparing budgeted with actual figures

D 7. Controllable costs are:

A. costs that fluctuate in total in response to small changes in the rate of capacity
utilization
B. costs that will be unaffected by current managerial decisions
C. costs that management decides to incur in the current period to enable the
company to achieve objectives other than filling customers' orders
D. costs that are likely to respond to the amount of attention devoted to them by a
specified manager
E. costs that are governed mainly by past decisions that established present levels of
operating and organizational capacity and that change slowly only in response to
changes in capacity

D 8. An accounting system in which the operations of the business are broken down into cost
centers and the control function of a supervisor or manager is emphasized is:
A. control accounting
B. budgetary accounting
C. absorption accounting
D. responsibility accounting
E. operations-research accounting

C 9. In a responsibility accounting system, costs are classified into categories on the basis of:
A. prime and overhead costs
B. administrative and nonadministrative costs
C. controllable and noncontrollable costs
D. direct and indirect costs
E. fixed and variable costs

C 10. When used for performance evaluation, periodic internal reports based on a responsibility
accounting system should ​not:
A. distinguish between controllable and noncontrollable costs
B. be related to the organization chart
C. include allocated fixed overhead
D. include variances between actual and budgeted controllable costs
E. all of the above

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D 11. The most desirable measure of departmental performance for evaluating the
departmental manager is departmental:
A. contribution to indirect expenses
B. revenue less departmental variable expenses
C. revenue less departmental fixed expenses
D. revenue less controllable departmental expenses
E. net income

D 12. Internal reports prepared under the responsibility accounting approach should be limited
to which of the following costs?
A. only costs properly allocable to the cost center under generally accepted
accounting principles
B. only variable costs of production
C. only conversion costs
D. only controllable costs
E. all of the above

B 13. Of most relevance in deciding how or which costs should be assigned to the
responsibility center is the degree of:
A. variability
B. controllability
C. avoidability
D. causality
E. linearity

C 14. A company's only service department provides the following data:

Monthly Service Hours Actual

​Service Center ​ Budget ​_ ​ Available ​_ ​Monthly
Expense
Carpenter Shop $40,000 1,600 $47,800

It serves three producing departments that show the following budgeted and actual cost and
servicehours data:

Estimated Actual
​Services Required
Services Used

​Department No. ​Carpenter Shop

Carpenter Shop
1 350 hrs. 600 hrs.
2 800 hrs. 750 hrs.
3 450 hrs. 650 hrs.

The sold-hour rate for the carpenter shop is:

A. $29.88
B. $20.00
C. $25.00

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D. $23.90
E. none of the above

SUPPORTING CALCULATION:

$40,000  1,600 = $25

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A 15. A company's only service department provides the following data:

Monthly Service Hours Actual

​ ervice Center
S ​ Budget ​_ ​ Available ​_ ​Monthly Expense
Carpenter Shop $40,000 1,600 $47,800

It serves three producing departments that show the following budgeted and actual cost and
servicehours data:

Estimated Actual
​Services Required
Services Used

​Department No. ​Carpenter Shop

Carpenter Shop
1 350 hrs. 600 hrs.
2 800 hrs. 750 hrs.
3 450 hrs. 650 hrs.

The spending variance for the carpenter shop, assuming that 80% of the budgeted expense is
fixed, is:
A. $5,800 unfav.
B. $7,800 unfav.
C. $5,800 fav.
D. $7,800 fav.
E. none of the above

SUPPORTING CALCULATION:

Actual factory overhead $ 47,800

Budget allowance:
Variable ($5 x 2,000) 10,000
Fixed (80% x $40,000) ​32,000
42,000
Spending variance ​$ 5,800

B 16. The primary difference between a fixed (static) budget and a variable (flexible) budget is
that a fixed budget:
A. cannot be changed after the period begins; while a variable budget can be changed
after the period begins
B. is a plan for a single level of sales (or other measure of activity); while a variable
budget consists of several plans, one for each of several levels of sales (or other
measure of activity)
C. includes only fixed costs; while variable budget includes only variable costs
D. is concerned only with future acquisitions of fixed assets; while a variable budget is
concerned with expenses that vary with sales
E. none of the above

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C 17. A flexible budget is:

A. appropriate for control of direct materials and direct labor but not for control of
factory overhead
B. not appropriate when costs and expenses are affected by fluctuations in volume
limits
C. appropriate for any relevant level of activity
D. appropriate for control of factory overhead but not for control of direct materials and
direct labor
E. none of the above

B 18. A flexible budget is appropriate for a:

Direct Labor Marketing

​ Budget ​_ ​ Budget
A. yes no
B. yes yes
C. no no
D. no yes

C 19. If a company wishes to establish a factory overhead budget system in which estimated
costs can be derived directly from estimates of activity levels, it should prepare a:
A. discretionary budget
B. fixed budget
C. flexible budget
D. capital budget
E. cash budget

C 20. Flexible budgeting is a reporting system wherein the:

A. statements included in the budget report vary from period to period
B. budget standards may be adjusted at will
C. planned level of activity is adjusted to the actual level of activity before the variance
report is prepared
D. reporting dates vary according to the levels of activity reported upon
E. none of the above

B 21. Flintstone Company uses flexible budgeting for cost control. Flintstone produced 10,800
units of a product during March, incurring indirect material costs of $13,000. Its static budget
for the year reflected variable indirect material costs of $180,000 at a production volume of
144,000 units. A flexible budget for March production would reflect indirect material costs of:
A. $13,000
B. $13,500
C. $13,975
D. $11,700
E. none of the above

SUPPORTING CALCULATION:

($180,000  144,000) x 10,800 = ​$13,500

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B 22. A company uses a two-way analysis for overhead variances: spending and idle capacity.
The idle capacity variance is based on the:
A. variable overhead application rate
B. fixed overhead application rate
C. semivariable overhead application rate
D. total overhead application rate
E. volume of total expenses at various activity levels

B 23. In analyzing factory overhead variances, an idle capacity variance is the difference
between the:
A. master budget application rate and the flexible budget application rate times actual
hours worked
B. budget allowance for actual units produced for the period and the amount of
applied factory overhead
C. actual amount spent for factory overhead items during the period and the amount
applied during the period
D. actual factory overhead incurred and the budget allowance estimated for the
capacity used
E. amount shown in the flexible budget and the amount shown in the master budget

B 24. The spending variance for variable overhead based on direct labor hours is the difference
between the actual variable overhead cost and the variable overhead cost that should have
been incurred for the actual hours worked. This variance results from:
A. differences caused by variations in production volume
B. price and quantity differences for overhead costs
C. differences caused by variations in sales volume
D. price differences for overhead costs
E. quantity differences for overhead costs

C 25. In the traditional view of responsibility accounting where individuals are evaluated rather
than operating systems, all of the following dysfunctional results may occur, ​except:
A. managers tend to take actions that are self-serving rather than beneficial to the
company as a whole
B. managers concentrate on meeting the budget rather than the best level of
performance that can be achieved
C. managers tend to focus their attention on long-run targets and ignore the
short-term needs of the company
D. many competent managers leave the company
E. all of the above may occur

D 26. All of the following are reasons why responsibility reports are of limited use to managers
in helping them to control costs, ​except:
A. most responsibility accounting systems improperly base allowable budgets on
volume-based measures of activity
B. control data available in a responsibility reporting system are too aggregated to be
useful
C. control data available to managers are not easily interpreted by all operating
managers
D. control data available to managers is too timely to be precise
E. all of the above are reasons

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PROBLEMS

PROBLEM

1.
Costs Allocated to Producing Departments; Variance Analysis.​ Starsky Inc. has two departments
providing service to its producing departmentsCthe Building Services Department and the General Plant
Department. Relevant data for June are:

Building Services General Plant

​ Department ​_ ​ Department
Budgeted fixed overhead $50,000 $100,000
Variable overhead $25 per service hour $15 per direct labor hour
Normal activity level 10,000 hours per month 50,000 direct labor hours
June activity 12,000 hours 45,000 direct labor hours
Actual department costs $358,000 $755,000

Required:

(1) Compute the predetermined billing rates used for allocating each service department's costs at
normal activity.
(2) Compute the costs allocated to the producing departments from each service department, using the
predetermined rates.
(3) Compute the spending and idle capacity variances for each service department.

SOLUTION

(1) Building Services Department: [$50,000 + ($25 x 10,000 hrs.)]/10,000 hrs. = $300,000/10,000 hrs. =
$30 per service hour
General Plant Department: [$100,000 + ($15 x 50,000 hrs.)]/50,000 hrs. = $850,000/50,000 hrs. =
$17 per direct labor hour
(2) Building Services Department: 12,000 hrs. x $30 = $360,000
General Plant Department: 45,000 hrs. x $17 = $765,000
(3)
Building Services General Plant
​ Department ​_ ​ Department
Actual overhead $ 358,000 $ 755,000
Less overhead allowed for
capacity achieved:
Fixed $ 50,000 $100,000
Variable
($25 x 12,000 hrs.) 300,000 350,000
($15 x 45,000 hrs.) ​ ​_ ​ 675,000
775,000
Spending variance ​$ 8,000 unfav. ​$ (20,000​) fav.
Overhead allowed for capacity
achieved $ 350,000 $ 775,000

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Less overhead applied

[from (2)] 360,000 765,000
Idle capacity variance ​$ (10,000​) fav. ​$ 10,000 unfav.

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PROBLEM

2.
Variable Cost Rate; Over- or Underdistributed Variable Cost.​ Greco Gear Co. has two producing
departmentsCAssembly and FinishingCand one service departmentCUtilities. Allocation of fixed service
department costs is based on readiness-to-serve capacity provided for each department. Variable service
department costs are charged on the basis of actual consumption. These costs are distributed to
departments at a predetermined rate based on variable costs at capacity. Present relevant data are:

​Producing Departments
​Assembly ​Finishing
Power consumption (based on kilowatt-hours this month) 35,000 56,000
Maximum kilowatt-hours required 40,000 60,000

​Utilities Department
Budgeted fixed cost (this month) $25,000
Budgeted variable cost at capacity 10,000
Actual variable cost (this month) 8,550

Required:

(1) Compute the rate per kwh used to distribute variable cost.
(2) Compute the distribution of fixed and variable Utilities Department costs for the month.
(3) Compute the over- or underdistributed variable cost and explain what kind of variance it is and who
is responsible for the variance.

SOLUTION

(1) Budgeted variable cost at capacity/Capacity provided = $10,000/(40,000 kwh + 60,000 kwh) = $.10
kwh for distribution of variable costs
(2)
​Producing Departments
​Assembly ​Finishing
Fixed cost distribution:
$25,000 x 40,000 kwh/100,000 kwh $10,000
$25,000 x 60,000 kwh/100,000 kwh $15,000
Variable cost distribution:
$.10 per kwh x 35,000 kwh 3,500
$.10 per kwh x 56,000 kwh ​ ​_ ​ 5,600
Total cost distributed ​$13,500 ​$20,600

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(3)
Over or underdistributed variable cost:
Total variable cost $8,550
Cost distributed:
Assembly Department $3,500
Finishing Department ​ 5,600 ​ 9,100
Overdistributed cost ​$ (550​)

Because all of the fixed cost was billed to user departments on the basis of maximum capacity available,
there is no idle capacity variance. The entire variance is a spending variance. The manager of the Utilities
Department is responsible for controlling variable cost; therefore, this variance should appear on the
manager's monthly performance report.

PROBLEM

3.
Over- or Underdistributed Cost; Variance Analysis.​ Watergate Hotel provides the following data on
overhead costs for its Room Service Division:

Budgeted departmental expenses:

Variable expense $ 26,000
Fixed expense 15,000
Total departmental expense (direct) $ 41,000
Budgeted distributed costs from other departments:
Personnel Department (fixed) 7,000
Food Service Department (variable) 32,000
Total departmental overhead ​ 80,000
$

Distribution rate (based on 10,000 calls) $ 8 per call to

room service
Actual data for the current period:
Calls to room service 11,000
Fixed expense $ 14,500
Variable expense 26,000
Distributed cost:
Personnel Department 7,500
Food Service Department 39,000

Required:

(1) Determine the departmental over- or underdistributed cost.

(2) Determine the spending and idle capacity variances for the Room Service Division's costs, plus the
spending variances as distributed from the other departments. (Round all answers to two decimal
places.)

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SOLUTION

(1)
Cost incurred:
Fixed expense $14,500
Variable expense 26,000
Personnel Department cost 7,500
Food Service Department cost ​ 39,000 87,000
Distributed cost (11,000 calls @ $8) ​$ 88,000
Overdistributed cost ​ $ (1,000​)

(2)
Overhead incurred in Room Service Division $40,500
Spending variance $ (3,100) fav.

Overhead expected at 11,000 calls:

Fixed $15,000
Variable: $26,000/10,000 x 11,000 ​ 28,600 43,600
Idle capacity variance ​ (1,500​) fav.
Applied overhead:
$41,000/10,000 x 11,000 45,100
Overabsorbed overhead ​$ (4,600​) fav.
Overhead distributed from other departments:
Personnel Department (fixed):
Actual $ 7,500
Estimated 7,000
Spending variance ​$ 500 unfav.

Food Service Department (variable):

Actual distributed cost $ 39,000
Cost expected at capacity attained ​ 35,2001​
Spending variance ​ $ 3,800 unfav.
Total variances from other departments ​ $ 4,300 unfav.

1​
$32,000/10,000 x 11,000 = $35,200

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PROBLEM

4.
Responsibility Report.​ In April, the vice president of sales of Petro Products asks the controller to prepare
a responsibility report for the performance evaluation of the manager of its Division Y, which is organized
into Sections A and B.

The following cost items related to the operation of Division Y for the month of May, 19-- are presented by
the controller:

Actual Budgeted
Item ​ Cost ​_ ​ Cost
Division Y costs:
Staff wages $ 20,000 $ 18,500
Supplies 6,000 4,800
Manager's salary 8,000 6,400
Other expenses 15,000 13,400
Total Division Y cost ​$ 49,000 ​$ 43,100

Administration cost allocable to Division Y $ 17,000 $ 14,500

Unit outputCDivision Y 10,000 10,000

Section A costs:
Supervisor's salaryCSection A 8,000 9,500
Employees' wagesCSection A:
Juracek 2,000 1,900
Molloy 3,500 3,600
Nienaber 3,300 3,250
Oats 4,100 4,050
Peterson 5,800 5,650
Washington 5,000 5,000
Materials costCSection A 4,500 5,200
Indirect laborCSection A 7,800 7,300
Other overhead costsCSection A 18,000 19,600
Total Section A costs ​ 62,000
$ ​$ 65,050

Section B costs:
Supervisor's salaryCSection B $ 7,000 $ 7,500
Employees' wagesCSection B:
Laurie 4,400 4,350
Potash 3,600 3,800
Tillman 2,100 2,050
Other overhead costsCSection B 15,000 14,500
Total Section B costs ​ 32,100
$ ​$ 32,200

Required: Prepare a responsibility report for the month of May in a format suitable for evaluating the
performance of Division Y's manager.

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SOLUTION

Petro Products
Responsibility Report
Manager, Division Y
For May, 19

Actual Over- Under-

Cost Item ​ Cost ​_ ​Budgeted Cost
Division Y costs:
Staff wages $ 20,000 $ 1,500 U
Supplies 6,000 1,200 U
Manager's salary 8,000 1,600 U
Other expenses 15,000 1,600 U
Section A cost 62,000 (3,050) F
Section B cost 32,100 (100​) F
Total ​ 143,100
$ ​ $ 2,750 U

PROBLEM

5.
Flexible Budget.​ At normal capacity, Boulder Products Corp. manufactures 10,000 trail bikes. At that
level, unit variable costs for the Assembly Department are:

Direct materials $ 30
Direct labor 60
Indirect labor 30
Repairs and maintenance 15
General factory expenses 15
$ 150

Fixed expenses are $150,000 for indirect labor, $175,000 for repairs and maintenance, and $80,000 for
general factory.

Required: Prepare a flexible budget for the Assembly Department at 70%, 80%, 90%, and 100% of normal
capacity.

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SOLUTION

Assembly Department
Flexible Budget

Percentage of capacity 70% 80% 90% 100%

Units ​ 7,000 ​ 8,000
9,000 ​ 10,000
Variable cost:
Direct materials $ 210,000 $ 240,000 $ 270,000 $ 300,000
Direct labor 420,000 480,000 540,000 600,000
Indirect labor 210,000 240,000 270,000 300,000
Repairs and maintenance 105,000 120,000 135,000 150,000
General factory expenses ​ _ 105,000 ​ _ 120,000 135,000 150,000
Total variable cost $ 1,050,000 $ 1,200,000 $ 1,350,000 $ 1,500,000

Fixed cost:
Indirect labor 150,000 150,000 150,000 150,000
Repairs and maintenance 175,000 175,000 175,000 175,000
General factory ​_ 80,000 80,000 80,000 80,000
Total fixed cost ​ $ 405,000 ​$ 405,000 ​$ 405,000 ​$ 405,000
Total cost ​ 1,455,000
$ ​ 1,605,000
$ ​$ 1,755,000 ​$ 1,905,000

PROBLEM

6.
Overhead Analysis; Report to Supervisors.​ The cost and operating data on June factory overhead for
Department 711 are as follows:

Budgeted Actual
Factory Factory
​Overhead ​Overhead
Variable departmental overhead:
Supplies $ 4,000 $ 3,400
Repairs and maintenance 1,600 1,400
Indirect labor 8,000 7,400
Power and light 2,400 2,000
Heat ​_ 800 ​_ 600
Subtotal ​ 16,800
$ ​ 14,800
$

Fixed departmental overhead:

Building expense $ 1,600 $ 1,520
DepreciationCmachinery 4,800 4,800
Property tax and insurance ​_ 800 760
Subtotal ​ $ 7,200 ​$ 7,080
Total ​ 24,000
$ ​ 21,880
$

Operating data:
Normal capacity hours 4,000

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Factory overhead rate per hour $6

Actual hours 3,600

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Required: Prepare a departmental report for the supervisor of Department 711 that shows the departmental
spending variance for each item of factory overhead and includes a single idle capacity variance.

SOLUTION

Spending
Variance
Original Budget Actual (Unfav./
​ Budget ​_ ​Allowance ​ Cost ​_ ​ Fav.)
Capacity hours ​ _ 4,000 3,600 3,600
Variable costs:
Supplies $ 4,000 $ 3,600 $ 3,400 $ (200)
Repairs and maintenance 1,600 1,440 1,400 (40)
Indirect labor 8,000 7,200 7,400 200
Power and light 2,400 2,160 2,000 (160)
Heat ​_ 800 720 600 (120)
Subtotal ​ 16,800
$ ​ 15,120
$ ​ 14,800
$
Fixed costs:
Building expense $ 1,600 $ 1,600 $ 1,520 (80)
DepreciationCmachinery 4,800 4,800 4,800 0
Property tax and insurance ​_ 800 800 760 (40)
Subtotal ​ $ 7,200 ​$ 7,200 ​$ 7,080
Total costs ​ 24,000
$ $ 22,320 ​$ 21,880 ​$ (440)
Applied factory overhead 21,600
Idle capacity variance ​ $ 720 unfav.

Actual factory overhead $ 21,880

Applied factory overhead 21,600
Underapplied factory overhead ​$ 280

Spending variance $ (440)

Idle capacity variance 720
Underapplied factory overhead ​$ 280

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