Solution WileyPlus COMM 305 / ACCO 240
Solution WileyPlus COMM 305 / ACCO 240
Solution WileyPlus COMM 305 / ACCO 240
SO
BT
Item
SO
BT
1.
2.
3.
4.
5.
6.
7.
8.
1
1
1
2
2
2
2
2
K
C
K
K
C
K
K
C
40.
41.
42.
43.
44.
45.
46.
47.
7
3
3
3
3
3
7
2,3
48.
Item
S
O
BT
9.
10.
11.
12.
13.
14.
15.
16.
3
3
3
3
3
3
3
3
C
K
K
C
C
C
K
K
AN
AP
AP
AP
AP
AN
AP
AN
66.
67.
68.
69.
70.
71.
72.
73.
3
3
3
2
3
3
2
3
C
C
C
K
C
K
C
C
92.
93.
94.
95.
96.
97.
98.
99.
4
4
5
5
5
5
5
6
K
K
C
C
C
C
K
C
74.
100.
49.
75.
101.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
1
1
1
1
2
2
2
2
2
2
2
C
K
K
K
C
C
C
K
C
C
C
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
3
3
2
4
4
4
4
4
4
4
4
C
C
C
K
C
C
C
K
C
C
C
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
6
6
6
6
6
6
6
6
6
6
6
61.
62.
63.
64.
65.
2
3
3
3
3
C
C
AP
AP
C
87.
88.
89.
90.
91.
4
4
4
4
4
C
C
C
C
C
113.
114.
115.
116.
117.
7
7
7
7
7
170.
AP
174.
4,5
AP
178.
AP
171.
172.
*173.
6
7
8
AP
AP
AP
175.
176.
177.
3
3
7
AP
AP
AN
179.
180.
181.
3
3
3
AP
AP
AP
190.
191.
5
3
AP
AP
194.
195.
3,5
3
AP
AP
198.
199.
Item
SO
BT
Item
SO
BT
5
5
6
7
7
8
8
8
K
C
K
K
K
K
C
C
33.
34.
35.
36.
37.
38.
*39.
4
4
4
7
7
7
8
K
K
K
K
K
C
K
7
7
7
7
7
7
7
8
C
C
K
C
AP
K
C
AP
144.
145.
146.
147.
148.
*149.
150.
*151.
7
7
6
7
4
8
4
8
C
K
K
AN
K
C
K
C
152.
AP
True-False Statements
17.
18.
19.
20.
21.
22.
23.
24.
3
3
4
4
4
4
4
4
K
K
C
C
C
C
C
K
25.
26.
27.
28.
29.
*30.
*31.
*32.
*153.
C
AP
C
AP
C
C
K
K
C
K
C
118.
119.
120.
121.
122.
123.
124.
*125
.
*126
.
*127
.
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
138.
2
3
3
3
2,3
7
6
7
8
7
4
C
AP
K
AP
C
E
AP
AP
K
AN
K
*154.
155.
156.
*157.
*158.
159.
160.
161.
162.
163.
164.
AP
AN
AP
AP
AN
E
K
C
C
C
C
K
K
C
AP
C
139.
140.
141.
142.
143.
4
7
7
7
7
C
AN
AP
AP
AN
165.
166.
167.
168.
169.
8
7
7
8
8
7
1
2
3
1
3,5,
6
4,5
5,6
7
8
7,8
*182
.
183.
184.
185.
AP
186.
AP
3
7
7
AP
AN
AP
187.
188.
189.
3
5
6
AP
AP
AP
202.
203.
6,7
7
AP
AN
206.
207.
7
4
AP
C
C
K
C
C
C
Brief Exercises
Exercises
6
3
AP
AP
SO
BT
Item
SO
BT
192.
193.
6
4,5
AP
AP
196.
197.
3
3,6
AP
AP
211.
212.
213.
1
1
1
K
K
K
214.
215.
216.
1
3
3
K
K
K
223.
1-7
224.
1-4
Item
200.
201.
S
O
5
5
BT
Item
SO
BT
Item
SO
BT
AP
AN
204.
205.
7
4
AN
C
208.
209.
210.
7
8
3,4,6
AP
AP
AN
220.
221.
222.
4
7
7
K
K
K
227.
1-7
Completion Statements
217.
218.
219.
4
4
4
K
K
K
Matching
Short Answer
225.
1-4
226.
11-2
1-3
11-3
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
C
Ma
Es
225.
226.
227.
Es
Es
Es
160.
163.
MC
MC
MC
MC
MC
Ma
224.
226.
227.
161.
Es
Es
Es
MC
BE
BE
BE
BE
Ex
Ex
C
C
Ma
Es
Es
Es
Es
43.
45.
162.
164.
210.
MC
MC
MC
MC
Ex
Ex
Ex
Ex
Ex
197.
199.
215.
216.
223.
224.
225.
226.
227.
MC
MC
MC
MC
BE
Ex
205.
207.
217.
218.
219.
220.
Ex
C
C
C
C
C
223.
224.
225.
227.
165.
210.
Ma
Es
Es
Es
MC
Ex
Ex
Ma
Es
164.
165.
166.
MC
MC
MC
188.
BE
MC
BE
Ex
Ex
198.
202.
223.
227.
Ex
Ex
Ma
Es
164.
166.
189.
210.
MC
MC
BE
Ex
MC
MC
MC
MC
MC
BE
BE
177.
184.
185.
202.
203.
204.
206.
BE
BE
BE
Ex
Ex
Ex
Ex
221.
222.
223.
227.
167.
169.
208.
C
C
Ma
Es
MC
MC
Ex
209.
MC
Study Objective 1
1.
2.
3.
TF
TF
TF
48.
49.
50.
MC
MC
MC
51.
52.
53.
MC
MC
MC
4.
5.
6.
7.
TF
TF
TF
TF
8.
47.
54.
55.
TF
MC
MC
MC
56.
57.
58.
59.
MC
MC
MC
MC
9.
10.
11.
12.
13.
14.
15.
16.
17.
TF
TF
TF
TF
TF
TF
TF
TF
TF
18.
41.
42.
44.
47.
62.
63.
64.
65.
TF
MC
MC
MC
MC
MC
MC
MC
MC
66.
67.
68.
70.
71.
73.
74.
75.
76.
MC
MC
MC
MC
MC
MC
MC
MC
MC
211.
212.
213.
C
C
C
214.
223.
224.
Study Objective 2
60.
61.
69.
72.
MC
MC
MC
MC
78.
128.
132.
223.
Study Objective 3
77.
129.
130.
131.
132.
175.
176.
178.
179.
MC
MC
MC
MC
MC
BE
BE
BE
BE
180.
191.
183.
186.
187.
191.
194.
195.
196.
BE
Study Objective 4
19.
20.
21.
22.
23.
24.
TF
TF
TF
TF
TF
TF
33.
34.
35.
79.
80.
81.
TF
TF
TF
MC
MC
MC
82.
83.
84.
85.
86.
87.
MC
MC
MC
MC
MC
MC
88.
89.
90.
91.
92.
93.
MC
MC
MC
MC
MC
MC
138.
139.
148.
150.
174.
193.
25.
26.
94.
TF
TF
MC
95.
96.
97.
MC
MC
MC
98.
174.
190.
MC
27.
99.
100.
101.
TF
MC
MC
MC
102.
103.
104.
105.
MC
MC
MC
MC
106.
107.
108.
109.
MC
MC
MC
MC
28.
29.
36.
37.
38.
40.
46.
TF
TF
TF
TF
TF
MC
MC
113.
114.
115.
116.
117.
118.
119.
MC
MC
MC
MC
MC
MC
MC
120.
121.
122.
123.
124.
133.
135.
MC
MC
MC
MC
MC
MC
MC
*30.
*31.
TF
TF
TF
MC
*127.
*149.
MC
MC
*154.
*157.
MC
MC
*173.
*182.
BE
BE
*153.
168.
MC
MC
*32.
TF
*39.
*125
.
*126
.
MC
*151.
MC
*158.
MC
*136.
MC
169.
MC
Study Objective 5
193.
201.
Ex
194.
Ex
223.
BE
Ex
200.
Ex
227.
Study Objective 6
110.
111.
112.
134.
MC
MC
MC
MC
146.
171.
192.
197.
Study Objective 7
137.
140.
141.
142.
143.
144.
145.
MC
MC
MC
MC
MC
MC
MC
147.
152.
155.
156.
159.
170.
172.
Study Objective *8
Note: TF = True-False
MC = Multiple Choice
C = Completion
BE = Brief Exercise
Ex = Exercise
Ma = Matching
Es = Essay
11-4
Describe the concept of budgetary control. Budgetary control consists of (a) preparing
periodic budget reports that compare actual results with planned objectives, (b) analyzing
the differences to determine their causes, (c) taking appropriate corrective action, and (d)
modifying future plans, if necessary.
2.
Evaluate the usefulness of static budget reports. Static budget reports are useful in
evaluating the progress toward planned sales and profit goals. They are also appropriate
in assessing a manager's effectiveness in controlling fixed costs and expenses when (a)
actual activity closely approximates the master budget activity level and/or (b) the
behaviour of the costs in response to changes in activity is fixed.
3.
Explain the development of flexible budgets and the usefulness of flexible budget
reports. To develop the flexible budget, it is necessary to:
(1)
Identify the activity index and the relevant range of activity.
(2)
Identify the variable costs, and determine the budgeted variable costs per unit of
activity for each cost.
(3)
Identify the fixed costs, and determine the budgeted amount for each cost.
(4)
Prepare the budget for selected increments of activity within the relevant range.
Flexible budget reports permit an evaluation of a manager's performance in controlling
production and costs.
4.
5.
Indicate the features of responsibility reports for cost centres. Responsibility reports
for cost centres compare actual costs with flexible budget data. The reports show only
controllable costs, and no distinction is made between variable and fixed costs.
6.
Identify the content of responsibility reports for profit centres. Responsibility reports
show contribution margin, controllable fixed costs, and controllable margin for each profit
centre.
7.
Explain the basis and formula that are used for evaluating performance in
investment centres. The primary basis for evaluating performance in investment centres
is return on investment (ROI). The formula for computing ROI for investment centres is:
Controllable margin (in dollars) Average operating assets.
*8.
11-5
Explain the difference between ROI and residual income. ROI is controllable margin
divided by average total assets. Residual income is the income that remains after
subtracting the minimum rate of return on a companys average operating assets. ROI
sometimes provides misleading results because profitable investments are often rejected
when the investment reduces ROI but increases overall profitability.
11-6
TRUE-FALSE STATEMENTS
1.
Budget reports comparing actual results with planned objectives should be prepared
weekly to be most effective.
2.
If actual results are different from planned results by a large amount, the difference should
be investigated by management to achieve effective budgetary control.
3.
Cash budget reports are often prepared daily, whereas others are prepared less
frequently depending on the activities being monitored.
4.
5.
6.
A static budget is one that is geared to the most profitable level of activity for a company.
7.
A static budget considers that actual activity is often different from the level of activity
expected.
8.
9.
A flexible budget should be prepared for each of the types of budgets included in the
master budget.
10.
11.
Flexible budgeting relies on the assumption that unit fixed costs will remain constant
within the relevant range of activity.
12.
The amount of fixed costs which appear on the flexible budget is the same as those
appearing on the master budget.
13.
14.
The activity index used in preparing a flexible budget should be the basis of the variable
costs that are being budgeted.
11-7
15.
A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total
variable cost activity level).
16.
Flexible budgets are widely used in production departments, and least used in service
departments.
17.
A flexible budget report will compare actual costs with the budgeted costs at the actual
activity level achieved.
18.
Management by exception means that management will investigate all areas where actual
results are greater than planned results.
19.
Policies regarding when a difference between actual and planned results should be
investigated are generally more restrictive for controllable items than for non-controllable
items.
20.
Under responsibility accounting, both controllable and non-controllable costs receive the
same attention.
21.
Cost centres are not classified as responsibility centres since there is no revenue
responsibility.
22.
More costs become controllable as one moves up to each higher level of managerial
responsibility.
23.
24.
The buck stops here implies that all costs and revenues are controllable at some level of
responsibility within a company.
25.
26.
27.
Since a profit centre is an independent entity, all fixed costs are controllable by its
manager.
11-8
28.
Return on investment is the primary basis for evaluating profit and investment centre
managers.
29.
Operating assets include all those listed under Assets on an investment centres balance
sheet.
*30.
Residual income is the income that remains after subtracting controllable costs from
controllable margin.
*31.
When evaluating residual income, the calculation tells management what percentage
return was generated by the particular division being evaluated.
*32.
Residual income generates a dollar amount which represents the increase in value to the
company beyond the cost necessary to pay for the financing of assets.
33.
34.
35.
36.
37.
Increasing either controllable margin or the average operating assets can raise ROI.
38.
*39.
Residual income and ROI are used as performance evaluation methods for profit centre
performance.
11-9
Ans.
F
T
T
T
T
F
F
Item
8.
9.
10.
11.
12.
13.
14.
Ans.
F
T
F
F
T
T
T
Item
15.
16.
17.
18.
19.
20.
21.
Ans.
F
F
T
F
T
F
F
Item
22.
23.
24.
25.
26.
27.
28.
Ans.
T
F
T
F
F
F
F
Item
29.
*30.
*31.
*32.
33.
34.
35.
Ans.
F
F
F
T
F
T
T
Item
36.
37.
38.
*39.
Ans.
T
F
T
F
11-10
ROI
33.33%
28.57%
The Steak House segment has currently $5,000,000 in invested capital and a controllable
margin of $1,500,000. Which one of following projects will increase the Steak House
divisions ROI?
a. Both the Winnipeg and Regina options
b. Only the Winnipeg option
c. Only the Regina option
d. Neither the Winnipeg nor the Regina options
Use the following information to answer questions 41 to 45
EKPN Company prepared the following data in its static budget based on 150,000 machine
hours:
Direct Materials
$ 450,000
Direct Labour
225,000
Variable Overhead
1,125,000
Fixed Overhead
2,100,000
Actual Results:
Machine Hours
160,000 hours
Direct Materials
$475,000
Direct Labour
245,000
Variable Overhead
1,150,000
Fixed Overhead
2,110,000
41.
What was the budgeted variable costs per machine hour for variable overhead, rounded to
the nearest whole cent?
a. $7.03/machine hour
b. $7.50/marchine hour
c. $19.53/machine hour
d. $20.83/machine hour
42.
What is the budgeted Direct Labour cost at the actual level of activity?
a. $245,000
b. $240,000
c. $210,938
d. $20,000
43.
b.
c.
d.
11-11
$2,110,000
$2,240,000
$3,260,000
44.
What was the difference between the actual and budgeted Direct Material costs at the
actual level of activity?
a. $25,000 unfavourable
b. $25,000 favourable
c. $5,000 favourable
d. $5,000 favourable
45.
What possible reason could explain the difference between the actual fixed overhead
costs and the budgeted fixed overhead costs?
a. EKPN Companys actual machine hours were greater than the budgeted amount.
b. EKPN Companys actual machine hours were less than the budgeted amount.
c. EKPN Company spent more on fixed costs than it expected.
d. EKPN Company spent less on fixed costs than expected.
46.
$ 40,000
125,000
30,000
10,000
475,000
Kilroy Manufacturing prepared a 2012 budget for 40,000 units of product. Actual
production in 2012 was 41,000 units. Which one of the following is the most useful
comparison for this company?
a. The actual results for 41,000 units with a new budget for 41,000 units
b. The actual results for 41,000 units with the original budget for 40,000 units
c. The actual results for 41,000 units with the previous years actual results for
44,000 units
d. It doesnt matter. All of these choices are equally useful.
48.
11-12
49.
50.
51.
52.
53.
Which one of the statements below is correct concerning the comparison of differences
between actual and planned results?
a. The difference must be reported on external financial statements.
b. The differences always require investigation.
c. It reflects information from the static budget.
d. It enables managers to take corrective action when differences are material.
54.
55.
56.
a.
b.
c.
d.
11-13
57.
58.
What should be the reaction of upper level managers when a difference between
budgeted and actual sales exists?
a. The difference should be investigated if it is unfavourable.
b. The difference should be ignored since economic conditions affect sales and
cannot be controlled by the companys managers.
c. It depends on whether the difference is material or not.
d. It depends on management personalities.
59.
A manager determined that certain costs were not responsive to changes in activity level.
What are these costs?
a. Mixed
b. Flexible
c. Variable
d. Fixed
60.
Dunellon Companys actual sales results exceeded the planned results for February. This
amount exceeded the amount of an unfavourable difference reported for January sales.
Which one of the following statements about the sales budget report for the two months
ending February 28 is true?
a. The sales report is not useful since it shows a favourable and unfavourable
difference for the two months.
b. The differences for the two months will offset each other so the differences
should not be a concern.
c. The difference for February can be ignored since it is favourable.
d. The differences for both months should be investigated if the amounts are
material.
61.
62.
11-14
a.
b.
c.
d.
63.
Haroot Companys master budget shows that the planned activity level for next year is
expected to be 20,000 machine hours. At this level of activity, the following manufacturing
overhead costs are expected:
Indirect labour
Factory supplies
Indirect materials
Depreciation on factory building
Total manufacturing overhead
$45,000
4,000
21,000
15,000
$85,000
If the company operates at 21,000 machine hours, how much is allowed on a flexible
budget for manufacturing overhead costs?
a. $89,250
b. $73,500
c. $88,500
d. $85,000
64.
A department has budgeted monthly manufacturing overhead cost of $40,000 plus $5 per
direct labour hour. The flexible budget report reflects $120,000 for total budgeted
manufacturing cost for the month. What is the budgeted level of activity to be achieved
during the month?
a. 32,000 direct labour hours
b. 24,000 direct labour hours
c. 16,000 direct labour hours
d. Cannot be determined
65.
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 labour cost
b. Indirect labour cost
c. Fixed manufacturing overhead
d. Variable manufacturing overhead
66.
Which one of the following statements is true in developing a flexible budget within a
relevant range of activity?
a. The budget must reflect a fixed level of activity.
b. Total variable costs should be adjusted based on the activity index chosen.
c. Costs cannot increase when different levels of activity exist.
d. Fixed costs are not reported.
67.
b.
c.
d.
11-15
68.
For which of the budgets in the master budget will a company prepare a flexible budget?
a. Only the sales budget
b. Only the income statement budget
c. Only the budgets that reflect operations
d. All of the budgets
69.
Which one of the following is another name for the static budget?
a. Flexible budget
b. Operating budget
c. Permanent budget
d. Master budget
70.
Surf N Waves planned to sell 27,000 surfboards, however the actual number sold totalled
23,000. Which one of the following provides the best comparison of the cost data
associated with the sales?
a. A budget based on the original planned level of activity
b. A budget of 27,000 units of activity
c. A budget of 23,000 units of activity
d. The master budget level of activity
71.
What assumption about the behaviour of total costs occurs within the relevant range of
activity?
a. Linear and upward sloping
b. Linear and downward sloping
c. Curvilinear and upward sloping
d. Horizontal
72.
Yellow Card Company compared its actual sales results with a static budget. Which of the
following situations might result?
a. Favourable differences that are not justified
b. Unfavourable differences that are not justified
c. Either favourable or unfavourable differences that are not justified
d. Actual differences that are justified
73.
Which statement is true concerning the selection of the level of activity used in the flexible
budget?
a. The activity level should be the same as actually achieved.
b. The activity level should be the same as found in the master budget.
c. Any activity level can be used in the flexible budget.
d. The activity level should be the level which maximizes profit.
74.
11-16
a.
b.
c.
d.
75.
76.
77.
Which statement is true about the activity index used in preparing the flexible budget?
a. It applies only to fixed manufacturing costs.
b. It is the same for all departments of the company.
c. It significantly influences the variable costs that are being budgeted.
d. It is irrelevant to total costs.
78.
79.
What is the preparation of reports for each level of responsibility in the companys
organization chart called?
a. Static reporting
b. Responsibility reporting
c. Exception reporting
d. Master budgeting analysis
80.
81.
b.
c.
d.
11-17
82.
83.
What centres receive responsibility reports containing budgeted and actual controllable
revenues and costs?
a. Investment centres
b. Profit centres
c. Cost centres
d. Investment, profit, and cost centres
84.
85.
86.
What is a segment?
a. A non-controllable cost
b. An area of responsibility in decentralized operations
c. Another name for a cost centre
d. A division which contains both controllable and non-controllable costs
87.
88.
11-18
89.
Which type of centre is the theme park division of Walt Disney Company?
a. Not a responsibility centre
b. A profit centre
c. A cost centre
d. An investment centre
90.
91.
Which of the following correctly indicates the responsibilities of the respective centre?
a. An investment centre incurs costs, and controls investment funds.
b. A cost centre incurs costs.
c. A profit centre incurs costs and controls investment funds.
d. None of these indicate the correct responsibilities.
92.
93.
94.
95.
What would you expect to find in a performance report for a cost centre?
a. Both controllable and non-controllable costs
b. Variable, but not fixed costs
c. Only costs controllable by the managers of the centre
d. Only material and labour costs
96.
b.
c.
d.
11-19
97.
98.
99.
Which one of the following is a measure of the performance of the manager of a profit
centre?
a. ROI
b. Success in meeting budgeted goals for non-controllable costs
c. Amount of controllable margin generated
d. Amount of residual income generated
100.
101.
102.
Which of the following will most likely result in a favourable controllable margin difference?
a. Sales exceeding budget; costs under budget
b. Sales exceeding budget; costs over budget
c. Sales under budget; costs under budget
d. Sales under budget; costs over budget
103.
11-20
Which one of the following is a performance indicator for an investment centre, but not for
a profit centre?
a. Controllable margin
b. Asset utilization effectiveness
c. Revenues
d. Controllable costs
105.
Given below is an excerpt from a management performance report for a profit centre:
Budget
Actual
Difference
Contribution margin
$600,000
$580,000
$20,000
Controllable fixed costs
$200,000
$220,000
$20,000
How well did the manager perform overall?
a. $20,000 below expectations
b. $40,000 below expectations
c. Equal to expectations
d. The ROI needs to be known for a total assessment.
106.
What will you expect to find on a responsibility report for a profit centre?
a. Only direct costs
b. No indirect fixed costs
c. All fixed costsboth controllable and non-controllable
d. Controllable margin
107.
108.
11-21
109.
110.
111.
112.
Which one of the following statements about a profit centre responsibility report is correct?
a. It shows budgeted and actual controllable revenues and costs.
b. Non-controllable fixed costs are reported.
c. It provides the same information as a cost centre responsibility report.
d. All fixed costs are deducted from controllable margin.
113.
114.
Merck Pharmaceuticals is evaluating its Vioxx division, an investment centre. The division
has a $45,000 controllable margin and $300,000 of sales. How much will Mercks average
operating assets be when its return on investment is 10%?
a. $450,000
b. $495,000
c. $300,000
d. $255,000
115.
SuitCity purchased an operating asset expected to benefit the company for 10 years for a
cost of $100,000 cash. The old operating asset was fully depreciated and was kept in
operations. What effect will acquiring this asset have on the performance measurement of
an investment centre?
a. A negative effect
b. A positive effect
c. No effect since cash replaces the asset sold
d. More information is needed to determine the effect
11-22
116.
117.
Which one of the following valuations of operating assets is not readily available from the
accounting records?
a. Cost
b. Book value
c. Market value
d. Both cost and market value
118.
119.
Which one of the following measures is frequently used to evaluate the performance of the
manager of an investment centre, but not profit centres?
a. The amount of profit generated
b. The percentage increase in profit over the previous year
c. Controllable margin
d. The rate of return on funds invested in the centre
120.
121.
122.
123.
124.
Behavioural principles are often included in performance evaluation. What does this
mean?
a. The human factor should be considered when evaluating performance.
b. Top management should evaluate lower managers.
c. The evaluation process must allow managers to respond to their evaluation.
d. Evaluation should identify only poor performance.
11-23
$750,000
90,000
175,000
10%
Which one of the following is a reason that a company may have significant deviations
from budgeted performance?
a. Actual results were compared to flexible budget amounts instead of static budget
amounts.
b. The budget was approved by the budget committee.
c. Economic conditions may have changed since the plan was developed.
11-24
d.
129.
Roasted Toasters prepared a 2012 budget for 40,000 units of product. Actual production in
2012 was 45,000 units. To be most useful, what amounts should a performance report for
this company compare?
a. The actual results for 45,000 units with the original budget for 40,000 units
b. The actual results for 45,000 units with a new budget for 45,000 units
c. The actual results for 45,000 units with last years actual results for 47,000 units
d. It doesnt matter. All of these choices are equally useful.
130.
131.
True Masons installed 20,000 linear metres of block during March. How much is budgeted
total manufacturing costs in March?
a. $320,000
b. $412,000
c. $400,000
d. $332,000
132.
What is the primary difference between a static budget and a flexible budget?
a. The static budget contains only fixed costs, while the flexible budget contains
only variable costs.
b. The static budget is prepared for a single level of activity, while a flexible budget
is adjusted for different activity levels.
c. The static budget is constructed using input from only upper level management,
while a flexible budget obtains input from all levels of management.
d. The static budget is prepared only for units produced, while a flexible budget
reflects the number of units sold.
11-25
12%
133.
134.
135.
Beach Road Foods calculated the following for two potential investments. Beach Roads
required rate of return is 10%.
Investment A
Investment B
11.5%
9.5%
139.
11-26
b.
c.
d.
140.
Frame, Inc. requires a return for the Picture Division totalling 8%. Which projects would
add value to the company?
Project
Average Operating Assets
A
$500,000
B
$450,000
C
$375,000
D
$425,000
a. A, B, C, and D
b. Projects A, C, and D
c. Projects C and D
d. Project A, B, and D
Controllable Margin
$40,000
$30,000
$32,000
$40,000
141.
The current controllable margin for Claremont Division is $62,000. Its current operating
assets are $200,000. The division is considering purchasing equipment for $60,000 that
will increase annual controllable margin by an estimated $10,000. If the equipment is
purchased, what will happen to the return on investment for Claremont Division?
a. An increase of 16.1%
b. A decrease of 13.3%
c. A decrease of 3.3%
d. A decrease of 7.2%
142.
CinRich Corporation recorded operating data for its Waterhole division for the year.
CinRich requires its return to be 9%.
Sales
Controllable margin
Total average assets
Fixed costs
Residual income
$500,000
90,000
300,000
30,000
50,000
CinRich Corporation recorded operating data for its Waterhole division for the year.
CinRich requires a 9% rate of return.
Sales
Controllable margin
Total average assets
Fixed costs
Residual income
$500,000
90,000
300,000
30,000
50,000
11-27
Suppose CinRich experiences an increase of $50,000 in controllable fixed costs. Will the
new ROI be acceptable?
a. Yes. The ROI will remain at 30% which exceeds the required ROI.
b. Yes. The new ROI is still above the required ROI.
c. No. The ROI drops to less than 9%.
d. There is not enough information to determine.
144.
145.
146.
Ginder Company operates four plants, each in separate divisions, and a separate
corporate office. Which one of the following would you not expect to find on a
responsibility report for the VP of production of the companys Eastern plant?
a. Material costs for the Eastern plant
b. Indirect labour of the Eastern plant
c. Asset maintenance costs of factory equipment in the Eastern plant
d. Interest expense on corporate company debt
147.
Investment
$ 75,000
330,000
Controllable Margin
$15,000
56,100
ROI
20%
17%
11-28
b.
c.
d.
Ed is the manager of the Montreal location of Books Galore. Which one of the following
would most likely be an uncontrollable cost for Ed?
a. Workers compensation insurance expense for his cashiers
b. Installation of a corporate-wide satellite dish system for book signings by selected
authors
c. Costs of printing signs for local promotions
d. Colour selection of logo merchandise
*151. Which one of the following does not impact the amount of residual income?
a. Contribution margin
b. Net income
c. Sales
d. Controllable costs
152.
The following information was extracted from the accounting records of the City of
Charlottetown, PEI:
Average assets increased by $100,000
Variable costs increased by $50,000
How much is the current years return on investment?
a. Less than the prior years due to the change in variable costs
b. Less than the prior years due to the change in average assets
c. No change between years
d. Less than the prior years due to both the change in assets and variable costs
b.
c.
d.
155.
11-29
$20,000
$80,000
$320,000
Jasper Recording Studio has a current return on investment of 10% and the company has
established an 8% minimum rate of return for the division. The division manager has two
investment projects available, for which the following estimates have been made:
Project A - annual controllable margin = $24,000, operating assets = $400,000
Project B - annual controllable margin = $60,000, operating assets = $550,000
Which project should be funded?
a. Both projects
b. Project A
c. Project B
d. Neither project
156.
Lou Alabassi is the Northwest Territories Division manager and his performance is
evaluated by executive management based on Division ROI. The current controllable
margin for Northwest Territories Division is $46,000. Its current operating assets total
$210,000. The Division is considering purchasing equipment for $40,000 that will increase
sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is
purchased, what will happen to the return on investment for the division?
a. An increase of 0.5%
b. A decrease of 0.5%
c. A decrease of 3.5%
d. It will remain unchanged
*157. Waterloo Company earned controllable margin of $125,000 on sales of $1,600,000. The
division had average operating assets of $1,300,000. The company requires a return on
investment of at least 8%. How much is residual income?
a. $104,000
b. $21,000
c. $146,000
d. $128,000
*158. The performance of the manager of Purina Division is measured by residual income.
Which of the following would decrease the manager's performance measure?
a. Decrease in required rate of return
b. Increase in amount of return on investment desired
c. Increase in sales
d. Increase in contribution margin
159.
11-30
a.
b.
c.
d.
160.
161.
162.
163.
164.
165.
In a cost centre
a. Managers are expected to control costs directly under their control.
b. Managers are expected to control all costs, including allocated costs from head
office.
c. Managers are expected to control all direct costs and the contribution margin that
they provide.
d. Managers are expected to control all costs and sales from their division.
11-31
166.
167.
168.
169.
When comparing performance tools such as Return on Investment and Residual Income,
a. ROI is superior to RI.
b. RI is superior to ROI.
c. Blending ROI and RI will eliminate the weaknesses inherent in both methods.
d. Management must be clear in recognizing that each method has strengths and
weaknesses.
11-32
Ans
.
Item
Ans
.
Item
Ans
.
Item
Ans
.
Item
Ans
.
Item
Ans
.
Item
Ans
.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
b
b
b
a
d
c
b
a
b
b
c
d
d
d
c
c
b
b
c
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
d
d
c
c
c
c
c
b
a
d
d
c
a
c
a
d
c
c
c
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
c
b
a
d
a
b
c
a
b
b
b
d
c
b
d
a
d
c
c
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
b
c
c
a
b
a
b
b
b
d
b
b
d
a
d
a
c
a
a
116.
117.
118.
119.
120.
121.
122.
123.
124.
*125.
*126.
*127.
128.
129.
130.
131.
132.
133.
134.
b
c
b
d
c
b
a
a
a
c
c
d
c
b
c
d
b
a
d
135.
*136.
137.
138.
139.
140.
141.
142.
143.
144.
145.
146.
147.
148.
*149.
150.
*151.
152.
*153.
a
c
a
a
d
b
c
d
b
b
a
d
a
a
c
b
b
d
b
*154.
155.
156.
*157.
*158.
159.
160.
161.
162.
163.
164.
165.
166.
167.
168.
169.
b
c
c
b
b
a
c
d
b
d
c
a
d
a
a
d
11-33
BRIEF EXERCISES
Brief Exercise 170
Data for the Electric Division of Bowden Baseball Company which is operated as an investment
centre follows:
Sales
Contribution Margin
Controllable Fixed Costs
Return on Investment
$2,750,000
900,000
400,000
10%
Current Assets
Plant Assets
The controllable margin is $680,000. How much is the return on investment for the centre for
2012?
Solution Brief Exercise 172
Average current assets
($700,000 + $900,000) 2 = $800,000
Average plant assets
($2,500,000 + $2,700,000) 2 = $2,600,000
ROI = Controllable Margin Average Operating Assets
= $680,000 ($800,000+$2,600,000) = 20%
11-34
Controllable margin
Average assets 11%
Residual income
Direct materials
Direct labour
Fixed overhead
Total costs
Flames Company
Manufacturing Performance Budget Report
For the Year Ending December 31, 2012
Budget
Actual
$ 63,800
$ 65,000
81,200
81,000
35,000
34,500
$180,000
$180,500
Differences
$1,200 U
200 F
500 F
$ 500 U
11-35
6,000 Units
9,000 Units
$42,000
6,000
48,000
24,000
$72,000
$7.00
1.00
$63,000
9,000
72,000
24,000
$96,000
Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month.
Solution Brief Exercise 178
3,200 x ($6.50 + $2.40 + $1.10) + ($12,600 + $3,500 + $2,200) = $50,300
11-36
$18,000
2,000
15,000
4,000
10,000
1,000
If Sekine prepares a flexible budget at 3,000 units, how much will its total variable cost be?
Solution Brief Exercise 179
Variable cost per unit: ($18,000 + $2,000 + $10,000)/2,000 = $15 per unit
Variable cost at 3,000 units: $15 x 3,000 = $45,000
Brief Exercise 180
SugarTowns manufacturing costs for August when production was 1,000 units appears below:
Direct material
Direct labour
Variable overhead
Factory depreciation
Factory supervisory salaries
Other fixed factory costs
How much is the flexible budget manufacturing cost amount for a month when 800 units are
produced?
Solution Brief Exercise 180
Direct material ($12*800)
Direct labour [($6,500/1,000)*800]
Variable overhead [($5,000/1,000)*800]
Factory depreciation -fixed
Factory supervisory salaries - fixed
Other fixed factory costs - fixed
Total
$9,600
5,200
4,000
9,000
7,800
2,500
$38,100
11-37
4% x $500,000
$20,000
80,000
1% x $500,000
5,000
Fixed portion
1,000
Variable: 0.5% x $500,000
2,500
$108,500
$4,000,000
250,000
60,000
1,800,000
$0.80
2.20
1.10
$8,600
4,500
1,200
Determine the amount of manufacturing costs for a production level of 3,200 dozen per month.
Solution Brief Exercise 183
[3,200 ($0.80 + $2.20 + $1.10)] + ($8,600 + $4,500 + $1,200) = $27,420
Brief Exercise 184
EKPN Company is currently generating an ROI of 10%. The Winnipeg division of EKPN is
operating as an investment centre. It is currently generating an ROI of 13% based on $130,000 in
operating assets and a controllable margin of $16,900. The manager of the Winnipeg division has
an opportunity to invest in an asset that will cost $30,000, and generate a controllable margin of
$3,600.
1. Would it be in the Winnipeg managers best interests to make the investment?
2. Would it be in EKPNs best interests to make the investment?
Solution Brief Exercise 184
11-38
1. The ROI on the investment is $3,600 / $30,000, or 12%. Since that is less than the
Winnipegs current ROI of 13%, it would lower the ROI. The investment is not attractive for
the Winnipeg division. New ROI = ($16,900 + $3,600) / ($130,000 + $30,000) or 12.8%.
2. The ROI on the investment of 12% is above EKPNs current ROI of 10%, and therefore it
would raise the companys ROI. Accordingly, the investment is attractive for EKPN.
* Brief Exercise 185
EKPN Companys required rate of return is 10%. The Winnipeg division of EKPN is operating as
an investment centre. It is currently generating an ROI of 13% based on $130,000 in operating
assets and a controllable margin of $16,900. The manager of the Winnipeg division has an
opportunity to invest in an asset that will cost $30,000, and generate a controllable margin of
$3,600. Is the investment opportunity attractive to the Winnipeg division if the division is
evaluated based on residual income?
Solution Brief Exercise 185
Current residual income: $16,900 ($130,000 X 10%) = $3,900
Residual income after investment: $16,900 + $3,600 ([$130,000 + $30,000] X 10%) = $4,500
The investment is attractive to the Winnipeg division, as it will increase its residual income.
Brief Exercise 186
Custom Air Corporations manufacturing costs for July when production was 500 units appears
below:
Direct material
$20 per unit
Factory depreciation
$8,000
Variable overhead
4,000
Direct labour
1,500
Factory supervisory salaries
5,800
Other fixed factory costs
1,500
How much is the flexible budget manufacturing cost amount for a month when 550 units are
produced?
Solution Brief Exercise 186
Direct material ($20 x 550)
Direct labour [($1,500/500) x 550]
Variable overhead [$4,000/500 x 550]
Factory depreciation -fixed
Factory supervisory salaries - fixed
Other fixed factory costs - fixed
Total
$11,000
1,650
4,400
8,000
5,800
1,500
$32,350
2,000 units
Variable costs:
Direct labour
Utilities
Fixed costs
Total costs
$10,000
2,000
12,000
16,000
$28,000
11-39
6,000 units
$30,000
6,000
36,000
16,000
$52,000
The company is over budget by $400. The flexible budget amount allowed was $52,000, and the
company incurred $52,400.
Brief Exercise 188
Back 2 Front Company makes products for the fashion industry. The head office is in Paris and it
has branches in all the major cities in the world. All designs are made in the head office and sent
to the branches where it is then the responsibility to manufacture the products and ship them to a
warehouse. The products then get sent to stores whenever the sales department in Paris gets
orders.
The company dictates that each branch complete an Income Statement with the following
headings:
Sales to Customers
Direct materials
Indirect materials
Factory labour
Administration costs
Factory overhead
Head office allocated costs
Selling costs
Interest expense (allocated)
The Canadian branch has its offices in Vancouver.
Required:
At an annual meeting to discuss results, determine which costs would be under the control of the
Vancouver branch manager.
Solution Brief Exercise 188
In a cost centre, the manager would only be responsible for those items directly under his or her
control. In this example it would be direct and indirect materials, factory labour, administration
costs and factory overhead. All selling, interest and any allocated head office charges would not
be considered as being under the control of the manager.
Brief Exercise 189
Back 2 Front Company is considering having each of its branches operate as a profit centre. It
will still allocate only certain head office costs to the branches, but all products will be designed in
the branches.
Required:
If the changes are made to how the company operates, determine which costs would be under
the control of the Vancouver branch manager as a result.
Solution Brief Exercise 189
11-40
All costs except for the allocated head office charges and the interest expense if it is still allocated
from Paris. It would be thought that the Vancouver manager would now be responsible for any
new capital investment decisions as well as the interest cost associated with running the branch.
11-41
EXERCISES
Exercise 190
Ashley Sofa Store produces sofas. The following budgeted and actual amounts are for 2012:
Cost
Direct materials
Direct labour
Equipment depreciation
Indirect labour
Indirect materials
Rent and insurance
Instructions
Prepare a performance report for Ashley Sofa Store for the year.
Solution Exercise 190 (6-8 mins.)
Ashley Sofa Store
Manufacturing Performance Budget Report
For the Year Ending December 31, 2012
Budget
Actual
Direct materials
$67,500
$64,000
Direct labour
52,500
49,500
Equipment depreciation
10,000
10,000
Indirect labour
6,000
5,700
Indirect materials
15,000
14,900
Rent and insurance
15,000
15,100
Total costs
$166,000
$159,200
Differences
$3,500 F
3,000 F
0
300 F
100 F
100 U
$6,800 F
Exercise 191
Cranium Co.'s static budget at 5,000 units of production includes $60,000 for direct labour and
$35,000 for materials. Total fixed costs are $12,000.
Instructions
a. Determine how much would appear on Craniums flexible budget for 2012 if 6,000 units are
produced and sold.
b. How would this comparison differ if a static budget were used instead of a flexible budget for
performance evaluation?
Solution Exercise 191 (7-9 mins.)
a.
Variable costs:
Direct labour
Direct materials
Fixed costs
Total costs
5,000 Units
$60,000
35,000
95,000
12,000
$107,000
6,000 Units
$72,000
42,000
114,000
12,000
$126,000
11-42
b. If a static budget were used, budgeted variable costs would be less because they would be
based on the static budget level of 5,000 units. The company would appear over budget since
the costs incurred would be correlated to a higher level of activity.
Exercise 192
Cheatem Trading Company's master budget reflects budgeted sales information for the month of
March, 2012, as follows:
Budgeted Quantity
Budgeted Unit Sales Price
Baking potatoes
35,000kilograms
$0.75 per kilogram
Boiling potatoes
20,000kilograms
$0.30 per kilogram
During March, the company actually sold 37,000kilograms of baking potatoes at an average price
of $0.73 per kilogram and 17,000kilograms of boiling potatoes at an average price of $0.32 per
kilogram.
Instructions
Prepare a Sales Budget Report for the month of March for Cheatem Trading Company which
shows whether the company achieved its planned objectives.
Solution Exercise 192 (68 min.)
Cheatem Trading Company
Sales Budget Report
For the Month Ended March 31, 2012
Product Line
Baking potatoes
Boiling potatoes
Total sales
Budget
$26,250
6,000
$32,250
Actual
$27,010
5,440
$32,450
Difference
$760 F
560 U
$200 F
Exercise 193
Toto Dog Toys developed its annual manufacturing overhead budget for its master budget for
2012 as follows:
Expected annual operating capacity: 90,000 Direct Labour Hours
Variable overhead costs
Indirect labour
Indirect materials
Factory supplies
Total variable costs
Fixed overhead costs
Depreciation
Supervision
Property taxes
Total fixed costs
Total costs
$360,000
27,000
63,000
450,000
72,000
70,000
12,000
154,000
$604,000
The relevant range for monthly activity is expected to be between 80,000 and 100,000 direct
labour hours.
Instructions
Prepare a flexible budget for a monthly activity level of 85,000 direct labour hours.
Solution Exercise 193 (810 min.)
Toto Dog Toys
Monthly Flexible Manufacturing Overhead Budget at 85,000 Direct Labour Hours
Variable overhead costs:
Indirect labour
Indirect materials
Factory supplies
Total variable costs
Fixed overhead costs:
Depreciation
Supervision
Property taxes
Total fixed costs
Total costs
$340,000
25,500
59,500
425,000
72,000
70,000
12,000
154,000
$579,000
Exercise 194
Jessica Simpson Music Company has prepared the following monthly flexible manufacturing
overhead budget for its Lip Sync Department:
Indirect labour
Indirect materials
Factory supplies
Depreciation
Supervision
Property taxes
Total costs
4,000 Units
$32,000
44,000
36,000
17,000
5,500
1,250
$135,750
5,000 Units
$40,000
55,000
45,000
17,000
5,500
1,250
$163,750
Instructions
Prepare a flexible budget at 4,700 units of activity.
Solution Exercise 194 (810 min.)
Jessica Simpson Music Company
Monthly Flexible Manufacturing Overhead Budget at 4,700 Units
Lip Sync Department
Variable overhead costs:
Indirect labour
Indirect materials
Factory supplies
Total variable costs
Fixed overhead costs:
Depreciation
Supervision
Property taxes
Total fixed costs
Total costs
$ 37,600
51,700
42,300
131,600
17,000
5,500
1,250
23,750
$155,350
11-43
11-44
Exercise 195
Usher Music Company uses a flexible budget for overhead based on studio hours. Variable
overhead costs per studio hour are as follows:
Indirect Labour
Indirect Materials
Maintenance
Utilities
$ 4.25
1.27
0.34
0.15
$900
700
400
600
The company believes it will normally operate in a range of 2,000 to 4,000 studio hours per
month.
Instructions
Prepare a flexible manufacturing overhead budget for 2,500 studio hours.
Solution Exercise 195 (810 min.)
Usher Music Company
Monthly Flexible Manufacturing Overhead Budget at 2,500 Studio Hours
Variable overhead costs
Indirect Labour
$10,625
Indirect Materials
3,175
Maintenance
850
Utilities
375
Total variable costs
15,025
Fixed overhead costs
Supervision
900
Insurance
700
Property Taxes
400
Depreciation
600
Total fixed costs
2,600
Total costs
$17,625
Exercise 196
Outkast Company uses a flexible budget for manufacturing overhead based on machine hours.
Variable manufacturing overhead costs per machine hour is as follows:
Indirect labour
$0.50
Indirect materials
1.50
Maintenance
.40
Utilities
.20
Budgeted fixed overhead costs per month are:
Supervision
$4,000
Insurance
2,000
Property taxes
1,000
Depreciation
9,000
11-45
The company believes it will normally operate in a range of 28,000 to 35,000 machine hours per
month. During the month of August, 2012, the company incurred the following manufacturing
overhead costs:
Indirect Labour
Indirect Materials
Maintenance
Utilities
Supervision
Insurance
Property Taxes
Depreciation
$14,800
44,000
12,000
6,500
4,200
2,100
800
8,600
Instructions
Prepare a flexible budget report, assuming that the company used 31,000 machine hours during
August.
Solution Exercise 196 (1012 min.)
Outkast Company
Manufacturing Overhead Budget Report (Flexible)
For the Month Ended August 31, 2012
Variable overhead costs
Indirect Labour
Indirect Materials
Maintenance
Utilities
Total variable costs
Fixed overhead costs
Supervision
Insurance
Property Taxes
Depreciation
Total fixed costs
Total costs
Difference F or U
$15,500
46,500
12,400
6,200
80,600
$14,800
44,000
12,000
6,500
77,300
$ 700 F
2,500 F
400 F
300 U
3,300 F
4,000
2,000
1,000
9,000
16,000
$96,600
4,200
2,100
800
8,600
15,700
$93,000
200 U
100 U
200 F
400 F
300 F
$3,600 F
Exercise 197
Eastwood Music uses flexible budgets to control its selling expenses. Monthly sales are expected
to be from $400,000 to $450,000. Variable costs and their percentage relationships to sales are:
Sales commissions
Advertising
Traveling
Delivery
8%
5%
15%
2%
Fixed selling expenses consist of sales salaries of $50,000 and depreciation on stage and
production equipment totalling $12,000.
Instructions
Prepare a flexible budget for $420,000 of sales.
11-46
$33,600
21,000
63,000
8,400
126,000
50,000
12,000
62,000
$188,000
Exercise 198
Westwood Music uses flexible budgets to control its selling expenses. Monthly sales are
expected to be from $400,000 to $450,000. Variable costs and their percentage relationships to
sales are:
Sales commissions
Advertising
Traveling
Delivery
8%
5%
15%
2%
Fixed selling expenses consist of sales salaries of $50,000 and depreciation on stage and
production equipment totalling $12,000.
The actual selling expenses incurred in March, 2012, by Westwood Music are as follows:
Sales commissions
$35,000
Advertising
19,800
Traveling
64,000
Delivery
8,200
Fixed selling expenses consist of sales salaries of $48,800 and depreciation on delivery
equipment totalling $11,000.
Instructions
Prepare a flexible budget performance report, assuming that March sales were $420,000.
Expected and actual sales are the same.
Solution Exercise 198 (1012 min.)
Westwood Music
Selling Expense Budget Report (Flexible)
For the Month Ended March 31, 2012
Variable costs
Sales commissions
Advertising
Budget at
$420,000
$33,600
21,000
Actual at
Difference
$420,000
$35,000
$1,400 U
19,800
1,200 F
Traveling
Delivery
Total variable costs
Fixed Costs
Sales salaries
Depreciation
Total fixed costs
Total costs
63,000
8,400
126,000
64,000
8,200
127,000
50,000
12,000
62,000
$188,000
48,800
11,000
59,800
$186,800
1,000 U
200 F
1,000 U
1,200
1,000
2,200
$1,200
F
F
F
F
Exercise 199
Sinclair Components uses flexible budgeting to control manufacturing overhead. The budget
below was prepared for the month ending June 30, 2012.
Direct Labour Hours
10,000
11,000
$12,00
$13,20
0
0
6,000
6,600
2,400
2,640
20,400
22,440
Indirect materials
Indirect labour
Utilities
Total variable costs
Rent
Depreciation
Insurance
Total fixed costs
Total costs
10,000
8,000
5,500
23,500
$43,900
10,000
8,000
5,500
23,500
$45,940
12,000
$14,400
7,200
2,880
24,480
10,000
8,000
5,500
23,500
$47,980
During the month of June, the company used direct labour hours totalling 11,600 and the
following costs were incurred:
Indirect materials
$13,200
Indirect labour
16,200
Utilities
2,500
Rent
9,900
Depreciation
7,800
Insurance
5,200
Instructions
Prepare a flexible budget that could be used for performance evaluation of this company.
Solution Exercise 199 (8-9 min.)
Sinclair Components
Flexible Budget at 11,600 Units
For the Month Ended June 30, 2012
Variable costs:
Indirect materials
Indirect labour
Utilities
Total variable costs
Fixed costs:
Rent
$13,920
6,960
2,784
23,664
10,000
11-47
11-48
Depreciation
Insurance
Total fixed costs
Total costs
8,000
5,500
23,500
$47,164
Exercise 200
Data concerning manufacturing overhead for Wilson Audio are presented below. The packaging
department is a cost centre.
An analysis of the overhead costs reveals that all variable costs are controllable by the manager
of the packaging department, and, out of fixed costs, only 40% of supervisory costs are
controllable at the department level. The flexible budget formula and the cost and activity for the
month of August while operating at 1,600 direct labour hours follows:
Variable
Indirect materials
Indirect labour
Factory supplies
Fixed
Depreciation
Supervision
Property taxes
Total costs
Flexible Budget
$2.00
3.00
0.50
$ 3,000
4,500
750
$7,000
20,000
2,000
$37,800
15,000
7,600
12,000
$42,850
Instructions
a. Prepare the responsibility reports for the packaging department for August.
b. Comment on the manager's performance in controlling costs during the month.
Solution Exercise 200 (912 min.)
a.
Wilson Audio Packaging Department
Manufacturing Overhead Cost Responsibility Report at 1,600 Direct Labour Hours
For the Month of August
Controllable Costs
Budget
Actual
Difference
Indirect materials
$ 3,200
$ 3,000
$200 F
Indirect labour
4,800
4,500
300 F
Factory supplies
800
750
50 F
Supervision
8,000
7,600
400 F
Total costs
$16,800
$15,850
$950 F
b.
The manager did a good job of controlling costs in August. All of the costs were under
budget and none look materially out of line.
Exercise 201
Ozzie Osborne Manufacturing Companys overhead budget for the first quarter of 2012 contained
the following data:
Variable Costs
Indirect Materials
Indirect Labour
$12,000
4,000
Utilities
Maintenance
Fixed Costs
Supervisor's Salary
Depreciation
Property taxes
$21,000
5,000
3,000
$13,300
4,200
3,050
5,600
11-49
3,000
5,000
Actual fixed costs were as expected except for property taxes which were $3,100. All costs are
considered controllable by the department manager except for the supervisor's salary. The
company manufactured and sold 1,100 units, however its budget was based on 1,000 units.
Instructions
Prepare a manufacturing overhead responsibility performance report for the first quarter.
Solution Exercise 201 (89 min.)
Ozzie Ozborne Manufacturing Company
Manufacturing Overhead Cost Responsibility Report at 1,100 Units
For the Quarter Ended March 31, 2012
Controllable Costs
Indirect materials
Indirect labour
Utilities
Maintenance
Depreciation
Property taxes
Total costs
Budget
$13,200
4,400
3,300
5,500
5,000
3,000
$34,400
Actual
$13,300
4,200
3,050
5,600
5,000
3,100
$34,250
Difference
$100 U
200 F
250 F
100 U
100 U
$150 F
Exercise 202
Maritime Division, a profit centre of Hurricane Weather Company, reported the following data for
the first quarter of 2012:
Sales
$2,000,000
Variable costs
1,200,000
Controllable direct fixed costs
200,000
Non-controllable direct fixed costs
150,000
Controllable indirect fixed costs
40,000
Instructions
a. Prepare a performance report for the manager of the Maritime Division.
b. How would the responsibility report differ if the division was an investment centre?
Solution Exercise 202(56 min.)
a.
Maritime Division of Hurricane Weather Company
Management Performance Report
11-50
$2,000,000
1,200,000
800,000
240,000
$ 560,000
For an investment centre, the responsibility report would also show the return on investment
for the period.
Exercise 203
Myrnas Market has two divisions: fruits and vegetables. The fruits division had sales of $500,000
and a contribution margin ratio of 15%. The vegetables division had a contribution margin of
$50,000 and variable costs of $300,000. Controllable fixed costs in total were $70,000, with the
fruits division having 60% of the total. Myrnas Markets net income was $20,000.
Instructions
Prepare an income statement for Myrnas Market in total and for its two divisions.
Solution Exercise 203(68 min.)
Myrnas Market
Income Statement
For the period ending....
Sales
Variable Costs
Contribution Margin
Controllable Fixed
Costs
Controllable Margin
Other Fixed Costs
Net Income
Company
$850,000
g
725,000f
125,000b
70,000
55,000c
35,000d
$20,000
Fruits
$500,00
0
425,000
e
75000a
42,000i
$33,000
Vegetable
s
$350,000
h
300,000
50,000
28,000j
$22,000
11-51
Exercise 204
The Candle Division of Dax Wax Company reported the following results for 2012:
Sales
Variable costs
Controllable fixed costs
Average operating assets
$800,000
420,000
100,000
4,000,000
Reduce controllable fixed costs by 50% with no change in sales or variable costs
Reduce average operating assets by 30% with no change in controllable margin
Increase sales $200,000 with no change in the contribution margin percentage
Instructions
a. Calculate the return on investment for 2012.
b. Calculate the expected return on investment for each of the alternative courses of action.
Solution Exercise 204 (68 min.)
a.
Controllable margin
Return on investment =
Average operating assets
2012 ROI =
b.
1.
2.
8.25%
3.
$280,000
= 7%
$4,000,000
10%
9.38%
11-52
Compare and contrast centralized and decentralized decision-making. Why would any firm
decentralize its operations?
Solution Exercise 205
Decentralization is the delegation of decision-making authority to lower levels of management. In
centralized decision-making, decisions are made at the top levels of management. Lower level
management is responsible for implementing such decisions, which, in effect, have been forced
on them. In decentralized decision-making, by contrast, decisions are both made and
implemented by various levels of management.
Various reasons for decentralizing include access to relevant, local information at all levels of the
organization, more timely response times, ability of central management to focus attention on
corporate level decision-making, training and evaluation, motivation and enhanced competition
among sub-units.
Exercise 206
Complete the missing information in the columns below:
A
B
C
$100,00
Sales
0
(e)
(i)
$1,000,00
Operating Assets
(a)
(f)
0
Net Operating
$100,00
Income
$30,000
0
$150,000
Margin
(b)
0.05
0.125
Turnover
4
(g)
1.2
Return On
Investment
(c )
20%
(j)
Required Rate Of
Return
20%
25%
(k)
Residual Income
(d)
(h)
$10,000
Solution Exercise 206
(a) $100,000 / a = 4. Therefore a = $25,000
(b) = $30,000 / $100,000. Therefore b = 30%
(c ) 4 X 30% = 120% or $30,000 / $25,000 = 120%
(d) $30,000 - ($25,000 X 20%) = $25,000
(e)$100,000 / e = 0.05. Therefore e = $2,000,000
(f)$100,000 / f = 0.20. Therefore f = $500,000
(g)$2,000,000 / $500,000 = 4
(h) $100,000 - ($500,000 X 25%) = ($25,000)
11-53
$2,000,000
$125,000
$600,000
11-54
Exercise 210
Candle Light Bus Lines Ltd. runs a series of bus routes between cities across Canada. A new
route, between Kenora and Thunder Bay, has been planned for next year. The sales manager
has come up with a series of possible passengers that would use the route in the upcoming year.
She tells you that passengers could range between 20,000 and 40,000 per year and that each
ticket would be $25 per trip. Because of the availability of buses to service the route, the
estimated passengers would be in increments of 10,000.
The controller of the company provides you with the following information
Costs per passenger per trip:
Fuel
$5
Driver
$4
Selling
$2
Admin
$1
In addition, she informs you that Facility Overhead will be $100,000 and Selling and Admin
Overhead will be $50,000, regardless of the number of trips made in the year.
Required
a) Prepare a flexible budget for the company based on the above information
b) Assume that there were actually 22,450 passengers who used the bus this year and sales
totaled $538,800. Fuel costs were $123,475, driver costs were $95,415 and selling and
admin variable costs were $41,500 and $17,250 respectively. Facility Costs were $125,000
and Selling and Admin Overhead was $78,000. Prepare a flexible budget report for the year.
c) Discuss the results of the year and what action should be taken in the future as a result.
Solution Exercise 210
a)
Budgeted Cost
Passenger Trips_____________
Per Passenger
20,000
30,000
40,000
_______________________________________________________________
Sales
$25
$500,000
$750,000
$1,000,000
Variable Costs
Fuel
5
100,000
150,000
200,000
Driver
4
80,000
120,000
160,000
Selling
2
40,000
60,000
80,000
Admin
1
20,000
30,000
40,000
Contribution Margin $13
Fixed Costs
Facility Costs
Selling & Admin
Operating Income
b)
260,000
390,000
520,000
100,000
50,000
$110,000
100,000
50,000
$240,000
100,000
50,000
$370,000
Passenger Trips__________
Flexible
Budgeted Cost
Flexible
Budget
Per Passenger
Actual
Budget
Variance
22,450
22,450
22,450
_______________________________________________________________
Sales
$25
$538,800
$561,250
$22,450 U
Variable Costs
Fuel
5
123,475
112,250
11,225 U
Driver
4
95,415
89,800
5,615 U
Selling
Admin
c)
2
1
41,500
17,250
44,900
22,450
3,400 F
5,200 F
261,160
291,850
30,690 U
125,000
78,000
$58,160
100,000
50,000
$141,850
25,000 U
28,000 U
$83,690 U
11-55
The budget is showing unfavourable variances right through most of the major items. First
off, the manager must investigate why selling prices were reduced by $1 per trip per year.
The large unfavourable variances for fuel and drivers must also be investigated, though fuel
costs would likely have gone up as a result of general price increases.
The costs to operate the facility are up dramatically as are the fixed selling and admin
overhead costs; perhaps there is an internal allocation from the accounting department that
should be looked into.
11-56
COMPLETION STATEMENTS
211.
212.
A major aspect of budgeting control is the use of budget reports that compare
_____________________ with _______________________.
213.
214.
215.
216.
Total ________________ costs will be the same on the master budget and on a flexible
budget which reflects the actual level of activity.
217.
218.
219.
220.
221.
The primary basis for evaluating the performance of a manager of an investment centre is
_________________.
222.
sales forecast
212.
213.
214.
static
215.
flexible
216.
fixed
217.
responsibility
218.
controllable
219.
220.
221.
222.
11-57
11-58
MATCHING
223.
Match the items below by entering the appropriate code letter in the space provided.
A.
B.
C.
D.
E.
F.
Budgetary control
Static budget
Flexible budget
Responsibility accounting
Controllable costs
Management by exception
G.
H.
I.
J.
K.
L.
____
____
2. A responsibility centre that incurs costs, generates revenues, and has control over the
investment funds available for use.
____
3. Costs that relate specifically to a responsibility centre and are incurred for the sole
benefit of the centre.
____
____
5. Costs which are incurred for the benefit of more than one profit centre.
____
____
____
____
9. The preparation of reports for each level of responsibility shown in the company's
organization chart.
ANSWERS TO MATCHING
1.
7.
2.
8.
3.
9.
4.
10.
5.
11.
6.
12.
11-59
11-60
1.
2.
11-61
Kim's actions are 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.
Earl Linton
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
unfavourable 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
11-62
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.