Deck 15: Performance Evaluation

Question 1

Which of the following statements regarding profit centers is correct?

A) A manager of a profit center has more responsibility than a manager of an investment center.
B) A manager of profit center is evaluated only on his/her ability to control costs.
C) A manager of a profit center is evaluated on his/her ability to control costs and generate revenues.
D) A manager of a profit center is responsible for assets, liabilities, and earnings.

Answer 1

C
Explanation: A cost center is an organizational unit that incurs expenses but does not generate revenue. A profit center differs from a cost center in that it not only incurs costs but also generates revenue. The manager of a profit center is judged on his ability to produce revenue in excess of expenses.

Question 2

Packrall Company makes computer chips. Curtis is manager of the company's maintenance department. Because his maintenance technicians are so well trained in maintaining expensive and sensitive circuit board stamping equipment, Curtis has been authorized to contract to perform maintenance for outside customers. In this company, the maintenance department is likely organized as:

A) A profit center.
B) A revenue center.
C) A cost center.
D) An investment center.

Answer 2

A
Explanation: Because the maintenance department will be performing maintenance for outside customers, this responsibility center is a profit center. Profit centers incur costs and also generate revenues, producing a measurable profit.

Question 3

Which of the following income statement formats is most commonly used with flexible budgeting?

A) Sales − Variable costs = Contribution margin; Contribution margin − Fixed costs = Net income
B) Sales − Cost of goods sold = Gross margin; Gross margin − Operating expenses = Net income
C) Sales − Manufacturing costs − Selling and administrative costs = Net income
D) None of these answers is correct.

Answer 3

A

Question 4

A budget prepared at a single volume of activity is referred to as a:

A) Strategic budget.
B) Standard budget.
C) Static budget.
D) Flexible budget.

Question 5

Which of the following is a characteristic that is needed for decentralization to work well in an organization?

A) Clear lines of authority
B) Responsibility
C) Good communication
D) All of these are correct answers.

Question 6

All of the following are characteristics that are required for effective responsibility accounting except:

A) motivation.
B) accountability.
C) centralization.
D) none of these.

Question 7

Select the incorrect statement concerning the application of the controllability concept to responsibility accounting.

A) As a practical matter, control of costs or revenues may be shared rather than absolute.
B) The concept of control is crucial to an effective responsibility accounting system.
C) Managers lose motivation when they are held accountable for actions that are beyond their scope of control.
D) Each manager should be evaluated on the costs but not the revenues that are under his or her control.

Question 8

The practice of delegating authority and responsibility is referred to as:

A) Centralization of authority.
B) Standard costing.
C) Management by exception.
D) Decentralization.

Question 9

A reporting unit of a decentralized business that controls identifiable revenue and/or expense items is known as a(n):

A) Management center.
B) Performance center.
C) Accounting center.
D) Responsibility center.

Question 10

Select the incorrect statement regarding flexible budgets.

A) Flexible budgets often show the estimated revenues and costs at multiple volume levels.
B) A flexible budget is used to compare actual to budgeted amounts.
C) A flexible budget is also known as a master budget.
D) Standard prices and costs are used in preparing a flexible budget.

Question 11

An organizational unit of a business that incurs costs and generates revenues is known as a(n):

A) Cost center.
B) Sales center.
C) Profit center.
D) Investment center.

Question 12

Spark Company's static budget is based on a planned activity level of 45,000 units. At the same time the static budget was prepared, the management accountant prepared two additional budgets, one based on 40,000 units and one based on 50,000. The company actually produced and sold 49,000 units. In evaluating its performance, management should compare the company's actual revenues and costs to which of the following budgets?

A) A budget based on 40,000 units
B) A budget based on 45,000 units
C) A budget based on 49,000 units
D) A budget based on 50,000 units

Question 13

The concept that says managers should be evaluated on the basis of revenues and/or expenses they can control is known as the:

A) Management by exception concept.
B) Controllability concept.
C) Responsibility concept.
D) None of these.

Question 14

Delegating authority and responsibility throughout an organization is known as:

A) centralization.
B) decentralization.
C) management by exception.
D) suboptimization.

Question 15

The process of evaluating the performance of individual managers is known as:

A) Responsibility accounting.
B) Management by exception.
C) Responsibility management.
D) Performance management.

Question 16

Which of the following statements regarding cost centers is incorrect?

A) Cost centers are units within a business that incur expense, but do not have responsibility for generating revenue.
B) Cost centers tend to be found at upper levels on a company's organization chart.
C) A manager of a cost center has less responsibility than a manager in an investment center.
D) Cost center managers are evaluated on their ability to control costs and keep within budget.

Question 17

Which of the following is not typically found in a decentralized organization?

A) Cost center
B) Decision center
C) Investment center
D) Profit center

Question 18

The research and development department of Apple Computers would likely be organized as:

A) A profit center.
B) A cost center.
C) A revenue center.
D) An investment center.

Question 19

Jacob is a department manager who recently instituted a new recognition program for his employees. He budgeted the cost of the new program at $10 per employee, but actual costs were $15 per employee. The cost associated with the recognition program would be considered which of the following kinds of cost?

A) Controllable cost
B) Opportunity cost
C) Fixed cost
D) Product cost

Question 20

Vanessa Grant is responsible for controlling expenses, but is not responsible for generating revenues. Vanessa Grant is a manager of a(n):

A) Cost center.
B) Profit center.
C) Investment center.
D) Liability center.

Question 21

White Company budgeted fixed overhead costs of $200,000 and volume of 40,000 units. During the year, the company produced and sold 39,000 units and spent $210,000 on fixed overhead. The spending variance relating to the fixed overhead cost is:

A) $10,000 favorable.
B) $10,000 unfavorable.
C) $5,000 favorable.
D) $5,000 unfavorable.

Question 22

The Ferguson Company estimated that October sales would be 100,000 units with an average selling price of $6.00. Actual sales for October were 105,000 units and average selling price was $5.95. The sales volume variance was:

A) $30,000 favorable.
B) $30,000 unfavorable.
C) $29,750 favorable.
D) $29,750 unfavorable.

Question 23

The following static budget is provided: What will budgeted net income equal if 21,000 units are produced and sold? (Do not round intermediate calculations.)

A) $53,550
B) $55,500
C) $94,500
D) $210,000

Question 24

When would a variance be labeled as favorable?

A) When actual costs are less than standard costs
B) When standard costs are equal to actual costs
C) When standard costs are less than actual costs
D) When estimated costs are greater than actual costs

Question 25

Select the correct statement regarding flexible budgets.

A) A flexible budget can only be prepared for a single level of activity.
B) A flexible budget is not used for planning.
C) A flexible budget shows expected revenues and costs at a variety of activity levels.
D) A flexible budget is also known as the master budget.

Question 26

The Boyle Company estimated that April sales would be 150,000 units with an average selling price of $6.00. Actual sales for April were 149,000 units and average selling price was $6.12. The sales revenue flexible budget variance was:

A) $6,120 favorable.
B) $6,000 unfavorable.
C) $17,880 favorable.
D) $17,880 unfavorable.

Question 27

The Boyle Company estimated that April sales would be 150,000 units with an average selling price of $6.00. Actual sales for April were 149,000 units and average selling price was $6.12. The sales volume variance was:

A) $6,120 favorable.
B) $6,000 unfavorable.
C) $17,880 favorable.
D) $17,880 unfavorable.

Question 28

Which of the following applications is most suited for developing flexible budgets?

A) Database
B) Graphics
C) Spreadsheet
D) Word processing

Question 29

Assuming actual volume is 10,000 units and planned volume is 12,000 units, the sales volume variance in units:

A) Equals 2,000 units unfavorable.
B) Equals 2,000 units favorable.
C) Cannot be determined without additional information.
D) None of these answers is correct.

Question 30

The Ferguson Company estimated that October sales would be 100,000 units with an average selling price of $6.00. Actual sales for October were 105,000 units and average selling price was $5.95. The sales revenue flexible budget variance was:

A) $5,000 favorable.
B) $5,000 unfavorable.
C) $5,250 favorable.
D) $5,250 unfavorable.

Question 31

A difference between the static budget based on planned volume and a flexible budget prepared at actual volume is called a:

A) Flexible budget variance.
B) Static budget variance.
C) Production activity variance.
D) Volume variance.

Question 32

The Landrum Company provides the following standard cost data per unit of product: Variable overhead: $8.00
Landrum anticipated that they would produce and sell 24,000 units. During the period, the company produced and sold 25,000 units incurring $210,000 of variable overhead costs.
The variable overhead flexible budget variance was:

A) $8,000 unfavorable.
B) $10,000 unfavorable.
C) $8,000 favorable.
D) $10,000 favorable.

Question 33

Burruss Company developed a static budget at the beginning of the company's accounting period based on an expected volume of 8,000 units: If actual production totals 10,000 units which is within the relevant range, the flexible budget would show fixed costs of:

A) $16,000.
B) $2 per unit.
C) $20,000.
D) None of these answers is correct.

Question 34

The following static budget is provided: What will be the overall volume variance if 12,000 units are produced and sold?

A) $80,000 F
B) $80,000 U
C) $60,000 U
D) $160,000 U

Question 35

Volume variances are computed for which of the following costs?

A) Fixed manufacturing costs only
B) Variable selling and administrative costs only
C) Variable manufacturing and selling and administrative costs
D) Variable manufacturing costs only

Question 36

Which of the following reason(s) cause flexible budgets to be useful planning tools?

A) Flexible budgets allow managers to anticipate results under a variety of scenarios.
B) Flexible budgets can help determine if a company's cash position is adequate.
C) Flexible budgets can help managers judge if materials and storage facilities are appropriate for various production levels.
D) All of these answers are correct.

Question 37

When would a variance be labeled as unfavorable?

A) When standard costs are more than actual costs
B) When expected sales are less than actual sales
C) When actual sales are equal to expected sales
D) None of these answers is correct.

Question 38

The following standard cost card is provided for Navid Company's Product A: The fixed overhead rate is based on total budgeted fixed overhead of $12,000. During the period, the company produced and sold 5,800 units at the following costs:
Direct material 12,200 pounds @ $4.80 per pound
Direct labor 5,950 hours @ $8.00 per hour
Overhead $29,920
The standard manufacturing cost per unit is $23.00. What is the actual manufacturing cost per unit? (Do not round intermediate calculations.)

A) $23.46.
B) $36.16.
C) $17.96.
D) Cannot be determined from the information provided.

Question 39

Jones Company developed the following static budget at the beginning of the company's accounting period: If actual production totals 8,200 units, the flexible budget would show total costs of:

A) $8,000.
B) $8,100.
C) $8,200.
D) None of these is correct.

Question 40

Static and flexible budgets are similar in that:

A) They both are based on the same per unit variable amounts and the same fixed costs.
B) They both concentrate solely on costs.
C) They both are prepared for multiple activity levels.
D) None of these answers is correct.

Question 41

Huang Company reported the following information for the current year: The company's return on investment was: (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

A) 10.00%.
B) 6.25%.
C) 16.00%.
D) Cannot be ascertained from the information provided.

Question 42

Which of the following is an incorrect statement regarding variances?

A) A variance is favorable when expected sales are more than actual sales.
B) A variance is a difference between budgeted and actual amounts.
C) A variance can be calculated for both revenues and expenses.
D) A variance can be both favorable and unfavorable.

Question 43

The sales volume variance is the difference between the:

A) static budget (based on actual volume) and the flexible budget (based on planned volume).
B) static budget (based on planned volume) and the flexible budget (based on actual volume).
C) static budget (based on planned volume) and actual revenue or cost.
D) flexible budget (based on actual volume) and actual or revenue or cost.

Question 44

Timberlake Company planned for a production and sales volume of 12,000 units. However, the company actually made and sold 13,000 units. What was the total variable cost volume variance?

A) $29,800 unfavorable
B) $29,800 favorable
C) $35,200 unfavorable
D) $35,200 favorable

Question 45

The sales volume variance was:

A) $16,000 favorable.
B) $16,000 unfavorable.
C) $25,000 unfavorable.
D) $25,000 favorable.

Question 46

When would a sales variance be listed as favorable?

A) When actual sales exceed budgeted or expected sales
B) When actual sales are less than budgeted or expected sales
C) When actual sales are equal to budgeted or expected sales
D) None of these answers is correct.

Question 47

Joseph Company has an investment in assets of $450,000, operating income that is 10% of sales, and an ROI of 18%. From this information the amount of operating income would be:

A) $81,000.
B) $45,000.
C) $2,500,000.
D) Impossible to determine from the information given.

Question 48

When would a cost variance be listed as unfavorable?

A) When actual costs are less than budgeted costs
B) When actual costs exceed budgeted costs
C) When actual costs are equal to budgeted costs
D) When actual sales are less than budgeted sales

Question 49

Stafford Company prepared a static budget for a production and sales volume of 10,000 units. What is net income if 9,000 units are sold?

A) $152,100
B) $152,400
C) $137,300
D) $122,400

Question 50

Which of the following is a difference between a static and a flexible budget?

A) Static budgets use the same fixed cost amounts, whereas flexible budgets change the amount of fixed costs at different levels of activity.
B) Static budgets are based on the same per unit variable amount, whereas flexible budgets are based on multiple per unit variable amounts.
C) Static budgets are based on single estimate of volume, whereas flexible budgets show estimated costs and revenues at a variety of activity levels.
D) None of these answers is correct.

Question 51

Campbell Candy Corporation desires a 16% return on investment (ROI) on all operations. The following information was available for the company for the current year: What is the corporation's ROI? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

A) 16.80%
B) 28.00%
C) 32.00%
D) Impossible to determine from the information given.

Question 52

The sales revenue flexible budget variance was:

A) $15,000 unfavorable.
B) $7,000 favorable.
C) $15,000 favorable.
D) $7,000 unfavorable.

Question 53

Achieving the sales volume in the master budget is known as:

A) making the numbers.
B) lowballing.
C) cooking the books.
D) budget slack.

Question 54

Which of the following statements about return on investment (ROI) is false?

A) ROI equals margin divided by investment turnover.
B) ROI is used to measure the performance of investment centers.
C) Seeking to maximize ROI can result in a conflict between the interest of a particular manager and the interest of the business as a whole.
D) Companies may minimize motivational problems by using original cost instead of book value in the denominator of the ROI formula.

Question 55

The kind of responsibility center that would be evaluated by comparing income on assets to the amount of assets invested is:

A) An investment center.
B) An asset center.
C) A cost center.
D) A profit center.

Question 56

Contribution margin would be the most important variable in evaluating the performance of:

A) A cost center.
B) A production center.
C) An investment center.
D) A profit center.

Question 57

When would a sales price variance be listed as unfavorable?

A) When the actual sales price is less than the standard sales price.
B) When the actual sales price is equal to the standard sales price.
C) When the actual sales price is greater than the standard sales price.
D) When the actual sales volume is less than the budgeted sales volume.

Question 58

Jared expects to charge $60 per hour for his industrial maintenance business during the following year. He expects to reach 50,000 hours at that price. Jared's partner disagrees with the estimate and expects closer to 40,000 hours. What should Jared do when preparing the budget for the year?

A) Create a flexible budget showing a range of outcomes between 40,000 hours and 50,000 hours.
B) Create two master budgets, one at 50,000 hours and one at 40,000 hours.
C) Create only one budget at the more optimistic volume of 50,000 hours.
D) Create a volume budget based on actual performance.

Question 59

Which manager is generally held responsible for the sales volume variance?

A) Purchasing agent
B) Marketing manager
C) Plant manager
D) Production manager

Question 60

Timberlake Company planned for a production and sales volume of 12,000 units. However, the company actually made and sold 13,000 units. What was the sales volume variance?

A) $65,000 favorable
B) $65,000 unfavorable
C) $29,800 unfavorable
D) $29,800 favorable

Question 61

Fairpoint Products provided the following selected information about its consumer products division for the current year: Based on this information, the division's investment amount was:

A) $500,000.
B) $1,250,000.
C) $750,000.
D) $2,000,000.

Question 62

The New Products Division of Testar Company, had operating income of $8,000,000 and operating assets of $44,800,000 during the current year. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Assuming that the new product is put into production, calculate the residual income for the division.

A) $832,000
B) $872,000
C) $528,000
D) $672,000

Question 63

Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year: Terra Company has set a target return on investment (ROI) of 15% for both divisions. Based on ROI, which division appears to have performed better?

A) Retail division.
B) Wholesale division.
C) Both divisions have the same results.
D) The answer cannot be determined using the information provided.

Question 64

Brookings Company evaluates its managers on the basis of return on investment. Division Three has a return on investment (ROI) of 15% while the company as a whole has an ROI of only 10%. Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?

A) ROI
B) Residual income
C) Both ROI and residual income will motivate the manager to accept the project.
D) Neither ROI nor residual income will motivate the manager to accept the project.

Question 65

In the current year, the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is correct?

A) The New Products division yielded ROI that was lower than the target ROI.
B) Residual income for the New Products division was $832,000.
C) The New Products division yielded no residual income.
D) All of these are correct.

Question 66

Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year: Assuming that these are the only divisions of Terra Company, what is the ROI for the company as a whole?

A) 15.7%
B) 16.3%
C) 16.6%
D) 32.3%

Question 67

The Electronics Division of Anton Company reports the following results for the current year: Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's turnover (asset utilization) is:

A) 0.1125.
B) 0.12.
C) 0.667.
D) 0.18.

Question 68

Joseph Company reported the following information for the current year: The company's operating income was:

A) $94,440.
B) $56,250.
C) $45,000.
D) $33,750.

Question 69

When using residual income as a project-screening tool, management should accept a project if the residual income is:

A) positive.
B) negative.
C) equals the ROI.
D) greater than net income.

Question 70

Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year: Terra Company has set a target return on investment (ROI) of 15% for both divisions Which of the following statements is accurate?

A) Residual income for the wholesale sales division was $100,000
B) Residual income for the wholesale sales division was $600,000
C) Residual income for the retail sales division was $600,000
D) None of these.

Question 71

Retail Sales and Wholesale Sales are the only divisions of Terra Company. The following information was gathered for the two divisions for the current year: The company has $1,200,000 in operating assets that are not assigned to either of the divisions and $500,000 in corporate expenses that are not reflected in the information above. Based on this information, what is the ROI for the company as a whole?

A) 17.7%
B) 16.9%
C) 15.0%
D) The answer cannot be determined using the information provided.

Question 72

The New Products Division of Testar Company, has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is accurate?

A) The new product is acceptable because it will yield an ROI that is higher than the target ROI and will yield residual income of $40,000.
B) The new product will yield residual income of $45,000.
C) The new product will decrease the company wide ROI.
D) The new product is unacceptable because it will yield an ROI that is lower than the target ROI.

Question 73

Payne Company reported the following information for the current year: The company's residual income was:

A) $(15,000).
B) $14,000.
C) $15,000.
D) $24,000.

Question 74

The New Products Division of Testar Company, had operating income of $8,000,000 and operating assets of $44,800,000 during the current year. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Assuming that the new product is put into production, calculate the division's ROI.

A) 17.6%
B) 17.9%
C) 16.5%
D) The answer cannot be determined using the information provided.

Question 75

Howard Company provided the following selected information about its consumer products division for the current year: Based on this information, the division's investment amount was:

A) $250,000.
B) $1,000,000.
C) $1,500,000.
D) $1,250,000.

Question 76

Which of the following would increase residual income? (Assume all other things are equal)

A) Decrease in investment
B) Decrease in operating income
C) Increase in the desired return on investment
D) None of these.

Question 77

The Electronics Division of Anton Company reports the following results for the current year: Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's return on investment is:

A) 11.25%.
B) 12%.
C) 66.7%.
D) 18%.

Question 78

To avoid suboptimization, many companies prefer to evaluate their investment centers using:

A) Residual income instead of return on investment.
B) Return on investment instead of residual income.
C) Gross margin instead of contribution margin.
D) Sales instead of income.

Question 79

The Electronics Division of Anton Company reports the following results for the current year: Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's margin is:

A) 11.25%.
B) 12%.
C) 66.7%.
D) 18%.

Question 80

Which of the following statements regarding investment centers is incorrect?

A) A manager of an investment center is responsible for the investment of capital, but not revenues or expenses.
B) Investment centers are commonly found at the higher levels of an organization chart.
C) A manager of an investment center should be accountable for assets, liabilities, and earnings.
D) Return on investment and residual income are tools used to assess managers of an investment center.