Question 1

All of the following statements are correct about management by exception except it
A) enables top management to focus on problem areas that need attention.
B) means that management has to investigate every budget difference.
C) requires that there must be some guidelines for identifying an exception.
D) means that top management's review of a budget report is focused primarily on differences between actual results and planned objectives.

Accepted Answer

Management by exception does not require investigating every budget difference, but rather identifying and focusing on significant differences or exceptions that require attention.

Question 2

Which statement is true?
A) An investment center is responsible for revenues and expenses, as well as earning a return on assets.
B) An investment center is only responsible for its investments.
C) An investment center is only responsible for revenues and expenses.
D) A profit center is evaluated using contribution margin, while an investment center is evaluated using ROI.

Accepted Answer

An investment center is a business unit that is responsible for revenues and expenses, as well as earning a return on assets. It is evaluated using the ROI (return on investment) metric, which takes into account both profit and investment. A profit center, on the other hand, is responsible for generating profits and is evaluated using the contribution margin metric, which focuses only on the profitability of the center.

Question 3

Which of the following will cause an increase in ROI?
A) An increase in variable costs
B) An increase in average operating assets
C) An increase in sales
D) An increase in controllable fixed costs

Accepted Answer

ROI (Return on Investment) is calculated by dividing net income by the average operating assets. Therefore, an increase in sales (numerator) will cause an increase in ROI. An increase in variable costs (numerator) or controllable fixed costs (denominator) will decrease ROI. An increase in average operating assets (denominator) will also decrease ROI.

Question 4

Which 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

Accepted Answer

Cost and book value can be easily obtained from accounting records, while market value requires external market data or appraisal to establish.

Question 5

A static budget is usually appropriate in evaluating a manager's effectiveness in controlling
A) fixed manufacturing costs and fixed selling and administrative expenses.
B) variable manufacturing costs and variable selling and administrative expenses.
C) fixed manufacturing costs and variable selling and administrative expenses.
D) variable manufacturing costs and fixed selling and administrative expenses.

Accepted Answer

A static budget is one that remains the same regardless of changes in the level of activity, and it is usually appropriate for evaluating a manager's effectiveness in controlling fixed manufacturing costs and fixed selling and administrative expenses. This is because these costs do not change in response to changes in production or sales volume. A static budget may not be appropriate for evaluating a manager's effectiveness in controlling variable costs, as these costs may change in response to changes in volume.

Question 6

All of the following statements are correct about controllable costs except
A) all costs are controllable at some level of responsibility within a company.
B) all costs are controllable by top management.
C) fewer costs are controllable as one moves up to each higher level of managerial responsibility.
D) costs incurred directly by a level of responsibility are controllable at that level.

Accepted Answer

Controllable costs are those that can be influenced by a manager's decisions and actions. The statement that fewer costs are controllable as one moves up to each higher level of managerial responsibility is incorrect. In fact, more costs become controllable as one moves up the hierarchy because higher-level managers have authority over a broader range of operations and decisions.

Question 7

In computing ROI, land held for future use
A) will hurt the performance measurement of an investment center's manager.
B) is important in evaluating the performance of a profit center manager.
C) is included in the calculation of operating assets.
D) is considered a nonoperating asset.

Accepted Answer

Land held for future use is considered a nonoperating asset because it is not currently being used in the operations of the business to generate revenue.

Question 8

Roark Productions makes a single product. Expected manufacturing costs are as follows:  
Instructions
Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month.

Accepted Answer

The answer of Roark Productions makes a single product. Expected...

Question 9

In the formula for ROI, idle plant assets are
A) included in the calculation of controllable margin.
B) included in the calculation of operating assets.
C) excluded in the calculation of operating assets.
D) excluded from total assets.

Accepted Answer

Idle plant assets are not generating any income and therefore cannot be considered as part of operating assets for ROI calculation. They should be excluded from the calculation of operating assets.

Question 10

A flexible budget is appropriate for

Accepted Answer

The answer of A flexible budget is appropriate for ...

Question 11

Which of the following would not be considered an aspect of budgetary control?
A) It assists in the determination of differences between actual and planned results.
B) It provides feedback value needed by management to see whether actual operations are on course.
C) It assists management in controlling operations.
D) It provides a guarantee for favorable results.

Accepted Answer

Budgetary control is a management process that uses budgets to monitor and control the financial operations of an organization. Its aspects include assisting in the determination of differences between actual and planned results, providing feedback value needed by management to see whether actual operations are on course, and assisting management in controlling operations. However, it does not guarantee favorable results, as the success of the budget is dependent on various internal and external factors that may affect its implementation.

Question 12

The denominator in the formula for return on investment calculation is
A) investment center controllable margin.
B) dependent on the specific type of profit center.
C) average investment center operating assets.
D) sales for the period.

Accepted Answer

The denominator in the formula for return on investment calculation is average investment center operating assets, which includes all assets that are under the control of the investment center manager. This includes property, plant, and equipment, inventory, accounts receivable, and other operating assets. The average investment center operating assets are used because it reflects the level of investment required to generate the returns being measured. Choice A is incorrect because investment center controllable margin is the numerator in the return on investment calculation. Choice B is incorrect because the formula for return on investment calculation is consistent across different types of profit centers. Choice D is incorrect because sales for the period are not the appropriate measure to use as the denominator in the return on investment calculation.

Question 13

Lounsbury Parts 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

Accepted Answer

To determine if an investment project should be funded, the ROI of the project must be compared to the minimum rate of return established by the company.

For Project A: 
ROI = Annual controllable margin / Operating assets 
ROI = $24,000 / $400,000 
ROI = 0.06 or 6%

Since the ROI of Project A is less than the 8% minimum rate of return, it should not be funded.

For Project B: 
ROI = Annual controllable margin / Operating assets 
ROI = $60,000 / $550,000 
ROI = 0.1091 or 10.91%.

Since the ROI of Project B is greater than the 8% minimum rate of return, it should be funded.

Therefore, the best choice is to fund Project B.

Question 14

If controllable margin is $300,000 and the average investment center operating assets are $1,000,000, the return on investment is
A) .33%.
B) 3.33%.
C) 10%.
D) 30%.

Accepted Answer

Return on investment (ROI) is calculated by dividing the controllable margin by the average operating assets. Here, $300,000 / $1,000,000 = 0.30 or 30%.

Question 15

Costs that relate specifically to one center and are incurred for the sole benefit of that center are
A) common fixed costs.
B) direct fixed costs.
C) indirect fixed costs.
D) noncontrollable fixed costs.

Accepted Answer

Direct fixed costs are costs that can be traced specifically to a particular center and are incurred for the sole benefit of that center. Common fixed costs (A) benefit more than one center, indirect fixed costs (C) cannot be traced to a specific center, and noncontrollable fixed costs (D) are costs that cannot be controlled by the center manager.

Question 16

To develop the flexible budget, management takes all of the following steps except identify the
A) activity index and the relevant range of activity.
B) variable costs and determine the budgeted variable cost per unit.
C) fixed costs and determine the budgeted fixed cost per unit.
D) All of these options are steps in developing the flexible budget.

Accepted Answer

The statement says that management takes all of the following steps except identifying fixed costs and determining the budgeted fixed cost per unit. Therefore, the correct answer is C.

Question 17

Controllable costs for responsibility accounting purposes are those costs that are directly influenced by
A) a given manager within a given period of time.
B) a change in activity.
C) production volume.
D) sales volume.

Accepted Answer

Controllable costs are those costs that can be directly influenced by a specific manager within their established responsibility or control. These costs can be managed by the manager's decisions or activities within a given period of time. Choices B, C, and D are not necessarily within the control of a specific manager and can be affected by external factors.

Question 18

Lamont Company uses flexible budgets. At normal capacity of 8,000 units, budgeted manufacturing overhead is $64,000 variable and $180,000 fixed. If Lamont had actual overhead costs of $250,000 for 9,000 units produced, what is the difference between actual and budgeted costs?
A) $2,000 unfavorable
B) $2,000 favorable
C) $6,000 unfavorable
D) $8,000 favorable

Accepted Answer

The answer of Lamont Company uses flexible budgets. At normal...

Question 19

A static budget report is appropriate for
A) fixed manufacturing costs.
B) fixed selling and administrative expenses.
C) variable selling and administrative expenses.
D) both fixed manufacturing costs and fixed selling and administrative expenses.

Accepted Answer

A static budget report is appropriate for fixed costs because it is prepared based on a predetermined level of activity. Fixed manufacturing costs and fixed selling and administrative expenses are both predetermined and do not vary with changes in activity levels, making them ideal for a static budget report. Variable costs, on the other hand, change with changes in activity levels and require a flexible budget report.

Question 20

If an investment center has a $45,000 controllable margin and $600,000 of sales, what average operating assets are needed to have a return on investment of 10%?
A) $60,000
B) $105,000
C) $450,000
D) $600,000

Accepted Answer

Return on Investment (ROI) is calculated as Controllable Margin divided by Average Operating Assets. To find the average operating assets needed for a 10% ROI, divide the controllable margin ($45,000) by the desired ROI (10%), which equals $450,000.

Quiz 24: Budgetary Planning

All of the following statements are correct about management by exception except it

Which statement is true?

Which of the following will cause an increase in ROI?

Which of the following valuations of operating assets is not readily available from the accounting records?

A static budget is usually appropriate in evaluating a manager's effectiveness in controlling

All of the following statements are correct about controllable costs except

In computing ROI, land held for future use

Roark Productions makes a single product. Expected manufacturing costs are as follows: Instructions Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month.

In the formula for ROI, idle plant assets are

A flexible budget is appropriate for

Which of the following would not be considered an aspect of budgetary control?

The denominator in the formula for return on investment calculation is

If controllable margin is $300,000 and the average investment center operating assets are $1,000,000, the return on investment is

Costs that relate specifically to one center and are incurred for the sole benefit of that center are

To develop the flexible budget, management takes all of the following steps except identify the

Controllable costs for responsibility accounting purposes are those costs that are directly influenced by

Lamont Company uses flexible budgets. At normal capacity of 8,000 units, budgeted manufacturing overhead is $64,000 variable and $180,000 fixed. If Lamont had actual overhead costs of $250,000 for 9,000 units produced, what is the difference between actual and budgeted costs?

A static budget report is appropriate for

If an investment center has a $45,000 controllable margin and $600,000 of sales, what average operating assets are needed to have a return on investment of 10%?