Question 1

When the different business units at a company use differently structured reporting formats for their business unit budgets, it is more difficult for the company to consolidate the business unit data into a companywide budget.

Accepted Answer

When the business units use different reporting formats, it becomes difficult to compare and combine their budgets, making it more challenging to create a cohesive companywide budget.

Question 2

Assume that AAA Company's Payroll and Human Resources Department is a centralized service department serving all the various business units of the company. If AAA wished to assign the costs of the department to the company's various business units, which of the following would be the MOST appropriate cost driver or assignment basis?

Accepted Answer

The number of employees is the most appropriate cost driver or assignment basis for the Payroll and Human Resources Department as the department serves all business units and its primary function is to support employees. The number of employees in each business unit would provide a fair and reasonable allocation of the costs. The other options, such as the number of purchase orders, reports prepared, or service hours provided, do not accurately reflect the workload or usage of the department by each business unit.

Question 3

Assume that AAA Company's Accounting Department is a centralized service department serving all the various business units of the company. If AAA wished to assign the costs of the department to the company's various business units, which of the following would be the MOST appropriate cost driver or assignment basis?

Accepted Answer

The answer of Assume that AAA Company's Accounting Department is...

Question 4

At a company with different business units, individual managers can modify various assumptions of their budget in order to determine how the modifications would affect the operational and financial results. This is an example of:

Accepted Answer

This scenario describes sensitivity analysis, which involves exploring how changes in certain assumptions or variables can impact the results of a budget or financial plan. This allows managers to test different scenarios and make informed decisions about the best course of action. Financial statement analysis involves reviewing historical financial information and ratios to evaluate the financial health and performance of a company. Responsibility accounting involves assigning responsibility for specific costs or revenues to individual managers or departments, while zero-based budgeting involves starting the budgeting process from scratch each year and justifying every expense.

Question 5

If an operating division or a product line of a company was eliminated, which of the following statements would be TRUE?

Accepted Answer

If an operating division or a product line of a company is eliminated, the traceable fixed costs associated with that division or product line would also be eliminated. Traceable fixed costs are directly related to a specific product, department, or division and would not exist without it. Therefore, eliminating the product or division would eliminate those costs.

Question 6

Henderson Industrial Products uses a centralized service department for procurement of raw materials, servicing all three of its divisionsConstruction, Manufacturing, and Military. The total monthly costs of the procurement department are $480,000. Of these costs, 80% are traceable to the divisions, and 20% are considered untraceable. Henderson has decided to assign the traceable costs to the divisions based on number of purchase orders processed. Below is a list of the purchase orders per division.
  When Henderson calculates a rate per purchase order, that rate should be calculated on the basis of the full cost of the procurement department.

Accepted Answer

The question states that the traceable costs should be assigned to the divisions based on the number of purchase orders processed, not the full cost of the procurement department. Therefore, the rate per purchase order should only be based on the traceable costs, not the full cost.

Question 7

Which of the following best describes the term sensitivity analysis?

Accepted Answer

Sensitivity analysis is a technique to test how changes in key assumptions would impact the results. It helps to identify which assumptions have the most significant impact on the outcome, and allows decision-makers to understand the risks associated with those assumptions. Option B is incorrect since sensitivity analysis is not related to emotional sensitivity, Option C is incorrect as it mentions only the evaluation of data assumptions, and Option D is incorrect since it describes financial ratio analysis, which is different from sensitivity analysis.

Question 8

Which of the following BEST describes a business unit where the manager is responsible not only for controlling costs and generating sales revenue, but also for investment decisions and for return on investments?

Accepted Answer

An investment center is a business unit where the manager is responsible not only for controlling costs and generating sales revenue, but also for investment decisions and for return on investments. Profit center is responsible for generating profit, revenue center is responsible for generating revenue, and cost center is responsible for controlling costs.

Question 9

Henderson Industrial Products uses a centralized service department for procurement of raw materials, servicing all three of its divisions-Construction, Manufacturing, and Military. The total monthly costs of the procurement department are $480,000. Of these costs, 80% are traceable to the divisions, and 20% are considered untraceable. Henderson has decided to assign the traceable costs to the divisions based on number of purchase orders processed. Below is a list of the purchase orders per division.
 Before assigning the traceable costs to the division, Henderson needs to calculate a cost per purchase order. That amount should be:

Accepted Answer

To calculate the cost per purchase order, we need to divide the total traceable costs by the total number of purchase orders processed. The total number of purchase orders processed is:
Construction: 4,000
Manufacturing: 6,000
Military: 2,000
Total: 12,000
Therefore, the cost per purchase order is:
($480,000 x 80%) ÷ 12,000 = $32 per purchase order
Multiplying this by 1.875 (the reciprocal of the 80% traceable costs) gives us the cost per purchase order including all procurement costs:
$32 ÷ 0.8 = $40 per purchase order
Finally, adding the untraceable costs ($480,000 x 20% ÷ 12,000 = $8 per purchase order) gives us the total cost per purchase order:
$40 + $8 = $48 per purchase order
Rounding to the nearest $2 gives us the final answer of $60 per purchase order (Choice B).

Question 10

Which of the following BEST describes a business unit where the manager is responsible for both controlling costs and generating sales revenue?

Accepted Answer

A profit center is a business unit that is responsible for both generating sales revenue and controlling costs in order to maximize profits.

Question 11

Responsibility centers are business units where managers are focused exclusively on controlling costs of operation.

Accepted Answer

Responsibility centers are business units where managers are responsible for achieving specific goals or objectives, which may include controlling costs of operation but are not limited to it. The different types of responsibility centers include cost centers, profit centers, revenue centers, and investment centers.

Question 12

Which of the following BEST describes a business unit where the manager is primarily responsible for cost control?

Accepted Answer

A cost center is a business unit where the manager is primarily responsible for controlling costs. This means they are evaluated based on their ability to keep costs within budget and to minimize expenses. The focus is on efficiency and minimizing waste, rather than generating revenue or making a profit.

Question 13

A manufacturing company's legal department provides legal guidance to all the divisions and units of the company. The salary and benefits of the legal department's personnel would be an example of which of the following?

Accepted Answer

The legal department's salary and benefits is an example of an untraceable fixed cost, as it cannot be directly attributed to a specific product or service and is not affected by changes in production levels.

Question 14

Which of the following BEST describes a business unit where the manager is primarily responsible for generating sales revenue?

Accepted Answer

A revenue center is a business unit that is primarily responsible for generating sales revenue. The manager of a revenue center is accountable for achieving revenue targets and maximizing profits. The other answer choices are not as relevant to the responsibility of generating sales revenue. A profit center is a business unit that is responsible for generating both revenues and profits. An investment center is a business unit that is responsible for generating returns on invested capital. A cost center is a business unit that is responsible for controlling costs and expenses.

Question 15

There are five types of responsibility centerscost centers, revenue centers, profit centers, investment centers, and financial centers.

Accepted Answer

There are four main types of responsibility centers: cost centers, revenue centers, profit centers, and investment centers. Financial centers are not typically classified as a separate type of responsibility center in management accounting.

Question 16

Assume that AAA Company's Legal Department is a centralized service department serving all the various business units of the company. If AAA wished to assign the costs of the department to the company's various business units, which of the following would be the MOST appropriate cost driver or assignment basis?

Accepted Answer

The number of service hours provided would be the most appropriate cost driver or assignment basis for the Legal Department because it directly reflects the amount of work being done by the department for each business unit. The other options (number of purchase orders, number of employees, number of reports prepared) do not necessarily reflect the amount of work being done by the Legal Department and may not be as accurate in assigning costs.

Question 17

Which of the following describes a responsibility center?

Accepted Answer

A responsibility center is a part of an organization for which a particular manager is responsible. It can be a department, branch, product line, or any other unit within the organization that has its own set of objectives and goals. This manager is accountable for the performance of the unit and has the authority to make decisions regarding its operations.

Question 18

One of the key functions of responsibility accounting is to evaluate the performance of company managers and the units they manage.

Accepted Answer

Responsibility accounting is a system that measures and reports the performance of managers and departments in a company by assigning them specific responsibilities and measuring their success in achieving those responsibilities. By evaluating performance through this system, it is possible to identify strengths and weaknesses in management and take measures to improve them. The purpose of responsibility accounting is to identify areas where managers and departments are falling short of expectations and provide them with the support they need to improve their performance.

Question 19

Assume that AAA Company's Procurement Department is a centralized service department serving all business units, which of the following would be the MOST appropriate cost driver or assignment basis?

Accepted Answer

The number of purchase orders is the most appropriate cost driver or assignment basis because it directly reflects the amount of work performed by the Procurement Department. The department's workload and therefore its costs are primarily driven by the number of purchase orders processed, making it the most appropriate allocation base.

Question 20

Henderson Industrial Products uses a centralized service department for procurement of raw materials, servicing all three of its divisions-Construction, Manufacturing, and Military. The total monthly costs of the procurement department are $480,000. Of these costs, 80% are traceable to the divisions, and 20% are considered untraceable. Henderson has decided to assign the traceable costs to the divisions based on number of purchase orders processed. Below is a list of the purchase orders per division.  How much of the procurement department's cost should be assigned to the Construction Division?

Accepted Answer

First, we need to determine the total traceable costs, which is 80% of $480,000: 
0.8 x $480,000 = $384,000

Then, we need to determine the allocation rate, which is the total traceable costs divided by the total number of purchase orders: 
$384,000 ÷ 1,200 = $320 per purchase order

Finally, we can allocate the traceable costs to each division based on the number of purchase orders processed:

Construction Division: 300 purchase orders x $320 per purchase order = $96,000 
Manufacturing Division: 600 purchase orders x $320 per purchase order = $192,000 
Military Division: 300 purchase orders x $320 per purchase order = $96,000

Therefore, the Construction Division should be assigned $96,000 of the procurement department's cost.

Quiz 22: The Master Budget and Responsibility Accounting