Chapter 22 Study Questions

Question 1
Which one of the statements is correct about controllable costs?

a.
Allocated costs are controllable.
b.
A cost is controllable if it is incurred directly in a manager’s division or segment.
c.
Variable costs are controllable and fixed costs are not.
d.
More costs are controllable as one moves downward in management levels.

b.
A cost is controllable if it is incurred directly in a manager’s division or segment.
Question 2
Responsibility centers include

a.
cost centers.
b.
profit centers.
c.
investment centers.
d.
all of the above.

d.
all of the above.
Question 3
A responsibility center that incurs costs and also generates revenues is a(n)

a.
investment center.
b.
profit center.
c.
segment.
d.
cost center.

b.
profit center.
Question 4
What type of center is the Human Resources department at a car dealership?

a.
Profit center.
b.
Segment.
c.
Investment center.
d.
Cost center.

d.
Cost center.
Question 5
CEO, Inc.’s budgeted data for March when 2,400 units were budgeted to be produced and sold are provided:

Controllable fixed costs
$31,300
Sales revenue
$190,000
Variable costs
$105,840

Actual profit in March totaled $47,000. How much is the variance in a month when 2,500 units are produced (assume sales revenue remains the same)?

a.
$4,360 unfavorable.
b.
$1,450 unfavorable.
c.
$48,500 unfavorable.
d.
$2,860 unfavorable.

b.
$1,450 unfavorable.
Question 6
A manager of an investment center can improve ROI by

a.
increasing average operating assets.
b.
reducing variable and/or controllable fixed costs.
c.
reducing sales.
d.
increasing variable costs.

b.
reducing variable and/or controllable fixed costs.
Question 7
The return on investment for an investment center can be improved by increasing

a.
fixed costs.
b.
average operating assets.
c.
controllable margin.
d.
variable costs.

c.
controllable margin.
Question 8
Which of the following does not impact the amount of residual income?

a.
Sales
b.
Net income
c.
Controllable costs
d.
Controllable margin

b.
Net income
Question 9
Which one of the following is a correct statement about residual income?

a.
It is less effective for evaluating investment centers than ROI.
b.
It is the ratio of controllable margin to the minimum rate of return on average operating assets.
c.
It evaluates performance by comparing the return of an investment center with the company’s minimum rate of return.
d.
Its goal is to maximize profits of an investment center.

c.
It evaluates performance by comparing the return of an investment center with the company’s minimum rate of return.
Question 10
The performance of the manager of Ottawa 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

b.
Increase in amount of return on investment desired
Question 11
The purpose of the departmental overhead cost report is to

a.
control indirect labor costs.
b.
control overhead costs.
c.
control selling expense.
d.
determine the efficient use of materials.

b.
control overhead costs.
Question 12
A static budget report

a.
may be appropriate in evaluating a manager’s effectiveness in controlling costs when the behavior of the costs in response to changes in activity is fixed.
b.
shows costs at only 2 or 3 different levels of activity.
c.
is appropriate in evaluating a manager’s effectiveness in controlling variable costs.
d.
should be used when the actual level of activity is materially different from the master budget activity level.

a.
may be appropriate in evaluating a manager’s effectiveness in controlling costs when the behavior of the costs in response to changes in activity is fixed.
Question 13
Assume that actual sales results exceed the planned results for the second quarter. This favorable difference is greater than the unfavorable difference reported for the first quarter sales. Which of the following statements about the sales budget report on June 30 is true?

a.
The year-to-date results will show an unfavorable difference.
b.
The year-to-date results will show a favorable difference.
c.
The difference for the first quarter can be ignored.
d.
The sales report is not useful if it shows a favorable and unfavorable difference for the two quarters.

b.
The year-to-date results will show a favorable difference.
Question 14
Boland Manufacturing prepared a 2016 budget for 120,000 units of product. Actual production in 2016 was 130,000 units. To be most useful, what amounts should a performance report for this company compare?

a.
The actual results for 130,000 units with a new budget for 130,000 units.
b.
The actual results for 130,000 units with the original budget for 120,000 units.
c.
The actual results for 130,000 units with last year’s actual results for 134,000 units.
d.
It doesn’t matter. All of these choices are equally useful.

a.
The actual results for 130,000 units with a new budget for 130,000 units.
Question 15
The flexible budget

a.
eliminates the need for a master budget.
b.
is a series of static budgets at different levels of activity.
c.
is prepared before the master budget.
d.
is relevant both within and outside the relevant range.

b.
is a series of static budgets at different levels of activity.
Question 16
Sales results that are evaluated by a static budget might show

1. favorable differences that are not justified.
2. unfavorable differences that are not justified.

a.
1
b.
2
c.
both 1 and 2.
d.
neither 1 nor 2.

c.
both 1 and 2.
Question 17
The activity index used in preparing the flexible budget

a.
should significantly influence the costs that are being budgeted.
b.
is prescribed by generally accepted accounting principles.
c.
is only applicable to fixed manufacturing costs.
d.
is the same for all departments.

a.
should significantly influence the costs that are being budgeted.
Question 18
Under management by exception, which differences between planned and actual results should be investigated?

a.
Controllable and noncontrollable
b.
Material and controllable
c.
All differences should be investigated
d.
Material and noncontrollable

b.
Material and controllable
Question 19
Nikoto Steel Co. budgeted manufacturing costs for 50,000 tons of steel are:

Fixed manufacturing costs
$50,000 per month
Variable manufacturing costs
$12.00 per ton of steel

Nikoto produced 40,000 tons of steel during March. How much is the flexible budget for total manufacturing costs for March?

a.
$520,000
b.
$650,000
c.
$480,000
d.
$530,000

d.
$530,000
Question 20
In the Dichter Co., indirect labor is budgeted for $72,000 and factory supervision is budgeted for $24,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is

a.
$99,000.
b.
$105,000.
c.
$96,000.
d.
$108,000.

b.
$105,000.
Question 21
In the Goblette Manufacturing Company, indirect labor is budgeted for $108,000 and factory supervision is budgeted for $36,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is:

a.
$157,500.
b.
$162,000.
c.
$148,500.
d.
$144,000.

a.
$157,500.
Question 22
Kevin Jarvis Industries produced 192,000 units in 90,000 direct labor hours. Production for the period was estimated at 198,000 units and 99,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at

a.
99,000 hours and 90,000 hours.
b.
96,000 hours and 90,000 hours.
c.
90,000 hours and 90,000 hours.
d.
96,000 hours and 99,000 hours.

c.
90,000 hours and 90,000 hours
Question 23
At zero direct labor hours in a flexible budget graph, the total budgeted cost line intersects the vertical axis at $30,000. At 15,000 direct labor hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $90,000. Fixed and variable costs may be expressed as:

a.
$30,000 fixed plus $6 per direct labor hour variable.
b.
$60,000 fixed plus $2 per direct labor hour variable.
c.
$30,000 fixed plus $4 per direct labor hour variable.
d.
$60,000 fixed plus $4 per direct labor hour variable.

Question 24
Power Manufacturing recorded operating data for its shoe division for the year.

Sales
$1,500,000
Contribution margin
300,000
Controllable fixed costs
180,000
Average total operating assets
600,000

How much is controllable margin for the year?

a.
$120,000
b.
20%
c.
50%
d.
$300,000

a.
$120,000
Question 25
A responsibility report should

a.
only be prepared at the highest level of managerial responsibility.
b.
be prepared in accordance with generally accepted accounting principles.
c.
show only those costs that a manager can control.
d.
only show variable costs.

c.
show only those costs that a manager can control.
Question 26
Which of the following is not a true statement?

a.
Fewer costs are controllable as one moves up to each higher level of managerial responsibility.
b.
Responsibility accounting applies to both profit and not-for-profit entities.
c.
The term segment is sometimes used to identify areas of responsibility in decentralized operations.
d.
All costs are controllable at some level within a company.

a.
Fewer costs are controllable as one moves up to each higher level of managerial responsibility.
Question 27
The linens department of a large department store is

a.
a profit center.
b.
an investment center.
c.
not a responsibility center.
d.
a cost center.

a.
a profit center.
Question 28
Which of the following is not a correct match?

1. Incurs costs
2. Generates revenue
3. Controls investment funds

a.
Investment Center 1, 2, 3
b.
Cost Center 1
c.
Profit Center 1, 2, 3
d.
All are correct matches

c.
Profit Center 1, 2, 3
Question 29
In the performance report for cost centers,

a.
fixed costs are not reported.
b.
no distinction is made between fixed and variable costs.
c.
only materials and controllable costs are reported.
d.
controllable and noncontrollable costs are reported.

b.
no distinction is made between fixed and variable costs.
Question 30
The best measure of the performance of the manager of a profit center is the

a.
success in meeting budgeted goals for controllable costs.
b.
rate of return on investment.
c.
amount of controllable margin generated by the profit center.
d.
amount of contribution margin generated by the profit center.

c.
amount of controllable margin generated by the profit center.
Question 31
Given below is an excerpt from a management performance report:

Budget
Actual
Difference
Contribution margin
$1,000,000
$1,050,000
$50,000
Controllable fixed costs
$ 500,000
$ 450,000
$50,000

The manager’s overall performance

a.
is 20% above expectations.
b.
is equal to expectations.
c.
cannot be determined from information given.
d.
is 20% below expectations.

a.
is 20% above expectations.
Question 32
A responsibility report for a profit center will

a.
not show indirect fixed costs.
b.
show noncontrollable fixed costs.
c.
not show cumulative year-to-date results.
d.
not show controllable fixed costs.

a.
not show indirect fixed costs.
Question 33
Trails and Paths, Inc. had average operating assets of $6,000,000 and sales of $3,000,000 in 2016. If the controllable margin was $600,000, the ROI was

a.
10%
b.
40%
c.
50%
d.
20%

a.
10%
Question 34
Dingo Division’s operating results include: controllable margin of $150,000, sales totaling $1,200,000, and average operating assets of $500,000. Dingo is considering a project with sales of $100,000, expenses of $86,000, and an investment of average operating assets of $200,000. Dingo’s required rate of return is 9%. Should Dingo accept this project?

a.
No, the return is less than the required rate of 9%.
b.
Yes, ROI still exceeds the cost of capital.
c.
Yes, ROI will drop by 6.6% which is still above the minimum required rate of return.
d.
No, ROI will decrease to 7%.

a.
No, the return is less than the required rate of 9%.
Question 35
An investment center generated a contribution margin of $400,000, fixed costs of $200,000 and sales of $2,000,000. The center’s average operating assets were $800,000. How much is the return on investment?

a.
75%
b.
25%
c.
50%
d.
175%

b.
25%
Question 36
Monte, Inc. recorded operating data for its Sandtrap division for the year. Monte requires its return to be 9%.

Sales
$1,000,000
Controllable margin
180,000
Total average assets
600,000
Fixed costs
60,000

How much is ROI for the year?

a.
10%
b.
17%
c.
20%
d.
30%

d.
30%
Question 37
Naples, Inc. recorded operating data for its shoe division for the year.

Sales
$750,000
Contribution margin
135,000
Total fixed costs
90,000
Average total operating assets
300,000

How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant?

a.
18%
b.
45%
c.
12%
d.
25%

d.
25%
Question 38
Return on investment is calculated by dividing

a.
contribution margin by sales.
b.
controllable margin by average operating assets.
c.
controllable margin by sales.
d.
contribution margin by average operating assets.

b.
controllable margin by average operating assets.
Question 39
Which statement is true?

a.
An investment center is only responsible for its investments.
b.
An investment center is only responsible for revenues and expenses.
c.
A profit center is evaluated using contribution margin, while an investment center is evaluated using ROI.
d.
An investment center is responsible for revenues and expenses, as well as earning a return on assets.

d.
An investment center is responsible for revenues and expenses, as well as earning a return on assets.
Question 40
In computing ROI, land held for future use

a.
is important in evaluating the performance of a profit center manager.
b.
is included in the calculation of operating assets.
c.
will hurt the performance measurement of an investment center’s manager.
d.
is considered a nonoperating asset.

d.
is considered a nonoperating asset.
Question 41
What is the goal of residual income?

a.
To maximize the total amount of residual income.
b.
To maximize controllable margin.
c.
To maximize profits.
d.
To maximize the amount of costs which are controllable.

a.
To maximize the total amount of residual income.
Question 42
Lew Co. had sales of $400,000, variable costs of $200,000, and direct fixed costs totaling $100,000. The company’s operating assets total $800,000, and its required return is 10%. How much is the residual income?

a.
$80,000
b.
$120,000
c.
$320,000
d.
$20,000

d.
$20,000
Question 43
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.
variable manufacturing costs and fixed selling and administrative expenses.
d.
fixed manufacturing costs and variable selling and administrative expenses.

a.
fixed manufacturing costs and fixed selling and administrative expenses.
Question 44
A flexible budget is appropriate for

Direct Labor Costs

Manufacturing Overhead Costs

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

a.

Yes

Yes

Question 45
Which of the following will cause an increase in ROI?

a.
An increase in average operating assets
b.
An increase in sales
c.
An increase in controllable fixed costs
d.
An increase in variable costs

b.
An increase in sales