Budgetary Control & Responsibility Accounting

CHAPTER 11
BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING

SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY
Item SO BT Item SO BT Item S BT Item SO BT Item SO BT
O
True-False Statements
1. 1 K 9. 3 C 17. 3 K 25. 5 K 33. 4 K
2. 1 C 10. 3 K 18. 3 K 26. 5 C 34. 4 K
3. 1 K 11. 3 K 19. 4 C 27. 6 K 35. 4 K
4. 2 K 12. 3 C 20. 4 C 28. 7 K 36. 7 K
5. 2 C 13. 3 C 21. 4 C 29. 7 K 37. 7 K
6. 2 K 14. 3 C 22. 4 C *30. 8 K 38. 7 C
7. 2 K 15. 3 K 23. 4 C *31. 8 C *39. 8 K
8. 2 C 16. 3 K 24. 4 K *32. 8 C
Multiple Choice Questions
40. 7 AN 66. 3 C 92. 4 K 118. 7 C 144. 7 C
41. 3 AP 67. 3 C 93. 4 K 119. 7 C 145. 7 K
42. 3 AP 68. 3 C 94. 5 C 120. 7 K 146. 6 K
43. 3 AP 69. 2 K 95. 5 C 121. 7 C 147. 7 AN
44. 3 AP 70. 3 C 96. 5 C 122. 7 AP 148. 4 K
45. 3 AN 71. 3 K 97. 5 C 123. 7 K *149. 8 C
46. 7 AP 72. 2 C 98. 5 K 124. 7 C 150. 4 K
47. 2,3 AN 73. 3 C 99. 6 C *125 8 AP *151. 8 C
.
48. 1 C 74. 3 K 100. 6 K *126 8 K 152. 7 AP
.
49. 1 K 75. 3 K 101. 6 C *127 8 C *153. 8 K
.
50. 1 C 76. 3 C 102. 6 C 128. 2 C *154. 8 AP
51. 1 K 77. 3 C 103. 6 AP 129. 3 AP 155. 7 AN
52. 1 K 78. 2 C 104. 6 C 130. 3 K 156. 7 AP
53. 1 K 79. 4 K 105. 6 AP 131. 3 AP *157. 8 AP
54. 2 C 80. 4 C 106. 6 C 132. 2,3 C *158. 8 AN
55. 2 C 81. 4 C 107. 6 C 133. 7 E 159. 7 E
56. 2 C 82. 4 C 108. 6 K 134. 6 AP 160. 1 K
57. 2 K 83. 4 K 109. 6 K 135. 7 AP 161. 2 C
58. 2 C 84. 4 C 110. 6 C 136. 8 K 162. 3 C
59. 2 C 85. 4 C 111. 6 K 137. 7 AN 163. 1 C
60. 2 C 86. 4 C 112. 6 C 138. 4 K 164. 3,5, C
6
61. 2 C 87. 4 C 113. 7 K 139. 4 C 165. 4,5 C
62. 3 C 88. 4 C 114. 7 K 140. 7 AN 166. 5,6 K
63. 3 AP 89. 4 C 115. 7 C 141. 7 AP 167. 7 C
64. 3 AP 90. 4 C 116. 7 AP 142. 7 AP 168. 8 C
65. 3 C 91. 4 C 117. 7 C 143. 7 AN 169. 7,8 C
Brief Exercises
170. 7 AP 174. 4,5 AP 178. 3 AP *182 8 AP 186. 3 AP
.
171. 6 AP 175. 3 AP 179. 3 AP 183. 3 AP 187. 3 AP
172. 7 AP 176. 3 AP 180. 3 AP 184. 7 AN 188. 5 AP
*173. 8 AP 177. 7 AN 181. 3 AP 185. 7 AP 189. 6 AP
Exercises
190. 5 AP 194. 3,5 AP 198. 6 AP 202. 6,7 AP 206. 7 AP
191. 3 AP 195. 3 AP 199. 3 AP 203. 7 AN 207. 4 C
11-2 Test Bank for Managerial Accounting, Third Canadian Edition
Item SO BT Item SO BT Item S BT Item SO BT Item SO BT

O
192. 6 AP 196. 3 AP 200. 5 AP 204. 7 AN 208. 7 AP
193. 4,5 AP 197. 3,6 AP 201. 5 AN 205. 4 C 209. 8 AP
210. 3,4,6 AN
Completion Statements
211. 1 K 214. 1 K 217. 4 K 220. 4 K
212. 1 K 215. 3 K 218. 4 K 221. 7 K
213. 1 K 216. 3 K 219. 4 K 222. 7 K
Matching
223. 1-7 K
Short Answer
224. 1-4 E 225. 1-4 E 226. 1-3 E 227. 1-7 E
*This topic is dealt with in an Appendix to the chapter.

Budgetary Control and Responsibility Accounting 11-3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 48. MC 51. MC 211. C 214. C 225. Es 160. MC
2. TF 49. MC 52. MC 212. C 223. Ma 226. Es 163. MC
3. TF 50. MC 53. MC 213. C 224. Es 227. Es
Study Objective 2
4. TF 8. TF 56. MC 60. MC 78. MC 224. Es
5. TF 47. MC 57. MC 61. MC 128. MC 226. Es
6. TF 54. MC 58. MC 69. MC 132. MC 227. Es
7. TF 55. MC 59. MC 72. MC 223. Ma 161. MC
Study Objective 3
9. TF 18. TF 66. MC 77. MC 180. BE 197. Ex 43. MC
10. TF 41. MC 67. MC 129. MC 191. BE 199. Ex 45. MC
11. TF 42. MC 68. MC 130. MC 183. BE 215. C 162. MC
12. TF 44. MC 70. MC 131. MC 186. BE 216. C 164. MC
13. TF 47. MC 71. MC 132. MC 187. BE 223. Ma 210. Ex
14. TF 62. MC 73. MC 175. BE 191. Ex 224. Es
15. TF 63. MC 74. MC 176. BE 194. Ex 225. Es
16. TF 64. MC 75. MC 178. BE 195. Ex 226. Es
17. TF 65. MC 76. MC 179. BE 196. Ex 227. Es
Study Objective 4
19. TF 33. TF 82. MC 88. MC 138. MC 205. Ex 223. Ma
20. TF 34. TF 83. MC 89. MC 139. MC 207. C 224. Es
21. TF 35. TF 84. MC 90. MC 148. MC 217. C 225. Es
22. TF 79. MC 85. MC 91. MC 150. MC 218. C 227. Es
23. TF 80. MC 86. MC 92. MC 174. BE 219. C 165. MC
24. TF 81. MC 87. MC 93. MC 193. Ex 220. C 210. Ex
Study Objective 5
25. TF 95. MC 98. MC 193. Ex 201. Ex 164. MC 188. BE
26. TF 96. MC 174. BE 194. Ex 223. Ma 165. MC
94. MC 97. MC 190. Ex 200. Ex 227. Es 166. MC
Study Objective 6
27. TF 102. MC 106. MC 110. MC 146. MC 198. Ex 164. MC
99. MC 103. MC 107. MC 111. MC 171. BE 202. Ex 166. MC
100. MC 104. MC 108. MC 112. MC 192. Ex 223. Ma 189. BE
101. MC 105. MC 109. MC 134. MC 197. Ex 227. Es 210. Ex
Study Objective 7
28. TF 113. MC 120. MC 137. MC 147. MC 177. BE 221. C
29. TF 114. MC 121. MC 140. MC 152. MC 184. BE 222. C
36. TF 115. MC 122. MC 141. MC 155. MC 185. BE 223. Ma
37. TF 116. MC 123. MC 142. MC 156. MC 202. Ex 227. Es
38. TF 117. MC 124. MC 143. MC 159. MC 203. Ex 167. MC
40. MC 118. MC 133. MC 144. MC 170. BE 204. Ex 169. MC
46. MC 119. MC 135. MC 145. MC 172. BE 206. Ex 208. Ex
Study Objective *8
*30. TF *39. TF *127. MC *154. MC *173. BE *153. MC 209. MC
*31. TF *125 MC *149. MC *157. MC *182. BE 168. MC
.
*32. TF *126 MC *151. MC *158. MC *136. MC 169. MC
.
Note: TF = True-False C = Completion Ex = Exercise
MC = Multiple Choice BE = Brief Exercise Ma = Matching Es = Essay
CHAPTER STUDY OBJECTIVES
1. 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. Describe the concept of responsibility accounting. Responsibility accounting involves

accumulating and reporting revenues and costs on the basis of the individual manager
who has the authority to make the day-to-day decisions about the items. The evaluation of
a manager's performance is based on the matters directly under the manager's control. In
responsibility accounting, it is necessary to distinguish between controllable and non-
controllable fixed costs and to identify three types of responsibility centres: cost, profit, and
investment.
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. 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 company’s average operating assets. ROI
sometimes provides misleading results because profitable investments are often rejected
when the investment reduces ROI but increases overall profitability.
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. The master budget is the basis of developing flexible budgets.
5. A flexible budget is more useful in evaluating a manager's performance than a static

budget.
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. Evaluating a manager's performance in controlling variable costs is effectively achieved

using a static budget.
9. A flexible budget should be prepared for each of the types of budgets included in the
master budget.
10. A static budget is a series of flexible budgets at different levels of activities.
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. A flexible budget is based on the master budget.
14. The activity index used in preparing a flexible budget should be the basis of the variable
costs that are being budgeted.
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. In a responsibility accounting reporting system, as one moves up each level of

responsibility in an organization, the responsibility reports become more detailed.
24. “The buck stops here” implies that all costs and revenues are controllable at some level of
responsibility within a company.
25. Direct fixed costs are synonymous with common costs.
26. Cost centre managers are evaluated on the profitability of their centres.
27. Since a profit centre is an independent entity, all fixed costs are controllable by its
manager.
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 centre’s 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. Investment centres rarely generate revenues by selling products.
34. Investment and profit centres generate both revenues and costs.
35. Investment centres generate a return on operating assets.
36. Decreasing the average operating assets can increase ROI.
37. Increasing either controllable margin or the average operating assets can raise ROI.
38. When ROI is calculated, management would prefer a high percentage.
*39. Residual income and ROI are used as performance evaluation methods for profit centre
performance.
ANSWERS TO TRUE-FALSE STATEMENTS

Ite Ans Ite Ans Ite Ans Ite Ans Ite Ans Ite Ans
m . m . m . m . m . m .
1. F 8. F 15. F 22. T 29. F 36. T
2. T 9. T 16. F 23. F *30. F 37. F
3. T 10. F 17. T 24. T *31. F 38. T
4. T 11. F 18. F 25. F *32. T *39. F
5. T 12. T 19. T 26. F 33. F
6. F 13. T 20. F 27. F 34. T
7. F 14. T 21. F 28. F 35. T
MULTIPLE CHOICE QUESTIONS
40. The area manager of the Steak House Restaurants is considering two possible expansion
alternatives. The required investments, expected controllable margins, and the ROIs of
each are as follows:
Project Investment Controllable Margin ROI

Winnipeg $300,000 $100,000 33.33%
Regina $700,000 $200,000 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
division’s 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. What is the budgeted Fixed Overhead at the actual level of activity?
a. $2,100,000
b. $2,110,000
c. $2,240,000
d. $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 Company’s actual machine hours were greater than the budgeted amount.
b. EKPN Company’s 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. Perot Manufacturing reported the following items for 2012:
Income tax expense $ 40,000

Contribution margin 125,000
Controllable fixed costs 30,000
Interest expense 10,000
Total operating assets 475,000
How much is controllable margin?

a. $125,000
b. $95,000
c. $85,000
d. $45,000
47. 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 year’s actual results for
44,000 units
d. It doesn’t matter. All of these choices are equally useful.
48. Which one of the following statements describes a budget report?

a. It is the preparation of long-term plans.
b. It is a comparison of actual results with planned objectives.
c. It includes the valuation of inventories.
d. It is voted on and approved by the stockholders.
49. How often should a company prepare budget reports?

a. As often as demanded by the stockholders
b. As often as deemed necessary
c. Annually is sufficient if the company is profitable
d. Monthly to be sure the company is operating successfully
50. Which one of the following do budget reports provide for managers?
a. The cause of differences between actual and projected amounts
b. The nature of corrective action needed
c. Feedback on operations
d. Modification actions necessary
51. What is the purpose of a departmental overhead cost report?

a. To control corporate labour costs
b. To allocate uncontrollable costs
c. To determine the cause of any misuse of costs
d. To control overhead costs
52. What is the purpose of the sales budget report?

a. To control the cost of selling products in a company
b. To assess whether the company is profitable or not
c. To determine why sales goals were met or not met
d. To identify differences between planned and actual and take corrective action if
necessary.
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. Which one of the following is true concerning a static budget?

a. It is prepared at the end of the accounting period once actual results are known.
b. It is useful in evaluating a manager's performance by comparing actual variable
costs and planned variable costs.
c. It shows planned results at the original budgeted activity level.
d. It reflects the level of activity at which the company will be most profitable.
55. When is a static budget most appropriate in evaluating a manager's performance?

a. When the actual costs incurred equal the amounts in the budget
b. When the actual activity is less than the master budget activity
c. When the company performed at the same activity level as the static budget level
d. The static budget is not appropriate for evaluating managers.
56. Which statement is true concerning a static budget report?

a. It considers performance at numerous activity levels.

b. It is appropriate in evaluating a manager's effectiveness in controlling fixed costs.
c. It should be used when the actual level of activity is materially different from the
master budget activity level.
d. It is most effective when evaluating a manager's effectiveness in controlling
variable costs.
57. What exists when budgeted costs exceed actual results?

a. A budgeting error
b. A favourable difference
c. An unfavourable difference
d. An excess profit
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 company’s 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 Company’s 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. For which of the following costs is a static budget most appropriate?
a. Uncontrollable costs
b. Manufacturing costs
c. Fixed overhead costs
d. Variable overhead costs
62. Which one of the following is true of a flexible budget?

a. It is prepared when managers are unsure of activity levels.

b. It projects budget data at a pre-planned level of activity.
c. It is useful in controlling variable and fixed costs.
d. It shows no differences between actual and budgeted amounts because it is
prepared after the actual results are determined.
63. Haroot Company’s 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 $45,000

Factory supplies 4,000
Indirect materials 21,000
Depreciation on factory building 15,000
Total manufacturing overhead $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. Which one of the following statements is true concerning a flexible budget?
a. It is prepared once the actual activity level is determined.
b. It is relevant both within and outside the relevant range.

c. It replaces a master budget.
d. It is one of the financial budgets.
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. Which statement is true concerning management by exception?

a. It causes employee morale problems.

b. It requires that all differences will be investigated.
c. It requires management to investigate only unfavourable differences.
d. It requires investigation of all material differences whether favourable or not.
75. Nextel Communications uses management by exception. Which differences between

planned and actual results will it investigate?
a. Those that are material and non-controllable
b. Those that are controllable and non-controllable
c. Those that are material and controllable
d. All differences should be investigated.
76. How does a graph of a flexible budget compare to a CVP graph?

a. Fixed costs appear differently.
b. Variable costs appear differently.
c. Sales revenues are not shown on a flexible budget graph.
d. The two are graphed identically.
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. In what situations will a static budget be most effective in evaluating a manager's
effectiveness?
a. The company has substantial fixed costs.
b. The company has substantial variable costs.
c. The planned activity levels match actual activity levels.
d. The company has no fixed costs.
79. What is the preparation of reports for each level of responsibility in the company’s
organization chart called?
a. Static reporting
b. Responsibility reporting
c. Exception reporting
d. Master budgeting analysis
80. When is a cost considered to be controllable?

a. Only when the manager has the power to incur the cost within a given time period
b. Only if the cost is less than the budget amount
c. Only when it is a variable cost
d. Only when the amount changes based on different activity levels
81. Which one of the following decreases the controllability of a particular cost?
a. Moving up to higher levels of managerial responsibility
b. An increase in the responsibility for costs incurred

c. A greater number of costs in a manager’s division
d. Moving down to lower levels of management
82. Which one of the following describes a responsibility report?

a. It is prepared using the CVP income statement format.
b. It shows all costs that relate to a particular manager’s division.
c. It shows only the variable costs in a manager’s division.
d. It is prepared at the highest level of managerial responsibility.
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. In which situation is responsibility accounting especially valuable?

a. When large amounts of uncontrollable costs exist
b. In not-for-profit companies
c. In decentralized companies
d. In cost centres
85. Which of the following is a true statement?

a. All costs are controllable at some level with a company.
b. Responsibility accounting applies to only profitable divisions and segments.
c. A cost is controllable if it is incurred in a manager’s division or segment.
d. More costs are controllable as one moves downward in management levels.
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. Which statement is true concerning management by exception?

a. It is most effective on uncontrollable costs.
b. It enables management to focus on problem areas.
c. It allows managers to decide when they want to use budget guidelines.
d. It allows managers to concentrate on the uncontrollable costs.
88. Which type of centre is the toy department in a Wal-Mart store?

a. An exception centre
b. A profit centre
c. A cost centre
d. An investment centre
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
90. Which type of centre is the housekeeping department of a manufacturing company?

a. A segment
b. A profit centre
c. A cost centre
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. Which statement is true concerning a cost centre?

a. It incurs costs and generates revenues.
b. It only exists in companies in which costs exceed revenues.
c. It is evaluated most effectively using ROI.
d. It is usually a production or service department.
93. On what is a manager of a profit centre evaluated?

a. The profit that the centre generates
b. His or her ability to control costs
c. The amount of return the centre’s assets generate
d. The amount of revenue that can be generated
94. Which one of the following is a suitable way to evaluate cost centres?
a. Compare the actual profit generated with expected profit.
b. Compare actual total costs with flexible budget data.
c. Compare actual controllable costs with static budget data.
d. Compare actual controllable costs with flexible budget data.
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. Of the following choices, which one contains a common fixed cost?
a. Profit centre manager's salary
b. Sales clerks’ salaries

c. Costs from a central payroll department to create paycheques for a cost centre's
employees
d. Depreciation on a responsibility centre's equipment
97. Which of the following is an indirect fixed cost?

a. Depreciation on a profit centre’s machinery
b. Depreciation on the company’s building which houses several profit centres
c. Health insurance costs for employees
d. Profit centre supervisory salaries
98. Which one of the statements about a responsibility report is correct?

a. It contains controllable and non-controllable costs.
b. It compares actual costs with static budget data.
c. A distinction is made between variable and fixed costs.
d. It is used to evaluate investment centres, but not cost or profit centres.
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. What is controllable margin?

a. Contribution margin less controllable fixed costs
b. Sales minus variable costs
c. Sales minus contribution margin
d. Contribution margin less all fixed costs
101. For what purpose is controllable margin most useful?

a. Preparing the master budget
b. Performance evaluation of profit centres
c. Break-even analysis
d. Evaluating cost centres
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. Given below is a portion of Swinging Tunes, Inc.’s management performance report:
Budget Actual Difference
Contribution margin $1,040,000 $1,020,000 $20,000
Controllable fixed costs 430,000 420,000 10,000
Which statement is true about the manager’s overall performance?

a. The manager’s performance is above expectations.
b. The manager’s performance is below expectations.
c. The manager was under budget on all controllable amounts.
d. The manager's overall performance cannot be determined from information
given.
104. 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 costs—both controllable and non-controllable
d. Controllable margin
107. How do controllable margin and contribution margin differ?

a. The amount of the controllable margin is larger than contribution margin.
b. The amount of the contribution margin is usually higher than the controllable
margin.
c. They are synonymous terms.
d. Controllable margin is used for profit centres, while contribution margin is used
for cost centres.
108. What is a profit centre?

a. A division of a company that has never incurred a loss
b. A responsibility centre that incurs costs and generates revenues
c. A centre evaluated by the rate of return earned on the assets allocated to the
centre
d. A division of the company that has fewer costs than the other divisions
109. Which one of the following is not controllable by a profit centre manager?
a. Variable costs
b. Sales
c. Controllable margin
d. Assets used by the centre
110. Which statement is true concerning direct fixed costs?

a. They also called traceable costs.
b. Profit centre managers are not able to control them.
c. The often apply to more than one centre.
d. They are deducted from controllable margin on a responsibility report.
111. What is another name for an indirect fixed cost?

a A traceable fixed cost
b. A controllable fixed cost
c. A segment fixed cost
d. A common fixed cost
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. What is the purpose of determining return on investment?

a. To assess a company’s controllable margin
b. To determine which costs are controllable
c. To assess performance of an investment centre
d. To determine profitability of a profit centre
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 Merck’s 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
116. What effects do increases in plant assets have on ROI?

a. An increase in controllable margin which increases ROI
b. A reduction of ROI
c. An increase in ROI
d. Unable to determine without the dollar amount of controllable margin known
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. Which one of the following is a distinguishing characteristic of an investment centre?

a. It includes significant uncontrollable fixed costs.
b. Performance can be evaluated with both profitability and return on utilizing
assets.
c. This type of responsibility centre only generates revenues.
d. Revenues are rarely generated by selling products.
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. What is included in operating assets for purposes of calculating ROI?

a. All assets which appear on a segment’s balance sheet
b. All depreciable assets
c. All current assets plus plant assets used in operations
d. All assets which are invested in stocks and bonds
121. Which one of the following will increase return on investment?

a. Variable costs are increased
b. An increase in sales
c. Average operating assets are increased
d. Fixed costs are increased
122. An investment centre generated a contribution margin of $200,000, fixed costs of

$100,000 and sales of $1,000,000. The centre’s average operating assets were $400,000.
How much is the return on investment?
a. 25%
b. 175%
c. 50%
d. 75%
123. How can the manager of an investment centre improve ROI?

a. By decreasing average operating assets
b. By increasing controllable fixed costs
c. By decreasing contribution margin
d. By increasing variable costs
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.
*125. The following information is available for Aggie Auto Sales:
Average operating assets $750,000

Controllable margin 90,000
Minimum rate of return 10%
How much is Aggie Auto’s residual income?

a. $125,000
b. $640,000
c. $15,000
d. $85,000
*126. What is the goal of residual income?

a. To maximize the amount of costs which are controllable
b. To maximize profits
c. To maximize the total amount of residual income
d. To maximize controllable margin
*127. Which one of the following is a correct statement about residual income?
a. Its goal is to maximize profits of an investment centre.
b. It is less effective for evaluating investment centres than ROI.
c. It is the ratio of controllable margin to the minimum rate of return on average
operating assets.
d. It evaluates performance by comparing the return of an investment centre with
the company’s minimum rate of return.
128. 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.
d. A company has substantial variable costs.
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 year’s actual results for 47,000 units
d. It doesn’t matter. All of these choices are equally useful.
130. What budgeted amounts appear on the flexible budget?

a. Original budgeted amounts at the static budget activity level
b. Actual costs for the budgeted activity level
c. Budgeted amounts for the actual activity level achieved
d. Actual costs for the estimated activity level
131. TrueMasons’ budgeted costs for 25,000 linear metres of block are:
Fixed manufacturing costs $12,000 per month

Variable manufacturing costs $16.00 per linear metre
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.
Use the following information to answer questions 133 to 136.
EKPN Company recorded the following operating data:

Sales $1,250,000
Total direct fixed costs 400,300
Total operating assets Jan. 1, 2012 750,000
Total operating assets Dec. 31, 2012 790,000
EKPN Company’s desired return 12%
133. What is EKPN Company’s average operating assets for 2012?

a. $770,000
b. $750,000
c. $790,000
d. $150,000
134. What is EKPN Company’s controllable margin?

a. $849,700
b. $765,000
c. $410,000
d. $$84,700
135. What is EKPN Company’s ROI, rounded to the nearest whole number?
a. 11%
b. 12%
c. 53%
d. 55%
*136. What is EKPN Company’s residual income?

a. $2,200
b. ($2,200)
c. ($7,700)
d. ($10,100)
137. Beach Road Foods calculated the following for two potential investments. Beach Road’s
required rate of return is 10%.
Investment A 11.5%
Investment B 9.5%
Which of the following should Beach Road choose?

a. Investment A
b. Investment B
c. Both, since both investments generate a positive return.
d. It depends on which investment generates the larger profits.
138. For which of the following is an investment centre manager responsible?

a. Invested assets, sales, and costs
b. Sales, profits, and invested assets
c. Sales, invested assets, and assets
d. Revenues and costs
139. For which of the following is a profit centre manager responsible?

a. Invested assets, sales, and costs
b. Sales, profits, and invested assets
c. Sales, invested assets, and assets
d. Revenues and costs
140. Frame, Inc. requires a return for the Picture Division totalling 8%. Which projects would
add value to the company?
Project Average Operating Assets Controllable Margin

A $500,000 $40,000
B $450,000 $30,000
C $375,000 $32,000
D $425,000 $40,000
a. A, B, C, and D
b. Projects A, C, and D
c. Projects C and D
d. Project A, B, and D
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 $500,000
Total average assets 300,000
Fixed costs 30,000
Residual income 50,000
How much is ROI for the year?

a. 10%
b. 16.7%
c. 20%
d. 30%
143. CinRich Corporation recorded operating data for its Waterhole division for the year.
CinRich requires a 9% rate of return.
Sales $500,000
Total average assets 300,000
Fixed costs 30,000
Residual income 50,000
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. How can management improve the return on investment?

a. By buying more plant assets
b. By reducing inventory levels
c. By reducing sales
d. By increasing expenses
145. Which statement is true?

a. An investment centre is responsible for revenues and expenses as well as
earning a return on assets.
b. An investment centre is only responsible for its investments.
c. An investment centre is only responsible for revenues and expenses.
d. A profit centre is evaluated using residual income, while an investment centre is
evaluated using ROI.
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 company’s 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. Fleur de Lys Segment of Windy’s restaurants is an investment centre. The manager is
considering two possible expansion alternatives. The required investments, controllable
margins, and the ROIs of each expansion project are as follows:
Project Investment Controllable Margin ROI

Power $ 75,000 $15,000 20%
Super 330,000 56,100 17%
The investment centre is currently generating an ROI of 15% based on $700,000 in

operating assets and a controllable margin of $105,000. Which one of following projects
will increase Fleur de Lys Segment’s ROI?
a. Both Power and Super
b. only Power
c. only Super
d. Neither Super nor Power
148. Which responsibility centres generate both revenues and costs?

a. Investment and profit centres
b. Profit and cost centres
c. Cost and investment centres

d. Only profit centres
*149. For what purpose do companies calculate residual income?

a. To determine whether decentralization is possible or not
b. To motivate managers through possible termination
c. To evaluate management performance
d. To measure company profits
150. 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 year’s return on investment?

a. Less than the prior year’s due to the change in variable costs
b. Less than the prior year’s due to the change in average assets
c. No change between years
d. Less than the prior year’s due to both the change in assets and variable costs
*153. What is a weakness of residual income?

a. It discourages goal congruence.
b. It can be misleading when comparing divisions of different sizes.
c. It routinely results in managers rejecting investment opportunities that would be
advantageous to the company as a whole.
d. It does not take cost of capital into consideration.
*154. Niceville Company had sales of $400,000, variable costs of $200,000, and direct fixed
costs totalling $100,000. The company’s operating assets total $800,000, and its required
return is 10%. How much is the residual income?
a. $120,000
b. $20,000
c. $80,000
d. $320,000
155. 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. Cruise Division of Harrah’s Company’s operating results include: controllable margin,
$150,000; sales, $1,750,000; and operating assets, $750,000. The Cruise Division’s ROI
is 20%. Management is considering a project with sales of $125,000, variable expenses of
$75,000, fixed costs of $50,000; and an asset investment of $90,000. Should
management accept this new project?
a. No, since ROI will be lowered.
b. Yes, since ROI will increase.

c. Yes, since additional sales always mean more customers.
d. No, since a loss will be incurred.
160. Budgetary control means

a. That once a budget is agreed to by management there can be no deviation from
it.
b. That once a budget is agreed to the controller of the company is now in charge of
cost and profit controls.
c. That the difference between actual results and budgeted results are reported and
assessed over time.
d. That the budget can be changed during the year to reflect actual results.
161. A static budget offers management the best results when

a. Variable material costs are fixed by suppliers to the company.
b. Fixed selling costs are established at the start of the budget process.
c. Fixed manufacturing costs are established at the start of the budget process.
d. Fixed manufacturing, selling and administrative costs are established at the start
of the budget process.
162. Flexible budgets imply

a. That sales managers can have a wide latitude in modifying prices during the year.
b. That a firm will have different levels of activity and costs during a year.
c. The budget process may not be accurate at the beginning of the budget year.
d. Each manager is free to change the budget as the year progresses.
163. A characteristic of a good budget is

a. That it is easy to understand by top management.
b. That is encompasses every account in the firm’s accounting system.
c. That management is satisfied that it will provide shareholders with an adequate
return on their investment.
d. That it is easy to understand and communicate to all within the firm.
164. When setting a flexible budget it is important to know

a. The expected profit that a firm requires.
b. The expected return that the shareholders or owners require.
c. The relevant ranges of activity and cost.
d. The impact of inflation on the budget in the year to come.
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.
166. Responsibility centres in a decentralized organization

a. Do not include cost centres.
b. Do not include profit centres.
c. Only include investment centres.
d. Include cost, profit and investment centres.
167. Managers who are evaluated on their Return on Investment

a. May tend to underestimate the level of investment required in their division.
b. May tend to overestimate the level of investment required in their division.
c. May tend to underestimate the value of new product lines.
d. May tend to overestimate the value of new product lines.
168. When using a reporting system based on Residual Income

a. Senior management must ensure that there is adequate capital investment in the
firm in the long term.
b. Senior management must ensure an adequate return for the shareholders.
c. Unprofitable divisions must be either sold off or improved.
d. Both a minimum and a maximum rate of expected return must be established.
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.
ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans
. . . . . . .
40. b 59. d 78. c 97. b 116. b 135. a *154. b
41. b 60. d 79. b 98. c 117. c *136. c 155. c
42. b 61. c 80. a 99. c 118. b 137. a 156. c
43. a 62. c 81. d 100. a 119. d 138. a *157. b
44. d 63. c 82. a 101. b 120. c 139. d *158. b
45. c 64. c 83. b 102. a 121. b 140. b 159. a
46. b 65. c 84. c 103. b 122. a 141. c 160. c
47. a 66. b 85. a 104. b 123. a 142. d 161. d
48. b 67. a 86. b 105. b 124. a 143. b 162. b
49. b 68. d 87. b 106. d *125. c 144. b 163. d
50. c 69. d 88. b 107. b *126. c 145. a 164. c
51. d 70. c 89. d 108. b *127. d 146. d 165. a
52. d 71. a 90. c 109. d 128. c 147. a 166. d
53. d 72. c 91. b 110. a 129. b 148. a 167. a
54. c 73. a 92. d 111. d 130. c *149. c 168. a
55. c 74. d 93. a 112. a 131. d 150. b 169. d
56. b 75. c 94. d 113. c 132. b *151. b
57. b 76. c 95. c 114. a 133. a 152. d
58. c 77. c 96. c 115. a 134. d *153. b
BRIEF EXERCISES
Brief Exercise 170

Data for the Electric Division of Bowden Baseball Company which is operated as an investment
centre follows:
Sales $2,750,000
Contribution Margin 900,000
Controllable Fixed Costs 400,000
Return on Investment 10%
Calculate controllable margin and average operating assets.
Solution Brief Exercise 170

Controllable Margin ($900,000 – $400,000) = $500,000
Average Operating Assets ($500,000 ÷ .10) = $5,000,000
Brief Exercise 171

Clark Inc. reported the following items for 2012:
Controllable fixed costs $ 56,000

Interest expense 35,000
Variable costs 157,000
Total assets 1,690,000
How much is controllable margin?

$235,000 - $56,000 = $179,000
Brief Exercise 172

The data for an investment centre is given below.
January 1, 2012 December 31, 2012

Current Assets $ 700,000 $ 900,000
Plant Assets 2,500,000 2,700,000
The controllable margin is $680,000. How much is the return on investment for the centre for
2012?

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%
*Brief Exercise 173

The owner of Shrek Toys has recently expanded his business in order to add an additional
product line. In addition to toys, the company will now sell shirts. The company has a minimum
rate of return of 11%.
Toys Shirts
Sales $540,000 $326,000
Controllable margin 390,000 15,000
Average operating assets 750,000 300,000
Calculate the residual income for both investment centres.

Toys Shirts
Controllable margin $390,000 $15,000
Average assets × 11% 82,500 33,000
Residual income $ 307,500 $ (18,000)
Brief Exercise 174

Flames Company produces men’s ties. The following budgeted and actual amounts are for 2012:
Cost Budget at 2,500 units Actual Amounts at 2,900 units

Direct materials $55,000 $65,000
Direct labour 70,000 81,000
Fixed overhead 35,000 34,500
Prepare a performance report for Flames Company for the year.

Flames Company
Manufacturing Performance Budget Report
For the Year Ending December 31, 2012
Budget Actual Differences
Direct materials $ 63,800 $ 65,000 $1,200 U
Direct labour 81,200 81,000 200 F
Fixed overhead 35,000 34,500 500 F
Total costs $180,000 $180,500 $ 500 U
Brief Exercise 175

A flexible budget graph for the waxing department shows the following:
1. At zero direct labour hours, the total budgeted cost line intersects the vertical axis at $75,000.
2. At normal capacity of 80,000 direct labour hours, the line drawn from the total budgeted cost
line intersects the vertical axis at $135,000.
Identify the total fixed costs and the variable costs per unit.

Fixed costs = $75,000
Variable costs = ($135,000 – $75,000) ÷ 80,000 = $0.75 per direct labour hour
Brief Exercise 176

Hastings Manufacturing Co.'s static budget at 6,000 units of production includes $42,000 for
direct labour and $6,000 for materials. Total fixed costs are $24,000. How much would appear on
Hastings’s flexible budget for 2012 if 9,000 units are produced and sold?

6,000 Units Unit Variable Cost 9,000 Units
Variable costs:
Direct labour $42,000 $7.00 $63,000
Direct materials 6,000 1.00 9,000
Total variable costs 48,000 72,000
Fixed costs 24,000 24,000
Total costs $72,000 $96,000
Brief Exercise 177

Wimmer Division’s operating results include:
 Controllable margin, $150,000
 Sales revenue, $1,200,000
 Operating assets, $500,000
Wimmer is considering a project with sales of $120,000, expenses of $84,000, and an investment
of $180,000. Wimmer’s required rate of return is 15%. Should Wimmer accept this project?

Current ROI = $150,000/$500,000 = 30%
ROI of new project = $36,000/$180,000 = 20%
New ROI with project = [$150,000 + $36,000]/[$500,000 + $180,000] = 27.4%
While ROI decreases, that does not make this a bad investment, since many projects cause total
ROI to fall even though they increase value of the division. The determination is based on how
the ROI of the project compares to the required rate of return. The company is not willing to
accept any projects with an investment less than 15%, so the 20% project should be accepted.
Brief Exercise 178

Shirk Productions makes a single product. Expected manufacturing costs are as follows:
Variable costs
Direct materials $6.50 per unit
Direct labour 2.40 per unit
Manufacturing overhead 1.10 per unit
Fixed costs per month
Supervisory salaries $12,600
Depreciation 3,500
Other fixed costs 2,200
Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month.

3,200 x ($6.50 + $2.40 + $1.10) + ($12,600 + $3,500 + $2,200) = $50,300
Brief Exercise 179

Sekine Company uses flexible budgets. Items from the budget for March in which 2,000 units
were produced and sold appear below:
Direct materials $18,000

Indirect materials - variable 2,000
Supervisor salaries 15,000
Depreciation on factory equipment 4,000
Direct labour 10,000
Property taxes on factory 1,000
If Sekine prepares a flexible budget at 3,000 units, how much will its total variable cost be?

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

SugarTown’s manufacturing costs for August when production was 1,000 units appears below:
Direct material $12 per unit

Direct labour $6,500
Variable overhead 5,000
Factory depreciation 9,000
Factory supervisory salaries 7,800
Other fixed factory costs 2,500
How much is the flexible budget manufacturing cost amount for a month when 800 units are
produced?
Direct material ($12*800) $9,600

Direct labour [($6,500/1,000)*800] 5,200
Variable overhead [($5,000/1,000)*800] 4,000
Factory depreciation -fixed 9,000
Factory supervisory salaries - fixed 7,800
Other fixed factory costs - fixed 2,500
Total $38,100
Brief Exercise 181

Butterfly World budgeted sales for April were estimated at $500,000, sales commissions at 4% of
sales, and the sales manager's salary at $80,000. The cost of shipping expenses was estimated
at 1% of sales and miscellaneous selling expenses were estimated at $1,000 plus 0.5% of sales.
How much are budgeted selling expenses on a flexible budget for April?

Sales commissions 4% x $500,000 $20,000
Sales manager’s salary 80,000
Shipping expenses 1% x $500,000 5,000
Miscellaneous selling: Fixed portion 1,000
Variable: 0.5% x $500,000 2,500
Budgeted selling expenses $108,500
*Brief Exercise 182

A & B Flooring has 4 divisions. Its hardwood flooring division’s information follows for 2012:
Sales $4,000,000
Average operating assets 1,800,000
A & B’s required rate of return is 9%. How much is residual income?

$250,000 – [9% x $1,800,000] = $88,000
Brief Exercise 183

Good Chicken Farms produces a single product, eggs. Expected manufacturing costs are as
follows (in dozens):
Variable costs per dozen

Direct materials $0.80
Direct labour 2.20
Production overhead 1.10
Fixed costs per month
Management salaries $8,600
Depreciation 4,500
Other fixed costs 1,200
Determine the amount of manufacturing costs for a production level of 3,200 dozen per month.

[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 manager’s best interests to make the investment?

2. Would it be in EKPN’s best interests to make the investment?

1. The ROI on the investment is $3,600 / $30,000, or 12%. Since that is less than the
Winnipeg’s 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 EKPN’s current ROI of 10%, and therefore it
would raise the company’s ROI. Accordingly, the investment is attractive for EKPN.
* Brief Exercise 185

EKPN Company’s 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?

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 Corporation’s 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?

Direct material ($20 x 550) $11,000
Direct labour [($1,500/500) x 550] 1,650
Variable overhead [$4,000/500 x 550] 4,400
Factory depreciation -fixed 8,000
Factory supervisory salaries - fixed 5,800
Other fixed factory costs - fixed 1,500
Total $32,350
Brief Exercise 187

New Clothing’s static budget at 2,000 units of production includes $10,000 for direct labour,
$2,000 for utilities (variable), and total fixed costs of $16,000. Actual production and sales for the
year was 6,000 units, with an actual cost of $52,400. Determine if New is over or under budget.

2,000 units Unit Variable Cost 6,000 units
Variable costs:
Direct labour $10,000 $ 5.00 $30,000
Utilities 2,000 1.00 6,000
12,000 36,000
Total costs $28,000 $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.

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.

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.
EXERCISES
Exercise 190
Ashley Sofa Store produces sofas. The following budgeted and actual amounts are for 2012:
Cost Budget at 7,000 units Actual Amounts at 7,500 units

Direct materials $63,000 $64,000
Direct labour 49,000 49,500
Equipment depreciation 10,000 10,000
Indirect labour 5,600 5,700
Indirect materials 14,000 14,900
Rent and insurance 15,000 15,100
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 Differences
Direct materials $67,500 $64,000 $3,500 F
Direct labour 52,500 49,500 3,000 F
Equipment depreciation 10,000 10,000 0
Indirect labour 6,000 5,700 300 F
Indirect materials 15,000 14,900 100 F
Rent and insurance 15,000 15,100 100 U
Total costs $166,000 $159,200 $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 Cranium’s 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. 5,000 Units Unit Variable Cost 6,000 Units
Variable costs:
Direct labour $60,000 $12 $72,000
Direct materials 35,000 7 42,000
95,000 114,000
Total costs $107,000 $126,000
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 (6–8 min.)

Cheatem Trading Company
Sales Budget Report
For the Month Ended March 31, 2012
Product Line Budget Actual Difference

Baking potatoes $26,250 $27,010 $760 F
Boiling potatoes 6,000 5,440 560 U
Total sales $32,250 $32,450 $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
Total variable costs 450,000
Fixed overhead costs
Depreciation 72,000
Supervision 70,000
Property taxes 12,000
Total fixed costs 154,000
Total costs $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.

Toto Dog Toys
Monthly Flexible Manufacturing Overhead Budget at 85,000 Direct Labour Hours
Variable overhead costs:

Fixed overhead costs:
Depreciation 72,000
Supervision 70,000
Exercise 194
Jessica Simpson Music Company has prepared the following monthly flexible manufacturing
overhead budget for its Lip Sync Department:
4,000 Units 5,000 Units

Indirect labour $32,000 $40,000
Indirect materials 44,000 55,000
Factory supplies 36,000 45,000
Depreciation 17,000 17,000
Supervision 5,500 5,500
Property taxes 1,250 1,250
Total costs $135,750 $163,750
Instructions
Prepare a flexible budget at 4,700 units of activity.

Jessica Simpson Music Company
Monthly Flexible Manufacturing Overhead Budget at 4,700 Units
Lip Sync Department
Variable overhead costs:
Indirect labour $ 37,600
Fixed overhead costs:
Depreciation 17,000
Supervision 5,500
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 $ 4.25

Indirect Materials 1.27
Maintenance 0.34
Utilities 0.15
Fixed overhead costs per month are:

Supervision $900
Insurance 700
Property Taxes 400
Depreciation 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.

Usher Music Company
Monthly Flexible Manufacturing Overhead Budget at 2,500 Studio Hours
Indirect Labour $10,625
Indirect Materials 3,175
Maintenance 850
Utilities 375
Supervision 900
Insurance 700
Property Taxes 400
Depreciation 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
Depreciation 9,000
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 $14,800

Indirect Materials 44,000
Maintenance 12,000
Utilities 6,500
Supervision 4,200
Insurance 2,100
Property Taxes 800
Depreciation 8,600
Instructions
Prepare a flexible budget report, assuming that the company used 31,000 machine hours during
August.

Outkast Company
Manufacturing Overhead Budget Report (Flexible)
For the Month Ended August 31, 2012
Budget at 31,000 Hours Actual at 31,000 Hours Difference F or U
Indirect Labour $15,500 $14,800 $ 700 F
Indirect Materials 46,500 44,000 2,500 F
Maintenance 12,400 12,000 400 F
Utilities 6,200 6,500 300 U
Total variable costs 80,600 77,300 3,300 F
Supervision 4,000 4,200 200 U
Insurance 2,000 2,100 100 U
Property Taxes 1,000 800 200 F
Depreciation 9,000 8,600 400 F
Total fixed costs 16,000 15,700 300 F
Total costs $96,600 $93,000 $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 8%
Advertising 5%
Traveling 15%
Delivery 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.

Eastwood Music
Monthly Flexible Selling Expense Budget at $420,000 of Sales
Variable costs
Sales commissions $33,600
Advertising 21,000
Traveling 63,000
Delivery 8,400
Fixed costs
Sales salaries 50,000
Depreciation 12,000
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 8%
Advertising 5%
Traveling 15%
Delivery 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.

Westwood Music
Selling Expense Budget Report (Flexible)
For the Month Ended March 31, 2012
Budget at Actual at
Difference
Variable costs $420,000 $420,000
Sales commissions $33,600 $35,000 $1,400 U
Advertising 21,000 19,800 1,200 F
Traveling 63,000 64,000 1,000 U

Delivery 8,400 8,200 200 F
Total variable costs 126,000 127,000 1,000 U
Fixed Costs
Sales salaries 50,000 48,800 1,200 F
Depreciation 12,000 11,000 1,000 F
Total fixed costs 62,000 59,800 2,200 F
Total costs $188,000 $186,800 $1,200 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 12,000
$12,00 $13,20
Indirect materials 0 0 $14,400
Indirect labour 6,000 6,600 7,200
Utilities 2,400 2,640 2,880
Total variable costs 20,400 22,440 24,480
Rent 10,000 10,000 10,000

Depreciation 8,000 8,000 8,000
Insurance 5,500 5,500 5,500
Total fixed costs 23,500 23,500 23,500
Total costs $43,900 $45,940 $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 $13,920
Indirect labour 6,960
Utilities 2,784
Fixed costs:
Rent 10,000
Depreciation 8,000
Insurance 5,500
Total costs $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:
Flexible Budget Actual August Activity

Variable
Indirect materials $2.00 $ 3,000
Indirect labour 3.00 4,500
Factory supplies 0.50 750
Fixed
Depreciation $7,000 15,000
Supervision 20,000 7,600
Property taxes 2,000 12,000
Total costs $37,800 $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.

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
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 Company’s overhead budget for the first quarter of 2012 contained
the following data:
Variable Costs
Indirect Materials $12,000
Indirect Labour 4,000
Utilities 3,000
Maintenance 5,000
Fixed Costs
Supervisor's Salary $21,000
Depreciation 5,000
Actual variable costs for the first quarter were:

Indirect Materials $13,300
Indirect Labour 4,200
Utilities 3,050
Maintenance 5,600
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.

Ozzie Ozborne Manufacturing Company
Manufacturing Overhead Cost Responsibility Report at 1,100 Units
For the Quarter Ended March 31, 2012
Controllable Costs Budget Actual Difference

Indirect materials $13,200 $13,300 $100 U
Utilities 3,300 3,050 250 F
Maintenance 5,500 5,600 100 U
Depreciation 5,000 5,000 —
Property taxes 3,000 3,100 100 U
Total costs $34,400 $34,250 $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(5–6 min.)

a. Maritime Division of Hurricane Weather Company
Management Performance Report
For the Quarter Ended March 31, 2012
Sales ........................................................................................... $2,000,000

Variable costs .............................................................................. 1,200,000
Contribution margin ..................................................................... 800,000
Controllable fixed costs ............................................................... 240,000
Controllable margin ..................................................................... $ 560,000
b. For an investment centre, the responsibility report would also show the return on investment
for the period.
Exercise 203
Myrna’s 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. Myrna’s Market’s net income was $20,000.
Instructions
Prepare an income statement for Myrna’s Market in total and for its two divisions.
Solution Exercise 203(6–8 min.)

Myrna’s Market
Income Statement
For the period ending....
Vegetable
Company Fruits s
$850,000 $500,00 $350,000
Sales g 0 h
425,000
Variable Costs 725,000f e 300,000
Contribution Margin 125,000b 75000a 50,000
Controllable Fixed
Costs 70,000 42,000i 28,000j
Controllable Margin 55,000c $33,000 $22,000
Other Fixed Costs 35,000d
Net Income $20,000
Italic numbers given

a $500,000 X15%
b75,000 + 50,000
c125,000-70,000
d55,000-20,000
e500,000-75,000
f425,000+300,000
g725,000+125,000
h850,000-500,000 or 300,000 + 50,000
i70,000X60%
j70,000X40%
Exercise 204
The Candle Division of Dax Wax Company reported the following results for 2012:
Sales $800,000
Controllable fixed costs 100,000
Average operating assets 4,000,000
Management is considering the following independent alternative courses of action in 2013 in

order to maximize the return on investment for the division.
1. Reduce controllable fixed costs by 50% with no change in sales or variable costs
2. Reduce average operating assets by 30% with no change in controllable margin
3. 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.

a. Controllable margin
Return on investment = ————————————
Average operating assets
$280,000
2012 ROI = ————— = 7%
$4,000,000
b.
1. New controllable margin = $800,000 − ($100,000 x 50%) − $420,000 = $330,000
$330,000
= 8.25%
$4,000,000
2. New operating assets = $4,000,000 × 70% = $2,800,000
$280,000
= 10%
$2,800,000
3. New controllable margin

= $800,000 + ($200,000 x *47.5%)− $100,000 − $420,000 = $375,000
$375,000
= 9.38%
$4,000,000
*$380,000 / $800,000 = 47.5% contribution margin
Exercise 205
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

(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)
(i) $150,000 / g = 0.125. Therefore i = $1,200,000

(j)1.2 X 0.125 = .15, or $150,000 / $1,000,000
(k)$150,000 - ($1,000,000 X k) = $10,000. Therefore k = 14%
Exercise 207
(a) What problems do owners encounter in encouraging the goal congruence of their
management body?
(b) What is a stock option, and how can stock options impact goal congruence?

(a) Managers are human, and without a vested interest in the company, they will often work only
as hard as they have to, to achieve their personal objectives, whereas owners desire
managers to work as hard as owners would themselves, in the same position. Further,
managers may try to use company resources for their own personal gain. Properly structured
incentive systems can alleviate these issues.
(b) A stock option is the right to buy a given amount of company stock at a known price. It can
encourage unified objectives (goal congruence) between the company owners and managers
by giving managers an ownership interest.
Exercise 208
Dromedrille Company has the following results for the year just ended:
Sales $2,000,000
Net Income $125,000
Capital Investment $600,000
What is the company’s Return on Investment for the year?

2,000,000 ÷ 600,000 x 125,000 ÷ 2,000,000 = 20.8%
Exercise 209
In addition to the information above, Dromedille Company has the following results for the year
just ended:
Asset turnover 5 times per year

Company interest rate 6%
What is the company’s Residual Income for the year?

$125,000 – ($2,000,000 ÷ 5 x 6%) = $101,000
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.

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 $13 260,000 390,000 520,000

Fixed Costs
Facility Costs 100,000 100,000 100,000
Selling & Admin 50,000 50,000 50,000
Operating Income $110,000 $240,000 $370,000
b) 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 2 41,500 44,900 3,400 F
Admin 1 17,250 22,450 5,200 F
Contribution Margin $13 261,160 291,850 30,690 U

Fixed Costs
Facility Costs 125,000 100,000 25,000 U
Selling & Admin 78,000 50,000 28,000 U
Operating Income $58,160 $141,850 $83,690 U
c) 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.
COMPLETION STATEMENTS
211. The budget is prepared within the framework of a _______________________.
212. A major aspect of budgeting control is the use of budget reports that compare
_____________________ with _______________________.
213. In analyzing differences from planned objectives, management may take

___________________, or it could decide to modify ___________________.
214. The master budget is a __________________ budget which is based on operating at one
budgeted activity level.
215. A __________________ budget projects budget data for various levels of activity.
216. Total ________________ costs will be the same on the master budget and on a flexible
budget which reflects the actual level of activity.
217. Under ___________________ accounting, the evaluation of a manager's performance is

based on the costs and revenues directly under that manager's control.
218. A cost is __________________ at a given level of managerial responsibility if a manager

has the authority to incur the cost in a given time period.
219. In general, costs ____________________ directly by the level of responsibility are

_______________, whereas costs that are ____________________ to the responsibility
level are __________________.
220. Responsibility centres may be classified into three types: (1)___________________,

(2)___________________ and, (3)____________________.
221. The primary basis for evaluating the performance of a manager of an investment centre is
_________________.
222. Return on investment is calculated by dividing _________________________ by

________________________.
ANSWERS TO COMPLETION STATEMENTS

211. sales forecast
212. actual results, planned objectives
213. corrective action, future plans
214. static
215. flexible
216. fixed
217. responsibility
218. controllable
219. incurred, controllable, allocated, non-controllable
220. cost centres, profit centres, investment centres
221. return on investment (ROI)
222. controllable margin, average operating assets

MATCHING
223. Match the items below by entering the appropriate code letter in the space provided.
A. Budgetary control G. Responsibility reporting system

B. Static budget H. Return on Investment
C. Flexible budget I. Profit centre
D. Responsibility accounting J. Investment centre
E. Controllable costs K. Indirect fixed costs
F. Management by exception L. Direct fixed costs
____ 1. A projection of budget data for various levels of activity.
____ 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.
____ 4. A responsibility centre that incurs costs and also generates revenues.
____ 5. Costs which are incurred for the benefit of more than one profit centre.
____ 6. A measure of the profitability of an investment centre calculated by dividing

controllable margin (in dollars) by average operating assets.
____ 7. The review of budget reports by top management directed entirely or primarily to
differences between actual results and planned objectives.
____ 8. A part of management accounting that involves accumulating and reporting revenues
and costs on the basis of the individual manager who has the authority to make the
day-to-day decisions about the items.
____ 9. The preparation of reports for each level of responsibility shown in the company's
organization chart.
____ 10. A projection of budget data at one level of activity.
____ 11. Costs that a manager has the authority to incur within a given period of time.
____ 12. The use of budgets to control operations.

ANSWERS TO MATCHING
1. C 7. F
2. J 8. D
3. L 9. G
4. I 10. B
5. K 11. E
6. H 12. A
SHORT-ANSWER ESSAY QUESTIONS
Short Answer Essay 224

How does the system of responsibility reporting work? What occurs at each level? Is
management by exception possible in a responsibility reporting system? Explain.
Solution Short Answer Essay 224

The system of responsibility reporting begins with the lowest level of responsibility and moves up
through each level. At the lowest level each manager receives detailed information concerning
the controllable costs for which they are responsible. At higher levels of responsibility the detail of
the lower levels may be omitted but the report encompasses all the areas for which the higher
level has responsibility. For example, a plant manager will receive reports concerning the
controllable costs of each of the plant departments.
Management by exception is possible in such a system because, if management at the higher

levels of responsibility identifies a significant variance, they can receive detailed reports for each
lower level of responsibility. This allows management to investigate causes and remedies for
variances as they feel necessary.
Short Answer Essay 225

Managers are motivated to accomplish objectives if they feel that their efforts will be fairly
evaluated. Explain why an organization may use different bases for evaluating the performance of
managers of different types of responsibility centres.

Because a manager should only be evaluated based on the performance results of matters that
are controllable by the manager, it is necessary to use different bases for evaluation. An
investment centre manager can control the investment funds available as well as costs and
revenues. Return on investment is therefore an appropriate basis for evaluation. A profit centre,
however, controls only revenues and expenses but not investment, so controllable margin is a
more appropriate basis relating only to the areas controllable by the profit centre. Similarly,
because only costs are controllable for a cost centre, such a centre is evaluated only on the basis
of its controllable costs.
Short Answer Essay 226 (Ethics)

Edwards Corporation evaluates its managers based on return on investment (ROI). Kim Tilley
and Sara Trane, managers of the electronics and housewares departments respectively, have
recently suffered from declining profits in their departments. Over lunch, they discuss the
problem, and how they could improve performance. Most of the discussion centres around ways
to increase sales. Near the end of the lunch period, however, Sara remarks that there are two
components to consider, and that they have considered only one. She wonders whether there is
some way to reduce investment, and by decreasing the denominator of the ROI fraction, to
improve the final result.
Back at work, Kim continues to mull over Sara's remarks. She decides to pursue the matter
further, and before the end of the quarter she has sold quite a bit of older equipment and replaced
it with equipment obtained with a short-term lease. Her performance, measured by ROI, is
markedly improved, although sales continue to be disappointing.
Required:
1. Who are the stakeholders in this situation?

2. Are Kim's actions ethical? Briefly explain.

1. The stakeholders include
Kim Tilley
Sara Trane
managers of Edwards Corporation
shareholders of Edwards Corporation
2. 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.
Short Answer Essay 227 (Communication)

Clara County Electronics manufactures circuit boards for computer-controlled appliances for the
home. The sales have been very volatile, sometimes stressing the plant's capacity, and
sometimes depressingly slow. During a recent slow period, Earl Linton, a production supervisor,
complained to Ann Royer, accounting manager, about the flexible budget.
"I try as hard as I can to meet the budget," he says, "and then I find out that just meeting the
budget's not good enough. Last month, when we sold 8,000 units, I was $10,000 under my
budget, and then you all blow me out of the water with your report that I actually was $5,000 over,
because sales were slow. I thought this responsibility accounting business was supposed to
mean we are held accountable just for things we can control. How do we control sales? At the
beginning of the year, you gave us all targets. Mine says that for an average month of 10,000
unit sales, I should spend about $82,000. I spend less, and get an unfavourable budget report.
What gives?"
Required:
Write a short memo to respond to Mr. Linton.
TO: Earl Linton
FROM: Ann Royer
RE: 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
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.

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CHAPTER 11

BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING

Item SO BT Item SO BT Item S BT Item SO BT Item SO BT

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

CHAPTER STUDY OBJECTIVES

4. Describe the concept of responsibility accounting. Responsibility accounting involves

4. The master budget is the basis of developing flexible budgets.

5. A flexible budget is more useful in evaluating a manager's performance than a static

8. Evaluating a manager's performance in controlling variable costs is effectively achieved

10. A static budget is a series of flexible budgets at different levels of activities.

13. A flexible budget is based on the master budget.

23. In a responsibility accounting reporting system, as one moves up each level of

25. Direct fixed costs are synonymous with common costs.

33. Investment centres rarely generate revenues by selling products.

35. Investment centres generate a return on operating assets.

36. Decreasing the average operating assets can increase ROI.

38. When ROI is calculated, management would prefer a high percentage.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

Project Investment Controllable Margin ROI

Use the following information to answer questions 41 to 45

46. Perot Manufacturing reported the following items for 2012:

Income tax expense $ 40,000

How much is controllable margin?

48. Which one of the following statements describes a budget report?

49. How often should a company prepare budget reports?

51. What is the purpose of a departmental overhead cost report?

52. What is the purpose of the sales budget report?

54. Which one of the following is true concerning a static budget?

55. When is a static budget most appropriate in evaluating a manager's performance?

56. Which statement is true concerning a static budget report?

a. It considers performance at numerous activity levels.

57. What exists when budgeted costs exceed actual results?

62. Which one of the following is true of a flexible budget?

a. It is prepared when managers are unsure of activity levels.

Indirect labour $45,000

b. It is relevant both within and outside the relevant range.

74. Which statement is true concerning management by exception?

a. It causes employee morale problems.

75. Nextel Communications uses management by exception. Which differences between

76. How does a graph of a flexible budget compare to a CVP graph?

80. When is a cost considered to be controllable?

b. An increase in the responsibility for costs incurred

82. Which one of the following describes a responsibility report?

84. In which situation is responsibility accounting especially valuable?

85. Which of the following is a true statement?

86. What is a segment?

87. Which statement is true concerning management by exception?

88. Which type of centre is the toy department in a Wal-Mart store?

90. Which type of centre is the housekeeping department of a manufacturing company?

92. Which statement is true concerning a cost centre?

93. On what is a manager of a profit centre evaluated?

b. Sales clerks’ salaries

97. Which of the following is an indirect fixed cost?

98. Which one of the statements about a responsibility report is correct?

100. What is controllable margin?

101. For what purpose is controllable margin most useful?

Which statement is true about the manager’s overall performance?

How well did the manager perform overall?

107. How do controllable margin and contribution margin differ?

108. What is a profit centre?

110. Which statement is true concerning direct fixed costs?

Budgetary Control & Responsibility Accounting

Budgetary Control & Responsibility Accounting