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Exam 11: Budgetary Control and Responsibility Accounting

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Question 1

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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.

E) B) and C)
F) A) and D)

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Question 2

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Given below is a portion of Swinging Tunes, Inc.'s management performance report: $\begin{array} { l c c c } & \text { Budget } & \text { Actual } & \text { Difference } \\\text { Contribution margin } & \$ 1,040,000 & \$ 1,020,000 & \$ 20,000 \\\text { Controllable fixed costs } & 430,000 & 420,000 & 10,000\end{array}$ 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 and uncontrollable amounts.
D) The manager's overall performance cannot be determined from information given.

E) A) and D)
F) A) and B)

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Question 3

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For what purpose is controllable margin most useful?

When evaluating residual income, the calculation tells management what percentage return was generated by the particular division being evaluated.

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?

EKPN Company recorded the following operating data: $\begin{array} { l r } \text { Sales } & \$ 1,250,000 \\\text { Contribution margin } & 485,000 \\\text { Total direct fixed costs } & 400,300 \\\text { Total operating assets Jan. 1, 2016 } & 750,000 \\\text { Total operating assets Dec. 31, 2016 } & 790,000 \\\text { EKPN Company's desired return } & 12 \%\end{array}$ What is EKPN Company's residual income?

How can the manager of an investment centre improve ROI?

Given below is an excerpt from a management performance report for a profit centre: $\begin{array} { l c c c } & \text { Budget } & \text { Actual } & \text { Difference } \\\text { Contribution margin } & \$ 600,000 & \$ 580,000 & \$ 20,000 \\\text { Controllable fixed costs } & \$ 200,000 & \$ 220,000 & \$ 20,000\end{array}$ How well did the manager perform overall?

Which of the following is an indirect fixed cost?

When is a cost considered to be controllable?

Yellow Card Company compared its actual sales results with a static budget.Which of the following situations might result?

What is the purpose of determining return on investment?

A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost ÷ activity level).

What is the primary difference between a static budget and a flexible budget?

Cash budget reports are often prepared daily, whereas others are prepared less frequently depending on the activities being monitored.

If actual results are different from planned results by a large amount, the difference should be investigated by management to achieve effective budgetary control.

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

Investment and profit centres generate both revenues and costs.

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

Use the following information to answer questions EKPN Company prepared the following data in its static budget based on 150,000 machine hours: $\begin{array}{lr}\text { Direct Materials } & \$ 450,000 \\\text { Direct Labour } & 225,000 \\\text { Variable Overhead } & 1,125,000 \\\text { Fixed Overhead } & 2,100,000\\\\\text { Actual Results: } \\\text { Machine Hours } & \\\text { Direct Materials } & \$ 60,000 \text { hours } \\\text { Direct Labour } & \$ 475,000 \\\text { Variable Overhead } & 245,000 \\\text { Fixed Overhead } & 1,150,000 \\& 2,110,000\end{array}$ -What is the budgeted Direct Labour cost at the actual level of activity?