Question 1

Which one of the following is a correct statement about residual income?
A)Its goal is to maximize profits of an investment center.
B)It is less effective for evaluating investment centers 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 center with the company's minimum rate of return.

Accepted Answer

Residual income evaluates the performance of an investment center by comparing its return with the company's minimum rate of return. It is a better measure than ROI because it takes into account the cost of capital and encourages investment in projects that exceed the minimum rate of return. Hence, the correct statement is D.

Question 2

Which of the following valuations of operating assets is not readily available from the accounting records?
A)Cost
B)Book value
C)Market value
D)Both cost and market value

Accepted Answer

Cost and book value can both be readily available from the accounting records, whereas market value requires analysis of external market conditions and may not be fully reflected in the accounting records.

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

Controllable costs are costs that a manager has the authority to influence or control within a given period. Option B, C, and D are not necessarily directly influenced or controlled by a manager.

Question 5

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

Accepted Answer

Budgetary control provides assistance in determining differences between actual and planned results, feedback value for management to see whether operations are on course, and assists in controlling operations. However, it does not provide a guarantee for favorable results as there are external factors that can impact the outcome of budgeted operations.

Question 6

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

Accepted Answer

A static budget is prepared based on a certain level of sales or production volume and does not change regardless of the actual sales or production volume. Therefore, it is most appropriate for evaluating a manager's effectiveness in controlling fixed costs, such as fixed manufacturing costs and fixed selling and administrative expenses. It may not be as effective in evaluating the manager's control over variable costs, as those may change with sales volume or production level.

Question 7

The following information is available for Halle Department Stores: $\begin{array}{lr}
\text { Average operating assets } & \$ 600,000 \
\text { Controllable margin } & 60,000 \
\text { Contribution margin } & 150,000 \
\text { Minimum rate of return } & 8 \%
\end{array}$ How much is Halle's residual income?
A)$102,000
B)$540,000
C)$12,000
D)$48,000

Accepted Answer

Residual income is calculated as the controllable margin minus the product of average operating assets and the minimum rate of return. Here, it is $60,000 - (8\% 	imes \$600,000) = \$60,000 - \$48,000 = \$12,000$.

Question 8

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

Accepted Answer

Companies use residual income to evaluate management performance by measuring how much income a manager generates above the minimum required return on investment. This helps the company identify which managers are performing well and which ones may need improvement. Residual income is not used to determine if decentralization is possible or to motivate managers through termination, and while it is related to company profits, it is not the same as traditional profit measures such as net income.

Question 9

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

Accepted Answer

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

Question 10

Sydney, Inc.uses flexible budgets.At normal capacity of 16,000 units, budgeted manufacturing overhead is $128,000 variable and $360,000 fixed.If Sydney had actual overhead costs of $500,000 for 18,000 units produced, what is the difference between actual and budgeted costs?
A)$4,000 unfavorable
B)$4,000 favorable
C)$12,000 unfavorable
D)$16,000 favorable

Accepted Answer

The answer of Sydney, Inc.uses flexible budgets.At normal capacity of...

Question 11

Lew Co.had sales of $400,000, variable costs of $200,000, and direct fixed costs totaling $100,000.The company's operating assets total $800,000, and its required return is 10%.How much is the residual income?
A)$120,000
B)$20,000
C)$80,000
D)$320,000

Accepted Answer

Residual income can be calculated as operating income minus a required return on operating assets. 
Operating income = Sales - Variable Costs - Direct Fixed Costs = $400,000 - $200,000 - $100,000 = $100,000 
Required return on operating assets = 10% of $800,000 = $80,000 
Residual income = $100,000 - $80,000 = $20,000 
Therefore, the answer is B.

Question 12

A flexible budget is appropriate for $\begin{array}{lll}&\text { Direct Labor Costs }&\text { Manufacturing Overhead Costs }\
\text { a. } & \text { No } & \text { No } \
\text { b. } & \text { Yes } & \text { Yes } \
\text { c. } & \text { Yes } & \text { No } \
\text { d. } & \text { No } & \text { Yes }
\end{array}$

Accepted Answer

The answer of A flexible budget is appropriate for \(\begin{array}{lll}&\text...

Question 13

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

Accepted Answer

Management by exception does not require investigating every budget difference, but rather only focusing on significant variances or exceptions that require attention. This allows management to prioritize their efforts and resources towards addressing areas that may negatively impact overall performance or strategic goals.

Question 14

Le Sud Retailers has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division.The division manager has two investment projects available, for which the following estimates have been made: Project A - Annual controllable margin = $24,000, operating assets = $400,000
Project B - Annual controllable margin = $60,000, operating assets = $550,000
Which project should be funded?
A)Both projects
B)Project A
C)Project B
D)Neither project

Accepted Answer

To determine which project to fund, we need to calculate the return on investment (ROI) for each project:

ROI A = Controllable Margin / Operating Assets = $24,000 / $400,000 = 0.06 = 6%
ROI B = Controllable Margin / Operating Assets = $60,000 / $550,000 = 0.109 = 10.9%

Since the minimum rate of return for the division is 8%, Project B has a higher ROI and should be funded. Project A does not meet the minimum rate of return and should not be funded. Therefore, the best choice is to fund Project B only.

Question 15

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

Accepted Answer

A static budget report is appropriate for both fixed manufacturing costs and fixed selling and administrative expenses because these costs do not change with changes in the level of activity. The budget amounts for these costs can be accurately predicted and planned for in advance. Variable expenses, on the other hand, are dependent on the level of activity and are better suited for a flexible budget report.

Question 16

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

Accepted Answer

Idle plant assets are excluded from the calculation of operating assets in the formula for ROI. Operating assets refer to the assets that are actively used in generating profits for the business, and idle assets do not contribute to this goal. Therefore, it makes sense to exclude idle plant assets from the ROI calculation as they are not relevant to the profitability of the business.

Question 17

If controllable margin is $300,000 and the average investment center operating assets are $2,000,000, the return on investment is
A).67%.
B)6.66%.
C)20%.
D)15%.

Accepted Answer

Return on Investment (ROI) = Controllable Margin / Average Operating Assets
= $300000 / $2000000
= 0.15 or 15%.
Therefore, the best choice is D.

Question 18

If an investment center has a $90,000 controllable margin and $1,200,000 of sales, what average operating assets are needed to have a return on investment of 10%?
A)$120,000
B)$210,000
C)$900,000
D)$1,200,000

Accepted Answer

The answer of If an investment center has a $90,000...

Question 19

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

Accepted Answer

In developing the flexible budget, management must identify the activity index and the relevant range of activity, as well as identify and determine the budgeted variable cost per unit. They should also identify and determine the budgeted fixed cost for the relevant range of activity. Therefore, identifying the fixed costs and determining the budgeted fixed cost per unit is a step in developing the flexible budget, rather than being excluded.

Question 20

Which one of the following does not impact the amount of residual income?
A)Contribution margin
B)Net income
C)Sales
D)Controllable costs

Accepted Answer

Net income is already taken into account in the calculation of residual income, so it does not impact the amount of residual income. Contribution margin, sales, and controllable costs all play a role in the calculation of residual income.

Quiz 10: Reporting and Analyzing Liabilities

Which one of the following is a correct statement about residual income?

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

In computing ROI, land held for future use

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

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

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

For what purpose do companies calculate residual income?

All of the following statements are correct about controllable costs except

Sydney, Inc.uses flexible budgets.At normal capacity of 16,000 units, budgeted manufacturing overhead is $128,000 variable and $360,000 fixed.If Sydney had actual overhead costs of $500,000 for 18,000 units produced, what is the difference between actual and budgeted costs?

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

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

A static budget report is appropriate for

In the formula for ROI, idle plant assets are

If controllable margin is $300,000 and the average investment center operating assets are $2,000,000, the return on investment is

If an investment center has a $90,000 controllable margin and $1,200,000 of sales, what average operating assets are needed to have a return on investment of 10%?

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

Which one of the following does not impact the amount of residual income?