Deck 11: Flexible Budgets, Segment Analysis, and Performance Reporting

Question 1

The budgeted level of activity often differs from the actual level of activity.

Answer 1

True

Question 2

Comparing static budgeted costs to actual costs can be misleading to management.

Answer 2

True

Question 3

If budgeted production is higher than actual production, static budget cost variances are likely to be unfavorable.

Answer 3

False

Question 4

If management underestimates sales and production levels, then overall cost variances are likely to favorable.

Question 5

A flexible budget is only useful for evaluating a company's performance during the fiscal period, not after.

Question 6

The flexible budget report provides a more accurate representation of a company's cost performance than the static budget report.

Question 7

A flexible budget generally presents all fixed costs on a per-unit cost basis - which changes based on the level of production.

Question 8

Profit center managers must be concerned about the costs incurred to generate revenues.

Question 9

An investment center manager is mostly concerned about the financial performance of the company's debt and equity securities.

Question 10

Delegating the operations of a business to lower management can create a burden on upper management due to the increased oversight needed.

Question 11

Large businesses tend to segment themselves according to divisions or departments for accountability purposes.

Question 12

Higher-level performance reports should allocate both traceable and common fixed costs to lower departments.

Question 13

It is helpful to segment a company according to type of customer targeted.

Question 14

If a business segment has a relatively low contribution margin, management may need to look into increasing prices of goods or reducing the cost of goods sold relating to that segment.

Question 15

Department management should be held responsible for allocated common fixed costs.

Question 16

The ROI is found by dividing Net Sales by Total Assets.

Question 17

The Asset Turnover ratio measures the whether a department is using their assets in a profitable manner.

Question 18

The balanced scorecard tracks both financial and non-financial metrics in a company.

Question 19

The objective of transfer pricing between two profit centers is to maximize the contribution margin of the buying profit center.

Question 20

The transfer price should be sufficient to cover both variable and fixed costs, as well as generate a reasonable gross profit for the supplier department.

Question 21

After determining the transfer price, the manager of the buying profit center should be allowed to decide whether or not to purchase components from a supplying profit center.

Question 22

If a profit center has excess capacity to supply another profit center with a component for production, then the minimum transfer price is equal to the market price of the component.

Question 23

Under-estimating production levels will likely lead to:

A) Unfavorable static budget variances
B) Unfavorable flexible budget variances
C) Favorable flexible budget variances
D) Favorable static budget variances
E) None of the above

Question 24

Over-estimating production levels will likely lead to:

A) Unfavorable flexible budget variances
B) Favorable static budget variances
C) Favorable flexible budget variances
D) Unfavorable static budget variances
E) None of the above

Question 25

Unplanned increases in per-unit costs could be hidden on the static budget report by:

A) Greater sales than planned
B) Less sales than planned
C) Less production than planned
D) Greater production than planned
E) None of the above

Question 26

Increased productivity of workers might not be reflected on the static budget variance if there were also:

A) Greater sales than planned
B) Less sales than planned
C) Less production than planned
D) Greater production than planned
E) None of the above

Question 27

Which of the following are benefits of flexible budget reporting?

A) Provide managers with reasonable cost targets at different levels of production
B) Compare cost performance with budgeted costs at actual levels of production
C) Help make mid-period projections about financial results
D) Allow for variance analysis
E) All of the above

Question 28

Which of the following is not important to know when preparing the flexible budget performance report?

A) Actual production levels
B) Actual per-unit costs
C) Budgeted per-unit costs
D) Budgeted production levels
E) All of the above are important for the flexible budget

Question 29

Which of the following is needed in order to prepare the flexible budget performance report?

A) Standard variable overhead cost driver usages
B) Actual production levels
C) Actual overall variable costs
D) Budgeted per-unit direct materials costs
E) All of the above

Question 30

Why is the cost function for the flexible budget only applicable within the relevant range?

A) Management does not expect to have production levels outside of the relevant range
B) The cost levels affect the range of production levels available
C) Some costs will behave differently outside of the relevant range
D) Only the static budget matters when compared with results outside of the relevant range
E) None of the above

Question 31

Which of the following are reasons to involve lower management in making business decisions?

A) Day-to-day involvement by lower-level management helps them react quicker to market changes
B) Being disconnected from the overall business strategy helps managers to focus on their departments better
C) Empowering lower-level management allows them to act on their own without requiring overburdening coordination between departments
D) It allows managers to set their own goals and expectations for their departments, without having to consider the goals and capacity of other departments
E) None of the above

Question 32

Which of the following are not reasons to involve lower management in making business decisions?

A) Allows upper management to concentrate more on overall strategy and business development without being involved in the minutia of the day-to-day operations
B) Allows managers to set expectations for their departments, without having to consider the goals and capacity of other departments
C) Provides on-the-job training to less-experienced managers, allowing them to make mistakes and grow
D) Encourages job satisfaction among lower-level employees
E) All of the above are reasons to involve lower management

Question 33

Which of the following managers would be most concerned about a segment's ROA?

A) Cost Center Manger
B) Profit Center Manager
C) Human Resources Manager
D) Investment Center Manager
E) None of the above

Question 34

Which of the following would not be indicated by analyzing various business segments?

A) Whether a special sales promotion is needed in a specific geographic region
B) Whether some segments should be reduced or consolidated
C) Whether company-wide fixed overhead is being utilized fully
D) What the contribution margin is of a particular segment
E) None of the above

Question 35

Which of the following costs would not be allocated to individual departments in a higher-level performance report?

A) Utilities usage
B) Corporate rent allocation
C) Production supervisor salary
D) Department machinery depreciation
E) None of the above

Question 36

In segmenting the reporting of a company, it would be appropriate to create divisions organized by:

A) Product type
B) Geographical area
C) Manufacturing process
D) Target customers
E) All of the above

Question 37

Which of the following would appear on a segmented contribution margin income statement?

A) Variable Cost of Goods Sold
B) Variable Overhead
C) Directly traceable fixed costs
D) All of the above
E) None of the above

Question 38

Who should be held responsible for department costs?

A) The person who made the decisions that led to costs being incurred
B) The person who actually spent the money to incur the costs
C) The person who scheduled the production runs associated with the costs
D) The person who created the purchase order related to the costs
E) None of the above

Question 39

The DuPont formula is:

A) Return on Assets x Asset Turnover (Asset Utilization)
B) Profit Margin (Return on Sales) x Asset Turnover (Asset Utilization)
C) Return on Equity x Debt-to-Equity Ratio
D) Return on Investment x Debt-to-Equity Ratio
E) None of the above

Question 40

Profit Margin (Return on Sales) is calculated as:

A) Contribution Margin / Sales
B) Sales / Operating Income
C) Operating Income / Sales
D) Sales / Contribution Margin
E) None of the above

Question 41

The Asset Turnover (Asset Utilization) ratio is equal to:

A) Investment / Sales
B) Sales x Return on Sales
C) ROI x ROA
D) Sales / Investment
E) None of the above

Question 42

Which of the following areas is not a category on the balanced scorecard?

A) Internal strategy development
B) Customer Satisfaction
C) Learning and growth
D) Financial Performance
E) All of the above are on the balanced scorecard

Question 43

What is the equation to calculate the minimum transfer price?

A) Variable Costs + Contribution Margin lost
B) Full Absorption Cost of Product
C) Variable Costs + Fixed Costs - Contribution Margin lost
D) Full Absorption Cost + Contribution Margin lost
E) None of the above

Question 44

When a supplying profit center is operating at full capacity, the minimum transfer price should be:

A) Enough to cover all fixed and variable per-unit costs
B) Enough to cover all variable per-unit costs and any contribution margin lost by dropping customers
C) Enough to cover all variable per-unit costs
D) Enough to generate a reasonable gross profit
E) None of the above

Question 45

If the market price of a good is below the minimum transfer price, the buying profit center should:

A) Negotiate a lower transfer price
B) Accept the transfer price: the money all stays in the company anyways
C) Not engage in the transfer, but rather buy from outside suppliers
D) Accept the transfer price and charge a higher selling price
E) None of the above

Question 46

If the market price of a good is above the minimum transfer price, the buying profit center should:

A) Purchase the goods from an outside supplier
B) Pay the market price to the supplying profit center
C) Accept the transfer price
D) Negotiate for the lowest transfer price possible
E) None of the above

Question 47

HSS Company provides security services to senior executives of prominent corporations when they travel outside the United States. HSS applies both fixed and variable overhead using direct labor hours. The annual budget for one if its customers is as follows:
During the year, HSS had the following activity related to this customer:
$\bullet$ Actual hours were 850 at a total cost of $44,200.
$\bullet$ Actual fixed overhead was $12,750.
$\bullet$ Actual variable overhead was $22,950.
What is the overall Static Budget Variance?

A) $850 favorable
B) $850 unfavorable
C) $3,900 favorable
D) $3,900 unfavorable
E) None of the above

Question 48

HSS Company provides security services to senior executives of prominent corporations when they travel outside the United States. HSS applies both fixed and variable overhead using direct labor hours. The annual budget for one if its customers is as follows:
During the year, HSS had the following activity related to this customer:
$\bullet$ Actual hours were 850 at a total cost of $44,200.
$\bullet$ Actual fixed overhead was $12,750.
$\bullet$ Actual variable overhead was $22,950.
What is the overall Static Budget Variance?

A) $1,700 favorable
B) $1,700 unfavorable
C) $4,200 favorable
D) $4,200 unfavorable
E) None of the above

Question 49

HSS Company provides security services to senior executives of prominent corporations when they travel outside the United States. HSS applies both fixed and variable overhead using direct labor hours. The annual budget for one if its customers is as follows:
During the year, HSS had the following activity related to this customer:
$\bullet$ Actual hours were 850 at a total cost of $44,200.
$\bullet$ Actual fixed overhead was $12,750.
$\bullet$ Actual variable overhead was $22,950.
What is the Variable Overhead Static Budget Variance?

A) $1,050 favorable
B) $1,050 unfavorable
C) $2,550 favorable
D) $2,550 unfavorable
E) None of the above

Question 50

Which of the following are benefits of flexible budget reporting?

A) Provide managers with reasonable cost targets at different levels of production
B) Compare cost performance with budgeted costs at actual levels of production
C) Help make projections about financial results
D) Allow for variance analysis
E) All of the above

Question 51

Which of the following is NOT important to know when preparing the flexible budget?

A) Budgeted production levels
B) Actual production levels
C) Actual per-unit costs
D) Budgeted per-unit costs
E) All of the above are important for the flexible budget

Question 52

Which of the following is needed in order to prepare the flexible budget?

A) Standard variable overhead cost driver usages
B) Actual production levels
C) Actual overall variable costs
D) Budgeted per-unit direct materials costs
E) All of the above

Question 53

Why is the cost function for the flexible budget only applicable within the relevant range?

A) Management does not expect to have production levels outside of the relevant range
B) Some costs will behave differently outside of the relevant range
C) The cost levels affect the range of production levels available
D) Only the static budget matters when compared with results outside of the relevant range
E) None of the above

Question 54

HSS Company provides security services to senior executives of prominent corporations when they travel outside the United States. HSS applies both fixed and variable overhead using direct labor hours. The annual budget for one if its customers is as follows:
During the year, HSS had the following activity related to this customer:
$\bullet$ Actual hours were 850 at a total cost of $44,200.
$\bullet$ Actual fixed overhead was $12,750.
$\bullet$ Actual variable overhead was $22,950.
What is the overall Flexible Budget Variance?

A) $850 favorable
B) $850 unfavorable
C) $3,900 favorable
D) $3,900 unfavorable
E) None of the above

Question 55

HSS Company provides security services to senior executives of prominent corporations when they travel outside the United States. HSS applies both fixed and variable overhead using direct labor hours. The annual budget for one if its customers is as follows:
During the year, HSS had the following activity related to this customer:
$\bullet$ Actual hours were 850 at a total cost of $44,200.
$\bullet$ Actual fixed overhead was $12,750.
$\bullet$ Actual variable overhead was $22,950.
What is the Direct Labor Flexible Budget Variance?

A) $1,700 favorable
B) $1,700 unfavorable
C) $4,200 favorable
D) $4,200 unfavorable
E) None of the above

Question 56

HSS Company provides security services to senior executives of prominent corporations when they travel outside the United States. HSS applies both fixed and variable overhead using direct labor hours. The annual budget for one if its customers is as follows:
During the year, HSS had the following activity related to this customer:
$\bullet$ Actual hours were 850 at a total cost of $44,200.
$\bullet$ Actual fixed overhead was $12,750.
$\bullet$ Actual variable overhead was $22,950.
What is the Variable Overhead Flexible Budget Variance?

A) $1,050 favorable
B) $1,050 unfavorable
C) $2,550 favorable
D) $2,550 unfavorable
E) None of the above

Question 57

Mangum Co. is a large company that segments its business into cost and profit centers. The Cost center for the manufacture of Product M2T incurred the following costs in October:
Sales were 2,000 units in October. Each unit sells for $210. The M2T Department is being evaluated on overall profitability. In September, the department margin was $100,000.
By how much did the department margin increase or decrease in October?

A) $100,000 decrease
B) $18,000 increase
C) $82,000 decrease
D) $118,000 increase
E) None of the above

Question 58

Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows:
Division 1:
Division 2:
Management discovers that the ROI is the same for both divisions, and wants a deeper evaluation.
Which division has a higher efficiency in the use of assets to generate sales?

A) Division 1
B) Division 2
C) Both divisions have the same asset utilization ratio

Question 59

Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows:
Division 1:
Division 2:
Management discovers that the ROI is the same for both divisions, and wants a deeper evaluation.
Which division generates greater profitability per sales dollar?

A) Division 1
B) Division 2
C) Both divisions have the same return on sales ratio

Question 60

Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows:
Division 1:
Division 2:
Based on ROI, which division is more profitable?

A) Division 1
B) Division 2
C) Both divisions have the same return on investment ratio

Question 61

Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows:
Division 1:
Division 2:
Conner currently requires investments to meet a rate of return on asset investment of 5%. Which division has the greatest level of "residual income"?

A) Division 1
B) Division 2
C) Both divisions have the same return on investment ratio

Question 62

Bagley & Daughters is a baked-goods manufacturing firm. Bagley has two main divisions: Packaged Mixes and Finished Desserts. The Finished Desserts division is considering purchasing the mix for its cakes from an outside supplier.
The Packaged Mixes department incurs the following costs for each batch of cake mix:
In addition to the cost of the cake mix, the Finished Desserts Department would incur the following costs for each batch of cakes:
The current market price from an outside supplier for the quantity of mix needed by the Finished Desserts department is $200. The finished cakes from each batch of mix will sell for $400.
What is the range of transfer prices within which the two departments could agree on a price to maximize Bagley & Daughters' profit?

A) $190 to $200
B) $284 to $400
C) $174 to $200
D) $160 to $200
E) None of the above

Question 63

Bagley & Daughters is a baked-goods manufacturing firm. Bagley has two main divisions: Packaged Mixes and Finished Desserts. The Finished Desserts division is considering purchasing the mix for its cakes from an outside supplier.
The Packaged Mixes department incurs the following costs for each batch of cake mix:
In addition to the cost of the cake mix, the Finished Desserts Department would incur the following costs for each batch of cakes:
Currently, the Packaged Mixes department is producing at full capacity and would need to decrease production in another area in order to provide cake mix to the Finished Desserts department. Management estimates that $50 of contribution margin would be lost by the decrease in other areas. The current market price for the quantity of mix needed by the Finished Desserts department is $200: this is the price at which Bagley can purchase the mix from an outside supplier. The finished cakes from each batch will sell for $400.
Based on the decision that will maximize the overall benefit to Bagley & Daughters, what is the contribution margin per batch that can be realized by the Finished Desserts department?

A) $50
B) $40
C) $116
D) $276
E) None of the above

Question 64

The following information is available for West Chemical Corporation for this last year:
What is the Direct Material Static Budget Variance?

Question 65

The following information is available for West Chemical Corporation for this last year:
What is the Direct Labor Static Budget Variance?

Question 66

The following information is available for Apex Manufacturing, Inc. for this last year:
What is the Variable Overhead Static Budget Variance?

Question 67

The following information is available for Apex Manufacturing, Inc. for this last year:
What is the overall Static Budget Variance?

Question 68

The following information is available for West Chemical Corporation for this last year:
What is the Direct Material Flexible Budget Variance?

Question 69

The following information is available for West Chemical Corporation for this last year:
What is the Direct Labor Flexible Budget Variance?

Question 70

The following information is available for Apex Manufacturing, Inc. for this last year:
What is the Variable Overhead Flexible Budget Variance?

Question 71

The following information is available for Apex Manufacturing, Inc. for this last year:
What is the overall Flexible Budget Variance?

Question 72

Cole Co. is a large company that segments its business into cost and profit centers. The Cost center for the manufacture of Product AC2 incurred the following costs in the previous period:
The AC2 Department reports the results of production to the Sales department for the plant. Sales were 5,000 units last period. Each unit sells for $100.
What were the total costs reported to the profit center last period?

Question 73

Cole Co. is a large company that segments its business into cost and profit centers. The Cost center for the manufacture of Product AC2 incurred the following costs in the previous period:
Sales were 5,000 units last period. Each unit sells for $100. The AC2 Department is being evaluated on overall profitability. Last period the department margin was $50,000.
By how much did the department margin increase or decrease this period?

Question 74

MC Ryan Inc. is a manufacturing company that has two production divisions. Both divisions report their costs to the Sales division, which is considered the profit center of the company. Information for the following divisions is as follows:
Which division had the highest division costs for the period?

Question 75

MC Ryan Inc. is a manufacturing company that has two production divisions. Both divisions report their costs to the Sales division, which is considered the profit center of the company. Information for the following divisions is as follows:
Which division is considered the most profitable for the period?

Question 76

Christensen & Co. is a manufacturing company that has two major divisions. Both divisions have required a significant investment, and management wants to compare the performance of the two divisions. Below is information related to the two divisions.
Based on ROI, which division is more profitable? Is it due to efficient asset use or relative profitability of sales or both?

Question 77

Larson Bros. is a manufacturing company that has two major divisions. Both divisions have required a significant investment, and management wants to compare their performance. Below is information related to the two divisions.
Management is confused that the ROI seems to be the same for both divisions and wants a deeper evaluation.
Which division generates greater profitability per sales dollar?

Question 78

Larson Bros. is a manufacturing company that has two major divisions. Both divisions have required a significant investment, and management wants to compare their performance. Below is information related to the two divisions.
Management is confused that the ROI seems to be the same for both divisions and wants a deeper evaluation.
Which division has a higher efficiency in the use of assets to generate sales?

Question 79

Christensen & Co. is a manufacturing company that has two major investment centers. Both divisions have required a significant investment, and management wants to compare the performance of the two divisions. Below is information related to the two divisions.
Management currently requires investments to meet a rate of return on asset investment of 5%.
Which Division has the greatest level of "residual income"?

Question 80

Pierre & Sons is a baked-goods manufacturing firm. Pierre has two main divisions: Packaged Mixes and Finished Desserts. The Finished Desserts division is considering purchasing the mix for its cakes from an outside supplier.
The Packaged Mixes department incurs the following costs for each batch of cake mix:
In addition to the cost of the cake mix, the Finished Desserts Department would incur the following costs for each batch of cakes:
The current market price from an outside supplier for the quantity of mix needed by the Finished Desserts department is $500. The finished cakes from each batch of mix will sell for $1,000.
What is the range of transfer prices within which the two departments could agree on a price to maximize Pierre & Sons' profit?