Question 1

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

Accepted Answer

Providing a guarantee for favorable results is not an aspect of budgetary control. Budgetary control provides information and feedback to management to help them control operations and identify differences between actual and planned results, but it cannot guarantee favorable results.

Question 2

All of the following statements are correct about controllable costs except

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 3

Quincy Corp. earned controllable margin of $500,000 on sales of $6,400,000. The division had average operating assets of $5,200,000. The company requires a return on investment of at least 8%. How much is residual income?

Accepted Answer

Residual income is calculated as the controllable margin minus the product of the required rate of return and the average operating assets. Here, it's $500,000 - (8% of $5,200,000) = $500,000 - $416,000 = $84,000.

Question 4

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?

Accepted Answer

Residual income is calculated as net operating income minus the product of the required return rate and operating assets. First, calculate the net operating income: Sales ($400,000) - Variable Costs ($200,000) - Direct Fixed Costs ($100,000) = $100,000. Then, calculate the required return: 10% of $800,000 = $80,000. Finally, subtract the required return from the net operating income: $100,000 - $80,000 = $20,000.

Question 5

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

Accepted Answer

The cost and book value of operating assets are readily available from the accounting records, as they are both recorded and reported on the balance sheet. However, market value is not readily available from the accounting records, as it requires external market data and analysis.

Question 6

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

Accepted Answer

Return on investment (ROI) = Controllable Margin / Average Operating Assets
= $300,000 / $2,000,000
= 0.15 or 15% (expressed as a percentage)

Question 7

For what purpose do companies calculate residual income?

Accepted Answer

Companies calculate residual income to evaluate management performance by measuring the profits earned beyond the minimum return expected by investors. It is one of the key performance measures used to evaluate the effectiveness of management in creating value for shareholders. Choices A, B, and D are not the primary purpose of calculating residual income.

Question 8

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

Accepted Answer

The statement says "to develop the flexible budget, management takes all of the following steps except identifying the fixed costs and determining the budgeted fixed cost per unit." However, this is incorrect as identifying fixed costs and determining the budgeted fixed cost per unit is an essential step in developing a flexible budget. Therefore, the correct answer is C.

Question 9

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?

Accepted Answer

Residual income is calculated as Controllable Margin - (Average Operating Assets * Minimum Rate of Return). Here, it's $60,000 - ($600,000 * 8%) = $60,000 - $48,000 = $12,000.

Question 10

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

Accepted Answer

Controllable costs for responsibility accounting purposes are those costs that can be directly influenced by a manager. These costs can be managed and controlled by the manager effectively, and they are typically related to the processes and activities under the manager’s control. The other options - B, C, and D - describe costs that may not necessarily be under the control of the manager or may be influenced by external factors beyond their control.

Question 11

Which of the following will cause an increase in ROI?

Accepted Answer

An increase in sales will result in higher revenue, which will increase ROI (return on investment). A decrease in variable costs or controllable fixed costs may also increase ROI, but an increase in these costs will decrease ROI. An increase in average operating assets may decrease ROI if it is not accompanied by an increase in revenue.

Question 12

A static budget report is appropriate for

Accepted Answer

A static budget report is appropriate for both fixed manufacturing costs and fixed selling and administrative expenses. A static budget is a projection of a company's fixed revenues, costs, and expenses for a particular period. It does not take into account any changes in the company's output or sales volume. Since fixed costs do not change with changes in output or sales level, a static budget works well for fixed costs. However, it may not be appropriate for variable costs, such as variable selling and administrative expenses, which can change with changes in output or sales level.

Question 13

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

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.

Question 14

Costs that relate specifically to one center and are incurred for the sole benefit of that center are

Accepted Answer

Direct fixed costs are costs that can be traced specifically to one center and are incurred solely for the benefit of that center. Common fixed costs (A) are costs that are shared by multiple centers and cannot be directly traced to one center. Indirect fixed costs (C) cannot be specifically traced to one center, but are incurred for the benefit of multiple centers. Noncontrollable fixed costs (D) are fixed costs that cannot be controlled at the center level, but are determined by higher levels of the organization.

Question 15

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%?

Accepted Answer

The return on investment (ROI) is calculated as the controllable margin divided by the average operating assets. Given a controllable margin of $90,000 and a desired ROI of 10%, the equation is $90,000 / Average Operating Assets = 10%. Solving for Average Operating Assets gives $90,000 / 0.10 = $900,000.

Question 16

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

Accepted Answer

A static budget is a budget that does not change during the budget period regardless of actual activity levels. It is usually appropriate in evaluating a manager's effectiveness in controlling fixed manufacturing costs and fixed selling and administrative expenses because these costs do not change with changes in activity levels. In contrast, variable costs change with activity levels, and a flexible budget would be more appropriate for evaluating a manager's effectiveness in controlling variable costs. A static budget can be used to assess a manager's ability to control costs within a fixed cost structure, but it may not be an accurate measure of performance if actual activity levels differ significantly from the budgeted activity levels.

Question 17

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

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 considered to be a better measure of performance than ROI since it takes into account the cost of capital and provides a clearer picture of the economic value added by the investment center.

Question 18

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

Accepted Answer

Management by exception does not require investigation of every budget difference, but rather focuses on significant differences that require attention.

Question 19

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?

Accepted Answer

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

Quiz 10: Budgetary Control and Responsibility Accounting