42. Controllable costs are those that a manager
a.
has no authority over.
b.
cannot avoid.
c.
does not participate in authorizing.
d.
can influence through decision making.
43. Which budget should be used to determine how efficiently managers controlled costs?
a.
master budget
b.
flexible budget
c.
static budget
d.
cash budget
44. Which of the following must be addressed if budgets are to be used in performance evaluation?
a.
determine how budgeted amounts should be compared with actual results
b.
consider the impact of budgets on human behaviour
c.
both a and b
d.
neither a nor b
45. Participative budgeting offers which of the following advantages?
a.
It offers nonmonetary incentives to employees that may lead to higher levels of employee
performance.
b.
It involves individuals whose knowledge of local conditions may enhance the budgeting
process.
c.
It communicates a sense of employee responsibility.
d.
All of the above are advantages of participative budgeting.
Figure 16-5
Torino, SA., manufactures machine parts. Torino has developed a static budget for its plant at an
activity level of 10,000 direct labour hours for the month of March. The actual level of activity was
11,000 hours. The following table summarizes the static budget and the actual costs for March:
Static Budget
Actual Costs
(10,000 DLH)
(11,000 DLH)
Variance
Variable costs
£21,000
£22,000
£1,000 U
Fixed costs
__7,800
__7,700
____100 F
Total
£28,800
£29,700
£ 900 U
46. Refer to Figure 16-5. Which of the following describes how well the plant manager performed for the
month of March?
a.
The manager performed a good job in controlling costs.
b.
The manager performed a poor job in controlling costs.
c.
The manager exceeded his goals.
d.
both a and c
47. Refer to Figure 16-5. What is the flexible budget for March?
a.
£28,800
b.
£29,800
c.
£30,900
d.
£31,680
48. Refer to Figure 16-5. What is the flexible budget variance for March?
a.
£-0-
b.
£1,200 F
c.
£900 U
d.
£1,100 F
49. Refer to Figure 16-5. Which of the following describes the flexible budget variance for March?
a.
The fixed overhead variance is £100 F.
b.
The variable overhead variance is £1,000 U.
c.
The variable overhead variance is £1,100 F.
d.
both a and c
50. Which of the following departments would NOT be classified as a profit centre?
a.
the accounting department of a large PLc
b.
the automotive division of a large PLc
c.
the hardware department of a department store
d.
the men’s shoe department of a department store
51. A manager of a profit centre:
a.
does not control revenues.
b.
does not control expenses.
c.
does not control investments.
d.
only controls revenues.
52. Which of the following facets of a responsibility accounting system is most likely to lead employees to
distrust the entire budgeting and performance evaluation system?
a.
tight standards
b.
well-defined standards
c.
budget participation
d.
static qualifiers
53. What results could be expected by placing pressure on management to perform at certain levels?
a.
Lower level managers could become frustrated if they believe upper management is
placing a burden on them for costs out of their control.
b.
Managers may resort to unethical practices to compensate for unfavorable results.
c.
Efforts to deal with immediate controllable factors could become diluted.
d.
All the responses could be correct.
54. Which cost centre listed below is evaluated with the aid of flexible budgets drawn up for the actual
level of activity?
a.
discretionary cost centres
b.
standard cost centres
c.
non-relational cost centres
d.
flexible cost centres
55. Which of the following departments is likely to be evaluated as a discretionary cost centre?
a.
the machining department of an automotive division
b.
the food products division of a large PLc
c.
the personnel department of an automotive division
d.
the Men’s shoe department of a department store
SHORT ANSWER
1. Why should motivational considerations be a part of budget planning and utilization? List several
ways to motivate employees with budgets.
2. Make a distinction between the manager’s basic responsibilities for the following types of
responsibility centres:
a.
cost centre
b.
revenue centre
c.
profit centre
d.
investment centre
costs; there is no revenue responsibility.
relationship between its profits and the total assets involved in the centre.
3. Before implementing a responsibility accounting system, all areas of authority and responsibility
within an organization must be clearly defined. Explain how this accomplished and why it is
important.
PROBLEM
1. Klamaty, SA., is looking for feedback on performance. The company compares the budget for the year
with the actual costs.
Klamaty, SA., had the following budgeted data:
Unit sales for 2011
10,000
Unit production for 2011
10,000
Budgeted fixed overhead for 2011:
Supervision
£18,000
Depreciation
20,000
Rent
10,000
Budgeted variable costs per unit:
Direct materials
£18.00
Direct labour
25.00
Supplies
0.20
Indirect labour
1.00
Power
0.10
The following actually occurred:
Actual unit sales for 2011
11,000
Actual unit production for 2011
12,000
Actual fixed overhead for 2011:
Supervision
£17,850
Depreciation
20,000
Rent
10,000
Actual variable costs for 2011:
Direct materials
£214,000
Direct labour
320,000
Supplies
2,500
Indirect labour
10,000
Power
1,500
Required:
a.
Prepare a performance report for all costs showing static budget variances.
b.
Prepare a performance report for all costs showing flexible budget variances.
Fixed costs:
Supervision
£150 F
Depreciation
Rent
Variable costs:
2. Glock, SA., is looking for feedback on performance. The company compares the budget for the year
with the actual costs.
Glock had the following budgeted data:
Budgeted variable costs per unit:
Direct materials
£11.00
Direct labour
15.00
Supplies
0.80
Indirect labour
1.00
Power
0.10
Budgeted fixed overhead for 2011:
Supervision
£ 9,000
Depreciation
13,000
Rent
12,000
Required:
Prepare a flexible budget for production costs for the following range of activity: 2,500 units; 4,000
units; 6,000 units.
Direct materials
Direct labour
Supplies
Indirect labour
Power
Direct labour
Supplies
Indirect labour
10,000
Power
___1,500
Total costs
£595,850
b.
Fixed costs:
Supervision
Depreciation
20,000
Rent
10,000
Variable costs:
Direct materials
£214,000
£ 2,000 F
Direct labour
Indirect labour
10,000
Power
___1,200
Total costs
£595,850
3. Mertz, SA., has done a cost analysis for its production of flags. The following activities and cost
drivers have been developed:
Activity
Cost Formula
Maintenance
£13,000 + £2 per machine hour
Machining
£45,000 + £6 per machine hour
Inspection
£70,000 + £500 per batch
Setups
£2,000 per batch
Purchasing
£80,000 + £150 per purchase order
Following are the actual costs of producing 75,000 flags:
1,000 machine hours; 15 batches; 10 purchase orders
Maintenance
£14,000
Machining
50,000
Inspection
70,000
Setups
32,000
Purchasing
82,000
Required:
Prepare an activity-based performance report.
Maintenance
Machining
Inspection
Setups
2,000 U
Purchasing
Total
4. Riemay, SA., has done a cost analysis for its production of sports cards. The following activities and
cost drivers have been developed:
Activity
Cost Formula
Photography
£50 + £35 per labour hour
Printing
£25,000 + £0.01 per machine hour
Setups
£25 per batch
Purchasing
£25 + £25 per purchase order
Budgeted fixed overhead for 2011:
Supervision
Depreciation
13,000
Rent
Total costs
Following are the actual costs of producing 35,000 cards:
60 labour hours; 500 machine hours; 5 batches; 30 purchase orders
Photography
?
Printing
£25,000
Setups
?
Purchasing
£770
The following variances were given in the activity performance report:
Photography
£10 F
Printing
?
Setups
£20 U
Purchasing
?
Required:
Find the missing values.
Prepare an activity-based performance report in good form
5. Classics, SA., uses a flexible budget for overhead costs. The company expects to produce 20,000 units
of the product it manufactures. Half of the units require 0.50 direct labour hours per unit. The
remainder requires 0.75 direct labour hours per unit. The cost formulas for each of the four overhead
items is as follows:
Fixed Cost
Variable Cost
Power
£ 1,000
£0.25
Maintenance
£ 5,000
£0.40
Indirect labour
£ 8,000
£2.00
Rent
£12,000
Required:
a.
Prepare an overhead budget for the expected activity level for the coming year.
b.
Prepare an overhead budget that reflects production that is 10 per cent higher than
expected.
Projected activity level:
(20,000 units/2) 0.50 hours =
Photography
Printing
25,000
Setups
Purchasing
Total costs
6. Timothy, SA., uses a flexible budget for overhead costs. The company expects to produce 40,000 units
of the product it manufactures. Each unit requires 0.40 direct labour hours. The cost formulas for each
of the four overhead items (where X is measured in direct labour hours) is as follows:
Cost Formula
Power
0.40X
Maintenance
£15,000 + 0.60X
Indirect labour
£18,000 + 2.50X
Rent
£20,000
Required:
a.
Prepare an overhead budget for the expected activity level for the coming year.
b.
Prepare an overhead budget that reflects production that is 25 per cent lower than
expected.
Overhead budget:
Power (£0.40 40,000 0.4)
Maintenance [£15,000 + (£0.60 40,000 0.4)]
Indirect labour [£18,000 + (£2.50 40,000 0.4)]
Rent
Total overhead
b.
Overhead budget:
Power (£0.40 30,000 0.40)
Maintenance [£15,000 + (£0.60 30,000 0.40)]
Indirect labour [£18,000 + (£2.50 30,000 0.40)]
Rent
Total overhead
(20,000 units/2) 0.75 hours =
Overhead budget:
Power [£1,000 + (£0.25 12,500)]
Maintenance [£5,000 + (£0.40 12,500)]
Indirect labour [£8,000 + (£2 12,500)]
Rent
Total overhead
High activity level: 12,500 1.10 = 13,750
Overhead budget:
Power [£1,000 + (£0.25 13,750)]
Maintenance [£5,000 + (£0.40 13,750)]
Indirect labour [£8,000 + (£2 13,750)]
Rent
Total overhead
ESSAY
1. If budget performance is overemphasized, myopic behaviour can occur where a manager takes actions
that improve budgetary performance in the short run but cause long-run harm to the firm.
Required:
a.
Give at least two examples of myopic behaviour that might be encouraged if there is an
overemphasis on budgets as a performance measure.
b.
Discuss ways to discourage or prevent myopic behaviour in managers.
2. Identify and discuss the key features that a budgetary system should have to encourage managerial,
goal-congruent behaviour.
3. Define responsibility accounting and describe four types of responsibility centres.