7) What is budgeted cost of goods sold for 2016?
A) $720,000
B) $582,400
C) $691,200
D) $640,000
8) Should Kramer increase the selling price in 2016?
A) Yes, because operating income increases for 2016.
B) Yes, because sales revenue increases for 2016.
C) No, because sales volume decreases for 2016.
D) No, because gross margin decreases for 2016.
Answer the following questions using the information below:
Violet Sales Corp, reports the year-end information from 2016 as follows:
Sales (35,000 units) $280,000
Cost of goods sold 105,000
Gross margin 175,000
Operating expenses 150,000
Operating income $ 25,000
Violet is developing the 2016 budget. In 2016 the company would like to increase selling prices by 3.5%,
and as a result expects a decrease in sales volume of 15%. All other operating expenses are expected to
remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed
cost.
9) What is budgeted sales for 2016?
A) $291,200
B) $246,330
C) $302,400
D) $322,000
10) What is budgeted cost of goods sold for 2016?
A) $89,250
B) $98,250
C) $15,750
D) $257,040
11) Should Violet increase the selling price in 2016?
A) Yes, because sales revenue increases for 2016.
B) Yes, because gross margin increases for 2016.
C) No, because sales volume decreases for 2016.
D) No, because operating income decreases for 2016.
12) Computer-based systems, like ERP, help managers budget for all manufacturing costs but lack the
ability to help managers budget for non-manufacturing costs.
13) Financial planning models are non-mathematical, abstract representations of the relationships among
operating activities, financing activities, and other factors that affect the master budget.
14) Most computer-based financial planning models have difficulty incorporating sensitivity (what-if)
analysis.
15) Sensitivity analysis is a useful tool that helps managers evaluate risks.
16) Computer-based systems, such as ERP systems, cannot perform calculations for financial planning
models.
17) Economics suggests that a decrease in the selling price of a product will decrease revenue.
18) Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use
sensitivity analysis in practice.
Objective 6.5
1) Which of the following is true of responsibility accounting?
A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility center.
B) It is an arrangement of lines of responsibility and authority within a responsibility center.
C) It explicitly incorporates continuous improvement and changes due to learning curve.
D) It examines how a result will change if the original plan is not achieved.
2) Which of the following departments is most likely to be a cost center?
A) sales department of a company selling industrial tools
B) call center of a company that serves customers and cross-sells other products
C) maintenance department of a luxury resort
D) research department of a company providing consultancy services
3) Which of the following departments is most likely to be a profit center?
A) the accounting department of a company that also assists in budgeting process
B) the research and development department of a company
C) the sales department of a company whose objective is to maximize the revenues
D) the consulting department of a law firm
4) A maintenance manager of a theatre is most likely to be responsible for a(n) ________.
A) revenue center
B) investment center
C) cost center
D) profit center
5) The regional sales office manager of a national firm is most likely responsible for a(n) ________.
A) revenue center
B) investment center
C) cost center
D) profit center
6) A regional manager of a restaurant chain in charge of finding additional locations for expansion is
most likely responsible for a(n) ________.
A) revenue center
B) investment center
C) cost center
D) profit center
7) Silas has been recently promoted to head his department. He is responsible for maximizing the profits
of the department and to ensure that the earnings are ploughed back into the business. Silas is most
likely to head a (n) ________.
A) revenue center
B) investment center
C) cost center
D) profit center
8) A manager of a revenue center is responsible ________.
A) for only the profits of his center
B) for investments, revenues, and costs
C) for only the revenues of his center
D) for both, the revenues and costs of his center
9) A controllable cost is any cost that can be ________ by a responsibility center manager for a period of
time.
A) controlled
B) influenced
C) segregated
D) excluded
10) Which of the following statements is true about responsibility accounting statements?
A) Responsibility accounting excludes controllable costs.
B) Responsibility accounting segregates fixed costs and variable costs.
C) Responsibility accounting excludes fixed costs and variable costs.
D) Responsibility accounting segregates uncontrollable costs from controllable costs.
11) Which of the following is the fundamental purpose of responsibility accounting?
A) to penalize managers for inefficiency
B) to gather information that will enable future improvement
C) to create an efficient and centralized organization
D) to evaluate the performance of managers
12) A company using responsibility accounting system decides to exclude all uncontrollable costs from a
manager’s performance report. Jenson is the machine supervisor. Which of the following costs will impact
Jenson’s performance report?
A) rent and taxes paid on by the company
B) cost of materials used in manufacture
C) machine maintenance cost
D) cost of power consumed by the plant
13) Responsibility accounting ________.
A) emphasizes controllability
B) focuses on who should be asked about the information
C) attempts to assign blame for problems to a specific manager
D) attempts to create a decentralized organization
14) A primary consideration in assigning a cost to a responsibility center is ________.
A) whether the cost is fixed or variable
B) whether the cost is direct or indirect
C) who can best control the change in that cost
D) where in the organizational structure the cost was incurred
15) A responsibility center is a part, segment, or subunit of an organization, whose manager is
accountable for a specified set of activities.
16) Performance reports for responsibility centers are sometimes designed to change managers’ behavior
in the direction top managers desire, even if the reports decrease controllability.
17) In a cost center, a manager is responsible for investments, revenues, and costs.
18) A packaging department is most likely a profit center.
19) Variances between actual and budgeted amounts inform management about performance relative to
the budget.
20) Each manager, regardless of level, is in charge of a responsibility center.
21) A responsibility center is a part, segment, or subunit of an organization whose manager is accountable
for a specified set of activities.
22) Management will most likely behave the same way if a department is structured as a cost center or if
the same department is structured as a profit center.
23) Responsibility accounting focuses on control, NOT on information and knowledge.
24) The sales department in any organization is usually a profit center.
25) Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager
totally control all revenue and costs? Why or why not?
Objective 6.6
1) The Japanese use the term kaizen when referring to________.
A) scarce resources
B) pro forma financial statements
C) continuous improvement
D) the sales forecast
2) Kaizen refers to incorporating cost reductions ________.
A) in each successive budgeting period
B) in each successive sales forecast
C) in all customer service centers
D) in all areas of the organization
3) Tom Magic Company manufactures various kinds of toys for different age groups. The company’s
flagship product is Rx. The company currently requires 8.50 labor hours to manufacture per unit of Rx.
The company believes that because of numerous small improvements in the process, it will require 0.10
labor-hours less and hence will only 8.40 labor-hours in the next quarter. It will require 8.35 and 8.25
labor-hours in third and fourth quarter. The company has adopted ________.
A) activity based budgeting
B) kaizen budgeting
C) zero-based budgeting
D) cost-based budgeting
4) Kaizen budgeting involves ________.
A) large cost reductions
B) management directed improvements
C) continual small cost reductions
D) continual small revenue increases
5) Kaizen budgeting is driven by ________.
A) management
B) employees
C) stockholders
Answer the following questions using the information below:
Sherry and John Enterprises are using the kaizen approach to budgeting for 2015. The budgeted income
statement for January 2015 is as follows:
Sales (168,000 units) $1,000,000
Less: Cost of goods sold 600,000
Gross margin 400,000
Operating expenses 300,000
(includes $50,000 of fixed costs)
Operating income $ 100,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline
by 1% per month.
6) What is budgeted cost of goods sold for March 2015?
A) $588,060
B) $592,000
C) $600,000
D) $594,000
7) What is budgeted gross margin for March 2015?
A) $392,040
B) $396,000
C) $408,040
D) $411,940
8) What is the budgeted operating income for February 2015?
A) $206,000
B) $297,500
C) $116,915
D) $594,000
9) To reduce budgetary slack management may ________.
A) incorporate stretch or challenge targets
B) use external benchmark performance measures
C) award bonuses for achieving budgeted amounts
D) reduce projected cost targets by 10% across all areas
10) A stretch budget is a budget that ________.
A) crosses more than one responsibility center
B) represents a challenging, but achievable level of performance
C) is impossible to implement in a cost center
D) is designed to include the effects of exchange rate fluctuations
11) Rolling budgets help in reducing budgetary slack.
12) Budgetary slack is the practice of underestimating costs so as to project an optimistic future outlook.
13) Companies implementing kaizen budgeting believe that employees who actually do the job have the
best knowledge of how the job can be done better.
14) The Japanese use kaizen to mean financing alternatives.
15) Kaizen budgeting does NOT make sense for cost centers.
16) Kaizen budgeting encourages dramatic improvements and substantial reduction in costs.
17) Kaizen budgeting allows for budgeting of small incremental increases in costs each budgeting period
to allow for the effects of normal inflation.
18) Budgeting is a mechanical tool because the budgeting techniques are free of emotions.
19) Budgetary slack provides management with a hedge against planned adverse circumstances.
20) Most costs can be easily controlled because they are under the sole influence of one manager.
21) Kaizen budgeting can be applied to activities such as setups with the goal of reducing setup time and
setup costs.
22) When the operating budget is used as a control device, managers are less likely to be motivated to
budget higher sales than actually anticipated.
23) Budgeting based on cost for specific activities is a key building block of the master budget for
companies that use the Kaizen approach.
24) Administration of budgets is free of emotions as budgets are mechanical tools.
25) Budgets are not remedies for weak management talent, faulty organization, or a poor accounting
system.
26) Allscott Company is developing its budgets for 2016 and, for the first time, will use the kaizen
approach. The initial 2016 income statement, based on static data from 2015, is as follows:
Sales (140,000 units) $420,000
Less: Cost of goods sold 280,000
Gross margin 140,000
Operating expenses (includes $28,000 of depreciation) 112,000
Net income $28,000
Selling prices for 2016 are expected to increase by 8%, and sales volume in units will decrease by 10%.
The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than
depreciation, all other operating costs are expected to decline by 5%.
Required:
Prepare a kaizen-based budgeted income statement for 2016.