Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
9) Jermaine Company is developing its budgets for 2013 and for the first time will use the Kaizen
approach. The initial 2013 income statement, based on static data from 2012, is as follows:
Sales (200,000 units) $300,000
Less: cost of goods sold 200,000
Gross margin $100,000
Operating expenses (includes $20,000 of amortization) 80,000
Net income $20,000
Selling prices for 2013 are expected to increase by 8 percent, and sales volume in units will decrease by 10
percent. The cost of goods sold as estimated by the Kaizen approach will decline by 10 percent per unit.
Other than amortization, all other operating costs are expected to decline by 5 percent.
Required:
Prepare a Kaizen-based budgeted income statement for 2013.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
10) Allscott Company is developing its budgets for 2013 and for the first time will use the Kaizen
approach. The initial 2013 income statement, based on static data from 2012, 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 2013 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 2013.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
11) Brad Corporation is developing its budgets for 2013 and for the first time will use the Kaizen
approach. The initial 2013 income statement, based on static data from 2012, is as follows:
Sales (240,000 units) $720,000
Less: Cost of goods sold 480,000
Gross margin 240,000
Operating expenses (includes $64,000 of fixed costs) 192,000
Net income $48,000
Under the Kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline
by 12%.
Required:
Prepare a Kaizen-based budgeted income statement for March of 2013.
12) Describe the concept of kaizen budgeting.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
13) Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use
sensitivity analysis in practice.
6.5 Contrast responsibility against controllability.
1) Responsibility accounting is a budgeting system that measures the plans and objectives of managers.
2) Performance reports for responsibility centres may include uncontrollable costs if they are segregated
from controllable costs.
3) A controllable cost is a cost that is not subject to the influence of a given manager of a given
responsibility centre for a given time span.
4) Few costs are clearly under the sole influence of one manager.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
5) Responsibility accounting focuses on information and knowledge, not control.
6) In a profit centre the manager is responsible for investments, revenues and expenses.
7) The major types of responsibility centres are
A) profit, non-profit, and governmental.
B) profit, sales, and direct cost.
C) revenue, profit, income, and cost.
D) revenue, profit, cost, and investment.
E) profit, indirect cost, and investment.
8) The reason for tracing a cost in responsibility accounting is to determine which of the following?
A) whether it is fixed or variable
B) who has the best knowledge about why the costs arose
C) what activity caused the costs to be incurred
D) either who has the best knowledge about why the costs arose or, what activity caused the costs to be
incurred
E) whether it is production or administrative
9) Responsibility accounting is a system that
A) deals mainly with revenues.
B) requires subdividing all management levels.
C) is most appropriate at the top levels of the organization.
D) is closely tied to the master budget.
E) measures the plans and actions of responsibility centres.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
10) Which of the following statements is true concerning controllability of costs?
A) Fixed costs are controllable costs.
B) Controllable costs are easy to identify with much accuracy.
C) Senior managers rarely differ in their reliance on controllable costs for performance measurement.
D) All costs are controllable, given a sufficiently long time period.
E) Most costs are under the sole influence of any one manager.
11) A criticism of traditional budgeting is “Excessive reliance on extrapolating past trends”. Which of the
following is a proposal for change to address this criticism?
A) Use activity-based budgeting.
B) Balance financial aspects with nonfinancial.
C) Signal to all employees the need for continuous improvement.
D) Adopt a cross-functional approach.
E) Link budgeting explicitly to strategy.
12) One of the criticisms of traditional budgeting is not using budgets to evaluate performance until the end of
the budget period. Which of the following proposals for change would address this criticism?
A) Link budgeting explicitly to strategy.
B) Use Kaizen budgeting to guide areas for cost reduction before the end of the budget period.
C) Inform employees of the need for continuous improvement in performance within the budget period.
D) Balance financial aspects with non-financial aspects (such as quality and time).
E) Rely strictly on extrapolation of past performance.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
13) Mannock Company budgeted $400,000 for employee training, but actually spent only $300,000. Which
of the following statements is the best course of action for management to take in this instance?
A) Because this $100,000 variance is favourable, management does not need to investigate further.
B) Management will investigate this $100,000 favourable variance to ensure that the cost savings do not
reflect a reduction in programming.
C) Management will investigate this $100,000 favourable variance to try to identify and correct the
problem with budgeting system.
D) Management should not investigate every variance, especially the favourable ones.
E) Management should hold a meeting with the budget department and the training department to
ensure that next year‘s budget is more realistic.
14) Disk Company was very profitable for the first ten years of its existence, but the company has fallen
on hard times with the growth of compact disks. In 2007 Jean Adams was appointed head of the Product
Research Department. She began a number of product development projects. Although the department
has developed several good ideas that led to the introduction of several promising products, Ms. Adams
was criticized for poor cost control. The financial performance reports of the department under Ms.
Adams leadership were consistently unfavourable. Management was quite concerned about cost control
because profits for the company were low and the cash budget indicated that additional borrowing
would be required during the next year.
Because of her inability to control costs, Ms. Adams was relieved of her responsibilities in 2008 and Fran
Jones became head of the department. Ms. Jones promised to improve performance of Product Research
and scaled back the developmental activities to obtain favourable financial performance. By the end of
2008 Ms. Jones was showing a favourable financial variance.
Required:
If the Product Research Department is classified as a responsibility centre, what unique problems are
associated with evaluating its financial performance?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
15) Rick Christensen is the new division manager of Fastfood Sales. His division is considered a
responsibility centre, and he has control over all costs and revenue of the division. His predecessor had
been dismissed from the company because he could not keep the revenues and costs with acceptable
variances on a quarterly basis. However, the former manager had relatively good annual reports.
Christensen is very concerned about the situation because Fastfood has a somewhat seasonal business
and it is very difficult to keep sales up during the winter months. He is considering changing jobs after
only a few months but wants some advice as to the likelihood that he will be able to keep revenue and
costs under control throughout the year.
Required:
Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally
control all revenue and costs? Why or why not?
16) Describe some of the drawbacks of using the operating budget as a control device.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
17) Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager
totally control all revenue and costs? Why or why not?
18) How is budgeting for a multinational corporation different than budgeting for a corporation that is
strictly domestic?
19) Describe the four types of responsibility centres. Give a specific example of each of the four types of
responsibility centres.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
20) When applied to budgets, responsibility accounting provides feedback to top management about the
performance of different responsibility-centre managers relative to the budget. Name and briefly describe
the three ways, presented in the textbook, that properly used variances can be helpful.