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104. A cost center
a. only incurs costs and does not directly generate revenues.
b. incurs costs and generates revenues.
c. is a responsibility center of a company which incurs losses.
d. is a responsibility center which generates profits and evaluates the investment cost of
earning the profit.
105. A manager of a cost center is evaluated mainly on
a. the profit that the center generates.
b. his or her ability to control costs.
c. the amount of investment it takes to support the cost center.
d. the amount of revenue that can be generated.
106. Performance reports for cost centers compare actual
a. total costs with static budget data.
b. total costs with flexible budget data.
c. controllable costs with static budget data.
d. controllable costs with flexible budget data.
107. In the performance report for cost centers,
a. controllable and noncontrollable costs are reported.
b. fixed costs are not reported.
c. no distinction is made between fixed and variable costs.
d. only materials and controllable costs are reported.
108. Of the following choices, which contain both a traceable fixed cost and a common fixed
cost?
a. Profit center manager’s salary and timekeeping costs for a responsibility center’s
employees.
b. Company president’s salary and company personnel department costs.
c. Company personnel department costs and timekeeping costs for a responsibility
center’s employees.
d. Depreciation on a responsibility center’s equipment and supervisory salaries for the
center.
109. Which of the following is not an indirect fixed cost?
a. Company president’s salary
b. Depreciation on the company building housing several profit centers
c. Company personnel department costs
d. Profit center supervisory salaries
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110. A profit center is
a. a responsibility center that always reports a profit.
b. a responsibility center that incurs costs and generates revenues.
c. evaluated by the rate of return earned on the investment allocated to the center.
d. referred to as a loss center when operations do not meet the company’s objectives.
111. The best measure of the performance of the manager of a profit center is the
a. rate of return on investment.
b. success in meeting budgeted goals for controllable costs.
c. amount of controllable margin generated by the profit center.
d. amount of contribution margin generated by the profit center.
112. Controllable margin is defined as
a. sales minus variable costs.
b. sales minus contribution margin.
c. contribution margin less controllable fixed costs.
d. contribution margin less noncontrollable fixed costs.
113. Controllable margin is most useful for
a. external financial reporting.
b. preparing the master budget.
c. performance evaluation of profit centers.
d. break-even analysis.
114. Which of the following will not result in an unfavorable controllable margin difference?
a. Sales exceeding budget; costs under budget
b. Sales exceeding budget; costs over budget
c. Sales under budget; costs under budget
d. Sales under budget; costs over budget
115. Given below is an excerpt from a management performance report:
Budget Actual Difference
Contribution margin $1,000,000 $1,050,000 $50,000
Controllable fixed costs $ 500,000 $ 450,000 $50,000
The manager’s overall performance
a. is 20% below expectations.
b. is 20% above expectations.
c. is equal to expectations.
d. cannot be determined from information given.
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116. Which of the following are financial measures of performance?
1. Controllable margin
2. Product quality
3. Labor productivity
a. 1
b. 2
c. 3
d. 1 and 3
117. Given below is an excerpt from a management performance report:
Budget Actual Difference
Contribution margin $600,000 $580,000 $20,000 U
Controllable fixed costs $200,000 $220,000 $20,000 U
The manager’s overall performance
a. is 10% above expectations.
b. is 10% below expectations.
c. is equal to expectations.
d. cannot be determined from the information provided.
118. A responsibility report for a profit center will
a. not show controllable fixed costs.
b. not show indirect fixed costs.
c. show noncontrollable fixed costs.
d. not show cumulative year-to-date results.
119. The dollar amount of the controllable margin
a. is usually higher than the contribution margin.
b. is usually lower than the contribution margin.
c. is always equal to the contribution margin.
d. cannot be a negative figure.
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120. Pippen Co. recorded operating data for its shoe division for the year. The company’s
desired return is 5%.
Sales $1,000,000
Contribution margin 200,000
Total direct fixed costs 120,000
Average total operating assets 400,000
Which one of the following reflects the controllable margin for the year?
a. 20%
b. 50%
c. $60,000
d. $80,000
Solution: $200,000 − $120,000 = $80,000
121. Las Sendas, Inc. had average operating assets of $4,000,000 and sales of $2,000,000 in
2013. If the controllable margin was $600,000, the ROI was
a. 60%
b. 50%
c. 30%
d. 15%
122. Trails and Paths, Inc. had average operating assets of $6,000,000 and sales of
$3,000,000 in 2013. If the controllable margin was $600,000, the ROI was
a. 50%
b. 40%
c. 20%
d. 10%
123. The area manager of the Red, White, and Brew Restaurants is considering two possible
expansion alternatives. The required investments, expected controllable margins, and the
ROIs of each are as follows:
Project Investment Controllable Margin ROI
Phoenix $120,000 $30,000 25%
Chicago $540,000 $50,000 9.25%
The Red, White, and Brew segment has currently $2,000,000 in invested capital and a
controllable margin of $250,000. Which one of following projects will increase the Red,
White, and Brew division’s ROI?
a. Both the Phoenix and Chicago options
b. Only the Phoenix option
c. Only the Chicago option
d. Neither the Phoenix nor the Chicago options
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124. Bogey Co. recorded operating data for its Cheap division for the year. Bogey requires its
return to be 10%.
Sales $ 1,400,000
Controllable margin 160,000
Total average assets 4,000,000
Fixed costs 100,000
What is the ROI for the year?
a. 4%
b. 35%
c. 6%
d. 1.5%
125. Dingo Division’s operating results include: controllable margin of $150,000, sales totaling
$1,200,000, and average operating assets of $500,000. Dingo is considering a project
with sales of $100,000, expenses of $86,000, and an investment of average operating
assets of $200,000. Dingo’s required rate of return is 9%. Should Dingo accept this
project?
a. Yes, ROI will drop by 6.6% which is still above the minimum required rate of return.
b. No, the return is less than the required rate of 9%.
c. Yes, ROI still exceeds the cost of capital.
d. No, ROI will decrease to 7%.
126. Grown Industries reported the following items for 2013:
Income tax expense $ 60,000
Contribution margin 200,000
Controllable fixed costs 80,000
Interest expense 40,000
Total operating assets 650,000
How much is controllable margin?
a. $200,000
b. $120,000
c. $60,000
d. $20,000
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127. Griffin Corp. is evaluating its Piquette division, an investment center. The division has a
$60,000 controllable margin and $400,000 of sales. How much will Griffin’s average
operating assets be when its return on investment is 10%?
a. $600,000
b. $660,000
c. $400,000
d. $340,000
128. An investment center generated a contribution margin of $400,000, fixed costs of
$200,000 and sales of $2,000,000. The center’s average operating assets were $800,000.
How much is the return on investment?
a. 25%
b. 175%
c. 50%
d. 75%
129. Rhein Manufacturing recorded operating data for its auto accessories division for the year.
Sales $750,000
Contribution margin 150,000
Total direct fixed costs 90,000
Average total operating assets 400,000
How much is ROI for the year if management is able to identify a way to improve the
contribution margin by $30,000, assuming fixed costs are held constant?
a. 45.0%
b. 22.5%
c. 15.0%
d. 12.0%
130. The current controllable margin for Henry Division is $93,000. Its current operating assets
are $300,000. The division is considering purchasing equipment for $90,000 that will
increase annual controllable margin by an estimated $15,000. If the equipment is
purchased, what will happen to the return on investment for Henry Division?
a. An increase of 16.1%
b. A decrease of 13.3%
c. A decrease of 3.3%
d. A decrease of 7.2%
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131. Monte, Inc. recorded operating data for its Sandtrap division for the year. Monte requires
its return to be 9%.
Sales $1,000,000
Controllable margin 180,000
Total average assets 600,000
Fixed costs 60,000
How much is ROI for the year?
a. 10%
b. 17%
c. 20%
d. 30%
132. Betsy Union is the Pika Division manager and her performance is evaluated by executive
management based on Division ROI. The current controllable margin for Pika Division is
$46,000. Its current operating assets total $210,000. The division is considering
purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with
annual depreciation of $10,000. If the equipment is purchased, what will happen to the
return on investment for the division?
a. An increase of 0.5%
b. A decrease of 0.5%
c. A decrease of 3.5%
d. It will remain unchanged.
133. Benet Division of United Refinery Company’s operating results include: controllable
margin, $200,000; sales $2,200,000; and operating assets, $800,000. The Benet
Division’s ROI is 25%. Management is considering a project with sales of $100,000,
variable expenses of $60,000, fixed costs of $40,000; and an asset investment of
$150,000. Should management accept this new project?
a. No, since ROI will be lowered.
b. Yes, since ROI will increase.
c. Yes, since additional sales always mean more customers.
d. No, since a loss will be incurred.
134. The Fulmar Division of Jayne Manufacturing had an ROI of 25% when sales were $3 million
and controllable margin was $600,000. What were the average operating assets?
a. $150,000
b. $750,000
c. $2,400,000
d. $12,000
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135. Naples, Inc. recorded operating data for its shoe division for the year.
Sales $750,000
Contribution margin 135,000
Total fixed costs 90,000
Average total operating assets 300,000
How much is ROI for the year if management is able to identify a way to improve the
contribution margin by $30,000, assuming fixed costs are held constant?
a. 25%
b. 18%
c. 45%
d. 12%
136. A distinguishing characteristic of an investment center is that
a. revenues are generated by selling and buying stocks and bonds.
b. interest revenue is the major source of revenues.
c. the profitability of the center is related to the funds invested in the center.
d. it is a responsibility center which only generates revenues.
137. A measure frequently used to evaluate the performance of the manager of an investment
center is
a. the amount of profit generated.
b. the rate of return on funds invested in the center.
c. the percentage increase in profit over the previous year.
d. departmental gross profit.
138. Return on investment is calculated by dividing
a. contribution margin by sales.
b. controllable margin by sales.
c. contribution margin by average operating assets.
d. controllable margin by average operating assets.
139. Which one of the following will not increase return on investment?
a. Variable costs are increased
b. An increase in sales
c. Average operating assets are decreased
d. Variable costs are decreased
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140. If an investment center has generated a controllable margin of $150,000 and sales of
$600,000, what is the return on investment for the investment center if average operating
assets were $1,000,000 during the period?
a. 15%
b. 25%
c. 45%
d. 60%
141. Which statement is true?
a. An investment center is responsible for revenues and expenses, as well as earning a
return on assets.
b. An investment center is only responsible for its investments.
c. An investment center is only responsible for revenues and expenses.
d. A profit center is evaluated using contribution margin, while an investment center is
evaluated using ROI.
142. The denominator in the formula for return on investment calculation is
a. investment center controllable margin.
b. dependent on the specific type of profit center.
c. investment center average operating assets.
d. sales for the period.
143. In the formula for ROI, idle plant assets are
a. included in the calculation of controllable margin.
b. included in the calculation of operating assets.
c. excluded in the calculation of operating assets.
d. excluded from total assets.
144. In computing ROI, land held for future use
a. will hurt the performance measurement of an investment center’s manager.
b. is important in evaluating the performance of a profit center manager.
c. is included in the calculation of operating assets.
d. is considered a nonoperating asset.
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145. Le Sud Retailers has a current return on investment of 10% and the company has
established an 8% minimum rate of return for the division. The division manager has two
investment projects available, for which the following estimates have been made:
Project A – Annual controllable margin = $24,000, operating assets = $400,000
Project B – Annual controllable margin = $60,000, operating assets = $550,000
Which project should be funded?
a. Both projects
b. Project A
c. Project B
d. Neither project
146. 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%?
a. $120,000
b. $210,000
c. $900,000
d. $1,200,000
147. Which of the following valuations of operating assets is not readily available from the
accounting records?
a. Cost
b. Book value
c. Market value
d. Both cost and market value
a148. The following information is available for Halle Department Stores:
Average operating assets $600,000
Controllable margin 60,000
Contribution margin 150,000
Minimum rate of return 8%
How much is Halle’s residual income?
a. $102,000
b. $540,000
c. $12,000
d. $48,000
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a149. What is the goal of residual income?
a. To maximize the amount of costs which are controllable
b. To maximize profits
c. To maximize the total amount of residual income
d. To maximize controllable margin
a150. Which one of the following is a correct statement about residual income?
a. Its goal is to maximize profits of an investment center.
b. It is less effective for evaluating investment centers than ROI.
c. It is the ratio of controllable margin to the minimum rate of return on average operating
assets.
d. It evaluates performance by comparing the return of an investment center with the
company’s minimum rate of return.
a151. Which one of the following does not impact the amount of residual income?
a. Contribution margin
b. Net income
c. Sales
d. Controllable costs
a152. For what purpose do companies calculate residual income?
a. To determine whether decentralization is possible or not
b. To motivate managers through possible termination
c. To evaluate management performance
d. To measure company profits
a153. 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?
a. $120,000
b. $20,000
c. $80,000
d. $320,000
a154. 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?
a. $416,000
b. $84,000
c. $584,000
d. $512,000
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a155. The performance of the manager of Ottawa Division is measured by residual income.
Which of the following would decrease the manager’s performance measure?
a. Decrease in required rate of return
b. Increase in amount of return on investment desired
c. Increase in sales
d. Increase in contribution margin
156. Which of the following would not be considered an aspect of budgetary control?
a. It assists in the determination of differences between actual and planned results.
b. It provides feedback value needed by management to see whether actual operations
are on course.
c. It assists management in controlling operations.
d. It provides a guarantee for favorable results.
157. A static budget is usually appropriate in evaluating a manager’s effectiveness in
controlling
a. fixed manufacturing costs and fixed selling and administrative expenses.
b. variable manufacturing costs and variable selling and administrative expenses.
c. fixed manufacturing costs and variable selling and administrative expenses.
d. variable manufacturing costs and fixed selling and administrative expenses.
158. A static budget report is appropriate for
a. fixed manufacturing costs.
b. fixed selling and administrative expenses.
c. variable selling and administrative expenses.
d. both fixed manufacturing costs and fixed selling and administrative expenses.
159. 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?
a. $4,000 unfavorable
b. $4,000 favorable
c. $12,000 unfavorable
d. $16,000 favorable
160. To develop the flexible budget, management takes all of the following steps except
identify the
a. activity index and the relevant range of activity.
b. variable costs and determine the budgeted variable cost per unit.
c. fixed costs and determine the budgeted fixed cost per unit.
d. All of these options are steps in developing the flexible budget.
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161. A flexible budget is appropriate for
Direct Labor Costs Manufacturing Overhead Costs
a. No No
b. Yes Yes
c. Yes No
d. No Yes
162. All of the following statements are correct about management by exception except it
a. enables top management to focus on problem areas that need attention.
b. means that management has to investigate every budget difference.
c. requires that there must be some guidelines for identifying an exception.
d. means that top management’s review of a budget report is focused primarily on
differences between actual results and planned objectives.
163. Controllable costs for responsibility accounting purposes are those costs that are directly
influenced by
a. a given manager within a given period of time.
b. a change in activity.
c. production volume.
d. sales volume.
164. All of the following statements are correct about controllable costs except
a. all costs are controllable at some level of responsibility within a company.
b. all costs are controllable by top management.
c. fewer costs are controllable as one moves up to each higher level of managerial
responsibility.
d. costs incurred directly by a level of responsibility are controllable at that level.
165. Which of the following will cause an increase in ROI?
a. An increase in variable costs
b. An increase in average operating assets
c. An increase in sales
d. An increase in controllable fixed costs
166. Costs that relate specifically to one center and are incurred for the sole benefit of that
center are
a. common fixed costs.
b. direct fixed costs.
c. indirect fixed costs.
d. noncontrollable fixed costs.
167. If controllable margin is $300,000 and the average investment center operating assets are
$2,000,000, the return on investment is
a. .67%.
b. 6.66%.
c. 20%.
d. 15%.
Answers to Multiple Choice Questions
BRIEF EXERCISES
BE 168
Devlin Manufacturing makes a single product. Expected manufacturing costs are as follows:
Variable costs
Direct materials $6.50 per unit
Direct labor 2.40 per unit
Manufacturing overhead 1.10 per unit
Fixed costs per month
Supervisory salaries $13,600
Depreciation 5,500
Other fixed costs 2,200
Instructions
Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month.
Budgetary Planning and Responsibility Accounting
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Solution 168 (4 min.)
BE 169
Wind Productions uses flexible budgets. Items from the budget for March in which 3,000 units
were produced and sold appear below:
Direct materials $18,000
Indirect materials – variable 2,000
Supervisor salaries 15,000
Depreciation on factory equipment 4,000
Direct labor 10,000
Property taxes on factory 1,000
Instructions
If Wind prepares a flexible budget at 4,000 units, compute its total variable cost.
BE 170
Cyber Construction’s manufacturing costs for August when production was 1,000 units appear
below:
Direct material $12 per unit
Direct labor $7,500
Variable overhead 6,000
Factory depreciation 9,000
Factory supervisory salaries 7,800
Other fixed factory costs 2,500
Instructions
Compute the flexible budget manufacturing cost amount for a month when 900 units are
produced.
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BE 171
Micro Miller Company’s budgeted sales for April were estimated at $700,000, sales commissions
at 4% of sales, and the sales manager’s salary at $80,000. Shipping expenses were estimated at
1% of sales and miscellaneous selling expenses were estimated at $1,000, plus 0.5% of sales.
Instructions
Determine the budgeted selling expenses on a flexible budget for April.
BE 172
Point, Inc. produces men’s shirts. The following budgeted and actual amounts are for 2013:
Cost Budget at 2,500 units Actual Amounts at 2,800 units
Direct materials $65,000 $75,000
Direct labor 70,000 78,000
Fixed overhead 35,000 34,500
Instructions
Prepare a performance report for Point, Inc. for the year.
BE 173
Moss Corp. reported the following items for 2013:
Controllable fixed costs $ 77,000
Contribution margin 122,000
Interest expense 20,000
Variable costs 80,000
Total assets $925,000
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BE 173 (Cont.)
Instructions
Compute the controllable margin for 2013.
BE 174
The data for an investment center is given below.
January 1, 2013 December 31, 2013
Current Assets $ 400,000 $ 800,000
Plant Assets 3,000,000 3,800,000
The controllable margin is $440,000.
Instructions
Compute the return on investment for the center for 2013.
BE 175
Data for the Deluxe Division of Park Industries which is operated as an investment center follows:
Sales $6,000,000
Contribution Margin 800,000
Controllable Fixed Costs 440,000
Return on Investment 12%
Instructions
Calculate controllable margin and average operating assets.
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BE 176
Sage Division’s operating results include:
• Controllable margin, $300,000
• Sales revenue, $2,400,000
• Operating assets, $1,000,000
Sage is considering a project with sales of $240,000, expenses of $168,000, and an investment
of $360,000. Sage’s required rate of return is 15%.
Instructions
Determine whether Sage should accept this project.
BE 177
An investment center manager is considering three possible investments. The company’s
required return is 10%. The required asset investment, controllable margins, and the ROIs of
each investment are as follows:
Project Average Investment Controllable Margin ROI
AA $160,000 $32,000 20.0%
BB 140,000 16,000 11.4%
CC 220,000 66,000 30%
The investment center is currently generating an ROI of 23% based on $1,200,000 in operating
assets and a controllable margin of $276,000.
Instructions
If the manager can select only one project, determine which one is the best choice to increase the
investment center’s ROI. Compute how much the investment center’s ROI will be if the manager
selects your recommendation.
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aBE 178
The owner of Denver Toy Manufacturing Company has recently expanded his business in order
to add an additional product line. In addition to toys, the company now sells shirts. The company
has a minimum rate of return of 11%.
Toys Shirts
Sales $600,000 $200,000
Controllable margin 120,000 10,000
Average operating assets 900,000 200,000
Instructions
Compute the residual income for both investment centers.
aBE 179
Floors Direct has 4 divisions. Its hardwood flooring division’s information follows for 2013:
Sales $4,000,000
Controllable margin 250,000
Variable costs 60,000
Average operating assets 1,800,000
Instructions
Floor’s required rate of return is 10%. How much is its residual income?
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EXERCISES
Ex. 180
Clark Company’s master budget reflects budgeted sales information for the month of June, 2013,
as follows:
Budgeted Quantity Budgeted Unit Sales Price
Product A 40,000 $7
Product B 48,000 $9
During June, the company actually sold 39,000 units of Product A at an average unit price of
$7.10 and 49,600 units of Product B at an average unit price of $8.90.
Instructions
Prepare a Sales Budget Report for the month of June for Clark Company which shows whether
the company achieved its planned objectives.
Ex. 181
Beal Manufacturing Co.’s static budget at 12,000 units of production includes $72,000 for direct
labor and $12,000 for direct materials. Total fixed costs are $48,000.
Instructions
a. Determine how much would appear on Beal’s flexible budget for 2013 if 18,000 units are
produced and sold.
b. How would this comparison differ if a static budget were used instead of a flexible budget for
performance evaluation?