Revised Spring 2018 Chapter 10 Review Questions
Multiple Choice Questions
1. What is the primary difference between a static budget and a flexible budget?
a) The static budget contains only fixed costs, while the flexible budget contains only
variable costs.
b) The static budget is adjusted for different activity levels, while a flexible budget is
prepared for a single level of activity.
c) The static budget is prepared for a single level of activity, while a flexible budget is
adjusted for different activity levels.
d) Both the static budget and the flexible budget are adjusted for different activity
levels.
2. M Company prepared a static budget of 50,000 direct labor hours, with estimated
overhead costs of $250,000 for variable overhead and $60,000 for fixed overhead.
Trepid then prepared a flexible budget at 38,000 labor hours. How much is total
overhead costs at this level of activity?
a) $190,000
b) $247,000
c) $250,000
d) $260,000
3. W Company uses flexible budgets. At normal capacity of 10,000 units, budgeted
manufacturing overhead is: $50,000 variable and $135,000 fixed. If W Company had
actual overhead costs of $187,500 for 11,000 units produced, what is the difference
between actual and flexible budget costs?
a) $2,500 unfavorable
b) $2,500 favorable
c) $4,500 unfavorable
d) $6,000 favorable
4. A profit center is responsible for which activities?
a) Costs only
b) Costs and the revenue generated by those costs
c) Costs and any revenue generated by the company
d) Costs, revenue, and assets purchased for revenue generation
5. Decentralization means
a) Control of operations is delegated to many managers throughout the organization.
b) Control of operations is delegated to top management.
c) Control of operations is delegated for controlling variable costs.
d) Control of operations is delegated for controlling fixed costs.
6. A responsibility report show the following information
a) Sales- variable costs- fixed costs= net income.
b) Sales- controllable variable costs- fixed costs= controllable margin.
c) Sales- variable costs- controllable fixed costs= controllable margin.
d) Sales- controllable variable costs- controllable fixed costs= net income.
Revised Spring 2018 Chapter 10 Review Questions
7. Arbor Co. has a controllable margin of $120,000 on revenues of $800,000. Average
invested assets were $600,000. Arbor requires a 15% minimum rate of return. What
is the ROI?
a) 8%
b) 10%
c) 12%
d) 20%
8. Arbor Co. has a controllable margin of $120,000 on revenues of $800,000. Average
invested assets were $600,000. Arbor requires a 15% minimum rate of return. What
is the residual income?
a) $0
b) $30,000
c) $40,000
d) $200,000
9. Which of the following will not improve ROI?
a) Increasing sales
b) Increasing average operating assets
c) Increasing Controllable margin
d) Decreasing Costs
10. Reviews that are based primarily on the differences between actual results and
planned objectives is called:
a) Behavior principles
b) Management by exception
c) materiality
d) responsibility accounting
Revised Spring 2018 Chapter 10 Review Questions
Practice Problems
Practice Problem #1
A partially completed flexible overhead budget for S Company is shown below:
Activity Level in Units
Cost Formula 8,000 12,000 16,000
Variable overhead:
Supplies $108,000
Utilities 60,000
Repairs 24,000
Total variable overhead $192,000
Fixed overhead:
Depreciation $15,000
Salaries 96,000
Rent 44,000
Total fixed overhead $155,000
Total overhead $347,000
Required: Fill in the missing data.
Practice Problem #2:
J Company’s has provided the following information regarding June’s results.
Revenue and Cost
Formula Actual Results
Conversion costs $3.25/unit 7,000
Salaries $8,000 7,600
Utilities $600 + $0.50/unit 1,550
Rent $5,000 5,000
Miscellaneous $800 + $0.80/unit 2,500
Required: a) Prepare the company’s flexible budget assuming that 2,000 units were
manufactured.
b) Assume that 2,100 units were actually manufactured. Prepare the
flexible budget for this level of activity. Determine Favorable or
Unfavorable Differences
Practice Problem #3
T Company recently prepared a manufacturing cost budget for an output of 50,000 units for one
of their cost centers, as follows:
Revised Spring 2018 Chapter 10 Review Questions
Direct materials $100,000
Direct labor 50,000
Controllable variable overhead 75,000
Noncontrollable overhead 100,000
Actual units produced amounted to 60,000. Actual costs incurred were direct materials,
$110,000; direct labor, $60,500; controllable overhead, $85,000; and noncontrollable overhead,
$97,000.
Required: If T Company evaluated performance by the use of a flexible budget,
prepare a responsibility report showing the differences.
Practice Problem #4
The H Company manufactures basketballs. Last year’s sales were $700,000, controllable
margin was $100,000, and average operating assets were $800,000.
Required: a) If next year’s sales are unchanged and expenses and average operating
assets are reduced by 10%, compute current year and next year’s ROI.
b) If the minimum required rate of return is 6%, what will be the residual
income in the current year and next year?
Solutions
1. C
2. C
3. B
4. B
5. A
6. C
7. D
8. B
9. B
10. B
Revised Spring 2018 Chapter 10 Review Questions
Solution #1
Activity Level in Units
Cost Formula 8,000 12,000 16,000
Variable overhead:
Supplies $9.00 $72,000 $108,000 $144,000
Utilities $5.00 40,000 60,000 80,000
Repairs $2.00 16,000 24,000 32,000
Total variable overhead $128,000 $192,000 $256,000
Fixed overhead:
Depreciation $15,000 $15,000 $15,000
Salaries 96,000 96,000 96,000
Rent 44,000 44,000 44,000
Total fixed overhead $155,000 $155,000 $155,000
Total overhead $283,000 $347,000 $411,000
Variable overhead cost formula = variable overhead cost / activity level
Fixed overhead costs do not change as the level of activity changes.
Solution #2
Flexible
Budget Actual Difference
Budgeted number of units
sold 2,000 2,000
Expenses:
Conversion costs $3.25/unit 6,500 7,000 500 U
Salaries $8,000 8,000 7,600 400 F
Utilities $.50/unit+$600 1,600 1,550 50 F
Rent $5,000 5,000 5,000 0
Miscellaneous $.80/unit+$800 2,400 2,500 100 U
Total costs $23,500 $23,650 150 U
Revised Spring 2018 Chapter 10 Review Questions
Solution #3
Cost Formula Flexible Actual Difference
based on Budget F-Favorable
50,000 units based on U-Unfavorable
60,000
units
Controllable Costs
Direct materials $2.00 $120,000 $110,000 $10,000 F
Direct labor $1.00 60,000 60,500 500 U
Controllable $1.50 90,000 85,000 5,000 F
overhead
Total $270,000 $255,500 14,500 F
Solution#4
ROI:
Controllable Margin $100,000
= 12.5%
Average operating assets 800,000
Last Year Change Next Year
ROI:
Controllable Margin $100,000 $60,000 $160,000
= 22.2%
Average operating assets 800,000 (80,000) 720,000
Change in Income:
Sales $700,000
Controllable Margin 100,000
Expenses 600,000
Decrease % 10%
Decrease in expenses $60,000 = Increase in
Controllable Margin
a)
Residual Income:
Average operating assets $800,000 $720,000
Minimum rate of return 6% 6%
Minimum required income $48,000 $43,200
Controllable Margin $100,000 $160,000
Residual Income $52,000 $ 116,800