Deck 15: Performance Evaluation

Question 1

Liam manages a division that is part of a large, decentralized business. He has a substantial degree of control over the division's costs, revenues, and investment in assets. Based on this information, the division would be classified as a profit center.

Answer 1

False

Question 2

Under all circumstances, unfavorable variances are bad; favorable variances are good.

Answer 2

False

Question 3

A cost variance is unfavorable if actual cost exceeds standard cost.

Answer 3

True

Question 4

If the master budget prepared at a volume level of 10,000 units includes direct materials of $40,000, a flexible budget based on a volume of 12,000 units would include direct materials of $48,000.

Question 5

The sales volume variance is favorable if actual sales volume is higher than the budgeted.

Question 6

In responsibility accounting systems, managers are only held responsible for items over which they have absolute control.

Question 7

In an optimal responsibility accounting system, managers are evaluated on only the revenues and costs that are under their control.

Question 8

Decentralization encourages upper level management to concentrate on short-term decisions.

Question 9

Flexible budget amounts for variable costs and revenues come from multiplying standard per unit amounts by the planned volume of production.

Question 10

When a comparison of static and flexible budgets shows an unfavorable sales volume variance, the variable cost volume variances will also be unfavorable.

Question 11

A restaurant that is part of a retail store and managed by the retail manager would most likely be classified as a cost center.

Question 12

The differences between the standard and actual amounts are called variances.

Question 13

The sales volume variance is the difference between sales revenue on the static budget and sales revenue on the flexible budget.

Question 14

If the master budget prepared at a volume level of 10,000 units includes direct labor of $10,000, a flexible budget based on a volume of 11,000 units would include direct labor of $10,000.

Question 15

A static budget is one that shows estimated revenues and costs at multiple activity levels.

Question 16

For performance evaluation, the amount of costs actually incurred should be compared to the costs that would have been incurred at the actual volume of activity rather than at the planned volume of activity.

Question 17

A disadvantage of decentralization is that it fails to motivate managers to improve the productivity of their division.

Question 18

The total sales variance includes both price and volume variances.

Question 19

If the master budget prepared at a volume level of 20,000 units includes factory rent of $40,000, a flexible budget based on a volume of 21,000 units would include factory rent of $40,000.

Question 20

Sales volume variances are attributable to differences between planned and actual activity volumes, as well as differences in selling price.

Question 21

Select the incorrect statement concerning the application of the controllability concept to responsibility accounting.

A) As a practical matter, control of costs or revenues may be shared rather than absolute.
B) The concept of control is crucial to an effective responsibility accounting system.
C) Managers lose motivation when they are held accountable for actions that are beyond their scope of control.
D) Each manager should be evaluated on the costs but not the revenues that are under his or her control.

Question 22

The process of evaluating the performance of individual managers is known as:

A) Responsibility accounting.
B) Management by exception.
C) Responsibility management.
D) Performance management.

Question 23

If Pascal Company's turnover (asset utilization) measure is 2.5 and its margin is 7.5%, its ROI is 18.75%.

Question 24

A favorable flexible budget materials variance may indicate that the price per unit of materials was lower than expected and that less material was used than expected or either of these.

Question 25

Jacob is a department manager who recently instituted a new recognition program for his employees. He budgeted the cost of the new program at $10 per employee, but actual costs were $15 per employee. The cost associated with the recognition program would be considered which of the following kinds of cost?

A) Controllable cost
B) Opportunity cost
C) Fixed cost
D) Product cost

Question 26

Management by exception means that only unfavorable cost variances are investigated.

Question 27

Vanessa Grant is responsible for controlling expenses, but is not responsible for generating revenues. Vanessa Grant is a manager of a(n):

A) Cost center.
B) Profit center.
C) Investment center.
D) Liability center.

Question 28

The research and development department of Apple Computers would likely be organized as:

A) A profit center.
B) A cost center.
C) A revenue center.
D) An investment center.

Question 29

A reporting unit of a decentralized business that controls identifiable revenue and/or expense items is known as a(n):

A) Management center.
B) Performance center.
C) Accounting center.
D) Responsibility center.

Question 30

All of the following are characteristics that are required for effective responsibility accounting except:

A) motivation.
B) accountability.
C) centralization.
D) none of these.

Question 31

Packrall Company makes computer chips. Curtis is manager of the company's maintenance department. Because his maintenance technicians are so well trained in maintaining expensive and sensitive circuit board stamping equipment, Curtis has been authorized to contract to perform maintenance for outside customers. In this company, the maintenance department is likely organized as:

A) A profit center.
B) A revenue center.
C) A cost center.
D) An investment center.

Question 32

Which of the following is a characteristic that is needed for decentralization to work well in an organization?

A) Clear lines of authority
B) Responsibility
C) Good communication
D) All of these are correct answers.

Question 33

The general formula for return on investment is revenue divided by investment in assets.

Question 34

Unless there are other factors to be considered, an investment opportunity with a return on investment that equals or exceeds the company's required rate of return would be accepted.

Question 35

Suboptimization refers to actions taken by a manager that are in the best interest of the firm as a whole but not in his/her own best interest.

Question 36

An important disadvantage of decentralization is that managers may engage in suboptimal behavior.

Question 37

Which of the following statements regarding cost centers is incorrect?

A) Cost centers are units within a business that incur expense, but do not have responsibility for generating revenue.
B) Cost centers tend to be found at upper levels on a company's organization chart.
C) A manager of a cost center has less responsibility than a manager in an investment center.
D) Cost center managers are evaluated on their ability to control costs and keep within budget.

Question 38

Which of the following is not typically found in a decentralized organization?

A) Cost center
B) Decision center
C) Investment center
D) Profit center

Question 39

Investment centers are often evaluated on the basis of return on investment.

Question 40

Unfavorable flexible budget variances are those that are the result of lower than expected sales volume.

Question 41

Which of the following statements regarding profit centers is correct?

A) A manager of a profit center has more responsibility than a manager of an investment center.
B) A manager of profit center is evaluated only on his/her ability to control costs.
C) A manager of a profit center is evaluated on his/her ability to control costs and generate revenues.
D) A manager of a profit center is responsible for assets, liabilities, and earnings.

Question 42

Spark Company's static budget is based on a planned activity level of 45,000 units. At the same time the static budget was prepared, the management accountant prepared two additional budgets, one based on 40,000 units and one based on 50,000. The company actually produced and sold 49,000 units. In evaluating its performance, management should compare the company's actual revenues and costs to which of the following budgets?

A) A budget based on 40,000 units
B) A budget based on 45,000 units
C) A budget based on 49,000 units
D) A budget based on 50,000 units

Question 43

Delegating authority and responsibility throughout an organization is known as:

A) centralization.
B) decentralization.
C) management by exception.
D) suboptimization.

Question 44

Select the incorrect statement regarding flexible budgets.

A) Flexible budgets often show the estimated revenues and costs at multiple volume levels.
B) A flexible budget is used to compare actual to budgeted amounts.
C) A flexible budget is also known as a master budget.
D) Standard prices and costs are used in preparing a flexible budget.

Question 45

Spark Company's static budget is based on a planned activity level of 57,000 units. At the same time the static budget was prepared, the management accountant prepared two additional budgets, one based on 52,000 units and one based on 62,000. The company actually produced and sold 61,000 units. In evaluating its performance, management should compare the company's actual revenues and costs to which of the following budgets?

A) A budget based on 62,000 units
B) A budget based on 57,000 units
C) A budget based on 61,000 units
D) A budget based on 52,000 units

Question 46

Which of the following income statement formats is most commonly used with flexible budgeting?

A) Sales − Variable costs = Contribution margin; Contribution margin − Fixed costs = Net income
B) Sales − Cost of goods sold = Gross margin; Gross margin − Operating expenses = Net income
C) Sales − Manufacturing costs − Selling and administrative costs = Net income
D) None of these answers is correct.

Question 47

Burruss Company developed a static budget at the beginning of the company's accounting period based on an expected volume of 7,000 units: $\begin{array}{lr}&\text { Per Unit }\\\text { Revenue } & \$ 7.00 \\\text { Variable costs } & \underline{ 3.00} \\\text { Contribution margin } & \$ 4.00 \\\text { Fixed costs }& \underline{ 2.00 }\\\text { Net income } & \underline{ \$ 2.00}\end{array}$ If actual production totals 8,000 units which is within the relevant range, the flexible budget would show fixed costs of:

A) $14,000.
B) $2 per unit.
C) $16,000.
D) None of these answers is correct.

Question 48

Assuming actual volume is 10,000 units and planned volume is 12,000 units, the sales volume variance in units:

A) Equals 2,000 units unfavorable.
B) Equals 2,000 units favorable.
C) Cannot be determined without additional information.
D) None of these answers is correct.

Question 49

Volume variances are computed for which of the following costs?

A) Fixed manufacturing costs only
B) Variable selling and administrative costs only
C) Variable manufacturing and selling and administrative costs
D) Variable manufacturing costs only

Question 50

A budget prepared at a single volume of activity is referred to as a:

A) Strategic budget.
B) Standard budget.
C) Static budget.
D) Flexible budget.

Question 51

When would a variance be labeled as unfavorable?

A) When standard costs are more than actual costs
B) When expected sales are less than actual sales
C) When actual sales are equal to expected sales
D) None of these answers is correct.

Question 52

Static and flexible budgets are similar in that:

A) They both are based on the same per unit variable amounts and the same fixed costs.
B) They both concentrate solely on costs.
C) They both are prepared for multiple activity levels.
D) None of these answers is correct.

Question 53

A difference between the static budget based on planned volume and a flexible budget prepared at actual volume is called a:

A) Flexible budget variance.
B) Static budget variance.
C) Production activity variance.
D) Volume variance.

Question 54

An organizational unit of a business that incurs costs and generates revenues is known as a(n):

A) Cost center.
B) Sales center.
C) Profit center.
D) Investment center.

Question 55

When would a variance be labeled as favorable?

A) When actual costs are less than standard costs
B) When standard costs are equal to actual costs
C) When standard costs are less than actual costs
D) When estimated costs are greater than actual costs

Question 56

Jones Company developed the following static budget at the beginning of the company's accounting period: $\begin{array}{lr}\text { Revenue ( } 8,000 \text { units) } & \$ 16,000 \\\text { Variable costs } & \underline{ 4,000} \\\text { Contribution margin } & \$ 12,00 \\\text { Fixed costs } & \underline{4,000 }\\\text { Net income } & \underline{\$ 8,000}\end{array}$

If actual production totals 8,200 units, the flexible budget would show total costs of:

A) $8,000.
B) $8,100.
C) $8,200.
D) None of these is correct.

Question 57

Burruss Company developed a static budget at the beginning of the company's accounting period based on an expected volume of 8,000 units: $\begin{array}{lr}&\text { Per Unit }\\\text { Revenue } & \$ 4.00 \\\text { Variable costs } & \underline{ 1.50} \\\text { Contribution margin } & \$ 2.50 \\\text { Fixed costs }& \underline{ 2.00 }\\\text { Net income } & \underline{ \$ 0.50}\end{array}$ If actual production totals 10,000 units which is within the relevant range, the flexible budget would show fixed costs of:

A) $16,000.
B) $2 per unit.
C) $20,000.
D) None of these answers is correct.

Question 58

Which of the following applications is most suited for developing flexible budgets?

A) Database
B) Graphics
C) Spreadsheet
D) Word processing

Question 59

The concept that says managers should be evaluated on the basis of revenues and/or expenses they can control is known as the:

A) Management by exception concept.
B) Controllability concept.
C) Responsibility concept.
D) None of these.

Question 60

Jones Company developed the following static budget at the beginning of the company's accounting period: $\begin{array}{lr}\text { Revenue ( } 8,100 \text { units) } & \$ 16,200 \\\text { Variable costs } & \underline{ 4,050} \\\text { Contribution margin } & \$ 12,150 \\\text { Fixed costs } & \underline{4,050 }\\\text { Net income } & \underline{\$ 8,100}\end{array}$
If actual production totals 8,500 units, the flexible budget would show total costs of:

A) $4,250.
B) $8,300.
C) $4,150.
D) None of these is correct.

Question 61

The following static budget is provided: $\begin{array}{lc}\text { Units }& \underline{20,000}\text{Units}\\\text {Sales}&\$ 200,000\\\text {Less variable costs:}\\\text {Manufacturing costs}&\$70,000 \\\text {Selling and administrative costs}& \underline{ \$ 40,000 }\\\text { Contribution margin } & \$ 90,000 \\\text { Less fixed costs: } & \\\text { Manufacturing costs } & \$ 22,000 \\\text { Selling and administrative costs } & \underline{\$ 17,000} \\\text { Net income } & \underline{\$ 51,000}\end{array}$ What will budgeted net income equal if 21,000 units are produced and sold? (Do not round intermediate calculations.)

A) $53,550
B) $55,500
C) $94,500
D) $210,000

Question 62

Which of the following is an incorrect statement regarding variances?

A) A variance is favorable when expected sales are more than actual sales.
B) A variance is a difference between budgeted and actual amounts.
C) A variance can be calculated for both revenues and expenses.
D) A variance can be both favorable and unfavorable.

Question 63

The following static budget is provided: $\begin{array}{lc}\text { Units }& \underline{24,000}\text{Units}\\\text {Sales}&\$ 288,000\\\text {Less variable costs:}\\\text {Manufacturing costs}&\$ 81,600 \\\text {Selling and administrative costs}& \underline{ \$ 45,600 }\\\text { Contribution margin } & \$ 160,800 \\\text { Less fixed costs: } & \\\text { Manufacturing costs } & \$ 43,200 \\\text { Selling and administrative costs } & \underline{\$ 32,400} \\\text { Net income } & \underline{\$ 85,200}\end{array}$ What will budgeted net income equal if 22,000 units are produced and sold? (Do not round intermediate calculations.)

A) $61,200
B) $71,800
C) $264,000
D) $264,000.

Question 64

The Ferguson Company estimated that October sales would be 100,000 units with an average selling price of $6.00. Actual sales for October were 105,000 units and average selling price was $5.95. The sales volume variance was:

A) $30,000 favorable.
B) $30,000 unfavorable.
C) $29,750 favorable.
D) $29,750 unfavorable.

Question 65

The following static budget is provided: $\begin{array}{lc}&\text { Per Unit }&\text {Total }\\\text { Sales }&\$60&\$900,000\\\text { Less variable costs: }\\ \text { Manufacturing costs } &30 & 450,000 \\ \text { Selling and administrative costs } & \underline{10} & \underline{ 150,000} \\\text { Contribution margin }&\$20&\$300,000\\\text { Less fixed costs: }\\\text { Manufacturing costs } && 75,000 \\\text { Selling and administrative costs } && \underline{ 125,000} \\\text { Total fixed costs } && \underline{ 200,000} \\\text { Net income } && \underline{ \$ 100,000}\end{array}$ What will be the overall volume variance if 12,000 units are produced and sold?

A) $80,000 F
B) $80,000 U
C) $60,000 U
D) $160,000 U

Question 66

When would a cost variance be listed as unfavorable?

A) When actual costs are less than budgeted costs
B) When actual costs exceed budgeted costs
C) When actual costs are equal to budgeted costs
D) When actual sales are less than budgeted sales

Question 67

When would a sales variance be listed as favorable?

A) When actual sales exceed budgeted or expected sales
B) When actual sales are less than budgeted or expected sales
C) When actual sales are equal to budgeted or expected sales
D) None of these answers is correct.

Question 68

The Ferguson Company estimated that October sales would be 100,000 units with an average selling price of $6.00. Actual sales for October were 105,000 units and average selling price was $5.95. The sales price variance was:

A) $5,000 favorable.
B) $5,000 unfavorable.
C) $5,250 favorable.
D) $5,250 unfavorable.

Question 69

White Company budgeted fixed overhead costs of $200,000 and volume of 40,000 units. During the year, the company produced and sold 39,000 units and spent $210,000 on fixed overhead.The spending variance relating to the fixed overhead cost is:

A) $10,000 favorable.
B) $10,000 unfavorable.
C) $5,000 favorable.
D) $5,000 unfavorable.

Question 70

The following standard cost card is provided for Navid Company's Product A: $\begin{array}{l}\text { Direct material (2 lbs. ( } \$ 5.00 \text { per lb.) }&\$10.00\\\text { Direct labor (1 hr @ \$5.00 per hr.) } &5.00\\\text { Variable overhead (1 hr. @ \$4.00 per hr.) } &4.00\\\text { Fixed overhead (1 hr. @ } \$ 2.00 \text { per hr.) } &\underline{2.00}\\\text { Total standard cost per unit }&\underline{\$21.00}\end{array}$
The fixed overhead rate is based on total budgeted fixed overhead of $15,000. During the period, the company produced and sold 5,300 units at the following costs:
Direct material 15,000 pounds @ $4.50 per pound
Direct labor 5,050 hours @ $5.00 per hour
Overhead $29,970The standard manufacturing cost per unit is $27.00. What is the actual manufacturing cost per unit? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

A) $23.15.
B) $20.65.
C) $21.20.
D) Cannot be determined from the information provided.

Question 71

Which manager is generally held responsible for the sales volume variance?

A) Purchasing agent
B) Marketing manager
C) Plant manager
D) Production manager

Question 72

The Landrum Company provides the following standard cost data per unit of product: Variable overhead: $8.00Landrum anticipated that they would produce and sell 24,000 units. During the period, the company produced and sold 25,000 units incurring $210,000 of variable overhead costs.
The variable overhead flexible budget variance was:

A) $8,000 unfavorable.
B) $10,000 unfavorable.
C) $8,000 favorable.
D) $10,000 favorable.

Question 73

The Boyle Company estimated that April sales would be 150,000 units with an average selling price of $6.00. Actual sales for April were 149,000 units and average selling price was $6.12. The sales volume variance was:

A) $6,120 favorable.
B) $6,000 unfavorable.
C) $17,880 favorable.
D) $17,880 unfavorable.

Question 74

The Boyle Company estimated that April sales would be 150,000 units with an average selling price of $6.00. Actual sales for April were 149,000 units and average selling price was $6.12. The sales price variance was:

A) $6,120 favorable.
B) $6,000 unfavorable.
C) $17,880 favorable.
D) $17,880 unfavorable.

Question 75

The sales volume variance is the difference between the:

A) static budget (based on actual volume) and the flexible budget (based on planned volume).
B) static budget (based on planned volume) and the flexible budget (based on actual volume).
C) static budget (based on planned volume) and actual revenue or cost.
D) flexible budget (based on actual volume) and actual or revenue or cost.

Question 76

Select the correct statement regarding flexible budgets.

A) A flexible budget can only be prepared for a single level of activity.
B) A flexible budget is not used for planning.
C) A flexible budget shows expected revenues and costs at a variety of activity levels.
D) A flexible budget is also known as the master budget.

Question 77

Which of the following reason(s) cause flexible budgets to be useful planning tools?

A) Flexible budgets allow managers to anticipate results under a variety of scenarios.
B) Flexible budgets can help determine if a company's cash position is adequate.
C) Flexible budgets can help managers judge if materials and storage facilities are appropriate for various production levels.
D) All of these answers are correct.

Question 78

The following static budget is provided: $\begin{array}{lc}&\text { Per Unit }&\text {Total }\\\text { Sales }&\$50&\$800,000\\\text { Less variable costs: }\\ \text { Manufacturing costs } &20 & 320,000 \\ \text { Selling and administrative costs } & \underline{10} & \underline{160,000 }\\\text { Contribution margin }&\$20&\$320,000\\\text { Less fixed costs: }\\\text { Manufacturing costs } && 84,000 \\\text { Selling and administrative costs } && \underline{ 130,000 }\\\text { Total fixed costs } && \underline{214,000 }\\\text { Net income } && \underline{\$ 106,000}\end{array}$
What will be the overall volume variance if 13,700 units are produced and sold?

A) $46,000 F
B) $23,000 F
C) $46,000 U
D) $115,000 U

Question 79

The following standard cost card is provided for Navid Company's Product A: $\begin{array}{l}\text { Direct material (2 lbs. ( } \$ 5.00 \text { per lb.) }&\$10.00\\\text { Direct labor (1 hr @ \$8.00 per hr.) } &8.00\\\text { Variable overhead (1 hr. @ \$3.00 per hr.) } &3.00\\\text { Fixed overhead (1 hr. @ } \$ 2.00 \text { per hr.) } &\underline{2.00}\\\text { Total standard cost per unit }&\underline{\$23.00}\end{array}$
The fixed overhead rate is based on total budgeted fixed overhead of $12,000. During the period, the company produced and sold 5,800 units at the following costs:Direct material 12,200 pounds @ $4.80 per poundDirect labor 5,950 hours @ $8.00 per hourOverhead $29,920
The standard manufacturing cost per unit is $23.00. What is the actual manufacturing cost per unit? (Do not round intermediate calculations.)

A) $23.46.
B) $36.16.
C) $17.96.
D) Cannot be determined from the information provided.

Question 80

Which of the following is a difference between a static and a flexible budget?

A) Static budgets use the same fixed cost amounts, whereas flexible budgets change the amount of fixed costs at different levels of activity.
B) Static budgets are based on the same per unit variable amount, whereas flexible budgets are based on multiple per unit variable amounts.
C) Static budgets are based on single estimate of volume, whereas flexible budgets show estimated costs and revenues at a variety of activity levels.
D) None of these answers is correct.