205. The use of budgets in controlling operations is known as ________________.
206. A major aspect of budgetary control is the use of budget reports that compare _____________________ with _______________________.
207. In analyzing differences from planned objectives, management may take ___________________, or it could decide to modify ___________________.
208. The master budget is a __________________ budget which is based on operating at one budgeted activity level.
209. A __________________ budget projects budget data for various levels of activity.
210. Total ________________ costs will be the same on the master budget and on a flexible budget which reflects the actual level of activity.
211. Under ___________________ accounting, the evaluation of a manager’s performance is based on the costs and revenues directly under that manager’s control.
212. A cost is __________________ at a given level of managerial responsibility if a manager has the authority to incur the cost in a given time period.
213. In general, costs ____________________ directly by the level of responsibility are _______________, whereas costs that are ____________________ to the responsibility level are __________________.
214. Responsibility centers may be classified into three types: (1)____________________, (2)___________________ and, (3)____________________.
215. The primary basis for evaluating the performance of a manager of an investment center is _________________.
216. Return on investment is calculated by dividing _________________________ by ________________________.
217. Match the items below by entering the appropriate code letter in the space provided.
A. Budgetary control G. Responsibility reporting system
B. Static budget H. Return on Investment
C. Flexible budget I. Profit center
D. Responsibility accounting J. Investment center
E. Controllable costs K. Indirect fixed costs
F. Management by exception L. Direct fixed costs
____ 1. The review of budget reports by top management directed entirely or primarily to differences between actual results and planned objectives.
____ 2. A part of management accounting that involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the day-to-day decisions about the items.
____ 3. The preparation of reports for each level of responsibility shown in the company’s organization chart.
____ 4. A projection of budget data at one level of activity.
____ 5. Costs that a manager has the authority to incur within a given period of time.
____ 6. The use of budgets to control operations.
____ 7. A projection of budget data for various levels of activity.
____ 8. A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use.
____ 9. Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.
____ 10. A responsibility center that incurs costs and also generates revenues.
____ 11. Costs which are incurred for the benefit of more than one profit center.
____ 12. A measure of the profitability of an investment center computed by dividing controllable margin (in dollars) by average operating assets.
Ans: N/A, LO: 1–7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
SHORT-ANSWER ESSAY QUESTIONS
S-A E 218
The master budget and flexible budgets are important aids to management in performing the management functions of planning and control. Briefly describe how planning and control are facilitated by preparing a master budget and flexible budgets. How are these two types of budgets interrelated with planning and control?
S-A E 219
Brad Ventura is confused about how a flexible budget is prepared. Identify the steps for Brad.
S-A E 220
Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centers.
S-A E 221
What is responsibility accounting? Explain the purpose of responsibility accounting.
S-A E 222 (Ethics)
Dixon Corporation evaluates its managers based on return on investment (ROI). Kathryn Bricker and Lindsey Allan, managers of the electronics and housewares departments respectively, have recently suffered from declining profits in their departments. Over lunch, they discuss the problem, and how they could improve performance. Most of the discussion centers around ways to increase sales. Near the end of the lunch period, however, Lindsey remarks that there are two components to consider, and that they have considered only one. She wonders whether there is some way to reduce investment, and by decreasing the denominator of the ROI fraction, to improve the final result.
Back at work, Kathryn continues to mull over Lindsey’s remarks. She decides to pursue the matter further, and before the end of the quarter she has sold quite a bit of older equipment and replaced it with equipment obtained with a short-term lease. Her performance, measured by ROI, is markedly improved, although sales continue to be disappointing.
1. Who are the stakeholders in this situation?
2. Is Kathryn’s action ethical? Briefly explain.
S-A E 223 (Communication)
Eiger Manufacturing manufactures circuit boards for computer-controlled appliances for the home. The sales have been very volatile, sometimes stressing the plant’s capacity, and sometimes depressingly slow. During a recent slow period, Nathan Jones, a production supervisor, complained to Janet Smith, accounting manager, about the flexible budget.
“I try as hard as I can to meet the budget,” he says, “and then I find out that just meeting the budget’s not good enough. Last month, when we sold 8,000 units, I was $10,000 under my budget, and then you all blow me out of the water with your report that I actually was $5,000 over, because sales were slow. I thought this responsibility accounting business was supposed to mean we are held accountable just for things we can control. How do we control sales? At the beginning of the year, you gave us all targets. Mine says that for an average month of 10,000 unit sales, I should spend about $82,000. I spend less, and get an unfavorable budget report. What gives?”
Write a short memo to respond to Mr. Jones.