MANAGERIAL ACCOUNTING 102

SUMMER 2013
PRACTICE EXAM #4 - CHAPTERS 20, 21

A)
B)
C)
D)

1.Which one of the following budgets would be prepared for a manufacturer but not for a merchandiser?
Direct labor budget
Cash budget
Sales budget
Budgeted income statement

A)
B)
C)
D)

2.A budget period should be

monthly.
for a year or more.
long-term.
long enough to provide an obtainable goal under normal business conditions.

3.(a)
(b)
A)
B)

What is a budget?
How does a budget contribute to good management?
4.The master budget reflects management's long-term plans encompassing five years or more.
True
False

5.(Communication)
At Boulder Industries, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales
personnel determine the likely sales volume. Bart Gray, one of the production managers, believes in building plenty of slack into
everything, including his estimates of ending inventory of work in process.
Required:
You are the accounting manager. Write a memo to Mr. Gray. Explain why the ending inventory figure should be extremely accurate, with as
little slack as possible.

A)
B)
C)
D)

6.The production budget shows expected unit sales are 50,000. The required production units are 52,000. What are the beginning and desired
ending finished goods units, respectively?
Beginning Units
Ending Units
5,000
3,000
3,000
5,000
2,000
5,000
5,000
2,000

A)
B)
C)
D)

7.An unrealistic budget is more likely to result when it

has been developed in a top down fashion.
has been developed in a bottom up fashion.
has been developed by all levels of management.
is developed with performance appraisal usages in mind.

A)
B)
C)
D)

8.A budget is most likely to be effective if

it is used to assess blame when things do not occur according to plans.
it is not used to evaluate a manager's performance.
employees and managers at the lower levels do not get involved in the budgeting process.
it has top management support.

A)
B)
C)
D)

9.Bean Manufacturing reported the following information for 2012:

October
November
December
Budgeted purchases
$180,000
$192,000
$216,000
Operating expenses are: Salaries, $75,000; Depreciation, $30,000; Rent, $15,000; Utilities, $21,000
Operating expenses are paid during the month incurred.
Accounts payable is used only for inventory acquisitions.
How much is the budgeted amount of cash to be paid for operating expenses in November?
$303,000
$111,000
$141,000
$333,000
10.A company budgeted unit sales of 136,000 units for January, 2012 and 160,000 units for February, 2012. The company has a policy of

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A)
B)
C)
D)

having an inventory of units on hand at the end of each month equal to 30% of next month's budgeted unit sales. If there were 40,800 units
of inventory on hand on December 31, 2011, how many units should be produced in January, 2012 in order for the company to meet its
goals?
143,200 units
136,000 units
128,800 units
184,000 units

A)
B)
C)
D)

11.The primary benefits of budgeting include all of the following except it

requires only top management to plan ahead and formalize their future goals.
provides definite objectives for evaluating performance.
creates an early warning system for potential problems.
motivates personnel throughout the organization.

A)
B)
C)
D)

12.Of the following items, which one is not obtained from an individual operating budget?
Selling and administrative expenses
Accounts receivable
Cost of goods sold
Sales

A)
B)
C)
D)

13.Lorie Nursery plans to sell 160 potted plants during April and 120 units in May. Lorie Nursery keeps 15% of the next month's sales as
ending inventory. How many units should Lorie Nursery produce during April?
154
166
160
178

A)
B)

14.The direct materials budget contains both quantity and cost data.
True
False

A)
B)
C)
D)

15.A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the
second month after the sale; the remainder is never collected. Budgeted credit sales were:
January
$240,000
February
144,000
March
360,000
The cash inflow in the month of March is expected to be
$271,200.
$205,200.
$216,000.
$259,200.

16.A __________________ is responsible for coordinating the preparation of the budget in many companies.
A)
B)
C)
D)

17.Long-range planning
generally presents more detailed information than an annual budget.
generally encompasses a longer period of time than an annual budget.
is usually more accurate than an annual budget.
is prepared on a quarterly basis if the budget is prepared on a quarterly basis.

A)
B)
C)
D)

18.Off-Line Co. has 6,000 units in beginning finished goods. The sales budget shows expected sales to be 24,000 units. If the production
budget shows that 28,000 units are required for production, what was the desired ending finished goods?
2,000.
6,000.
10,000.
18,000.

A)
B)
C)
D)

19.Dex Industries expects to purchase $90,000 of materials in March and $105,000 of materials in April. Three-quarters of all purchases are
paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. In addition, a 2%
discount is received for payments made in the month of purchase. How much will April's cash disbursements for materials purchases be?
$66,150
$81,150
$99,675
$90,000

20.The beginning cash balance is $15,000. Sales are forecasted at $600,000 of which 80% will be on credit. 70% of credit sales are expected
to be collected in the year of sale. Cash expenditures for the year are forecasted at $375,000. Accounts Receivable from previous

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accounting periods totaling $9,000 will be collected in the current year. The company is required to make a $15,000 loan payment and an
annual interest payment on the last day of every year. The loan balance as of the beginning of the year is $90,000, and the annual interest
rate is 10%.
Instructions
Compute the excess of cash receipts over cash disbursements.
A)
B)
C)
D)

21.The responsibility for expressing management's budgeting goals in financial terms is performed by the
accounting department.
top management.
lower level of management.
budget committee.

A)
B)

22.In order to develop a budgeted balance sheet, the previous year's balance sheet is needed.
True
False

A)
B)
C)
D)

23.The starting point in preparing a master budget is the preparation of the

production budget.
sales budget.
purchasing budget.
personnel budget.

A)
B)

24.A budget can be a means of communicating a company's objectives to external parties.

True
False

25.In September 2012, the management of Rye Company assembles the following data in preparation of budgeted merchandise purchases for
the months of October and November.
1. Expected Sales
October
$1,500,000
November
2,100,000
December
2,700,000
2. Cost of goods sold is expected to be 68% of sales.
3. Desired ending merchandise inventory is 25% of the next month's cost of goods sold.
4. The beginning inventory at October 1 will be the desired amount.
Instructions
Compute the budgeted merchandise purchases for October and November. Use a columnar format with separate columns for each month.
26.Lombard, Inc. has two investment centers and has developed the following information:
Department A
Department B
Departmental controllable margin
$200,000
Average operating assets
?
Sales
800,000
ROI
10%

?
$500,000
250,000
16%

Instructions
Answer the following questions about Department A and Department B.
1. What was the amount of Department A's average operating assets?
$____________.
2. What was the amount of Department B's controllable margin? $____________.
3. If Department B is able to reduce its operating assets by $100,000, Department B's new ROI would be ____________.
4. If Department A is able to increase its controllable margin by $60,000 as a result of reducing variable costs, Department A's new ROI
would be _________________.

A)
B)

27.If actual results are different from planned results, the difference must always be investigated by management to achieve effective
budgetary control.
True
False

A)
B)
C)
D)

28.Which of the following would not be considered an aspect of budgetary control?

It assists in the determination of differences between actual and planned results.
It provides feedback value needed by management to see whether actual operations are on course.
It assists management in controlling operations.
It provides a guarantee for favorable results.
29.The foreign subsidiary of a large corporation is

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A)
B)
C)
D)

not a responsibility center.

a profit center.
a cost center.
an investment center.

A)
B)
C)
D)

30.Management by exception
causes managers to be buried under voluminous paperwork.
means that all differences will be investigated.
means that only unfavorable differences will be investigated.
means that material differences will be investigated.

A)
B)
C)
D)

31.The selection of levels of activity to depict a flexible budget

1. will be within the relevant range.
2. is largely a matter of expediency.
3. is governed by generally accepted accounting principles.
1
2
3
1 and 2

A)
B)

32.A static budget is changed only when actual activity is different from the level of activity expected.
True
False

A)
B)
C)
D)

33.Top management's reaction to a difference between budgeted and actual sales often depends on
whether the difference is favorable or unfavorable.
whether management anticipated the difference.
the materiality of the difference.
the personality of the top managers.

A)
B)

34.Certain budget reports are prepared monthly, whereas others are prepared more frequently depending on the activities being monitored.
True
False

A)
B)
C)
D)

35.Controllable costs for responsibility accounting purposes are those costs that are directly influenced by
a given manager within a given period of time.
a change in activity.
production volume.
sales volume.

36.The data for an investment center is given below.

January 1, 2012
Current Assets
$ 400,000
Plant Assets
3,000,000

December 31, 2012

$ 800,000
3,800,000

The controllable margin is $520,000.

Instructions
Compute the return on investment for the center for 2012.

A)
B)
C)
D)

37.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?
Both projects
Project A
Project B
Neither project

A)
B)
C)
D)

38.Under management by exception, which differences between planned and actual results should be investigated?
Material and noncontrollable
Controllable and noncontrollable
Material and controllable
All differences should be investigated
39.A static budget is one that is geared to one level of activity.

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A)
B)

True
False

A)
B)
C)
D)

40.Within the relevant range of activity, the behavior of total costs is assumed to be
linear and upward sloping.
linear and downward sloping.
curvilinear and upward sloping.
linear to a point and then level off.

A)
B)
C)
D)

41.Naples, Inc. recorded operating data for its shoe division for the year.
Sales
$500,000
Contribution margin
90,000
Total fixed costs
60,000
Average total operating assets
200,000
How much is ROI for the year if management is able to identify a way to improve the contribution margin by $20,000, assuming fixed
costs are held constant?
25%
18%
45%
12%

A)
B)
C)
D)

42.All of the following statements are correct about controllable costs except
all costs are controllable at some level of responsibility within a company.
all costs are controllable by top management.
fewer costs are controllable as one moves up to each higher level of managerial responsibility.
costs incurred directly by a level of responsibility are controllable at that level.

A)
B)
C)
D)

43.Quincy Corp. earned controllable margin of $250,000 on sales of $3,200,000. The division had average operating assets of $2,600,000. The
company requires a return on investment of at least 8%. How much is residual income?
$208,000
$42,000
$292,000
$256,000

A)
B)
C)
D)

44.At zero direct labor hours in a flexible budget graph, the total budgeted cost line intersects the vertical axis at $20,000. At 10,000 direct
labor hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $60,000. Fixed and variable costs may be
expressed as:
$20,000 fixed plus $4 per direct labor hour variable.
$20,000 fixed plus $6 per direct labor hour variable.
$40,000 fixed plus $2 per direct labor hour variable.
$40,000 fixed plus $4 per direct labor hour variable.

45.Match the items below by entering the appropriate code letter in the space provided.
A.
B.
C.
D.
E.
F.

Budgetary control
Static budget
Flexible budget
Responsibility accounting
Controllable costs
Management by exception

_____

1.

_____

2.

_____
_____
_____
_____
_____
_____

3.
4.
5.
6.
7.
8.

_____
_____
_____
_____

9.
10.
11.
12.

G.
H.
I.
J.
K.
L.

Responsibility reporting system

Return on Investment
Profit center
Investment center
Indirect fixed costs
Direct fixed costs

The review of budget reports by top management directed entirely or primarily to differences between
actual results and planned objectives.
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.
The preparation of reports for each level of responsibility shown in the company's organization chart.
A projection of budget data at one level of activity.
Costs that a manager has the authority to incur within a given period of time.
The use of budgets to control operations.
A projection of budget data for various levels of activity.
A responsibility center that incurs costs, generates revenues, and has control over the investment funds
available for use.
Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.
A responsibility center that incurs costs and also generates revenues.
Costs which are incurred for the benefit of more than one profit center.
A measure of the profitability of an investment center computed by dividing controllable margin (in
dollars) by average operating assets.

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A)
B)

46.Controllable margin is subtracted from controllable fixed costs to get net income for a profit center.
True
False

47.The Medford Burkett Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes,
Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The
allocation of resources within the company and the segment managers' bonuses are based in part on the results shown in these reports.
Recently, the company was the victim of a computer virus that deleted portions of the company's accounting records. This was discovered
when the current period's responsibility reports were being prepared. The printout of the actual operating results appeared as follows.
Service revenue
Variable costs
Contribution margin
Controllable fixed costs
Controllable margin
Average operating assets
Return on investment

Planes
$

Taxis
?

Limos
$450,000

5,000,000
?
1,500,000
?
20,000,000
12%

?
180,000
?
70,000
?
10%

$ ?
320,000
380,000
?
160,000
1,600,000
?

Instructions
Determine the missing pieces of information above.
A)
B)
C)
D)

48.A cost is considered controllable at a given level of managerial responsibility if

the manager has the power to incur the cost within a given time period.
the cost has not exceeded the budget amount in the master budget.
it is a variable cost, but it is uncontrollable if it is a fixed cost.
it changes in magnitude in a flexible budget.

A)
B)
C)
D)

49.Stone Industries uses flexible budgets. At normal capacity of 8,000 units, budgeted manufacturing overhead is: $64,000 variable and
$180,000 fixed. If Stone had actual overhead costs of $250,000 for 9,000 units produced, what is the difference between actual and
budgeted costs?
$2,000 unfavorable
$2,000 favorable
$6,000 unfavorable
$8,000 favorable

50.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 25% based on $1,200,000 in operating assets and a controllable margin of
$300,000.
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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Answer Key
1.A
2.D
3.(a) A budget is a formal written statement of management's plans for a specified future time period, expressed in financial terms.
(b) A budget aids management in planning because it represents the primary means of communicating agreed-upon objectives throughout
the organization. Once adopted, a budget becomes an important basis for evaluating performance.
4.B
5.

6.B
7.A
8.D
9.B
10.A
11.A
12.B
13.A
14.A
15.A
16.budget committee
17.B
18.C
19.C
20.(5 min.)
Cash collections:
Accounts receivable collected
Cash sales: 20% $600,000
Credit sales: (80% $600,000) 70%
Cash expenditures
Loan payment
Interest payment (10% $90,000)
Net increase in cash
21.A
22.A
23.B
24.B
25.(1217 min.)

9,000
120,000
336,000
(375,000)
(15,000)
(9,000)
$ 66,000

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RYE COMPANY
Merchandise Purchases Budget
For the Months of October and November, 2012
October
$1,020,000
357,000
1,377,000
255,000
$1,122,000

Budgeted cost of goods sold

Desired ending merchandise inventory
Total
Less: Beginning merchandise inventory
Required merchandise purchase

October
November
$1,500,000 68% = $1,020,000
$2,100,000 68% = $1,428,000
$1,428,000 25% = $357,000
$2,700,000 68% 25% = $459,000
$1,020,000 25% = $255,000
26.(812 min.)
1.
$2,000,000 ($200,000 .10)
2.
$80,000 ($500,000 .16)
3.
20% [$80,000 $500,000 $100,000)]
4.
13% [($200,000 + $60,000) $2,000,000]
27.B
28.D
29.D
30.D
31.D
32.B
33.C
34.A
35.A
36.(4 min.)
Average current assets
($400,000 + $800,000) 2 = $600,000
Plant assets
($3,000,000 + $3,800,000) 2 = $3,400,000
ROI = Controllable Margin Average Operating Assets = $520,000 $4,000,000 = 13%
37.C
38.C
39.A
40.A
41.A
42.C
43.B
44.A
45.1. F
7.
C
2. D
8.
J
3. G
9.
L
4. B
10.
I
5. E
11.
K
6. A
12.
H
46.B
47.(10 min.)
Planes:
ROI = Controllable margin Average operating assets
12% = Controllable margin $20,000,000
Controllable margin = $20,000,000 12%
= $2,400,000
Contribution margin = Controllable margin + Controllable fixed costs
= $2,400,000 + $1,500,000
= $3,900,000
Service revenue = Contribution margin + Variable costs
= $3,900,000 + $5,000,000
= $8,900,000
Taxis:
ROI = Controllable margin Average operating assets
10%=
$70,000
Average operating assets
Average operating assets = $70,000 10%

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November
$1,428,000
459,000
1,887,000
357,000
$1,530,000

= $700,000
Controllable margin = Contribution margin Controllable fixed costs
$70,000
=
$180,000 Controllable fixed costs
Controllable fixed costs
= $180,000 $70,000
= $110,000
Contribution margin
= Service revenue Variable costs
$180,000
= $450,000 Variable costs
Variable costs
= $450,000 $180,000
= $270,000
Limos:
ROI = Controllable margin Average operating assets
= $160,000 $1,600,000
= 10%
Controllable margin = Contribution margin Controllable fixed costs
$160,000
=
$380,000
Controllable fixed costs
Controllable fixed costs
= $380,000 $160,000
= $220,000
Contribution margin = Service revenue Variable costs
$380,000
= Service revenue $320,000
Service revenue
= $380,000 + $320,000
= $700,000
48.A
49.B
50.(4 min.)
CC is the best choice because it increases the ROI (30% is greater than 25%).
Project
New ROI
AA
($300,000 + $32,000) ($1,200,000 + $160,000) = 24.4%
BB
($300,000 + $16,000) ($1,200,000 + $140,000) = 23.6%
CC

($300,000 + $66,000) ($1,200,000 + $220,000) = 25.8%

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