Achievement Test 5: Chapters 9-10 Name ___________________________

Managerial Accounting, 6e Instructor ________________________

Section # _________ Date __________

Part I II III IV Total

Points 26 32 22 20 100

Score

PART I MULTIPLE CHOICE (26 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. Office Stuff produced 15,000 file cabinets at a cost of $80,000. Production for the
period was estimated at 14,000 file cabinets at a cost of $75,000. On which of the
following should the flexible budget be based?
a. Budgeted costs of actual production
b. Budgeted costs of budgeted production
c. Actual costs of budgeted production
d. Actual costs of actual production

____ 2. Which of the following is true with regard to budgeting vs. long-range planning?
a. Both tend to be very detailed.
b. They are the same in all significant aspects.
c. The maximum length for both usually is a year, with shorter periods of time also
common.
d. Budgeting is oriented more toward short-term goals; long-range planning toward
long-term goals.

____ 3. Which of the following is false with regard to budgetary planning?

a. The starting point for the budgets of a not-for-profit organization is generally
receipts, rather than expenditures.
b. A merchandising company uses a purchases budget instead of a production
budget.
c. Budgets may be used by manufacturing companies, merchandising companies,
service enterprises, and not-for-profit organizations.
d. For a service enterprise, the critical factor in budgeting is coordinating professional
staff needs with anticipated services.

____ 4. The manager of an investment center can improve ROI by

a. reducing variable and/or controllable fixed costs.
b. reducing average operating assets.
c. increasing sales.
d. all of the above.
AT5- 2 Test Bank for Managerial Accounting, Sixth Edition

____ 5. Which of the following is true with regard to budgetary planning?

a. Generally accepted accounting principles require the budgets be prepared at least
annually.
b. The cash budget is often considered to be the most important output in preparing
financial budgets.
c. The likelihood of a realistic budget is greater when the budget is developed from
top management down to lower management.
d. The human behavior aspects of budgeting, while they should not be ignored, are
generally of little real significance.

____ 6. A static budget is

a. applicable to cost budgets but not to a sales budget.
b. modified or adjusted for changes in activity during the year.
c. appropriate in evaluating a manager's effectiveness in controlling fixed costs.
d. appropriate in evaluating a manager's effectiveness in controlling variable costs.

____ 7. When considering controllable versus noncontrollable costs,

a. costs allocated to, and thus identifiable with, a particular responsibility level are
controllable.
b. costs incurred directly by a level of responsibility are controllable at that level.
c. controllable cost and noncontrollable cost, respectively, are synonymous with
variable cost and fixed cost.
d. more costs are controllable as one moves down to the lower levels where actual
production takes place.

____ 8. A responsibility report for a profit center shows

a. gross profit and income from operations.
b. contribution margin and controllable margin.
c. contribution margin, controllable margin, and return on investment.
d. gross profit, income from operations, and net income.

____ 9. A flexible budget

a. is, in essence, a series of static budgets at different levels of activity.
b. can be prepared for each of the types of budgets included in a master budget.
c. increases budget allowances both directly and proportionately for variable costs as
production increases.
d. all of the above.

____ 10. Responsibility centers are generally classified as either

a. divisions, departments, or branches.
b. segments, subunits, or subdivisions.
c. cost centers, profit centers, or divisions.
d. cost centers, profit centers, or investment centers.

____ 11. The initial budget prepared in the master budget is the
a. sales budget.
b. production budget.
c. budgeted balance sheet.
d. budgeted income statement.
 Achievement Test 5 AT5- 3

____ 12. The ROI formula for an investment center is

a. Controllable Margin Sales.
b. Net Income Average Operating Assets.
c. Contribution Margin Average Operating Assets.
d. Controllable Margin Average Operating Assets.

____ 13. The Florida Division of Right Enterprises had an ROI of 18% when sales were
$1,500,000 and controllable margin was $118,800. What were the average operating
assets?
a. $270,000
b. $21,384
c. $291,384
d. $660,000

PART II BUDGETARY PLANNING (32 points)

This problem consists of four independent mini-problems. Omit headings other than those already
given.

A. Kriter Kitchen Tools produces and sells insulated ice buckets. The sales budget for 2014 is as
follows:

1st quarter 8,000 units 3rd quarter 13,000 units

2nd quarter 11,000 units 4th quarter 10,000 units

Kriter desires an ending inventory equal to 10% of the next quarter's sales. The January 1,
2014 inventory is 800 units. Unit sales during the 1st quarter of 2015 are estimated at 9,000
units.

Instructions: Compute required production for 2014, showing quarterly data.

Description Quarter 1 Quarter 2 Quarter 3 Quarter 4

AT5- 4 Test Bank for Managerial Accounting, Sixth Edition

B. Shanigans Manufacturers is preparing its direct labor budget for the second quarter of 2014
from the following budgeted production figures: April8,000 units; May7,000 units; and
June9,000 units. Each unit requires 3.25 hour of direct labor. The hourly wage rates are
expected to be $15 in April, and $15.50 in May and June.

Instructions: Prepare a direct labor budget for the quarter, showing monthly data.

Description April May June Quarter

C. JetGreen Cleaners makes 80% of its sales on credit. Experience shows that 25% of the credit
customers pay in the month of sale, 55% within the following month, the rest during the next
month. Total sales for May, June, July, and August are estimated at $180,000; $220,000;
$280,000; and $200,000, respectively.

Instructions: Determine budgeted cash receipts for July and August.

Description July August

 Achievement Test 5 AT5- 5

D. Southside Sports is preparing its annual cash budget, showing quarterly data, for 2014. A
$14,000 cash balance is desired at the end of each quarter. Borrowings and repayments are
in $1,000 increments at 6% annual interest. The company borrows at the beginning of a
quarter based on the estimated deficiency. Interest is paid only when principal is repaid at the
end of a quarter with excess cash. The maximum amount of principal was repaid in the
second and fourth quarters. The cash balance on December 31, 2013 is $17,000. Total
receipts and disbursements, other than borrowings and principal or interest payments, are
estimated at:
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Disbursements: $110,000 $135,000 $124,000 $140,000
Receipts: 102,000 142,000 120,000 155,000

Instructions: Prepare a schedule of estimated borrowings and repayments of principal and

interest for the four quarters of 2014.

Description Quarter 1 Quarter 2 Quarter 3 Quarter 4

AT5- 6 Test Bank for Managerial Accounting, Sixth Edition

PART III FLEXIBLE BUDGETS (22 points)

Handover Company uses a flexible budget for overhead based on direct labor hours (DLH).
Annual master budget figures, based on 400,000 direct labor hours, and actual overhead for
March, when 30,000 labor hours were worked, are as follows:

Master Budget March Actual

Variable:
Indirect labor $ 24,000 $ 1,900
Indirect materials 45,000 3,300
Other 280,000 21,100
Fixed:
Supervision 120,000 10,000
Depreciation 54,000 4,600
Other 216,000 17,700

Instructions: Prepare a flexible budget performance report for March. Omit headings other than
descriptive columnar headings.

FLEXIBLE BUDGET PERFORMANCE REPORT:

 Achievement Test 5 AT5- 7

PART IV COMPUTATION OF RETURN ON INVESTMENT (ROI) (20 points)

For the year ended December 31, 2014, SanaDune Tools reports the following:

Sales $4,000,000
Variable costs 2,700,000
Controllable fixed costs 600,000
Average operating assets 3,400,000

Instructions: Compute ROI for each of the following situations. Show all computations.

1. The year ended December 31, 2014.

_________________ _________________ = ________%

2. For 2015 assuming the following independent courses of action:

(a) Sales will increase 15% with no change in the contribution margin ratio.

_________________ _________________ = ________%

(b) Variable costs and controllable fixed costs will both be reduced 8%.

_________________ _________________ = ________%

(c) Average operating assets will be reduced 25%.

_________________ _________________ = ________%

AT5- 8 Test Bank for Managerial Accounting, Sixth Edition

Solutions Achievement Test 5: Chapters 9-10

PART I MULTIPLE CHOICE (26 points)

1. A 6. C 11. A
2. D 7. B 12. D
3. A 8. B 13. D
4. D 9. D
5. B 10. D

PART II BUDGETARY PLANNING (32 points)

A. Description Quarter 1 Quarter 2 Quarter 3 Quarter 4
Expected unit sales 8,000 11,000 13,000 10,000
Desired ending finished goods units 1,100 1,300 1,000 900
Total required units 9,100 12,300 14,000 10,900
Beginning finished goods units (800) (1,100) (1,300) (1,000)
Required production units 8,300 11,200 12,700 9,900

B. Description April May June Quarter

Units to be produced 8,000 7,000 9,000 24,000
Direct labor hours/unit 3.25 3.25 3.25 3.25
Total direct labor hours 26,000 22,750 29,250 78,000
Direct labor cost/hour $15.00 $15.50 $15.50
Total direct labor cost $390,000 $352,625 $453,375 $1,196,000

C. Description July August

Collections from May ($180,000 80% 20%) $ 28,800
Collections from June ($220,000 80% 55%) 96,800
($220,000 80% 20%) $ 35,200
Collections from July ($280,000 80% 25%) 56,000
($280,000 80% 55%) 123,200
Collections from August ($200,000 80% 25%) 40,000
Cash sales, July ($280,000 20%) 56,000
Cash sales, August ($200,000 20%) 40,000
$237,600 $238,400

D. Description Quarter 1 Quarter 2 Quarter 3 Quarter 4

Beginning cash balance $ 17,000 $ 14,000 $ 15,850 $ 14,850
Add: Receipts 102,000 142,000 120,000 155,000
Total available cash $119,000 $156,000 $135,850 $169,850
Less: Disbursements 110,000 135,000 124,000 140,000
Excess (deficiency) 9,000 21,000 11,850 29,850
Financing
Borrowings 5,000 0 3,000 0
Repayments 0 5,150* 0 3,090**
Ending cash balance $ 14,000 $ 15,850 $ 14,850 $ 26,760

*$5,000 + (5,000 .06 2/4)

**$3,000 + (3,000 .06 2/4)
 Achievement Test 5 AT5- 9

PART III FLEXIBLE BUDGETS (22 points)

PERFORMANCE REPORT: Difference
Budget at Actual Costs Favorable (F)
30,000 DLH 30,000 DLH Unfavorable (U)
Variable costs
Indirect labor $ 1,800 $ 1,900 $100 U
Indirect materials 3,375 3,300 75 F
Other 21,000 21,100 100 U
Total variable 26,175 26,300 125 U
Fixed costs
Supervision 10,000 10,000 0 -
Depreciation 4,500 4,600 100 U
Other 18,000 17,700 300 F
Total fixed 32,500 32,300 200 F
Total costs $58,675 $58,600 $ 75 F

PART IV COMPUTATION OF RETURN ON INVESTMENT (ROI) (20 points)

1. $4,000,000 $2,700,000 600,000 = $700,000: $700,000 $3,400,000 = 20.6%

2. (a) ($700,000 + $195,000*) $3,400,000 = 26.3%

*($4,000,000 $2,700,000) 0.15 = $195,000

(b) ($700,000 + $264,000*) $3,400,000 = 28.4%

*($2,700,000 + $600,000) 0.08

(c) $700,000 ($3,400,000 $850,000) = 27.5%