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Achievement Test 5: Chapters 9-10 Name ___________________________

Managerial Accounting, 5e 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. Pine Company produced 96,000 units in 45,000 direct labor hours. Production for the
period was estimated at 99,000 units and 49,500 direct labor hours. A flexible budget
would compare budgeted costs and actual costs, respectively, at
a. 48,000 hours and 49,500 hours.
b. 49,500 hours and 45,000 hours.
c. 48,000 hours and 45,000 hours.
d. 45,000 hours and 45,000 hours.

____ 2. 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.

____ 3. 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.

____ 4. 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.

____ 5. The initial budget prepared in the master budget is the


a. sales budget.
b. production budget.
c. budgeted balance sheet.
d. budgeted income statement.
AT5- 2 Test Bank for Managerial Accounting, Fifth Edition

____ 6. 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.

____ 7. 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.

____ 8. 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.

____ 9. 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.

____ 10. 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.

____ 11. 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.
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 Northern Division of Hart Corp. had an ROI of 20% when sales were $1 million
and controllable margin was $200,000. What were the average operating assets?
a. $5,000,000
b. $1,000,000
c. $100,000
d. $40,000

PART II — BUDGETARY PLANNING (32 points)


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

A. Dryer Manufacturing produces and sells containers designed to hold liquid beverages. The
sales budget for 2011 is as follows:

1st quarter — 90,000 units 3rd quarter — 135,000 units


2nd quarter — 120,000 units 4th quarter — 105,000 units

Dryer desires an ending inventory equal to 10% of the next quarter's sales. January 1, 2011
inventory is 9,000 units. Unit sales during the 1st quarter of 2012 are estimated at 90,000
units.

Instructions: Compute required production for the year, showing quarterly data.

Description Quarter 1 Quarter 2 Quarter 3 Quarter 4

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AT5- 4 Test Bank for Managerial Accounting, Fifth Edition

B. Parker Manufacturers is preparing its direct labor budget for the second quarter of 2011 from
the following budgeted production figures: April—70,000 units; May—100,000 units; and June
—110,000 units. Each unit requires 2 hour of direct labor. The hourly wage rates are expected
to be $14 in April and May and $16 in June.

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

Description April May June Quarter

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C. Carson's Widget Works makes 70% of its sales on credit. Experience shows that 60% of the
credit customers pay in the month of sale, 30% within the following month, the rest in the next
month. Total sales for May, June, July, and August are estimated at $210,000; $240,000;
$300,000; and $250,000, respectively.

Instructions: Determine budgeted cash receipts for July and August.

Description July August

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Achievement Test 5 AT5- 5

D. John's Sporting Goods is preparing its annual cash budget, showing quarterly data, for 2011.
A $20,000 cash balance is desired at the end of each quarter. Borrowings and repayments
are in $1,000 increments at 12% 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 quarter. The cash balance on December 31, 2010 is $21,000. Total receipts and
disbursements, other than borrowings and principal or interest payments, are estimated at:
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Disbursements: $226,000 $226,000 $244,000 $260,000
Receipts: 216,000 230,000 245,000 253,000

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


interest for 2008 and its quarters.

Description Quarter 1 Quarter 2 Quarter 3 Quarter 4

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AT5- 6 Test Bank for Managerial Accounting, Fifth Edition

PART III — FLEXIBLE BUDGETS (22 points)


Mitchell Company uses a flexible budget for overhead based on direct labor hours (DLH). Master
budget figures, based on 900,000 direct labor hours, and actual overhead for March, when
80,000 labor hours were worked, are as follows:

Master Budget March Actual


Variable:
Indirect labor $ 225,000 $ 20,700
Indirect materials 1,350,000 119,000
Other 900,000 81,800
Fixed:
Supervision 420,000 34,000
Depreciation 750,000 62,500
Other 600,000 52,000

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

FLEXIBLE BUDGET PERFORMANCE REPORT:

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Achievement Test 5 AT5- 7

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


For the year ended December 31, 2011, Reese Company reports the following:

Sales $6,000,000
Variable costs 3,200,000
Controllable fixed costs 2,000,000
Average operating assets 5,000,000

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

1. The year ended December 31, 2011.

_________________ ÷ _________________ = ________%

2. For 2012 assuming the following independent courses of action:

(a) Sales will increase 10% with no change in the contribution margin ratio.

_________________ ÷ _________________ = ________%

(b) Variable costs and controllable fixed costs will both be reduced 10%.

_________________ ÷ _________________ = ________%

(c) Average operating assets will be reduced 20%.

_________________ ÷ _________________ = ________%


AT5- 8 Test Bank for Managerial Accounting, Fifth Edition

Solutions — Achievement Test 5: Chapters 9-10

PART I — MULTIPLE CHOICE (26 points)


1. d 6. d 11. b
2. b 7. a 12. d
3. d 8. d 13. b
4. d 9. b
5. a 10. c

PART II — BUDGETARY PLANNING (32 points)


A. Description Quarter 1 Quarter 2 Quarter 3 Quarter 4
Expected unit sales 90,000 120,000 135,000 105,000
Desired ending finished goods units 12,000 13,500 10,500 9,000
Total required units 102,000 133,500 145,500 114,000
Beginning finished goods units (9,000) (12,000) (13,500) (10,500)
Required production units 93,000 121,500 132,000 103,500

B. Description April May June Quarter


Units to be produced 70,000 100,000 110,000 280,000
Direct labor hours/unit × 2 × 2 × 2 × 2
Total direct labor hours 140,000 200,000 220,000 560,000
Direct labor cost/hour × $14 × $14 × $16
Total direct labor cost $1,960,000 $2,800,000 $3,520,000 $8,280,000

C. Description July August


Collections from May ($210,000 × 70% × 10%) $ 14,700
Collections from June ($240,000 × 70% × 10%) $ 16,800
($240,000 × 70% × 30%) 50,400
Collections from July ($300,000 × 70% × 30%) 63,000
($300,000 × 70% × 60%) 126,000
Collections from August ($250,000 × 70% × 60%) 105,000
Cash sales, July ($300,000 × 30%) 90,000
Cash sales, August ($250,000 × 30%) 75,000
$281,100 $259,800

D. Description Quarter 1 Quarter 2 Quarter 3 Quarter 4


Beginning cash balance $ 21,000 $ 20,000 $ 20,820 $ 20,730
Add: Receipts 216,000 230,000 245,000 253,000
Total available cash $237,000 $250,000 $265,820 $273,730
Less: Disbursements 226,000 226,000 244,000 260,000
Excess (deficiency) 11,000 24,000 21,820 13,730
Financing
Borrowings 9,000 -0- -0- 7,000
Repayments -0- 3,180* 1,090** -0-
Ending cash balance $ 20,000 $ 20,820 $ 20,730 $ 20,730

*$3,000 + (3,000 × .12 × 2/4)


**$1,000 + (1,000 × .12 × 3/4)
Achievement Test 5 AT5- 9

PART III — FLEXIBLE BUDGETS (22 points)


PERFORMANCE REPORT: Difference
Budget at Actual Costs Favorable (F)
80,000 DLH 80,000 DLH Unfavorable (U)
Variable costs
Indirect labor $ 20,000 $ 20,700 $700 U
Indirect materials 120,000 119,000 1,000 F
Other 80,000 81,800 1,800 U
Total variable 220,000 221,500 1,500 U
Fixed costs
Supervision 35,000 34,000 1,000 F
Depreciation 62,500 62,500 —
Other 50,000 52,000 2,000 U
Total fixed 147,500 148,500 1,000 U
Total costs $367,500 $370,000 $2,500 U

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


1. $6,000,000 – 3,200,000 – 2,000,000 = $800,000: $800,000 ÷ $5,000,000 = 16%

2. (a) ($800,000 + $280,000*) ÷ $5,000,000 = 21.6%


*($6,000,000 – $3,200,000) × 0.10 = $280,000

(b) ($800,000 + $520,000*) ÷ $5,000,000 = 26.4%


*($3,200,000 + $2,000,000) × 0.10

(c) $800,000 ÷ ($5,000,000 – $1,000,000) = 20%