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 ________________________.

MATCHING

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.

Required:

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?”

Required:

Write a short
memo to respond to Mr. Jones.