Acct Test 3: Ch 7-11
unfavorable variance
Actual revenue is less than budgeted revenue.
Favorable variance
Actual revenue is more than budgeted revenue.
Which of the following statements are true?
Managers should not use standards to assign blame. Standard cost reports may be too outdated to be useful.
A price variance is the difference between the:
actual price and the standard price multiplied by the actual amount of the input
When preparing a flexible budget, the level of activity:
affects variable costs only
Master budget schedules:
are based on estimates and assumptions. answer several key questions for a company
Typical capital budgeting decisions include:
equipment selection decisions cost reduction decisions lease or buy decisions
When actual revenue ______ what the revenue should have been, the variance is labeled favorable.
exceeds
True or false: The standard hours per unit includes both direct and indirect labor hours.
false
Spending the money on opening a new location, purchasing new equipment, implementing new programs, expanding to new product lines, and conducting research are all examples of:
investments
It is important to know the present value of an investment because a dollar:
is worth more today than it will be worth a year from today
Nonprofit organizations:
may have revenue sources that are fixed usually have significant funding sources other than sales
The amount of goods to be purchased from suppliers during the period is shown on the _______ budget.
merchandise purchases
Managers of cost centers are expected to:
minimize costs, while providing an acceptable level of service
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be ____ (more/less) likely to pursue projects that will benefit the entire company.
more
Unfavorable labor rate variances may occur as a result of:
overtime premiums being charged to the direct labor account. skilled workers being assigned to jobs requiring little skill.
An unfavorable labor efficiency variance can result from:
poor-quality materials faulty equipment poorly motivated workers
If the original investment in a capital project has been recovered, the net present value will be:
positive or zero
Most companies compute the material price variance when materials are ______ and the material quantity variance when materials are ______.
purchased, used
A cost center's performance report does not include:
revenue net operating income
The standard rate per unit that a company expects to pay for variable overhead equals the:
variable portion of the predetermined overhead rate
Companies use the ________ _________ cycle to evaluate and improve performance.
variance analysis
Water World is planning to build a new attraction at its water park. A new wave pool has a project profitability index of 0.09, and a new water slide has a profitability index of 0.14. The best choice for Water World is the:
water slide
Revenue on the planning budget is expected to be $380,000 for 1,900 client visits. The revenue on the flexible budget is $410,000, showing that there were actually ______ client visits.
2,050 Reason: $380,000/1,900 = $200 per client visit. $410,000/200 = 2,050 client visits.
Which of the following are used to calculate the standard quantity per unit of direct materials?
Direct materials requirements per unit of finished product Allowance for waste and spoilage
Choose the four groups of performance measures typically used in the balanced scorecard approach.
Financial, customer, internal business processes, and learning and growth
All costs of production other than direct materials and direct labor are shown on the
MOH budget
Return on investment =
Net operating income/Average operating assets
Which of the following statements are true?
Overtime premiums can cause an unfavorable labor rate variance. How production supervisors use direct labor workers can lead to labor rate variances.
True or false: A spending variance is the difference between how much a cost should have been and the actual cost given the actual level of activity.
True
A flexible budget performance report combines the:
activity variances with the revenue and spending variances
In a manufacturing company, the ______ budget details the raw materials that must be purchased to fulfill the production budget and provide for adequate inventories
direct materials
In a manufacturing company, the ____ budget is prepared right after the sales budget.
production
Net operating income - (Average operating assets x Minimum required rate of return) =
residual income
The manufacturing cycle efficiency is computed by relating the value-added time to the
throughput time
The difference between the standard and the actual variable overhead cost is reflected in the
variable overhead rate variance
A manufacturing cycle efficiency of 40% means that:
the typical order is being worked on 40% of the time. value-added activities are being performed 40% of the time.
Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because:
there are fewer managers that must be consulted before a decision is made
All cash flows are included, and a net present value is computed for each alternative when using the
total cost approach
Current assets minus current liabilities is called
working capital
True or false: A favorable labor rate variance is always favorable for a company.
False:A favorable labor rate variance may not be favorable when lower-paid workers are less efficient than those with the proper pay rate and skills. The result could be an overall unfavorable labor variance.
Which of the following performance measures are part of the balanced scorecard?
Financial Customer perspective Learning and growth
Which of the following statements is correct when evaluating divisions of different sizes?
Management should focus on the percentage change in residual income from year to year rather than on absolute amounts.
Which of the following statements are true?
Compound interest means that interest is paid on interest. The more frequently interest is compounded, the faster the balance grows.
True or false: An integrated set of performance measures is known as a strategy.
False
When using a standard cost system:
an undue emphasis on labor efficiency variances can create pressure to build excess inventory. the information in the variance reports may be too old to be useful.
The materials price variance is the difference between the actual price of materials:
and the standard price for materials with the difference multiplied by the actual quantity of materials
The annual master budget file includes the ________ from last year because it is needed for the schedule of expected cash collections.
balance sheet
Standards are:
compared to the actual quantities and costs of inputs set for each major production input or task benchmarks for measuring performance
The ending finished goods inventory budget computes the:
cost of unsold units
An organization in which decision-making authority is spread throughout the organization is:
decentralized
In a _______ organization lower-level managers are empowered to make decisions which can ________ motivation and job satisfaction.
decentralized, increase
The time between when an order is placed and when it is delivered is known as the
delivery cycle time
Net present value is the:
difference between the present value of a project's cash inflows and the present value of the project's cash outflows
A revenue variance is the:
difference between what revenue should have been at the actual level of activity and the actual revenue
The number of working hours required to satisfy the production budget is shown on the ____________ budget. (Enter only one word per blank.)
direct labor
In a manufacturing company, the ____________ budget details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.
direct materials
Payments for direct materials, direct labor, and manufacturing overhead costs are all listed in the _______ section of the cash budget.
disbursements
Finding the present value of a future cash flow is called
discounting
The results of what people in the organization do are reflected in ____ performance measures and what drives organizational performance are reflected in _____ performance measures.
financial and nonfinancial
Revenues and costs are adjusted as the level of activity changes on a _________ budget
flexible
Options to generate a favorable revenue and spending variance include:
increase operating efficiency reduce the prices of inputs protecting the selling price
Unfavorable activity variances may not indicate bad performance because:
increased activity should result in higher variable costs.
Components of throughput time include:
inspection time process time queue time
Net operating income is income before ____ and _____
interest, taxes
Residual income is a measure used to evaluate managers of ________ centers.
investment
ROI is a method used to evaluate:
investment centers, but not cost or profit centers
In an equipment capital budgeting decision, recovering the original investment means that the:
investment has generated enough cash inflows to completely cover the cost of the equipment
In a manufacturing company, the _________ budget shows the number of units that must be manufactured to satisfy sales needs and provide for the desired ending inventory.
production
The material variance terms price and quantity are replaced with the terms ____ and _______ when computing direct labor variances.
rate and hours
Preference decisions are also called _______ decisions.
rationing and ranking
The net operating income that an investment center earns above the minimum required return on its average operating assets is:
residual income
Standard costs fit naturally into an integrated system of ______ acct
responsibility
The flexible budget performance report consists of:
revenue and spending variances. the planning budget, flexible budget and actual results. activity variances.
Material requirements plus an allowance for normal inefficiencies are added together to determine the ____________ __________ of a direct material per unit of output. (Enter only one word per blank.)
standard quantity
Planning budgets are sometimes called _______ budgets.
static
Comparing the static planning budget to actual results only makes sense when:
the actual activity level is the same as the budgeted activity level all costs are fixed
Commission expense is budgeted to be $16,000 at a planned sales level of 4,000 units. If only 2,900 units are sold, how much commission expense will appear on the flexible budget, and is the activity variance favorable or unfavorable?
$11,600 and favorable Reason: Flexible budget expense: $16,000/4,000 = $4 per unit x 2,900 units = $11,600. Since the flexible budget expense < planning budget expense, the variance is favorable.
Gavin, Inc. recorded the following information for one of its products. All amounts are in days: Wait time 5.0; Inspection time 0.7; Process time 2.5; Move time 0.4; Queue time 3.0. Gavin's delivery cycle time is:
11.6 days Reason: Delivery cycle time = wait time + process time + inspection time + move time + queue time.
Garnett, Inc. has a required rate of return on new projects of 12%. The Western division of Garnett is currently earning a combined return on investment (ROI) of 14.5% on the projects in its division. The manager of the Western division is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct?
Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment. The manager may decide to reject the project because it will lower the current ROI earned by his division.
Which of the following ratios are part of the ROI formula?
Sales/Average operating assets Net operating income/Sales
Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true?
The department manager may not want to accept the project because it will lower the overall ROI for the department. The project should be accepted by the company because it increases overall residual income.
Which of the following is a deficiency of using a static planning budget in performance reports?
The report compares actual revenues and costs at one level of activity with budgeted revenues and costs at a different level of activity
Which of the following statements is true?
The variable part of manufacturing overhead is analyzed using the same basic formulas used for materials and labor.
Valid criticisms of evaluating performance based on return on investment (ROI) include managers may:
be put in charge of a business segment that includes committed costs over which a manager has no control take actions that increase ROI in the short-run at the expense of long-term performance reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI
A budgeted balance sheet is developed using data from the ______ of the budget period and data contained in the various schedules.
beginning
The variance analysis cycle:
begins with the preparation of performance reports
A detailed plan for the future that is usually expressed in formal quantitative terms is a(n)
budget
Nonfinancial (operating) performance measures:
help identify what drives organizational performance
A number of separate but interdependent budgets that formally lay out a company's sales, production, and financial goals is contained in the _____ budget.
master
A cost center's performance report does not include:
net operating income
EBIT is another term for:
net operating income
In decentralized organizations, decision-making authority is:
spread throughout the organization
A benchmark used in measuring performance is called a(n)
standard
The amount of direct-labor hours that should be used to produce one unit of finished goods is the _______ hours per unit.
standard
A favorable activity variance may not indicate good performance because a favorable activity variance:
for a variable cost will occur simply because the actual level of activity is less than the budgeted level of activity.
The rule used when comparing competing investments is the ______ the project profitability index, the more desirable the project.
higher
When using net present value to compare projects, the total cost approach:
includes all cash inflows and outflows under each alternative is the most flexible method available to compare projects
A company's planned net profit that serves as a benchmark against which subsequent company performance can be measured is shown on the budgeted
income statement
ROI can be calculated as:
margin multiplied by turnover. net operating income divided by average operating assets.
A MCE of less than 1 indicates:
non-value added time is present
Working capital:
often increases when a company takes on a new project
Compensation should:
only be tied to balanced scorecard measures after the organization has been successfully managed with it for some time
The performance of two different investment centers should be evaluated by comparing the _______ change in residual income from year to year for the two investment centers.
percentage
A budget that is prepared at the beginning of the period for a specific level of activity is a ______ budget.
planning
The two broad categories into which capital budgeting decisions fall are _______ and _____
preference and screening
The net present value of a project is:
the difference between the present value of cash inflows and present value of cash outflows for a project. used in determining whether or not a project is an acceptable capital investment.
An investment requires committing funds today with:
the expectation of earning a return on those funds in the future
When using the internal rate of return method to rank competing investment projects:
the higher the internal rate of return, the more desirable the project
The period from which a product begins production as raw materials and ends as a finished product is known as ____ time or manufacturing cycle time.
throughput
When the actual cost incurred exceeds the standard cost allowed for the actual level of output, the spending variance is:
unfavorable
The standard cost for ______ manufacturing overhead is computed the same way as the standard cost for direct labor.
variable
Fancy Nails' budgeted revenue is $20 per manicure. The planning budget for June was based on 2,400 manicures. During June, the actual revenue was $49,750 for 2,500 manicures. The revenue variance for June is:
$250 U Reason: Flexible budget amount for revenue = $20 per manicure x 2,500 manicures = $50,000. Revenue variance = $50,000 - $49,750 = $250 U.
A planning budget called for 500 units to be produced and total direct labor cost of $7,500. Actual production was 600 units and actual direct labor cost was $9,300. The spending variance is:
$300 U Reason: $7,500/500 = $15 standard rate per unit x 600 = $9,000 flexible budget - $9,300 actual = $300 U
Use the following information to calculate the labor rate variance for Adkinson Company. Actual hours used 5,500 Standard hours allowed 5,800 Actual labor rate $14.75 per hour Standard labor rate $14.00 per hour
$4,125 Unfavorable Reason: The labor rate variance is: AH(AR-SR): 5,500 x ($14.75 - 14.00) = $4,125 Unfavorable
A company's cost of supplies for when 5,000 units are sold is $7,500 of fixed costs plus $1.25 variable cost per unit. What is the increase in the total cost of supplies if 350 more units are sold than expected?
$437.50 Reason:350 x $1.25 = $437.50. Fixed costs remain the same.
The standard price of materials is $4.10 per pound and the standard quantity allowed for actual output is 5,800 pounds. If the actual quantity purchased and used was 6,000 pounds, and the actual price per pound was $4.00, the direct materials price variance is:
$600 F 6,000 x ($4.00 - $4.10) = $600 F.
Which of the following capital budgeting decision tools focuses on net operating income rather than cash flows?
Simple rate of return
Which of the following is needed to prepare a sales budget?
The budgeted number of units to be sold
An integrated set of performance measures that are derived from the company's strategy is:
a balanced scorecard
A detailed plan for the future that is usually expressed in formal quantitative terms is:
a budget
The materials price variance is calculated using the ______ quantity of the input purchased.
actual
The materials price variance is calculated using the:
actual quantity of the input purchased standard price of the input actual price of the input
A postaudit is a valuable process because:
actual values can be used to determine if the project is performing as expected
The materials price variance is generally calculated at the time materials are purchased because:
it simplifies bookkeeping it allows materials to be carried in the inventory accounts at standard cost management can generate more timely variance reports
Poor supervision is one possible cause of an unfavorable _________ variance.
labor efficiency
When a capital budgeting decision does not involve any revenues, the most desirable alternative is the one with the:
least total cost from a present value perspective
Using budget assumptions when preparing the master budget:
makes it easier to answer "what-if" questions
Standard costs are a key element in the _____ by ____ approach utilized by some companies
management and exception
All costs of production other than direct materials and direct labor are shown on the _________ budget.
manufacturing overhead
Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?
ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.
A static planning budget
compares actual costs at one level of activity with budgeted costs at a different level of activity compares actual revenues at one level of activity with budgeted revenues at a different level of activity
The manager of a(n) ____ center does not have control over revenue or the use of investment funds.
cost
The difference between what the total sales should have been, given the actual level of activity for the period, and the actual total sales is a(n)
revenue variance
To calculate total sales on the sales budget, multiply budgeted sales in units by:
sales price per unit
Budgeted expenses for areas other than manufacturing are shown on the ______ budget.
selling and administrative
In large organizations, many smaller individual budgets submitted by department heads and other responsible people comprise the ______ budget.
selling and administrative