Test bank cost and management accounting 4e by barfield ch15

CHAPTER 15 FINANCIAL MANAGEMENT MULTIPLE CHOICE A logical structure of activities designed to analyze and evaluate management of expenditures is a cost a b c d consciousness system understanding system avoidance system control system ANSWER: the original budget actual costs for the prior period a flexible budget a static budget ANSWER: c EASY When the organizational output is difficult to define, management may rely on _ for cost control a b c d qualitative measures program budgeting surrogate measures of output all of the above ANSWER: EASY For cost control purposes, actual costs should be compared to a b c d d d EASY Setting organizational goals and objectives and preparing a budget are aspects of control a b c d during an event before an event after an event before, during, and after an event ANSWER: b EASY 15–1 15–2 Chapter 15 Which of the following does not create a specific price level change? a b c d change in production technology change in the rate of inflation changes due to supply and demand changes in the number of competing suppliers ANSWER: EASY higher this period and lower in future periods higher this period and higher in future periods lower this period and higher in future periods lower this period and lower in future periods ANSWER: a EASY Spending levels in prior years are often the basis of a b c d traditional budgets zero-base budgets variance targets engineered cost analyses ANSWER: b As the economy becomes more and more depressed, a company’s management decides to slash spending on research and development What is the likely effect of this action on net income? Net income will be a b c d Financial Management a EASY Minimizing period-by-period increases in unit variable costs and total fixed costs defines efforts of cost a b c d control avoidance containment reduction ANSWER: c EASY Chapter 15 Financial Management Cost containment practices by a firm would not be effective for cost increases caused by a b c d inflation a reduction in the quantity of an input purchased normal seasonality a reduction in the number of suppliers ANSWER: 10 EASY inflation/deflation changes in quantities purchased technological change changes in supply chain costs ANSWER: b MEDIUM The greatest degree of control for committed fixed costs is exerted a b c d in the post-investment audit during the life of the investment prior to acquisition by equipment operators ANSWER: 12 a All of the following are explanations of cost changes Which of these influences can be substantially affected by cost containment measures? a b c d 11 15–3 c EASY Careful analysis of the capital budget is an important control activity for a b c d variable costs discretionary costs committed costs period costs ANSWER: c EASY 15–4 13 Chapter 15 An effective control system functions before, during, and after an event However, little control is possible during the event for most a b c d variable manufacturing costs variable period costs discretionary fixed costs committed fixed costs ANSWER: 14 b c d EASY management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by customers are likely to respond to the amount of attention devoted to them by a specified manager are governed mainly by past decisions that established the present levels of operating and organizational capacity and that only change slowly in response to small changes in capacity fluctuate in total in response to small changes in the rate of utilization of capacity ANSWER: c EASY A committed fixed cost can a b c d never be eliminated be eliminated in the short term and in the long term be eliminated in the long term but not in the short term be eliminated in the short term but not in the long term ANSWER: 16 d The term “committed costs” refers to costs that a 15 Financial Management c EASY Which of the following is an example of a committed fixed cost? a b c d investment in production facilities advertising preventive maintenance employee training programs ANSWER: a EASY Chapter 15 17 Financial Management A company would be reducing its discretionary costs if it a b c d fired a production supervisor closed its research and development department successfully negotiated a reduction in its factory rent reduced its direct labor costs by hiring temporary workers ANSWER: 18 program budgeting zero-base budgeting capital budgeting flexible budgeting ANSWER: d MEDIUM Most discretionary costs relate to a b c d plant and equipment acquisitions long-term investments basic personnel costs service activities ANSWER: 20 MEDIUM If a discretionary cost can be treated like an engineered cost, cost control may be achieved through the use of a b c d 19 b d EASY If a cost can be reduced to zero in the short run without significantly harming the organization, the cost is a a b c d variable cost committed cost discretionary cost product cost ANSWER: c EASY 15–5 15–6 21 Chapter 15 Discretionary costs are often difficult to control because a b c d it is difficult to measure the cost they cannot be changed in the short run they cannot be changed from period to period it is difficult to measure the benefits of discretionary activities ANSWER: 22 MEDIUM managerial training programs managerial labor costs factory utilities factory rent ANSWER: a EASY The level of discretionary costs a b c d are set by management for one period at a time cannot be changed in the short run are determined when capital investment is undertaken always varies with sales ANSWER: 24 d Which of the following is likely to be a discretionary cost in most organizations? a b c d 23 Financial Management a EASY Which of the following is not a factor that directly affects the budget for a discretionary cost? a b c d the importance of the activity to the achievement of the organization’s goals last period’s budget the expected level of operations managerial negotiations in the budgeting process ANSWER: b EASY Chapter 15 25 Financial Management If an actual discretionary cost is exactly equal to the budgeted level of that cost, which of the following statements is true? a b c d Funds were appropriately spent The discretionary activity was efficient The discretionary activity was effective None of the above ANSWER: 26 MEDIUM organizational policies and managerial preferences the budgeted amount from the prior period the level of long-term investment an organization’s internal control ANSWER: a MEDIUM The term “discretionary costs” refers to a b c d costs that management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by customers costs that are likely to respond to the amount of attention devoted to them by a specified manager costs that are governed mainly by past decisions that established the present levels of operating and organizational capacity and that only change slowly in response to small changes in capacity amortization of costs that were capitalized in previous periods ANSWER: 28 d Discretionary activities in an organization are determined based on a b c d 27 15–7 a EASY Avoidable costs are usually a b c d committed common discretionary joint ANSWER: c EASY 15–8 29 Chapter 15 Which of the following is least likely to be a discretionary cost? a b c d salaries of salespeople advertising maintenance insurance ANSWER: 30 EASY product or period costs discretionary or committed direct or common sunk or avoidable ANSWER: b EASY If economic activity slows down, total costs could easily decline in which of the following categories? a b c d variable costs and committed fixed costs variable costs and discretionary fixed costs variable costs only committed fixed costs only ANSWER: 32 a For cost control purposes, fixed costs are classified as a b c d 31 Financial Management b EASY Usually, with respect to a variable cost, optimal control is exerted when the cost a b c d can be controlled prior to incurrence is compared to its budget amount increases steadily over time is closely monitored ANSWER: d EASY Chapter 15 33 Financial Management Which kind of costs could be eliminated by closing a sales office? a b c d Direct yes yes yes no ANSWER: 34 c d a Committed no yes no yes MEDIUM incurring committed fixed costs is less risky than using discretionary costs managers are usually responsible for committed fixed costs but not for discretionary fixed costs incurring discretionary fixed costs rather than committed fixed costs gives a company more flexibility in controlling costs companies are using more discretionary fixed costs because labor is easier to “remove” than technology ANSWER: c EASY The distinction between avoidable and unavoidable costs is similar to the distinction between a b c d variable costs and fixed costs variable costs and mixed costs step-variable costs and fixed costs discretionary costs and committed costs ANSWER: 36 Discretionary yes no no no A major difference between committed and discretionary fixed costs is that a b 35 15–9 d MEDIUM The maximum allowable expenditure is the a b c d appropriation allowance allocation committed fixed cost ANSWER: a EASY 15–10 37 Chapter 15 If a firm is successful in meeting its output goal for a period, the firm has been a b c d efficient effective profitable exercising cost containment measures ANSWER: 38 EASY qualitative measures of inputs and outputs a match of inputs in one period with outputs in subsequent periods a causal relationship between inputs and outputs a ratio of planned output to actual output ANSWER: c EASY A ratio of outputs to inputs is a(n) a b c d effectiveness measure efficiency measure qualitative measure cost reduction measure ANSWER: 40 b A reasonable measure of efficiency relies on a b c d 39 Financial Management b EASY A small manufacturing company recently stated its sales goal for a period was $100,000 At this level of activity, its budgeted expenses were $80,000 Its actual sales were $100,000, but its actual expenses were $85,000 This company operated a b c d effectively and efficiently neither effectively nor efficiently effectively but not efficiently efficiently but not effectively ANSWER: c EASY Chapter 15 41 Financial Management Master Corp has a sales goal of $500,000 for the coming year Based on this level of activity, Master budgets its total expenses at $450,000 Actual sales are $480,000 and actual costs are $460,000 Master Corp.’s operations were a b c d both efficient and effective neither efficient nor effective efficient but not effective effective but not efficient ANSWER: 42 EASY a flexible budget variance an efficiency measure required in program budgeting an effectiveness measure ANSWER: d EASY A cost that is found to bear an observable and known relationship to a quantifiable activity base is a(n) a b c d discretionary cost product cost period cost engineered cost ANSWER: 44 b The difference between actual sales and budgeted sales is a b c d 43 15–11 d EASY Control of engineered costs is frequently achieved through the use of a b c d zero-base budgeting program budgeting standards cash budgeting ANSWER: c EASY 15–12 45 Chapter 15 A variance represents the difference between a budgeted and an actual cost Thus, the variance measures a b c d only controllable cost differences only uncontrollable cost differences both uncontrollable and controllable cost differences the effectiveness of management ANSWER: 46 c EASY Assume actual output exceeds the level of output in the original budget You would expect costs in which of the following categories to exceed the original budget? a b c d total variable costs committed fixed costs discretionary fixed costs all of the above ANSWER: 47 Financial Management a EASY An organization plans to produce and sell 50,000 units It actually produces and sells 45,000 units You would expect total costs to be below the planned level due to cost a b c d consciousness control reductions behavior ANSWER: d EASY Chapter 15 Financial Management 15–13 The following information is provided for the IHM Co for June 2001, and is to be used for questions 48–51 Actual 1,800 units 8,900 DLHs @ $10.50 per DLH Variable OH $6,400 Fixed OH $17,500 48 What is the price variance? a b c d $4,450 F $4,450 U $1,000 F $1,000 U ANSWER: 49 $4,450 F $4,450 U $1,000 F $1,000 U ANSWER: c MEDIUM What is the spending variance? a b c d $590 U $590 F $190 F $190 U ANSWER: 51 MEDIUM What is the efficiency variance? a b c d 50 b a MEDIUM What is the volume variance? a b c d $590 U $590 F $190 F $190 U ANSWER: c MEDIUM Standard DLHs per unit @ $10.00 per DLH VOH rate per DLH $ 75 FOH rate per DLH $1.90 Budgeted FOH $16,910 15–14 Chapter 15 Financial Management THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN THE APPENDIX OF THE CHAPTER 52 Program budgeting typically begins with a(n) a b c d zero funding level for all organizational activities statement of the quantity of input activities required analysis of potential organizational contributors definition of the organization’s objectives in terms of output results ANSWER: 53 program zero-base capital cash ANSWER: a EASY Surrogate measures of output are required in a b c d zero-base budgeting program budgeting capital budgeting cash budgeting ANSWER: 55 EASY A charitable organization that has well-defined objectives but tremendous flexibility in meeting those objectives might increase its efficiency substantially by using budgeting a b c d 54 d b EASY Zero-base budgeting requires managers to a b c d justify expenditures that are increases over the prior period’s budgeted amount justify all expenditures, not just increases over last year’s amount maintain a full-year budget intact at all times maintain a budget with zero increases over the prior period ANSWER: b EASY Chapter 15 56 Financial Management Zero-base budgeting differs from other budgeting techniques in several ways Zero-base budgeting a b c d is less expensive than other methods is more widely used than any other method requires more time than other methods can only be used in governmental settings ANSWER: 57 15–15 c EASY Budgeting is frequently difficult in government because a b c d governmental managers are usually inexperienced governmental managers are not motivated to be cost conscious it is difficult to identify the output of governmental units it is difficult to identify the inputs of governmental units ANSWER: c EASY SHORT ANSWER/PROBLEMS What factors make discretionary costs difficult to control? ANSWER: Discretionary costs are difficult to control because it is difficult to identify the exact benefits of discretionary activities and the relationship of these activities to the organization’s output and goals Thus, it is difficult to decide at what level a discretionary activity should be funded or if it should be funded at all based on the lack of a definite causal relationship between the discretionary activity and the firm’s output and goals MEDIUM (Appendix) What kinds of organizations are more likely to use program budgeting? ANSWER: Program budgeting is more likely to be found in organizations that have difficulty in defining their outputs Such organizations are frequently not-for-profit or governmental organizations MEDIUM 15–16 Chapter 15 Financial Management What are the differences between committed fixed costs and discretionary fixed costs? ANSWER: Committed fixed costs are those costs that flow from the basic existence of the organization These are the direct costs of the organization’s long-term investments (such as plant and equipment) and the costs of essential personnel These costs can only be changed in the long run without significantly affecting the organization Discretionary fixed costs are all fixed costs that not fit into the committed category This includes the costs of auxiliary service activities including activities that could be discontinued in the short run without adversely affecting the long-run viability of the organization MEDIUM When can a discretionary fixed cost be subjected to control methods that are used for engineered costs? ANSWER: When a discretionary cost is repetitive and can be related to some fundamental activity measure (such as machine hours or units of output), it may be treated like an engineered cost With a repetitive cost that can be related to an activity base, performance standards can be developed and flexible budget variances can be computed and used as cost control tools MEDIUM What factors influence the total level of discretionary costs in an organization? ANSWER: Organizations tend to fund discretionary activities at different levels depending on the state of the economy and the original profit level When management anticipates unfavorable economic conditions or downturns in profitability, discretionary costs may be reduced Likewise, they may be increased as economic conditions improve Total discretionary expenditures will also vary as certain activities lose their funding and new discretionary activities are initiated MEDIUM How does strategic staffing fit in with departmental staffing? ANSWER: Strategic staffing is based on a department’s needs related to its longrange objectives and those of the overall company The department looks at its needs to see how a combination of temporary and permanent personnel fills the bill By using temporary personnel, flexible staffing is provided that helps insulate the jobs of permanent personnel Also, when temporary personnel are used by a department, the overall cost of organizational fringe benefits is reduced, thereby saving funds for other needs MEDIUM Chapter 15 Financial Management 15–17 Discuss the various elements of the cost control process ANSWER: Cost understanding is one element of a cost control system An organization needs to understand that costs may change from one period to the next or understand why costs differ from budgeted amounts Total variable costs will increase/decrease with different levels of activity Costs can also change due to inflation/deflation creating general price-level changes Costs also change because of supply/supplier cost adjustments Lastly, costs may change because of quantity purchased by the organization Cost containment is another element of the cost control process Cost containment is defined as the practice of minimizing, to the extent possible, period-to-period increases in per-unit variable and total fixed costs Cost containment is possible for costs that rise due to competition, seasonal variations, and quantities purchased A third element of the cost control process is cost avoidance Cost avoidance is defined as the practice of finding acceptable alternatives to high-cost products and/or not spending money for unnecessary goods/services A final element of the cost control process is cost reduction Cost reduction means lowering current costs especially for goods/services that may not be needed currently Exhibit 15–5 provides a visual to the implementation of a cost control system MEDIUM PJW has made the following information available for January 2001: Actual 1,500 units produced 2,400 DLH used @ $10.25 per DLH Standards DLH per unit @ $10 Assume that PJW hires part-time employees for production of these units Compute the price and efficiency variances ANSWER: 2,400 × $10.25 2,400 × $10.00 Price variance $24,600 24,000 $ 600 U 2,400 × $10.00 (1,500 × 2) × $10.00 Efficiency variance $24,000 30,000 $ 6,000 F MEDIUM SAF has provided the following information for July 2001: Actual Standards 15–18 Chapter 15 800 units produced Actual DL cost $6,750 Financial Management DLH per unit @ $5.00 $1 fixed overhead per DLH Assume that SAF hires full-time employees who are paid a total of $6,500 per month Compute the spending and volume variances ANSWER: Actual labor cost Budgeted labor cost Spending variance $6,750 6,500 $ 250 U Budgeted labor cost (800 × 2) × $5 Volume variance $6,500 8,000 $1,500 F MEDIUM 10 GSWS provided the following information for 2001 relative to the times and costs to prepare a simple last will and testament: Standards DLH @ $50 per DLH Actual 500 simple wills were prepared during the year 1,100 DLHs utilized during the year @ $52 per DLH Compute the price and efficiency variances ANSWER: MEDIUM 1,100 × $52 1,100 × $50 Price variance $57,200 55,000 $ 2,200 U 1,100 × $50 (500 × 2) × $50 Efficiency variance $55,000 50,000 $ 5,000 U Chapter 15 Financial Management 15–19 Use the following information for questions 11–13 Big Corp manufactures and sells baseball bats For a recent period, its production and sales objectives were each set at 20,000 units Also, for this period the firm had estimated costs as follows: Variable production costs Variable selling costs Committed fixed costs Discretionary fixed costs 11 $3 per unit $2 per unit $30,000 per period $40,000 per period For this question only, assume that Big Corp actually produced and sold 18,000 bats Big Corp.’s operations for the period would (on an overall basis) be regarded as efficient if total costs were below what amount? ANSWER: First, remember how fixed and variable costs change when volume changes Fixed costs remain constant in total and variable costs remain constant on a per-unit basis To be regarded as efficient, the company’s costs would need to be at or below the flexible budget for 18,000 units The flexible budget for all costs would be: [18,000 × ($3 + $2)] + $30,000 + $40,000 = $90,000 + $70,000 = $160,000 MEDIUM 12 For this question only, assume Big Corp actually produced and sold 19,000 bats At this level of operation, Big Corp.’s total costs were $170,000 Evaluate Big Corp.’s success in terms of effectiveness and efficiency ANSWER: Big Corp was not entirely effective in reaching its goal because its objective was to produce and sell 20,000 bats It only produced and sold 19,000 Its operations would still be regarded as efficient if it contained costs below the flexible budget for 19,000 units, which would be: [19,000 × ($3 + $2)] + $30,000 + $40,000 = $95,000 + $70,000 = $165,000 Since its actual costs were $170,000, the company was neither effective nor efficient in achieving its operating objectives MEDIUM 15–20 13 Chapter 15 Financial Management Note that the budget for discretionary fixed costs is $40,000 If actual discretionary fixed costs were $50,000, could cost control have still been effective? Explain ANSWER: Yes, cost control could have been effective Company managers may have deliberately and consciously overspent on certain items because of opportunities or challenges that emerged during the period For example, advertising expenses may have been increased because new competitors entered the baseball bat market, or research and development expenditures may have been boosted because of the discovery of a new metal alloy that could revolutionize the baseball bat market Another explanation would be that cost control was effective, but costs increased dramatically for uncontrollable reasons (severe inflation) MEDIUM ... distinction between a b c d variable costs and fixed costs variable costs and mixed costs step-variable costs and fixed costs discretionary costs and committed costs ANSWER: 36 Discretionary yes... down, total costs could easily decline in which of the following categories? a b c d variable costs and committed fixed costs variable costs and discretionary fixed costs variable costs only committed... period -by- period increases in unit variable costs and total fixed costs defines efforts of cost a b c d control avoidance containment reduction ANSWER: c EASY Chapter 15 Financial Management Cost