Chapter 17
RESPONSIBILITY ACCOUNTING AND REPORTING
MULTIPLE CHOICE
Question Nos. 8, 10, 11-13, and 16-24 are AICPA adapted.
Question No. 21 is ICMA adapted.
Question No. 9 is CIA adapted.
E
1.
Internal reports prepared under the responsibility accounting approach should highlight:
A.
cost properly allocable to the cost center under generally accepted accounting principles
B.
fixed cost of production
C.
variable cost of
production
D.
conversion cost
E.
controllable cost
C
2.
A company has three producing departments and one service department. Due to a
scheduling error in the service department, an unfavorable variance was created. A sound
responsibility accounting system would dictate that the variance be:
A.
ignored
B.
allocated to producing departments, but not on the same basis as ordinary charges for
use of the service
C.
charged to the
service department causing the variance and not allocated to other
departments
D.
allocated to both producing and service departments
E.
allocated to producing departments on the basis of usage
A
3.
The control of service department costs at the source level is accomplished by means of:
A.
predetermining service requirements in user departments
B.
allocating service usage on the basis of priority of need
C.
limiting the number of hours of
service used
D.
organizing maintenance labor
E.
limiting the number of hours of service provided
B
4.
The rate used to distribute service hours to recipient departments is denoted by all of the
following terms except:
A.
sold-hour rate
B.
burden rate
C.
charging rate
D.
transfer rate
E.
billing rate
237
238
Chapter 17
E
5.
The cost item least likely to appear in a performance report based on
responsibility accounting
techniques for the supervisor of an assembly line in a large manufacturing situation is:
A.
materials
B.
repairs and maintenance
C.
direct labor
D.
other indirect labor
E.
supervisor's salary
D
6.
Responsibility reports should possess all of the following characteristics except:
A.
being issued with regularity
B.
fitting the organization chart
C.
being consistent in form and content each time they
are issued
D.
being stated only in dollars for operating management
E.
comparing budgeted with actual figures
D
7.
Controllable costs are:
A.
costs that fluctuate in total in response to small changes in the rate of capacity
utilization
B.
costs that will be unaffected by current managerial decisions
C.
costs that management decides to incur in the current period to enable the company to
achieve objectives other than filling customers'
orders
D.
costs that are likely to respond to the amount of attention devoted to them by a
specified manager
E.
costs that are governed mainly by past decisions that established present levels of
operating and organizational capacity and that change slowly only in response to
changes in capacity
D
8.
An accounting system in which the operations of the business are broken down into cost
centers and the control function of a supervisor or manager is
emphasized is:
A.
control accounting
B.
budgetary accounting
C.
absorption accounting
D.
responsibility accounting
E.
operations-research accounting
C
9.
In a responsibility accounting system, costs are classified into categories on the basis of:
A.
prime and overhead costs
B.
administrative and nonadministrative costs
C.
controllable and noncontrollable costs
D.
direct and indirect costs
E.
fixed and variable
costs
C
10.
When used for performance evaluation, periodic internal reports based on a responsibility
accounting system should not:
A.
distinguish between controllable and noncontrollable costs
B.
be related to the organization chart
C.
include allocated fixed overhead
D.
include variances between actual and budgeted controllable costs
E.
all of the above
Responsibility Accounting and Reporting
239
D
11.
The most
desirable measure of departmental performance for evaluating the departmental
manager is departmental:
A.
contribution to indirect expenses
B.
revenue less departmental variable expenses
C.
revenue less departmental fixed expenses
D.
revenue less controllable departmental expenses
E.
net income
D
12.
Internal reports prepared under the responsibility accounting approach should be limited to
which of the following costs?
A.
only costs
properly allocable to the cost center under generally accepted accounting
principles
B.
only variable costs of production
C.
only conversion costs
D.
only controllable costs
E.
all of the above
B
13.
Of most relevance in deciding how or which costs should be assigned to the responsibility
center is the degree of:
A.
variability
B.
controllability
C.
avoidability
D.
causality
E.
linearity
C
14.
A
company's only service department provides the following data:
Service Center
Carpenter Shop
Monthly
Budget
$40,000
Service Hours
Available
1,600
Actual
Monthly Expense
$47,800
It serves three producing departments that show the following budgeted and actual cost and
service-hours data:
Department
No.
1.........................................................................
2.........................................................................
3.........................................................................
The sold-hour rate for the carpenter shop is:
A.
$29.88
B.
$20.00
C.
$25.00
D.
$23.90
E.
none of the above
SUPPORTING CALCULATION:
$40,000 ÷ 1,600 = $25
Estimated
Services Required
Actual
Services
Used
Carpenter Shop
350 hrs.
800 hrs.
450 hrs.
Carpenter Shop
600 hrs.
750 hrs.
650 hrs.
240
A
Chapter 17
15.
A company's only service department provides the following data:
Service Center
Carpenter Shop
Monthly
Budget
$40,000
Service Hours
Available
1,600
Actual
Monthly Expense
$47,800
It serves three producing departments that show the following budgeted and actual cost and
service-hours data:
Department No.
1.........................................................................
2.........................................................................
3.........................................................................
Estimated
Services Required
Actual
Services Used
Carpenter Shop
350 hrs.
800 hrs.
450 hrs.
Carpenter Shop
600 hrs.
750 hrs.
650 hrs.
The spending variance for the carpenter shop, assuming that
80% of the budgeted expense is
fixed, is:
A.
$5,800 unfav.
B.
$7,800 unfav.
C.
$5,800 fav.
D.
$7,800 fav.
E.
none of the above
SUPPORTING CALCULATION:
Actual factory overhead.........................................................................
Budget allowance:
Variable [$5 x 2,000]........................................................................
Fixed [80% x
$40,000]....................................................................
Spending variance...................................................................................
B
16.
$ 47,800
10,000
32,000
$
42,000
5,800
The primary difference between a fixed [static] budget and a variable [flexible] budget is that
a fixed budget:
A.
cannot be changed after the period begins; while a variable budget can be changed after
the period
begins
B.
is a plan for a single level of sales [or other measure of activity]; while a variable budget
consists of several plans, one for each of several levels of sales [or other measure of
activity]
C.
includes only fixed costs; while variable budget includes only variable costs
D.
is concerned only with future acquisitions of fixed assets; while a variable budget is
concerned with expenses that vary with sales
E.
none of the above
Responsibility Accounting and Reporting
241
C
17.
A flexible budget is:
A.
appropriate for control of direct materials and direct labor but not for control of
factory overhead
B.
not appropriate when costs and expenses are affected by fluctuations in volume limits
C.
appropriate for any relevant level of activity
D.
appropriate for control of factory overhead but not for control of direct materials and
direct labor
E.
none of the above
B
18.
A flexible budget is appropriate for a:
A.
B.
C.
D.
Direct Labor
Budget
yes
yes
no
no
Marketing
Budget
no
yes
no
yes
C
19.
If a company wishes to establish a factory overhead budget system in which estimated costs
can be derived directly from estimates of activity levels, it should prepare a:
A.
discretionary budget
B.
fixed budget
C.
flexible budget
D.
capital budget
E.
cash
budget
C
20.
Flexible budgeting is a reporting system wherein the:
A.
statements included in the budget report vary from period to period
B.
budget standards may be adjusted at will
C.
planned level of activity is adjusted to the actual level of activity before the variance
report is prepared
D.
reporting dates vary according to the levels of activity reported upon
E.
none of the above
B
21.
Flintstone Company uses flexible
budgeting for cost control. Flintstone produced 10,800 units
of a product during March, incurring indirect material costs of $13,000. Its static budget for
the year reflected variable indirect material costs of $180,000 at a production volume of
144,000 units. A flexible budget for March production would reflect indirect material costs of:
A.
$13,000
B.
$13,500
C.
$13,975
D.
$11,700
E.
none of the above
SUPPORTING CALCULATION:
[$180,000 ÷ 144,000] x
10,800 = $13,500
242
Chapter 17
B
22.
A company uses a two-way analysis for overhead variances: spending and idle capacity. The
idle capacity variance is based on the:
A.
variable overhead application rate
B.
fixed overhead application rate
C.
semivariable overhead application rate
D.
total overhead application rate
E.
volume of total expenses at various activity levels
B
23.
In analyzing factory overhead
variances, an idle capacity variance is the difference between
the:
A.
master budget application rate and the flexible budget application rate times actual
hours worked
B.
budget allowance for actual units produced for the period and the amount of applied
factory overhead
C.
actual amount spent for factory overhead items during the period and the amount
applied during the period
D.
actual factory overhead incurred and the budget allowance estimated for the
capacity
used
E.
amount shown in the flexible budget and the amount shown in the master budget
B
24.
The spending variance for variable overhead based on direct labor hours is the difference
between the actual variable overhead cost and the variable overhead cost that should have
been incurred for the actual hours worked. This variance results from:
A.
differences caused by variations in production volume
B.
price and quantity differences for overhead
costs
C.
differences caused by variations in sales volume
D.
price differences for overhead costs
E.
quantity differences for overhead costs
C
25.
In the traditional view of responsibility accounting where individuals are evaluated rather
than operating systems, all of the following dysfunctional results may occur, except:
A.
managers tend to take actions that are self-serving rather than beneficial to the
company as a whole
B.
managers
concentrate on meeting the budget rather than the best level of performance
that can be achieved
C.
managers tend to focus their attention on long-run targets and ignore the short-term
needs of the company
D.
many competent managers leave the company
E.
all of the above may occur
D
26.
All of the following are reasons why responsibility reports are of limited use to managers in
helping them to control costs, except:
A.
most responsibility
accounting systems improperly base allowable budgets on volumebased measures of activity
B.
control data available in a responsibility reporting system are too aggregated to be
useful
C.
control data available to managers are not easily interpreted by all operating managers
D.
control data available to managers is too timely to be precise
E.
all of the above are reasons
Responsibility Accounting and Reporting
243
PROBLEMS
PROBLEM
1.
Costs
Allocated to Producing Departments; Variance Analysis. Starsky Inc. has two departments
providing service to its producing departments—the Building Services Department and the General Plant
Department. Relevant data for June are:
Budgeted fixed overhead................................
Variable overhead............................................
Normal activity level.......................................
June
activity......................................................
Actual department costs.................................
Building Services
Department
$50,000
$25 per service hour
10,000 hours per month
12,000 hours
$358,000
General Plant
Department
$100,000
$15 per direct labor hour
50,000 direct labor hours
45,000 direct labor hours
$755,000
Required:
[1]Compute the predetermined billing rates used for allocating each service
department's costs at normal
activity.
[2]Compute the costs allocated to the producing departments from each service department, using the
predetermined rates.
[3]Compute the spending and idle capacity variances for each service department.
SOLUTION
[1]Building Services Department: [$50,000 + [$25 x 10,000 hrs.]]/10,000 hrs. = $300,000/10,000 hrs. = $30
per service hour
General Plant Department: [$100,000 + [$15 x 50,000 hrs.]]/50,000 hrs. = $850,000/50,000 hrs. =
$17
per direct labor hour
[2]Building Services Department: 12,000 hrs. x $30 = $360,000
General Plant Department: 45,000 hrs. x $17 = $765,000
[3]
Building Services
General Plant
Department
Department
Actual overhead........................................
$ 358,000
$ 755,000
Less overhead allowed for
capacity achieved:
Fixed.................................................... $ 50,000
$100,000
Variable
[$25 x 12,000 hrs.]......................
300,000
350,000
[$15 x 45,000 hrs.]......................
675,000
775,000
Spending variance....................................
$
8,000 unfav.
$ [20,000] fav.
Overhead allowed for capacity
achieved...............................................
$ 350,000
$ 775,000
Less overhead applied
[from [2]].............................................
360,000
765,000
Idle capacity variance..............................
$ [10,000] fav.
$
10,000
unfav.
244
Chapter 17
PROBLEM
2.
Variable Cost Rate; Over- or Underdistributed Variable Cost. Greco Gear Co. has two producing
departments—Assembly and Finishing—and one service department—Utilities. Allocation of fixed service
department costs is based on readiness-to-serve capacity provided for each department. Variable service
department costs are charged on the basis of actual consumption. These costs are distributed to
departments at a predetermined rate based on variable costs at capacity. Present relevant data are:
Power consumption [based on kilowatt-hours this month].................................
Maximum kilowatt-hours required..........................................................................
Producing Departments
Assembly
Finishing
35,000
56,000
40,000
60,000
Budgeted fixed cost [this month]...............................................................................
Budgeted
variable cost at capacity............................................................................
Actual variable cost [this month]..............................................................................
Utilities Department
$25,000
10,000
8,550
Required:
[1]
[2]
[3]
Compute the rate per kwh used to distribute variable cost.
Compute the distribution of fixed and variable Utilities Department costs for the month.
Compute the over- or
underdistributed variable cost and explain what kind of variance it is and
who is responsible for the variance.
SOLUTION
[1]
[2]
Budgeted variable cost at capacity/Capacity provided = $10,000/[40,000 kwh + 60,000 kwh] = $.10
kwh for distribution of variable costs
Producing Departments
Assembly
Finishing
Fixed cost distribution:
$25,000 x 40,000 kwh/100,000 kwh...................................................................
$25,000 x 60,000
kwh/100,000 kwh...................................................................
Variable cost distribution:
$.10 per kwh x 35,000 kwh..................................................................................
$.10 per kwh x 56,000 kwh..................................................................................
Total cost distributed...................................................................................................
$10,000
$15,000
3,500
$13,500
5,600
$20,600
Responsibility Accounting and Reporting
245
[3]
Over- or underdistributed variable cost:
Total variable cost..................................................................................................
Cost distributed:
Assembly Department...................................................................................
Finishing
Department...................................................................................
Overdistributed cost..............................................................................................
$8,550
$3,500
5,600
9,100
$ [550]
Because all of the fixed cost was billed to user departments on the basis of maximum capacity available,
there is no idle capacity variance. The entire variance is a spending variance. The manager of the
Utilities
Department is responsible for controlling variable cost; therefore, this variance should appear on the
manager's monthly performance report.
PROBLEM
3.
Over- or Underdistributed Cost; Variance Analysis. Watergate Hotel provides the following data on
overhead costs for its Room Service Division:
Budgeted departmental expenses:
Variable expense.....................................................................................................
Fixed
expense..........................................................................................................
Total departmental expense [direct]...........................................................
Budgeted distributed costs from other departments:
Personnel Department [fixed].............................................................................
Food Service Department [variable]..................................................................
Total
departmental overhead.......................................................................
Distribution rate [based on 10,000 calls].................................................................
Actual data for the current period:
Calls to room service.............................................................................................
Fixed expense..........................................................................................................
Variable
expense.....................................................................................................
Distributed cost:
Personnel Department...................................................................................
Food Service Department.............................................................................
$ 26,000
15,000
$ 41,000
7,000
32,000
$ 80,000
$
8 per call to
room service
11,000
$
14,500
26,000
7,500
39,000
Required:
[1]
[2]
Determine the departmental over- or underdistributed cost.
Determine the spending and idle capacity variances for the Room Service Division's costs, plus the
spending variances as distributed from the other departments. [Round all answers to two decimal
places.]
246
Chapter 17
SOLUTION
[1]
Cost incurred:
Fixed
expense........................................................................
Variable expense...................................................................
Personnel Department cost................................................
Food Service Department cost...........................................
Distributed cost [11,000 calls @ $8].........................................
Overdistributed cost...................................................................
$14,500
26,000
7,500
39,000
[2]
Overhead incurred in Room Service Division........................
Spending variance................................................................
$40,500
Overhead expected at 11,000 calls:
Fixed ......................................................................................
Variable: $26,000/10,000 x 11,000.....................................
Idle capacity variance....................................................
Applied
overhead:
$41,000/10,000 x 11,000......................................................
Overabsorbed overhead.............................................................
Overhead distributed from other departments:
Personnel Department [fixed]:
Actual................................................................................
Estimated.........................................................................
Spending
variance.....................................................
Food Service Department [variable]:
Actual distributed cost..................................................
Cost expected at capacity attained..............................
Spending variance.....................................................
Total variances from other departments.........................
$32,000/10,000 x 11,000 = $35,200
1
87,000
$ 88,000
$ [1,000]
$
$15,000
28,600
43,600
[3,100] fav.
[1,500] fav.
45,100
$
$
$
[4,600] fav.
7,500
7,000
500 unfav.
$ 39,000
35,200 1
$
3,800 unfav.
$ 4,300 unfav.
Responsibility Accounting and Reporting
247
PROBLEM
4.
Responsibility Report. In April, the vice president of sales of Petro Products asks the controller to prepare
a responsibility report for the performance evaluation of the manager of its Division Y, which is organized
into
Sections A and B.
The following cost items related to the operation of Division Y for the month of May, 19-- are presented by
the controller:
Item
Division Y costs:
Staff wages...............................................................................................................
Supplies.....................................................................................................................
Manager's
salary.....................................................................................................
Other expenses.........................................................................................................
Total Division Y cost........................................................................................
Actual
Cost
Budgeted
Cost
$ 20,000
6,000
8,000
15,000
$ 49,000
$ 18,500
4,800
6,400
13,400
$
43,100
Administration cost allocable to Division Y.............................................................
Unit output—Division Y...............................................................................................
$ 17,000
10,000
$ 14,500
10,000
8,000
9,500
2,000
3,500
3,300
4,100
5,800
5,000
4,500
7,800
18,000
$ 62,000
1,900
3,600
3,250
4,050
5,650
5,000
5,200
7,300
19,600
$
65,050
$
$
Section A costs:
Supervisor's salary—Section A............................................................................
Employees' wages—Section
A:
Juracek...............................................................................................................
Molloy.................................................................................................................
Nienaber.............................................................................................................
Oats.....................................................................................................................
Peterson..............................................................................................................
Washington........................................................................................................
Materials
cost—Section A.....................................................................................
Indirect labor—Section A......................................................................................
Other overhead costs—Section A.........................................................................
Total Section A costs........................................................................................
Section B costs:
Supervisor's salary—Section
B............................................................................
Employees' wages—Section B:
Laurie.................................................................................................................
Potash.................................................................................................................
Tillman...............................................................................................................
Other overhead
costs—Section B.........................................................................
Total Section B costs........................................................................................
7,000
4,400
3,600
2,100
15,000
$ 32,100
7,500
4,350
3,800
2,050
14,500
$ 32,200
Required: Prepare a responsibility report for the month of May in a format suitable for evaluating the
performance of Division Y's manager.
248
Chapter 17
SOLUTION
Petro Products
Responsibility Report
Manager, Division Y
For May, 19-Cost Item
Division Y costs:
Staff wages....................................................................................................
Supplies..........................................................................................................
Manager's salary..........................................................................................
Other
expenses..............................................................................................
Section A cost.......................................................................................................
Section B cost.......................................................................................................
Total................................................................................................................
Actual
Cost
$
20,000
6,000
8,000
15,000
62,000
32,100
$
143,100
Over- UnderBudgeted Cost
$ 1,500
1,200
1,600
1,600
[3,050]
[100]
$ 2,750
U
U
U
U
F
F
U
PROBLEM
5.
Flexible Budget. At normal capacity, Boulder Products Corp. manufactures 10,000 trail bikes. At that
level, unit variable costs for the Assembly Department are:
Direct
materials................................................................................................................................................
Direct labor.......................................................................................................................................................
Indirect labor....................................................................................................................................................
Repairs
and maintenance...............................................................................................................................
General factory expenses................................................................................................................................
$ 30
60
30
15
15
$ 150
Fixed expenses are $150,000 for indirect labor, $175,000 for repairs and maintenance, and $80,000 for
general factory.
Required: Prepare a
flexible budget for the Assembly Department at 70%, 80%, 90%, and 100% of
normal capacity.
Responsibility Accounting and Reporting
249
SOLUTION
Assembly Department
Flexible Budget
Percentage of capacity......................................
Units.....................................................................
70%
7,000
9,000
Variable cost:
Direct materials................................................. $
210,000
Direct
labor.........................................................
420,000
Indirect labor.....................................................
210,000
Repairs and maintenance................................
105,000
General factory expenses.................................
105,000
Total variable cost....................................... $ 1,050,000
Fixed cost:
Indirect labor.....................................................
Repairs and
maintenance................................
General factory..................................................
Total fixed cost............................................. $
Total cost............................................................. $
150,000
175,000
80,000
405,000
1,455,000
80%
8,000
10,000
$
$
240,000
480,000
240,000
120,000
120,000
1,200,000
$
$
150,000
175,000
80,000
405,000
1,605,000
90%
$
$
270,000
540,000
270,000
135,000
135,000
1,350,000
$
$
150,000
175,000
80,000
405,000
1,755,000
100%
$
$
300,000
600,000
300,000
150,000
150,000
1,500,000
$
$
150,000
175,000
80,000
405,000
1,905,000
PROBLEM
6.
Overhead Analysis; Report to Supervisors. The cost and operating data on June factory overhead for
Department 711 are as follows:
Variable departmental overhead:
Supplies..............................................................................................................................
Repairs and maintenance...............................................................................................
Indirect labor....................................................................................................................
Power and
light................................................................................................................
Heat....................................................................................................................................
Subtotal........................................................................................................................
Fixed departmental overhead:
Building
expense..............................................................................................................
Depreciation—machinery..............................................................................................
Property tax and
insurance...........................................................................................
Subtotal........................................................................................................................
Total........................................................................................................................
Operating data:
Normal capacity
hours...................................................................................................
Factory overhead rate per hour....................................................................................
Actual hours.....................................................................................................................
Budgeted
Factory
Overhead
Actual
Factory
Overhead
$
4,000
1,600
8,000
2,400
800
$ 16,800
$
$
$
1,600
4,800
800
$ 7,200
$ 24,000
4,000
$6
3,600
3,400
1,400
7,400
2,000
600
$ 14,800
1,520
4,800
760
$ 7,080
$ 21,880
250
Chapter 17
Required: Prepare a departmental report for the supervisor of Department 711 that shows the
departmental spending variance for each item of factory overhead and includes a single idle capacity
variance.
SOLUTION
Capacity
hours.....................................................
Variable costs:
Supplies.................................................................
Repairs and maintenance...................................
Indirect labor.......................................................
Power and
light....................................................
Heat........................................................................
Subtotal..........................................................
Fixed costs:
Building expense..................................................
Depreciation—machinery..................................
Property tax and insurance...............................
Subtotal..........................................................
Total
costs...............................................
Applied factory overhead..................................
Idle capacity variance.........................................
Original
Budget
4,000
Budget
Allowance
3,600
$
4,000
1,600
8,000
2,400
800
$ 16,800
$
$
$
1,600
4,800
800
$ 7,200
$ 24,000
3,400
1,400
7,400
2,000
600
$ 14,800
$
[200]
[40]
200
[160]
[120]
1,600
$ 1,520
4,800
4,800
800
760
$ 7,200
$ 7,080
$ 22,320
$ 21,880
21,600
$
720 unfav.
[80]
0
[40]
$
3,600
1,440
7,200
2,160
720
15,120
Actual
Cost
3,600
Actual factory overhead.....................................
Applied factory overhead..................................
Underapplied factory overhead........................
$ 21,880
21,600
$
280
Spending
variance...............................................
Idle capacity variance.........................................
Underapplied factory overhead........................
$
$
[440]
720
280
$
Spending
Variance
[Unfav./
Fav.]
$ [440]