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chapter 22
Tools for Enterprise Performance Evaluation

goals   discussion   goals achievement  fill in the blanks   multiple choice   problems    check list and key terms  


Select the appropriate response:

1. An accounting system wherein the operations are broken down into cost centers controllable by a foreman, sales manager, or supervisor, is known as:

a. Control accounting
b. Budgetary accounting
c. Responsibility accounting
d. Allocated cost accounting


2. A business unit is known as a profit center:

a. if its management is held accountable for both revenues and expenses, and has the authority to make decisions regarding its products, markets, and sources of supply.
b. if its management is compensated based on the level of profitability.
c. if its management is evaluated not only on revenues and expenses but also on asset investment.
d. if its operations or departments are not directly involved in revenue generating activities, but instead focus on elements of cost control (including choosing the source of supply).


3. The basic difference between a static budget and a flexible budget is that:

a. A flexible budget considers only variable costs, but a static budget considers all costs.
b. Flexible budgets allow management latitude in meeting goals, whereas a static budget is based on a fixed standard.
c. A static budget is for an entire production facility, but a flexible budget is applicable only to a single department.
d. A static budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range.


4. Linwood Industries prepared a flexible budget which revealed total production costs of $79,000 at an anticipated 10,000 unit activity level.  Variable production costs were (per unit) $1.50 for direct materials, $3.50 for direct labor, and $0.75 for variable factory overhead.  How much are total anticipated production costs in Linwood's flexible budget for an activity level of 10,800 units?

a. $21,500
b. $62,100
c. $79,000
d. $83,600


5. Which of the following is not one of the objectives in utilizing standard costs?

a. To simplify costing procedures and expedite cost reports.
b. To allow management to readily determine and focus attention on special problem areas.
c. To allow a measure of cost assuming ideal or perfect operating conditions.
d. To provide a measure of budgeted cost for a single unit of activity.


6. If a unit manager made a decision to purchase raw materials that were of superior quality to that which was anticipated, and this decision resulted in less spoilage than normal, the effect on the quantity and price variances, respectively, would be:

a. Unfavorable, unfavorable
b. Favorable, unfavorable
c. Favorable, favorable
d. Unfavorable, favorable


7. Quillen uses a single raw material in its production process.  The standard price for a unit of material is $7.00.  During October the company purchased and used 10,000 units of this material.  The actual purchase price was $8.00 per unit.  The standard quantity required per finished product is 3 units.  Quillen produced 3,000 finished units of the final product in October.  How much was the material price variance for October?

a. $3,000 favorable
b. $3,000 unfavorable
c. $9,000 unfavorable
d. $10,000 unfavorable


8. Finch produced 3,000 units of output.  The production process normally requires 3 hours of labor per unit of output.  The standard labor rate is $7.00 per hour, but Finch paid $6.00 per hour.  Actual hours needed to complete the production process were 8,500.  How much was the labor efficiency variance?

a. $3,000 favorable
b. $3,000 unfavorable
c. $3,500 favorable
d. $3,500 unfavorable


9. Actual direct labor at Subramaniam Tire during the month of June amounted to 14,000 hours.  This compares to the standard direct labor hours for the actual output of 15,000 hours.  During June, total actual variable overhead was $32,000.  The standard total variable overhead application rate per standard direct labor hour was $2.25.   How much was the variable overhead spending variance for June?

a. $500 favorable
b. $500 unfavorable
c. $2,000 favorable
d. $2,000 unfavorable


10. Which of the following factors would be subject to evaluation in a balanced scorecard approach to performance evaluation?

a. Financial outcomes
b. Customer outcomes
c. Business process outcomes
d. All of the above


























1. c. Responsibility accounting is a reporting system that is based on the organizational structure of a firm.  The firm is divided into cost centers or segments, such as departments, plants, divisions, etc., and a manager is appointed to oversee that cost center or segment.



















2. a. A profit center is a responsibility unit in which a manager is held accountable for profit.  Because revenues and expenses both enter into the evaluation process, management is allowed the flexibility to make decisions regarding product delivery and product development expenditures.  An investment center includes evaluation of management based not only on revenues and expenses, but also asset investment decisions.  A cost center is one wherein the operations or departments are not directly involved in revenue generating activities, and management is held accountable primarily for cost control.


















3. d. A static budget assumes one operating level and includes all elements of anticipated revenues and costs, whereas a flexible budget allows evaluations of anticipated costs dependent on the production level achieved.  Flexible budgets include both fixed and variable elements.  Flexible budgets do not really allow latitude in cost incurrence, but instead make cost incurrence a function of revenues and production levels achieved.  A flexible budget can be prepared for an entire production facility.



















4. d.  $83,600


Activity Levels


Cost Per Unit

10,000 10,800
Direct materials $1.50  $15,000 $16,200
Direct labor $3.50   35,000 37,800
Variable overhead $0.75   7,500  8,100
Fixed factory overhead     21,500 21,500
Total production costs   $79,000  $83,600



















5. c. Standard costs are not necessarily developed assuming ideal conditions.  Standards may be based on currently attainable objectives (presuming a normal amount of operating inefficiency related to scrap, waste, spoilage, and the like).  The other statements are all true.



















6. b. Because less material was used, the quantity variance would be favorable.  However, the goods were probably acquired at higher than anticipated prices, resulting in an unfavorable price variance.




















7. d. $10,000 unfavorable.  Quillen paid $1.00 per unit above the standard cost and purchased 10,000 units of material.  Stated differently, the actual quantity purchased at the actual price was $80,000.  The actual quantity purchased at the standard price would have cost $70,000, for a $10,000 unfavorable difference.
















8. c. $3,500 favorable.  The standard hours required to produce 3,000 units at 3 hours per unit would be 9,000 hours.  Finch only needed 8,500 to achieve this production level, resulting in a 500 hour savings.  500 hours at $7.00 per hour (standard labor rate) results in a $3,500 favorable variance.




















9. b The variable overhead spending variance is $500 unfavorable as shown below:















10. d. With the balanced scorecard approach, an array of performance measurements are developed.  Each indicator should be congruent with the overall entity objectives.  Further, each measure should be easily determined and understood.  These measurements can relate to financial outcomes, customer outcomes, or business process outcomes.