Budgetary CONTROL AND
1. Budget reports comparing actual results with planned objectives should be prepared only once a year.
2. If actual results are different from planned results, the difference must always be investigated by management to achieve effective budgetary control.
3. Certain budget reports are prepared monthly whereas others are prepared more frequently depending on the activities being monitored.
4. The master budget is not used in the budgetary control process.
5. A master budget is most useful in evaluating a manager’s performance in controlling costs.
6. A static budget is one that is geared to one level of activity.
7. A static budget is changed only when actual activity is different from the level of activity expected.
8. A static budget is most useful for evaluating a manager’s performance in controlling variable costs.
9. A flexible budget can be prepared for each of the types of budgets included in the master budget.
10. A flexible budget is a series of static budgets at different levels of activities.
11. Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity.
12. Total budgeted fixed costs appearing on a flexible budget will be the same amount as total fixed costs on the master budget.
13. A flexible budget is prepared before the master budget.
14. The activity index used in preparing a flexible budget should not influence the variable costs that are being budgeted.
15. A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost per unit X activity level).
16. Flexible budgets are widely used in production and service departments.
17. A flexible budget report will show both actual and budget cost based on the actual activity level achieved.
18. Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.
19. Policies regarding when a difference between actual and planned results should be investigated are generally more restrictive for noncontrollable items than for controllable items.
20. A distinction should be made between controllable and noncontrollable costs when reporting information under responsibility accounting.
21. Cost centers, profit centers, and investment centers can all be classified as responsibility centers.
22. More costs become controllable as one moves down to each lower level of managerial responsibility.
23. In a responsibility accounting reporting system, as one moves up each level of responsibility in an organization the responsibility reports become more summarized and show less detailed information.
24. A cost item is considered to be controllable if there is not a large difference between actual cost and budgeted cost for that item.
25. The terms “direct fixed costs” and “indirect fixed costs” are synonymous with “traceable costs” and “common costs,” respectively.
26. A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers.
27. Controllable margin is subtracted from controllable fixed costs to get net income for a profit center.
28. The formula for computing return on investment is controllable margin divided by average operating assets.
29. The denominator in the formula for calculating the return on investment includes operating and nonoperating assets.
*30. Residual income is the income that remains after subtracting from controllable margin the minimum rate of return on a company’s average operating assets.