Exam 24: Budgetary Planning

Simmons Company has two production departments, Fabricating and Assembling. At a department managers' meeting, the controller uses flexible budget graphs to explain total budgeted costs. Separate graphs based on direct labor hours are used for each department. The graphs show the following. 1. At zero direct labor hours, the total budgeted cost line and the fixed cost line intersect the vertical axis at $50,000 in the Fabricating Department, and $40,000 in the Assembling Department. 2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $180,000 in the Fabricating Department, and $145,000 in the Assembling Department. Instructions (a) State the total budgeted cost formula for each department. (b) Compute the total budgeted cost for each department, assuming actual direct labor hours worked were 53,000 and 47,000, in the Fabricating and Assembling Departments, respectively.

A static budget

Total budgeted fixed costs appearing on a flexible budget will be the same amount as total fixed costs on the master budget.

Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets?

Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.

Rob Haughton is the North Division manager and his performance is evaluated by executive management based on Division ROI. The current controllable margin for North Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, what will happen to the return on investment for the division?

The activity index used in preparing the flexible budget

What budgeted amounts appear on the flexible budget?

A static budget is appropriate in evaluating a manager's performance if

Budget reports provide the feedback needed by management to see whether actual operations are on course.

The area manager of the Little Italy Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows: The Little Italy segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following projects will increase the Little Italy division's ROI?

A static budget report

A flexible budget graph for the Assembly Department shows the following: 1. At zero direct labor hours, the total budgeted cost line intersects the vertical axis at $60,000. 2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $180,000. Instructions Develop the budgeted cost formula for the Assembly Department and identify the fixed and variable costs.

Dryden Manufacturing Company prepared a fixed budget of 40,000 direct labor hours, with estimated overhead costs of $200,000 for variable overhead and $60,000 for fixed overhead. Dryden then prepared a flexible budget at 38,000 labor hours. How much is total overhead costs at this level of activity?

Data for the Electric Division of Nordmeyer Company which is operated as an investment center follows: Instructions Calculate controllable margin and average operating assets.

Harbaugh Company recorded operating data for its shoe division for the year. The company's desired return is 5%. Which one of the following reflects the controllable margin for the year?

Return on investment is calculated by dividing

A static budget is most useful for evaluating a manager's performance in controlling variable costs.

Another name for the static budget is

An investment center manager is considering three possible investments. The company's required return is 10%. The required asset investment, controllable margins, and the ROIs of each investment are as follows: The investment center is currently generating an ROI of 25% based on $1,200,000 in operating assets and a controllable margin of $300,000. Instructions If the manager can select only one project, determine which one is the best choice to increase the investment center's ROI. Compute how much the investment center's ROI will be if the manager selects your recommendation.