Managerial Accounting: Controllable Costs
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Questions and Answers

What is the primary focus of a performance report in a profit entity?

  • Optimize budget goals
  • Evaluate management by exception
  • Minimize cost of providing services
  • Maximize net income (correct)

    • What is a controllable cost?

  • A cost that can be controlled by top management
  • A cost that is allocated to a responsibility level
  • A cost that can be controlled by any manager
  • A cost over which a manager has control (correct)

    • Why are exception guidelines more restrictive for controllable items?

  • Because they are directly related to budget goals
  • Because top management focuses on them
  • Because they are directly controllable by the manager (correct)
  • Because they are more material

    • What is the primary purpose of management by exception?

    <p>To focus on differences between actual results and planned objectives</p> Signup and view all the answers

    What is the principle of performance evaluation that states that managers should have direct input into establishing budget goals?

    <p>Behavioral principle</p> Signup and view all the answers

    What type of costs are incurred indirectly and allocated to a responsibility level?

    <p>Noncontrollable costs</p> Signup and view all the answers

    What is the primary purpose of a performance report in a not-for-profit entity?

    <p>Minimize cost of providing services</p> Signup and view all the answers

    Why is it important to establish a materiality threshold in management by exception?

    <p>To avoid investigating every budget difference</p> Signup and view all the answers

    Under responsibility accounting, what is the basis for evaluating a manager's performance?

    <p>Ability to control matters that the manager directly controls</p> Signup and view all the answers

    What type of costs are typically included in responsibility reports for cost centers?

    <p>Controllable costs</p> Signup and view all the answers

    What type of costs are considered traceable costs?

    <p>Direct fixed costs</p> Signup and view all the answers

    Which type of responsibility center is evaluated based on controllable revenues and controllable costs?

    <p>Profit center</p> Signup and view all the answers

    What is the focus of responsibility accounting for cost centers?

    <p>Meeting budgeted goals for controllable costs</p> Signup and view all the answers

    Which of the following is a characteristic of direct fixed costs?

    <p>They are incurred for the sole benefit of the center</p> Signup and view all the answers

    What type of costs are most likely to be controllable by a profit center manager?

    <p>Direct fixed costs</p> Signup and view all the answers

    Under responsibility accounting, what is the primary focus of evaluating a manager's performance?

    <p>Ability to control matters that the manager directly controls</p> Signup and view all the answers

    What is a key principle of evaluation in a responsibility reporting system?

    <p>To identify both good and poor performance</p> Signup and view all the answers

    What type of data should be included in a report according to the reporting principles?

    <p>Only controllable data by the manager of the responsibility center</p> Signup and view all the answers

    What is the purpose of highlighting significant differences between actual results and budget goals?

    <p>To identify areas for improvement</p> Signup and view all the answers

    How often should reports be prepared according to the reporting principles?

    <p>At reasonable time intervals</p> Signup and view all the answers

    What is the purpose of a responsibility reporting system?

    <p>To prepare reports for each level of responsibility in the organization's chart</p> Signup and view all the answers

    How does a responsibility reporting system permit management by exception?

    <p>By permitting each higher level to obtain detailed reports for each lower level</p> Signup and view all the answers

    What is the flow of reporting in a responsibility reporting system?

    <p>From lower-level management to top-level management</p> Signup and view all the answers

    What is the purpose of Report A in the partial organization chart?

    <p>To show summary data of vice presidents for the president</p> Signup and view all the answers

    What is the formula for Return on Investment (ROI)?

    <p>Controllable Margin / Average Operating Assets</p> Signup and view all the answers

    What is included in operating assets?

    <p>Current assets and plant assets used in operations</p> Signup and view all the answers

    How are average operating assets calculated?

    <p>Based on beginning and ending cost or book values of assets</p> Signup and view all the answers

    What is the ROI of the investment if controllable margin is $1,000,000 and average operating assets are $5,000,000?

    <p>20%</p> Signup and view all the answers

    What is the purpose of the Balanced Scorecard?

    <p>To evaluate the performance of a business from four perspectives</p> Signup and view all the answers

    What is the factor that represents the profitability of an investment in the ROI formula?

    <p>Controllable Margin Dollars</p> Signup and view all the answers

    What is the term for the assets used in operations and controlled by a manager?

    <p>Operating Assets</p> Signup and view all the answers

    What is the learning objective that discusses the Balanced Scorecard?

    <p>LO 4</p> Signup and view all the answers

    Which perspective of the Balanced Scorecard focuses on measures such as return on assets and net income?

    <p>Financial</p> Signup and view all the answers

    What is the objective 'Percentage of customers who would recommend product' a measure of in the Balanced Scorecard?

    <p>Customer satisfaction</p> Signup and view all the answers

    Which of the following is an objective used in the Internal Process perspective of the Balanced Scorecard?

    <p>Percentage of defect-free products</p> Signup and view all the answers

    What is the objective 'Training hours' a measure of in the Balanced Scorecard?

    <p>Employee development</p> Signup and view all the answers

    Which of the following is NOT an objective used in the Learning and Growth perspective of the Balanced Scorecard?

    <p>Customer retention</p> Signup and view all the answers

    What is the objective 'Stockouts' a measure of in the Balanced Scorecard?

    <p>Internal process efficiency</p> Signup and view all the answers

    Which perspective of the Balanced Scorecard focuses on measures such as customer retention and brand recognition?

    <p>Customer</p> Signup and view all the answers

    What is the objective 'Profit per employee' a measure of in the Balanced Scorecard?

    <p>Financial performance</p> Signup and view all the answers

    Study Notes

    Performance Evaluation

    • Emphasizes controllable costs and relevant data for performance reports
    • Applies to both profit and not-for-profit entities
      • Profit entities: maximize net income
      • Not-for-profit: minimize cost of providing services

    Controllable versus Noncontrollable Costs

    • Controllable costs: costs over which a manager has control
    • Top management controls all costs, but fewer costs are controllable as one moves down to each lower level of managerial responsibility
    • Noncontrollable costs: costs incurred indirectly and allocated to a responsibility level

    Principles of Performance Evaluation

    • Management function that compares actual results with budget goals
    • Includes both behavioral and reporting principles
    • Behavioral principles:
      • Managers should have direct input into establishing budget goals
      • Performance evaluation should be based entirely on controllable matters
      • Top management should support the evaluation process
      • The evaluation process must allow managers to respond to their evaluations
      • Evaluations should identify both good and poor performance
    • Reporting principles:
      • Contain only data controllable by the manager of the responsibility center
      • Provide accurate and reliable budget data to measure performance
      • Highlight significant differences between actual results and budget goals
      • Be tailor-made for intended evaluation by ensuring only controllable costs are included
      • Be prepared at reasonable time intervals

    Responsibility Reporting System

    • Preparation of a report for each level of responsibility in the company's organization chart
    • Begins with the lowest level of responsibility and moves upward to higher levels
    • Permits management by exception at each level of responsibility
    • Each higher level can obtain detailed reports for each lower level

    Types of Responsibility Centers

    • Cost Centers: based on manager's ability to meet budgeted goals for controllable costs
    • Profit Centers: based on detailed information about both controllable revenues and controllable costs
    • Direct fixed costs: relate specifically to one responsibility center, incurred for the sole benefit of the center, and are usually controllable by the profit center manager

    Return on Investment (ROI)

    • ROI formula: controllable margin ÷ average operating assets
    • Controllable margin: revenue minus controllable costs
    • Average operating assets: average of beginning and ending balances of operating assets

    Balanced Scorecard

    • A framework for performance evaluation that includes four perspectives:
      • Financial
      • Customer
      • Internal Process
      • Learning and Growth
    • Examples of objectives within each perspective:
      • Financial: return on assets, net income, credit rating
      • Customer: customer retention, response time per customer request, brand recognition
      • Internal Process: percentage of defect-free products, stockouts, labor utilization rates
      • Learning and Growth: percentage of employees leaving in less than one year, number of cross-trained employees

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    Description

    This quiz focuses on controllable costs in managerial accounting, including the role of managers in controlling costs and making decisions in profit and non-profit organizations.

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