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Chapter 22-25

A budget can be an effective means of communicating management’s plans to the employees of a business.
True
The process of evaluating performance can be improved by using budgets.
True
The merchandise purchases budget depends on information provided by the sales budget.
True
The merchandise purchases budget is the starting point for preparing the master budget.
False
The sales budget is derived from the production budget.
False
The selling expenses budget is normally prepared before the sales budget because selling expenses affect the amount of sales.
False
A company's history indicates that 20% of its sales are for cash and the remaining 80% are on credit. Collections on credit sales are 30% in the month of the sale and 70% the following month. Projected sales for January, February, and March are $75,000, $92,000 and $60,000, respectively. The March expected cash receipts are $80,500.
A company’s history indicates that 20% of its sales are for cash and the remaining 80% are on credit. Collections on credit sales are 30% in the month of the sale and 70% the following month. Projected sales for January, February, and March are $75,000, $92,000 and $60,000, respectively. The March expected cash receipts are $80,500.
False
A cash budget shows the expected cash receipts and cash expenditures during the budget period.
True
Production budgets always show both budgeted units of product and total costs for the budgeted units.
False
Operating budgets include all of the following budgets except the:
(N-T/F)
Sales budget.

Selling expense budget.

Cash budget.

Merchandise purchases budget.

General and administrative expense budget.

Cash Budget
The usual starting point for preparing a master budget is forecasting or estimating:
(N-T/F)

Expenditures.

Sales.

Production.

Income.

Cash payments.

Sales
When preparing the cash budget, all of the following should be considered except:
(N-T/F)

Cash receipts from customers.

Cash payments for merchandise.

Depreciation expense.

Cash payments for income taxes.

Cash payments for capital expenditures.

Depreciation expense
Identify which of the following sets of items are necessary components of the master budget.
(N-T/F)

Sales budget, operating budgets, and historical financial budgets.

Operating budgets, historical income statement, and budgeted balance sheet.

Operating budgets, financial budgets, and capital expenditures budget.

Prior sales reports, capital expenditures budget, and financial budgets.

Operating budgets, financial budgets, and capital expenditures budget.
Standard Costs can be used by management to assess the reasonableness of actual costs incurred
True
Standard costs are preset costs for delivering a product or service under normal conditions
True
When computing a price variance, the price is held constant
False
Fixed budgets are also known as flexible budgets
False
The total sales variance can be divided into the sales price varianc and the sales volume variance
True
A flexible budget expresses all coasts on a per unit basis regardless of cost behavior
False
The purchasing department is usually responsible for the price paid for materials
True
A favorable direct materials price variance might lead to an unfavorable direct materials quantity variance because the company purchased inferior materials
True
One possible explanation for DL rate and efficiency variances is the use of workers with different skill levels
True
A volume variance is the difference between overhead at maximum volume of production and the standard volume of production
False
Variable budget is another name for:(N-T/F)
Flexible budget
Regarding overhead costs, as volume increases…(N-T/F)
Unit fixed cost DECREASES, unit variable remains CONSTANT
Standard costs are…(N-T/F)
Preset costs for delivering a product or service under normal conditions
In dentist the situation below that will result in a favorable variance (N-T/F)
Actual REVENUE is HIGHER than BUDGETED REVENUE
Which department is often responsible for the direct materials price variance? (N-T/F)
The purchasing department
Profit center managers are evaluated on their ability to generate revenues in excess of costs.
true
Investment center is another name for profit center.
false
An example of a controllable cost is equipment depreciation expense.
false
A responsibility accounting performance report usually compares actual costs to budgeted costs amounts by management level
true
Return on investment is a useful measure to evaluate the performance of a cost center manager.
False
A useful measure used to evaluate the performance of an investment center is investment center residual income.
True
In a decentralized organization, decisions are made by managers throughout the company rather than by a few top executives.
True
A unit of a business that generates revenues and incurs costs is called a:

Performance center.
Profit center.
Cost center.
Responsibility center.
Expense center.

Profit Center
The type of department that generates revenues and incurs costs, and its manager is responsible for the investments made in operating assets is called a:
Profit center
Cost center
Service department
Investment center
Responsibility center
Investment Center
An accounting system that is set up to control costs and evaluate managers’ performance by assigning costs to the managers responsible for controlling them is called a:
Cost accounting system.
Managerial accounting system.
Responsibility accounting system.
Financial accounting system.
Activity-based accounting system.
Responsibility accounting system.
Which of the following is not true regarding a responsibility accounting system?

It is designed to measure the performance of managers in terms of controllable costs.

It assigns responsibility for costs to the appropriate managerial level that controls those costs.

It should not hold a manager responsible for costs over which the manager has no influence.

It can be applied at any level of an organization.

It is only relevant in manufacturing companies

It is only relevant in manufacturing companies
A system of performance measures, including nonfinancial measures, used to assess company and division manager performance is:
Hurdle rate.
Return on investment.
Balanced scorecard.
Residual income.
Investment turnover.
Balanced scorecard
Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.
True
If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be accepted.
False
Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.
True
A sunk cost will change with a future course of action.
False
Additional business in the form of a special order of goods or services should be accepted when the incremental revenue equals the incremental costs
False
If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin. (T/F)
True
An advantage of the break-even time (BET) method over the payback period method is that it recognizes the time value of money.
True
The accounting rate of return is based on cash flows rather than net income in its calculation.
False
If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the early years has the higher net present value.
True
The internal rate of return equals the rate that yields a net present value of zero for an investment.
True
The calculation of annual net cash flow from a particular investment project should include all of the following except:
Income taxes.
Revenues generated by the investment.
Cost of products generated by the investment.
Depreciation expense.
General and administrative expenses.
Depreciation Expense
A limitation of the internal rate of return method is that it:
Does not consider the time value of money.
Measures results in years.
Lacks ability to compare dissimilar projects.
Ignores varying risks over the life of a project.
Measures net income rather than cash flows.
Ignores varying risks over the life of a project.
An opportunity cost:
Is an unavoidable cost because it remains the same regardless of the alternative chosen.
Requires a current outlay of cash.
Results from past managerial decisions.
Is the potential benefit lost by choosing a specific alternative course of action among two or more.
Is irrelevant in decision making because it occurred in the past.
Is the potential benefit lost by choosing a specific alternative course of action among two or more.
A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n):
Uncontrollable cost.
Incremental cost.
Opportunity cost.
Out-of-pocket cost.
Sunk cost.
Sunk Cost
Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon’s production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should:

Sell the watches for $3 per unit.

Correct the defects and sell the watches at the regular price.

Sell the watches as they are because repairing them will cause their total cost to exceed their selling price.

Sell 5,000 watches to the salvage company and repair the remainder.
Throw the watches away.

Correct the defects and sell the watches at the regular price.
Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company’s productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:

Produce only Product A.

Produce only Product B.

Produce equal amounts of A and B.

Produce A and B in the ratio of 62.5% A to 37.5% B.

Produce A and B in the ratio of 40% A and 60% B.

Produce only Product B.
A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $2,850 after taxes of 30%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?
2.85%.
4.75%.
6.65%.
9.50%.
42.75%.
9.5%
An estimate of an asset’s value to the company, calculated by discounting the future cash flows from the investment at the project’s required rate of return and then subtracting the initial amount of the investment, is known as:
Annual net cash flows.
Rate of return on investment.
Net present value.
Payback period.
Unamortized carrying value.
Net Present Value
The discount rate that yields a net present value of zero for an investment is the:
Internal rate of return.
Accounting rate of return.
Net present value rate of return.
Zero rate of return.
Payback rate of return.
Internal rate of return
Answer:
Answer:
(1,590)

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