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Exam 15: Performance Evaluation

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Question 51

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Based on the information given for a variance, indicate whether the variance is favorable or unfavorable. $\begin{array} { | l | l | l | l | } \hline \text { Item to classify } & \text { Static budget } & \text { Actual } & \begin{array} { l } \text { Variance - Favorable or } \\\text { Unfavorable? }\end{array} \\\hline \text { Sales volume } & 100,000 \text { units } & 96,000 \text { units } & \\\hline\end{array}$

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Question 52

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Evaluation of the amount of costs incurred should be based on the actual volume of activity rather than the planned volume of activity.

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Question 53

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Use the following information to answer Question. Renfro Company has two divisions, the Restaurants Division and the Commissary Division. The following information was gathered for the two divisions in 2012: $\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Restaurants } \\\text { Division }\end{array} & \begin{array} { l } \text { Commissary } \\\text { Division }\end{array} \\\hline \text { Operating Income } & \$ 4,000,000 & \$ 1,500,000 \\\hline \text { Operating Assets } & \$ 30,000,000 & \$ 10,500,000 \\\hline\end{array}$ Hays Company has set a target return on investment (ROI) of 12% for both divisions. Assuming that these are the only divisions of Renfro Company, calculate ROI for the company as a whole.

Use the following information to answer Question. Renfro Company has two divisions, the Restaurants Division and the Commissary Division. The following information was gathered for the two divisions in 2012: $\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Restaurants } \\\text { Division }\end{array} & \begin{array} { l } \text { Commissary } \\\text { Division }\end{array} \\\hline \text { Operating Income } & \$ 4,000,000 & \$ 1,500,000 \\\hline \text { Operating Assets } & \$ 30,000,000 & \$ 10,500,000 \\\hline\end{array}$ Hays Company has set a target return on investment (ROI) of 12% for both divisions. Calculate residual income (RI) for the Restaurants Division and the Commissary Division. Based on RI, which division appears to have performed better?

If the master budget prepared at a volume level of 20,000 units includes factory rent of $40,000, a flexible budget based on a volume of 18,000 units would include factory rent of $36,000.

The Jordan Company, estimating its sales to be 20,000 units for the upcoming period, prepared the following static budget: $\begin{array}{l}\text { Units: }&20,000\\\text { Sales }&\$200,000\\\text { Less variable costs: }\\\text { Manufacturing costs } & 70,000 \\\text { Selling and administrative costs } & 40,000\\\text { Contribution margin } & \$ 90,000 \\\text { Less fixed costs: } & \\\quad \text { Manufacturing costs } & 22,000 \\\text { Selling and administrative costs } & 17,000\\\text { Net income }&\$51,000\end{array}$ The owner of the business is not so sure about the 20,000 unit sales volume and has requested additional budgets. Required: In the table provided, prepare two additional budgets, one at 90% of the static budget volume level and one at 110% of the static budget volume level. Flexible budgets at 90% and 110%:

The sales volume variance is the difference between actual sales revenue and the static budget amount.

The following static budget is provided: What will be the total volume variance (the effect on net income) if 18,000 units are produced and sold?

Because both the flexible budget and actual results are based on the actual volume of activity, the flexible budget sales variance is attributable to sales price, not sales volume.

Which of the following statements about ROI is false?

If Paterno Company's turnover measure is 2.5 and its margin is 7.5%, its ROI is 10%.

The sales revenue volume variance is favorable if actual sales volume is lower than expected.

Caroline Farr is manager of a production department of Helling Company. Her department makes one product; the following information for her department was accumulated for 2012: $\begin{array}{|l|r|r|}\hline&\text { Static Budget }&\text { Actual Results }\\\hline \text { Number of units } & 100,000 & 97,000 \\\hline \text { Direct materials cost } & \$ 800,000 & \$ 792,000 \\\hline \text { Direct labor cost } & \$ 400,000 & \$ 380,000 \\\hline \begin{array}{l}\text { Variable manufacturing } \\\text { overhead }\end{array} & \$ 200,000 & \$ 199,000 \\\hline \begin{array}{l}\text { Fixed manufacturing } \\\text { overhead }\end{array} & \$ 290,000 & \$ 292,000 \\\hline \text { Total } & \$ 1,690,000 & \$ 1,663,000 \\\hline\end{array}$ Required: a) Prepare a flexible budget for the department's actual level of activity, 97,000 units. b) Use the flexible budget to evaluate Ms. Farr's performance. c) Why does the budget not include sales revenue and net income?

Which of the following income statement formats is most commonly used with flexible budgeting?

What is suboptimization? How might use of return on investment to evaluate a manager's performance lead to suboptimization?

Which of the following software applications is most suited for developing flexible budgets?

If the master budget prepared at a volume level of 20,000 units includes direct materials of $80,000, a flexible budget based on a volume of 18,000 units would include direct materials of $72,000.

Hansen Company reported the following information for 2012: $\begin{array}{lr}\text { Sales } & \$ 787,000 \\\text { Average Operating Assets } & \$ 375,000 \\\text { Desired ROI } & 9 \% \\\text { Residual Income } & \$ 11,250\end{array}$ The company's operating income for 2012 was

What are cost centers? What responsibilities does the manager of a cost center have? And at what level on an organization chart are you most likely to find cost centers?

Use the following information to answer Question. Renfro Company has two divisions, the Restaurants Division and the Commissary Division. The following information was gathered for the two divisions in 2012: $\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Restaurants } \\\text { Division }\end{array} & \begin{array} { l } \text { Commissary } \\\text { Division }\end{array} \\\hline \text { Operating Income } & \$ 4,000,000 & \$ 1,500,000 \\\hline \text { Operating Assets } & \$ 30,000,000 & \$ 10,500,000 \\\hline\end{array}$ Hays Company has set a target return on investment (ROI) of 12% for both divisions. Calculate ROI for the Restaurants Division and the Commissary Division. Based on ROI, which division appears to have performed better?