CH 14

CHAPTER 15
FINANCIAL MANAGEMENT
MULTIPLE CHOICE
1.
A logical structure of activities designed to analyze and evaluate management of

expenditures is a cost
a.
b.
c.
d.
consciousness system.
understanding system.
avoidance system.
control system.
ANSWER:
2.
the original budget.

actual costs for the prior period.
a flexible budget.
a static budget.
ANSWER:
EASY
When the organizational output is difficult to define, management may rely on

___________ for cost control.
a.
b.
c.
d.
qualitative measures
program budgeting
surrogate measures of output
all of the above
ANSWER:
4.
EASY
For cost control purposes, actual costs should be compared to

a.
b.
c.
d.
3.
EASY
Setting organizational goals and objectives and preparing a budget are aspects of control
a.
b.
c.
d.
during an event.
before an event.
after an event.
before, during, and after an event.
ANSWER:
EASY
151
152
5.
Chapter 15
Which of the following does not create a specific price level change?
a.
b.
c.
d.
change in production technology

change in the rate of inflation
changes due to supply and demand
changes in the number of competing suppliers
ANSWER:
6.
EASY
higher this period and lower in future periods.

higher this period and higher in future periods.
lower this period and higher in future periods.
lower this period and lower in future periods.
ANSWER:
EASY
Spending levels in prior years are often the basis of

a.
b.
c.
d.
traditional budgets.
zero-base budgets.
variance targets.
engineered cost analyses.
ANSWER:
8.
As the economy becomes more and more depressed, a companys management decides to
slash spending on research and development. What is the likely effect of this action on net
income? Net income will be
a.
b.
c.
d.
7.
Financial Management
EASY
Minimizing period-by-period increases in unit variable costs and total fixed costs defines
efforts of cost
a.
b.
c.
d.
control.
avoidance.
containment.
reduction.
ANSWER:
EASY
Chapter 15
9.
Cost containment practices by a firm would not be effective for cost increases caused by
a.
b.
c.
d.
inflation.
a reduction in the quantity of an input purchased.
normal seasonality.
a reduction in the number of suppliers.
ANSWER:
10.
EASY
inflation/deflation
changes in quantities purchased
technological change
changes in supply chain costs
ANSWER:
MEDIUM
The greatest degree of control for committed fixed costs is exerted

a.
b.
c.
d.
in the post-investment audit.

during the life of the investment.
prior to acquisition.
by equipment operators.
ANSWER:
12.
All of the following are explanations of cost changes. Which of these influences can be
substantially affected by cost containment measures?
a.
b.
c.
d.
11.
153
EASY
Careful analysis of the capital budget is an important control activity for

a.
b.
c.
d.
variable costs.
discretionary costs.
committed costs.
period costs.
ANSWER:
EASY
154
13.
Chapter 15
An effective control system functions before, during, and after an event. However, little
control is possible during the event for most
a.
b.
c.
d.
variable manufacturing costs.

variable period costs.
discretionary fixed costs.
committed fixed costs.
ANSWER:
14.
b.
c.
d.
EASY
management decides to incur in the current period to enable the company to

achieve objectives other than the filling of orders placed by customers.
are likely to respond to the amount of attention devoted to them by a specified
manager.
are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only change slowly in response to
small changes in capacity.
fluctuate in total in response to small changes in the rate of utilization of capacity.
ANSWER:
EASY
A committed fixed cost can

a.
b.
c.
d.
never be eliminated.
be eliminated in the short term and in the long term.
be eliminated in the long term but not in the short term.
be eliminated in the short term but not in the long term.
ANSWER:
16.
The term committed costs refers to costs that

a.
15.
EASY
Which of the following is an example of a committed fixed cost?

a.
b.
c.
d.
investment in production facilities

advertising
preventive maintenance
employee training programs
ANSWER:
EASY
Chapter 15
17.
A company would be reducing its discretionary costs if it

a.
b.
c.
d.
fired a production supervisor.

closed its research and development department.
successfully negotiated a reduction in its factory rent.
reduced its direct labor costs by hiring temporary workers.
ANSWER:
18.
MEDIUM
program budgeting.
zero-base budgeting.
capital budgeting.
flexible budgeting.
ANSWER:
MEDIUM
Most discretionary costs relate to

a.
b.
c.
d.
plant and equipment acquisitions.

long-term investments.
basic personnel costs.
service activities.
ANSWER:
20.
If a discretionary cost can be treated like an engineered cost, cost control may be achieved
through the use of
a.
b.
c.
d.
19.
155
EASY
If a cost can be reduced to zero in the short run without significantly harming the
organization, the cost is a
a.
b.
c.
d.
variable cost.
committed cost.
discretionary cost.
product cost.
ANSWER:
EASY
156
21.
Chapter 15
Discretionary costs are often difficult to control because

a.
b.
c.
d.
it is difficult to measure the cost.

they cannot be changed in the short run.
they cannot be changed from period to period.
it is difficult to measure the benefits of discretionary activities.
ANSWER:
22.
MEDIUM
managerial training programs

managerial labor costs
factory utilities
factory rent
ANSWER:
EASY
The level of discretionary costs

a.
b.
c.
d.
are set by management for one period at a time.

cannot be changed in the short run.
are determined when capital investment is undertaken.
always varies with sales.
ANSWER:
24.
Which of the following is likely to be a discretionary cost in most organizations?

a.
b.
c.
d.
23.
EASY
Which of the following is not a factor that directly affects the budget for a discretionary
cost?
a.
b.
c.
d.
the importance of the activity to the achievement of the organizations goals

last periods budget
the expected level of operations
managerial negotiations in the budgeting process
ANSWER:
EASY
Chapter 15
25.
If an actual discretionary cost is exactly equal to the budgeted level of that cost, which of
the following statements is true?
a.
b.
c.
d.
Funds were appropriately spent.

The discretionary activity was efficient.
The discretionary activity was effective.
None of the above.
ANSWER:
26.
MEDIUM
organizational policies and managerial preferences.

the budgeted amount from the prior period.
the level of long-term investment.
an organizations internal control.
ANSWER:
MEDIUM
The term discretionary costs refers to

a.
b.
c.
d.
costs that management decides to incur in the current period to enable the
company to achieve objectives other than the filling of orders placed by customers.
costs that are likely to respond to the amount of attention devoted to them by a
specified manager.
costs that are governed mainly by past decisions that established the present levels
of operating and organizational capacity and that only change slowly in response to
small changes in capacity.
amortization of costs that were capitalized in previous periods.
ANSWER:
28.
Discretionary activities in an organization are determined based on

a.
b.
c.
d.
27.
157
EASY
Avoidable costs are usually

a.
b.
c.
d.
committed.
common.
discretionary.
joint.
ANSWER:
EASY
158
29.
Chapter 15
Which of the following is least likely to be a discretionary cost?

a.
b.
c.
d.
salaries of salespeople
advertising
maintenance
insurance
ANSWER:
30.
EASY
product or period costs.

discretionary or committed.
direct or common.
sunk or avoidable.
ANSWER:
EASY
If economic activity slows down, total costs could easily decline in which of the following
categories?
a.
b.
c.
d.
variable costs and committed fixed costs

variable costs and discretionary fixed costs
variable costs only
committed fixed costs only
ANSWER:
32.
For cost control purposes, fixed costs are classified as

a.
b.
c.
d.
31.
EASY
Usually, with respect to a variable cost, optimal control is exerted when the cost
a.
b.
c.
d.
can be controlled prior to incurrence.

is compared to its budget amount.
increases steadily over time.
is closely monitored.
ANSWER:
EASY
Chapter 15
33.
Which kind of costs could be eliminated by closing a sales office?

a.
b.
c.
d.
Direct
yes
yes
yes
no
ANSWER:
34.
c.
d.
Committed
no
yes
no
yes
MEDIUM
incurring committed fixed costs is less risky than using discretionary costs.
managers are usually responsible for committed fixed costs but not for
discretionary fixed costs.
incurring discretionary fixed costs rather than committed fixed costs gives a
company more flexibility in controlling costs.
companies are using more discretionary fixed costs because labor is easier to
remove than technology.
ANSWER:
EASY
The distinction between avoidable and unavoidable costs is similar to the distinction
between
a.
b.
c.
d.
variable costs and fixed costs.

variable costs and mixed costs.
step-variable costs and fixed costs.
discretionary costs and committed costs.
ANSWER:
36.
Discretionary
yes
no
no
no
A major difference between committed and discretionary fixed costs is that

a.
b.
35.
159
MEDIUM
The maximum allowable expenditure is the

a.
b.
c.
d.
appropriation.
allowance.
allocation.
committed fixed cost.
ANSWER:
EASY
1510
37.
Chapter 15
If a firm is successful in meeting its output goal for a period, the firm has been
a.
b.
c.
d.
efficient.
effective.
profitable.
exercising cost containment measures.
ANSWER:
38.
EASY
qualitative measures of inputs and outputs.

a match of inputs in one period with outputs in subsequent periods.
a causal relationship between inputs and outputs.
a ratio of planned output to actual output.
ANSWER:
EASY
A ratio of outputs to inputs is a(n)

a.
b.
c.
d.
effectiveness measure.
efficiency measure.
qualitative measure.
cost reduction measure.
ANSWER:
40.
A reasonable measure of efficiency relies on

a.
b.
c.
d.
39.
EASY
A small manufacturing company recently stated its sales goal for a period was $100,000.
At this level of activity, its budgeted expenses were $80,000. Its actual sales were
$100,000, but its actual expenses were $85,000. This company operated
a.
b.
c.
d.
effectively and efficiently.

neither effectively nor efficiently.
effectively but not efficiently.
efficiently but not effectively.
ANSWER:
EASY
Chapter 15
41.
Master Corp. has a sales goal of $500,000 for the coming year. Based on this level of
activity, Master budgets its total expenses at $450,000. Actual sales are $480,000 and
actual costs are $460,000. Master Corp.s operations were
a.
b.
c.
d.
both efficient and effective.

neither efficient nor effective.
efficient but not effective.
effective but not efficient.
ANSWER:
42.
EASY
a flexible budget variance.

an efficiency measure.
required in program budgeting.
an effectiveness measure.
ANSWER:
EASY
A cost that is found to bear an observable and known relationship to a quantifiable activity
base is a(n)
a.
b.
c.
d.
discretionary cost.
product cost.
period cost.
engineered cost.
ANSWER:
44.
The difference between actual sales and budgeted sales is

a.
b.
c.
d.
43.
1511
EASY
Control of engineered costs is frequently achieved through the use of

a.
b.
c.
d.
program budgeting.
standards.
cash budgeting.
ANSWER:
EASY
1512
45.
Chapter 15
A variance represents the difference between a budgeted and an actual cost. Thus, the
variance measures
a.
b.
c.
d.
only controllable cost differences.

only uncontrollable cost differences.
both uncontrollable and controllable cost differences.
the effectiveness of management.
ANSWER:
46.
EASY
Assume actual output exceeds the level of output in the original budget. You would expect
costs in which of the following categories to exceed the original budget?
a.
b.
c.
d.
total variable costs

committed fixed costs
discretionary fixed costs
all of the above
ANSWER:
47.
EASY
An organization plans to produce and sell 50,000 units. It actually produces and sells
45,000 units. You would expect total costs to be below the planned level due to cost
a.
b.
c.
d.
consciousness.
control.
reductions.
behavior.
ANSWER:
EASY
Chapter 15
1513
The following information is provided for the IHM Co. for June 2001, and is to be used for
questions 4851.
Actual
1,800 units
8,900 DLHs @ $10.50 per DLH
Variable OH $6,400
Fixed OH $17,500
48.
What is the price variance?

a.
b.
c.
d.
$4,450 F
$4,450 U
$1,000 F
$1,000 U
ANSWER:
49.
$4,450 F
$4,450 U
$1,000 F
$1,000 U
ANSWER:
MEDIUM
What is the spending variance?

a.
b.
c.
d.
$590 U
$590 F
$190 F
$190 U
ANSWER:
51.
MEDIUM
What is the efficiency variance?

a.
b.
c.
d.
50.
MEDIUM
What is the volume variance?

a.
b.
c.
d.
$590 U
$590 F
$190 F
$190 U
ANSWER:
MEDIUM
Standard
5 DLHs per unit @ $10.00 per DLH
VOH rate per DLH $ .75
FOH rate per DLH $1.90
Budgeted FOH $16,910
1514
Chapter 15
THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN THE

APPENDIX OF THE CHAPTER.
52.
Program budgeting typically begins with a(n)

a.
b.
c.
d.
zero funding level for all organizational activities.

statement of the quantity of input activities required.
analysis of potential organizational contributors.
definition of the organizations objectives in terms of output results.
ANSWER:
53.
program
zero-base
capital
cash
ANSWER:
EASY
Surrogate measures of output are required in

a.
b.
c.
d.
program budgeting.
capital budgeting.
cash budgeting.
ANSWER:
55.
EASY
A charitable organization that has well-defined objectives but tremendous flexibility in

meeting those objectives might increase its efficiency substantially by using
__________________ budgeting.
a.
b.
c.
d.
54.
EASY
Zero-base budgeting requires managers to

a.
b.
c.
d.
justify expenditures that are increases over the prior periods budgeted amount.
justify all expenditures, not just increases over last years amount.
maintain a full-year budget intact at all times.
maintain a budget with zero increases over the prior period.
ANSWER:
EASY
Chapter 15
56.
Zero-base budgeting differs from other budgeting techniques in several ways. Zero-base
budgeting
a.
b.
c.
d.
is less expensive than other methods.

is more widely used than any other method.
requires more time than other methods.
can only be used in governmental settings.
ANSWER:
57.
1515
EASY
Budgeting is frequently difficult in government because

a.
b.
c.
d.
governmental managers are usually inexperienced.

governmental managers are not motivated to be cost conscious.
it is difficult to identify the output of governmental units.
it is difficult to identify the inputs of governmental units.
ANSWER:
EASY
SHORT ANSWER/PROBLEMS
1.
What factors make discretionary costs difficult to control?

ANSWER:
Discretionary costs are difficult to control because it is difficult to identify
the exact benefits of discretionary activities and the relationship of these activities to the
organizations output and goals. Thus, it is difficult to decide at what level a discretionary
activity should be funded or if it should be funded at all based on the lack of a definite
causal relationship between the discretionary activity and the firms output and goals.
MEDIUM
2.
(Appendix) What kinds of organizations are more likely to use program budgeting?
ANSWER:
Program budgeting is more likely to be found in organizations that have
difficulty in defining their outputs. Such organizations are frequently not-for-profit or
governmental organizations.
MEDIUM
1516
3.
Chapter 15
What are the differences between committed fixed costs and discretionary fixed costs?
ANSWER:
Committed fixed costs are those costs that flow from the basic existence of
the organization. These are the direct costs of the organizations long-term investments
(such as plant and equipment) and the costs of essential personnel. These costs can only be
changed in the long run without significantly affecting the organization. Discretionary
fixed costs are all fixed costs that do not fit into the committed category. This includes the
costs of auxiliary service activities including activities that could be discontinued in the
short run without adversely affecting the long-run viability of the organization.
MEDIUM
4.
When can a discretionary fixed cost be subjected to control methods that are used for
engineered costs?
ANSWER:
When a discretionary cost is repetitive and can be related to some
fundamental activity measure (such as machine hours or units of output), it may be treated
like an engineered cost. With a repetitive cost that can be related to an activity
base, performance standards can be developed and flexible budget variances can be
computed and used as cost control tools.
MEDIUM
5.
What factors influence the total level of discretionary costs in an organization?

ANSWER:
Organizations tend to fund discretionary activities at different levels
depending on the state of the economy and the original profit level. When management
anticipates unfavorable economic conditions or downturns in profitability, discretionary
costs may be reduced. Likewise, they may be increased as economic conditions improve.
Total discretionary expenditures will also vary as certain activities lose their funding and
new discretionary activities are initiated.
MEDIUM
6.
How does strategic staffing fit in with departmental staffing?

ANSWER:
Strategic staffing is based on a departments needs related to its long-range
objectives and those of the overall company. The department looks at its needs to see how
a combination of temporary and permanent personnel fills the bill. By using temporary
personnel, flexible staffing is provided that helps insulate the jobs of permanent personnel.
Also, when temporary personnel are used by a department, the overall cost of
organizational fringe benefits is reduced, thereby saving funds for other needs.
MEDIUM
Chapter 15
7.
1517
Discuss the various elements of the cost control process.

ANSWER:
Cost understanding is one element of a cost control system. An
organization needs to understand that costs may change from one period to the next or
understand why costs differ from budgeted amounts. Total variable costs will
increase/decrease with different levels of activity. Costs can also change due to
inflation/deflation creating general price-level changes. Costs also change because of
supply/supplier cost adjustments. Lastly, costs may change because of quantity purchased
by the organization.
Cost containment is another element of the cost control process. Cost containment is
defined as the practice of minimizing, to the extent possible, period-to-period increases in
per-unit variable and total fixed costs. Cost containment is possible for costs that rise due
to competition, seasonal variations, and quantities purchased.
A third element of the cost control process is cost avoidance. Cost avoidance is defined as
the practice of finding acceptable alternatives to high-cost products and/or not spending
money for unnecessary goods/services.
A final element of the cost control process is cost reduction. Cost reduction means
lowering current costs especially for goods/services that may not be needed currently.
Exhibit 155 provides a visual to the implementation of a cost control system.
MEDIUM
8.
PJW has made the following information available for January 2001:
Actual
1,500 units produced
2,400 DLH used @ $10.25 per DLH
Standards
2 DLH per unit @ $10
Assume that PJW hires part-time employees for production of these units.
Compute the price and efficiency variances.
ANSWER:
2,400 $10.25
2,400 $10.00
Price variance
$24,600
24,000
$ 600 U
2,400 $10.00
(1,500 2) $10.00
Efficiency variance
$24,000
30,000
$ 6,000 F
MEDIUM
9.
SAF has provided the following information for July 2001:

Actual
Standards
1518
Chapter 15
800 units produced

Actual DL cost $6,750
2 DLH per unit @ $5.00

$1 fixed overhead per DLH
Assume that SAF hires full-time employees who are paid a total of $6,500 per month.
Compute the spending and volume variances.
ANSWER:
Actual labor cost

Budgeted labor cost
Spending variance
$6,750
6,500
$ 250 U
Budgeted labor cost

(800 2) $5
Volume variance
$6,500
8,000
$1,500 F
MEDIUM
10.
GSWS provided the following information for 2001 relative to the times and costs to
prepare a simple last will and testament:
Standards
2 DLH @ $50 per DLH
Actual
500 simple wills were prepared during the year
1,100 DLHs utilized during the year @ $52 per DLH
Compute the price and efficiency variances.

ANSWER:
MEDIUM
1,100 $52
1,100 $50
Price variance
$57,200
55,000
$ 2,200 U
1,100 $50
(500 2) $50
Efficiency variance
$55,000
50,000
$ 5,000 U
Chapter 15
1519
Use the following information for questions 1113.

Big Corp. manufactures and sells baseball bats. For a recent period, its production and sales
objectives were each set at 20,000 units. Also, for this period the firm had estimated costs as
follows:
Variable production costs
Variable selling costs
Committed fixed costs
Discretionary fixed costs
11.
$3 per unit
$2 per unit
$30,000 per period
$40,000 per period
For this question only, assume that Big Corp. actually produced and sold 18,000 bats. Big
Corp.s operations for the period would (on an overall basis) be regarded as efficient if
total costs were below what amount?
ANSWER:
First, remember how fixed and variable costs change when volume
changes. Fixed costs remain constant in total and variable costs remain constant on a perunit basis. To be regarded as efficient, the companys costs would need to be at or below
the flexible budget for 18,000 units. The flexible budget for all costs would be:
[18,000 ($3 + $2)] + $30,000 + $40,000 = $90,000 + $70,000 = $160,000
MEDIUM
12.
For this question only, assume Big Corp. actually produced and sold 19,000 bats. At this
level of operation, Big Corp.s total costs were $170,000. Evaluate Big Corp.s success in
terms of effectiveness and efficiency.
ANSWER:
Big Corp. was not entirely effective in reaching its goal because its
objective was to produce and sell 20,000 bats. It only produced and sold 19,000. Its
operations would still be regarded as efficient if it contained costs below the flexible
budget for 19,000 units, which would be:
[19,000 ($3 + $2)] + $30,000 + $40,000 = $95,000 + $70,000 = $165,000.
Since its actual costs were $170,000, the company was neither effective nor efficient in
achieving its operating objectives.
MEDIUM
1520
13.
Chapter 15
Note that the budget for discretionary fixed costs is $40,000. If actual discretionary fixed
costs were $50,000, could cost control have still been effective? Explain.
ANSWER:
Yes, cost control could have been effective. Company managers may have
deliberately and consciously overspent on certain items because of opportunities or
challenges that emerged during the period. For example, advertising expenses may have
been increased because new competitors entered the baseball bat market, or research and
development expenditures may have been boosted because of the discovery of a new metal
alloy that could revolutionize the baseball bat market. Another explanation would be that
cost control was effective, but costs increased dramatically for uncontrollable
reasons (severe inflation).
MEDIUM

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CHAPTER 15

A logical structure of activities designed to analyze and evaluate management of

the original budget.

When the organizational output is difficult to define, management may rely on

For cost control purposes, actual costs should be compared to

change in production technology

higher this period and lower in future periods.

Spending levels in prior years are often the basis of

The greatest degree of control for committed fixed costs is exerted

in the post-investment audit.

Careful analysis of the capital budget is an important control activity for

variable manufacturing costs.

management decides to incur in the current period to enable the company to

A committed fixed cost can

The term committed costs refers to costs that

Which of the following is an example of a committed fixed cost?

investment in production facilities

A company would be reducing its discretionary costs if it

fired a production supervisor.

Most discretionary costs relate to

plant and equipment acquisitions.

Discretionary costs are often difficult to control because

it is difficult to measure the cost.

managerial training programs

The level of discretionary costs

are set by management for one period at a time.

Which of the following is likely to be a discretionary cost in most organizations?

the importance of the activity to the achievement of the organizations goals

Funds were appropriately spent.

organizational policies and managerial preferences.

The term discretionary costs refers to

Discretionary activities in an organization are determined based on

Avoidable costs are usually

Which of the following is least likely to be a discretionary cost?

product or period costs.

variable costs and committed fixed costs

For cost control purposes, fixed costs are classified as

can be controlled prior to incurrence.

Which kind of costs could be eliminated by closing a sales office?

variable costs and fixed costs.

A major difference between committed and discretionary fixed costs is that

The maximum allowable expenditure is the

qualitative measures of inputs and outputs.

A ratio of outputs to inputs is a(n)

A reasonable measure of efficiency relies on

effectively and efficiently.

both efficient and effective.

a flexible budget variance.

The difference between actual sales and budgeted sales is

Control of engineered costs is frequently achieved through the use of

only controllable cost differences.

total variable costs

What is the price variance?

What is the spending variance?

What is the efficiency variance?

What is the volume variance?

THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN THE

Program budgeting typically begins with a(n)

zero funding level for all organizational activities.

Surrogate measures of output are required in

A charitable organization that has well-defined objectives but tremendous flexibility in

Zero-base budgeting requires managers to

is less expensive than other methods.