1. The unit sales budget affects many of the other schedules comprising the master budget (i.e. will affect the production, direct materials, and direct labor budgets).
a. True
b. False

2. Which of the following is not a characteristic of bottom-up budgeting?
a. Encourages organization-wide input into the process.
b. Takes advantage of employees' intimate knowledge of operations when formulating plans.
c. Is not as time consuming as top-down budgeting.
d. Increases employees' commitment to achieving budget goals.
e. All of the above are characteristics of bottom-up budgeting.

3. Which of the following is a concern of using prior performance as the starting point for developing budgets?
a. This approach can foster a business-as-usual mentality.
b. This approach may blind decision makers to the need for drastic changes in business by making them focus narrowly on small changes from the status quo.
c. Both A and B are concerns.
d. Neither A or B are concerns

4. Which of the following transfer prices, in theory, is the most sound because it provides the best measure of the opportunity cost of inter-divisional transfers?
a. Variable cost-based transfer prices.
b. Full cost-based transfer prices.
c. Market-based transfer prices.
d. Negotiated transfer prices.
e. None of the above.

5. The minimum price that the selling division wants from an inter-company transfer is:
a. The cost of the transfer plus the opportunity cost of the transfer.
b. The cost of the transfer less the opportunity cost of the transfer.
c. The normal selling price of the item plus the opportunity cost of the transfer.
d. The normal selling price of the item less the opportunity cost of the transfer.

6. The benefits of decentralization include all of the following except:
A. It forces top levels of management to focus on individual units.
B. It empowers more employees at lower levels of management.
C. It allows for better and more timely decision making.
D. It trains future managers.

7. Agency problems arise in the case of decentralization related to:
A. The fact that local managers have private information.
B. The fact that senior management cannot observe local manager effort (i.e., "hidden action"). C. Both A. and B.
D. Neither A. or B.

8. A "noisier" performance measure places less risk on the employee being evaluated using the performance measure.
A. True
B. False

Sweet Marian is a bakery that provides frozen cakes to retail grocery stores. Sweet Marian produces numerous types of cakes and charges $4.50 per cake, including delivery and regardless of the type of cake. A specialty cake line, "Marian's Moist," has been gaining popularity lately because these cakes are so moist they "melt in your mouth." Sweet Marian's accounting system computes the cost of cakes by summing the total of all raw materials, direct labor costs and overhead incurred each week and dividing it by the number of cakes produced. SG&A costs are reported in total whenever GAAP financial statements are prepared at the end of a month, quarter, or year.

Sweet Marian's profit has been decreasing lately. The company has hired you as a consultant to help it determine how to stop their declining profits. You have toured the bakery and noticed the following:

a) The Marian's Moist line of cakes require a quick-freeze process to maintain their moisture. The quick freeze process requires using special equipment that must be precisely calibrated and charged with gasses before each batch of cakes is run through the system.

b) Some cakes require extensive hand decorating whereas most require simple icing.

c) Sweet Marian has recently landed a new upscale food chain as a customer. In order to entice the customer, Sweet Marian agreed to stock the cakes on the customer's display cases in each store as part of the delivery service. For other customers Sweet Marian only delivers the cakes to the customer's warehouse.

BRIEFLY provide an overall critique (in bullet point format) of the current costing system and how this may relate to the declining profits.

BRIEFLY describe recommendations and/or any changes you would make to the accounting system for each of the items noted above (i.e., your answers below should correspond with the items labeled a, b, and c in the problem):

a)

b)

c)

You are a division manager at Caddo Co. Below is your division's income statement and other information for the current year:

Compute the ROA and RI for your division:

ROA ___________

RI ____________

You are considering an investment that will generate annual returns of 10%; assume that it is generally risk free. Based on your answers for ROA and RI above, answer the following two questions.

1. Would a 100% self-interested manager choose to invest in this project if they are paid incentives based on ROA? Circle one below.

YES NO

2. Would a 100% self-interested manager choose to invest in this project if they are paid incentives based on RI? Circle one below.

YES NO

Prepare an income statement in the space below for your division using the contribution margin format.

For purposes of this question, assume that all costs shown on the income statement (that you just prepared on the previous page) can be directly traced to your division (i.e., there are no corporate-level allocations).

A. Compute the breakeven point in total $ of revenues.

BEP in total $ of revenues ______________

B. If revenues increased by $10,000 from your answer in part A, how much would your profits increase?

Profit increase $ ______________

Gamon Memorial Diner is a charity supported by donations that provides free meals to the homeless. The diner's manager has just submitted the report presented below, which compares the diner's budget for February to the actual costs for February. The diner's manager was very happy about the results because total actual costs were less than budgeted.

Prepare a flexible budget for the diner in the space provided above.

As a highly trained MBA, do you share the joy of the diner's manager? (circle yes or no below) YES NO

Which two flexible budget variances would you investigate? Name the expense and BRIEFLY state why it would be important to investigate.
1.

2

Macon Paper Co (MPC) currently manufactures commodity grade papers for use in computer printers and photocopiers. MPC has reported losses for the last two years due to intense pressure from much larger competitors. The MPC management team is contemplating a change in strategy to restore financial viability. The commodity paper manufacturing business is all about economies of scale in which the largest competitor with the lowest cost per unit wins. Therefore MPC has been focused on cost reduction, with a particular focus on maintaining full capacity utilization of its machines. However, MPC's older machines with limited capacity have made it difficult for them to succeed at the "crank out as many tons of paper as possible" strategy. The new strategy would be to pursue low-volume business opportunities that exist in non-standard, specialized paper grades. These customers would want prompt deliveries of smaller quantities of a full range of paper grades. MPC management believes it will be able to charge premium prices because there is limited competition in this market. To succeed at this new strategy, MPC would need to adjust its manufacturing in three ways:

• Improve the ability to switch between paper grades. Right now they require an average of four hours to change over to another grade. Prompt customer deliveries are a function of changeover performance.

• Expand the range of paper grades they can manufacture. Currently they only manufacture three grades, and they would need to expand grade capability so as to be perceived by customers as a "one stop shop." This would require new supply chain relationships and production worker training.

• Improve their yields (i.e., tons of acceptable output relative to total tons produced) in the nonstandard papers. Currently, the percentage of waste within the non-standard grades is unacceptably high.

1. Generally speaking, why would a company need to change its performance measurement system when it changes its strategy?

2 Provide two examples of measures that would be appropriate under the new strategy. Why would these measures support MPC's new strategy?