Chapter 9

Question 1

Why is it important to control, expenses?

Answer 1

Because doing so can increase cash flow, increase the value of the property, and increase profits for tenants.

Question 2

What is a fixed cost?

Answer 2

A present operating expense that remains fixed

Question 3

What is a variable cost?

Answer 3

A non-fixed operating expense that has the potential to fluctuate.

Question 4

What is a semi-variable cost?

Answer 4

An operating expense that displays both fixed and variable components.

Question 5

What causes costs to vary?

Answer 5

occupancy*
inflation
regulations
building size/age
tenant service requirements

Question 6

What is an occupancy audit?

Answer 6

It is the method of allocating the latest increases in expense items, such as cleaning costs, to the most recent new tenant based on square feet occupied.

Question 7

How are costs identified as either controllable or uncontrollable?

Answer 7

By determining whether the costs are caused by factors beyond our control.

Question 8

When is the best opportunity to control costs?

Answer 8

During budget preparations.

Question 9

Why should explanations in the annual budget be as detailed as possible?

Answer 9

By providing more detail, it is easier to explain and justify budget variances throughout the year.

Question 10

What is a pro forma?

Answer 10

It is a projection of operating expenses over an anticipated holding period.

Question 11

What happens when budgeted expenses exceed projections?

Answer 11

The asset will no longer perform as planned and a decision must be made by the owner to sell the asset or adjust the budget to align with operating projections.

Question 12

What is responsibility reporting?

Answer 12

Budget preparations and variance explanations are assigned to those individuals responsible for the items in that portion of the budget.

Question 13

Explain internal controls?

Answer 13

They are the efforts made to safeguard assets, assure accurate and reliable accounting data, promote efficiency, and adhere to prescribed management policies.

Question 14

What areas of concern give rise to internal controls?

Answer 14

Selecting vendors
Establishing types, quantities, and prices and terms of purchases
requests for goods or services
accepting goods or services
reporting goods and services
computing amounts due to vendors
disbursing cash
making adjustments to cash disbursements
accessing records

Question 15

What is the first step in handling an invoice?

Answer 15

It should be compared an reconciled with the receiving copy of the PO or other receiving docs or a monthly contract.

Question 16

What is cost accounting?

Answer 16

It is the process of classifying or segregating the costs of operations into logically similar or homogenous groups.

Question 17

What is the main reason for cost accounting?

Answer 17

It established the basis for pricing and enables management to control and localize cost excess and thereby take the necessary steps to correct or minimize these excesses.

Question 18

What is job order costing?

Answer 18

It is a system used in project management where information detailing numerous types of costs that can be incurred during the completion of a project and identifying problem areas.

Question 19

What is the purpose of sub-accounts and descriptions in job order costing?

Answer 19

It allows for more detailed records to determine costs of each area of management.

Question 20

List the factors that generally cause costs to vary.

Answer 20

occupancy
inflation
regulations/compliance
building size and age
tenant service requirements

Question 21

How does an owner use the budget process to control costs?

Answer 21

During budget preparation and review the owner has the opportunity to review and approve every anticipated expense of the property for the coming year with the property or facility manager substantiating budget projections; budget variance require an explanation to the owner

Question 22

Explain responsibility reporting for budget variances.

Answer 22

In a large property, all employees involved in the operation of a property become responsible for the portions of the budgeted items that fall under their control and must explain budget variances; often the employees are also involved in budget preparations.

Question 23

Define cost accounting.

Answer 23

It is the process of classifying or segregating the costs of operations into logically similar or homogeneous groups; it enables management to localize cost excess and take steps to control them.

Question 24

Costs can be classified into which category?

a) over budget and under budget
b) controllable and uncontrollable
c) authorized and unauthorized
d) taxable and nontaxable

Answer 24

b) controllable and uncontrollable

Question 25

Budget Variances are easier to explain when:

a) the budget is prepared in great detail
b) the owner visits the property regularly
c) actual amounts vary significantly from the budget
d) the budget is prepared by the owner

Answer 25

a) the budget is prepared in great detail

Question 26

If budgeted expenses are higher than original projections, the owner will:

a) reevaluate investment objectives
b) loosen internal budget controls
c) speed budget approval
d) shorten the budget cycle

Answer 26

a) reevaluate investment objectives

Question 27

The owner relies on internal controls to do all of the following except:

a) regular maintenance
b) supplies
c) contract labor
d) payroll

Answer 27

a) regular maintenance