ACCT 202 - Chapter 11 Learnsmart

Division B wants to buy 500 units of a part from Division A. Division A's variable cost per unit for the part is $18. Division A has enough idle capacity to make 300 parts without interrupting regular sales. If Division A supplies the parts, it will lose sales of 200 units. The selling price per unit on the outside market is $38. The lowest transfer price per unit that Division A might accept is $ __________

26

Which of the following are disadvantages of decentralization? Select all that apply a. Lower-level managers may have objectives that differ from the objectives of the entire organization. b. Coordination among departments may be lacking. c. The layers of required approvals and decisions often cause slow customer response time. d. Decision-making authority is removed from those with the most detailed information about the day-to-day operations. e. Lower-level managers may make decisions without understanding the big picture.

a. b. e.

Select all that apply Disadvantages of decentralization include ______. a. lack of coordination b. defining organization strategy is difficult c. spreading innovative ideas may be difficult d. clashing objectives between departments and the organization

a. c. d.

Select all that apply Drawbacks of using variable or full costing to set transfer prices include ______. a. a lack of departmental profit for the supplying department b. suboptimization that may occur as fixed costs per unit may push the transfer price above market price c. a lack of incentive to control costs because they are simply passed to another department d. a lack of cooperation between managers who are being pitted against each other

a. a lack of departmental.. b. suboptimization that may... c. a lack of incentive to control

If a transfer within a company would result in higher overall profits for the company, there is ______ a range of transfer prices where both divisions would have higher profits if they are able to negotiate a price.

always

Select all that apply Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers? a. Actual profits compared to budgeted profits b. Return on investment (ROI) c. Standard cost variances d. Residual income

b. d.

Select all that apply Operating assets include ______ a. investments in bonds b. equipment c. land held for investment d. inventory e. accounts receivable

b. equipment d. inventory e. accounts receivable

The ROI formula typically uses ______. a. end of year operating and non-operating assets b. end of year operating assets c. average operating and non-operating assets for the year d. average operating assets for the year

d. average operating assets for the year

How managers are evaluated has no impact on transfer price negotiations. true or false

false

When a department has no idle capacity and will interrupt their current level of sales to regular customers, the lowest acceptable transfer price to supply product to another division is ______.

selling price

In strongly decentralized organizations, even the lowest-level managers can make decisions. true or false

true

Decision-making authority lies mostly with higher-level managers in strongly ______. a. centralized organizations b. diversified organizations c. segregated organizations d. decentralized organizations

a. centralized organizations

In decentralized organizations, decision-making authority is: a. spread throughout the organization b. confined to a few top executives c. not granted to the lowest level managers

a. spread throughout the organization

If the transfer has no effect on fixed cost, the transfer price from the selling division's standard must be equal to or greater than the (variable cost per unit + _______) ÷ number of units transferred. a. net operating income on lost sales b. total contribution margin on all current sales c. opportunity cost of lost sales

c. opportunity cost of lost sales

Suboptimization occurs when responsibility center managers make decisions that are in the best interests of their own responsibility center but not the company as a whole. T True False

false

Carlos, Inc. requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average operating assets of $200,000 and a net operating income of $24,000. The department's residual income is $______

24,000 - (10% x 200,000) = 4,000

Select all that apply Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true? a. The department manager may not want to accept the project because it will lower the overall ROI for the department. b. The project should be rejected by the company because its ROI is lower than the current departmental ROI. c. The project should be accepted because the residual income will help push the project's ROI above the projected 12%. d. The project should be accepted by the company because it increases overall residual income.

a. The department manager may not want to accept the project because it will lower the overall ROI for the department. d. The project should be accepted by the company because it increases overall residual income.

Which of the following is not a characteristic of decentralization? a. Decentralization puts the decision-making authority in the hands of those who have the most information on day-to-day operations. b. Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions. c. Decentralization allows top management to concentrate on bigger issues such as overall strategy. d. Decentralization helps to train lower-level managers for higher level positions.

b.

The three methods commonly used for transfer pricing are ______. a. variable cost, market price, arbitration b. variable cost, full cost, arbitration c. negotiation, full cost, market price d. negotiation, contribution margin, market price

c. negotiation, full cost, market price

The fundamental objective in setting transfer prices is to motivate managers to act in the best interest of ______. a. their own department b. the service departments within the organization c. the overall company

c. the overall company

Service departments, such as the accounting department, are generally considered ________ centers, while sales offices are often considered ________ centers

cost profit

Adams, Inc. has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book values. True False

false

In order to increase return on investment (ROI), the company must _______ sales, and/or ________ operating expenses and/or _______ average operating assets.

increase decrease decrease

Using net book value (instead of gross cost) to calculate average operating assets ______. has no effect on ROI increases ROI over time encourages new investment

increases ROI over time

Using sales dollars to allocate fixed costs from service departments to operating departments ______.

is often viewed as a measure of ability to pay is simple and straightforward is often a poor base because sales dollars vary from period to period

Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress __________ and excessive operating assets which can depress ____________.

margin turnover

Select all that apply ROI can be calculated as ______. margin ÷ turnover average operating assets ÷ net operating income margin × turnover net operating income ÷ average operating assets

margin x turnov

When managers are evaluated on residual income, rather than on return on investment (ROI), they will be ______ likely to pursue projects that will benefit the entire company. more less equally

more

When ROI is calculated using the gross cost of assets, replacing a fully depreciated asset with a comparably priced new asset will not adversely affect ROI. true or false

true

If service department costs are not allocated ______. a. operating departments will be inclined to waste their resources b. services departments will operate more efficiently c. the profitability of operating departments will decrease c. the overall profitability of the company will increase

a. operating departments will be inclined to waste their resources

Select all that apply Negotiated transfer prices ______. a. preserve the autonomy of the divisions b. use the expertise of managers in weighing the costs and benefits of the transfer c. ensure that the supplying division will receive a market price d. ensure that all common costs will be covered e. are consistent with decentralization

a. preserve b. use the expertise e. are consistent with decentralization

When a department has enough idle capacity to supply a part to another division within the company without interrupting current sales, what is the lowest price the selling division might accept? a. Variable cost per unit b. Cost of buying from an outside supplier c. Variable cost per unit + Fixed cost per unit based on units sold and units transferred d. Variable cost per unit + Fixed cost per unit based on existing sales

a. variable cost per unit

Select all that apply Garnett, Inc. has a required rate of return on new projects of 12%. The Western division of Garnett is currently earning a combined return on investment (ROI) of 14.5% on the projects in its division. The manager of the Western division is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct? a. The project will improve the ROI for the Western division, since it is above the required rate of return that the company has specified. b. The manager may decide to reject the project because it will lower the current ROI earned by his division. c. Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment.

b. c.

When a buying division has no outside supplier available to them, the highest transfer price they should be willing to pay is the ______. a. price the selling division charges to other customers b. amount they will make on the sale of the transferred units c. contribution margin of the transferred units d. variable cost of the transferred units

b. amount they will make on the sale of the transferred units

A company can increase its return on investment (ROI) by ______. a. borrowing additional funds b. increasing sales c. reducing operating expenses d. increasing operating assets

b. increasing sales c. reducing operating expenses

Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value? a. The net book value is rarely used by companies and may not be understood by management. b. Replacing an existing asset will not automatically decrease ROI c. Using the gross cost will provide an opportunity for ROI to grow automatically over time as accumulated depreciation increases.

b. replacing an existing....

Return on investment = a. Net operating income ÷ Segment revenue b. Segment revenue ÷ Net operating income c. Net operating income ÷ Average operating assets d. Average operating assets ÷ Net operating income

c.

The main objective of using transfer prices in an organization is to ______. a. ensure that managers will act in the best interests of the departments under their control b. enable the company to lower its selling prices to more competitive levels c. motivate the managers to act in the best interests of the overall company d. provide revenue for cost centers in order to provide financial incentives to cost center managers

c. motivate the managers to act in the best interests of the overall company

Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because ______. a. lower-level managers are judged on non financial measures rather than financial outcomes of their decisions b. top management is heavily involved in the day-to-day operations c. there are fewer managers that must be consulted before a decision is made

c. there are few managers that...

Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance? a. Managers may increase ROI in a way that is inconsistent with company strategy. b. It may be difficult to assess the performance of a manager who takes over an existing business segment. c. Managers may reject investment opportunities that would benefit the entire company but negatively affect the manager. d. ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.

d. ROI does not include the investment in...

When the selling division has some idle capacity, but will have to interrupt current sales to supply the buying division, how is the lowest acceptable transfer price calculated? a. Total contribution margin on all transferred units ÷ Total units sold and transferred b. Variable cost per unit c. Variable cost per unit + (Total contribution margin on all transferred unit ÷ Total transferred units) d. Variable cost per unit + (Total contribution margin on lost sales ÷ Total transferred units)

d. Variable cost per unit + (Total contribution margin on lost sales ÷ Total transferred units)

Using the market price to set transfer prices may not be the best approach when ______. a. price negotiation between managers is inefficient or unproductive b. the selling division has idle capacity c. the buying division can purchase the products or services from an outside supplier d. the selling division is operating at full capacity

d. the selling division is operating at full capacity

When a manager is evaluated on residual income, an investment is acceptable when ______.

net operating income for the investment is above the minimum required return on average operating assets

When responsibility center managers forego additional companywide profits by making decisions not in the best interest of the overall company, __________ occurs.

suboptimization

Production Department A uses 30% of the Maintenance Dept. resources and budgeted 70,000 machine hours for the year. Actual machine hours used were 75,000. The Maintenance Dept. variable cost rate per machine hour was $5. Fixed costs were budgeted to be $400,000. Actual fixed costs were $450,000. Total Maintenance Dept. costs assigned to Production Dept. A for the year equal ______.

$495,000 Reason: (75,000 × $5) + ($400,000 × 30%) = $495,000

Production Department B uses 40% of the Maintenance Dept. resources and budgeted 90,000 machine hours for the year. Actual machine hours used were 85,000. The Maintenance Dept. variable cost rate per machine hour was $5. Fixed costs were budgeted to be $400,000. Actual fixed costs were $450,000. Total Maintenance Dept. costs assigned to Production Dept. B for the year equal ______.

$585,000 Reason: (85,000 × $5) + ($400,000 × 40%) = $585,000

Division B wants to purchase a part from Division A. Division A's variable cost per unit is $18. Allocated fixed costs are $5 per unit. Division A's normal selling price for the part is $30 per unit. Division A has enough idle capacity to be able to supply the needed parts without interrupting its regular sales. The lowest transfer price per unit that Division A might accept is $

18

Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $____________

42,000 - (12%x300,000) = 6,000

Macey, Inc.'s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is ______. 10% 5% 20% 6.7%

70,000 divided by 350,000 = .20 20%

A company with no idle capacity has variable costs of $8 per unit and a contribution margin of $12 per unit. Fixed costs total $10,000 for 5,000 units produced. The lowest per unit price they will accept to supply another division with 500 units is $

8+12 = $20

Which of the following methods is not commonly used to set transfer prices? Arbitration cost Negotiation Market price Variable cost

Arbitration cost

ROI is a method used to evaluate ______. a. investment centers, but not cost or profit centers b. cost, profit, and investment centers c. cost and profit centers, but not investment centers d. profit and investment centers, but not cost centers

a.

Which of the following statements is incorrect regarding responsibility accounting? a. Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers. b. Responsibility accounting divides the organization into "responsibility centers" to evaluate managers' decisions. c. Responsibility accounting links lower-level managers' decisions with the outcomes of those decisions. d. Responsibility accounting holds managers accountable for the revenues and expenses over which they have control.

a.

Select all that apply Which of the following ratios are part of the ROI formula? a. Sales ÷ Average operating assets b. Cost of goods sold ÷ Average inventory c. Net operating income ÷ Sales d. Sales on account ÷ Average accounts receivable

a. c.

If cost is used as a transfer price, the only division with an opportunity to make a profit on the transfer is the division that ______. a. makes the final sale to an outside party b. buys the item that is being transferred c. sells the item that is being transferred

a. makes the final sale to an outside party

Which of the following statements is correct? a. A project that is not acceptable using residual income calculations may be acceptable when ROI is calculated. b. Managers will be more likely to pursue projects that will benefit the entire company when being evaluated on ROI instead of residual income. c. A manager might reject a proposal using ROI that the manager would accept using residual income.

c. A manager might reject a proposal using ROI that the manager would accept using residual income.

In order for the buying division to agree to a transfer price when an outside supplier does not exist, the transfer price must be ______. a. zero b. more than the profit per unit not including the transfer price c. less than or equal to the profit per unit not including the transfer price

c. less than or equal to...

Assume the selling division has no idle capacity and must give up outside sales, but does not lose anything by selling internally rather than outside. In addition, the buying division has an accurate assessment of how much it costs the company for the transfer to take place. Under this situation, which pricing method is being used? a. Variable costing b. Negotiation c. Market price d. Full (absorption) costing

c. market price

Select all that apply When a transfer has no effect on fixed costs, to be acceptable to the selling division, the transfer price must ______. a. cover the variable costs per unit b. cover a reasonable portion of the selling division's fixed costs c. cover any opportunity cost from lost sales d. cover any lost contribution margin due to the transfer e. equal the product's normal selling price

cover the variable costs per unit cover any opportunity costs from lost sales cover any lost contribution margin due to the transfer

The range of acceptable prices is the range of transfer prices within which the profits of ______. a. the selling division would decrease and the buying division would increase b. both the buying and the selling divisions participating in a transfer would decrease c. the selling division would increase and the buying division would decrease d. both the buying and the selling divisions participating in a transfer would increase

d. both the buying and the selling divisions participating in a transfer would increase

Which of the following business segments would not be considered a cost center? a. Personnel department b. Manufacturing facilities c. Accounting department d. Retail outlet

d. retail outlet

Which of the following is not one of the three primary types of responsibility centers? a. profit b. investment c. cost d. sales

d. sales

When a department has no idle capacity and will interrupt their current level of sales to regular customers, the lowest acceptable transfer price to supply product to another division is ______. a. price charged by an outside supplier b. contribution margin on lost sales c. variable costs d. selling price

d. selling price

When allocating fixed costs of service departments, the fact that operating departments do not need the peak level of service every period ______.

does not impact

The variable costs of service departments should be charged to consuming departments in a predetermined lump-sum amount, so that the cost of the service can be properly traced to departments, products, and customers. True or false

false

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000. The equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to _______________ (increase/decrease) from the current level of _________% to a new return on investment (ROI) of ______ %.

increase 10 12

Net operating income is income before __________ and __________.

interest taxes

Residual income is a measure used to evaluate managers of ______ centers. investment profit profit & investment cost

investment

Once set, fixed service department charges that are allocated to operating departments should not change because the:

operating department is effectively being assessed the cost of having the capacity to utilize the services

The net operating income that an investment center earns above the minimum required return on its average operating assets is ______. return on investment (ROI) net income residual income

residual income

Which of the following is NOT a service department? Sales Human resources Internal auditing Purchasing

sales

The buying division would be willing to pay up to the amount it expects to make on transferred units ______ outside supplier exists. a. whether or not an b. when an c. when no

when no

Macey, Inc.'s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is ______. 5% 20% 10% 6.7%

20%

Given a margin of 12%, sales of $150,000 and average operating assets of $90,000, the ROI is ____%

20% 12% x 150,000 = 18,000 18,000 divided by 90,000 = .20

Select all that apply In a decentralized organization ______. a. lower-level managers are trained for higher positions. b. changes in the operating environment can be responded to rapidly c. top management can concentrate on issues such as overall strategy d. lower-level managers have low motivation and job satisfaction due to increased responsibility e. decision-making authority is reserved for top management so lower level managers can concentrate on operations. f. lower-level managers should not be held accountable for the outcomes of their decisions

a. b. c.

An organization in which decision-making authority is spread throughout the organization is: centralized decentralized

decentralized

Which of the following statements are correct? Fixed service department costs are based on actual cost and budgeted activity. Fixed service department costs are based entirely on budgeted data. Variable service department costs are charged to operating divisions based on the budgeted rate and actual activity. Variable service department costs are charged to operating divisions based on the budgeted rate and budgeted activity.

fixed service department costs are based entirely on budgeted data variable service department costs are charged to operating... based on the budgeted rate and actual activity

Service department costs are NOT allocated to operating departments to ______.

help measure the profitability of service departments