Chapter 10

Revenue Center

A responsibility center in which managers are responsible for generating revenue

Cost Center

A responsibility center in which managers are responsible for controlling cost

Management by Exception

A management technique in which managers only investigate budget variances that are relatively large

Responsibility Center

A part of an organization whose manager is accountable for planning and controlling certain activities

Balanced Scorecard

A performance evaluation system that integrates financial and operational performance measures along four perspectives: financial, customer, internal business, and learning and growth

Decentralize

A process where companies split their operations into different operating segments

Performance scorecard or Dashboard

A report displaying the measurement of Key Performance Indicators (KPIs), as well as their short-term and long-term targets

Profit Center

A responsibility center in which managers are responsible for both revenues and costs, and therefore profits

Investment Center

A responsibility center in which managers are responsible for generating revenue, controlling costs, and efficiently managing the division's assets

Flexible Budget

A summarized budget prepared for different levels of volume

Responsibility Accounting

A system for evaluating the performance of each responsibility center and its manager

Favorable Variance

A variance that causes operating income to be higher than budgeted

Unfavorable Variance

A variance that causes operating income to be lower than budget

Which of the following is not an advantage of decentralization?

Achieving goal congruence

Companies often decentralize their operations by

All of the above (geographic area, product line, customer base)

Sales Margin

Operating income divided by sales revenue. The sales margin shows how much income is generated for every $1.00 of sales

Which of the following is true?

Favorable variances are variances that cause operating income to be higher than budgeted

Direct Fixed Expenses

Fixed expenses that can be traced to the segment

Common Fixed Expenses

Fixed expenses that cannot be traced to the segment

Return on Investments (ROI)

Operating income divided by total assets. The Return on Investments (ROI) measures the profitability of a division related to the size of its assets

Gross Book Value

Historical cost of assets

Net Book Value

Historical cost of assets less accumulated depreciation

"Number of new products developed" would be a key performance indictor (KPI) for which of the four balanced scorecard perspectives?

Internal business

In terms of responsibility centers, a large corporate division would be considered a(n)

Investment center

"Hours of employee training" would be a key performance indicator (KPI) for which of the four balanced scorecard perspectives?

Learning and growth

A segment margin is the operating income generated by subtracting

Only direct fixed expenses from a segment's contribution margin

Residual Income

Operating income minus the minimum acceptable operating income given the size of the division's assets

Lag Indicators

Performance indicators that revel the results of past actions and decisions

Lead Indicators

Performance measures that predict future performance

Performance Reports

Reports that compare actual results against budget figures

Return on investment (ROI) can be restated as which of the following

Sales margin (X) Capital turnover

Capital Turnover

Sales revenue divided by total assets. The capital turnover shows how much sales revenue is generated with every $1.00 of assets

Key Performance Indicators (KPIs)

Summary performance metrics used to assess how well a company is achieving its goals

Vertical Integration

The acquisition of companies within one's supply chain

Master Budget Variances

The difference between actual results and the master budget

Variance

The difference between an actual amount and the budget

Flexible Budget Variance

The difference between the flexible budget and actual results. The flexible budget variances are due to something other than volume

Volume Variance

The difference between the master budget and the flexible budget. The volume variance arises only because the actual sales volume differs from the volume originally anticipated in the master budget

Segment Margin

The operating income generated by a profit or investment center before subtracting the common fixed costs that have been allocated to the center

Transfer Price

The price charged for the internal sale of product between two different divisions of the same company

Which of the following is false?

The volume variance is due to causes other than volume

Which of the following is not a valid strategy for determining transfer price?

Using the price set by GAAP

Goal Congruence

When the goals of the segment managers align with the goals of top management