Chapter 11

Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through _____ accounting systems

responsibility

The buying division would be willing to pay up to the amount it expects to make on transferred units ______ outside supplier exists.

when no

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. Western's manager is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct?

Accepting the project is in the best interest of the company as a whole., The manager may decide to reject the project because it will lower the current ROI earned by his division.

When a department has enough idle capacity to supply a part to another division within the company without interrupting current sales, the lowest price the selling division will accept is the

variable cost per unit

Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?

ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.

Which of the following is not a characteristic of decentralization?

Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.

The net operating income that an investment center earns above the minimum required return on its average operating assets is

residual income

If operating departments were expected to use a total of 20,000 machine hours and actually used 22,000 hours, the spending variance charged to the maintenance department is

$30,000

Division A manufactures a part with a variable cost per of $18 and allocated fixed costs of $5 per unit. Division A's normal selling price for the part is $30 and Division B currently purchases a similar part for $26. Division A has enough idle capacity to be able to supply the needed part to Division B without interrupting its regular sales. The acceptable range of transfer prices for Division A and B from lowest to highest is $____ to $____

18-26

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

20

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

20%

Division A manufactures a part with a variable cost per of $18 and allocated fixed costs of $5 per unit. Division A's normal selling price for the part is $30 and Division B currently purchases a similar part for $26. Division A has enough idle capacity to be able to supply 400 parts to Division B without interrupting its regular sales. Assuming that Division B needs Division A to provide a total of 600 parts, the acceptable range of transfer prices is

22-26

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 B can purchase the part from an outside supplier for $26 per unit. The highest transfer price per unit that Division B will be willing to pay is $

26

Division A current sells a product for $30 and has no idle capacity. Variable costs are $18 and full costs are $23. Division B is currently purchasing a similar product for $26 from an outside supplier. Assuming that Division A's product is an acceptable substitute, which of the following statements is correct?

A transfer between divisions should not take place.

The correct formula for charging service department costs to operating departments is

Budgeted variable rate × Actual level of activity

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.

False

Because it fosters cooperation, most companies rely on negotiated transfer prices.

False

To make sure all costs are assigned to operations, service departments should allocate their actual costs to operating departments.

False

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?

Market price

Return on investment =

Net Operating Income / Average Operating Assets

Which of the following statements is incorrect regarding responsibility accounting?

Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.

Which of the following business segments would not be considered a cost center?

Retail outlet

Which of the following ratios are part of the ROI formula?

Sales ÷ Average operating assets, Net operating income ÷ Sales

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?

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

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?

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

Operating assets include

accounts receivable equipment inventory

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

When a buying division has no outside supplier available to them, the highest transfer price they should be willing to pay is the

amount they will make on the sale of the transferred units

The ROI formula typically uses

average operating assets for the year

Operating departments should be charged service department _____ costs

budgeted

Operating divisions are charged for ______ service department costs.

budgeted variable and fixed

The manager of a(n) ______ center does not have control over revenue or the use of investment funds.

cost

When a transfer has no effect on fixed costs, to be acceptable to the selling division, the transfer price must

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

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

decentralized

When fixed costs are allocated using a variable allocation base, such as departmental sales

departments with high sales are penalized, allocations are influenced by what happens within other departments

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 total allocation of costs

The cost of making capacity available for use is represented by service department's _____ costs which should be charged to operating departments in predetermined lump-sum amounts.

fixed

Using net book value (instead of gross cost) to calculate average operating assets

increases ROI over time

Net operating income is income before _____ and ______

interest, taxes

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

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

In order for the buying division to agree to a transfer price when an outside supplier does not exist, the transfer price must be _____ the profit per unit not including the transfer price.

less than or equal to

Drawbacks of using variable or full costing to set transfer prices include

little incentive to reduce costs, no profit for the supplying department, suboptimization when idle capacity exists

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

makes the final sale to an outside party

The margin and turnover formulas help managers better understand how to increase ROI. Increasing selling prices, reducing operating expenses, or increasing unit sales generally improves

margin

ROI can be calculated as

margin × turnover, net operating income ÷ average operating assets

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

Discussions between the buying and selling responsibility centers result in a(n) _____ transfer price

negotiated

EBIT is another term for

net operating income

The two types of departments in large organizations are

operating and service

Most large organizations have both _____ departments where the central purposes of the organization are carried out and ______departments that provide assistance

operating, service

Negotiated transfer prices

preserve the autonomy of the divisions are consistent with decentralization use the expertise of managers in weighing the costs and benefits of the transfer

Net operating income - (Average operating assets × Minimum required rate of return) =

residual income

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 decentralized organizations, decision-making authority is

spread throughout the organization

Using the market price to set transfer prices may not be the best approach when

the selling division has idle capacity

Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because

there are fewer managers that must be consulted before a decision is made

If the transfer has no effect on fixed cost, the transfer price from the selling division's standpoint must be equal to or greater than the variable cost per unit + _______ ÷ number of units transferred).

total contribution margin on lost sales

The amount that one responsibility center charges when it sells goods or services to another responsibility center of the same company is called a(n) ______ price

transfer

The price charged when one responsibility center of a company provides goods or services to another responsibility center of the same company is the ______ price

transfer

Having excessive funds tied up in operating assets will depress _____ and lower ROI

turnover

The activity that causes the service department's cost should be the basis for assigning ____ costs to operating departments.

variable