chapter 9-10

There are four categories of cost in the quality cost​ report; match them to the correct explanation.

Prevention Costs incurred to prevent the production of defective products or services. Appraisal Costs incurred to identify defective products or services. Internal failure Costs of defective products that are scrapped or reworked. External failure Costs caused by delivery of defective products or services to customers.

Which of the following statements about management control systems is​ FALSE?

Profit−center managers always have more decentralized decision−making authority than cost−center managers.

An example of a nonfinancial goal is​ ________.

increase customer satisfaction

What is the major disadvantage of negotiated transfer​ prices?

A major disadvantage of negotiated transfer prices is the valuable time and effort can be lost in the negotiating​ process, as well​ as, divisional profit becomes a function of negotiating ability and power.

What is a balanced​ scorecard?

A performance report that contains measures of all the key financial and nonfinancial variables that are important for a company to prosper.

What are the purposes of a management control​ system? ​(Select all choices that​ apply.)

A. To communicate results and coordinate actions across the organization. B. To motivate managers and employees to achieve the​ organization's goals. C. To ensure that managers and employees understand the specific actions required to achieve organizational goals. D. To clearly define and communicate the​ organization's goals.

List four nonfinancial measures of performance that managers find useful.

Average time from order to delivery. 2. Percentage of products delivered on time. 3. Pounds of output per direct labor hour. 4. Proportion of defective units produced.

List five characteristics of a good performance measure. ​(Select five that​ apply.)

C. Be used in evaluating and rewarding managers and employees D. Relate to the​ organization's goals E. Reflect key activities of the organization F. Be affected by​ managers' actions A. Be easily understood by managers and employees

Why are more companies using a balanced​ scorecard?

Companies find that it is a useful tool to help managers focus on the multidimensional factors that make an organization successful.

Give four examples of segments.

Divisions, territories, branches and product lines

Nonfinancial performance measures are often lagging indicators that arrive too late to help prevent problems.

False

Profit−center managers always have more decentralized decision−making authority than cost−center managers.

False

The first and most basic component in a management control system is the​ employee's goals.

False

When compared to a decentralized​ organization, there are really no advantages to a centralized organization.

False

​"Goals are useless without performance​ measures." Do you​ agree? Explain.

Goals without performance measures may not be completely​ useless, but performance measures greatly enhance the achievement of goals. They provide signals to managers about whether goals are being achieved.

Describe management by objectives​ (MBO).

In organizations using management by objectives​ (MBO), managers and their superiors jointly formulate and agree on the goals and plans for the forthcoming period. Managers are then evaluated against these​ agree-upon goals and plans.

According to agency​ theory, employment contracts balance what three​ factors?

Incentives created for​ managers, the risk imposed on​ managers, and the cost of developing and using the performance measurement system.

ROI

Income/Invested Capital

How do profit centers and investment centers​ differ?

Investment centers go a step farther than profit centers. Both measure​ profits, but an investment center also compares that profit to investment using measures such as return on​ investment, residual income or EVA.

Why is decentralization more popular in​ profit-seeking organizations than in nonprofit​ organizations?

It is more difficult to hold managers of nonprofit organizations responsible for performance because inputs and outputs are generally more difficult to measure. Without reliable performance​ measures, granting managerial freedom is more risky.

What is the major benefit of the ROI technique for measuring​ performance?

Its attention to the required asset investment in relation to operating income.

Why are companies increasing their quality control emphasis on the prevention of​ defects?

Many companies are finding that it is less costly to prevent defects than it is to identify and correct defects.

What are key performance​ indicators?

Measures that drive the organization to achieve its goals.

Discuss two factors that affect multinational transfer prices but have little effect on purely domestic transfers.

Multinational transfer prices are influenced by the relative​ income-tax rates in the countries in which the producing and purchasing divisions are located. They are also influenced by import duties and restrictions on flows of capital between countries.

What two major items affect​ ROI?

ROI is affected by a​ division's income and the amount of its investment. B. ROI as the product of return on sales and capital turnover.

A manager at a local home improvement store is considering the following costs. Which of the following is a cost controllable by the​ manager?

Salary of head cashier

Capital Turnover Formula

Sales Revenue/Invested Capital

Management control systems in nonprofit organizations will probably never be as highly developed as those in profit−seeking firms. Which of the following is NOT a reason for this to​ occur?

There are low levels of discretionary fixed costs in nonprofit organizations.

Name three kinds of responsibility centers.

Three types of responsibility centers are​ (1) cost​ center, (2) profit​ center, and​ (3) investment center.

Give three possible definitions of invested capital that we can use in measuring ROI or economic profit.

Total​ assets, total assets less current liabilities or​ stockholders' equity.

​"We use​ variable-cost transfer prices to ensure that we make no dysfunctional​ decisions." Discuss.

Variable-cost transfer prices can also lead to dysfunctional decisions. For​ example, in a situation where the producing division has no excess​ capacity, variable-cost transfers may cause dysfunctional decisions.

How can performance measurement lead to unethical behavior by​ managers?

When making performance targets becomes too​ important, managers may be tempted to manipulate the numbers to meet their targets. Such pressures can result in unethical behavior.

Wisconsin Division has operating income of​ $40,000 for the year ending December​ 31, 2011. Average invested capital is​ $800,000 and the weightedminus−average cost of capital is​ 10%. The division is considering a new investment that would cost​ $800,000 and earn​ 7% annually. If return on investment is the performance​ metric, should the manager of the Wisconsin Division accept the new​ investment?

Yes, because the return on investment of the division increases with the new investment.

What is a management control​ system?

a management control system is a logical integration of techniques to gather and use information to make planning and control​ decisions, to motivate employee​ behavior, and to evaluate performance.

The variable cost of Part X is​ $50 per unit and the full cost of the part is​ $80 per unit. The part is produced in Portugal and transferred to a plant in the United States. Portugal has a​ 10% income tax rate. The United States has a​ 50% income tax rate and an import duty equal to​ 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume Part X is transferred at full cost. By using full cost instead of variable cost for the transfer​ price, the income tax effect per unit in Portugal is​ ________.

an increase in tax by​ $3 per unit

Key performance indicators for a balanced scorecard are usually grouped into two categories.

false

Return on investment equals return on sales divided by capital turnover.

false

In cases of constrained​ capacity, the opportunity cost of transferring a product internally is zero.

false

the joint formulation by a manager and his or her superior of a set of goals and plans for achieving the goals for a forthcoming period is known as​ ________.

management by objectives

To increase and improve​ employees' work efforts in​ organizations, organizations should link​ ________ to​ ________ such as bonuses.

performance​ measures; personal rewards

Most employees perform better when performance reports lead to​ ________.

personal rewards

The classic balanced scorecard developed by Robert Kaplan and David Norton includes four categories of key performance indicators. Which of the following items is NOT one of the categories used by Kaplan and​ Norton?

quality control

The following information pertains to a segment of the Moore Company. Invested capital is defined as total assets. The weighted average cost of capital is​ 10%. The ROI of the segment before the project is​ 20%. The ROI of the segment after the project is​ 18%. The manager is evaluated based on the​ segment's ROI. A project earning a ROI of​ 12% should be​ ________.

rejected

In companies with segment​ autonomy, who determines the transfer price for internal sales and purchases of​ products?

segment mangers involved in transfer

A management by objectives approach uses responsibility center budgets.

true

​"The essence of decentralization is the use of profit​ centers." Do you​ agree? Explain.

No. Profit centers facilitate​ decentralization, but one can exist without the other. They are different concepts. Your answer is correct.

​"Always try to distinguish between the performance of a segment and its​ manager." Why?

C. Managers should be judged on how well they attain their currently attainable​ objectives, focusing on deducting controllable costs from​ revenues, whereas the subunit should be judged on its performance as an economic investment.

What kinds of organizations find decentralization to be preferable to​ centralization?

Decentralization is usually most successful in organizations where segments are relatively independent. If segments buy from or sell to one​ another, or if there are many common customers or​ suppliers, decentralization is less likely to be desirable.

What is the major advantage of negotiated transfer​ prices?

Negotiated transfer prices are likely to lead to better transfer pricing decisions because those with the best knowledge are making the decisions.

Return on Sales

Net Income/Sales

Decentralization is most successful when an​ organization's segments are relatively independent of one another.

True

Evaluations of the responsibility center​ manager's performance should ignore uncontrollable costs.

True

Fixed costs not controllable by a segment manager usually include depreciation and property taxes on the building used by the segment.

True

The greater the influence of noncontrollable factors on responsibility center​ results, the more problems there are in using the results to measure and reward a​ manager's performance.

True

Describe two problems that can arise when using actual full cost as a transfer price.

Using actual costs can pass on inefficiencies and make planning difficult for the buying department. The amount of the transfer is not known until actual costs are​ available, and factors beyond the control of the buying department can affect the transfer price. Using full costs can mask the real behavior of a cost. Any transfer price that includes a fixed cost element makes a fixed cost in the producing department look like a variable cost to the buying department.

"Managers who use a​ historical-cost accounting system look backward at what something cost​ yesterday, instead of forward to what it will cost​ tomorrow." Do you​ agree? Why?

Using a​ historical-cost accounting system with budgets is not backward looking. Budgets force managers to plan for the​ future, including predicting future prices.

Control systems in nonprofit organizations will never be as highly developed as in​ profit-seeking organizations." Do you​ agree? Explain.

Yes. There is no​ single, measurable objective such as profit that determines the​ trade-off between various goals.

A transfer price exists when two segments of the same organization sell​ ________.

a product to each other

Inspection costs of incoming raw materials are​ ________ costs.

appraisal

The organizational goal of a hotel chain is to increase customer satisfaction. Which of the following is NOT a valid performance measure to meet the organizational​ goal?

average room rate

If there is a competitive market for the product being transferred​ internally, using the​ ________ as the transfer price will lead to​ ________.

market​ price; goal congruence

In a multinational​ setting, low transfer prices generally lead to low import duties.

true

Internal delays and lost sales are examples of opportunity costs for a firm.

true

The keys to successful management control in any organization are proper training of​ employees, motivation of employees and consistent monitoring of performance measures.

true

​A(n) ________ cost is any cost that management cannot reasonably affect within a given time span.

uncontrollable

Maury​ Company's revenues are​ $300 for the year. Average invested capital for the year is​ $240. Expenses are currently​ 84% of revenues. If Maury Company can reduce its expenses to​ 70% of​ revenues, return on investment will be​ ________.

​37.5%

According to agency​ theory, employment contracts will balance three factors that include​ ________.

​incentive, risk and cost of measuring performance