Managerial Accounting Chapter 11: Performance Management FINAL EXAM
Lower-level management goals that are inconsistent with company goals are a possible disadvantage of ________.
decentralization
Positive RI means ROI is ________ the hurdle rate.
higher
The manager of a __________ center has control over costs, revenue, and investments in operating assets.
investment
Negative RI means ROI is ________ the hurdle rate.
lower
Comparing actual net income to budgeted net income is often done to evaluate the manager of _________ center.
profit
in decentralized organization, decision-making authority is _______.
spread throughout the organization
Tan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Osaka: Sales: $3,000,000 Net operating income: $210,000 Average operating assets: $1,000,000 Yokohama: Sales: $9,000,000 Net operating income: $720,000 Average operating assets: $4,000,000 1. For each division, compute the margin, turnover, and return on investment (ROI). Where necessary, carry computations to two decimal places. 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 15%. Compute the residual income for each division.
a. ROI: Osaka: 21% Yakohama: 18% b. Residual Income: Osaka: Income: $210,000 Assets: $1,000,000 Required Rate: 15% Yokohama: Income: $720,000 Assets: $4,000,000 Required Rate: 15% Osaka: $60,000 Yokohama: $120,000
Disadvantages of decentralization include __________.
closing objective between departments and the organization, spreading innovative ideas may be difficult, and lack of coordination
An organization in which decision-making authority is spread throughout the organization is ______.
decentralized
Residual Income is measured in
$
Alaska Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below: Sales: $7,500,000 Net Operating Income: $600,000 Average Operating Assets: $5,000,000 1. Compute the margin. 2. Compute the turnover. 3. Compute the return on investment (ROI).
1. Income/Sales = 8% 2. Sales/Assets = 1.5% 3. Income/Assets = 12%
ROI can be calculated as
1. Margin x Turnover 2. Net operating income / average operating assets
Which of the following ratios are part of the ROI formula?
1. Net operating income / Sales 2. Sales / Average Operating assets
Residual Income
Income - Investment x Imputed Interest Rate
Net operating income is income before __________ and __________.
Interest, Taxes
Net operating income / Sales
Margin
EBIT is another term for ______.
Net operating income
Return on investment =
Net operating income / Average operating assets
Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value?
Replace an existing asset will not automatically decrease ROI.
Net operating income - (Average operating assets x Minimum required rate of return)
Residual Income
Net operating income / Average operating assets =
Return on Investment
ROI stands for
Return on Investment
True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.
True
True or false: When ROI is calculated using the gross cost of assets, replacing a fully depreciated asset with a comparably prices new asset will not adversely affect ROI.
True
Sales / Average operating assets
Turnover
