SU 16 Gleim

Which of the following attributes of a management report has the greatest impact on management's ability to make effective decisions? A.Relevance. B.Summarization. C.Exception orientation. D.Conciseness.

A.Relevance.Answer (A) is correct. Relevance is the most important attribute of management reporting. Relevance is determined by asking the question: "Does a change to this revenue or cost element depend on my choice?"

Edith Carolina, president of the Deed Corporation, requires a minimum return on investment of 8% for any project to be undertaken by her company. The company is decentralized, and leaves investment decisions up to the discretion of the division managers as long as the 8% return is expected to be realized. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past 3 years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics that is expected to have a return on investment of 12%. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return, what will be the preference for taking on the proposed cosmetics line by Edith Carolina and Michael Sanders? CarolinaSanders A. CarolinaAccept SandersAccept B. CarolinaReject SandersAccept C. CarolinaReject SandersReject D. CarolinaAccept SandersReject

A. CarolinaAccept SandersAccept Answer (A) is correct. Residual income is the excess of operating income over a targeted amount equal to an imputed interest charge on invested capital (in this case, 8%). Using a percentage ROI approach, expansion might be rejected if it lowered ROI, even though residual income would increase. Using residual income, both Carolina and Sanders would accept the new project because residual income will increase if a 12% return is earned when the target ROI is only 8%.

Controllable revenue would be included in a performance report for a Profit CenterCost Center A. Profit Center Yes Cost Center No B. Profit Center Yes Cost Center Yes C. Profit Center No Cost Center Yes D. Profit Center No Cost Center No

A. Profit Center Yes Cost Center No Answer (A) is correct. A profit center is a segment of a company responsible for both revenues and expenses. A profit center has the authority to make decisions concerning markets (revenues) and sources of supply (costs).

Listed below are selected line items from the cost of quality report for Watson Products for last month.CategoryAmountRework$ 725Equipment maintenance1,154Product testing786Product repair695 What is Watson's total prevention and appraisal cost for last month? A.$1,940 B.$2,665 C.$1,154 D.$786

A.$1,940Answer (A) is correct. The costs of prevention and appraisal are conformance costs that serve as financial measures of internal performance. Prevention costs are incurred to prevent defective output. These costs include (1) preventive maintenance, (2) employee training, (3) review of equipment design, and (4) evaluation of suppliers. Appraisal costs are incurred to detect nonconforming output. They include such activities as (1) statistical quality control programs, (2) inspection, and (3) testing. The equipment maintenance cost of $1,154 is a prevention cost. The product testing cost of $786 is an appraisal cost. Their sum is $1,940.

The following information relates to Cinder Co.'s Northeast Division:Sales$600,000Variable costs360,000Traceable fixed costs60,000Average invested capital120,000Imputed interest rate8% Cinder's residual income was A.$170,400 B.$189,600 C.$230,400 D.$180,000

A.$170,400Answer (A) is correct. Residual income is the operating income of an investment center minus an imputed interest charge for invested capital. Accordingly, Cinder's residual income is $170,400 [($600,000 sales - $360,000 variable costs - $60,000 traceable fixed costs) operating income - ($120,000 average invested capital × 8%) imputed interest].

A company uses its fixed assets of $1,000,000 at 95% capacity to generate sales of $2,000,000. The company wishes to generate sales of $3,000,000. What amount of additional fixed assets must be acquired, assuming that all fixed assets will operate at maximum capacity? A.$425,000 B.$578,000 C.$500,000 D.$475,000

A.$425,000Answer (A) is correct. The company generates $2.1053 ($2,000,000 sales ÷ $950,000 fixed assets currently in use) of sales per $1 of fixed assets that are currently in use. Therefore, to generate $3,000,000 of sales, the company needs to use at full capacity fixed assets of $1,425,000 [$3,000,000 required sales ÷ ($2,000,000 ÷ $950,000)]. Because the company currently has $1,000,000 fixed assets, it needs to acquire additional $425,000 of fixed assets ($1,425,000 - $1,000,000).

As part of a benchmarking process, a company's costs of quality for the current month have been identified as follows: Employee training$20,000Product recalls8,000Scrap4,500Quality inspectors48,000Preventive maintenance19,500Supplier education expense17,500Materials inspection expense60,000Processing product returns2,500 What amount is the company's prevention cost for the current month? A.$57,000 B.$165,000 C.$175,500 D.$39,500

A.$57,000Answer (A) is correct. Prevention attempts to avoid defective output. These costs include preventive maintenance and employee training as well as review of equipment design and evaluation of suppliers. Accordingly, the total prevention costs equal $57,000 ($20,000 employee training + $19,500 preventive maintenance + $17,500 supplier education expense).

A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. The company's residual income would be which of the following amounts? A.$640 B.$260 C.$0 D.$900

A.$640Answer (A) is correct. The company's total residual income can be calculated as follows: Residual income= Operating income - Target return on invested capital = ($500 + $400) - [($1,000 + $1,600) × 10%] = $900 - $260 = $640

Listed below are costs of quality that a manufacturing company has incurred throughout its operations. The company plans to prepare a report that classifies these costs into the following four categories: preventive costs, appraisal costs, internal failure costs, and external failure costs. Cost Items Amount Design reviews $275,000 Finished goods returned due to failure 55,000 Freight on replacement finished goods 27,000 Labor inspection during manufacturing 75,000 Labor inspection of raw materials 32,000 Manufacturing product-testing labor 63,000 Manufacturing rework labor and overhead 150,000 Materials used in warranty repairs 68,000 Process engineering 180,000 Product-liability claims 145,000 Product-testing equipment 35,000 Repairs to equipment due to breakdowns 22,000 Scheduled equipment maintenance 90,000 Scrap material 125,000 Training of manufacturing workers 156,000 The dollar amount of the costs of quality classified as preventive costs for the manufacturing firm would be A.$701,000 B.$643,000 C.$768,000 D.$736,000

A.$701,000Answer (A) is correct. Prevention attempts to avoid defective output, e.g., by employee training, review of equipment design, preventive maintenance, and evaluation of suppliers. Accordingly, the preventive costs equal $701,000 ($275,000 design reviews + $180,000 process engineering + $90,000 scheduled maintenance + $156,000 training).

Avionics Industrials reported at year end that operating income before taxes for the year equaled $2,400,000. The firm's weighted-average cost of capital (WACC) is 7.24%. The carrying amount of debt is $1,300,000, and the carrying amount of equity capital is $8,800,000. The income tax rate for Avionics is 30%. What is the economic value added (EVA)? A.$948,760 B.$731,240 C.$1,668,760 D.$1,680,000

A.$948,760Answer (A) is correct. EVA equals after-tax operating income minus the product of the weighted-average cost of capital (WACC) and the investment base. After-tax operating income equals operating income multiplied by 1 minus the tax rate, or $1,680,000 [$2,400,000 × (1 - .3)]. The investment base is $10,100,000, consisting of $1,300,000 of debt and $8,800,000 of equity. Thus, EVA equals $948,760 [$1,680,000 - ($10,100,000 × 0.0724)].

Oslo Co.'s industrial photo-finishing division, Rho, incurred the following costs and expenses during the year just ended: VariableFixedDirect materials$200,000Direct labor150,000Factory overhead70,000$42,000General, selling, andadministrative30,00048,000Totals$450,000$90,000 During the year, Rho produced 300,000 units of industrial photo prints, which were sold for $2.00 each. Oslo's investment in Rho was $500,000 and $700,000 at January 1 and December 31, respectively. Oslo normally imputes interest on investments at 15% of average invested capital. For the year ended December 31, Rho's return on average investment was A.10.0% B.8.6% C.15.0% D.(5.0%)

A.10.0%Answer (A) is correct. Rho's return on average investment can be calculated as follows:ROI=Operating income ÷ Average invested capital=[(300,000 units × $2) - $450,000 - $90,000] ÷ [($500,000 + $700,000) ÷ 2]=$60,000 ÷ $600,000=10%

The Statement of Financial Position for King Products Corporation for the fiscal years ended June 30, Year 2, and June 30, Year 1, is presented below. Net sales and cost of goods sold for the year ended June 30, Year 2, were $600,000 and $440,000, respectively. King Products Corporation Statement of Financial Position (in thousands) June 30 Year 2 Year 1 Cash $ 60 $ 50 Marketable securities (at market) 40 30 Accounts receivable (net) 90 60 Inventories (at lower of cost or market) 120 100 Prepaid items 30 40 Total current assets $ 340 $280 Land (at cost) $ 200 $190 Building (net) 160 180 Equipment (net) 190 200 Patents (net) 70 34 Goodwill (net) 40 26 Total long-term assets $ 660 $630 Total assets $1,000 $910 Notes payable $ 46 $ 24 Accounts payable 94 56 Accrued interest 30 30 Total current liabilities $ 170 $110 Notes payable, 10% due 12/31/Year 7 $ 20 $ 20 Bonds payable, 12% due 6/30/Year 10 30 30 Total long-term debt $ 50 $ 50 Total liabilities $ 220 $160 Preferred stock -- 5% cumulative, $100 par, nonparticipating, authorized, issued and outstanding, 2,000 shares $ 200 $200 Common stock -- $10 par, 40,000 shares authorized, 30,000 shares issued and outstanding 300 300 Additional paid-in capital -- common 150 150 Retained earnings 130 100 Total equity $ 780 $750 Total liabilities & equity $1,000 $910 Assuming that King Products Corporation's net income for the year ended June 30, Year 2, was $70,000 and there are no preferred stock dividends in arrears, King Products Corporation's return on common equity was A.10.6% B.7.8% C.10.9% D.12.4%

A.10.6%Answer (A) is correct. The preferred stock dividend requirement is $10,000 ($200,000 par value × 5%), so the income available to common shareholders is $60,000 ($70,000 NI - $10,000). The return on common equity equals income available to common shareholders divided by the average common equity. Given that preferred equity was $200,000 at all relevant times, beginning and ending common equity was $550,000 ($750,000 total - $200,000) and $580,000 ($780,000 total - $200,000), an average of $565,000 [($580,000 + $550,000) ÷ 2]. The return on common equity was therefore 10.6% ($60,000 ÷ $565,000).

Lisa, Inc. Statement of Financial Position December 31, Year 2 (000s) Assets Year 2 Year 1 Current assets: Cash $ 30 $ 25 Trading securities 20 15 Accounts receivable (net) 45 30 Inventories (at lower of cost or market) 60 50 Prepaid items 15 20 Total current assets 170 140 Long-term investments: Securities (at cost) 25 20 Property, plant, & equipment: Land (at cost) 75 75 Building (net) 80 90 Equipment (net) 95 100 Intangible assets Patents (net) 35 17 Goodwill (net) 20 13 Total long-term assets 330 315 Total assets $500 $455 Liabilities & Shareholders' Equity Current liabilities: Notes payable $ 23 $ 12 Accounts payable 47 28 Accrued interest 15 15 Total current liabilities 85 55 Long-term debt: Notes payable 10% due 12/31/Year 9 10 10 Bonds payable 12% due 12/31/Year 8 15 15 Total long-term debt 25 25 Total liabilities $110 $ 80 Shareholders' equity: Preferred -- 5% cumulative, $100 par, non-participating, 1,000 shares authorized, issued and outstanding $100 $100 Common -- $10 par 20,000 shares authorized, 15,000 issued and outstanding shares 150 150 Additional paid-in capital -- common 75 75 Retained earnings 65 50 Total shareholders' equity $390 $375 Total liabilities & equity $500 $455 Assuming that Lisa, Inc.'s net income for Year 2 was $35,000, and there were no preferred stock dividends in arrears, Lisa's return on common equity for Year 2 was A.10.6% B.12.4% C.10.9% D.7.8%

A.10.6%Answer (A) is correct. The preferred stock dividend requirement is 5%, or $5,000 ($100,000 × 5%). Deducting the $5,000 of preferred dividends from the $35,000 of net income leaves $30,000 for the common shareholders. The firm began the year with common equity of $275,000 ($150,000 + $75,000 + $50,000) and ended with $290,000 ($150,000 + $75,000 + $65,000). Thus, the average common equity during the year was $282,500. The return on common equity was 10.6% ($30,000 ÷ $282,500).

Gamma Co., a manufacturer of medical products, had a 10% return on assets and an asset turnover of 4:1. What was Gamma's profit margin on sales? A.2.5% B.4.0% C.10.0% D.40.0%

A.2.5%Answer (A) is correct. The formula for gross profit margin is Profit margin on sales = Net income ÷ Sales revenue However, these items are not provided in the question. An alternative calculation for the profit margin can be derived by using the equations for measures that are provided in the question: Return on assets = Net income ÷ Average total assets Asset turnover ratio = Sales revenue ÷ Average total assets From these three equations, the following alternative equation can be derived: Profit margin on sales = Return on assets ÷ Asset turnover ratio Accordingly, Gamma's profit margin on sales is 2.5% (10% ÷ 4).

Selected information for Dayan Company is as follows: December 31,Year 5Year 6 Preferred stock, 8%, par $100, nonconvertible, noncumulative $125,000 $125,000 Common stock 300,000 400,000 Retained earnings 75,000 185,000 Accumulated other comprehensive income 0 40,000 Dividends paid on preferred stock for year ended 10,000 10,000 Net income for year ended 60,000 120,000 Dayan's return on common equity, rounded to the nearest percentage point, for Year 6 is A.22% B.24% C.16% D.17.6%

A.22%Answer (A) is correct. Return on common equity is equal to the earnings available to common shareholders divided by the average common equity. The numerator is therefore net income ($120,000) minus preferred dividends ($125,000 × 8% = $10,000), that is, $110,000. Average common equity is equal to the average of beginning and ending common equity, or $500,000 [($375,000 + $625,000) ÷ 2]. Beginning common equity is $375,000 ($300,000 common stock + $75,000 retained earnings). In the second year, we have accumulated other comprehensive income, which is another form of common equity. Therefore, ending common equity is $625,000 ($400,000 common stock + $185,000 retained earnings + $40,000 accumulated other comprehensive income). Thus, return on common equity equals 22% ($110,000 ÷ $500,000).

Vested, Inc., made some changes in operations and provided the following information:Year 2Year 3Operating revenues$ 900,000$1,100,000Operating expenses650,000700,000Operating assets1,200,0002,000,000What percentage represents the return on investment for Year 3? A.25% B.20.83% C.22.5% D.10%

A.25%Answer (A) is correct. Vested's Year 3 return on investment can be calculated as follows: ROI=Operating income ÷ Average invested capital=($1,100,000 - $700,000) ÷ [($2,000,000 + $1,200,000) ÷ 2]=$400,000 ÷ $1,600,000=25%

A company reports the following account balances at year end: Account Balance Long-term debt $200,000 Cash 50,000 Net sales 600,000 Fixed assets (net) 320,000 Tax expense 67,500 Inventory 25,000 Common stock 100,000 Interest expense 20,000 Administrative expense 35,000 Retained earnings 150,000 Accounts payable 65,000 Accounts receivable 120,000 Cost of goods sold 400,000 Depreciation expense 10,000 Additional Information: • The opening balance of common stock was $100,000. • The opening balance of retained earnings was $82,500. • The company had 10,000 common shares outstanding all year. • No dividends were paid during the year. For the year just ended, the company had a rate of return on common equity, rounded to two decimals, of A.31.21% B.58.06% C.71.68% D.67.50%

A.31.21%Answer (A) is correct. The rate of return on common equity is the ratio of net income to average shareholders' equity. This company's net income can be calculated as follows:Sales$ 600,000Cost of goods sold(400,000)Administrative expenses(35,000)Depreciation expense(10,000)Interest expense(20,000)Tax expense(67,500)Net income$ 67,500Average shareholders' equity was $216,250 [($182,500 + $250,000) ÷ 2]. Return on common equity was therefore 31.21% ($67,500 ÷ $216,250).

Company A and company B are subsidiaries of company C, a multinational company. A has a fixed corporate tax rate of 15% and B pays a 25% fixed corporate tax rate. A sells a component to B at a price ranging from $100 to $200 per unit. Which of the following statements is correct regarding the transfer price from A to B? A.A transfer price of $200 will maximize after-tax profits of A and C. B.A transfer price of $200 will maximize after-tax profits of B and C. C.A transfer price of $100 will maximize after-tax profits of A and C. D.A transfer price of $100 will maximize after-tax profits of B and C.

A.A transfer price of $200 will maximize after-tax profits of A and C.Answer (A) is correct. Transfer prices are charged by one segment of an organization for goods and services it provides to another segment of the same organization. If A sells the component to B at $100, A's after-tax profit will increase by $85 [$100 × (1 - 15%)], B's after-tax profit will decrease by $75 [(25% × $100) - $100], and C's after-tax profit will increase by $10 ($85 - $75). If A sells the component to B at $200, A's after-tax profit will increase by $170 [$200 × (1 - 15%)], B's after-tax profit will decrease by $150 [(25% × $200) - $200], and C's after-tax profit will increase by $20 ($170 - $150). Thus, a transfer price of $200 will maximize after-tax profits of A and C.

A segment of an organization is referred to as a profit center if it has A.Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply. B.Authority to provide specialized support to other units within the organization. C.Authority to make decisions over the most significant costs of operations including the power to choose the sources of supply. D.Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply and significant control over the amount of invested capital.

A.Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply.Answer (A) is correct. A profit center is responsible for both revenues and expenses. For example, the perfume department in a department store is a profit center. The manager of a profit center usually has the authority to make decisions affecting the major determinants of profit, including the power to choose markets (revenue sources) and suppliers (costs).

Which of the following is not required when ISO 9000 standards are adopted? A.Consistent high quality products. B.Organization of a quality management system. C.Creation of an internal audit system. D.On-site inspections by a registrar.

A.Consistent high quality products.Answer (A) is correct. ISO 9000 is a set of generic standards for establishing and maintaining a quality system within a company. The standards provide no basis for judging the quality of the end product. The marketplace will make this determination. The objective of ISO 9000 standards is to ensure consistent quality, even if the quality is poor.

Benchmarking compares the current performance of operations to which of the following factors related to competing organizations? A.Current performance measures. B.Standard cost of developing performance measures. C.Prior performance measures. D.Anticipated future performance measures.

A.Current performance measures.Answer (A) is correct. Benchmarking involves analysis and measurement of key outputs against those of the best organizations. This procedure also identifies the underlying key actions and causes that contribute to the performance difference. Competitive benchmarking studies an organization in the same industry. Thus, comparing the current performance of operations to the current performance of competing organizations is the most appropriate form of benchmarking.

If a firm is considering the use of learning curve analysis in the determination of labor cost standards for a new product, it should be advised that this technique ordinarily is most relevant to situations in which the production time per unit decreases as additional units are produced and the unit cost A.Decreases. B.Does not change. C.Increases slightly. D.Increases or decreases in an unpredictable manner.

A.Decreases.Answer (A) is correct. The learning curve is a cost function showing that the time required for production and therefore the average cost per unit decrease as production rises.

Total quality management (TQM) in a manufacturing environment is best exemplified by A.Designing the product to minimize defects. B.Identifying and reworking production defects before sale. C.Performing inspections to isolate defects as early as possible. D.Making machine adjustments periodically to reduce defects.

A.Designing the product to minimize defects.Answer (A) is correct. TQM emphasizes quality as a basic organizational function. TQM is the continuous pursuit of quality in every aspect of organizational activities. One of the basic principles of TQM is doing it right the first time. Thus, errors should be caught and corrected at the source, and quality should be built in (designed in) from the start.

Which of the following performance measures is nonfinancial? A.Percentage of defective products. B.Return on investment. C.Gross profit margin. D.Economic value added.

A.Percentage of defective products. Answer (A) is correct. Of the choices provided, percentage of defective products is the only one whose calculation does not involve a monetary amount.

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because A.Desirable investment decisions will not be neglected by high return divisions. B.Returns do not increase as assets are depreciated. C.Only the gross book value of assets needs to be calculated. D.The problems associated with measuring the asset base are eliminated.

A.Desirable investment decisions will not be neglected by high return divisions.Answer (A) is correct. A disadvantage of ROI is potential rejection of projects that decrease ROI despite increasing shareholder value. Residual income often is preferable because a firm ultimately is most interested in the total monetary amount of an investment's return.

One approach to measuring divisional performance is return on investment. Return on investment is expressed as operating income A.Divided by average total assets. B.Divided by the current year's capital expenditures plus cost of capital. C.Minus imputed interest charged for invested capital. D.Divided by average fixed assets.

A.Divided by average total assets.Answer (A) is correct. ROI is calculated by dividing income by average invested capital. It is a key performance measure of an investment center. Invested capital may be defined in various ways, such as shareholders' equity, total assets available, or total assets employed, which excludes idle assets. Total assets available is the measure that assumes the manager uses all assets without regard to financing.

Which statement best describes the emphasis of total quality management (TQM)? A.Doing each job right the first time. B.Encouraging cross-functional teamwork. C.Implementing better statistical quality control techniques. D.Reducing the cost of inspection.

A.Doing each job right the first time.Answer (A) is correct. The basic principles of TQM include (1) doing each job right the first time, (2) being customer-oriented, (3) committing the organizational culture to continuous improvement, and (4) promoting teamwork and employee empowerment.

On a balanced scorecard, which of the following is not a customer satisfaction measure? A.Economic value added. B.Market share. C.Customer retention. D.Response time.

A.Economic value added.Answer (A) is correct. Customer satisfaction measures include market share, retention, response time, delivery performance, number of defects, and lead time. Economic value added, or EVA, is a profitability (financial) measure.

Which of the following methods is best suited for evaluating the performance of a firm's capital in any given year? A.Economic value-added. B.Net present value. C.Payback. D.Internal rate of return.

A.Economic value-added.Answer (A) is correct. Economic value-added (EVA) is the formula for residual income adjusted for the opportunity cost of capital. EVA represents a business unit's true economic profit primarily because it is determined by subtracting the cost of equity capital. The EVA method is therefore the best method for evaluating the performance of a firm's capital in any given year.

Which of the following is a characteristic of total quality management (TQM)? A.Education and self-improvement. B.Quality by final inspection. C.On-the-job training by other workers. D.Management by objectives.

A.Education and self-improvement.Answer (A) is correct. Education and self-improvement are essential. Hence, continuous improvement should be everyone's primary career objective.

Which of the following is a key to successful total quality management (TQM)? A.Focusing intensely on the customer. B.Establishing a well-defined quality standard, then focusing on meeting it. C.Training quality inspectors. D.Creating appropriate hierarchies to increase efficiency.

A.Focusing intensely on the customer.Answer (A) is correct. TQM emphasizes satisfaction of customers, both internal and external. TQM considers the supplier's relationship with the customer, identifies customer needs, and recognizes that everyone in a process is at some time a customer or supplier of someone else, either inside or outside of the organization.

Which of the following ratios would be used to evaluate a company's profitability? A.Gross margin ratio. B.Inventory turnover ratio. C.Current ratio. D.Debt-to-total assets ratio.

A.Gross margin ratio.Answer (A) is correct. The gross margin ratio is the ratio of sales minus cost of goods sold to sales. It is a profitability ratio that measures the percentage of sales earned after incurring direct costs of goods and services.

The total quality management process identifies each of the following as a cost of quality, except A.Investment costs. B.Internal failure costs. C.Prevention costs. D.External failure costs.

A.Investment costs.Answer (A) is correct. The total quality management process identifies four costs of quality: (1) prevention costs, (2) appraisal costs, (3) internal failure costs, and (4) external failure costs. Investment costs are not a cost of quality.

Under a total quality management (TQM) approach, A.Measurement occurs throughout the process, and errors are caught and corrected at the source. B.Upper management assumes the primary responsibility for the quality of the products and services. C.A large number of suppliers are used in order to obtain the lowest possible prices. D.Quality control is performed by highly trained inspectors at the end of the production process.

A.Measurement occurs throughout the process, and errors are caught and corrected at the source.Answer (A) is correct. Total quality management emphasizes quality as a basic organizational function. TQM is the continuous pursuit of quality in every aspect of organizational activities. One of the basic tenets of TQM is doing it right the first time. Thus, errors should be caught and corrected at the source.

In responsibility accounting, a center's performance is measured by controllable costs. Controllable costs are best described as including A.Only those costs that the manager can influence in the current time period. B.Those costs about which the manager is knowledgeable and informed. C.Only discretionary costs. D.Direct material and direct labor only.

A.Only those costs that the manager can influence in the current time period.Answer (A) is correct. A controllable cost is one that is directly regulated by a specific manager at a given level of production within a given time span or that the manager can significantly influence.

The director of sales asks for a count of customers grouped in descending numerical rank by (1) the number of orders they place during a single year and (2) the dollar amounts of the average order. The visual format of these two pieces of information is most likely to be a A.Pareto diagram. B.Cost of quality report. C.Fishbone diagram. D.Kaizen diagram.

A.Pareto diagram.Answer (A) is correct. A Pareto diagram displays the values of an independent variable such that managers can quickly identify the areas most in need of attention.

Which of the following ratios should be used to compare the profitability of two electronics companies that differ in size? A.Return on assets. B.Asset turnover. C.Quick (acid-test) ratio. D.Inventory turnover.

A.Return on assets.Answer (A) is correct. Return on assets (ROA) allows an investor to assess how effectively (efficiently) the firm is deploying assets in the pursuit of a return. It equals net income divided by average total assets. Since the return on assets (investment) is stated in percentage terms, it is a very useful measure in comparing the profitability of companies that differ in size.

A table manufacturing company believes that the strength of its tables is reduced after being processed through the shaping machine. Which of the following is not a preventive measure to address the issue? A.Statistically test the strength of the tables to be certain that they are weaker after processing. B.Evaluate suppliers. C.Train employees to properly align the planks of wood as they enter the shaping machine. D.Purchase a new machine that automatically aligns the product regardless of orientation.

A.Statistically test the strength of the tables to be certain that they are weaker after processing.Answer (A) is correct. Prevention attempts to prevent defective output. But the cost of performing a statistical test is an appraisal cost, not a prevention cost.

Which statement best describes total quality management (TQM)? A.TQM is the continuous pursuit of quality. B.TQM implementation is quick and easy. C.TQM emphasizes participation by all employees in the decision-making process. D.TQM emphasizes reducing the cost of inspection.

A.TQM is the continuous pursuit of quality.Answer (A) is correct. TQM is the continuous pursuit of quality in every aspect of organizational activities through (1) a philosophy of doing it right the first time, (2) employee training and empowerment, (3) promotion of teamwork, (4) improvement of processes, and (5) attention to satisfaction of customers, both internal and external.

The imputed interest rate used in the residual income approach to performance evaluation can best be described as the A.Target return on investment set by the company's management. B.Average return on investments for the company over the last several years. C.Historical weighted-average cost of capital for the company. D.Average lending rate for the year being evaluated.

A.Target return on investment set by the company's management.Answer (A) is correct. Residual income is the excess of operating income over a targeted amount equal to an imputed interest charge on invested capital. The rate used ordinarily is set as a target return by management but is often equal to the weighted average cost of capital.

Which of the following statements regarding benchmarking is false? A.The benchmarked organization against which a firm is comparing itself must be a direct competitor. B.Benchmarking is an ongoing process that involves quantitative and qualitative measurement of the difference between the organization's performance of an activity and the performance by the best in the world or the best in the industry. C.Benchmarking, in practice, usually involves formation of benchmarking teams. D.Benchmarking involves continuously evaluating the practices of best-in-class organization and adapting processes to incorporate the best of these practices.

A.The benchmarked organization against which a firm is comparing itself must be a direct competitor.Answer (A) is correct. Benchmarking is an ongoing process that involves quantitative and qualitative measurement of the difference between the organization's performance of an activity and the performance by a best-in-class organization. The benchmarked organization need not be a direct competitor. The important consideration is that it be an outstanding performer in its industry.

Which of the following statements is not true regarding ISO 9000 standards? A.The objective of ISO 9000 standards is to ensure high quality products and services. B.The ISO 9000 standards are revised every 5 years to account for technological and market developments. C.Compliance with the standards is voluntary. D.ISO 9000 is a set of generic standards for establishing and maintaining a quality system within a company.

A.The objective of ISO 9000 standards is to ensure high quality products and services.Answer (A) is correct. The objective of ISO 9000 standards is to ensure consistent quality even if the quality is poor. The market will determine the quality of the end result.

Edith Carolina, president of the Deed Corporation, requires a minimum return on investment of 8% for any project to be undertaken by her company. The company is decentralized, and leaves investment decisions up to the discretion of the division managers as long as the 8% return is expected to be realized. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past 3 years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics that is expected to have a return on investment of 12%. If the Deed Corporation evaluates managerial performance using return on investment, what will be the preference for taking on the proposed cosmetics line by Edith Carolina and Michael Sanders? CarolinaSanders A. CarolinaReject SandersAccept B. CarolinaAccept SandersReject C. CarolinaReject SandersReject D. CarolinaAccept SandersAccept

B. CarolinaAccept SandersReject Answer (B) is correct. A company with an 8% ROI threshold should obviously accept a project yielding 12% because the company's overall ROI would increase. The manager being evaluated on the basis of ROI who is already earning 14% will be unwilling to accept a 12% return on a new project because the overall ROI for the division would decline slightly. This absence of goal congruence suggests a weakness in ROI-based performance evaluation.

The following is a summarized income statement of Carr Co.'s profit center No. 43 for the month just ended:Contribution margin $70,000Period expenses: Manager's salary$20,000Facility depreciation8,000Corporate expense allocation5,000(33,000)Profit center income $37,000 Which of the following amounts would most likely be subject to the control of the profit center's manager? A.$37,000 B.$70,000 C.$50,000 D.$33,000

B.$70,000Answer (B) is correct. A profit center is a segment of a company responsible for both revenues and expenses. A profit center has the authority to make decisions concerning markets (revenues) and sources of supply (costs). However, the profit center's manager does not control his or her own salary, investment, and the resulting costs (e.g., depreciation of plant assets), or expenses incurred at the corporate level. Consequently, profit center No. 43 is most likely able to control its $70,000 contribution margin (sales - variable costs) but not the other items in the summarized income statement.

Which of the following formulas should be used to calculate the economic rate of return on common stock? A.Dividends per share divided by market price per share. B.(Dividends + change in price) divided by beginning price. C.Market price per share divided by earnings per share. D.(Net income - preferred dividend) divided by common shares outstanding.

B.(Dividends + change in price) divided by beginning price. Answer (B) is correct. The economic rate of return on common stock is calculated by (1) adding the dividends received over the period of ownership to the change in the stock price during the period of ownership and (2) dividing this amount by the original price paid for the stock.

Last year a segment of Dickson Company had the following sales, assets, and operating income:Sales$500,000Assets 200,000Operating income 50,000What is the segment's asset turnover? A.4 times. B.2.5 times. C.10 times. D.2 times.

B.2.5 times.Answer (B) is correct. Asset turnover is the ratio of sales to average assets. Thus, the segment's asset turnover is 2.5 times ($500,000 ÷ $200,000).

The financial statements for Dividendosaurus, Inc., for the current year are as follows: Balance Sheet Cash $100 Accounts receivable 200 Inventory 50 Net fixed assets 600 Total $950 Accounts payable $140 Long-term debt 300 Capital stock 260 Retained earnings 250 Total $950 Statement of Income and Retained Earnings Sales $ 3,000 Cost of goods sold (1,600) Gross profit $ 1,400 Operations expenses (970) Operating income $ 430 Interest expense (30) Income before tax $ 400 Income tax (200) Net income $ 200 Add: Jan. 1 retained earnings 150 Less: Dividends (100) Dec. 31 retained earnings $ 250 Using year-end assets as the average, Dividendosaurus has return on assets of A.42.1% B.21.1% C.45.3% D.39.2%

B.21.1%Answer (B) is correct. The return on assets is the ratio of net income to average total assets. It equals 21.1% ($200 NI ÷ $950 average total assets).

Ace Co. is evaluating a new novelty product that would sell for $30 per unit and have the following costs: Variable manufacturing$20 per unitVariable selling and distribution4 per unitFixed manufacturing$100,000 per yearProduct design and development$80,000 totalThe product is expected to have a market life of 1 year, at the end of which all production and sales would be discontinued. Ace has a target rate of return on sales of 0.10. How many units must Ace sell to earn the target rate of return? A.33,333 B.60,000 C.16,667 D.30,000

B.60,000Answer (B) is correct. The return on sales is operating income divided by net sales. Assuming the required unit is Q, the operating income is $3Q ($30 × 0.10 × Q). The operating income is also equal to profit margin per unit multiplied by units sold minus total costs [$6 × Q - ($100,000 fixed manufacturing + $80,000 product design)]. Thus, Ace must sell 60,000 units to earn the target rate of return (Q).

Which of the following criteria would be most useful to a sales department manager in evaluating the performance of the manager's customer-service group? A.Employees should maintain a positive attitude when dealing with customers. B.All customer inquiries should be answered within 7 days of receipt. C.The customer is always right. D.Customer complaints should be processed promptly.

B.All customer inquiries should be answered within 7 days of receipt.Answer (B) is correct. A criterion that requires all customer inquiries to be answered within 7 days of receipt permits accurate measurement of performance. The quantitative and specific nature of the appraisal using this standard avoids the vagueness, subjectivity, and personal bias that may afflict other forms of personnel evaluations.

Product-quality-related costs are part of a total quality control program. A product-quality-related cost incurred in detecting individual products that do not conform to specifications is an example of a(n) A.External failure cost. B.Appraisal cost. C.Prevention cost. D.Opportunity cost.

B.Appraisal cost.Answer (B) is correct. Quality-related costs can be subdivided into four categories: external failure costs, internal failure costs, prevention costs, and appraisal costs. Appraisal costs embrace such activities as statistical quality control programs, inspection, and testing. Thus, the cost of detecting nonconforming individual products is an appraisal cost.

Which of the following methods involves comparing a company's internal processes that need to be improved to those of external companies identified as being best in class? A.Economic value added. B.Benchmarking. C.Performance measurement. D.Balanced scorecard.

B.Benchmarking.Answer (B) is correct. Benchmarking involves analysis and measurement of key outputs against those of the best organizations. This procedure also identifies the underlying key actions and causes that contribute to the performance difference.

Managers are most likely to accept allocations of common costs based on A.Top management decisions. B.Cause and effect. C.Ability to bear. D.Percent of revenues earned.

B.Cause and effect.Answer (B) is correct. The difficulty with common costs is that they are indirect costs whose allocation may be arbitrary. A direct cause-and-effect relationship between a common cost and the actions of the cost object to which it is allocated is desirable. Such a relationship promotes acceptance of the allocation by managers who perceive the fairness of the procedure, but identification of cause and effect may not be feasible.

Which of the following is typical for a firm implementing a system of total quality management (TQM)? A.Limiting quality management to quality management staff, engineers, and production departments. B.Conducting a quality audit. C.Consolidating all horizontal business functions. D.Preparing a gap analysis to determine customer and supplier requirements.

B.Conducting a quality audit.Answer (B) is correct. A quality audit should be conducted to evaluate the process for gathering information to develop a strategic quality improvement plan. It also may identify the best improvement opportunities and the organization's strengths and weaknesses relative to benchmarked competitors.

Which of the following is a core principle of total quality management (TQM)? A.Providing quality training for senior managers. B.Continuous improvement as a never-ending process. C.Satisfaction of suppliers. D.Establishing quality teams to ensure goods and services conform to standards.

B.Continuous improvement as a never-ending process.Answer (B) is correct. TQM is the continuous pursuit of quality in every aspect of organizational activities through (1) a philosophy of doing it right the first time, (2) employee training and empowerment, (3) promotion of teamwork, (4) improvement of processes, and (5) attention to satisfaction of internal and external customers.

Which of the following balanced scorecard perspectives examines a company's success in targeted market segments? A.Learning and growth. B.Customer. C.Internal business process. D.Financial.

B.Customer.Answer (B) is correct. Any critical success factor that addresses some aspect of the target market is included in the customer perspective.

Performance results for four geographic divisions of a manufacturing company are shown below. Target ReturnActual ReturnReturnDivisionon Investmenton Investmenton SalesA18%18.1%8%B1620.08C1415.86D1211.09The division with the best performance is A.Division C. B.Division B. C.Division D. D.Division A.

B.Division B.Answer (B) is correct. Return on investment, that is, the amount of return generated for the parent firm per dollar of capital invested, is the simplest and generally the soundest measure of divisional performance.

Which cost of quality is the most expensive? A.Internal failure cost. B.External failure cost. C.Appraisal. D.Prevention.

B.External failure cost.Answer (B) is correct. External failure costs are the most expensive to address because they are incurred after shipment to customers. These fixes could include product recalls, litigation costs, and warranty claims. The failure to provide a suitable product also harms the goodwill of the entity.

Managerial performance can be measured in many different ways, including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is that A.Residual income is well understood and often used in the financial press. B.Goal congruence is more likely to be promoted by using residual income. C.Residual income can be computed without regard to identifying an investment base. D.ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.

B.Goal congruence is more likely to be promoted by using residual income.Answer (B) is correct. Residual income is the excess of operating income over a targeted amount equal to an imputed interest charge on invested capital. Residual income may be preferable to ROI because a firm benefits from expansion if residual income is earned. Using an ROI criterion, expansion might be rejected if it lowered ROI even though residual income increases. Thus, the residual income method promotes the congruence of a manager's goal with those of the firm. Actions that tend to benefit the firm also tend to improve the measure of the manager's performance.

A company, which has many branch stores, has decided to benchmark one of its stores for the purpose of analyzing the accuracy and reliability of branch store financial reporting. Which one of the following is the most likely measure to be included in a financial benchmark? A.High turnover of employees. B.High amount of credit loss write-offs. C.High number of suppliers. D.High level of employee participation in setting budgets.

B.High amount of credit loss write-offs.Answer (B) is correct. High credit loss (bad debt) write-offs could indicate fraud, which compromises the accuracy and reliability of financial reports. Credit loss (bad debt) write-offs may result from recording fictitious sales.

Rework costs should be regarded as a cost of quality in a manufacturing company's quality control program when they are I Caused by the customer II Caused by internal failure A.I only. B.II only. C.Both I and II. D.Neither I nor II.

B.II only.Answer (B) is correct. Internal failure costs are those incurred when detection of defective products occurs before shipment. Examples are scrap, rework, tooling changes, and downtime. The costs of external failure, e.g., warranty, product liability, and customer ill will, arise when problems occur after shipment.

Common costs are A.Current costs. B.Indirect costs. C.Controllable costs. D.Direct costs.

B.Indirect costs.Answer (B) is correct. Common costs are the cost of products, activities, facilities, services, or operations shared by two or more cost objects. They are indirect costs because they cannot be traced to a particular cost object in an economically feasible manner. Hence, they must be allocated.

Which of the following is one of the four perspectives of a balanced scorecard? A.Activity-based costing. B.Innovation. C.Just in time. D.Benchmarking.

B.Innovation.Answer (B) is correct. The balanced scorecard is an accounting report that connects the firm's critical success factors determined in a strategic analysis with measures of its performance. The critical success factors (and appropriate measures thereof) are assigned to four perspectives on the business: financial, customer, internal business processes, and learning and growth. Innovation is a facet of the learning and growth perspective.

The cost of scrap, rework, and tooling changes in a product quality cost system are categorized as a(n) A.External failure cost. B.Internal failure cost. C.Appraisal cost. D.Prevention cost.

B.Internal failure cost.Answer (B) is correct. The four categories of quality costs are (1) prevention, (2) appraisal, (3) internal failure, and (4) external failure (lost opportunity). Internal failure costs are incurred when detection of defective products occurs before shipment. Examples include (1) scrap, (2) rework, (3) tooling changes, and (4) downtime.

To evaluate its performance, the Blankie Co. is comparing its costs of quality from one year to the next. The relevant costs are as follows:First YearSecond YearPrevention$45,000$60,000Appraisal25,00035,000Internal failure80,00050,000External failure75,00065,000Which of the following conclusions can Blankie draw about its quality program? A.It has been a failure, because conformance costs decreased by $40,000 while nonconformance costs increased by $25,000. B.It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000. C.It has been a failure, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000. D.It has been a success, because conformance costs decreased by $40,000 and nonconformance costs increased by $25,000.

B.It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.Answer (B) is correct. Conformance costs increased by $25,000 [($60,000 second year prevention costs - $45,000 first year prevention costs) + ($35,000 second year appraisal costs - $25,000 first year appraisal costs)], and nonconformance costs decreased by $40,000 [($80,000 first year internal failure costs - $50,000 second year internal failure costs) + ($75,000 first year external failure costs - $65,000 second year external failure costs)]. Because total costs of quality decreased by $15,000 ($40,000 decrease in nonconformance costs - $25,000 increase in conformance costs), Blankie's quality program was a success.

One of the main reasons that implementation of a total quality management program works better through the use of teams is A.The use of teams eliminates the need for supervision, thereby allowing a company to reduce staffing. B.Teams are a natural vehicle for sharing ideas, which leads to process improvement. C.Teams are more efficient and help an organization reduce its staffing. D.Employee motivation is always higher for team members than for individual contributors.

B.Teams are a natural vehicle for sharing ideas, which leads to process improvement.Answer (B) is correct. TQM promotes teamwork by modifying or eliminating traditional (and rigid) vertical hierarchies and instead forming flexible groups of specialists. Quality circles, cross-functional teams, and self-managed teams are typical formats. Teams are an excellent vehicle for encouraging the sharing of ideas and removing process improvement obstacles.

SkyBound Airlines provided the following information about its two operating divisions: PassengerCargoOperating profit$40,000$50,000Investment$250,000$500,000External borrowing rate6%8%Measuring performance using return on investment (ROI), which division performed better? A.The Cargo division, with an ROI of 10%. B.The Passenger division, with an ROI of 16%. C.The Passenger division, with an ROI of 22%. D.The Cargo division, with an ROI of 18%.

B.The Passenger division, with an ROI of 16%.Answer (B) is correct. ROI is equal to operating profit divided by the investment. The ROI for the Passenger division is 16% ($40,000 ÷ $250,000). The ROI for the Cargo division is 10% ($50,000 ÷ $500,000). Thus, the Passenger division performed better.

Which of the following is a characteristic of business process reengineering? A.The movement of manual processes to computers. B.The bottom-up revision of the way the organization carries out a particular business process. C.A change in the nature of the business itself. D.Gradual, incremental streamlining of existing procedures.

B.The bottom-up revision of the way the organization carries out a particular business process.Answer (B) is correct. Business process reengineering (BPR) is the complete, bottom-up revision of the way an organization carries out a particular business process. Organizations undertaking BPR totally rethink how a particular business function should be carried out, without regard to how it is currently performed.

Management of a company is attempting to build a reputation as a world-class manufacturer of quality products. Which of the following measures would not be used by the firm to measure quality? A.The number of defective parts per million. B.The number of parts shipped per day. C.The percentage of shipments returned by customers because of poor quality. D.The percentage of products passing quality tests the first time.

B.The number of parts shipped per day.Answer (B) is correct. The number of parts shipped per day is most likely to be used as a measure of the effectiveness and efficiency of shipping procedures, not the quality of the product. This measure does not consider how many of the parts are defective.

After investing in a new project, a company discovered that its residual income remained unchanged. Which one of the following must be true about the new project? A.The net present value of the new project must have been positive. B.The return on investment of the new project must have been equal to the firm's cost of capital. C.The net present value of the new project must have been negative. D.The return on investment of the new project must have been less than the firm's cost of capital.

B.The return on investment of the new project must have been equal to the firm's cost of capital.Answer (B) is correct. Residual income is the excess of the return on an investment over the firm's cost of capital. If residual income is unchanged, the return on the project must have been the same as the firm's cost of capital.

Learning curves are most often used to predict A.Total unit costs. B.Unit direct labor costs. C.Unit material costs. D.Overhead variances.

B.Unit direct labor costs.Answer (B) is correct. Learning curves reflect the increased rate at which people perform tasks as they gain experience. Thus, they are useful in predicting unit direct labor costs.

Minon, Inc., purchased a long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income? Return onInvestmentResidualIncome A. Return on Investment Increase Residual Income Decrease B. Return on Investment Decrease Residual Income Increase C. Return on Investment Decrease Residual Income Decrease D. Return on Investment Increase Residual Income Increase

C. Return on Investment Decrease Residual Income Decrease Answer (C) is correct. ROI equals operating income divided by average invested capital. The purchase of a long-term asset on the last day of the fiscal year has little or no effect on net income. But it increases average invested capital, thereby decreasing ROI. Residual income is operating income minus a target return on average invested capital. Given no change in operating income or the required rate of return, an increase in invested capital decreases residual income.

Return on investment (ROI) is a very popular measure employed to evaluate the performance of corporate segments because it incorporates all of the major ingredients of profitability (revenue, cost, investment) into a single measure. Under which one of the following combinations of actions regarding a segment's revenues, costs, and investment would a segment's ROI always increase? RevenuesCostsInvestments A. Revenues Increase Costs Decrease Investments Increase B. Revenues Increase Costs Increase Investments Increase C. Revenues Increase Costs Decrease Investments Decrease D. Revenues Decrease Costs Decrease Investments Decrease

C. Revenues Increase Costs Decrease Investments Decrease Answer (C) is correct. An increase in revenue and a decrease in costs will increase the ROI numerator. A decrease in investment will decrease the denominator. The ROI must increase in this situation.

Oslo Co.'s industrial photo-finishing division, Rho, incurred the following costs and expenses during the year just ended: VariableFixedDirect materials$200,000Direct labor150,000Factory overhead70,000$42,000General, selling, andadministrative30,00048,000Totals$450,000$90,000 During the year, Rho produced 300,000 units of industrial photo prints, which were sold for $2.00 each. Oslo's investment in Rho was $500,000 and $700,000 at January 1 and December 31, respectively. Oslo normally imputes interest on investments at 15% of average invested capital. Assume that net operating income was $60,000 and that average invested capital was $600,000. For the year ended December 31, Rho's residual income (loss) was A.$60,000 B.$150,000 C.$(30,000) D.$(45,000)

C.$(30,000)Answer (C) is correct. Rho's residual income can be calculated as follows:Residual income=Operating income - Target return on invested capital=$60,000 - ($600,000 × 15%)=$60,000 - $90,000=$30,000 loss

Wexford Co. has a subunit that reported the following data for Year 1: Asset (investment) turnover1.5 timesSales$750,000Return on sales8%The imputed interest rate is 12%. What is the division residual income for Year 1? A.$30,000 B.$20,000 C.$0 D.$60,000

C.$0Answer (C) is correct. Residual income is the excess of operating income over a target return on invested capital. Because return on sales is the ratio of operating income to sales, Wexford has operating income of $60,000 ($750,000 sales × 8% return on sales). The target return on invested capital equals invested capital times the imputed interest rate. Invested capital is $500,000 ($750,000 sales ÷ 1.5 asset turnover), so the target return on capital is $60,000 ($500,000 capital × 12% imputed interest). Thus, Wexford's residual income is $0 ($60,000 operating income - $60,000 target return on capital).

James Webb is the general manager of the Industrial Product Division, and his performance is measured using the residual income method. Webb is reviewing the following forecasted information for his division for next year: AmountCategory(thousands)Working capital$ 1,800Revenue30,000Plant and equipment17,200 If the imputed interest charge is 15% and Webb wants to achieve a residual income target of $2,000,000, what will costs (cost of goods sold and other operating expenses) have to be in order to achieve the target? A.$10,800,000 B.$9,000,000 C.$25,150,000 D.$25,690,000

C.$25,150,000Answer (C) is correct. Residual income is the excess of operating income over a targeted amount equal to an imputed interest charge on invested capital. If a manager has $19,000,000 of invested capital ($17,200,000 of plant and equipment + $1,800,000 of working capital), a 15% imputed interest charge equals $2,850,000. Adding $2,000,000 of residual income to the imputed interest results in a target profit of $4,850,000. This profit can be achieved if costs are $25,150,000 ($30,000,000 revenue - $4,850,000 profit).

Zig Corp. provides the following information:Pretax operating profit$ 300,000,000Tax rate40%Capital used to generate profits50% debt, 50% equity$1,200,000,000Cost of equity15%Cost of debt5%What of the following represents Zig's year-end economic value-added amount? A.$180,000,000 B.$120,000,000 C.$72,000,000 D.$0

C.$72,000,000Answer (C) is correct. Zig's economic value added can be calculated as follows:WACC==0.09=9%Economic value added (EVA):After-tax operating income[$300,000,000 × (1 - 40%)]$180,000,000Capital used × cost of capital($1,200,000,000 × 9%)(108,000,000)Economic value added$ 72,000,000

The following information pertains to Andrew Co. for the year ended December 31:Sales$720,000Operating income120,000Average capital investment480,000 Which one of the following formulas generates Andrew's return on investment? A.(480,000 ÷ 720,000) × (120,000 ÷ 720,000) B.(720,000 ÷ 480,000) × (720,000 ÷ 120,000) C.(720,000 ÷ 480,000) × (120,000 ÷ 720,000) D.(480,000 ÷ 720,000) × (720,000 ÷ 120,000)

C.(720,000 ÷ 480,000) × (120,000 ÷ 720,000)Answer (C) is correct. ROI equals capital turnover (sales divided by investment) times the operating profit margin (operating income divided by sales). Therefore, Andrew's ROI is 25% [($720,000 ÷ $480,000) × ($120,000 ÷ $720,000)].

Management would like to calculate return on investment (ROI) for the current year. The following information is available:Operating assets at the end of the year $6,600,000Operating assets at the beginning of the year5,400,000Sales1,150,000Operating expenses550,000 What percentage amount is the ROI? A.9% B.11% C.10% D.19%

C.10%Answer (C) is correct. Return on investment can be calculated as follows:ROI=Operating income ÷ Average invested capital=($1,150,000 - $550,000) ÷ [($5,400,000 + $6,600,000) ÷ 2]=$600,000 ÷ $6,000,000 =10%

A company's common stock has a market value of $45. The company's most recent annual earnings per share is $3.60 and the company pays an annual dividend of $1.50 per share. What is the company's price-earnings ratio? A.12.08 B.8.82 C.12.50 D.21.43

C.12.50Answer (C) is correct. The price-earnings (PE) ratio equals market price per share divided by earnings per share (EPS). The company's market price per share is $45 and its EPS is $3.60. Thus, its PE ratio is 12.50 ($45 ÷ $3.60).

Which one of the following is not a core principle of total quality management (TQM)? A.Participation and teamwork by everyone in the organization. B.A focus on customers and stakeholders. C.A focus on technological breakthroughs. D.A process focus supported by continuous improvement and learning.

C.A focus on technological breakthroughs.Answer (C) is correct. The core principles of total quality management (TQM) are emphasis on the customer, continuous improvement, and engaging every employee in the pursuit of total quality.

Which one of the following best identifies a profit center? A.The Production Operations Department of a small job-order machine shop company. B.The Information Technology Department of a large consumer products company. C.A new car sales division for a large local auto agency. D.A large toy company.

C.A new car sales division for a large local auto agency.Answer (C) is correct. Management of a profit center is responsible for revenues and expenses but not invested capital. Of the four responsibility centers listed, a new car sales division for a large local auto agency is the only one that fits this description.

The cost of statistical quality control in a product quality cost system is categorized as a(n) A.Training cost. B.Internal failure cost. C.Appraisal cost. D.External failure cost.

C.Appraisal cost.Answer (C) is correct. The four categories of quality costs are (1) prevention, (2) appraisal, (3) internal failure, and (4) external failure (lost opportunity). Appraisal costs include quality control programs, inspection, and testing. However, some authorities regard statistical quality and process control as preventive activities. They not only detect faulty work but also allow for adjustment of processes to avoid future defects.

The costs of quality that are incurred in detecting units of product that do not conform to product specifications are referred to as A.Rework costs. B.Failure costs. C.Appraisal costs. D.Prevention costs.

C.Appraisal costs.Answer (C) is correct. Appraisal embraces such activities as statistical quality control programs, inspection, and testing. Appraisal costs are those costs (such as test equipment maintenance and destructive testing) incurred to detect which products do not conform to specifications.

Which of the following types of performance measures integrates financial performance, internal operations, learning and growth, and customer satisfaction? A.Financial ratio analysis. B.Total productivity. C.Balanced scorecard. D.Benchmarking.

C.Balanced scorecard.Answer (C) is correct. A typical balanced scorecard classifies objectives into one of four perspectives: financial, customer satisfaction, internal business processes, and learning and growth.

What is the process by which products and services of a business entity are measured and evaluated relative to the best possible levels of performance? A.Standard measurement. B.Measuring the performance gap. C.Benchmarking. D.Variance management.

C.Benchmarking.Answer (C) is correct. Benchmarking involves analysis and measurement of key outputs against those of the best organizations. Benchmarking also identifies the underlying key actions and causes that contribute to the performance difference.

The balanced scorecard provides an action plan for achieving competitive success by focusing management attention on critical success factors. Which one of the following is not one of the perspectives on the business into which critical success factors are commonly grouped in the balanced scorecard? A.Financial performance. B.Internal business processes. C.Competitor business strategies. D.Employee innovation and learning.

C.Competitor business strategies.Answer (C) is correct. A typical balanced scorecard classifies critical success factors and measures into one of four perspectives on the business: financial, customer satisfaction, internal business processes, and learning and growth.

The least complex segment or area of responsibility for which costs are allocated is a(n) A.Profit center. B.Contribution center. C.Cost center. D.Investment center.

C.Cost center.Answer (C) is correct. A cost center is a responsibility center that is accountable only for costs. The cost center is the least complex type of segment because it has no responsibility for revenues or investments.

In a highly decentralized organization, the best option for measuring the performance of manufacturing subunits is the establishment of A.Marketing centers. B.Revenue centers. C.Cost centers. D.Product centers.

C.Cost centers.Answer (C) is correct. Manufacturing subunits have costs but not revenues. Also, they do not make marketing or product decisions.

Rockford Manufacturing Corporation uses a responsibility accounting system in its operations. Which one of the following items is least likely to appear in a performance report for a manager of one of Rockford's assembly lines? A.Direct labor. B.Materials. C.Depreciation on the manufacturing facility. D.Repairs and maintenance.

C.Depreciation on the manufacturing facility.Answer (C) is correct. The manager of an assembly line cannot make the decision whether or not to invest in the machinery of the line. Managers in a responsibility accounting system can only be held responsible for revenue and cost elements that are subject to their control.

Which of the following terms refers to a performance measurement that is calculated as an investment center's after-tax operating income minus the product of its total assets multiplied by the company's weighted-average cost of capital (WACC)? A.Return on investment. B.Profitability index. C.Economic value added. D.Net realizable value.

C.Economic value added.Answer (C) is correct. Economic value added (EVA) is the formula for residual income adjusted for the opportunity cost of capital. The company's WACC is usually used as an opportunity cost of capital. The basic formula for EVA is after-tax operating income - (initial investment × cost of capital).

Which of the following terms represents the residual income that remains after the cost of all capital, including equity capital, has been deducted? A.Free cash flow. B.Market value-added. C.Economic value-added. D.Net operating capital.

C.Economic value-added.Answer (C) is correct. Economic value-added equals after-tax operating income minus the cost-of-capital-weighted investment base.

Which of the following quality costs are nonconformance costs? A.Systems development costs. B.Costs of inspecting in-process items. C.Environmental costs. D.Costs of quality circles.

C.Environmental costs.Answer (C) is correct. Nonconformance costs include internal and external failure costs. External failure costs include environmental costs, e.g., fines for violations of environmental laws and loss of customer goodwill.

If a manufacturing company uses responsibility centers, which one of the following items is least likely to appear in a performance report for a manager of an assembly line? A.Repairs and maintenance. B.Supervisory salaries. C.Equipment depreciation. D.Materials.

C.Equipment depreciation.Answer (C) is correct. Responsibility centers hold managers responsible for factors they can influence. The depreciation of equipment will probably not appear on the performance report of an assembly-line manager because the manager usually has no influence over the depreciation calculations.

The four categories of costs associated with product quality costs are A.External failure, internal failure, prevention, and carrying. B.Warranty, product liability, prevention, and appraisal. C.External failure, internal failure, prevention, and appraisal. D.Warranty, product liability, training, and appraisal.

C.External failure, internal failure, prevention, and appraisal.Answer (C) is correct. The four categories of quality costs are (1) prevention, (2) appraisal, (3) internal failure, and (4) external failure. Costs of prevention include attempts to avoid defective output, such as (1) employee training, (2) review of equipment design, (3) preventive maintenance, and (4) evaluation of suppliers. Appraisal includes quality control programs, inspection, and testing. Internal failure costs are incurred when detection of defective products occurs before shipment. They include costs of (1) scrap, (2) rework, (3) tooling changes, and (4) downtime. External failure costs are incurred after the product has been shipped. They include the costs associated with warranties, product liability, and loss of customer goodwill.

An automobile parts manufacturer has received complaints about declining quality from customers. After a quick review, management realizes the problem has no single source. To perform a thorough process of problem identification, the most appropriate tool is a(n) A.ISO 9000 audit. B.Histogram. C.Fishbone diagram. D.Pareto diagram.

C.Fishbone diagram.Answer (C) is correct. A fishbone diagram (also called a cause-and-effect diagram) is a total quality management process improvement technique. It is useful in studying causation (why the actual and desired situations differ). This format organizes the analysis of causation and helps to identify possible interactions among causes.

Jago Co. has two products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the A.Lower total variable manufacturing costs for the manufacturing capacity. B.Lower total manufacturing costs for the manufacturing capacity. C.Greater contribution margin per hour of manufacturing capacity. D.Greater gross profit per hour of manufacturing capacity.

C.Greater contribution margin per hour of manufacturing capacity.Answer (C) is correct. Fixed costs do not vary in the short run. Consequently, the appropriate decision criterion considers revenues and variable costs only, for example, contribution margin per hour of manufacturing capacity (contribution margin = sales revenue - variable costs).

The management and employees of We Move You, a large household goods moving company, decided to adopt total quality management (TQM) and continuous improvement (CI). They believed that, if their company became nationally known as adhering to TQM and CI, one result would be an increase in the company's profits and market share. The primary reason that We Move You adopted TQM was to achieve A.Reduced delivery time. B.Reduced delivery charges. C.Greater customer satisfaction. D.Greater employee participation.

C.Greater customer satisfaction.Answer (C) is correct. TQM is an integrated system that anticipates, meets, and exceeds customers' needs, wants, and expectations.

Which measures would be useful in evaluating the performance of a manufacturing system?Throughput timeTotal setup time for machines/total production timeNumber of rework units/total number of units completed A.II and III only. B.I and II only. C.I, II, and III. D.I and III only.

C.I, II, and III.Answer (C) is correct. Throughput time is the average amount of time required to convert raw materials into finished goods ready to be shipped. Total setup time as a percentage of total production time provides valuable information for scheduling. The number of rework items as a percentage of total number of units completed provides efficiency and quality control data. These are all important factors in evaluating the performance of a manufacturing system.

The basic objective of the residual income approach to performance measurement and evaluation is to have a division maximize its A.Imputed interest rate charge. B.Return on investment rate. C.Income in excess of a desired minimum return. D.Cash flows.

C.Income in excess of a desired minimum return.Answer (C) is correct. Residual income is the excess of the return on an investment over the targeted amount. This amount may be defined as the imputed interest on invested capital. Some firms prefer to measure managerial performance in terms of the amount of residual income rather than the percentage ROI. The principle is that the firm is expected to benefit from expansion if residual income is earned. Using a percentage ROI approach, expansion might be rejected if it lowered ROI even though residual income increases.

A firm earning a profit can increase its return on investment by A.Decreasing sales revenues and operating expenses by the same percentage. B.Increasing sales revenue and operating expenses by the same dollar amount. C.Increasing sales revenues and operating expenses by the same percentage. D.Increasing investment and operating expenses by the same dollar amount.

C.Increasing sales revenues and operating expenses by the same percentage.Answer (C) is correct. ROI equals income divided by invested capital. If a firm is profitable, increasing sales and expenses by the same percentage increases ROI. For example, if a company has sales of $100 and expenses of $80, its net income is $20. Given invested capital of $100, ROI is 20% ($20 ÷ $100). If sales and expenses both increase 10% to $110 and $88, respectively, net income increases to $22. ROI then is 22% ($22 ÷ $100).

System flexibility, elimination of waste, and elimination of disruptions are characteristic goals of which business process? A.Six Sigma. B.Delphi technique. C.Lean operation. D.Monte Carlo technique.

C.Lean operation.Answer (C) is correct. The three supporting goals of lean operation are (1) elimination of disruptions, (2) system flexibility, and (3) elimination of waste. Inventory is considered a waste.

Under the balanced scorecard concept, employee satisfaction and retention are measures used under which of the following perspectives? A.Financial. B.Internal business. C.Learning and growth. D.Customer.

C.Learning and growth.Answer (C) is correct. The level of employee satisfaction and retention directly relates to the learning and growth perspective.

In analyzing its current-year operating performance, Merle Co. determined that its return on assets improved significantly from the prior year. Total assets and operating expenses were stable and overall debt decreased, while net earnings increased due to greater sales volume. An additional 50,000 shares of common stock were authorized during the year. Which of the following statements best explains Merle's improved return on assets in the current year? A.Merle decreased its operating expenses. B.Merle increased its outstanding capital. C.Merle made more efficient use of its assets. D.Merle made more efficient use of its cash flow.

C.Merle made more efficient use of its assets.Answer (C) is correct. Return on assets is calculated as net income divided by total assets. Because net income increased despite total assets remaining stable, the assets must have been used more efficiently in the current year.

Using the balanced scorecard approach, an organization evaluates managerial performance based on A.Multiple financial measures only. B.Multiple nonfinancial measures only. C.Multiple financial and nonfinancial measures. D.A single ultimate measure of operating results, such as residual income.

C.Multiple financial and nonfinancial measures.Answer (C) is correct. The trend in managerial performance evaluation is the balanced scorecard approach. Multiple measures of performance permit a determination as to whether a manager is achieving certain objectives at the expense of others that may be equally or more important. These measures may be financial or nonfinancial and usually include items with four perspectives: (1) financial; (2) customer satisfaction; (3) internal business processes; and (4) learning and growth.

The management and employees of We Move You, a large household goods moving company, decided to adopt total quality management (TQM) and continuous improvement (CI). They believed that, if their company became nationally known as adhering to TQM and CI, one result would be an increase in the company's profits and market share. Quality is achieved more economically if We Move You focuses on A.External failure costs. B.Internal failure costs. C.Prevention costs. D.Appraisal costs.

C.Prevention costs.Answer (C) is correct. Prevention attempts to avoid defective output. Prevention costs include preventive maintenance, employee training, review of equipment design, and evaluation of suppliers. Prevention is less costly than detection and correction of defective output.

The internal audit activity has undertaken an audit of the shipping and receiving department of a department store chain. The best engagement tool for this purpose most likely is A.Strategic benchmarking. B.Internal benchmarking. C.Process benchmarking. D.Competitive benchmarking.

C.Process benchmarking.Answer (C) is correct. Process (function) benchmarking studies operations of organizations with similar processes regardless of industry. Thus, the benchmark need not be a competitor or even a similar entity. This method may introduce new ideas that provide a significant competitive advantage. The advantage of process benchmarking is that it permits a wider choice of benchmarked organizations. Thus, the best practices for a shipping and receiving function may not be found in the same industry.

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers? A.ROI does not necessarily reflect the company's cost of capital. B.ROI does not reflect all economic gains. C.ROI may lead to rejecting projects that yield positive cash flows. D.ROI is a percentage, while RI is a dollar amount.

C.ROI may lead to rejecting projects that yield positive cash flows.Answer (C) is correct. A serious drawback of relying on ROI is the temptation to reject capital projects that would decrease the ROI percentage in spite of the fact that they would increase shareholder wealth. Management tends to reject any capital project that would decrease current ROI even if it would add to the company's bottom line. Residual income is often considered superior because dealing with absolute dollars rather than percentages forces management to consider all decisions in the light of increasing shareholder wealth, not just historical percentage returns.

Charlie's Service Co. is an automobile service center. Charlie's had the following operating statistics for Year 6:Sales$750,000Operating income50,000Net profit after taxes6,000Total assets available700,000Shareholders' equity300,000Cost of capital8% Charlie's has a A.Return on investment of 6.67%. B.Return on investment of 8%. C.Residual income of $(6,000). D.Residual income of $(10,000).

C.Residual income of $(6,000).Answer (C) is correct. Residual income is the excess of operating income (a pretax amount) over a targeted amount equal to an imputed interest charge on invested capital. Using total assets available as the investment base, Charlie's targeted amount is $56,000 ($700,000 total assets × 8% cost of capital). Subtracting this amount from operating income results in residual income of $(6,000).

An example of an internal failure cost is A.Inspection. B.Maintenance. C.Rework. D.Product recalls.

C.Rework.Answer (C) is correct. In a quality management system, one of the costs of product nonconformance is internal failure cost, the cost of discovering, after appraisal but before shipment, that a completed product does not meet quality standards. An example is the cost of reworking the product.

Which of the following is a financial measure of success in a balanced scorecard? A.Staff morale. B.Market share. C.Sales growth. D.Cycle time.

C.Sales growth.Answer (C) is correct. Sales growth is a financial measure of success under the critical success factor of sales.

The following forecasted information is available for a manufacturing division for next year: AmountCategory(thousands)Working capital$ 1,800Revenue30,000Plant and equipment17,200 To establish a standard of performance for the division's manager using the residual income approach, four scenarios are being considered.TargetImputed InterestResidual Income115%$2,000,000212%1,500,000318%1,250,000410%2,500,000 Which scenario assumes the lowest maximum cost? A.Scenario 4. B.Scenario 2. C.Scenario 1. D.Scenario 3.

C.Scenario 1.Answer (C) is correct. Residual income is the excess of operating income over a targeted amount equal to an imputed interest charge on invested capital. If a manager has $19,000,000 of invested capital ($17,200,000 of plant and equipment + $1,800,000 of working capital), a 15% imputed interest charge equals $2,850,000. Adding $2,000,000 of residual income to the imputed interest results in a target profit of $4,850,000. This profit can be achieved if costs are $25,150,000 ($30,000,000 revenue - $4,850,000 profit).

Which of the following methodologies would be most effective for a company that wants to reduce its rate of defective products? A.Variable costing. B.Breakeven analysis. C.Six Sigma. D.Sensitivity analysis.

C.Six Sigma.Answer (C) is correct. Six Sigma is a quality improvement approach. The goal is to reduce the number of defects in a mass-production process.

Which of the following indicates that market-based transfer prices would be preferable to cost-based transfer prices? A.The market is perfectly competitive for the intermediate product, and the selling division has ample unused capacity. B.The market is imperfectly competitive for the intermediate product, and the selling division has no unused capacity. C.The market is perfectly competitive for the intermediate product, and the selling division has no unused capacity. D.The market is imperfectly competitive for the intermediate product, and the selling division has ample unused capacity.

C.The market is perfectly competitive for the intermediate product, and the selling division has no unused capacity.Answer (C) is correct. In a perfectly competitive market, firms are unable to control the market price of their product. If the selling division has no unused capacity, there is no threat of displaced external sales.

An organization has collected data on the complaints made by computer users and has categorized the complaints in the Pareto diagram below. Using the information collected, the organization should focus on A.The number of computer complaints associated with connectivity problems and new software usage. B.The cost to alleviate all computer complaints. C.The number of computer complaints associated with the lack of user knowledge and hardware problems. D.The total number of personal computer complaints that occurred.

C.The number of computer complaints associated with the lack of user knowledge and hardware problems.Answer (C) is correct. Complaints based on lack of user knowledge and hardware problems are by far the most frequent according to this chart. Consequently, the company should devote its resources primarily to these issues.

Which of the following decision-making techniques is most useful to a manager who is attempting to increase the profitability of an area, but who has a problem with limited capacity for operation of a critical machine? A.Cost-variance analysis. B.Balanced scorecard. C.Theory of constraints. D.Economic order quantity.

C.Theory of constraints.Answer (C) is correct. A manager who is concerned with limited capacity for operation of a critical machine should use the theory of constraints (TOC). The basic premise of TOC is that improving any process is best done, not by trying to maximize efficiency in every part of the process, but by focusing on the constraint. The system is only as fast as its slowest part.

Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs? A.Inspection of in-process goods. B.Tracking warranty expenses over time. C.Tracking the number of products reworked. D.Recording the number of products returned over time.

C.Tracking the number of products reworked.Answer (C) is correct. Internal failure costs occur when defective products are detected before shipment. Examples include scrap, rework, tooling changes, and downtime.

Which of the following types of responsibility centers include controllable revenues in their performance reports? CostCentersInvestmentCentersProfitCenters A. Cost Centers No Investment Centers No Profit Centers No B. Cost Centers Yes Investment Centers No Profit Centers No C. Cost Centers Yes Investment Centers Yes Profit Centers Yes D. Cost Centers No Investment Centers Yes Profit Centers Yes

D. Cost Centers No Investment Centers Yes Profit Centers Yes Answer (D) is correct. In investment centers, managers are responsible for all activities, including costs, revenues, and investments. An investment center is a profit center with significant control over the amount of capital invested. This control extends to investments such as receivables and property, plant, and equipment, as well as entry into new markets. A cost center, for example, a production department, is responsible for costs only. A profit center, for example, the appliance department in a retail store, is responsible for both revenues and expenses.

The following selected data pertain to the Darwin Division of Beagle Co. for the year just ended:Sales$400,000Operating income$ 40,000Capital turnover4Imputed interest rate10% What was Darwin's residual income for the year? A.$0 B.$4,000 C.$10,000 D.$30,000

D.$30,000Answer (D) is correct. Residual income equals operating income minus a target return on invested capital. Since the capital turnover equals sales divided by average invested capital, average invested capital is $100,000 ($400,000 sales ÷ 4 capital turnover). Residual income can now be calculated as follows: Residual income= Operating income - Target return on invested capital = $40,000 - ($100,000 × 10%) = $40,000 - $10,000 = $30,000

Galax, Inc., had operating income of $5,000,000 before interest and taxes. Galax's net book value of plant assets at January 1 and December 31 were $22,000,000 and $18,000,000, respectively. Galax achieved a 25% return on investment for the year, with an investment turnover of 2.5. What were Galax's sales for the year? A.$55,000,000 B.$45,000,000 C.$20,000,000 D.$50,000,000

D.$50,000,000Answer (D) is correct. The capital (investment) turnover ratio equals sales divided by average invested capital. Sales equals the capital turnover ratio of 2.5 times average invested capital of $20,000,000 [($22,000,000 + $18,000,000) ÷ 2]. Galax's sales are therefore $50,000,000.

The following information pertains to Bala Co. for the year ended December 31: Sales$600,000Income100,000Capital investment400,000 Which of the following equations should be used to compute Bala's return on investment? A.(4/6) × (6/1) = ROI. B.(6/4) × (6/1) = ROI. C.(4/6) × (1/6) = ROI. D.(6/4) × (1/6) = ROI.

D.(6/4) × (1/6) = ROI.Answer (D) is correct. ROI equals capital turnover (sales ÷ investment) times the profit margin (income ÷ sales). Thus, Bala's ROI can be represented by [($600,000 ÷ $400,000) × ($100,000 ÷ $600,000)].

The data presented below show actual figures for selected accounts of McKeon Company for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal year. McKeon's controller is in the process of reviewing the Year 1 figures and calculating some key ratios based on the actual figures. (Round all calculations to three decimal places if necessary.) 5/31/Year 2 5/31/Year 1 Current assets $210,000 $180,000 Noncurrent assets 275,000 255,000 Current liabilities 78,000 85,000 Long-term debt 75,000 30,000 Common stock ($30 par value) 300,000 300,000 Retained earnings 32,000 20,000 Year 1 Operations Sales* $350,000 Cost of goods sold 160,000 Interest expense 3,000 Income taxes (40% rate) 48,000 Dividends declared and paid in Year 1 60,000 Administrative expense 67,000 *All sales are credit sales. Current Assets 5/31/Year 2 5/31/Year 1 Cash $ 20,000 $10,000 Accounts receivable 100,000 70,000 Inventory 70,000 75,000 Prepaid expenses 20,000 20,000 The Year 2 return on equity for McKeon Company is A.0.040 B.0.361 C.0.240 D.0.221

D.0.221Answer (D) is correct. Return on equity equals net income of $72,000 ($350,000 sales - $160,000 COGS - $3,000 interest expense - $48,000 taxes - $67,000 administrative expenses) divided by the average stockholders' equity. The average equity of $326,000 is found by averaging the $320,000 sum of the common stock and retained earnings at May 31, Year 1, with the $332,000 ending balance. Dividing the $72,000 net income by $326,000 produces a rate of return of 22.1%.

The information below pertains to Devlin Company. Statement of Financial Position as of May 31 (in thousands) Year 2 Year 1 Assets Current assets Cash $ 45 $ 38 Trading securities 30 20 Accounts receivable (net) 68 48 Inventory 90 80 Prepaid expenses 22 30 Total current assets $255 $216 Investments, at equity 38 30 Property, plant, and equipment (net) 375 400 Intangible assets (net) 80 45 Total assets $748 $691 Liabilities Current liabilities Accounts payable $ 70 $ 42 Accrued expenses 5 4 Notes payable 35 18 Income taxes payable 15 16 Total current liabilities $125 $ 80 Long-term debt 35 35 Deferred taxes 3 2 Total liabilities $163 $117 Equity Preferred stock, 6%, $100 par value, cumulative $150 $150 Common stock, $10 par value 225 195 Additional paid-in capital -- common stock 114 100 Retained earnings 96 129 Total equity $585 $574 Total liabilities and equity $748 $691 Income Statement for the year ended May 31 (in thousands) Year 2 Year 1 Net sales $480 $460 Costs and expenses Costs of goods sold 330 315 Selling, general, and administrative 52 51 Interest expense 8 9 Income before taxes $ 90 $ 85 Income taxes 36 34 Net i Assuming there are no preferred stock dividends in arrears, Devlin Company's return on common equity for the year ended May 31, Year 2, was A.7.5% B.7.8% C.6.3% D.10.5%

D.10.5%Answer (D) is correct. The return on common equity equals income available to common shareholders divided by average common equity. Net income available to common shareholders is $45 [$54 - ($150 par value of preferred stock × 6%)]. Average common equity is $429.5 {[$574 - $150 preferred stock) + ($585 - $150 preferred stock)] ÷ 2}. Thus, the return is 10.5% ($45 ÷ $429.5).

Spear Corp. had sales of $2,000,000, a profit margin of 11%, and assets of $2,500,000. Spear decided to reduce its debt ratio to 0.40 from 0.50 by selling new common stock and using the proceeds to repay principal on some outstanding long-term debt. After the refinancing, what is Spear's return on equity (ROE)? A.3.5% B.5.3% C.22.9% D.14.7%

D.14.7%Answer (D) is correct. The debt ratio equals total debt (liabilities) divided by total assets. Therefore, Spear's total liabilities after the repayment of long-term debt are $1,000,000 ($2,500,000 total assets × 0.4 debt ratio). According to the basic accounting equation, assets equal liabilities plus equity. Thus, Spear's equity equals $1,500,000 ($2,500,000 assets - $1,000,000 liabilities). ROE measures the amount of income a company earns per dollar invested by the equity holders. It equals net income divided by average amount of equity (or total equity based on the data provided in this question). Net income for the period is $220,000 ($2,000,000 sales × 11% profit margin). Therefore, the return on equity is 14.7% ($220,000 net income ÷ $1,500,000 equity).

Listed below is selected financial information for the Western Division of the Hinzel Company for last year. AmountAccount(thousands)Average working capital$ 625General and administrative expenses75Net sales4,000Average plant and equipment1,775Cost of goods sold3,525 If Hinzel treats the Western Division as an investment center for performance measurement purposes, what is the before-tax return on investment (ROI) for last year? A.22.54% B.19.79% C.34.78% D.16.67%

D.16.67%Answer (D) is correct. An investment center's ROI is its operating income divided by its average invested capital. The Western Division's operating income is $400 ($4,000 sales - $3,525 cost of goods sold - $75 general expenses). Given average plant and equipment of $1,775 and average working capital of $625, the total average invested capital is $2,400. ROI is thus 16.67% ($400 ÷ $2,400).

Managers of the Doggie Food Co. want to add a bonus component to their compensation plan. They are trying to decide between return on investment (ROI) and residual income (RI) as the performance measure they will use. If Doggie adopts the RI performance measure, the relevant required rate of return would be 18%. One segment of Doggie is the Good Treats division, where the manager has invested in new equipment. The operating results from this equipment are as follows:Revenues$80,000Costs of goods sold45,000General and administrative expenses15,000Assuming that there are no income taxes, what would be the ROI and RI, respectively, for this equipment, which has an average value of $100,000? A.$2,000, 20% B.$3,600, 35% C.35%, $3,600 D.20%, $2,000

D.20%, $2,000Answer (D) is correct. Operating income is equal to $20,000 ($80,000 - $45,000 - $15,000), invested capital is equal to $100,000, and the target return on invested capital is equal to $18,000 ($100,000 × 18%). Therefore, the ROI on this equipment is 20% ($20,000 operating income ÷ $100,000 average invested capital) and the RI is $2,000 ($20,000 - $18,000).

The following information pertains to Quest Co.'s Gold Division for the year just ended: Sales$311,000Variable cost250,000Traceable fixed costs50,000Average invested capital40,000Imputed interest rate10% Quest's return on investment was A.13.33% B.30.00% C.10.00% D.27.50%

D.27.50%Answer (D) is correct. Quest's return on investment can be calculated as follows:ROI=Operating income ÷ Average invested capital=($311,000 - $250,000 - $50,000) ÷ $40,000=$11,000 ÷ $40,000=27.5%

The following data pertain to Canova, Inc., for the year ended December 31:Net sales$ 600,000Net income150,000Total assets, January 12,000,000Total assets, December 313,000,000What was Canova's rate of return on assets for the year? A.5% B.24% C.20% D.6%

D.6%Answer (D) is correct. Return on assets equals net income divided by average total assets, or 6% {$150,000 ÷ [($2,000,000 + $3,000,000) ÷ 2]}.

The information below pertains to Devlin Company. Statement of Financial Position as of May 31 (in thousands) Year 2 Year 1 Assets Current assets Cash $ 45 $ 38 Trading securities 30 20 Accounts receivable (net) 68 48 Inventory 90 80 Prepaid expenses 22 30 Total current assets $255 $216 Investments, at equity 38 30 Property, plant, and equipment (net) 375 400 Intangible assets (net) 80 45 Total assets $748 $691 Liabilities Current liabilities Accounts payable $ 70 $ 42 Accrued expenses 5 4 Notes payable 35 18 Income taxes payable 15 16 Total current liabilities $125 $ 80 Long-term debt 35 35 Deferred taxes 3 2 Total liabilities $163 $117 Equity Preferred stock, 6%, $100 par value, cumulative $150 $150 Common stock, $10 par value 225 195 Additional paid-in capital -- common stock 114 100 Retained earnings 96 129 Total equity $585 $574 Total liabilities and equity $748 $691 Income Statement for the year ended May 31 (in thousands) Year 2 Year 1 Net sales $480 $460 Costs and expenses Costs of goods sold 330 315 Selling, general, and administrative 52 51 Interest expense 8 9 Income before taxes $ 90 $ 85 Income taxes 36 34 Devlin Company's rate of return on assets for the year ended May 31, Year 2, was A.7.2% B.11.2% C.7.8% D.7.5%

D.7.5%Answer (D) is correct. The rate of return on assets equals net income divided by average total assets. Accordingly, the rate of return is 7.5% {$54 ÷ [($748 + $691) ÷ 2]}.

Last year a consulting company that solves computer network problems instituted a total quality management (TQM) program and produced the following summary cost-of-quality report:Year 1Year 2ChangePrevention costs$ 200,000$ 300,000+50%Appraisal costs210,000315,000+50%Internal failure costs190,000114,000-40%External failure costs1,200,000621,000-48%Total quality costs$1,800,000$1,350,000-25%Which of the following statements regarding the report is most likely correct? A.An increase in inspection costs was solely responsible for the decrease in quality costs. B.The increase in conformance costs indicated that the TQM program was not working. C.In the long run, increased conformance costs would cause total quality costs to increase. D.An increase in conformance costs resulted in a decrease in nonconformance costs.

D.An increase in conformance costs resulted in a decrease in nonconformance costs.Answer (D) is correct. Total costs of quality include the conformance costs and nonconformance costs. Conformance costs include costs of prevention (attempt to avoid defective products) and costs of appraisal (embrace such activities as statistical quality control programs, inspection, and testing). Nonconformance costs include internal failure costs (occur when defective products are detected before shipment) and external failure costs (arise when problems occur after shipment). Since the major goal of conformance costs is to prevent defective products, and as evidenced by the chart provided, an increase in conformance costs resulted in a decrease in nonconformance costs.

If a company is customer-centered, its customers are defined as A.Everybody external to the company who is currently doing, or may in the future do, business with the company. B.Only people internal to the company who directly use its product. C.Only people external to the company who have purchased something from the company. D.Anyone external to the company and those internal who rely on its product to get their job done.

D.Anyone external to the company and those internal who rely on its product to get their job done.Answer (D) is correct. One of the principles of TQM is customer orientation, whether the customer is internal or external. An internal customer is a member of the organization who relies on another member's work to accomplish his or her task.

A segment of an organization is referred to as an investment center if it has A.Authority to provide specialized support to other units within the organization. B.Authority to make decisions over the most significant costs of operations including the power to choose the sources of supply. C.Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply. D.Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply and significant control over the amount of invested capital.

D.Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply and significant control over the amount of invested capital.Answer (D) is correct. An investment center is responsible for revenues, expenses, and invested capital. Return on investment is usually the key performance measure of an investment center.

Decentralized firms can delegate authority and yet retain control and monitor managers' performance by structuring the organization into responsibility centers. Which one of the following organizational segments is most like an independent business? A.Cost center. B.Profit center. C.Revenue center. D.Investment center.

D.Investment center.Answer (D) is correct. An investment center is the organizational type most like an independent business because it is responsible for its own revenues, costs incurred, and capital invested. The other types of centers do not incorporate all three elements.

Total quality management (TQM) in a manufacturing environment follows a series of steps in its implementation. Which of the following is the correct order of the steps? A.Begin with internal competencies, find external customers that need these skills, and establish requirements for external suppliers. B.Begin with external suppliers, proceed through the firm and find ways to use available supplies, and convince customers to use the products. C.Begin with external customer requirements, find suppliers who can satisfy them, and subcontract to those suppliers. D.Begin with external customer requirements, identify customer-supplier relationships and requirements, and establish requirements for external suppliers.

D.Begin with external customer requirements, identify customer-supplier relationships and requirements, and establish requirements for external suppliers.Answer (D) is correct. TQM is customer focused, and requirements flow through the entity from the customers to the supplier.

The management of a company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts? A.Utilize best practices. B.Forecast. C.Budget. D.Benchmark.

D.Benchmark. Answer (D) is correct. Benchmarking is an ongoing process that requires quantitative and qualitative measurement of the difference between the performance of an activity and the performance by the benchmark.

A manufacturer that wants to improve its staging process compares its procedures against the check-in process for a major airline. Which of the following tools is the manufacturer using? A.Total quality management. B.Economic value added. C.Statistical process control. D.Benchmarking.

D.Benchmarking.Answer (D) is correct. Benchmarking is a primary tool used in quality management. It is a means of helping organizations with productivity management and business process analysis. Benchmarking involves analysis and measurement of key outputs against those of the best organizations. This procedure also involves identifying the underlying key actions and causes that contribute to the performance difference. The benchmark need not be a competitor or even a similar entity. Process (function) benchmarking studies operations of organizations with similar processes regardless of industry. Thus, a comparison to procedures against the check-in process for a major airline is an example of benchmarking.

On a balanced scorecard, which is more of an internal process measure than an external-based measure? A.Profitability. B.Customer satisfaction. C.Market share. D.Cycle time.

D.Cycle time.Answer (D) is correct. Cycle time is the manufacturing time to complete an order. Thus, cycle time is strictly related to internal processes. Profitability is a combination of internal and external considerations. Customer satisfaction and market share are related to how customers perceive a product and how competitors react.

What is gap analysis in TQM? A.Conducting a quality audit. B.Evaluating workers' space requirements to optimize their work flow. C.Evaluating the minimum or maximum amount of shelf space required to maximize profits in retail stores. D.Determining what is necessary to bring the practices of the organization closer to the quality leaders in its industry.

D.Determining what is necessary to bring the practices of the organization closer to the quality leaders in its industry.Answer (D) is correct. The "gap" is the difference between best practices and the firm's practices. TQM examines (benchmarks) the best in the industry and imitates them. The analysis includes establishing a database for developing a strategic quality improvement plan.

The essence of responsibility accounting is A.Determining who is to blame for unfavorable variances. B.Allocating service department costs to production departments so that production department managers know all costs for which they are responsible. C.Investigating all variances, regardless of their status as favorable or unfavorable. D.Developing performance reports emphasizing costs and revenues that managers can control.

D.Developing performance reports emphasizing costs and revenues that managers can control.Answer (D) is correct. Responsibility accounting allows each component of an organization to be evaluated based on the component's individual performance. In order for the evaluation to occur, appropriate documentation, such as performance reports, should be developed.

Which criterion for allocation of common costs most likely promotes acceptance of the allocation? A.Benefit-received relationship. B.Ability-to-bear relationship. C.Arbitrary allocation. D.Direct cause-and-effect relationship.

D.Direct cause-and-effect relationship.Answer (D) is correct. Establishment of a direct cause-and-effect relationship often is the most accepted allocation by managers because of the perceived fairness of the procedure.

Nonfinancial performance measures are important to engineering and operations managers in assessing the quality levels of their products. Which of the following indicators can be used to measure product quality? I Returns and allowances II Number and types of customer complaints III Production cycle time A.I and III only. B.I, II, and III. C.II and III only. D.I and II only.

D.I and II only.Answer (D) is correct. Nonfinancial performance measures, such as product quality, are useful for day-to-day control purposes. Examples (indicators) of nonfinancial performance measures include the following: outgoing quality level for each product line, returned merchandise, customer report card, competitive rank, and on-time delivery.

In a quality control program, which of the following is(are) categorized as internal failure costs? I Rework II Responding to customer complaints III Statistical quality control procedures A.II only. B.III only. C.I, II, and III. D.I only.

D.I only.Answer (D) is correct. Internal failure costs are those incurred when detection of defective products occurs before shipment. Examples are scrap, rework, tooling changes, and downtime.

Given demand in excess of capacity, no spoilage or waste, and full use of a constant number of assembly hours, the number of components needed for an assembly operation with an 80% learning curve should I Increase for successive periods. II Decrease per unit of output. A.Neither I nor II. B.Both I and II. C.II only. D.I only.

D.I only.Answer (D) is correct. Learning curves reflect the increased rate at which people perform tasks as they gain experience. An 80% learning curve means that the cumulative average time required to complete a unit (or the time required to produce the last unit) declines by 20% when unit output doubles in the early stages of production. Thus, as the cumulative average time per unit (or the time to complete the last unit) declines, the number of units produced per period of time increases. As more units are produced, more components are needed for the production. The number of components per unit of output is not affected by an increase in output.

Each of the following will affect a company's return on investment, except A.Decreasing expenses. B.Raising prices as demand remains unchanged. C.Decreasing investment in assets. D.Maintaining the company's cost of capital at current levels.

D.Maintaining the company's cost of capital at current levels.Answer (D) is correct. Return on investment equals operating income over total assets (or average invested capital). Maintaining the company's cost of capital at current levels will not change the operating income nor the amount of invested capital in the company. Hence, it will not affect the company's return on investment.

A student aircraft mechanic scored 90% on her midterm exam on electronic systems, but her employer wanted a perfect score on every exam, stating, "Nothing less than perfection works in aviation." Because the mechanic is required to make a test flight in every airplane she repairs, how would the 10% error rate be classified in a cost of quality analysis? A.Nonconformance - external. B.Conformance - prevention. C.Conformance - appraisal. D.Nonconformance - internal.

D.Nonconformance - internal.Answer (D) is correct. Because the mechanic must fly in every aircraft she repairs, the cost of an in-flight failure of an electrical system could be serious. Thus, the 10% error rate is nonconformance (failure of the system) and internal. The mechanic could incur personal consequences from failure of the electrical system.

Which one of the following statements pertaining to the return on investment (ROI) as a performance measurement is false? A.The use of ROI can make it undesirable for a skillful manager to take on troubleshooting assignments such as those involving turning around unprofitable divisions. B.The use of ROI may lead managers to reject capital investment projects that can be justified by using discounted cash flow models. C.When the average age of assets differs substantially across segments of a business, the use of ROI may not be appropriate. D.ROI relies on financial measures that are capable of being independently verified, while other forms of performance measures are subject to manipulation.

D.ROI relies on financial measures that are capable of being independently verified, while other forms of performance measures are subject to manipulation.Answer (D) is correct. ROI is calculated by dividing a segment's income by the invested capital. Thus, ROI can be manipulated by falsifying income or invested capital.

REB Service Co. is a computer service center. For the month, REB had the following operating statistics:Sales$450,000Operating income25,000Net profit after taxes8,000Total assets500,000Shareholders' equity200,000Cost of capital6% Based on the above information, which one of the following statements is true? REB has a A.Return on investment of 1.6%. B.Residual income of $(22,000). C.Return on investment of 4%. D.Residual income of $(5,000).

D.Residual income of $(5,000).Answer (D) is correct. Residual income is the excess of operating income (a pretax amount) over a targeted amount equal to an imputed interest charge on invested capital. Using assets of $500,000 as the investment base and a cost of capital of 6%, REB must earn $30,000 on those assets to cover the cost of capital. Given that operating income was only $25,000, residual income is $(5,000).

Which of the following performance measures may lead a manager of an investment center to forgo investments that could benefit the company as a whole? A.Profitability index. B.Residual income. C.Economic value added. D.Return on investment.

D.Return on investment.Answer (D) is correct. A significant drawback of relying on return on investment (ROI) is the temptation to reject capital projects that would decrease the ROI percentage in spite of the fact that they would increase shareholder wealth. Focusing on percentages rather than dollar amounts would lead a manager to forgo investments that could benefit the company as a whole since they could potentially reject projects with positive dollar returns.

In evaluating an investment center, top management should concentrate on A.Profit percentages. B.Net income. C.Dollar sales. D.Return on investment.

D.Return on investment.Answer (D) is correct. Each investment center of a business should be evaluated based upon return on investment to judge operating performance. ROI is comparable to calculations made both within and outside a particular organization. Management may review the investment opportunities available. In essence, net income is stated as a proportion of investment capital (resources required).

Champions, yellow belts, and master black belts are associated with which business process? A.Kanban. B.Demand flow technology. C.Business process reengineering. D.Six Sigma.

D.Six Sigma.Answer (D) is correct. A Six Sigma program involves role-filling by specific individuals in the organization. Champions are responsible for overseeing the implementation of the Six Sigma program across the organization. Master black belts assist the champions in implementing the program. Green belts and yellow belts are the ones closest to the production processes that are being improved.

A manufacturer mass produces nuts and bolts on its assembly line. The line supervisors sample every nth unit for conformance with specifications. Once a nonconforming part is detected, the machinery is shut down and adjusted. The most appropriate tool for this process is a A.Fishbone diagram. B.Cost of quality report. C.ISO 9000 audit. D.Statistical quality control chart.

D.Statistical quality control chart.Answer (D) is correct. Statistical quality control is a method of determining whether the shipment or production run of units lies within acceptable limits. It is also used to determine whether production processes are out of control. Statistical control charts are graphic aids for monitoring the status of any process subject to random variations.

In which of the following organizational structures does total quality management (TQM) work best? A.Teams of people from the same specialty. B.Specialists working individually. C.Hierarchical. D.Teams of people from different specialties.

D.Teams of people from different specialties.Answer (D) is correct. TQM advocates replacement of the traditional hierarchical structure with teams of people from different specialties. This change follows from TQM's emphasis on empowering employees and teamwork.

An organization has collected data on the complaints made by computer users and has categorized the complaints in the Pareto diagram below. The chart displays A.The arithmetic mean of each computer complaint. B.The relative frequency of each computer complaint. C.The median of each computer complaint. D.The absolute frequency of each computer complaint.

D.The absolute frequency of each computer complaint.Answer (D) is correct. This Pareto diagram depicts the frequencies of complaints in absolute terms. It displays the actual number of each type of complaint.

One of the main reasons total quality management (TQM) can be used as a strategic weapon is that A.Introducing new products can lure customers away from competitors. B.Reduced costs associated with better quality can support higher shareholder dividends. C.TQM provides a comprehensive planning process for a business. D.The cumulative improvement from a company's TQM efforts cannot readily be copied by competitors.

D.The cumulative improvement from a company's TQM efforts cannot readily be copied by competitors.Answer (D) is correct. Because TQM affects every aspect of the organization's activities, it permeates the organizational culture. Thus, the cumulative effect of TQM's continuous improvement process can attract and hold customers and cannot be duplicated by competitors.

An example of an internal nonfinancial benchmark is A.The labor rate of comparably skilled employees at a major competitor's plant. B.A $50,000 limit on the cost of employee training programs at each of the company's plants. C.The average actual cost per pound of a specific product at the company's most efficient plant. D.The percentage of customer orders delivered on time at the company's most efficient plant.

D.The percentage of customer orders delivered on time at the company's most efficient plant.Answer (D) is correct. Benchmarking is a continuous evaluation of the practices of the best organizations in their class and the adaptation of processes to reflect the best of these practices. It requires analysis and measurement of key outputs against those of the best organizations. This procedure also involves identifying the underlying key actions and causes that contribute to the performance difference. The percentage of orders delivered on time at the most efficient plant is an example of an internal nonfinancial benchmark.

Increasing the efficiency of all phases of a given process is specifically discouraged by which of the following models? A.Lean operation. B.Six Sigma. C.Demand flow technology. D.Theory of constraints.

D.Theory of constraints.Answer (D) is correct. Under the theory of constraints, increasing the efficiency of processes that are not constraints (bottlenecks) merely creates backup in the system.