A306: Chapter 11
Net operating income ÷ Average operating assets = ______. Multiple choice question. Return on investment Turnover Margin Residual income
Return on investment
Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers? Multiple select question. Actual profits compared to budgeted profits Standard cost variances Return on investment (ROI) Residual income
Return on investment (ROI) Residual income
The ROI formula typically uses Blank______. Multiple choice question. end of year operating and non-operating assets end of year operating assets average operating assets for the year average operating and non-operating assets for the year
average operating assets for the year
Residual income is a measure used to evaluate managers of Blank______ centers. Multiple choice question. profit & investment investment profit cost
investment
Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) Blank______ center. Multiple choice question. cost profit investment
profit
Disadvantages of decentralization include ______. Multiple select question. defining organization strategy is difficult spreading innovative ideas may be difficult lack of coordination clashing objectives between departments and the organization
spreading innovative ideas may be difficult lack of coordination clashing objectives between departments and the organization
In a decentralized organization ______. Multiple select question. lower-level managers have low motivation and job satisfaction due to increased responsibility Reason: The opposite is true. decision-making authority is reserved for top management so lower level managers can concentrate on operations. top management can concentrate on issues such as overall strategy lower-level managers are trained for higher positions. changes in the operating environment can be responded to rapidly
top management can concentrate on issues such as overall strategy lower-level managers are trained for higher positions. changes in the operating environment can be responded to rapidly
ROI is a method used to evaluate Blank______. Multiple choice question. profit and investment centers, but not cost centers cost and profit centers, but not investment centers investment centers, but not cost or profit centers cost, profit, and investment centers
investment centers, but not cost or profit centers
Valid criticisms of evaluating performance based on return on investment (ROI) include managers may Blank______. Multiple select question. take actions that increase ROI in the short-run at the expense of long-term performance affect ROI by increasing sales or decreasing operating expenses for their division be put in charge of a business segment that includes committed costs over which a manager has no control reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI
take actions that increase ROI in the short-run at the expense of long-term performance be put in charge of a business segment that includes committed costs over which a manager has no control reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI
Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because Blank______. Multiple choice question. top management is heavily involved in the day-to-day operations lower-level managers are judged on non financial measures rather than financial outcomes of their decisions Reason: A good performance evaluation system judges managers on both financial and nonfinancial measures. there are fewer managers that must be consulted before a decision is made
there are fewer managers that must be consulted before a decision is made
Which of the following are disadvantages of decentralization? Multiple select question. Decision-making authority is removed from those with the most detailed information about the day-to-day operations. The layers of required approvals and decisions often cause slow customer response time. Coordination among departments may be lacking. Lower-level managers may make decisions without understanding the big picture. Lower-level managers may have objectives that differ from the objectives of the entire organization.
Coordination among departments may be lacking. Lower-level managers may make decisions without understanding the big picture. Lower-level managers may have objectives that differ from the objectives of the entire organization.
Which of the following statements is incorrect regarding responsibility accounting? Multiple choice question. Responsibility accounting divides the organization into "responsibility centers" to evaluate managers' decisions. Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers. Responsibility accounting links lower-level managers' decisions with the outcomes of those decisions. Responsibility accounting holds managers accountable for the revenues and expenses over which they have control.
Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.
Garnett, Inc. has a required rate of return on new projects of 12%. The Western division of Garnett is currently earning a combined return on investment (ROI) of 14.5% on the projects in its division. Western's manager is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct? Multiple select question. Accepting the project is in the best interest of the company as a whole. The project will improve the ROI for the Western division, since it is above the required rate of return that the company has specified. The manager may decide to reject the project because it will lower the current ROI earned by his division.
Accepting the project is in the best interest of the company as a whole. The manager may decide to reject the project because it will lower the current ROI earned by his division.
Which of the following statements is incorrect regarding responsibility accounting? Multiple choice question. Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers. Responsibility accounting divides the organization into "responsibility centers" to evaluate managers' decisions. Responsibility accounting holds managers accountable for the revenues and expenses over which they have control. Responsibility accounting links lower-level managers' decisions with the outcomes of those decisions.
Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.
Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) Blank______ center. Multiple choice question. cost investment profit
profit
Which of the following statements is correct? Multiple choice question. A project that is not acceptable using residual income calculations may be acceptable when ROI is calculated. Managers will be more likely to pursue projects that will benefit the entire company when being evaluated on ROI instead of residual income. A manager might reject a proposal using ROI that the manager would accept using residual income.
A manager might reject a proposal using ROI that the manager would accept using residual income. Reason: A project that lowers overall ROI may still be acceptable using residual income. Reason: Managers will be more likely to choose projects that benefit the entire company when using residual income. A manager might reject a proposal using ROI that the manager would accept using residual income.
Net operating income is income before __________ and ____________.
Blank 1: interest Blank 2: taxes or tax
In order to fully understand how a manager's decisions can affect ROI, both ______________ and _______________ should be computed.
Blank 1: margin Blank 2: turnover
True or false: Adams, Inc. has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book values.
False Reason: Net book value discourages equipment replacement.
Which of the following will ordinarily improve margin (and ROI)? Multiple select question. Reducing operating assets Reducing unit sales Increasing selling prices Reducing operating expenses
Increasing selling prices Reducing operating expenses
Residual income = ______. Multiple choice question. Net operating income (NOI) ÷ Average operating assets NOI ÷ Sales NOI - (Average operating assets × Minimum rate of return) Margin × Turnover
NOI - (Average operating assets × Minimum rate of return)
Residual income
Net operating income - (Average operating assets × Minimum required rate of return).
Return on investment
Net operating income ÷ Average operating assets
Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance? Multiple choice question. Managers may increase ROI in a way that is inconsistent with company strategy. It may be difficult to assess the performance of a manager who takes over an existing business segment. Managers may reject investment opportunities that would benefit the entire company but negatively affect the manager. ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.
ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.
Which of the following business segments would not be considered a cost center? Multiple choice question. Accounting department Manufacturing facilities Retail outlet Personnel department
Retail outlet
Which of the following ratios are part of the ROI formula? Multiple select question. Sales ÷ Average operating assets Net operating income ÷ Sales Cost of goods sold ÷ Average inventory Sales on account ÷ Average accounts receivable
Sales ÷ Average operating assets Net operating income ÷ Sales
Turnover
Sales ÷ Average operating assets.
Operating assets include ______. Multiple select question. land held for investment accounts receivable equipment investments in bonds inventory
accounts receivable equipment inventory
An organization in which decision-making authority is spread throughout the organization is Blank______. Multiple choice question. centralized decentralized
decentralized
The manager of a(n) ____________ center has control over costs, revenue, and investments in operating assets.
investment
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be Blank______ likely to pursue projects that will benefit the entire company. Multiple choice question. more less equally
more Reason: Managers evaluated based on residual income will accept projects that increase residual income, as they should, even if they decrease the manager's ROI.
EBIT is another term for Blank______. Multiple choice question. income after taxes residual income net operating income operating assets
net operating income (earnings before interest and taxes)
The net operating income that an investment center earns above the minimum required return on its average operating assets is Blank______. Multiple choice question. residual income return on investment (ROI) EBIT
residual income
Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through______________ accounting
responsibility
Managers of cost centers are evaluated on ______ in their responsibility center. Multiple choice question. revenues, costs and the use of investment funds their ability to control costs revenues and costs incurred
their ability to control costs NOT revenue
Margin
Net operating income ÷ Sales.
Which manager has control over both costs and revenue, but not over decisions regarding major purchases and expansions? Multiple choice question. Cost center Profit center Investment center
Profit center
Which manager has control over both costs and revenue, but not over decisions regarding major purchases and expansions? Multiple choice question. Profit center Investment center Cost center
Profit center
Using net book value (instead of gross cost) to calculate average operating assets Blank______. Multiple choice question. encourages new investment increases ROI over time has no effect on ROI
increases ROI over time Reason: As accumulated depreciation increases, net book value decreases. This decreases the ROI calculation denominator and increases ROI. As a result, new investment is discouraged. Reason: As accumulated depreciation increases, net book value decreases. This decreases the ROI calculation denominator and increases ROI.
ROI can be calculated as ______. Multiple select question. margin × turnover average operating assets ÷ net operating income net operating income ÷ average operating assets margin ÷ turnover
margin × turnover net operating income ÷ average operating assets
In decentralized organizations, decision-making authority is Blank______. Multiple choice question. not granted to the lowest level managers confined to a few top executives spread throughout the organization
spread throughout the organization
