Chapter 10 - Cost

The after-tax operating income reported by Beta, Inc., is $125,000. The weighted average cost of capital is 15.30 percent, and the total capital employed is $750,000. Determine the economic value added (EVA) of Beta, Inc. a.$100,000 b.$10,250 c.$114,750 d.$15,000

$10,250 EVA = After-tax operating income - (Weighted average cost of capital × Total capital employed) = $125,000 - (0.1530 × $750,000) = $125,000 - $114,750 = $10,250

Theta, Inc., has a number of divisions, including Division Gamma, a manufacturer of mother boards, and Division Beta, a manufacturer of desktop computers. Division Gamma manufactures Model MB-04 that can be used by Division Gamma in its desktops. The market price of MB-04 is $75, and the cost information is as follows:Variable manufacturing cost per unit $40 Fixed cost per unit 10 Variable selling overhead per unit 10 Total cost $60 Determine the minimum transfer price per unit of MB-04 that can be set by Division Gamma when Theta, Inc., allows negotiated transfer pricing. Assume that Gamma Division can avoid $10 of selling overhead by selling MB-04 to Division Beta. a.$55 per unit b.$75 per unit c.$65 per unit d.$40 per unit

$65 per unit

Data relating to Aquamarine, Inc., is as follows:Beginning assets $1,500,000 Ending assets $2,250,000 Operating income$ 375,000 Determine the return on investment (ROI) of Aquamarine. a.20% b.25% c.22% d.16%

20% Average operating assets = (Beginning assets + Ending assets) / 2 = ($1,500,000 + $2,250,000) / 2 = $1,875,000 ROI = Operating income / Average operating assets = $375,000 / $1,875,000 = 0.20 or 20%

Which of the following is one of the four types of responsibility centers? a.An external center b.A cost center c.A budget center d.A quality center

A cost center

Which of the following is affected by the transfer price charged by one division to another? a.Divisional production expenses b.Divisional non-current assets c.Divisional fixed cost d.Divisional profitability

Divisional profitability

Which of the following is affected by the transfer price charged by one division to another? a.Divisional profitability b.Divisional non-current assets c.Divisional production expenses d.Divisional fixed cost

Divisional profitability

Which of the following transfer pricing approaches can provide perverse incentives and distort performance measures? a.Full-cost transfer pricing b.Variable cost plus fixed fee transfer pricing c.Market-based transfer pricing d.Opportunity cost transfer pricing

Full-cost transfer pricing

Which of the following statements is true about the transfer price charged by one division to another division of a company? a.It affects the costs of the transferring division and the revenues of the receiving division. b.It affects the revenues of the transferring division and the costs of the receiving division. c.It affects the income statement of the transferring division and the balance sheet of the receiving division. d.It affects the balance sheet of the transferring division and the income statement of the receiving division.

It affects the revenues of the transferring division and the costs of the receiving division.

Mahogany, Inc., manufactures a component in Division A and sells it to Division B at a transfer price of $30 per unit. Which of the following is an impact of transfer price on the receiving division (Division B)? a.It decreases the current liabilities of Division B. b.It increases the costs of Division B. c.It decreases the acceptable rate of return of Division B. d.It increases the return on investment of Division B.

It increases the costs of Division B.

Which of the following statements is true of perquisite? a.It is the difference between sales and average operating assets. b.It is the ratio of operating income to average operating assets. c.It is a type of fringe benefit received over and above salary. d.It is an increment in salary of an employee that is linked with his performance.

It is a type of fringe benefit received over and above salary.

Which of the following is a disadvantage of residual income? a.It encourages managers to concentrate only on projects requiring high investments without considering other aspects. b.It always encourages a long-run orientation rather than short-run projects. c.It discourages managers from investing in projects that would increase the profitability of the company as a whole. d.It is an absolute measure of return and does not discourage myopic behavior.

It is an absolute measure of return and does not discourage myopic behavior.

Which of the following is a disadvantage of residual income? a.It is an absolute measure of return and does not discourage myopic behavior. b.It always encourages a long-run orientation rather than short-run projects. c.It discourages managers from investing in projects that would increase the profitability of the company as a whole. d.It encourages managers to concentrate only on projects requiring high investments without considering other aspects.

It is an absolute measure of return and does not discourage myopic behavior.

Which of the following is true of return on investment (ROI)? a.It is used by stockholders to indicate the health of a company. b.It is the difference between operating income and the dollar return required. c.It is the most common measure of performance for a cost center. d.It refers to earnings before interest and income taxes.

It is used by stockholders to indicate the health of a company.

Which of the following is true of return on investment (ROI)? a.It refers to earnings before interest and income taxes. b.It is the difference between operating income and the dollar return required. c.It is the most common measure of performance for a cost center. d.It is used by stockholders to indicate the health of a company.

It is used by stockholders to indicate the health of a company.

Which of the following is an advantage of decentralization? a.It reduces the competition among divisions. b.It helps the central management to focus on the operating decisions of various divisions. c.It provides less access to local information which leads to the best decision. d.It works as motivation to segment managers.

It works as motivation to segment managers.

Which of the following transfer pricing approaches distorts the measurement of managerial performance? a.Fixed transfer pricing b.Negotiated transfer pricing c.Market-based transfer pricing d.Cost-based transfer pricing

Negotiated transfer pricing

Which of the following is considered a measure of efficiency? a.Number of value added activities carried out b.Number of units produced per hour c.Customer loyalty index d.Employee turnover

Number of units produced per hour

Which of the following is a performance measure for profit center managers? a.Accounts receivable turnover b.Current ratio c.Return on investment d.Operating income

Operating income

Which of the following is a performance measure for profit center managers? a.Return on investment b.Operating income c.Current ratio d.Accounts receivable turnover

Operating income

Which of the following is an example of a cost center within a factory? a.The Production Department b.The Investment Department c.The Marketing Department d.The Administrative Department

The Production Department

Which of the following statements is true if Division X manufactures and transfers a component to Division Z at its cost of $20? a.The return on investment of Division Z will not change. b.The overall profit of the company will not change. c.The revenue of Division Z will increase. d.The costs of Division X will increase.

The overall profit of the company will not change.

Which of the following criteria helps in evaluating the performance of a profit center? a.The long-term investments reported on the balance sheet b.The current assets reported on the balance sheet c.The annual employee salaries recorded in the income statements d.The unit's net margin, measured on income statements

The unit's net margin, measured on income statements

Which of the following criteria helps in evaluating the performance of a profit center? a.The unit's net margin, measured on income statements b.The current assets reported on the balance sheet c.The annual employee salaries recorded in the income statements d.The long-term investments reported on the balance sheet

The unit's net margin, measured on income statements

Which of the following statements is true about transfer prices? a.Transfer prices are the prices charged for goods produced by one division and transferred to another. b.Transfer prices are the expenses incurred for transferring goods from one division to another division. c.Transfer prices are the prices charged for goods produced by one multinational firm to another multinational firm. d.Transfer prices are the expenses incurred for transferring goods from a factory to a customer's location.

Transfer prices are the prices charged for goods produced by one division and transferred to another.

A manager's evaluation at a multi-national corporation (MNC) should not include factors over which he exercises no control, such as: a.divisional performance. b.total assets of the firm. c.currency fluctuations. d.the profitability of the firm.

currency fluctuations.

A mechanism which allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility is called: a.decentralized decision making. b.hypothetical decision making. c.discretionary decision making. d.consolidated decision making.

decentralized decision making.

Autonomy in the conduct of managers' daily business is an example of: a.stock-based compensation. b.noncash compensation. c.cash compensation. d.income-based compensation.

noncash compensation.

A decision relating to keeping or dropping a product line is taken by the manager of a(n): a. cost center. b. revenue center. c. investment center. d. profit center.

profit center.

A responsibility center in which a manager is responsible for both revenues and costs is called the: a.profit center. b.revenue center. c.cost center. d.investment center.

profit center.

Cash compensation includes: a.perquisites and profit shares. b.stock options and right shares. c.stock dividends and gains. d.salaries and bonuses.

salaries and bonuses.

Control of cost centers is achieved by evaluating: a.only the available assets of each division. b.only the profitability of each division. c.the efficiency and the effectiveness of managers in generating income. d.the efficiency and the effectiveness of divisional managers.

the efficiency and the effectiveness of divisional managers.