Chapter 11. Responsibility Accounting Systems

In order to fully understand how a manager's decisions can affect ROI, both and should be computed.

margin, turnover

The net operating income that an investment center earns above the minimum required return on its average operating assets is ______.

residual income

Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true?

-The project should be accepted by the company because it increases overall residual income. -The department manager may not want to accept the project because it will lower the overall ROI for the department.

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000. The equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to (increase/decrease) from the current level of % to a new return on investment (ROI) of %.

increase, 10%, 12%

Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value?

Replacing an existing asset will not automatically decrease ROI

Which of the following business segments would not be considered a cost center?

Retail outlet

Operating assets include ______.

inventory accounts receivable equipment

Residual income is a measure used to evaluate managers of ______ centers.

investment

The manager of a(n) center has control over costs, revenue, and investments in operating assets

investment

The manager of a(n) center has control over costs, revenue, and investments in operating assets.

investment

Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) center.

profit

True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.

true

Given a margin of 12%, sales of $150,000 and average operating assets of $90,000, the ROI is %.

20%

Carlos, Inc. requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average operating assets of $200,000 and a net operating income of $24,000. The department's residual income is $

4,000

Which of the following statements is correct?

A manager might reject a proposal using ROI that the manager would accept using residual income.

Residual income =

NOI - (Average operating assets × Minimum rate of return)

Which of the following statements is incorrect regarding responsibility accounting?

Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.

Net operating income ÷ Average operating assets =

Return on investment

Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers?

Return on investment (ROI) Residual income

True or false: When ROI is calculated using the gross cost of assets, replacing a fully depreciated asset with a comparably priced new asset will not adversely affect ROI.

True

The ROI formula typically uses ______.

average operating assets for the year

Service departments, such as the accounting department, are generally considered centers, while sales offices are often considered centers.

cost, profit

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

In order to increase return on investment (ROI), the company must (increase/decrease) sales, and/or (increase/decrease) operating expenses and/or (increase/decrease) average operating assets.

increase, decrease,decrease

Using net book value (instead of gross cost) to calculate average operating assets ______.

increases ROI over time

A company can increase its return on investment (ROI) by ______.

increasing sales reducing operating expenses

When managers are evaluated on residual income, rather than on return on investment (ROI), they will be ______ likely to pursue projects that will benefit the entire company.

more

EBIT is another term for ______.

net operating income

Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through accounting systems.

responsibility

ROI can be calculated as ______.

-margin × turnover -net operating income ÷ average operating assets

Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $

6,000

Return on investment =

Net operating income ÷ Average operating assets

Which of the following ratios are part of the ROI formula?

Net operating income ÷ Sales Sales ÷ Average operating assets

The manager of a(n) center does not have control over revenue or the use of investment funds

cost

An organization in which decision-making authority is spread throughout the organization is ______.

decentralized

Lower-level managers are empowered to make decisions in a ______ organization, which can ________ motivation and job satisfaction.

decentralized, increase

Net operating income is income before and .

interest, taxes

ROI is a method used to evaluate ______.

investment centers, but not cost or profit centers

ROI can be calculated as ______.

margin × turnover net operating income ÷ average operating assets

Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress and excessive operating assets which can depress

margin, turnover

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. The manager of the Western division is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct?

-The manager may decide to reject the project because it will lower the current ROI earned by his division. -Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment.

In a decentralized organization ______.

-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.

Valid criticisms of evaluating performance based on return on investment (ROI) include managers may ______.

-take actions that increase ROI in the short-run at the expense of long-term performance -reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI -be put in charge of a business segment that includes committed costs over which a manager has no control