Chapter 11 Smartbook Assignment

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 "Net book value discourages equipment replacement. To stop this practice, a company should use gross cost

If cost is used as a transfer price, the only division with an opportunity to make a profit on the transfer is the division that ___

Makes the final sale to an outside party

Net operating income - (average operating assets x minimum required rate of return) =

Residual income

The correct formula for charging service department costs to operating departments is ___

Budgeted variable rate x Actual level of activity

Division A current sells a product for $30 and has no idle capacity. Variable costs are $18 and full costs are $23. Division B is currently purchasing a similar product for $26 from an outside supplier. Assuming that Division A's product is an acceptable substitute, which of the following statements is correct? -Division B should accept a $30 transfer price and stop purchasing from the outside supplier. -The divisions should negotiate a price between $18 and $30. -Division A should provide the product to Division B for $26 and reduce sales to outside customers. -A transfer between divisions should not take place.

A transfer between divisions should not take place

Using sales dollars to allocate fixed costs from service departments to operating departments _ -can lead to bitterness and resentment from managers of poor departments -is simple and straightforward -is often a poor base because sales dollars vary from period to period -is often viewed as a measure of ability to pay

-Is simple and straighfoward -Is often viewed as a measure of ability to pay -Is often a poor base because sales dollars vary from period to period

Division A current sells a product for $30 and has no idle capacity. Variable costs are $18 and full costs are $23. Division B is currently purchasing a similar product for $26 from an outside supplier. Assuming that Division A's product is an acceptable substitute, which of the following statements is correct?

A transfer between divisions should not take place

If a transfer within a company would result in higher overall profits for the company, there is ___ a range of transfer prices where both divisions would have higher profits if they are able to negotiate a price

Always

When a buying division has no outside supplier available to them, the highest transfer price they should be willing to pay is the ___

Amount they will make on the sale of the transferred units

Which of the following methods is not commonly used to set transfer prices? -Negotiation -Market price -Variable cost -Arbitration cost

Arbitration cost

The ROI formula typically uses ___

Average operating assets for the year

Operating departments should be charged service department ___ costs

Budgeted

Operating divisions are charged for ___ service department costs

Budgeted variable and fixed

Because it fosters cooperation, most companies rely on negotiated transfer prices

False

The cost of making capacity available for use is represented by service departments _ costs which should be charged to operating departments in predetermined lump-sum amounts

Fixed

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

Increases ROI over time

In order for the buying division to agree to a transfer price when an outside supplier does not exist, the transfer price must be ___ the profit per unit not including the transfer price

Less than or equal to

The margin and turnover formulas help managers better understand how to increase ROI. Increasing selling prices, reducing operating expenses, or increasing unit sales generally improves

Margin

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

Discussions between the buying and selling responsibility centers result in a ___ transfer price

Negotiated

The three methods commonly used for transfer pricing are ___

Negotiation, full or variable cost, market price

EBIT is another term for ___

Net operating income

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? -ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies. -Managers may increase ROI in a way that is inconsistent with company strategy. -Managers may reject investment opportunities that would benefit the entire company but negatively affect the manager. -It may be difficult to assess the performance of a manager who takes over an existing business segment.

ROI does not include the investment assets, such as land held for investment or stock in other companies

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

Responsibility

Which of the following business segments would not be considered a cost center? -Manufacturing facilities -Accounting department -Personnel department -Retail outlet

Retail outlet

Net operating income / average operating assets =

Return on investment

When a department has no idle capacity and will interrupt their current level of sales to regular customers, the lowest acceptable transfer price to supply product to another division is ___

Selling price

In decentralized organizations, decision-making authority is ___

Spread throughout the organization

Net operating income is income before ___ and ___

Taxes and interest

Using the market price to set transfer prices may not be the best approach when ___

The selling division has idle capacity

Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because ___

There are fewer managers that must be coed before a decision is made

If the transfer has no effect on fixed cost, the transfer price from the selling division's standpoint must be equal to or greater than the variable cost per unit + (___ / number of units transferred)

Total contribution margin on lost sales

The amount that one responsibility center charges when it sells goods or services to another responsibility center of the same company is called a ___ price

Transfer

The price charged when one responsibility center of a company provides goods or services to another responsibility center of the same company is the ___ price

Transfer

Having excessive funds tied up in operating assets will depress ___ and lower ROI

Turnover

The activity that causes the service department's cost should be the basis for assigning ___ costs to operating departments

Variable

When a department has enough idle capacity to supply a part to another division within the company without interrupting current sales, the lowest price the selling division will accept is the ___

Variable cost per unit

When the selling division has some idle capacity, but will have to interrupt current sales to supply the buying division, how is the lowest acceptable transfer price calculated?

Variable cost per unit + (Total contribution margin o n lost sales / Total transferred units)

The buying division would be willing to pay up to the amount it expects to make on transferred units ___ outside supplier exists

When no

Division A manufactures a part with a variable cost per of $18 and allocated fixed costs of $5 per unit. Division A's normal selling price for the part is $30 and Division B currently purchases a similar part for $26. Division A has enough idle capacity to be able to supply the needed part to Division B without interrupting its regular sales. The acceptable range of transfer prices for Division A and B from lowest to highest is $___ to $___

$18 to $26

Division A manufactures a part with a variable cost per of $18 and allocated fixed costs of $5 per unit. Division A's normal selling price for the part is $30 and Division B currently purchases a similar part for $26. Division A has enough idle capacity to be able to supply 400 parts to Division B without interrupting its regular sales. Assuming that Division B needs Division A to provide a total of 600 parts, the acceptable range of transfer prices is

$22 to $26 $18 + [(($30 - $18) x 200) / 600] = $22 lowest acceptable price to A. The current purchase price of $26 is the highest acceptable price to B

Division B wants to purchase a part from Division A. Division A's variable cost per unit is $18. Allocated fixed costs are $5 per unit. Division B can purchase the part from an outside supplier for $26 per unit. The highest transfer price per unit that Division B will be willing to pay is $

$26

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 NOI - (Average operating assets x Minimum rate of return 24,000 - (200,000 x 10%)

Operating assets include -Investments in bonds -Land held for investment -Equipment -Accounts receivable -Inventory

-Accounts receivable -Inventory -Equipment

When a transfer has no effect on fixed costs, to be acceptable to the selling division, the transfer price must ___ -cover any opportunity cost from lost sales -cover the variable costs per unit -equal the product's normal selling price -cover any lost contribution margin due to the transfer -cover a reasonable portion of the selling division's fixed costs

-Cover the variable costs per unit -Cover any opportunity cost from lost sales -Cover any lost contribution margin due to the transfer

When fixed costs are allocated using a variable allocation base, such as departmental sales ___ -departments with high sales are penalized -allocations are influenced by what happens within other departments -departments with high sales shift costs to departments with lower sales

-Departments with high sales are penalized -Allocations are influenced by what happens within other departments

ROI can be calculated as -Margin / turnover -Average operating assets / net operating income -Margin x turnover -Net operating income / average operating assets

-Margin x turnover -Net operating income / average operating sales

Negotiated transfer prices ___ -ensure that all common costs will be covered -ensure that the supplying division will receive a market price -preserve the autonomy of the divisions -are consistent with decentralization -use manager expertise in weighing the costs and benefits of the transfer

-Preserve the autonomy of the divisions -Use manager expertise in weighing the costs and benefits of the transfer -Are consistent with decentralization

Assume the selling division has no idle capacity and must give up outside sales, but does not lose anything by selling internally rather than outside. In addition, the buying division has an accurate assessment of how much it costs the company for the transfer to take place. Under this situation, which pricing method is being used?

Market price

The two types of departments in large organizatins are ___

Operating and service

Which of the following statements is incorrect regarding responsibility accounting? -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 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 refers to the process of evaluating top management on the decisions made by lower-level managers

Which of the following is NOT a service department -Human resources -Sales -Purchasing -Internal auditing

Sales

The Maintenance Dept. budgeted $400,000 in variable costs and $300,000 in fixed costs. Actual variable costs were $420,000 and actual fixed costs were $350,000. If operating departments were expected to use a total of 20,000 machine hours and actually used 22,000 hours, the spending variance charged to the maintenance department is

$30,000 $400,000 / 20,000 = $20 per hour x 22,000 actual hours = $440,000 applied vs. $420,000 = ($20,000) difference + $50,000 fixed cost difference = $30,000

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 42,000 - (300,000 x 12%) = $6,000

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? -The project will improve the ROI for the Western division, since it is above the required rate of return that the company has specified. -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.

-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 ratios are part of the ROI formula? -Net operating income / sales -Sales / Average operating assets -Sales on account / average accounts receivable -Cost of goods sold / Average inventory

-Net operating income / sales -Sales / average operating assets

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

Macey, Inc.'s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is

20% Net operating income / Average operating assets = $70,000 / $350,000 = 20%

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

20% ROI = Margin x Turnover Turnover = Sales / Average operating assets ROI = 12% x (150,000 / 90,000)

Which of the following is not a characteristic of decentralization? -Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions. -Decentralization helps to train lower-level managers for higher level positions. -Decentralization allows top management to concentrate on bigger issues such as overall strategy. -Decentralization puts decision-making authority in the hands of those with the most information on day-to-day operations.

Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions

Residual income =

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

Comparing actual net income to budgeted net income is often done to evaluate the manager of a ___ center

Profit

Drawbacks of using variable or full costing to set transfer prices include ___ -little incentive to reduce costs -a lack of cooperation between managers -no profit for the supplying department -suboptimization when idle capacity exists

-Suboptimization when idle capacity exists -No profit for the supplying department -Little incentive to reduce costs

The manager of a ___ 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

When allocating fixed costs of service departments, the fact that operating departments do not need the peak level of serivce every period ___

Does not impact the total allocation of costs "The capacity must be availalbe so it is charged to operating deparments according"

To make sure all costs are assigned to operations, service departments should allocate their actual costs to operating departments. True or False

False

The manager of a ___ center has control over both costs and revenues, but not over the use of investment funds

Profit