Cost Final Review
The conventional return on investment (ROI) performance measure calculates "profit" and "investment" based on:
Generally Accepted Accounting Principles (GAAP).
The manager acting independently in such a way as to simultaneously achieve top management's objectives is:
Goal congruence.
A "participative" budget is a(n)
Good two-way communication device.
A standard that assumes perfect implementation and maximum efficiency is called a(n):
Ideal standard.
Which of the following is not an advantage of using a "highly achievable target" when constructing budgets?
Increasing the risk that managers will engage in "earnings management" behavior
Zero-base budgeting (ZBB) differs from traditional budgeting in terms of its requirement to:
Justify all budgeted operations and associated spending.
Which of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income (RI) or the return on investment (ROI) approach for performance measurement and evaluation?
Land being held by the division as a site for a new plant in the future.
The evaluation by upper-level managers of the performance of mid-level managers is:
Management control.
Goal congruence is more likely to be promoted by using RI.
Managerial performance can be measured in various ways, including return on investment (ROI) and residual income (RI). A good reason for using RI rather than ROI is:
Authoritative standards (within the context of a standard cost system) are determined primarily by:
Managers
Performance evaluation in most firms is applied at:
Many different levels from top management down to individual production and sales employees.
The effect of changes in a product's proportion of the total market are measured by:
Market share variance.
The effect of changes in the total industry sales of the firm's product is measured by:
Market size variance.
A rate of return higher than the unit's current ROI.
Return on investment (ROI) encourages business units—such as investment centers— to invest only in projects that earn:
The type of strategic business unit (SBU) where the focus is on the selling function of a specific product line or by a geographical location is referred to as a(n)
Revenue center.
The "flexible budget" can best be described as a budget that adjusts:
Revenues and expenses for changes in output (such as sales volume).
Asset Turnover formula
Sales / Investment
The two major contributing factors to a sales volume variance are deviations in:
Sales mix and sales quantity.
Which one of the following is a result of the difference between the actual sales mix and the budgeted sales mix?
Sales mix variance.
Return on investment (ROI) is a term often used to express income earned on capital invested in a division (investment center). A division's ROI would increase if:
Sales remained the same and expenses were reduced by the same dollar amount that total assets increased.
Which one of the following is the result of the [(units sold) × (actual selling price per unit)] − [(units sold) × (budgeted selling price per unit)]:
Selling price variance.
A "standard cost" is a predetermined amount (e.g., cost) that:
Should be incurred under relatively efficient operating conditions.
The budgeted income statement and budgeted balance sheet benefit a business primarily in terms of the ability of the organization to:
Summarize the financial impact of the firm's financial and operating activities for an upcoming period.
Expropriation occurs when the government in which a foreign company's investment assets are located:
Takes ownership and control of those assets.
The valuation of fixed assets (e.g., Plant, Property, and Equipment) used by an investment center
The choice of valuation method for inventories would normally not affect which item(s) used in calculating Return on Investment (ROI)?
Sales volume variances can have significant implications for strategic management. An unfavorable sales volume variance may indicate that:
The company needs a new competitive strategy.
The decision to keep or drop products or services involves strategic consideration all of the following except:
The desired inventory levels of the product
Accumulated depreciation expense on the asset.
The difference between the historical cost and the net book value (NBV) of a plant asset is the:
When a manager has significant direct control over spending, but little control over revenues or decision making for investment facilities, the department will most likely be treated as a _________ center
cost
duel allocation
cost allocation method that separates fixed and variable costs. Variable costs are directly traced to user departments, and fixed costs are allocated on some logical basis
dual allocation
cost allocation method that separates fixed and variable costs; variable traced to user department and fixed allocated logically
The main reason for _______ is the use of local specialized knowledge of SBU managers
decentralization
Done on a regular basis, relevant cost pricing in "special-order decisions" can erode normal pricing policies and lead to:
decrease in the firm's long-term profitability.
revenue centers
defined by product line or by geographical area
revenue center
defined either by product line or by geographical area and focuses on the selling function
Revenue drivers include:
delivery dates, promotions, and discounts
controllable margin
determined by subtracting short-term controllable fixed costs from the contribution margin
budget slack
difference between budgeted and expected performance
To motivate administrative support department managers to focus on long-term goals for a period of time, the department would be treated as a(n) :
discretionary cost center
The two methods for implementing cost centers for production and support departments are the _____ cost method and the _______ cost method
discretionary; engineered
In the __________ stage of the product life cycle, management focuses primarily on nonfinancial factors
early
principal-agent model
economic model that contains the key elements that contracts must have to achieve the desired objectives
order-getting costs
expenses to advertise and promote the product
Given a situation where there is a 50-50 chance of winning $200 or getting a guaranteed payment of 100, the manager who would see these options as equal and be indifferent between them is risk
neutral
Depreciation and property taxes are __________ fixed costs
noncontrollable
Special order decision
occurs when a firm has a one-time opportunity to sell a specified quantity of its product.
A primary objective in measuring productivity is to improve operations either by using fewer inputs to produce the same output
or to produce:,More outputs with the same inputs.
The term used to describe a firm's decision to have a service or product currently supplied by a support department supplied by an outside firm is ___________
outsourcing
The process by which managers at all various levels gain information about the performance of tasks is called
performance measurement
performance management
process by which managers at all levels gain information about performance of tasks within the firm and judge that performance against pre-established criteria as set by budgets, plans, and goals
To encourage coordination between marketing, production, and support centers, the best choice is _______ centers
profit
management control
refers to the evaluation by upper-level managers of the performance of mid-level managers
operational control
refers to the evaluation of operating level employees by mid-level managers
operational control
refers to the evaluation of operating-level employees by mid-level managers
The type of SBU that primarily focuses on generating sales is a
revenue center
The factors that affect sales volume, such as price changes, promotions, etc. are called:
revenue drivers
A strategic business unit (SBU) consists of a well-defined set of controllable operating activities over/about which the SBU manager is:
Responsible for strategy, execution, and performance.
Return on sales (ROS) by asset turnover (AT).
Return on investment (ROI) is the result of multiplying:
Return on investment (ROI) is the result of multiplying:
Return on sales (ROS) times asset turnover (AT).
A measure of the manager's ability to control expenses and increase revenues in order to improve profitability is:
Return on sales (ROS).
(Budgeted sales mix − actual sales mix) × (total quantity sold) × (budgeted contribution margin per unit of the product) equals:
Sales mix variance.
(Units sold − budgeted sales units) × (Budgeted contribution margin per unit) equals:
Sales volume variance.
Which of the following is different in a flexible budget compared to the master budget for a period?
Sales volume.
Companies use the balanced scorecard to describe strategy in detail through the use of a cause-and-effect diagram which is also known as a(n):
Strategy Map.
When much of the decision making in an organization rests with top management, the organization is
centralized
Performance measures that focus on profitability, customer satisfaction, strategy, product modifications, and potential new markets are appropriate in the ________ stage of the product life cycle
mature
contribution by profit center
measures all costs traceable to, and therefore controllable by, the individual profit centers
In lean accounting, products and services are grouped into families called
value streams
decentralized
when a firm is chosen to delegate a significant amount of responsibility to SBU managers (responsibility pushed down as low in company as possible)
For any given year, income under variable and income under full costing
will be different if inventory levels change
The primary limitation of using Economic Value Added (EVA®) to evaluate the financial performance of investment centers is:
Complexity of the calculation.
Which one of the following concepts is correct for determining relevant costs for decision-making?
Differential
Which one of the following is the difference between the actual hourly wage rate and the standard hourly wage rate, multiplied by the actual number of direct labor hours worked during a period?
Direct labor rate variance.
Variable costs will generally be relevant for decision making because they:
Have not been committed and are likely to differ between decision options.
The focal point in budgeting for a service organization is likely to be:
Human resource (i.e., personnel) planning.
Which of the following is not a characteristic of the payback method for making capital budgeting decisions?
It considers returns over the entire life of the project.
The master budget for a given accounting period has all of the following except:
It is based on the actual level of sales activity for the period.
When evaluating capital budgeting decision models, the payback period emphasizes:
Liquidity.
The opportunity cost of making a component part in a factory with no excess capacity is the:
Net benefit foregone from the best alternative use of the capacity required.
Residual Income formula
Net operating income - (Minimum required rate of return * Average investment (assets))
The time value of money is explicitly considered in which of the following capital budgeting method(s)?
Net present value (NPV) method.
A selling price variance is:
Not further divided.
Economic value added (EVA®):
Of $10,000 indicates that the division's actual earnings (adjusted for bias effects of accounting conservatism) exceed the division's imputed capital charge by $10,000.
Return on Sales formula
Operating income / Sales
Residual income (RI) is:
Operating income of an investment center, less the imputed interest on the capital used by the center.
Residual income (RI) is:
Operating income of an investment center, less the imputed interest on the invested capital used by the center.
The market share variance measures the effect of the difference in market shares on the firm's total contribution margin and:
Operating income.
The evaluation of operating level employees by mid-level managers is:
Operational control.
A measure of productivity can be either:
Operational or financial.
Which one of the following does not use the dollar amount of the input in assessing productivity?
Operational productivity.
Which one of the following uses the number of units of an input factor in its assessment of productivity?
Operational productivity.
Operating at or near full capacity will require a firm considering a "special sales order" to potentially recognize the
Opportunity cost from lost sales.
Which of the following is the most appropriate and comprehensive short-term financial-performance indicator for an investment center that is a division of a larger business entity?
Residual income (RI).
What is the sales mix variance for Spiders?
$1,650 unfavorable.
What is the sales volume variance for Spiders?
$1,650 unfavorable.
What is MT's sales quantity variance?
$10,000 favorable.
Fixed costs that a SBU manager can influence in a year or less are:
controllable fixed costs
Contribution by profit center =
controllable margin- noncontrollable fixed costs
What is the sales quantity variance for Spiders?
$0
The market size variance is:
$385,104 favorable.
TV Timers, Inc. What is the company's market share variance?
$1,200 favorable.
The net effect of AR-10's sales volume variance on profit is:
$1,440 favorable.
What is AB's contribution margin sales volume variance?
$1,500 unfavorable.
Twitter Company manufactures a remote control device for home theaters. The following data were from the operating period just completed: Actual market size (units) 12,000 Budgeted market size (units) 11,000 Actual market share 15 % Budgeted market share 12 % Budgeted selling price per unit $ 60 Actual selling price per unit $ 55 Budgeted variable cost per unit $ 30 Actual variable cost per unit $ 18 What is the firm's market share variance?
$10,800 favorable.
Total sales quantity variance is:
$107,920 favorable.
What is the firm's market size variance?
$11,000 unfavorable.
Jackson, Inc The weighted-average budgeted contribution margin per unit is
$11.36.
What is ET's sales quantity variance?
$12,000 favorable
The contribution margin sales volume variance for Product X is:
$14,800 favorable
The selling price variance for November is:
$15,000 unfavorable
Consider the following data from two divisions of a company, P and Q: Divisional P Q Sales $1,500,000 $1,000,000 Operating Income $600,000 $450,000 Investment $4,000,000 $2,750,000 If the minimum rate of return is 11%, what is Division P's residual income (RI)?
$160,000
What is the company's market size variance?
$2,400 unfavorable.
Folsom Fashions The effect of the sales volume variance on November's contribution margin is:
$20,000 unfavorable.
What is the firm's total sales quantity variance?
$22,000 favorable
The sales quantity variance for Product Y is:
$23,200 unfavorable
What is the total contribution margin sales volume variance?
$24,160 favorable.
Gourmet Aroma Coffee House has an exclusive contract with Columbia exporters. Two brands of gourmet coffee are imported, Morning Thunder (MT) and Evening Tender (ET). The following data are provided for the current fiscal year: Budgeted Operating Results MT ET MT ET Price per pound $ 40 $ 60 $ 50 $ 56 Variable cost per pound 20 36 24 40 Sales (in pounds) 4,000 4,000 3,960 5,040 The total market was estimated to be 80,000 pounds at the time of budget. The actual total market for the year is 75,000 pounds. What is ET's contribution margin sales volume variance?
$24,960 favorable.
Hollaway Corp. has the following data for the current fiscal year: The total sales quantity variance for both products is:
$254,000 unfavorable
The sales quantity variance for Product X is:
$26,000 favorable
The contribution margin sales volume variance for Product X i
$26,000 unfavorable.
The market share variance is:
$277,184 unfavorable.
What is the firm's market size variance?
$3,600 favorable.
The selling price variance for Product X is:
$30,000 favorable
The weighted-average budgeted contribution margin per unit is:
$30.60.
The total contribution margin sales volume variance of the period is:
$36,400 unfavorable.
The total selling price variance of the period is:
$38,000 unfavorable.
What is the firm's total sales quantity variance?
$4,000 favorable.
Wheat Inc. What is the total contribution margin sales volume variance?
$4,000 favorable.
What is the firm's market size variance?
$4,000 unfavorable.
The contribution margin sales volume variance for Product Y is:
$40,600 unfavorable
The contribution margin sales volume variance is:
$410,000 unfavorable.
The selling price variance for Product Y is:
$42,500 unfavorable.
The sales quantity variance for Product Y is:
$45,000 favorable.
What is CD's contribution margin sales volume variance?
$5,500 favorable.
If fixed costs are budgeted for $500,000 and are actually $500,000, what is the difference between budgeted and actual operating income?
$5,800 favorable.
The net effect of ZR-7's selling price variance on profit is:
$560 favorable.
The weighted-average budgeted contribution margin per unit is:
$6.35
A company established a branch to sell automobile seat covers. The company purchases these covers and stores them in a warehouse. The covers are then shipped from the warehouse to both the home office and the new branch, FOB (Free On Board) destination. Home office management is responsible for setting the transfer price of the covers charged to the branch. Per-unit costs of the covers are: $60.00 purchase price $2.50 shipping cost to warehouse $3.00 handling cost, including $1 allocated administrative overhead $3.50 shipping cost to branch, paid by home office According to the general transfer-pricing formula given in the text, the minimum transfer price that home office should charge the branch is:
$68.00
The selling price variance for Product X is:
$7,500 favorable
The contribution margin sales volume variance for Product Y is:
$75,000 favorable.
What is MT's contribution margin sales volume variance?
$800 unfavorable.
The selling price variance for Product Y is:
$90,000 favorable.
The firm's market size variance for the period is: Winston Co.
$91,800 unfavorable.
The market share variance is:
(Actual market share − budgeted market share) × (actual total market size) × (weighted average budgeted contribution margin per unit).
A firm manufactures 5,000 umbrellas per year. The umbrellas cost $25,000 to manufacture. The firm has an annual overhead cost of $5,000. What is the total productivity of manufacturing umbrellas?
0.20 umbrellas/dollar
The total productivity ratio in 2019 is:
0.20.
The total productivity ratio in 2018 is:
0.21
In 2018, the partial financial productivity of direct labor is
0.25
In 2019, the partial financial productivity of direct labor is:
0.25
The partial direct labor financial productivity ratio for 2019 is:
0.33.
The partial financial productivity ratio of DTV-12 in 2019 is:
0.33.
The partial financial productivity ratio of DTV-12 in 2018 is:
0.42.
Gutsen Communications Inc. manufactures a scrambling device for cellular phones. The main component of the scrambling device is a very delicate part—DTV-12. DTV-12 requires careful handlings during manufacturing. Once damaged, the part must be discarded. Only skilled laborers are hired to manufacture and install DTV-12. Damages still occur, however. The following are the operating data of Gutsen Communications Inc. for 2018 and 2019 relative to the insertion of DTV-12. Round calculations to 2 significant digits. 2018 2019 Number of phones manufactured 600,000 780,000 Units of DTV-12 used 960,000 1,072,500 Direct labor hours for DTV-12 insertion 1,800 2,600 Total cost of DTV-12 units $ 1,443,750 $ 2,333,750 Direct labor wage rate per hour $ 67 $ 82 The partial operational productivity ratio of DTV-12 in 2018 is:
0.63 per unit.
The partial operational productivity ratio of DTV-12 in 2019 is:
0.73 per unit.
Characteristics of the engineered cost method
1) cost center with relatively well-defined output and goals 2) Suitable when costs are considered variable and controllable 3) output oriented approach
Cost shifting:
1) generally leads to a decrease in variable costs 2) occurs when the controllable costs are replaced with noncontrllable costs
Characteristics of the discretionary cost method
1) input-oriented approach 2) Cost center with relatively ill-defined output and goals 3) Suitable when costs are predominantly fixed and uncontrollable
Budget slack:
1) is found in most SBU's 2) limits exposure to environmental uncertainty 3) may create budgeted targets that are easier to attain than is reasonably expected
The contracting relationship is complicated by:
1) lack of observability 2) risk aversion 3) uncertainty
Identified objectives of management control include:
1) motivate management effort 2) provide incentives that promote goal congruence 3) fair determination of rewards
The choice of a cost, profit, or revenue center depends on
1) selling environment of the firm 2) nature of production 3) coordination needs between production and selling
A balanced scorecard (BSC) is important in difficult economic times because:
1) strategies are likely to change and managers may have to focus on new and different strategic priorities 2) Traditional profit based measures can be distorted and difficult to evaluate against established benchmarks
The actual partial operational productivity ratio of the production factor is (round to 2 significant digits):
1.02 units per gallon
Darwin, Inc., provided the following information (round calculations to 2 significant digits): Budgeted production 10,000 units Actual production 9,500 units Budgeted input 9,750 gallons Actual input 8,950 gallons What is the actual partial operational productivity ratio?
1.06 units per gallon.
In 2019, the partial financial productivity of Material H is:
1.82
In 2018, the partial financial productivity of Material H is:
2.00.
In 2019, the partial financial productivity of Material A is:
2.22.
In 2018, the partial financial productivity of Material A is:
3.00
Broha Company manufactured 1,500 units of its only product during 2019. The inputs for this production are as follows: 450 pounds of Material A at a cost of $1.50 per pound 300 pounds of Material H at a cost of $2.75 per pound 300 direct labor hours at $20 per hour The firm manufactured 1,800 units of the same product in 2018 with the following inputs: 500 pounds of Material A at a cost of $1.20 per pound 360 pounds of Material H at a cost of $2.50 per pound 400 direct labor hours at $18 per hour Round all calculations to 2 significant digits. In 2019, the partial operational productivity of Material A is:
3.33.
The partial operational productivity of Material A in 2018 is:
3.60.
The partial direct labor operational productivity ratio for 2019 is:
300 units per DLH.
The partial direct labor operational productivity ratio for 2018 is:
333 units per DLH.
The partial direct labor operational productivity in 2018 is:
4.50.
The partial direct labor financial productivity ratio for 2018 is:
4.98.
In 2019, the partial direct labor operational productivity is:
5.00.
In 2019, the partial operational productivity of Material H is:
5.00.
The partial operational productivity of Material H in 2018 is:
5.00.
One major problem in measuring the productivity of a service organization is the absence of
A common measure for its outputs.
Economic value added (EVA®)
A division's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:
In a standard cost system, when production (i.e., actual output) is greater than the denominator volume level, there will be:
A favorable production-volume variance.
Investment center
A fully-owned subsidiary of a multinational company reports its return on investment (ROI) periodically during the year. This unit of the company, for performance evaluation purposes, is likely considered a(n):
The arm's-length standard.
A key standard in international transfer pricing is:
A favorable price variance for direct materials indicates that:
A lower price than expected was paid for the materials.
In contrast to residual income (RI), economic value added (EVA®) uses:
A measure (or estimate) of economic, not accounting, income.
Return on sales (ROS)
A measure of the manager's ability to control expenses and increase revenues to improve profitability is:
Asset turnover (AT)
A measure of the manager's ability to produce increased sales from a given level of investment is:
Understates the level of investment for organizations operating in the so-called knowledge-based economy.
A primary limitation of return on investment (ROI) as a performance evaluation metric for investment centers is that ROI:
Return on investment (ROI) encourages business units—such as investment centers— to invest only in projects that earn:
A rate of return higher than the unit's current ROI.
The fixed factory overhead production-volume variance represents:
A result of unitizing fixed overhead costs for product-costing purposes.
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 segment of an organization is referred to as an investment center if it has:
The balanced scorecard measures the SBU's performance in all of the following areas except:
Accounting and tax compliance.
The difference between the historical cost and the net book value (NBV) of a plant asset is the:
Accumulated depreciation expense of the asset.
Which of the following is not a part of the sales mix variance equation?
Actual contribution margin per unit of the product.
A materials usage variance can be caused by all of the following except:
Actual output volume of the period (i.e., units produced).
An unfavorable sales mix variance arises for a product when the
Actual sales mix percentage is less than the budgeted sales mix percentage.
Which of the following is not an element of a product's sales quantity variance?
Actual sales mix ratio.
c
All of the following are possible transfer pricing methods used in practice except: a. Market price. b. Variable cost. c. Fixed cost. d. Full cost. e. Negotiated price.
b
All of the following are true of market-based transfer prices except: a. They generally motivate the correct economic decision. b. They can be determined for all goods and services transferred internally. c. They may lead to goods and services purchased externally by the purchasing unit. d. To the extent they exist, they are objective.
Budgeting provides all of the following except:
An ethical framework for decision-making.
Controllable fixed costs:
Are those costs that the profit center manager can influence in approximately a year or less.
To generate operating income.
As a general rule, leased assets should be included as part of the calculation of "investment" (for calculating ROI and residual income) since they represent assets used:
A measure of the manager's ability to produce increased sales from a given level of investment is:
Asset turnover (AT).
A unit of an organization is referred to as an investment center if it has:
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 unit of an organization is referred to as a profit center if it has:
Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply.
cause sub-optimal short-term decision making.
Because the full-cost method of transfer pricing includes fixed cost, it can:
An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: Fabricating Division: Market price of the subassembly $50 Variable cost of the subassembly $20 Excess capacity (in units) 1,000 Assembly Division: Number of units needed 900 What is the natural bargaining range for the two divisions?
Between $20 and $50.
An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: Market price of sub assembly $50, Variable cost of the sub assembly $20, excess capacity 1,000 units, 900 units needed
Between $20 and $50.
Weighted-average budgeted contribution margin per unit is:
Budgeted total contribution margin/budgeted total units.
One advantage of the return on investment (ROI) metric is that it:
Can be compared to interest rates and to rates of return on alternative investments.
A primary characteristic of a negotiated transfer price is that it:
Can be costly and time-consuming to implement.
By not distinguishing between direct and indirect costs in their performance reporting, many companies:
Can cause poor decision-making.
Because the full-cost method of transfer pricing includes fixed cost, it can:
Cause sub-optimal short-term decision making.
Intolerance of uncertainty often leads managers to:
Choose projects with short payback periods.
Of the fact that desirable investment opportunities will not be neglected by divisions currently earning high rates of return.
Compared to return on investment (ROI), residual income (RI) may be a better measure of the financial performance of an investment center because:
Since residual income (RI) is not a percentage, it is not useful for:
Comparing business units of significantly different size.
A useful device or concept for solving production problems involving multiple products and limited resources is:
Contribution per unit of scarce resource
Which of the following is not a key determinant of productivity for most organizations?
Control of overhead costs.
Of most relevance in deciding how or which costs should be assigned to an SBU is the degree of:
Controllability.
Production or support SBUs within the firm that have the goal of providing the best quality product or service at the lowest cost are:
Cost Centers.
In a not-for-profit organization, you are more likely to see
Cost centers.
Production or support SBUs within the firm that have the goal of providing the best quality product or service at the lowest cost are:
Cost centers.
A flexible budget contains:
Cost targets based on actual output (e.g., sales volume) for the period.
Investment center
Decentralized firms can delegate authority and yet retain control and monitor managers' performances by structuring the organization into so-called "responsibility centers." Which one of the following business segments/responsibility centers is most like an independent business?
Residual income (RI) may be a better measure for performance evaluation of an investment center than return on investment (ROI) is because:
Desirable investment decisions will not be discouraged by high-rate-of-return divisions.
Consider the following data from two divisions of a company, P and Q: Divisional P Q Sales $1,500,000 $1,000,000 Operating Income $600,000 $450,000 Investment $4,000,000 $2,750,000 If both divisions were presented with an opportunity to invest in a project that is estimated to achieve an ROI of 15%, what will the units likely decide?
Division P will be indifferent; Division Q will not invest.
Division P's ROI is 12%; Division Q's ROI is 13%. If both divisions were presented with an opportunity to invest in a project that is estimated to achieve an ROI of 12%, what will the units likely decide?
Division P will be indifferent; Division Q will not invest.
A company has two divisions, X and Y, each operated as an investment center. X charges Y $55 per unit for each unit transferred to Y. Other data are: X's variable cost per unit $40 X's fixed costs $100,000 X's annual sales to Y 5,000 units X's sales to outsiders 10,000 units X is planning to raise its transfer price to $65 per unit. Division Y can purchase units at $50 each from outsiders, but doing so would idle X's facilities now committed to producing units for Y. Division X cannot increase its sales to outsiders. From the perspective of the short-term profit position of the company as a whole, from which source should Division Y acquire the units?
Division X, in spite of the increased transfer price.
A cost is not relevant for decision making if it:
Does not differ for each option available to the decision maker.
The sales mix variance for a firm is ultimately expressed in terms of:
Dollars.
For a typical capital investment project, the bulk of the investment-related cash outflow occurs:
During the initiation stage of the project.
Unless properly controlled, a "bottom-up" budgeting process can lead to:
Easy budget targets.
Reasons for failure to implement the balanced scorecard effectively include all except which of the following?
Failure to include SEC reporting responsibilities.
Which of the following is not a plausible cause of a direct labor efficiency variance?
Failure to update the standard cost to conform to wage provisions in the union contract
Put simply, transfer pricing is a management tool for assigning a "price" to internally transferred goods (or services) in order to simulate the marketplace, thus encouraging managers to make decisions that are in the best interest of the:
Firm as a whole
Put simply, transfer pricing is a management tool for assigning a "price" to internally transferred goods (or services) in order to simulate the marketplace, thus encouraging mangers to make decisions that are in the best interest of the:
Firm as a whole.
Low asset turnover and high return on sales.
Firms with high operating leverage tend to have:
Budgets can serve as the standard against which actual performance is measured. When compensation is based on this comparison, the organization is said to use
Fixed performance contracts.
What additional information would be needed for Folsom to calculate the dollar impact of changes in market share on November's operating income?
Folsom's budgeted market share and the actual total market size
The sales volume variance is:
Further divided into separate sales quantity and sales mix variances.
The act of encouraging non-value-adding actions on the part of management in order to improve indicated performance is referred to as:
Gaming the performance indicator.
The market size variance arises because of changes:
In the total market size of the firm's product.
The successful use of a budgeting system generally involves all of the following except:
Inclusion of "budgetary slack" in most budgets.
The experience of many firms is that decreases in labor costs may:
Increase productivity.
SBUs that include the assets they employ as well as profits in the performance evaluation are:
Investment centers.
Zero-base budgeting (ZBB
Involves rigorous review of each cost item before inclusion in the budget.
A firm with a declining market share percentage may still earn a higher operating income if the:
Market as a whole is growing.
One important short-term financial goal for a company is to earn the projected operating income for the period. Attainment of this goal is measured by comparing the actual operating income for the period to the:
Master budget operating income.
Which one of the following is a drawback of decentralization?
May hinder coordination among independent SBUs.
A favorable cost variance of significant magnitude:
May lead to future improvements in production methods if the variance is investigated to determine its underlying cause(s).
The objectives of management control of the manager include:
Motivation, incentive and fairness.
The most important objective of a strategic performance measurement system is:
Motivation.
When deciding to purchase a new cutting machine or continue using an existing machine, the following costs are all relevant except the:
Original cost of the old machine.
Which one of the following is a productivity measure that focuses on the relationship between only one of the inputs and the output attained?
Partial productivity.
The process by which managers at all levels in the firm gain information about the performance of tasks within the firm and judge that performance against pre-established criteria is:
Performance measurement.
A total variable cost variance (such as for direct materials) can be broken down into separate variances that evaluate:
Price and efficiency.
In making a decision whether to accept or reject a "special sales order," managers need critical information about all of the following except:
Prior period operating costs.
SBUs that generate revenues and incur the major portion of the cost for producing those revenues are:
Profit centers.
The need for coordination between the production and the selling function will impact the choice of:
Profit, cost or revenue center.
Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:
Profits in relation to the amount of capital invested in the unit.
Firm as a whole.
Put simply, transfer pricing is a management tool for assigning a "price" to internally transferred goods (or services) in order to simulate the marketplace, thus encouraging managers to make decisions that are in the best interest of the:
ROI, though widely used, is subject to which one of the following limitations?
ROI may motivate managers to take suboptimal decisions from the standpoint of the organization as a whole.
Return on Investment (ROI), though widely used, is subject to which one of the following limitations?
ROI may motivate managers to take suboptimal decisions from the standpoint of the organization as a whole.
replacement cost
The estimated cost to replicate assets of an investment center at the current level of service and functionality of these assets is defined as:
liquidation value
The estimated price that could be received for the sale of divisional assets is referred to as:
The biggest problem with cost-based transfer prices is:
The fact that their use may result in sub-optimal decisions from the standpoint of the organization as a whole.
Gives managers of profitable business units an incentive to reject some projects that would benefit the organization as a whole.
The major criticism of using return on investment (ROI) for evaluating the financial performance of business units considered investment centers is that ROI:
complexity of the calculation
The primary limitation of using Economic Value Added (EVA®) to evaluate the financial performance of investment centers is:
Productivity can be thought of as:
The ratio of output to input.
In the context of transfer pricing, dual pricing is:
The simultaneous use of two or more transfer pricing methods.
When deciding whether to discontinue a segment of a business, managers should focus on:
The total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment.
A historical cost number.
The use of gross book value (GBV) for measuring the level of investment in depreciable assets (for purposes of calculating return on investment, ROI) is preferred by those who value the objectivity of:
The choice of valuation method for inventories would normally not affect which item(s) used in calculating ROI?
The valuation of fixed assets (e.g., Plant, Property, and Equipment) used by an investment center.
Which of the following statements regarding "opportunity costs" is true?
These costs relate to the benefit lost or foregone when a chosen option (course of action) precludes the benefits of an alternative option from being realized.
All of the following are characteristic of relevant costs except:
They are inventory-related costs.
Which one of the following is an advantage of both ROI and Residual Income (RI)?
They both measure all elements important for measuring short-term financial performance of investment centers: revenues, costs, and investment.
Which one of the following is not a limitation shared by residual income (RI) and return on investment (ROI) divisional performance measures?
They both relate, in percentage terms, earnings to the level of investment in each division.
Which of the following is not a characteristic of Kaizen budgeting?
This approach cannot be used externally (e.g., to budget supplier costs)
The greatest advantage of using a negotiated transfer price is:
This may be the most practical approach when conflicts exist between selling and buying divisions.
Budgetary slack occurs when:
To "meet" budget objectives, employees ask for resources in excess of what they need.
Which one of the following measures the relationship between the output attained and the total input costs of all the required input resources?
Total productivity.
The sales quantity variance of a firm arises when the:
Total units of all products sold differ from the budgeted total units to be sold.
May fail to provide the selling division with an incentive to control costs.
Transfer prices based on actual costs of the selling division as opposed to standard costs incurred by that division:
Fixed costs will often be irrelevant for short-term decision making because they:
Typically do not differ between decision alternatives being considered.
Especially for projects with long lives, estimation of revenues (or benefits), costs, and cash flows of a capital investment project is a difficult task principally because of:
Uncertainty about future events.
The principal-agent economic model applied to employment contracts includes two of the following management performance aspects:
Uncertainty and lack of observability.
Under the principal-agent model of contract relationships, situations such as machine breakdowns or a decrease in market demand would be classified under:
Uncertainty.
Profits generated in relation to the amount of capital invested in the unit
Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:
Which of the following is a total productivity measure?
Units of output per dollar value of input.
Other things being equal, income computed by the variable costing method will exceed that computed by the full costing method if:
Units sold exceed units produced.
Usually overstate ROI.
Use of net book value (NBV) in valuing investment in operating plant assets for investment centers, in contrast to using an estimate of current value, will:
A partial operational productivity measure:
Uses physical units in both the numerator and denominator.
Use of net book value (NBV) in valuing investment in operating plant assets for investment centers, in contrast to using an estimate current value, will:
Usually overstate ROI
The main concept of the balanced scorecard is that, to evaluate the SBU's progress to strategic success, an organization must use all of the following except:
Value chain analysis.
Efforts to improve productivity should be focused only on
Value-Added activities
Land being held by the division as a site for a new plant in the future.
Which of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income (RI) or the return on investment (ROI) approach for performance measurement and evaluation?
EVA® = NOPAT − Imputed charge on EVA® capital, where NOPAT = net operating profit after (cash) taxes.
Which of the following specifications for calculating EVA® is correct?
Cost-plus method
Which one of the following determines the transfer price based on the seller's costs, plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?
They both relate, in percentage terms, earnings to the level of investment in each division
Which one of the following is not a limitation shared by residual income (RI) and return on investment (ROI) divisional performance measures?
A complete and fair measure of performance that measures profit after all traceable costs and is therefore controllable by the profit center manager is
contribution by profit center
employment contract
agreement between the manager and top management designed to provide incentives for the manager to act independently to achieve top management's objectives (helps with goal congruence)
employment contract
an agreement between the manager and top management designed to provide incentives for the manager to act independently to achieve top management's objectives
cost centers
are a firm's production or support SBUs that are evaluated on the basis of cost
Sunk costs
are costs that have been incurred in the past or is already committed for the future.
order getting costs
are expenditures to advertise and promote the product
Relevant costs
are future costs that differ between and among decision alternatives
controllable fixed costs
are those fixed costs that the profit center manager can influence in approximately a year or less
A complete and fair measure of performance that measures profit after all traceable costs and is therefore controllable by the profit center manager is:
contribution by profit center
contribution income statement
based on the contribution margin developed for each profit center and for each relevant group of profit centers
profit center
both generates revenues and incurs the major portion of the cost for producing the revenues
profit center
both generates revenues and incurs the major portion of the cost for producing these revenues
principal agent model
conceptual model that contains the key elements that contracts must have to achieve the desired objectives
Consistency between goals of the firm and the goals of its employees is referred to as goal:
congruence.
discretionary-cost method
considers costs largely uncontrollable and applies discretion at the planning stage; input-oriented approach
discretionary cost method
considers costs largely uncontrollable and applies discretion at the planning stage; it is an input-oriented approach
engineered cost method
considers costs to be variable and therefore engineered, or controllable; it is an output-oriented approach
engineered-cost method
considers costs to be variable and therefore engineered, or controllable; output-oriented approach
strategic business unit
consists of a well-defined set of controllable operating activities over which an SBU manager is responsible
strategic business unit (SBU)
consists of a well-defined set of controllable operating activities which the SBU manager is responsible
A common form of profit center evaluation is the _______ income statement
contribution
Management consulting and advertising are ______ fixed costs
controllable
revenue drivers
factors that affect sales volume, such as price changes; promotions, discounts, customer service, changes in product features, delivery dates, and other value-added activities
cost centers
firm's production or support SBUs that are evaluated on the basis of cost
Being a relevant measure of the level of investment in a continuing business.
he use of replacement cost of assets for purposes of calculating return on investment (ROI) has the advantage of:
Formal management control systems at the individual employee level include both _______ and _________ policies
hiring; promotion
decentralized
if it has chosen to delegate a significant amount of responsibility to SBU managers
investment center
include assets employed by the center as well as profits in the performance evaluation
order filling costs
include freight, warehousing, packing and shipping, and collections
order-filling costs
include freight, warehousing, packing and shipping, and collections
investment center
includes assets employed by the SBU as well as profits in performance evaluation
Opportunity cost
is the highest potential net benefit that is given up when one alternative is selected over others.
Training courses, readings, meetings and policies and procedures are all part of ________ development
leadership
strategic performance measurement
system used by top management to evaluate SBU managers
strategic performance measurement
system used to evaluate SUB managers
budget slack
the difference between budgeted performance and expected performance
revenue drivers
the factors that affect sales volume, such as price changes, promotions, discounts, customer service, changes in product features, delivery dates, and other value-added factors
performance measurement
the process by which managers at all levels gain information about the performance of tasks within the firm and judge that performance against preestablished criteria as set out in budgets, plans, and goals
noncontrollable fixed costs
those fixed costs that are not controllable within a year's tie, usually including facilities-related costs such as depreciation, taxes and insurance
A unique feature of the ______ _______ income statement is that it shows the increase or decrease in profit due to a change in inventory separately
value stream
Managers of batch and product level processes have some control over their spending, meaning costs may vary with underlying activities. Departments at this level are most likely going to be evaluated:
with an engineered cost method
