ACCT 2210 Exam 3

Knowledge Check 01: Axis Corporation's Division A has average operating assets of $500,000 and the division earned $100,000 as net operating income during a period. The company expects a minimum required rate of return of 15% on its investments. What is the residual income for Division A?

$25,000

Budget

- A detailed plan for the future that is usually expressed in formal, quantitative terms. - Define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

Why do organizations create budgets from a planning standpoint?

1. Encourage managers to think about and plan for the future. 2. Communicate financial goals throughout the organization. 3. Allocate resources within the organization where they can be used most effectively. 4. Coordinate the plans and activities of departmental managers. 5. Uncover potential bottlenecks before they occur.

Why do organizations create budgets from a control standpoint?

1. Improve the efficiency and effectiveness of operations. 2. Evaluate and reward employees.

Knowledge Check 01: Systems Corporation earned a net operating income of $2 million on sales of $6 million. Assume that the company's average operating assets were $20 million. What is the company's ROI?

10%

Planning

Developing goals and preparing various budgets to achieve those goals.

Control

Gathering feedback to ensure that the plan is being followed is referred to as ____________.

Knowledge Check 01: Which department carries out the main activities of the organization?

Operating Department

Knowledge Check 01: Residual income = Net operating income less ________.

Residual Income = Net Operating Income - (Average Operating Assets x Minimum Rate of Return)

Knowledge Check 01: When a manager has control over and is accountable for cost, profit or investments of an organization, it is called ________.

Responsibility Center

Recognizing individuals at all levels of the organization as team members whose views and judgments are valued by top management is an advantage of ________________________.

Self-Imposed Budgeting

Knowledge Check 01: The compressor division at Norco Corporation can buy the coils it requires either from the company's coil division or from the market. Assuming the coil division has no idle capacity to satisfy the compressor division's requirements, which of the following will be the lower limit for setting the transfer price between the two divisions?

Selling price per unit of coil division

Budgetary slack occurs when a manager submits a budget that is ________________.

Too easy to attain

Knowledge Check 01: Brooks Corporation has a Food Services department that provides food for employees in all other departments of the company. For September, variable food costs were budgeted at $4 per meal, based on 14,000 meals served during the month. At the end of the month, it was determined that 15,000 meals had been served at a total cost of $70,000. What is the amount of the variable food costs that should be charged to the other departments of the company at the end of the month?

Total Variable Food Costs Charged to Other Departments = $4 per meal x 15,000 meals = $60,000

Knowledge Check 01: The price charged when one segment of a company provides goods or services to another segment of the same company is called a(n) ________.

Transfer Price

Knowledge Check 01: The compressor division at Norco Corporation can buy the coils it requires either from the company's coil division or from the market. Assuming the coil division has enough idle capacity to satisfy the compressor division's requirements, which of the following will be the lower limit for setting the transfer price between the two divisions?

Variable cost of production for coil division

Knowledge Check 01: The compressor division at Norco Corporation can buy the coils it requires either from the company's coil division or from the market. Assuming the coil division has some idle capacity to satisfy the compressor division's requirements, which of the following will be the lower limit for setting the transfer price between the two divisions?

Variable cost per unit + Average opportunity cost of lost sales.

Knowledge Check 01: Return on investment can be calculated by each of the following formulas except ________. a) Margin ÷ Turnover b) Margin × TurnoverNet c) Operating Income ÷ Average Operating Assets

a) Margin ÷ Turnover

Knowledge Check 01: Which of the following statements about service department costs is not correct? a) The actual cost of a service department should be charged to operating departments. b) The fixed costs of service departments should be charged in lump-sums to each operating department in proportion to their peak-period needs or long-run average needs. c) Variable and fixed service department costs should be charged separately to operating departments.

a) The actual cost of a service department should be charged to operating departments.

Knowledge Check 01: Which of the following is not an approach used to set transfer prices? a) Managers negotiate the transfer price b) Managers set transfer price at cost using variable cost c) The transfer price is set at the ceiling price d) The transfer price is set at the market price

c) The transfer price is set at the ceiling price

Knowledge Check 01: A major drawback of residual income is that it ________.

cannot be used to compare the performances of divisions of different sizes

Knowledge Check 01: Residual income is a better measure for performance evaluation of an investment center manager than return on investment because ________.

it encourages managers to make investments that are profitable for the entire company

Many managers believe that being empowered to create their own ___________________ budgets is the most effective method of budget preparation.

self-imposed