acct pre-ch 10

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. $24,000 - ($20,000 x 10%) = $4,000

The balanced scorecard:

- links the organization's strategy to its financial budgets - Helps managers communicate the organization's strategy to their subordinates - helps to ensure employees understand the organization's strategy

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

Residual Income

EBIT is another term for _______.

net operating income

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

20% 12%*($150,000/$90,000)

True or False: When considering ROI, excessive operating expenses is always of greater concern to managers than excessive operating assets.

False

True or false: For a typical company current financial measures are the best and only indication of future financial performance.

False

Given sales of $100,000, Net Operating Income of $12,000 and Average Operating Assets of $50,000. Margin= ______% and Turnover = _______.

Margin = 12% - $12,000/$100,000 Turnover= 2 - $100,000/$50,000

Net operating income/average operating assets=

Return on Investment (ROI)

operating assets include

accounts receivable, equipment, inventory

performance measures should be reported:

as often as needed

an integrated set of performance measures that are derived from the company's strategy is:

balanced scorecard

in organizations, decision making authority is spread throughout the organization

decentralized

In order to increase margin, a company must ___________ sales, and/or __________ operating expenses and/or __________ selling price.

increase, decrease, increase

Assembling products and handling baggage are examples of _________ processes.

internal

What the company does in an attempt to satisfy customers falls into the _________ group of the balance scorecard.

internal business process

Which of the following statements is correct when evaluating divisions of different sizes?

management should focus on the percentage change in residual income from year to year rather than on absolute amounts

in order to fully understand how a manager's decisions can affect ROI, both ________ and _________ should be computed

margin, turnover

managers of cost centers are expected to

minimize costs while providing an acceptable level of products and services

Comparing actual net income to budgeted net income is often done to evaluate the manager of an _________ center.

profit

Any part of an organization whose manager who has control over and is accountable for cost , profit, or investment is a __________ center,

responsibility

Because customers target different customers with different kinds of products and services, performance measures should be tailored to the specific ___________ of a company

strategy

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 consulted before a decision is made

choose the groups of performance measures typically used in the balanced scoreboard approach

-financial -learning and growth -customer related -internal business processes

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.

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

-residual income -return on investment

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

-sales/average operating assets -net operating income/sales

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

1. be put in charge of a business segment that includes committed costs over which a manager has no control 2. take actions that increase ROI in short-run at the expense of long-term performance 3. reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI