Chapter 11
Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through _____ accounting systems
responsibility
The buying division would be willing to pay up to the amount it expects to make on transferred units ______ outside supplier exists.
when no
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?
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.
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
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.
Which of the following is not a characteristic of decentralization?
Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.
The net operating income that an investment center earns above the minimum required return on its average operating assets is
residual income
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
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 $____
18-26
Given a margin of 12%, sales of $150,000 and average operating assets of $90,000, the ROI is
20
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%
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
22-26
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
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.
The correct formula for charging service department costs to operating departments is
Budgeted variable rate × Actual level of activity
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
Because it fosters cooperation, most companies rely on negotiated transfer prices.
False
To make sure all costs are assigned to operations, service departments should allocate their actual costs to operating departments.
False
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
Return on investment =
Net Operating Income / Average Operating Assets
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.
Which of the following business segments would not be considered a cost center?
Retail outlet
Which of the following ratios are part of the ROI formula?
Sales ÷ Average operating assets, Net operating income ÷ Sales
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.
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 on lost sales ÷ Total transferred units)
Operating assets include
accounts receivable equipment inventory
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
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
The manager of a(n) ______ center does not have control over revenue or the use of investment funds.
cost
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, cover any lost contribution margin due to the transfer
An organization in which decision-making authority is spread throughout the organization is
decentralized
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
When allocating fixed costs of service departments, the fact that operating departments do not need the peak level of service every period
does not impact the total allocation of costs
The cost of making capacity available for use is represented by service department's _____ 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
Net operating income is income before _____ and ______
interest, taxes
Using sales dollars to allocate fixed costs from service departments to operating departments
is often viewed as a measure of ability to pay, is often a poor base because sales dollars vary from period to period, is simple and straightforward
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
Drawbacks of using variable or full costing to set transfer prices include
little incentive to reduce costs, no profit for the supplying department, suboptimization when idle capacity exists
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
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
ROI can be calculated as
margin × turnover, net operating income ÷ average operating assets
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(n) _____ transfer price
negotiated
EBIT is another term for
net operating income
The two types of departments in large organizations are
operating and service
Most large organizations have both _____ departments where the central purposes of the organization are carried out and ______departments that provide assistance
operating, service
Negotiated transfer prices
preserve the autonomy of the divisions are consistent with decentralization use the expertise of managers in weighing the costs and benefits of the transfer
Net operating income - (Average operating assets × Minimum required rate of return) =
residual income
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
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 consulted 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(n) ______ 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