Unit 4 ACCT
The manager of a(n) center does not have control over revenue or the use of investment funds.
cost
Lower-level management goals that are inconsistent with company goals are a possible disadvantage of
decentralization or decentralisation
Assembling products and handling baggage are examples of Blank______ processes.
internal business
Future costs and benefits that do not differ between alternatives are Blank______ costs to the decision-making process.
irrelevant
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
Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress and excessive operating assets which can depress .
margin, turnover
Preventing, detecting, and dealing with defects causes the incurrence of
quality
Net operating income - (Average operating assets × Minimum required rate of return) =
residual income
Disadvantages of decentralization include
spreading innovative ideas may be difficult clashing objectives between departments and the organization lack of coordination
Customer value propositions are the essence of
strategy
Operational excellence is an example of a company ______.
strategy
A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n)
sunk
Costs that have no impact on future cash flows and are irrelevant to decisions are ______ costs.
sunk
When making a decision, irrelevant items are included in the analysis of both alternatives when using
the total cost approach only
When considering decision alternatives, both relevant and irrelevant costs are included when using the
total cost approach
Being less dependent on suppliers and making profits on both parts and the final product are advantages of
vertical integrations
When demand for products exceeds the production capacity, a(n)
volume trade-off
_________ is a measure of whether or not a product meets its design specifications and is free of defects that degrade its appearance or diminish its performance.
Conformance quality
Which of the following are disadvantages of decentralization?
Coordination among departments may be lacking. Lower-level managers may have objectives that differ from the objectives of the entire organization. Lower-level managers may make decisions without understanding the big picture.
Opportunity costs are not found in accounting records because they are not relevant to decisions.
False
Some decisions have only one alternative and cannot consider steps in decision making.
False
True or false: 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 Reason: Net book value discourages equipment replacement.
Which of the following is NOT a dimension of learning and growth measures?
Lean resourcement management
Choose the groups of performance measures typically used in the balanced scorecard approach.
Learning and growth Financial Customer
The manager of a(n) center has control over both costs and revenues, but not over the use of funds.
Profit
The ROI formula typically uses Blank______.
average operating assets for the year
A major drawback of residual income is that it ________.
cannot be used to compare the performances of divisions of different sizes
Anything that prevents you from getting more of what you want is a(n)
constraint
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 $
$24,000 - ($200,000x0.10) =$4,000
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 $
$42,000 - ($300,000x0.12) = $6,000
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?
2 mil/20 mil=10%
Which of the following may be an advantage of making a part rather than buying it?
A smoother flow of parts and materials for production Less dependence on outside suppliers
Choose the four groups of performance measures typically used in the balanced scorecard approach.
Financial, customer, internal business processes, and learning and growth
Which of the following performance measures are part of the balanced scorecard?
Learning and growth Financial Customer
Residual income =
NOI - (Average operating assets × Minimum rate of return)
Return on investment =
Net operating income ÷ Average operating assets
Which of the following ratios are part of the ROI formula?
Net operating income ÷ Sales Sales ÷ 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.
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
Reason: Net operating income ÷ Average operating assets = $70,000 ÷ $350,000 = 20%.
Which of the following business segments would not be considered a cost center?
Retail outlet
Net operating income ÷ Average operating assets =
Return on investment Reason: Residual income is Net operating income - (Average operating assets × Minimum required rate of return). Reason: Margin is Net operating income ÷ Sales. Reason: Turnover is Sales ÷ Average operating assets.
Which of the following is NOT a dimension of internal business process measures?
Skills development
Improvements in learning and growth and internal business process measures should ultimately have a positive influence on customer measures.
True
The balanced scorecard framework
considers market performance as a financial measure holds organizations accountable for translating improvements in nonfinancial performance to financial results
The sum of prevention, appraisal, internal failure, and external failure costs is called the
cost of quality
Service departments, such as the accounting department, are generally considered centers, while sales offices are often considered centers.
cost, profit
An organization in which decision-making authority is spread throughout the organization is
decentralized
Lower-level managers are empowered to make decisions in a ______ organization, which can ________ motivation and job satisfaction.
decentralized, increase
The first step in decision making is to
define the alternatives
Using net book value (instead of gross cost) to calculate average operating assets
increases ROI over time
A company can increase its return on investment (ROI) by ______.
increasing sales reducing operating expenses
Synonyms for differential costs include
incremental avoidable
An increase in cost between two alternatives is a(n)
incremental or differential cost
What the company does in an attempt to satisfy customers falls into the Blank______ group of the balance scorecard.
internal business processes
Operating assets include
inventory accounts receivable equipment
The manager of a(n) responsibilityBlank 1Blank 1 responsibility , Incorrect Unavailable center has control over costs, revenue, and investments in operating assets.
investment
Costs and benefits that should be ignored when making decisions are called
irrelevant
In order to prevent confusion and keep attention focused on critical information, it is desirable to
isolate relevant costs from irrelevant costs
EBIT is another term for
net operating income
Differential revenue is an example of a(n) Blank______ benefit.
relevant
When making a decision only Blank______ costs and benefits should to be included in the analysis.
relevant
The net operating income that an investment center earns above the minimum required return on its average operating assets is
residual income
Which of the following is not one of the three primary types of responsibility centers?
sales
A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include
salvage value alternative uses for the equipment
A one-time order that is not considered part of the company's normal ongoing business is called a
special order
In a decentralized organization Blank______.
top management can concentrate on issues such as overall strategy changes in the operating environment can be responded to rapidly lower-level managers are trained for higher positions.
Which of the following can make a product line look less profitable than it really is?
Allocated common fixed costs
Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value?
Replacing an existing asset will not automatically decrease ROI
Isolating relevant costs is desirable because
all information needed for the total cost approach is rarely available irrelevant costs may be used incorrectly in the analysis critical information may be overlooked with the total cost approach
Decision-making authority lies mostly with higher-level managers in strongly Blank______ organizations.
centralized
Decision-making authority lies mostly with higher-level managers in strongly organizations.
centralized
Quality cost information reports
help identify the financial cost of defects give managers an idea of where to focus quality control efforts show managers if quality control costs are poorly distributed
Net operating income is income before and
interest, taxes
Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.
make or buy
Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n)
profit
A report that details prevention, appraisal, internal failure, and external failure costs is called a ________.
quality cost report
Costs and benefits that always differ between alternatives are Blank______ costs and benefits.
relevant
Any part of an organization whose manager has control over and is accountable for cost, profit, or investments is a(n) center.
responsibility
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 (ROI)
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 statements are true?
The impact of customer ill will is generally not found on quality control reports. Quality cost information helps managers identify the relative importance of quality problems. Measuring and reporting quality costs does not solve quality problems.
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. The manager of the Western division is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct?
The manager may decide to reject the project because it will lower the current ROI earned by his division. Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment.
True or false: When ROI is calculated using the gross cost of assets, replacing a fully depreciated asset with a comparably priced new asset will not adversely affect ROI.
True Reason: When depreciation is disregarded the asset base will not change significantly when new, comparable assets are purchased.
Potential advantages of dropping a product line or other segment include
an overall increase in net operating income avoiding more fixed costs than the company loses in contribution margin
Costs incurred to identify defective products before they are shipped to customers are ______ costs.
appraisal Reason: Internal failure costs are a result of appraisal cost activities and include costs to repair and rework defects. Reason: External failure costs result from defective products in the hands of customers. Reason: Prevention costs support activities that attempt to reduce the number of defects.
Costs incurred to identify defective products before they are shipped to customers are called
appraisal or inspection
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative
income statements
Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000. The equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to
increase, 10, 12 Net operating income/Average operating assets
Residual income is a measure used to evaluate managers of Blank______ centers.
investment
True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.
True Reason: Decentralized operations often allow the lower-levels of management to make decisions because they are most familiar with the day-to-day operations.
Costs that result from identifying defects before products are shipped to customers and include the cost of scrap and rework are ______ costs.
internal failure
ROI is a method used to evaluate
investment centers, but not cost or profit centers
ROI can be calculated as
margin × turnover net operating income ÷ average operating assets
When it comes to quality of conformance, an economy car Blank______ quality of conformance as a luxury car
may have the same
When a manager is evaluated on residual income, an investment is acceptable when
net operating income for the investment is above the minimum required return on average operating assets
When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored.
original cost of the car
To reduce the cost of quality organizations should increase
prevention and appraisal costs to reduce internal and external failure costs
________ is an example of an external failure cost.
product recalls
When a manager accepts a project because the net operating income from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on
residual income
Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through
responsibility
