Chapter 10 and 11 Managerial
By eliminating layers of decision making and approvals, organizations can respond more quickly to customers and to changes in the operating environment.
Advantage of Decentralization
Granting decision-making authority helps train lower-level managers for higher-level positions.
Advantage of Decentralization
How can a company increase its return on investment (ROI)? A. Reduce operating expenses B. Increase operating assets C. Increase sales D. Borrow additional funds
A. Reduce operating expenses C. Increase sales
A benchmark used in measuring performance is called a(n) _______________.
Standard
The period from which a product begins production as raw materials and ends as a finished product is known as ________________ time or manufacturing cycle time.
Throughput
In order to increase return on investment (ROI), the company must _______________ (increase/decrease) sales, and/or _________________ (increase/decrease) operating expenses and/or _________________ (increase/decrease) average operating assets.
Increase; decrease; decrease
Net operating income is income before _________________ and ________________.
Interest; Taxes
Margin equation
Net operating income/Sales
What is the correct formula for return on investment? A. Average operating assets/Net operating income B. Net operating income/Segment revenue C. Segment revenue/Net operating income D. Net Operating income/Average operating assets
D. Net Operating Income/Average Operating Assets
If lower-level managers make their own decisions independently of each other, coordination may be lacking.
Disadvantage of Decentralization
Lower-level managers may have objectives that clash with the objectives of the entire organization.
Disadvantage of Decentralization
Lower-level managers may make decisions without fully understanding the company's overall strategy.
Disadvantage of Decentralization
The higher a business segment's retrn on investment (ROI), the greater the profit earned per _________________ invested in the segment's average operating assets.
Dollar
How much should be paid for each unit of an input is specified by a(n) _____________ standard.
Price
Value-Added Time
Process Time
Throughput Time equation
Process Time + Inspection Time + Move Time + Queue Time
Manufacturing Cycle Efficiency (MCE) equation
Process Time/Throughput Time
SP(AQ-SQ) is the formula for the materials ________________ variance.
Quantity
The difference between the actual materials used in production and the standard amount allowed for the actual output is reflected in the materials _______________ variance.
Quantity
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
Any part of an organization whose manager has control over and is accountable for cost, profit, and/or investments is a(n) _________________ center.
Responsibility
The process of holding lower-level managers accountable for the revenues and expenses over which thay have control is referred to as _______________ ______________.
Responsibility Accounting
Turnover equation
Sales/Average operating assets
Decentralized organization
an organization in which decision-making authority is not confined to a few top executives but rather is spread throughout the organization
Responsibility Center
any part of an organization whose manager has control over and is accountable for cost, profit, or investments. The three primary types of responsibility centers are cost centers, profit centers, and investment centers.
Profit Center
manager has control over both costs and revenue, but not over the use of investment funds
Investment Center
manager has control over cost, revenue, and investments in operating assets
Cost Center
manager has control over costs, but not over revenue or the use of investment funds
The standard price of materials is $4.10 per pound and the standard quantity allowed for actual output is 5800 pounds. If the actual quantity purchased and used was 6000 pounds, and the actual price per pound was $4.00, the direct materials price variance is: A. $600 F B. $600 U C. $580 F D. $580 U
A. $600 F
Volume variance = A. Budgeted fixed overhead - Fixed overhead applied to work in progress B. Actual fixed overhead - Fixed overhead applied to production C. Standard fixed overhead applied to production - Actual fixed overhead applied to production D. Actual fixed overhead - Budgeted fixed overhead
A. Budgeted fixed overhead - Fixed overhead applied to work in progress
Which of the following ratios are part of the ROI formula? A. Net operating income/Sales B. Cost of goods sold/Average inventory C. Sales on account/Average accounts receivable D. Sales/Average operating assets
A. Net operating income/Sales D. Sales/Average operating assets
Decentralized operations are able to respond quickly to customers and changes in operations because in a decentralized organization: A. there are fewer managers that must be consulted before a decision is made B. lower-level managers are judged on non financial measures rather than financial outcomes of their decisions C. top management is heavily involved in the day-to-day operations
A. there are fewer managers that must be consulted before a decision is made
Empowering lower-level managers to make decisions can increase their motivation and job satisfaction.
Advantage of Decentralization
The net operating income that an investment center earns above the minimum requires return on its average operating assets is: A. return on investment (ROI) B. net income C. residual income
C. residual income
Residual income is a measure used to evaluate managers of _____________ centers. A. profit and investment B. profit C. cost D. investment
D. investment
The most difficult standard to determine is perhaps the: A. standard rate per direct labor hour. B. standard quantity per unit. C. standard price per unit D. standard hours per unit.
D. standard hours per unit.
The amount of an input that should have been used to produce the actual output is known as the ______________ quantity or hours allowed.
Standard
The final, delivered price that should be paid for each unit of direct materials is the _______________ price per unit of materials.
Standard
In a standard cost system, overhead is applied on the basis of the ______________ hours allowed for the ____________ output of the period.
Standard; Actual
Which of the following is not a characteristics of decentralization? A. Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions. B. Decentralization puts the decision-making authority in the hands of those who have the most information on day-to-day operations. C. Decentralization helps to train lower-level managers for higher level positions. D. Decentralization allows top management to concentrate on bigger issues such as overall strategy.
A. Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions
Which of the following statements regarding decentralized organizations are correct? A. Decisions can be made more rapidly, since not as many layers of management are needed for approval. B. In a decentralized organization, lower-level managers should not be held accountable for the outcomes of their decisions. C. Decentralization is likely to cause job dissatisfaction and decreased motivation for lower-level managers since they have increased responsibility. D. In a decentralized organization, decision-making authority is reserved for top management so lower-level managers can concentrate on operations. E. It allows top management to concentrate on issues such as overall strategy. F. Decentralization helps train lower-level managers for higher positions.
A. Decisions can be made more rapidly, since not as many layers of management are needed for approval. E. It allows top management to concentrate on issues such as overall strategy F. Decentralization helps train lower-level managers for higher positions.
Which of the following statements are true? A. Overtime premiums can cause an unfavorable labor rate variance B. Wage rates paid to workers are unpredictable in most companies. C. How production supervisors use direct labor workers can lead to labor rate variances. D. Assigning highly skilled, highly paid workers to low skill, low pay level jobs will cause a favorable rate variance.
A. Overtime premiums can cause an unfavorable labor rate variance C. How production supervisors use direct labor workers can lead to labor rate variances
Which of the following evaluation measures are used for investment center managers only--not for cost or profit center managers? A. Residual income B. Actual profits compared to budgeted profits C. Return on investment (ROI) D. Standard cost variances
A. Residual income C. Return on investment (ROI)
Which of the following statements are correct when comparing projects using residual income versus return on investment (ROI)? A. Residual income cannot be used to compare divisions of different sizes without some modification. B. ROI automatically decreases over time when using the net book value of operating assets as depreciation lowers net book value C. Managers will be more likely to pursue projects that will benefit the entire company when being evaluated on ROI than residual income. D. A manager might reject a proposal using ROI that the manager would accept using residual income.
A. Residual income cannot be used to compare divisions of different sizes without some modification. D. A manager might reject a proposal using ROI that the manager would accept using residual income.
Marcos Co. is considering a project that will increase residual income by $15000. 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? A. The department manager may not want to accept the project because it will lower the overall ROI for the department. B. The project should be accepted by the company because it increases overall residual income. C. The project should be accepted because the residual income will help push the project's ROI above the projected 12%. D. The project should be rejected by the company because its ROI is lower than the current departmental ROI.
A. The department manager may not want to accpet the project because it will lower the overall ROI for the department. B. The project should be accepted by the company because it increases overall residual income.
The standard quantity allowed equals: A. actual output x standard quantity B. standard output x actual quantity C. standard output x standard quantity D. actual output x actual quantity
A. actual output x standard quantity
The calculation of the budget variance uses: A. budgeted fixed overhead B. actual variable overhead C. actual fixed overhead D. budgeted variable overhead
A. budgeted fixed overhead C. actual fixed overhead
A quantity variance is: A. calculated using the standard price of the input B. based only on the actual quantity of inputs C. based only on the standard quantity of inputs D. calculated using the actual price of the input
A. calculated using the standard price of the input
A problem with decentralization is that: A. coordination between departments may be difficult B. granting decision-making authority discourages lower-level managers from aspiring to higher-level positions C. delegation of authority may decrease motivation of lower-level management
A. coordination between departments may be difficult
The standard rate per hour includes: A. fringe benefits B. employment taxes C. employee-paid union dues D. the base rate per hour
A. fringe benefits B. employment taxes C. employee-paid union dues
A manufacturing cycle efficiency of 40% means that: A. value-added activities are being performed 40% of the time B. the typical order is being worked on 40% of the time C. value-added activities are being performed 60% of the time D. 40% of the company's time is spent on non-value added activities
A. value-added activities are being performed 40% of the time B. the typical order is being worked on 40% of the time
Empowering lower-level managers to make decisions puts the decision-making authority in the hands of those who tend to have the most detailed and up-to-date information about day-to-day operations.
Advantage of Decentralization
The fixed overhead volume variance: A. measures overspending or underspending of total fixed overhead B. occurs because the costing system assumes fixed costs behave as if they were variable. C. is the error that occurs when the level of activity is incorrectly estimated.
B. occurs because the costing system assumes fixed costs behave as if they were variable. C. is the error that occurs when the level of activity is incorrectly estimated.
Advantages to using a standard cost system include: A. too much emphasis on standards can impede other objectives B. standard costs can simplify bookkeeping C. standards provide feedback that can reduce employee morale D. standards can provide benchmarks individuals use to judge their own performance.
B. standard costs can simplify bookkeeping D. standards can provide benchmarks individuals use to judge their own performance
An unfavorable materials quantity variance occurs when: A. too much material is purchased B. the actual amount of material used is greater than the standard amount of material allowed for the actual output C. the actual price paid for material is greater than the standard price allowed for the material
B. the actual amount of material used is greater than the standard amount of material allowed for the actual output
How does a manager who is evaluated based on residual income decide whether or not to invest in a new project? A. To be accepted, net operating income from the new investment just needs to be positive. B. To be accepted, net operating income for the new investment should be above the current return on average operating assets. C. To be accepted, net operating income for the investment should be above the minimum required return on average operating assets. D. To be accepted, the return on investment of the new project must equal or exceed current ROI.
C. To be accepted, net operating income for the investment should be above the minimum required return on average operating assets
Residual Income equation
Net operating income - (Average operating assets x Minimum required rate of return)
Delivery Cycle Time equation
Wait Time + Throughput Time
Operating Assets
cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be _____________ (more/less) likely to pursue projects that will benefit the entire company.
More
The _____________ ____________ rate is calculated by dividing the estimated total manufacturing overhead cost by the estimated total amount of the allocation base.
Predetermined overhead
Manufacturing cycle efficiency (MCT)
process (value-added) time as a percentage of throughput time
Profit center managers are often evaluated by comparing _______________ profit to _______________ profit.
Actual; Budgeted
The variable overhead efficiency variance compares the ______________ hours times the standard rate with the standard hours allowed for the actual output times the _____________ rate.
Actual; Standard
Match the scope of management's authority with the type of center. 1. Cost center 2. Profit center 3. Investment center A. Manager has the control over costs, revenues, and the investment in operating assets. B. Manager has control over both costs and revenue, but not over the use of investment funds. C. Manager has control over costs, but not over the use of investment funds.
1. C 2. B 3. A
Quick to Ship Company has a process time of 2 days and a throughput time of 8 days. The manufacturing cycle efficiency is ________________. A. 0.25 B. 4 C. 16
A. 0.25
Which of the following are used to calculate the standard quantity per unit of direct materials? A. Allowance for waste and spoilage B. Direct materials requirements per unit of finished product C. Freight and transportation costs
A. Allowance for waste and spoilage B. Direct materials requirements per unit of finished product
Which of the following statements are true? A. Standards are only used in managerial accounting. B. Standards provide information for measuring performance. C. The purpose of using standards is to assess blame and responsibility. D. When actual results depart significantly from the standard, the reasons why should be investigated.
B. Standards provide information for measuring performance. D. When actual results depart significantly from the standard, the reasons why should be investigated.
The standard hours per unit of an output of an output includes: A. an allowance for spoilage and downtime B. an allowance for cleanup and downtime C. the estimated time to complete the unit D. an allowance for vacation time
B. an allowance for cleanup and downtime C. the estimated time to complete the unit
The materials price variance is the difference between the actual price of materials: A. times the actual quantity of materials and the standard price of materials times the standard quantity allowed for production B. and the standard price for materials with the difference multiplied by the actual quantity of materials C. and the standard price for materials with the difference multiplied by the standard quantity of material allowed
B. and the standard price for materials with the difference multiplied by the actual quantity of materials
Using net book value (instead of gorss cost) to calculate average operating assets: A. has no effect on ROI B. increases ROI over time C. decreases ROI over time D. encourages new investment
B. increases ROI over time
Use the following information to calculate the labor rate variance for Adkinson Company. Actual hours used- 5500 Standard hours allowed- 5800 Actual labor rate- $14.75 per hour Standard labor rate- $14.00 per hour A. $4200 Favorable B. $4350 Unfavorable C. $4125 Unfavorable
C. $4125 Unfavorable AH(AR-SR)
Which of the following statements is not a weakness of using return on investment (ROI) to evaluate segment performance? A. Segment managers may cut back on costs that will benefit the company in the long-term if the costs negatively affect the segment's ROI. B. Segment managers may sacrifice investment opportunities that would benefit the entire company if the segment's ROI is negatively affected. C. ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies. D. The segment's ROI will increase mechanically over time due to the effect of depreciation accumulating on operating assets.
C. ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.
SR(AH - SH) is the formula for the ____________ variance. A. material quantity B. material price C. labor efficiency D. labor rate
C. labor efficiency
An adaption of residual income that has been adopted by many companies is called: A. responsibility accounting B. minimum required return C. return on investment D. economic value added
D. economic value added
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-($200,000x10%))
ROI can be calculated as: A. margin multiplied by turnover. B. margin divided by turnover. C. average operating assets divided by net operating income. D. net operating income divided by average operating assets.
A. margin multiplied by turnover. D. net operating income divided by average operating assets
Standards are: A. set for each major production input or task B. rarely used outside of management accounting C. benchmarks for measuring performance D. compared to the actual quantities and costs of inputs
A. set for each major production input or task C. benchmarks for measuring performance D. compared to the actual quantities and costs of inputs
Managers of cost centers are evaluated on: A. their ability to control costs in their responsibility center B. revenues and costs incurred in their responsibility center C. revenues, costs and the use of investment funds in their responsibility center
A. their ability to control costs in their responsibility center
To calculate a price variance, multiply the _____________ quantity times the actual price and compare it to the actual quantity times the _____________ price.
Actual; Standard
The difference between the standard and the actual direct labor hourly rates is reflected in the _______________ ______________ variance.
Labor Rate
Managers can improve return on investment (ROI) by improving either _______________ or _________________.
Margin; Turnover
Return on Investment Equation
Net operating income/Average operating assets
Non-Value-Added Time
Wait Time, Inspection Time, Move Time, and Queue Time
Economic Value Added (EVA)
a concept similar to residual income in which a variety of adjustments may be made to GAAP financial statements for performance evaluation purposes.
Standard Cost Card
a detailed listing of the standard amounts of inputs and their costs that are required to produce one unit of a specific product
A materials price variance is ______________ when the standard price is higher than the actual price. A. favorable B. unfavorable
A. favorable
The materials price variance is generally calculated at the time materials are purchased because: A. it simplifies bookkeeping B. GAAP requires variances to be recognized when they are incurred C. management can generate more timely variance reports D. it allows materials to be carried in the inventory accounts at standard cost
A. it simplifies bookkeeping C. management can generate more timely variance reports. D. it allows materials to be carried in the inventory accounts at standard cost
Companies need to keep the delivery cycle time short to: A. maintain the company's competitive edge B. increase the order's wait time C. increase delivery costs D. help ensure survival
A. maintain the company's competitive edge D. help ensure survival
By delegating day-to-day problem solving to lower-level managers, top management can concentrate on bigger issues, such as overall strategy.
Advantage of Decentralization
