chapter 9-10
There are four categories of cost in the quality cost report; match them to the correct explanation.
Prevention Costs incurred to prevent the production of defective products or services. Appraisal Costs incurred to identify defective products or services. Internal failure Costs of defective products that are scrapped or reworked. External failure Costs caused by delivery of defective products or services to customers.
Which of the following statements about management control systems is FALSE?
Profit−center managers always have more decentralized decision−making authority than cost−center managers.
An example of a nonfinancial goal is ________.
increase customer satisfaction
What is the major disadvantage of negotiated transfer prices?
A major disadvantage of negotiated transfer prices is the valuable time and effort can be lost in the negotiating process, as well as, divisional profit becomes a function of negotiating ability and power.
What is a balanced scorecard?
A performance report that contains measures of all the key financial and nonfinancial variables that are important for a company to prosper.
What are the purposes of a management control system? (Select all choices that apply.)
A. To communicate results and coordinate actions across the organization. B. To motivate managers and employees to achieve the organization's goals. C. To ensure that managers and employees understand the specific actions required to achieve organizational goals. D. To clearly define and communicate the organization's goals.
List four nonfinancial measures of performance that managers find useful.
Average time from order to delivery. 2. Percentage of products delivered on time. 3. Pounds of output per direct labor hour. 4. Proportion of defective units produced.
List five characteristics of a good performance measure. (Select five that apply.)
C. Be used in evaluating and rewarding managers and employees D. Relate to the organization's goals E. Reflect key activities of the organization F. Be affected by managers' actions A. Be easily understood by managers and employees
Why are more companies using a balanced scorecard?
Companies find that it is a useful tool to help managers focus on the multidimensional factors that make an organization successful.
Give four examples of segments.
Divisions, territories, branches and product lines
Nonfinancial performance measures are often lagging indicators that arrive too late to help prevent problems.
False
Profit−center managers always have more decentralized decision−making authority than cost−center managers.
False
The first and most basic component in a management control system is the employee's goals.
False
When compared to a decentralized organization, there are really no advantages to a centralized organization.
False
"Goals are useless without performance measures." Do you agree? Explain.
Goals without performance measures may not be completely useless, but performance measures greatly enhance the achievement of goals. They provide signals to managers about whether goals are being achieved.
Describe management by objectives (MBO).
In organizations using management by objectives (MBO), managers and their superiors jointly formulate and agree on the goals and plans for the forthcoming period. Managers are then evaluated against these agree-upon goals and plans.
According to agency theory, employment contracts balance what three factors?
Incentives created for managers, the risk imposed on managers, and the cost of developing and using the performance measurement system.
ROI
Income/Invested Capital
How do profit centers and investment centers differ?
Investment centers go a step farther than profit centers. Both measure profits, but an investment center also compares that profit to investment using measures such as return on investment, residual income or EVA.
Why is decentralization more popular in profit-seeking organizations than in nonprofit organizations?
It is more difficult to hold managers of nonprofit organizations responsible for performance because inputs and outputs are generally more difficult to measure. Without reliable performance measures, granting managerial freedom is more risky.
What is the major benefit of the ROI technique for measuring performance?
Its attention to the required asset investment in relation to operating income.
Why are companies increasing their quality control emphasis on the prevention of defects?
Many companies are finding that it is less costly to prevent defects than it is to identify and correct defects.
What are key performance indicators?
Measures that drive the organization to achieve its goals.
Discuss two factors that affect multinational transfer prices but have little effect on purely domestic transfers.
Multinational transfer prices are influenced by the relative income-tax rates in the countries in which the producing and purchasing divisions are located. They are also influenced by import duties and restrictions on flows of capital between countries.
What two major items affect ROI?
ROI is affected by a division's income and the amount of its investment. B. ROI as the product of return on sales and capital turnover.
A manager at a local home improvement store is considering the following costs. Which of the following is a cost controllable by the manager?
Salary of head cashier
Capital Turnover Formula
Sales Revenue/Invested Capital
Management control systems in nonprofit organizations will probably never be as highly developed as those in profit−seeking firms. Which of the following is NOT a reason for this to occur?
There are low levels of discretionary fixed costs in nonprofit organizations.
Name three kinds of responsibility centers.
Three types of responsibility centers are (1) cost center, (2) profit center, and (3) investment center.
Give three possible definitions of invested capital that we can use in measuring ROI or economic profit.
Total assets, total assets less current liabilities or stockholders' equity.
"We use variable-cost transfer prices to ensure that we make no dysfunctional decisions." Discuss.
Variable-cost transfer prices can also lead to dysfunctional decisions. For example, in a situation where the producing division has no excess capacity, variable-cost transfers may cause dysfunctional decisions.
How can performance measurement lead to unethical behavior by managers?
When making performance targets becomes too important, managers may be tempted to manipulate the numbers to meet their targets. Such pressures can result in unethical behavior.
Wisconsin Division has operating income of $40,000 for the year ending December 31, 2011. Average invested capital is $800,000 and the weightedminus−average cost of capital is 10%. The division is considering a new investment that would cost $800,000 and earn 7% annually. If return on investment is the performance metric, should the manager of the Wisconsin Division accept the new investment?
Yes, because the return on investment of the division increases with the new investment.
What is a management control system?
a management control system is a logical integration of techniques to gather and use information to make planning and control decisions, to motivate employee behavior, and to evaluate performance.
The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit. The part is produced in Portugal and transferred to a plant in the United States. Portugal has a 10% income tax rate. The United States has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume Part X is transferred at full cost. By using full cost instead of variable cost for the transfer price, the income tax effect per unit in Portugal is ________.
an increase in tax by $3 per unit
Key performance indicators for a balanced scorecard are usually grouped into two categories.
false
Return on investment equals return on sales divided by capital turnover.
false
In cases of constrained capacity, the opportunity cost of transferring a product internally is zero.
false
the joint formulation by a manager and his or her superior of a set of goals and plans for achieving the goals for a forthcoming period is known as ________.
management by objectives
To increase and improve employees' work efforts in organizations, organizations should link ________ to ________ such as bonuses.
performance measures; personal rewards
Most employees perform better when performance reports lead to ________.
personal rewards
The classic balanced scorecard developed by Robert Kaplan and David Norton includes four categories of key performance indicators. Which of the following items is NOT one of the categories used by Kaplan and Norton?
quality control
The following information pertains to a segment of the Moore Company. Invested capital is defined as total assets. The weighted average cost of capital is 10%. The ROI of the segment before the project is 20%. The ROI of the segment after the project is 18%. The manager is evaluated based on the segment's ROI. A project earning a ROI of 12% should be ________.
rejected
In companies with segment autonomy, who determines the transfer price for internal sales and purchases of products?
segment mangers involved in transfer
A management by objectives approach uses responsibility center budgets.
true
"The essence of decentralization is the use of profit centers." Do you agree? Explain.
No. Profit centers facilitate decentralization, but one can exist without the other. They are different concepts. Your answer is correct.
"Always try to distinguish between the performance of a segment and its manager." Why?
C. Managers should be judged on how well they attain their currently attainable objectives, focusing on deducting controllable costs from revenues, whereas the subunit should be judged on its performance as an economic investment.
What kinds of organizations find decentralization to be preferable to centralization?
Decentralization is usually most successful in organizations where segments are relatively independent. If segments buy from or sell to one another, or if there are many common customers or suppliers, decentralization is less likely to be desirable.
What is the major advantage of negotiated transfer prices?
Negotiated transfer prices are likely to lead to better transfer pricing decisions because those with the best knowledge are making the decisions.
Return on Sales
Net Income/Sales
Decentralization is most successful when an organization's segments are relatively independent of one another.
True
Evaluations of the responsibility center manager's performance should ignore uncontrollable costs.
True
Fixed costs not controllable by a segment manager usually include depreciation and property taxes on the building used by the segment.
True
The greater the influence of noncontrollable factors on responsibility center results, the more problems there are in using the results to measure and reward a manager's performance.
True
Describe two problems that can arise when using actual full cost as a transfer price.
Using actual costs can pass on inefficiencies and make planning difficult for the buying department. The amount of the transfer is not known until actual costs are available, and factors beyond the control of the buying department can affect the transfer price. Using full costs can mask the real behavior of a cost. Any transfer price that includes a fixed cost element makes a fixed cost in the producing department look like a variable cost to the buying department.
"Managers who use a historical-cost accounting system look backward at what something cost yesterday, instead of forward to what it will cost tomorrow." Do you agree? Why?
Using a historical-cost accounting system with budgets is not backward looking. Budgets force managers to plan for the future, including predicting future prices.
Control systems in nonprofit organizations will never be as highly developed as in profit-seeking organizations." Do you agree? Explain.
Yes. There is no single, measurable objective such as profit that determines the trade-off between various goals.
A transfer price exists when two segments of the same organization sell ________.
a product to each other
Inspection costs of incoming raw materials are ________ costs.
appraisal
The organizational goal of a hotel chain is to increase customer satisfaction. Which of the following is NOT a valid performance measure to meet the organizational goal?
average room rate
If there is a competitive market for the product being transferred internally, using the ________ as the transfer price will lead to ________.
market price; goal congruence
In a multinational setting, low transfer prices generally lead to low import duties.
true
Internal delays and lost sales are examples of opportunity costs for a firm.
true
The keys to successful management control in any organization are proper training of employees, motivation of employees and consistent monitoring of performance measures.
true
A(n) ________ cost is any cost that management cannot reasonably affect within a given time span.
uncontrollable
Maury Company's revenues are $300 for the year. Average invested capital for the year is $240. Expenses are currently 84% of revenues. If Maury Company can reduce its expenses to 70% of revenues, return on investment will be ________.
37.5%
According to agency theory, employment contracts will balance three factors that include ________.
incentive, risk and cost of measuring performance
