Unit 3 Test Managerial Accounting

Residual income = Net operating income less ________.

(Average operating assets x Minimum required rate of return)

Average Operating assets

(beginning assets + ending assets) / 2

ROI formula

(net operating income/average operating assets) times (Sales / Average Operating Assets) or Margin x Turnover

Benefits of a Decentralized Organization

- Lower-level decisions often based on better information - Top management freed to concentrate on strategy - Lower level managers can respond quickly to customers. -Decision-making authority leads to job satisfaction - Lower-level managers gain experience in decision making.

Disadvantages of Decentralized Organizations

- Lower-level managers may make decisions without seeing the "big picture" - May be a lack of coordination among autonomous managers - Lower-level managers objectives may not be those of the organization. - May be difficult to spread innovative ideas in the organization.

Return On investment Formula

- Net Operating Income / Average Operating Assets - NOI (Income before interest and taxes EBIT) - Average operating assets (Cash, accounts receivable, inventory, plant and equipment, and other productive assets)

the standard quantity per unit for direct materials is the amount of material that should go into each finished unit of product. the standard quantity should reflect

- engineered (bill of materials) requirements. - expected spoilage of raw materials. - unavoidable waste of materials in the production process. - materials in expected scrapped units (rejects)

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

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

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

In a decentralized organization

-lower level managers are trained for high positions -top management can concentrate on issues such as overall strategy - changes in the operating environment can be responded to quickly

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?

10%

Hamiter Framing's cost formula for its supplies cost is $1,640 per month plus $9 per frame. For the month of August, the company planned for activity of 572 frames, but the actual level of activity was 573 frames. The actual supplies cost for the month was $7,080. The supplies cost in the planning budget for August would be closest to:

6,788

Which of the following statements is correct? - A manager might reject a proposal using ROI that the manager would accept using residual income. - A project that is not acceptable using residual income calculations may be acceptable when ROI is calculated. - Managers will be more likely to pursue projects that will benefit the entire company when being evaluated on ROI instead of residual income.

A manager might reject a proposal using ROI that the manager would accept using residual income.

Profit Center

A segment whose manager has control over both costs and revenues, but no control over investment funds.

Cost Center

A segment whose manager has control over costs, but not over revenues or investment funds

Investment Center

A segment whose manager has control over costs, revenues, and investments in operating assets

Paradise Company's planning budget for 10,000 units showed sales of $500,000. The flexible budget for 12,000 units showed sales of $600,000. What is the variance of $100,000 called if this variance was due only to an increase in unit sales? multiple choice

Activity Variance

Fixed overhead budget variance

Actual fixed overhead - budgeted fixed overhead

Variable overhead rate variance

Actual hours × ( Actual rate - Standard rate)

Minimum required return

Average operating assets x Minimum required rate of return

Fixed overhead volume variance

Budgeted fixed overhead - Fixed overhead applied to work in process

What are the three responsibility centers?

Const, Profit, Investment

The difference between the actual total revenue and budgeted total revenue at the actual level of activity is called a(n) ________.

Revenue variance

Variable overhead efficiency variance

Standard rate (Actual hours - standard hours)

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 Correct

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

Residual Income

net operating income above some minimum return on operating assets.

When a manager has control over and is accountable for cost, profit or investments of an organization, it is called ________.

responsibility center

An unfavorable variance of $5,000 in cost of goods sold is determined by comparing the actual results (10,000 units) and the flexible budget (10,000 units). What type of variance is described?

spending variance

The difference between the actual cost and budgeted cost at the actual level of activity is called a(n) ________.

spending variance

Which of the following scenarios demonstrates the leverage effect on net operating income due to the existence of fixed costs?

A 25% increase in sales resulting in a 30% increase in net operating income. Correct

Which of the following is true when a company determines that its costs should be explained by more than one cost driver?

A flexible budget performance report that is based on more than one cost driver will be more accurate than a flexible budget performance report that is based on just one cost driver. Correct

Speyer Medical Clinic measures its activity in terms of patient-visits. Last month, the budgeted level of activity was 1,530 patient-visits and the actual level of activity was 1,490 patient-visits. The cost formula for administrative expenses is $4.00 per patient-visit plus $15,300 per month. The actual administrative expense was $19,810. In the clinic's flexible budget performance report for last month, the spending variance for administrative expenses was:

$1,450 F

Axis Corporation's Division A has average operating assets of $500,000 and the division earned $100,000 as net operating income during a period. The company expects a minimum required rate of return of 15% on its investments. What is the residual income for Division A?

$25,000

Turnover formula

(Sales / Average Operating Assets)

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. True false question.

False

Return on investment can be calculated by each of the following formulas except ________.

Margin ÷ Turnover Correct

Which of the following is NOT a column on a flexible budget performance report?

Net Operating Income

Residual Income formula

Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return). aka Net Operating Income - Minimum rate of return

Margin formula

Net Operating Income / Sales

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.

Material Quantity Variance

SP(AQ-SQ)

All of the following are reasons for revenue variances EXCEPT ________.

a change in input prices

An unfavorable variance of $5,000 in sales is determined by comparing the flexible budget (9,000 units) and the planning budget (10,000 units). What type of variance is described?

activity variance

A major drawback of residual income is that it ________.

cannot be used to compare the performances of divisions of different sizes Correct

Net Book Value

cost - accumulated depreciation

Material Price Variance

diff of total price paid and total price should have paid for the same amount

the standerd rate per hour for direct labor should include all the cost of direct labor workers, uncluding

hourly wage rate, fringe benefits, and employment taxes

Standerd Quantity Allowed

in the case of labor and overhead is the amount of materials (or labor) that should have been used to complete the output of the period

Using net book value (instead of gross cost) to calculate average operating assets ______.

increases ROI overtime

All of the following are reasons for preparing a flexible budget with multiple cost drivers EXCEPT ________.

it eliminates the need for performing variance analysis Correct

EBIT is another term for ______.

net operating income