Accounting CHP 11 Theory Review

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%

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 $ ____________.

6000

Decision-making authority lies mostly with higher-level managers in strongly ______ organizations.

centralized

The manager of a(n) _________center does not have control over revenue or the use of investment funds.

cost

Lower-level managers are empowered to make decisions in a ______ organization, which can ________ motivation and job satisfaction.

decentralized, increase

The net operating income that an investment center earns above the minimum required return on its average operating assets is ______.

residual income

Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through _____________ accounting

responsibilty

Which of the following business segments would not be considered a cost center?

retail outlet

Which of the following is not one of the three primary types of responsibility centers?

sales

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 be put in charge of a business segment that includes committed costs over which a manager has no control take actions that increase ROI in the short-run at the expense of long-term performance

The manager of a(n) _____________ center has control over costs, revenue, and investments in operating assets.

investment

Negotiated transfer prices ______.

use the expertise of managers in weighing the costs and benefits of the transfer are consistent with decentralization preserve the autonomy of the divisions

The range of acceptable prices is the range of transfer prices within which the profits of ______.

both the buying and the selling divisions participating in a transfer would increase

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 ___________ from the current level of _________ % to a new return on investment (ROI) of ___________ %.

increase; 10; 12

ROI is a method used to evaluate ______.

investment centers, but not cost or profit centers

In order to fully understand how a manager's decisions can affect ROI, both ___________ and __________ should be computed.

margin; turnover

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 A's normal selling price for the part is $30 per unit. Division A has enough idle capacity to be able to supply the needed parts without interrupting its regular sales. The lowest transfer price per unit that Division A might accept is $ ____.

18

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

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 $ _______________.

4000

Which of the following methods is not commonly used to set transfer prices?

Arbitration cost

Which of the following are disadvantages of decentralization?

Lower-level managers may make decisions without understanding the big picture. Lower-level managers may have objectives that differ from the objectives of the entire organization. Coordination among departments may be lacking.

EBIT is another term for ______.

Net operating income

Return on investment =

Net operating income ÷ Average operating assets

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?

Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment. The manager may decide to reject the project because it will lower the current ROI earned by his division.

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

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 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 project should be accepted by the company because it increases overall residual income. The department manager may not want to accept the project because it will lower the overall ROI for the department.

True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.

True

When a department has enough idle capacity to supply a part to another division within the company without interrupting current sales, what is the lowest price the selling division might accept?

Variable cost per unit

Operating assets include ______.

accounts receivable equipment inventory

The ROI formula typically uses ______.

average operating assets for the year

Decision-making authority lies mostly with higher-level managers in strongly ___________ organizations.

centralized

The manager of a(n) __________ center does not have control over revenue or the use of investment funds.

cost

Service departments, such as the accounting department, are generally considered ___________ centers, while sales offices are often considered ________ centers.

cost; profit

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

Suboptimization occurs when responsibility center managers make decisions that are in the best interests of their own responsibility center but not the company as a whole.

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

In order to increase return on investment (ROI), the company must _________ sales, and/or ___________ operating expenses and/or ______________ average operating assets.

increase, decrease, decrease

The selling division will agree to a transfer price only if its profits _____________ as a result of the transfer, and the buying division will agree to the transfer only if its profits _______________ as a result of the transfer.

increase; increase

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

The buying division in a transfer will only agree to a transfer price if the inside supplier's price is __________ than or equal to the price offered by an outside supplier.

less

In a decentralized organization ______.

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

ROI can be calculated as ______.

margin × turnover net operating income ÷ average operating assets

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

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

The main objective of using transfer prices in an organization is to ______.

motivate the managers to act in the best interests of the overall company

Discussions between the buying and selling divisions result in a(n) ____________ transfer price.

negotiated

The three methods commonly used for transfer pricing are ______.

negotiation, full cost, market price

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

Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) __________ center.

profit

Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) ____________ center.

profit

The manager of a(n) ________ center has control over both costs and revenues, but not over the use of ___________ funds.

profit; investment

A company can increase its return on investment (ROI) by ______.

reducing operating expenses increasing sales

The net operating income that an investment center earns above the minimum required return on its average operating assets is its ___________ income.

residual

Any part of an organization whose manager has control over and is accountable for cost, profit, or investments is a(n) ____________ center.

responsibility

Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through ______________ accounting systems.

responsibility

In decentralized organizations, decision-making authority is ______.

spread throughout the organization

Disadvantages of decentralization include ______.

spreading innovative ideas may be difficult clashing objectives between departments and the organization lack of coordination

When responsibility center managers forego additional companywide profits by making decisions not in the best interest of the overall company, ___________ occurs.

suboptimization

The fundamental objective in setting transfer prices is to motivate managers to act in the best interest of ______.

the overall company

Managers of cost centers are evaluated on ______.

their ability to control costs in their responsibility center

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 price charged when one segment of a company provides goods or services to another segment of the same company is the ______ price.

transfer

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