ACCT 2210 Exam 3 -> Ch 9 & 11

To increase ROI you must :

- Increase sales - reduce operating expenses - reduce average operating assets

Advantages of Decentralization

- Upper level people can think about bigger decisions - Lower level managers are better able to make lower level decisions because they are I the trenches - Eliminates layers, allowing for faster response times - Helps train people for higher level positions

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

- be put in charge of a business segment that includes committed costs over which a manager has no control - 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

Operating Assets include

- cash - accounts receivable - inventory - plant and equipment

When a transfer has no effect on fixed costs, to be acceptable to the selling division, the transfer price must

- cover the variable costs per unit - cover any opportunity cost from lost sales - cover any lost contribution margin due to the transfer

Negotiated transfer prices

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

Disadvantages of Decentralization

-lower-level managers may make decisions without seeing the "big picture" - Difficulty spreading ideas in a large organization -lower-level manager's objectives may not be those of the organization - Lack of coordination if managers make their decision independently

Service departments such as the Accounting department is considered

A cost center

A sales office is considered

A profit center

Decentralized organization

A structure in which decision-making authority is delegated as far down the chain of command as possible.

Which of the following methods is not commonly used to set transfer prices? - Market Price - Negotiation - Variable Cost - Arbitration cost

Arbitration cost

ROI

Margin x 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

Discussions between the buying and selling divisions result in a

Negotiated transfer price

Residual Income Formula

Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)

ROI Formula

Net Operating Income / Average Operating Assets

Margin Formula

Net Operating Income / Sales

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

Turnover Formula

Sales / Average Operating Assets

Cost Center managers are evaluated on

Their ability control costs in their responsibility center

The amount that one division charges when it sells goods or services to another division of the same company is called a

Transfer price

T or F 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

What is Control

Trying to get members of your group to operate how you want them to

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

Profit Center

a business segment whose manager has control over cost and revenue but has no control over investments in operating assets

Cost center

a business segment whose manager has control over cost but has no control over revenue or investments in operating assets

Investment Center

a business segment whose manager has control over cost, revenue, and investments in operating assets

Responsibility Accounting

a manager should be held responsible for those items and only those items that the manager can actually control to a significant extent

Planning budgets are prepared for a

a single, planned level of activity

If a transfer within a company would result in higher overall profits for the company, there is ______ a range of transfer prices where both divisions would have higher profits if they are able to negotiate a price.

always

When a buying division has no outside supplier available to them, the highest transfer price they should be willing to pay is the

amount they will make on the sale of the transferred units

Responsibility Center

any business segment whose manager has control over costs, revenues, or investments in operating assets

Net Operating Income is income

before interest and taxes

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

A company's owners must delegate decision making authority to lower level managers or others unless

it is a very small organization

In order for the buying division to agree to a transfer price when an outside supplier does not exist, the transfer price must be

less than or equal to the profit per unit not including the transfer price

If cost is used as a transfer price, the only division with an opportunity to make a profit on the transfer is the division that

makes the final sale to the outside party

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

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

When a department has no idle capacity and will interrupt their current level of sales to regular customers, the lowest acceptable transfer price to supply product to another division is

selling price

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

sub-optimization occurred

Residual Income

the net operating income that an investment center earns above or below the minimum required return on its operating assets

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

the overall company

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

transfer

The buying division would be willing to pay up to the amount it expects to make on transferred units ______ outside supplier exists.

when no