Ch 11 PCP

Which of the following statements is correct? A project that is not acceptable using residual income calculations may be acceptable when ROI is calculated. A manager might reject a proposal using ROI that the manager would accept using residual income. 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.

which of the following is not a characteristic of decentralization? Decentralization helps to train lower-level managers for higher level positions. Decentralization puts the decision-making authority in the hands of those who have the most information on day-to-day operations. Decentralization allows top management to concentrate on bigger issues such as overall strategy. Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.

Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.

Which of the following statements are correct? Variable service department costs are charged to operating divisions based on the budgeted rate and budgeted activity. Fixed service department costs are based entirely on budgeted data. Variable service department costs are charged to operating divisions based on the budgeted rate and actual activity. Fixed service department costs are based on actual cost and budgeted activity.

Fixed service department costs are based entirely on budgeted data. Variable service department costs are charged to operating divisions based on the budgeted rate and actual activity.

return on investment =

Net Operating Income / Average Operating Assets

Which of the following ratios are part of the ROI formula? Sales ÷ Average operating assets Net operating income ÷ Sales Cost of goods sold ÷ Average inventory Sales on account ÷ Average accounts receivable

Net operating income ÷ Sales Sales ÷ Average operating assets

net operating income / average operating assets =

ROI

Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance? It may be difficult to assess the performance of a manager who takes over an existing business segment. Managers may reject investment opportunities that would benefit the entire company but negatively affect the manager. ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies. Managers may increase ROI in a way that is inconsistent with company strategy.

ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.

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 department manager may not want to accept the project because it will lower the overall ROI for the department. The project should be accepted by the company because it increases overall residual income. The project should be accepted because the residual income will help push the project's ROI above the projected 12%. The project should be rejected by the company because its ROI is lower than the current departmental ROI.

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

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? The manager may decide to reject the project because it will lower the current ROI earned by his division. Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment. The project will improve the ROI for the Western division, since it is above the required rate of return that the company has specified.

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

Drawbacks of using variable or full costing to set transfer prices include ______.

a lack of departmental profit for the supplying department a lack of incentive to control costs because they are simply passed to another department suboptimization that may occur as fixed costs per unit may push the transfer price above market price

Negotiated transfer prices ______.

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

The service department remains responsible for any differences between the budgeted and actual costs of their department when operating departments are charged the service department's ____ costs.

budgeted

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

cost

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 any lost contribution margin due to the transfer cover the variable costs per unit

lower-level managers are empowered to make decisions in a _____ organization, which can _____ motivation and job satisfaction

decentralized, increase

True or false: The variable costs of service departments should be charged to consuming departments in a predetermined lump-sum amount, so that the cost of the service can be properly traced to departments, products, and customers.

false

The cost of making capacity available for use is represented by service department ____ costs which should be charged to operating departments in predetermined lump-sum amounts.

fixed

net operating income is income before _____ and ______

interest and taxes

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 an outside party

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

EBIT is another term for

net operating income

Once set, fixed service department charges that are allocated to operating departments should not change because the:

operating department is effectively being assessed the cost of having the capacity to utilize the services

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.

opportunity cost of lost sales

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

residual

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 systems

responsibility

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 business segments would not be considered a cost center? manufacturing facilities retail outlet personnel department accounting department

retail outlet

in decentralized organizations, decision making authority is

spread throughout the organization

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

the overall company

Using the market price to set transfer prices may not be the best approach when ______.

the selling division has idle capacity

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

transfer price

true or false. in strongly decentralized organizations, even the lowest-level managers can make decisions

true

The activity that causes the service department's cost should be the basis for assigning ______ costs to operating departments.

variable