Chapter 10 - Managerial Accounting
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. The division manager has a current ROI of 15%. Based on these facts, the ______.
- division manager currently has a positive residual income - project should be accepted by the company because it increases residual income - division manager may not want to accept the project
When calculating Return on Investment (ROI), net operating income ______.
- includes income from normal operations - does not include interest expense
A company can increase its return on investment (ROI) by ______.
- increasing sales - decreasing operating expenses
Financial performance measures ______.
- may cause managers to make decisions that won't be optimal in the long run - focus on past, not future performance
ROI can be calculated as ______.
- net operating income ÷ average invested assets - profit margin × investment turnover
Authority to make decisions about how and where to invest the company's assets to drive long-term profitability manager rests with the manager of a(n) ______ center.
investment
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be ______ (more/less) likely to pursue projects that will benefit the entire company.
more
The formula for return on investment is ______.
net operating income ÷ average invested assets
In order to fully evaluate ROI, managers should compute both _______ _______ and ______ turnover.
profit ; margin ; investment
Net operating income ÷ Sales revenue = ______.
profit margin
The net operating income that an investment center earns above the minimum amount needed to meet the required rate of return is its _____ _____.
residual income
Which of the following business segments would not be considered a cost center?
retail outlet ; Examples of cost centers would be manufacturing facilities, accounting departments, and personnel department since it is a business segment that does not generate revenues, therefore they are considered cost centers.
Investment turnover × profit margin = ______.
return on investment
Sales quotas are often given to ______ center managers.
revenue
The required rate of return ______
- considers financing costs - considers the risk of an investment
The required rate of return ______.
- considers the risk of an investment - considers financing costs
Responsibilities of a profit center manager may include ______.
- involvement in strategic initiatives related to product success - controlling division costs - contract negotiations
A comprehensive performance measurement system that is derived from an organization's strategic vision is ______.
a balanced scoreboard
Revenue center managers are evaluated primarily on their ______.
ability to meet sales goals
Return on investment, residual income, and economic value added ______.
are all lagging measures of performance
There are many variances of ROI, including return on ______.
capital employed, equity, assets
When a transfer price is based on cost plus a percentage markup, the method being used is ______.
cost-based
An organization in which decision-making authority is spread throughout the organization is ______.
decentralized
True or false: A balanced scorecard includes leading indicators but NOT lagging indicators.
false
True or false: Residual income can be broken down into profit margin and investment turnover.
false
True or false: Cost centers have no impact on revenue.
false ; the reason behind is that although cost centers do not generate revenue, they may have an impact through other measures, such as customer satisfaction and service quality.
The required rate of return is also known as the ______ rate.
hurdle
In order to increase return on investment (ROI), the company must _____ (increase/decrease) sales, and/or ______ (increase/decrease) operating expenses and/or ______ (increase/decrease) average operating assets.
increase ; decrease ; decrease
Net operating income is net income from normal operating activities, before other income, ______, and _______.
interest ; taxes
Which type of manager(s) have the authority to make purchase decisions regarding company assets?
investment center managers only
Sales revenue ÷ average invested assets equals ______ ______.
investment turnover
The transfer pricing method that generally provides the most benefit to the seller is the ______ method.
market-price
The transfer pricing method that treats the two segments as if they were independent businesses is the ______ method.
market-price
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be _____ (more/less) likely to pursue projects that will benefit the entire company.
more
A transfer price that falls somewhere between the variable cost and the wholesale priced was most likely developed using the _____ method.
negotiation
Inside information about the other division's costs, capacity, and demand will impact setting a transfer price using the ______ method.
negotiation
Residual income is equal to ______.
net operating income - (average invested assets × hurdle rate)
The manager of a(n) ______ center has control over both costs and revenues, but not the use of investment funds.
profit
Sales revenue minus all costs that are directly attributable to a particular product line or region of a business is called the _____ _____.
segment margin
A(n) ______ income statement is broken down by product line, region, or other area of a business.
segmented
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 a(n) _____ ______.
transfer price
True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.
true ; decentralized operations often allow the lower-levels of management to make decisions because they are most familiar with the day-to-day operations.
The minimum acceptable transfer price using the cost-based method is ______.
variable cost
