Exam 3 Review

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A screening decision ____

-relates to whether a proposed project meets some minimum criteria -is used to determine if a project is a candidate for further consideration

The weighted-average cost of capital ____

-should be reflected in the company's discount rate -is how much it costs a company to fund capital projects

Synonyms for the accounting rate of return are the ___ and the ___

-simple rate of return -unadjusted rate of return

Which of the following statements is correct?

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

The sum of budgeting direct materials, direct labor, and manufacturing overhead stated on a per-unit basis

Budgeted Manufacturing Cost Per Unit

Forward-looking balance sheet that shows expected balance of assets, liabilities, and owners' equity at the end of the budget perion

Budgeted balance sheet

True or False: Budgeting is more important in manufacturing firms than in other types of businesses

False

True or False: Cost centers have no impact on revenue

False

True or False: The sales budget is based on the production budget

False

True or False: Using a participative approach to budgeting is less likely to motivate employees than using a top-down approach

False

True or False: When two projects are mutually exclusive, investing in one does not eliminate the other one from consideration

False

Specific goal that management wants to achieve over a long-term horizon, typically 5 to 10 years

Long-Term Objective

Budget of selling and administration expenses required for the planned level of sales

Selling and Administration Expense Budget

Performing "what if" analysis to determine whether changing any underlying assumptions would affect the analysis and decision

Sensitivity Analysis

Specific goal that management wants to achieve in the short run; usually no longer than one year

Short-Term Objective

Managers vision of what they want the organization to achieve over a long-term horizon

Strategic Plan

Specific actions or mechanisms that management uses to achieve objectives

Tactics

To calculate the cash balance before financing on the cash budget, add the ____

beginning cash balance to the budgeted cash receipt and deduct budgeted cash payments

When a manager creates a budget that understates expected revenue or overstates expected expenses _____ occurs

budgetary slack

The final step in the master budgeting process is to prepare the __

budgeted balance sheet

Which of the following budgets shows the company's planned proft?

budgeted income statement

What number does the raw materials budget take directly from the production budget?

budgeted production

Total sales on the sales budget equal budgeted unit sales multiplies by ___

budgeted sales price per unit

An organization in which decision-making authority is spread throughout the organization is ____

decentralized

If the interest rate earned increases, net present value will ___

decrease

The cash budget is one of the primary ___ budgets that is prepared

financial

A pro forma budgeted balance sheet is developed from the ____

financial budgets

Managers put plans into action as part of ___

implementing

The budgeted ___ shows a company's planned profit

income statement

When projects are ___ or unrelated to one another, each project can be evaluated on its own merit

independent

When two projects are ___ investing in one of the projects does not preclude investing in the other

independent

Net operating income is income before other income ___ and ____

interest and taxes

The manager of a(n) ___ has control over costs, revenue, and purchasing long-lived company assets

investment center

Which type of manager(s) have the authority to make purchase decisions regarding company assets?

investment center managers only

Sales revenue divided by average assets equals ___

investment turnover

The internal rate of return

is the discount rate that makes NVP equal zero for a project

A project's payback period is the ____

length of time is takes for the project to recover its initial cost from the net cash inflows generated

All costs of production other than direct materials and direct labor or shown on the ____

manufacturing overhead budget

The calculation of unit production cost requires information from the ____

manufacturing overhead budget

The transfer pricing method that treats the two segments as if they were independent businesses is the ____

market price method

The transfer pricing method that generally provides the most benefit to the seller is the ____

market-price method

A comprehensive set of budgets that covers all phases of planned activities for a specific period if called the ___ budget

master

Employees throughout the organization have input into the budget setting process when ____ is used

participative budget

The time it takes for a project to recoup its original investment is the ___ period

payback

The number of units that must be made to satisfy sales needs and to provide for the desired ending inventory is shown in the ____

production budget

Which of the following is NOT included on a budgeted cash payments budget?

production in units

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

The ____ budget is prepared first when creating the master budget

sales

The first step in the process of preparing the master budget is the ___ budget or forcast

sales

The production budget is based upon the ____

sales budget

Which of the following is needed to prepare a sales budget?

the budgeted number of units to be sold

When it comes to preparing budgets, ____

the budgets needed depend upon the type of firm

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

transfer price

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

transfer price

Which of the following statements is true?

understanding the interrelationship of individual budgets is the key to developing a master budget

The minimum acceptable transfer price using the cost-based method is ___

variable cost

The cost of capital is the ____

weighted average after tax cost of debt and cost of equity

A rate that reflects the cost of funds used to finance a company's operations. Computed as the weighted-average cost of debt and equity

Cost of Capital

The required rate of return is also known as the ____

hurdle rate

Responsibility centers can be based on ___,____,___ or some combination of the three

-geographical regions -product lines -functional characteristics

Davidson Corporations master budget shows expected direct labor cost of $90,000 for the month of May. During May, the company's expected sales equal 12,000 units and expected production is 15,000 units if each requires 1/2 hours of direct labor, the budgeted direct labor rate is $____ per hour

$12 (150000 x 1/2 = 7500; 90000/7500 =12)

Pastoria Enterprises has scheduled raw material purchases of $100,000 in January, $130,000 in February and $150,000 in March. The company pays for 75% of its purchases in the month of purchase and 25% the month after the purchase. Calculate the expected cash disbursements for the month of February

$122,500 (February purchases (130,000 x 75%) 97500 + January purchases (100,000 x 25%)25,000 - 122,500)

A company sales for year total $218,000. Cash expenses for the year were $92,000 and depreciation expense was $23,000. The company's net cash flow for the year is ____

$126,000 (218,000-92,000=126,000)

A company's net operating income for the year is $118,000. Depreciation expense for the year equals $23,000. The company's net cash flow for the year is ____

$141,000 (118,000 + 23,000 = 141,000)

Madison Corporation's expected beginning cash balance is $35,000. Cash collections are budgeted at $50,000 and cash disbursements are estimated to the $80,000. The minimum required cash balance is $20,000 and the company can borrow as much as needed in increments of $10,000. Calculate the expected ending cash balance for the month

$25,000 (35,000 + 50,000 = 80,000 = 5,000. Since they can borrow in increments of $10,000, they must borrow $20,000 to meet or exceed the minimum cash balance, making the ending balance $25,000)

Carlos, Inc requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average invested assets of $200,000, and a net operating income of $24,000. The department's residual income is ____

$4,000

State Bank is implementing a new marketing campaign that requires an initial investment of $35,000. If the project profitability index is 1.2, the present value of the campaign's future cash flows is

$42,000 (35,000 x 1.2 = 42,000)

Sterling Company's master budget shows expected sales of 10,000 units and expected production of 11,000 units for the month of March. Each unit requires 1/2 hours of direct labor. The direct labor rate is $15 per hour. Calculate the expected total direct labor cost for the month of March

$82,500 (11,000 x 1/2 x 15 = 82,500)

Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average invested assets of $400,000. Based on this, Valley's investment turnover is, its profit margin is ___, and its return on investment is ___

-2 -5% -10%

Capital budgeting decisions include ____

-acquiring a new facility to increase capacity -choosing to lease or buy new equipment -determining which equipment to purchase among available alternatives -purchasing new equipment to reduct cost

There are many variances of ROI, including return on ____

-assets -equity -capital employed

Which of the following statements are true?

-capital budgeting techniques that use time value of money are superior to those that don't -Any capital budgeting technique can be used for screening decisions

The required rate of return ____

-considers financing costs -considers the risk of an investment

Which of the following budgets are needed to calculate unit production costs?

-direct labor budget -direct materials budget -manufacturing overhead budget

Typical capital budgeting decisions include ____

-equipment selection decisions -lease or buy decisions -research and development projects

Financial budgets ____

-impact the budgeted balance sheet -include the capital expenditures budget -include the cash budget

When calculating return on investment (ROI), net operating income ____

-includes income from normal operations -does not include interest expense

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 manufacturing overhead budget includes ___

-indirect manufacturing costs -depreciation on production equipment

Responsibilities of a profit center manager may include ____

-involvement in strategic initiatives related to product success -contract negotiations -controlling division costs

Financial performance measures ____

-may cause managers to make decisions that won't be optimal in the long run -focus on past, not future performance

The manager of a(n) center has control over bot costs and revenues, but not over use of ___ funds

-profit -investment

In order to fully evaluate ROI, managers should compute both ___ and ___

-profit margin -investment turnover

ROI can be calculated as ____

-profit margin multiplied by investment turnover -net operating income divided by average invested assets

Advantages of budgeting include

-promoting cooperation and coordination among different areas within the organization -providing lead time to solve potential problems -providing benchmarks for evaluating performance -forcing managers to think about and plan for the future

How can a company increase its return on investment (ROI)?

-reduce operating expenses -increase sales

Caldron Kitchen supplies is planning to invest $210,000 in a new product. The product is expected to generate a net present value of $56,700. The project profitability index is ___

1.27 (210,000 + 56,700 = 266,700/210,000 = 1.27)

Budgeted manufacturing cost per unit multiplied by budgeted unit sales

Budgeted Cost of Goods Sold

Macey, Inc's investment center had invested assets at the beginning of the year of $300,000. Ending invested assets totals $400,000. Total revenue for the year was $1,050,000, and net operating income was $70,000. Return on investment was ____

20% (Average invested assets = 300,000+400,000/2 = 350,000. 350,000/70,000=0.2 x 100=20)

Given beginning operating assets of $140,000, ending operating assets of $180,000, net operating income of $40,000 and tax expense of $8,000, return of investment is equal to ___

25% (Average invested assets = 140,000 + 180,000/2 = 160,000. ROI 40,000/160,000=0.25 x 100=25)

Annual net income as a percentage of the original investment in assets

Accounting Rate of Return

Stream of equal cash flows that occurs uniformly across time

Annuity

Comprehensive performance measurement system that translates an organization's vision and strategy into a set of operational performance metrics

Balances Scorecard

Forward-looking income statement that summarizes budgeted sales revenues and expenses for the budget period

Budgeted Income Statement

Quantification of the resources and expenditures that will be required during a given period of time to achieve a plan

Budget

Cushion that managers may try to build into their budget by understating expected sales or overstating budgeting expenses so that they are more likely to come in under budget for expenses and over budget for revenues

Budgetary Slack

A decision making process that managers use to determine how to invest the company's funds in major capital assets

Capital Budgeting

Financial budget that provides information that provides information about budgeted cash receipts and payments

Cash budget

Organization in which decision-making authority is kept at the top level of the organization

Centralized Organization

Process of interest being earned on top of interest

Compounding

Concept that managers should be held responsible for only those things they can control

Controllability Principle

Responsibility center in which the manager has authority over and responsibility for cost

Cost Center

Organization in which decision-making authority is spread throughout, and managers are responsible for deciding how to manage their particular area of responsibility

Decentralized Organization

Budget indicating the amount of direct labor needed to meet expected producing

Direct Labor Budget

Budget that indicates the quantity of direct materials that must be purchased to meet production and direct materials inventory needs

Direct Materials Purchases Budget

Rate used to discount future cash flows back to their equivalent present value to reflect the time value of money

Discount Rate

Capital budgeting methods that incorporate the time value of money

Discounted Cash Flow Methods

Process of calculating the cash-equivalent present value of future payments by removing the interest component that is built into future payments

Discounting

Formula developed by executives at DuPont in the early 1900's, shows that the return on investment is a function of profit margin and investment turnover

DuPont Method

Measures the economic wealth that is created when a company's after-tax operating income exceeds its cost of capitol

Economic Value Added

Budgets that focus on the financial resources needed to support operations

Financial Budgets

Value of cash received in the future

Future Value

Conflict of interest between a manager and the organization that may cause managers to make decisions that are not in the best interest of the overall organization

Goal Incongruence

Minimum required rate of return for a project

Hurdle Rate

Projects unrelated to one another, so that investing in one does not preclude investing in another

Independent Projects

Discount rate at which the present value of cash inflows exactly equals value of the cash of the outflows

Internal Rate of Return

Responsibility center in which the manager has authority over and responsibility for profit (revenue minus cost) and the investment of assets

Investment Center

Ratio of sales revenue to the average invested assets

Investment Turnover

Budget that estimates the manufacturing overhead costs needed to support budgeted production

Manufacturing Overhead Budget

Comprehensive set of budgets that covers all phases of an organizations planned activities for a specific period

Master Budget

Projects that involve a choice among competing alternatives. Managers choose one or the other, but not both.

Mutually Exclusive Projects

Method used to evaluate capital investment decisions. Compares the present value of the future cash inflows to the present value of the cash inflows.

Net Present Value (NVP) Method

Budgets that cover the organizations planned operating activities for a particular period of time

Operating Budgets

Business transactions between units or divisions of the same company

Related-Party Transactions

Method that allows employees throughout the organization to have input into the budget setting process

Participative Budgting

Amount of time it takes a project to generate enough cash to pay for its initial investment

Payback Period

Setting goals and objectives for the future is done during the ___ phase

Planning

Decisions that require managers to choose from among a set of alternative capital investment opportunities

Preference Decisions

Value of future cash flows expressed in today's equivalent dollars

Present Value

Budget that shows how many units need to be produced in each budget period

Production Budget

Responsibility center in which the manager has authority over and responsibility for profit (revenue minus cost)

Profit Center

Ratio of operating profit to sales revenue

Profit Margin

Factor used to prioritize capital investment; computed as the present value of future cash flows divided by the initial investment

Profitability Index

Lowest acceptable rate of return. Also called minimum rate of return or hurdle rate

Required Rate of Return

Difference between operating income and minimum profit needed to cover the required rate of return of hurdle rate

Residual Income

Area of accounting in which managers are given authority over and responsibility for a particular area of organization and are then evaluated based on the results of that area of responsibility

Responsibility Accounting

Area over which managers are given responsibility for specific operations of an organization

Responsibility Center

Common method of evaluating investment center performance; calculated as net operating income divided by average invested assets

Return on Investment (ROI)

Responsibility center in which the manager has authority over and responsibility for generating revenue

Revenue Center

Estimate of the sales revenue to be generated in each budget period

Sales Budget

Number of units expected to be sold each budget period. Serves as the starting period for all other components of the master budget

Sales Forcast

Decisions made when managers evaluate a proposed capital investment to determine whether it meets some minimum criteria

Screening Decision

The idea that the value of a dollar changes over time because it can be invested to earn interest

Time Value of Money

Budgeting method in which top management sets a budget and imposes it on lower levels of the organization

Top-Down Approach

Amount charged when on division sells goods or services to another division of the same company

Transfer Price

True or False: For capital budgeting purposes, capital assets include item research and development projects

True

True or False: Preference decisions are made to prioritize and select from capital budgeting alternatives

True

A comprehensive performance measurements system that is derived from an organizations strategic vision is ___

a balanced scorecard

Revenue center managers are evaluated primarily on their ____

ability to meet sales goals

How much net income a potential project is expected to generates as a relative percentage of required investment is told by the ____

accounting rate of return

If you have $1,000 now and want to know what will be worth in 3 years, you are solving a(n)

accounting rate of return

Equal interest rates, interest periods, and dollar amounts each interest period are all characteristics of ____

annuities

A monthly house or car payment is an example of a(n) ____

annuity

Return on investment, residual income, and economic value added ___

are all lagging measures of performance

Budgets that are most likely to motivate employees ___

are tight but attainable

A tool to help managers make decisions about investments in major assets such as new facilities, equipment, and product is called ____

capital budgeting

The operating budgets feed directly into the ___, which then feeds directly into the budgeted balance sheet

cash budget

Collections on credit sales made to customers in prior period(s) plus collections on sales made in the current budget period equal ____

cash receipts

The three sections of the cash budgets are ___, ____, and ____

collections, disbursements, financing

Budgets ___

communicate managements plan throughout the organization

When a transfer price is based on cost plus a percentage markup, the method being used is ____

cost-based

The four groups of performance measures typically used in the balanced scorecard approach are financial, ___

customer, internal business processes, and learning and growth

In a lease of buy decision, ___ is not relevant to the decision

depreciation expense

Net present value is the ____

difference between the present value of a projects cash inflows and the present value of the projects cash outflows

The rate applies to future cash flows to reflect the time value of money is called the ___

discount rate

Backing out interest to find the equivalent value in today's present dollars is called ____

discounting

Managers must try to find the "just-right" level of difficulty in setting budgetary goals so they ____

have motivating effects on employee behavior

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

Deciding whether to purchase or lease a vehicle is an example of a(n) ___ project decisions

mutually exclusive

Inside information about the other divisions costs, capacity, and demand will impact setting a transfer price using the ____

negotiation

A transfer price developed using the ___ should fall somewhere between the variable cost and the whole sale price

negotiation method

Residual income is equal to ___

net operating income - (average invested assets x hurdle rate)

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

The formula for return on investment is ___

net operating income/average invested assets

The formula for return on investment is ____

net operating income/average invested assets

When deciding between two competing alternatives, the best capital budgeting method to use is the ___

net present value

The budget income statement is formed from the combined ___ budgets

operating

The sales, production, and purchases budgets are all ____

operating budgets

Budgets are used for two distinct purposes; ___ and ___. The first of these purposes relates to developing goals and preparing various budgets, while the second involves comparing actual results to the budget

planning and controlling

Budgeting is an important part of the

planning and controlling cycle

Managers are required to evaluate and compare more than one capital investment alternative when making a(n) ____

preference decision

The term discounting cash flows refers to the process of calculating the ___ value of the cash flows

present

Capital budgeting techniques involve solving ___ problems because of the need to know how much something is worth today

present value

The ___ budget shows the number of units needed to satisfy sales and provide the desired ending inventory

production

The budget that shows the budgeted expenses for areas other than manufacturing is the

production budget

When investment funds are limited, the amount of economic value (represented by the present value of future cash flows) that is generated per unit of scarce resource (investment cash) is measured by the ____

profitability index

When prioritizing independent projects when limited investment funds are available, the best capital budgeting method to use is the ___

profitability index

The net operating income that an investment center earns about the amount required to earn the minimum required rate of return is ____

residual income

When a manager accepts a project because the net operating income from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on ____

residual income

An area of business that a manager has control over is accountable for is called a(n)

responsibility center

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

retail outlet

Investment turnover x profit margin =

return on investment

Sales quotas are often given to ___ center managers

revenue

Narrowing down a set of projects for further consideration is a(n) ___ decision

screening

The two types of capital investment decisions are ___ and ____

screening decisions and preference decisions

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 are area of a business

segmented

Budgeted expenses for cost related to selling the product and managing the business are shown on the ___ budget

selling and administration

The discount rate ____

should reflect the company's cost of capital

In decentralized organizations, decision-making authority is ___

spread throughout the organization

The time value of money is the idea that ____

the value of a dollar changes overtime

The concept that the worth of a dollar changes over time is known as the ___

time value of the money

Budgetary slack occurs when a manager submits a budget that is _

too easy to attain


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