Exam 3 Review
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
