Managerial Accounting Chapter 9 - Part 2

Residual Income = NOI - (Minimum/Desired return x operating assets) Residual Income = 83,000 - (16% x $38,000)

A company reported the following results: Average operating assets $ 380,000 Stockholders' equity $ 58,000 Sales $ 980,000 Net operating income $ 83,000 Minimum required rate of return 16 % The company's residual income is:

RI = NOI (Desired/Minimum ROI x Assets Invested) RI = 3,000 - (18% x 15,000) = $300

A company's current net operating income is $16,800 and its average operating assets are $80,000. The company's required rate of return is 18%. A new project being considered would require an investment of $15,000 and would generate annual net operating income of $3,000. What is the residual income of the new project?

make decisions without fully understanding the big picture.

A major disadvantage of decentralization is that lower-level managers may _____

residual income

A variation of ____ is EVA (Economic Value Added)

Margin = NOI/Sales Margin = 870,000 / 17,400,000 = 5%

Aide Industries is a division of a major corporation. Data concerning the most recent years appears below: Sales = $17,400,000 NOI = $870,000 Average Operating Assets = $4,000,000 What is the margin?

Decrease in operating assets

All other things the same, which of the following would increase residual income?

What are the three primary types of responsibility accounting?

Cost, Profit, Investment

Cost Centers

Manager has control over cost, but not revenue or investments (i.g. accounting)

Profit Centers

Manager has responsibility for control over both cost and revenue

Minimum required return = Net operating income - Residual income Minimum required return = $27,000 - $16,000 = $11,000 Minimum required rate of return = Minimum required return ÷ Average operating assets Minimum required rate of return = $11,000 ÷ $100,000 = 11.00%

Sales $ 300,000 Average operating assets 100,000 Stockholders' equity 60,000 Net operating income 27,000 Residual income 16,000 What was the company's minimum required rate of return for the past year?

Turnover = Sales ÷ Average operating assets Turnover = $856,980 ÷ $372,600 = 2.30

Sales $ 856,980 Average operating assets 372,600 Stockholders' equity 246,000 Net operating income 81,000 Residual income 45,000 The division's turnover for the past year was:

Margin

The percentage of each sales dollar that resulted in profit

Responsibility Accounting

Used by organizations to assist in performance management and evaluation especially in a decentralized organization

Responsibility Accounting

an information system that classifies data according to areas of responsibility and reports each area's activity based on categories that the assigned manager controls

Residual Income

another way to measure investment center's performance

How are Investment centers evaluated?

evaluated using ROI and residual income

What are the 4 balanced scorecard groups?

financial (investors), learning and growth (employees), internal business processes, customers

Balanced Scorecard

framework that links the perspectives of an organization four basic stakeholder groups with an organization's mission and vision ect.

Net operating income

income before interest and taxes

How are profit responsibility centers evaluated?

it is evaluated by comparing actual to budget

Investment Centers

manager has control over cost, revenue, and investments

How are cost centers evaluated?

standard costs

Delivery Cycle Time

time from the receipt of a customer order to when it is completed and shipped

Throughout or Manufacturing Cycle Time

time required to turn raw materials into completed products

Return on investment = (Sales ÷ Average operating assets) Return on investment = $6,512/$37,000

Average operating assets $ 37,000 Sales 118,400 Contribution margin 20,800 Net operating income 6,512 The company's ROI is:

ROI = NOI/Assets ROI = 4,750/25,000 = 19%

Average operating assets are $110,000 and net operating income is $23,100. The company invests $25,000 in new assets for a project that will increase next operating income by $4,750. What will the return on investment (ROI) be for the new project?

Turnover = Sales/Assets Turnover = $20,160,000/8,000,000 = 2.52

Beal Industries is a division of a major corporation. Last year the division had total sales of $20,160,000, net operating income of $1,592,640, and average operating assets of $8,000,000. What is the turnover?

ROI = NOI/Assets ROI = 5,678,395/20,000,000 = 28%

Determine the October 2012 ROI for an investment center providing the following information: Assets at 9/30/12 $20,000,000 Assets at 10/15/12 $18,595,000 Assets at 10/31/12 $22,000,000 Operating income for the month ended 10/31/12 $5,678,395

EVA = (after tax operating income - cost of capital in dollars) or (after tax operating income) - cost of capital x (total assets - current liabilities)

Economic Activity (EVA)

3

How many different responsibility centers exist?

Sales in the denominator

In computing the margin in a ROI analysis, which of the following is used?

To increase ROI you must

Increase sales, or reduce operating expenses or operating assets

ROI = Net profit margin x Turnover ROI = 0.16 x 0.5 = 8% Margin = NOI/Sales Margin = 16,000/100,000 = 16%

Last year a company had a stockholder's equity of $160,000, net operating income of $16,000 and sales of $100,000. The turnover was 0.5. The return on invest (ROI) is:

Turnover

Measures the productivity of assets or the number of sales dollars generated by each dollar invested in assets

Residual Income

Net operating income that an investment center earns above a minimum required rate of return on its operating assets

long term and short term

Organizations must add value to all groups in ___ and ____ in order to succeed

Balanced Scorecard

Set of performance measures designed to support the company's strategy (or how to achieve the organization's goals)

Cost Center

The purpose of the data processing department of Falena Corporation is to assist the various departments of the corporation with their information needs free of charge. The Data Processing Department would be evaluated as:

ROI

Under an ___ evaluation system, managers are encouraged to make investments that are profitable for the entire company, but that would be rejected when using the residual income approach

Responsibility Accounting

Use for any part of an organization whose manager has control and is accountable for cost, profit, and investments

Throughput time = Process time + Inspection time + Move time + Queue time Throughput time = 4.4 days + 3.0 days + 3.8 days + 10.4 days = 21.6 days

Wait time 15.4 days Inspection time 3.0 days Process time 4.4 days Move time 3.8 days Queue time 10.4 days The throughput time would be:

MCE = Process time ÷ Throughput time MCE = 3.7 days ÷ 13.6 days = 27.21%

Wait time 15.7 days Inspection time 0.7 days Process time 3.7 days Move time 1.5 days Queue time 7.7 days The manufacturing cycle efficiency (MCE) would be:

earning an adequate return on investment or ROI

What is an investment center responsible for?

Robert Kaplan and David Norton

Who developed the balanced scorecard?

Decentralization

decision making is spread throughout the organization

Manufacturing Cycle Efficiency

focus on eliminating non-value added activities

What is not included in operating assets?

land held for future use, investment in another company, building rented to someone else

Economic Value Added (EVA)

the shareholder wealth created by an investment center