Managerial Accounting Exam 3 CH 9 & 11

Disadvantages of Decentralization

1. Lower-level managers may make decisions without seeing the "big picture" 2. May be a lack of coordination among autonomous managers 3. Lower-level manager's objectives may not be those of the organization 4. May be difficult to spread innovative ideas in the organization a. Disadvantages of decentralization b. Benefits of decentralization

Benefits of Decentralization

1. Top management freed to concentrate on strategy 2. Lower-level decisions often based on better information 3. Lower level managers can respond quickly to customers 4. Lower-level managers gain experience in decision-making 5. Decision-making authority leads to job satisfaction a. Disadvantages of decentralization b. Benefits of decentralization

Market price

A ____________ (i.e., the price charged for an item on the open market) is often regarded as the best approach to the transfer pricing problem. 1. A _________ approach works best when the product or service is sold in its present form to outside customers and the selling division has no idle capacity 2. A __________ approach does not work well when the selling division has idle capacity

Transfer price

A _________________ is the price charged when one segment of a company provides goods or services to another segment of the company

Cannot be used to compare the performances of divisions of different sizes (The residual income approach cannot be used to compare the performances of divisions of different sizes. It is better to focus on the percentage change in the residual income from year to year rather than the absolute amount of the residual income)

A major drawback of residual income is that it ________________ a. encourages managers to make investments that are profitable for the entire company b. cannot be used to compare the performances of divisions of different sizes c. measures performance based on operating assets d. is too complex to calculate

Advantages

A negotiated transfer price results from discussions between the selling and buying divisions. ___________ of negotiated transfer prices: 1. They preserve the autonomy of the divisions, which is consistent with the spirit of decentralization 2. The managers negotiating the transfer price are likely to have much better information about the potential costs and benefits of the transfers than others in the company a. Advantages b. Disadvantages

Profit center

A segment whose manager has control over BOTH costs and revenues, but no control over investment funds Revenues: Sales, Interest, Other Costs: Mfg. costs, Commissions, Salaries, Other a. Responsibility accounting b. Cost center c. Profit center d. Investment center

Cost center

A segment whose manager has control over costs, but not over revenues or investment funds a. Responsibility accounting b. Cost center c. Profit center d. Investment center

Investment center

A segment whose manager has control over costs, revenues, and investments in operating assets a. Responsibility accounting b. Cost center c. Profit center d. Investment center

It eliminates the need for performing variance analysis (The use of multiple cost drivers does not eliminate the need for performing variance analysis. It does lead to more accurate variance, cost formulas are likely to be more accurate, and an expense may be expected to vary for more than one reason)

All of the following are reasons for preparing a flexible budget with multiple cost drivers EXCEPT ______________ a. multiple cost drivers can lead to more accurate variances b. cost formulas are likely to be more accurate c. an expense may be expected to vary for more than one reason d. it eliminates the need for performing variance analysis

A change in input prices (Possible reasons for revenue variances can be changes in selling price, product mix, discount structure, poor accounting controls, and so on. Possible explanations for such spending variances can be changes in input prices, changes in usage, a change in technology, and so on.)

All of the following are reasons for revenue variances EXCEPT _________________ a. a change in discount structure b. a change in input prices c. a change in product mix d. a change in selling price

14.21% (ROI = Margin x Turnover x 100 OR Net operating income / Average operating assets x 100 ROI = 30.23% x 0.47 x 100 = 14.21% OR ROI = 5,200,000 / 36,400,000 x 100 = 14.21%)

Alyeska Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below: Sales: $17,200,000 Net Operating Income: $5,200,000 Average Operating Assets: $36,400,000 Compute the return on investment (ROI). (Round your intermediate calculations and final answer to 2 decimal places.)

0.47 (Turnover = Sales / Average operating assets 17,200,000 / 36,400,000 = 0.47)

Alyeska Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below: Sales: $17,200,000 Net Operating Income: $5,200,000 Average Operating Assets: $36,400,000 Compute the turnover. (Round your answers to 2 decimal places).

30.23% (Margin = Net operating income / Sales x 100 5,200,000 / 17,200,000 x 100 = 30.23%)

Alyeska Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below: Sales: $17,200,000 Net Operating Income: $5,200,000 Average Operating Assets: $36,400,000 Compute the. margin. (Round you answers to 2 decimal places).

Spending variance (since actual costs are being compared with the costs that should have been ideally incurred at the actual level of activity. this is a spending variance)

An unfavorable variance of $5,000 in cost of goods sold is determined by comparing the actual results (10,000 units) and the flexible budget (10,000 units). What type of variance is described? a. activity variance b. spending variance c. revenue variance

Activity variance (what revenues should have been at the actual level of activity are compared with planned activity revenues. this variance is called the activity variance)

An unfavorable variance of $5,000 in sales is determined by comparing the flexible budget (9,000 units) and the planning budget (10,000 units). What type of variance is described? a. activity variance b. spending variance c. revenue variance

$25,000 (Residual income = Net operating income - (Average operating assets x minimum required rate of return) Residual income = $100,000 - (500,000 x 15%) = 100,000 - 75,000 = 25,000)

Axis Corporation's Division A has average operating assets of $500,000 and the division earned $100,000 as net operating income during a period. The company expects a minimum required rate of return of 15% on its investments. What is the residual income for Division A? a. $75,000 b. $100,000 c. $25,000 d. $500,000

$3,000 Unfavorable (The amount of variance in selling costs is 28,000-25,000 = 3,000. Because the actual costs are higher, the variance is unfavorable)

Budget solutions has determined from its flexible budget that selling costs for actual level for a period should have been $25,000. Actual selling costs incurred during the period were $28,000. What is the amount of direction of variance in selling costs? a. $3,000 Favorable b. $28,000 Unfavorable c. $0 d. $3,000 Unfavorable

Flex

How much of the cost variances are due to higher activity and how much are due to cost control? To answer the question, we need to ________ the planning budget to accommodate the actual level of activity.

Upper

In the range of acceptable transfer prices, the ________ limit is determined by the buying division a. upper b. lower

Lower

In the range of acceptable transfer prices, the ________ limit is determined by the selling division a. upper b. lower

$224,000 (Residual income = Net operating income - (Average operating assets x Minimum rate of return) Residual income = 400,000 - (1,600,000 x 11%) = $224,000)

Juniper Design Limited of Manchester, England, provides design services to residential developers. Last year, the company has net operating income of $400,000 on sales of $1,400,000. The company's average operating assets for the year were $1,600,000 and its minimum required rate of return was 11%. Compute the company's residual income for the year.

$49,000

Khan Corporation has budgeted the unit sales for April to be 5,000 units. The sales price is $25 per unit, and production costs are $10 per unit. Monthly utility expenses are estimated to be $2,000 plus $2 per unit, whereas selling expenses are estimated to be $12,000. The company pays a monthly rent of $2,000. What is the net operating income in the company's planning budget? a. $49,000 b. $62,000 c. $125,000 d. $72,000

$14,000 (2,000 + (2 x 6,000 units) = 14,000)

Khan Corporation has budgeted the unit sales for April to be 5,000 units. The sales price is $25 per unit, and production costs are $10 per unit. Monthly utility expenses are estimated to be $2,000 plus $2 per unit, whereas selling expenses are estimated to be $12,000. The company pays a monthly rent of $2,000. What would be the utility expenses on the company's flexible budget if actual unit sales for April were 6,000 units? a. $12,000 b. $14,000 c. $2,000 d. $26,000

Responsibility accounting

Managers are held responsible for those items-- and ONLY those items --that the manager can actually control to a significant extent. a. Responsibility accounting b. Cost center c. Profit center d. Investment center

Disadvantages

Many companies set transfer prices at either the variable cost or full (absorption) cost incurred by the selling division. ____________ of this approach include: 1. Using full cost as a transfer price can lead to sub-optimization 2. The selling division will never show a profit on any internal transfer 3. Cost-based transfer prices do not provide incentives to control costs a. Advantages b. Disadvantages

Residual Income

Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return) = ____________ a. Operating margin b. ROI c. Asset Turnover d. Residual Income

ROI (Net operating income = income before interest and taxes (EBIT) Average operating assets = cash, accounts receivable, inventory, plant and equipment, and other productive assets)

Net Operating Income / Average Operating Assets x 100 = __________ a. Operating margin b. ROI c. Asset Turnover d. Residual Income

Operating Margin

Net Operating Income / Sales x 100 = __________ a. Operating margin b. ROI c. Asset Turnover d. Residual Income

carry out central purposes of organization

Operating Departments.... a. carry out central purposes of organization b. do not directly engage in operating activities

Activity variance (variances caused solely because of the differences in the level of activity are called activity variances)

Paradise Company's planning budget for 10,000 units showed sales of $500,000. The flexible budget for 12,000 units showed sales of $600,000. What is the variance of $100,000 called if this variance was due only to an increase in unit sales? a. Spending variance b. Activity variance c. Unfavorable variance d. Revenue variance

$18,500 (Budgeted maintenance expense = 3,000 fixed portion + ($5 per batch x 800 batches) + ($0.50 per unit produced x 23,000 units produced = 18,500))

Pinnacle Corporation is a manufacturing company operating numerous machines, which require a regular maintenance to keep them operational. The fixed portion of maintenance expense is $3,000 per month. Maintenance costs are also incurred at the rate of $5 per batch and $0.50 per unit produced. The company produced 23,000 units in 800 batches during a particular month. What budgeted maintenance expense for this month? a. $3,000 b. $18,500 c. $7,000 d. $11,500

Planned level

Planning (static) budgets are prepared for a single, __________________ of activity. a. actual level b. planned level c. flexible level d. total level

Average operating assets x Minimum required rate of return (Residual income = Net operating income less (average operating assets x minimum required rate of return))

Residual income = Net operating income less _______________ a. Average operating assets b. (Sales x Minimum required rate of return) c. (Average operating assets x minimum required rate of return) d. Cost of goods sold

Encourages

Residual income ____________ managers to make profitable investments that would be rejected by managers using ROI. a. Discourages b. Encourages

It encourages managers to make investments that are profitable for the entire company (The residual income approach encourages managers to make investments that are profitable for the entire company, which normally would be rejected by managers who are evaluated using the ROI formula)

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because _______________ a. it encourages managers to make investments that are profitable for the entire company b. it can be used to compare the performances of divisions of different sizes c. it does not measure performance based on operating assets d. the problems with measuring the asset base are eliminated

Margin / Turnover (ROI can be calculated as Margin x Turnover OR Net Operating Income / Average Operating Assets)

Return on investment can be calculated by each of the following formulas EXCEPT _____________ a. Margin / Turnover b. Margin x Turnover c. Net Operating Income / Average Operating Assets

Asset Turnover

Sales / Average Operating Assets = ____________ a. Operating margin b. ROI c. Asset Turnover d. Residual Income

do not directly engage in operating activities

Service Departments.... a. carry out central purposes of organization b. do not directly engage in operating activities

10% (ROI = net operating income / average operating assets = $2 million / $20 million = 10%)

Systems Corporation earned a net operating income of $2 million on sales of $6 million. Assume that the company's average operating assets were $20 million. What is the company's ROI? a. 10% b. 1% c. 33% d. 30%

True

T/F: More than one cost driver may be needed to adequately explain all of the costs in an organization

False (The cost formulas used to prepare a flexible budget CAN BE adjusted to recognize multiple cost drivers)

T/F: The cost formulas used to prepare a flexible budget CANNOT BE adjusted to recognize multiple cost drivers

True

T/F: The fundamental objective in setting transfer prices is to motivate managers to act in the best interest of the overall company

Osaka: $321,000, Yokohama: $370,000 (Residual Income = Net operating income - (Average operating assets x Minimum rate of return))

Tan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Osaka Sales: $10,700,000 Osaka Net Operating Income: $749,000 Osaka Average Operating Assets: $2,675,000 Yokohama Sales: $37,000,000 Yokohama Net Operating Income: $3,330,000 Yokohama Average Operating Assets: $18,500,000 Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 16%. Compute the residual income for each division.

Osaka: $28%, Yokohama: 18% (ROI = Margin x Turnover x 100 OR Net operating income / Average operating assets x 100)

Tan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Osaka Sales: $10,700,000 Osaka Net Operating Income: $749,000 Osaka Average Operating Assets: $2,675,000 Yokohama Sales: $37,000,000 Yokohama Net Operating Income: $3,330,000 Yokohama Average Operating Assets: $18,500,000 For each division, compute the return on investment (ROI).

Spending variance

The difference between the actual cost and flexible budgeted cost at the actual level of activity is called a(n) __________________ a. spending variance b. activity variance c. unfavorable variance d. revenue variance

revenue variance

The difference between the actual total revenue and flexible budgeted total revenue at the actual level of activity is called a(n) _________________ a. spending variance b. activity variance c. unfavorable variance d. revenue variance

Transfer prices

There are three primary approaches to setting ________________ 1. Negotiated transfer prices; 2. Set transfer prices at cost using either variable cost or full (absorption cost); and 3. Transfers at market price

Variance Analysis Cycle

What cycle is this?

Responsibility center

When a manager has control over and is accountable for cost, profit, or investments of an organization, it is called _____________ a. margin center b. responsibility center c. net operating income d. cost center

Net operating income (the flexible budget performance report has the following columns; actual results, revenue, and spending variances, flexible budgets, activity variances, and planning budget)

Which of the following is NOT a column on a flexible budget performance report? a. actual results b. planning budget c. net operating income d. activity variances

A flexible budget performance report that is based on more than one cost driver will be more accurate than a flexible budget performance report that is based on just one cost driver

Which of the following is true when a company determines that its costs should be explained by more than one cost driver? a. the flexible budget performance report should be prepared using only a single cost driver b. a flexible budget performance report that is based on more than one cost driver will be more accurate than a flexible budget performance report that is based on just one cost driver c. a flexible budget performance report that is based on just one cost driver will be more accurate than a flexible budget performance report that is based on more than one cost driver d. a flexible budget performance report cannot be prepared

A 25% increase in sales resulting in a 30% increase in net operating income (Because fixed costs do not change with the level of activity, they cause a leverage effect. In other words, a 25 increase in sales would be expected to increase the net operating income by more than 25%)

Which of the following scenarios demonstrates the leverage effect on net operating income due to the existence of fixed costs? a. A 25% increase in sales resulting in a 30% decrease in net operating income b. A 15% increase in sals resulting in a 15% increase in cost of goods sold c. A 25% increase in sales resulting in a 30% increase in net operating income d. A 25% increase in sales resulting in a 30% increase in fixed costs

ROI

________ measures net operating income earned relative to the investment in average operating assets a. ROI b. Residual income

Favorable

__________ variance in case of Expenses & Costs occurs when: Actual expenses & costs < Flexible Budget expenses & costs (spending variance)

Unfavorable

__________ variance in case of Expenses & Costs occurs when: Actual expenses & costs > Flexible Budget expenses & costs (spending variance)

Favorable

__________ variance in case of Expenses & Costs occurs when: Flexible Budget expenses & costs < Planned Budget expenses & costs (activity variance)

Unfavorable

__________ variance in case of Expenses & Costs occurs when: Flexible Budget expenses & costs > Planned Budget expenses & costs (activity variance)

Unfavorable

__________ variance in case of Net Operating Income occurs when: Actual net operating income < Flexible Budget net operating income

Favorable

__________ variance in case of Net Operating Income occurs when: Actual net operating income > Flexible Budget net operating income

Unfavorable

__________ variance in case of Net Operating Income occurs when: Flexible Budget net operating income < Planned Budget net operating income

Favorable

__________ variance in case of Net Operating Income occurs when: Flexible Budget net operating income > Planned Budget net operating income

Unfavorable

__________ variance in case of Revenue occurs when: Actual Revenue < Flexible Budget Revenue (spending variance)

Favorable

__________ variance in case of Revenue occurs when: Actual Revenue > Flexible Budget Revenue (spending variance)

Unfavorable

__________ variance in case of Revenue occurs when: Flexible Budget Revenue < Planned Budget Revenue (activity variance)

Favorable

__________ variance in case of Revenue occurs when: Flexible Budget Revenue > Planned Budget Revenue (activity variance)

Favorable

__________ variance in case of Total Expenses occurs when: Actual total expenses < Flexible Budget total expenses

Unfavorable

__________ variance in case of Total Expenses occurs when: Actual total expenses > Flexible Budget total expenses

Favorable

__________ variance in case of Total Expenses occurs when: Flexible Budget total expenses < Planned Budget total expenses

Unfavorable

__________ variance in case of Total Expenses occurs when: Flexible Budget total expenses > Planned Budget total expenses

Residual income

___________ measures net operating income earned less the minimum required return on average operating assets a. ROI b. Residual income

variable

______________ service department costs should be charged to consuming departments according to whatever activity (or cost driver) causes the incurrence of the cost a. fixed b. budgeted c. variable d. variable and fixed

budgeted

______________ variable and fixed service department costs should be charged to operating departments a. fixed b. budgeted c. variable d. variable and fixed

variable and fixed

_______________ service department costs should be charged to operating departments separately a. fixed b. budgeted c. variable d. variable and fixed

service department costs are charged to operating departments

________________________________ for a variety of reasons: 1. To encourage operating departments to wisely use service department resources 2. To help measure the profitability of operating departments 3. To provide operating departments with more complete cost data for making decisions 4. To create an incentive for service departments to operate efficiently a. operating department costs are charged to service departments b. service department costs are charged to operating departments

fixed

charge _____________ service department costs to consuming departments in predetermined lump-sum amounts that are based on the consuming department's peak-period or long-run average servicing needs 1. are based on amounts of capacity each consuming department requires 2. should not vary from period to period a. fixed b. budgeted c. variable d. variable and fixed