MBUS 300 Chapter 9-M

Howard Company provided the following selected information about its consumer products division for the current year: Desired ROI 12% Net Income$150,000 Residual Income$30,000

$1,000,000. Residual income = Operating income − (Operating assets × Desired ROI) $30,000 = $150,000 − (Operating assets × 12%) Operating assets × 12% = $150,000 − $30,000 Operating assets = $120,000 ÷ 12% = $1,000,000

Contribution margin would be the most important variable in evaluating the performance of: A) A cost center. B) A production center. C) A profit center. D) An investment center.

A profit center.

Which of the following should not be included in the investment base used to compute residual income? a) Land held for future use b) Inventory c) Cash d) Accounts receivable

A. Companies use operating income and operating assets rather than net income and total assets in the computation of ROI and residual income. It would be inappropriate to include any nonoperating plant assets, such as land held for future use, in the denominator of the ROI computation or, for the same reason, in the residual income computation.

Which of the following statements regarding profit centers is correct? a) A manager of a profit center is evaluated on his/her ability to control costs and generate revenues. b) A manager of a profit center has more responsibility than a manager of an investment center. c) A manager of a profit center is responsible for assets, liabilities, and earnings. d) A manager of a profit center is evaluated only on his/her ability to control costs.

A. A cost center is an organizational unit that incurs expenses but does not generate revenue. A profit center differs from a cost center in that it not only incurs costs but also generates revenue. The manager of a profit center is judged on his ability to produce revenue in excess of expenses.

The kind of responsibility center that would be evaluated by comparing income on assets to the amount of assets invested is: a) An investment center. b) A cost center. c) A profit center. d) An asset center.

A. Companies use ROI or residual income to evaluate the performance of investment center managers.

The research and development department of Apple Computers would likely be organized as: a) A cost center. b) An investment center. c) A profit center. d) A revenue center.

A. Cost centers, such as Apple's research and development department, are segments that incur costs but do not generate revenues.

Which of the following statements regarding investment centers is incorrect? a) A manager of an investment center is responsible for the investment of capital, but not revenues or expenses. b) Return on investment and residual income are tools used to assess managers of an investment center. c) A manager of an investment center should be accountable for assets, liabilities, and earnings. d) Investment centers are commonly found at the higher levels of an organization chart.

A. Investment center managers are responsible for revenues, expenses, and the investment of capital. Investment centers normally appear at the upper levels of an organization chart. Managers of investment centers are accountable for assets and liabilities as well as earnings. The performance of investment center managers is evaluated using ROI or residual income.

Fairpoint Products provided the following selected information about its consumer products division for the current year: Desired ROI: 8% Net Income: $100,000 Residual Income: $60,000 Based on this information, the division's investment amount was: a) $500,000. b) $750,000. c) $1,250,000. d) $2,000,000.

A. Residual income = Operating income − (Operating assets × Desired ROI) $60,000 = $100,000 − (Operating assets × 8%) Operating assets × 8% = $100,000 − $60,000 Operating assets = $40,000 ÷ 8% = $500,000

Select the incorrect statement concerning the application of the controllability concept to responsibility accounting. a) Each manager should be evaluated on the costs but not the revenues that are under his or her control. b) As a practical matter, control of costs or revenues may be shared rather than absolute. c) The concept of control is crucial to an effective responsibility accounting system. d) Managers lose motivation when they are held accountable for actions that are beyond their scope of control.

A. The controllability concept is crucial to an effective responsibility accounting system. Managers should be evaluated based only on revenues or costs they control.

Which of the following statements regarding a balanced scorecard is correct? A) A balanced scorecard includes several different performance measures that can be used to assess how well a business is accomplishing its mission. B) A balanced scorecard includes financial performance measures such as ROI. C) A balanced scorecard includes nonfinancial measures such as defect rates or on-time deliveries. D) All of these answers are correct.

All of these answers are correct.

A responsibility report provided to a manager typically includes: A) A list of all the items under the manager's control. B) The differences between the budgeted and actual amounts for each item on the report. C) All of these are correct answers. D) The budgeted amount for each item on the report.

All of these are correct answers.

The concept that says managers should be evaluated on the basis of revenues and/or expenses they can control is known as the: a) Management by exception concept. b) Controllability concept. c) Responsibility concept. d) None of these answers are correct.

B Controllability concept.

A tool that is often used to depict the lines of authority and responsibility within a firm is: a) A master budget. b) An organization chart. c) A responsibility report. d) A variance report.

B An organization chart.

A reporting unit of a decentralized business that controls identifiable revenue and/or expense items is known as a(n): a) Performance center. b) Responsibility center. c) Accounting center. d) Management center.

B Responsibility center.

Select the incorrect statement concerning responsibility reports. a) At the corporate level, responsibility reports generally include year-to-date contribution format income statements. b) The reports become more specific for higher levels within the organization. c) The reports should be stated in simple terms. d) The reports should show clearly the budgeted and actual amounts of controllable revenues and expenses.

B. From the lower level upward, each successive report includes summary data from the preceding report.

The cellular phone division of Stegall Company had budgeted sales of $950,000 and actual sales of $900,000. Budgeted expenses were $600,000, while actual expenses were $550,000. Based on this information, the responsibility report for the manager of this profit center would show: a) A favorable revenue variance. b) A favorable cost variance. c) Both a favorable revenue variance and a favorable cost variance. d) None of these answers are correct.

B. Revenue variance = Actual sales − Budgeted salesRevenue variance = $900,000 − $950,000 = $50,000 unfavorable (since actual sales were less than budgeted sales) Cost variance = Actual costs − Budgeted costs Cost variance = $550,000 − $600,000 = $50,000 favorable (since actual costs were less than budgeted costs)

Which of the following is an advantage of decentralization?

Decentralization motivates managers to improve productivity.

The practice of delegating authority and responsibility is referred to as

Decentralization.

Brookings Company evaluates its managers on the basis of return on investment. Division Three has a return on investment (ROI) of 15%, while the company as a whole has an ROI of only 10%. Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?

Residual income.

Prentiss Company is decentralized with three divisions. While all three division managers have responsibility for costs, only the Division Three manager has responsibility for generating revenues. Select the correct statement from the following.

Responsibility reports should be prepared for all three divisions.

The New Products Division of Testar Company has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is accurate?

The new product is acceptable because it will yield an ROI that is higher than the target ROI and will yield residual income of $40,000 ROI = Operating income ÷ Operating assets ROI = $1,400,000 ÷ $8,500,000 = 16.5% The New Product ROI of 16.5% is higher than the target ROI of 16%. New Product: Residual income = Operating income - (Operating assets × Desired ROI) Residual income = $1,400,000 - ($8,500,000 × 16%) = $40,000

Which of the following is not an advantage of decentralization? A) Lower-level managers are trained for increased responsibilities. B) Managers are motivated to improve productivity. C) Upper-level managers are able to concentrate on routine decisions. D) All of these are advantages of decentralization.

Upper-level managers are able to concentrate on routine decisions. Explaination: Delegating authority and responsibility is referred to as decentralization. Upper-level managers are encouraged to concentrate on strategic decisions while local management makes routine decisions.

Which of the following is a characteristic that is needed for decentralization to work well in an organization? a) All of these answers are correct. b) Clear lines of authority. c) Good communication. d) Responsibility.

A All of these answers are correct.

The New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000 during the current year. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Assuming that the new product is put into production, calculate the residual income for the division. a) $832,000 b) $528,000 c) $872,000 d) $672,000

C. Residual income = Operating income − (Operating assets × Desired ROI) Residual income = ($8,000,000 + $1,400,000) − [($44,800,000 + $8,500,000) × 16%] = $872,000

Packrall Company makes computer chips. Curtis is manager of the company's maintenance department. Because his maintenance technicians are so well trained in maintaining expensive and sensitive circuit board stamping equipment, Curtis has been authorized to contract to perform maintenance for outside customers. In this company, the maintenance department is likely organized as: a) A cost center. b) An investment center. c) A profit center. d) A revenue center.

C.A profit center. Because the maintenance department will be performing maintenance for outside customers, this responsibility center is a profit center. Profit centers incur costs and generate revenues, producing a measurable profit.

Jacob is a department manager who recently instituted a new recognition program for his employees. He budgeted the cost of the new program at $10 per employee, but actual costs were $15 per employee. The cost associated with the recognition program would be considered which of the following kinds of cost?

Controllable cost

Which of the following statements regarding cost centers is incorrect? a) Cost center managers are evaluated on their ability to control costs and keep within budget. b) Cost centers are units within a business that incur expense but do not have responsibility for generating revenue. c) A manager of a cost center has less responsibility than a manager in an investment center. d) Cost centers tend to be found at upper levels on a company's organization chart.

D. A cost center is an organizational unit that incurs expenses but does not generate revenue. Cost centers normally fall on the lower levels of an organization chart. Investment center managers are responsible for revenues, expenses, and the investment of capital.

Which of the following is not a characteristic of an effective responsibility accounting system? a) Reports that show budgeted and actual amounts of controllable revenue and expense items b) Reports that show the areas that need corrective action c) Reports that show revenue and/or expense items under a manager's control d) Reports that set goals for long-term strategic performance

D. A responsibility report is prepared for each manager who controls a responsibility center. The report compares the expectations for the manager's responsibility center with the center's actual performance. These reports would focus on short-term (rather than long-term) performance.

Which of the following statements regarding responsibility accounting is not correct? a) It calls for the preparation of responsibility reports listing the budgeted and actual revenue and/or expense items over which the manager has control. b) It calls for the preparation of reports containing detailed information regarding the performance of a responsibility center. c) It is most effective in a decentralized business structure where many managers exert control over various segments of a company's operations. d) It requires top management to prepare a budget for the entire company and communicate that plan to lower levels of management.

D. Because local management makes routine decisions, upper-level management can concentrate on long-term planning (rather than the short-term planning efforts that result in budgets), goal setting, and performance evaluation. Responsibility accounting improves the quality of decisions by delegating authority down a chain of command, such as the preparation of budgets.

Payne Company reported the following information for the current year: Sales: $1,600,000 Average Operating Assets: $500,000 Desired ROI: 14% Net Income: $85,000 The company's residual income was: a) $14,000. b) $(15,000). c) $24,000. d) $15,000.

D. $15,000. Residual income = Operating income − (Operating assets × Desired ROI) Residual income = $85,000 − ($500,000 × 14%) = $15,000

The process of evaluating the performance of individual managers is known as: a) Management by exception. b) Performance management. c) Responsibility management. d) Responsibility accounting.

D. Responsibility accounting. The controllability concept is crucial to an effective responsibility accounting system. Managers should be evaluated based only on revenues or costs they control.

All of the following are characteristics that are required for effective responsibility accounting except A) None of these answers are correct. B) motivation. C) accountability. D) centralization.

centralization

When using residual income as a project-screening tool, management should accept a project if the residual income is:

positive Explaination: When the manager's evaluation is based on residual income, the manager is likely to accept the funds when the additional investment increases the residual income generated by the investment (that is, when the residual income is positive).