ACCT- Ch. 11
Which of the following is not one of the three primary types of responsibility centers?
sales
The net operating income that an investment center earns above the minimum required return on its average operating assets is ______.
residual income
Given a margin of 12%, sales of $150,000 and average operating assets of $90,000, the ROI is ____ %.
20
Macey, Inc.'s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is ______.
20%
Which of the following statements is correct?
A manager might reject a proposal using ROI that the manager would accept using residual income.
Which of the following is not a characteristic of decentralization?
Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.
EBIT is another term for ______.
Net operating income
Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?
ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.
Which of the following statements is incorrect regarding responsibility accounting?
Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.
Net operating income ÷ Average operating assets = ______.
Return on investment
Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true?
The department manager may not want to accept the project because it will lower the overall ROI for the department. The project should be accepted by the company because it increases overall residual income.
True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.
True
Valid criticisms of evaluating performance based on return on investment (ROI) include managers may ______.
be put in charge of a business segment that includes committed costs over which a manager has no control reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI take actions that increase ROI in the short-run at the expense of long-term performance
The manager of a(n) ____ center does not have control over revenue or the use of investment funds.
cost
An organization in which decision-making authority is spread throughout the organization is ______.
decentralized
Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000. The equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to ____ (increase/decrease) from the current level of ____% to a new return on investment (ROI) of ____%.
increase, 10, 12
Residual income is a measure used to evaluate managers of ______ centers.
investment
ROI is a method used to evaluate ______.
investment centers, but not cost or profit centers
ROI can be calculated as ______.
margin × turnover net operating income ÷ average operating assets
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
The net operating income that an investment center earns above the minimum required return on its average operating assets is its ____ income.
residual
Any part of an organization whose manager has control over and is accountable for cost, profit, or investments is a(n) ____ center.
responsibility
Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through ____ accounting systems.
responsibility
Managers of cost centers are evaluated on ______ in their responsibility center.
their ability to control costs
Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because ______.
there are fewer managers that must be consulted before a decision is made
Service departments, such as the accounting department, are generally considered ____ centers, while sales offices are often considered ____ centers.
cost, profit
Net operating income is income before ____ and ____.
interests, taxes
Carlos, Inc. requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average operating assets of $200,000 and a net operating income of $24,000. The department's residual income is $ ____.
4000
Return on investment = ______.
Net operating income ÷ Average operating assets
Which of the following ratios are part of the ROI formula?
Net operating income ÷ Sales Sales ÷ Average operating assets
The ROI formula typically uses ______.
average operating assets for the year
Operating assets include ______.
inventory accounts receivable equipment
Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress ____ and excessive operating assets which can depress ____.
margin, turnover
In order to fully understand how a manager's decisions can affect ROI, both ____ and ____ should be computed.
margin, turnover
Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) ____ center.
profit
