Chapter 15 Performance Evaluation

If operating income is $30,000, operating assets are $100,000 and desired ROI is 15%, residual income is ______.

$15,000 Reason: $30,000 - ($100,000 × 15%) = $15,000

If operating income is $20,000, operating assets are $50,000 and desired ROI is 30%, residual income is ______.

$5,000 Reason: $20,000 - ($50,000 × 30%) = $5,000

Unfavorable variable cost volume variances ______.

-focus solely on the cost component of the income statement -should be assessed in conjunction with other variances -may occur in conjunction with favorable revenue variances

Actual sales exceed expected sales matches Favorable Actual sales are less than expected sales matches Unfavorable

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Given sales of $900,000, operating income of $108,000 and operating assets of $600,000, turnover is ______.

1.5 Reason: $900,000 ÷ $600,000 = 1.5

Given sales of $900,000, operating income of $108,000 and operating assets of $600,000, margin is ______.

12% Reason: $108,000 ÷ $900,000 = 12%

Assume operating income is $150,000 and operating assets are $100,000. What is return on investment (ROI)?

150% Reason: $150,000 ÷ $100,000 = 1.5 or 150%.

Assume operating income is $40,000 and operating assets are $100,000. What is return on investment (ROI)?

40% Reason: $40,000 ÷ $100,000 =.40 or 40%.

Assume operating income is $25,000 and operating assets are $50,000. What is return on investment (ROI)?

50%

If margin is 0.05 and turnover is 10, what is return on investment (ROI)?

50% Reason: 0.05 × 10 =. 5 or 50%

Return on investment (ROI) is defined as net income divided by total assets.

False

True or false: A fixed cost spending variance is due to fixed cost differences between fixed costs in the static budget and in the flexible budget.

False

True or false: ROI and residual income should only be calculated for the company as a whole.

False

True or false: Unfavorable variable cost volume variances are always cause for concern.

False

Why do companies typically use operating income and assets as opposed to net income and total assets in calculating return on investment (ROI)?

Managers usually have more control over operating income and assets.

Why do companies typically use operating income and assets as opposed to net income and total assets in calculating return on investment (ROI)?

Operating income and operating assets are more controllable than net income and total assets. Net income and total assets do not measure performance as accurately.

True or false: The only difference between a flexible budget and a static budget is the expected number of units sold.

True

True or false: When actual results are compared to a flexible budget, any variances in revenues and variable costs result from differences between standard and actual per-unit amounts.

True

A holistic approach to evaluating managers that uses both financial and non-financial measures is ______.

a balanced scorecard

Variances should be seen as ______.

a signal to investigate

Flexible budget variances occur due to differences in standard and _____ per-unit amounts.

actual

A flexible budget variance is the difference between ______.

actual figures and figures on a flexible budget based on actual volume

An approach to evaluating managers that uses both financial and non-financial performance measures is a(n) _____ _____.

balanced scorecard

A cost center incurs expenses ______.

but does not generate revenues

Margin captures the managers ability to ______.

control operating expenses relative to the level of sales

Crucial to an effective responsibility accounting system is the ______ concept.

controllability

An organizational unit that incurs expenses, but does not generate revenue, is called a(n) ______ center.

cost

The cost volume variance is defined as the difference between the ______.

cost on the static budget and the cost on a flexible budget based on actual volume

The process of delegating authority and responsibility is referred to as _____.

decentralization

In a decentralized organization, decision-making authority is ______.

delegated to individuals responsible for managing specific organization functions

A decentralized organization ______.

encourages upper-level management to concentrate on strategic decisions improves performance evaluation

A favorable sales variance occurs when actual sales ______ budgeted or expected sales.

exceed

Sales variances are favorable when actual sales ______.

exceed expected sales

Cost variances are unfavorable when actual costs ______.

exceed standard costs

When the actual sales price exceeds the expected sales price a company has a(n) ______ sales price variance.

favorable

When evaluating a fixed cost volume variance, ______ variances can have negative consequences.

favorable & unfavorable

A budget that shows revenues and costs at a variety of volume levels is a ______ budget.

flexible

A budget that shows revenues and costs at a variety of volume levels is a(n) _____ budget.

flexible

The difference between actual figures and figures on a flexible budget based on actual volume is a(n) _____ budget variance.

flexible

The difference between flexible budget figures and actual figures are ______ variances.

flexible budget

An investment center ______.

incurs expenses, generates revenues, and is responsible for the investment of capital.

Managers of ______ centers are accountable for assets, liabilities and earnings.

investment

The primary disadvantage of using residual income (RI) as a performance measure is ______.

it uses absolute dollars, so it is dependent on the size of the investment base

Because businesses cannot have mangers spend large amounts of time on operations that are functioning normally, many businesses follow the philosophy known as ______.

management by exception

A favorable labor variance could mean ______.

management motivated employees to work hard

Volume variances are typically the responsibility of ______ managers.

marketing

Return on investment (ROI) and residual income (RI) ______.

may be calculated for segments of the company may be calculated for specific investment opportunities

Under the concept of management by exception, areas with minor variances, ______.

need little or no review

Unfavorable variances are ______ bad.

not all

The controllability concept states that managers should ______.

only be evaluated based on the revenues and costs they control

Return on investment (ROI) is defined as ______.

operating income divided by operating assets

Margin is defined as ______.

operating income divided by sales

Managers are usually held responsible for items over which they have _____ rather than absolute control.

predominant

Managers are usually held responsible for items that they have ______ control over.

predominant

An organizational unit that incurs expenses and generates revenue is called a(n) _____ center.

profit

An organizational unit that incurs expenses and generates revenue is called a(n) ______ center.

profit

A favorable material variance could mean ______.

purchasing agents negotiated price concessions or discounts low prices were paid for inferior goods

An approach that measures management's ability to maximize earnings above some targeted level is _____ income.

residual

An approach that measures management's ability to maximize earnings above some targeted level is ______.

residual income (RI)

Using absolute dollars which are dependent on the size of the investment base is a disadvantage of ______.

residual income (RI)

An organizational unit that controls identifiable revenue or expense items is a(n) ______ center.

responsibility

Cost, profit and investment are all categories of _____ centers.

responsibility

The ratio of wealth generated to the amount invested is ______.

return on investment

Turnover is defined as ______.

sales divided by operating assets

The difference between actual sales and sales on a flexible budget based on actual volume is a ______ variance.

sales price

The difference between sales on the static budget and sales on a flexible budget based on actual volume is a ______ variance.

sales volume

The difference between the budgeted fixed costs and the actual fixed costs is called a(n) _____ variance.

spending

The master budget is frequently called a(n) _____ budget.

static

The master budget is frequently called a(n) ______ budget.

static

When marketing managers refer to making the numbers, they usually mean reaching the sales volume in the _____ budget.

static

Decisions made in the best interest of a division of the company, but not in the best interest of the company result in ______.

suboptimization

Decisions that are in the best interest of a division of the company, but not in the best interest of the company as a whole lead to a condition called _____.

suboptimization

Turnover is a measure of ______.

the amount of operating assets employed to support the achieved level of sales

Sales price variances always occur when ______.

the sales price is different than expected

When using cost-plus pricing, if the planned volume of activity is lower than the actual volume of activity, the price of goods will be ______.

too high

When using cost-plus pricing, if the planned volume of activity is higher than the actual volume of activity, the price of goods will be ______.

too low

Decentralization promotes ______.

training lower-level managers for increased responsibility

If actual volume is less than planned volume, the fixed cost volume variance is ______.

unfavorable

Flexible budgets ______.

use the same per-unit standard amounts as the static budget show the same fixed costs as the static budget can be prepared for any number of units sold

The difference between the cost on the static budget and the cost on a flexible budget based on actual volume is a(n) _____ _____ volume variance.

variable cost

The difference between the standard and the actual amount is called a(n) _____

variance

The difference between the standard and the actual amount is called a(n) ______.

variance

The difference between sales on the static budget and sales on a flexible budget based on actual volume is a sales _____ variance.

volume

To monitor the effects of changes in activity level on fixed cost per unit, companies frequently calculate a fixed cost _____ variance.

volume