Managerial Accounting
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
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 _____.
1. margin 2. turnover
When a manager accepts a project because the net operating income from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on _____ _____.
1. residual 2. income
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%
In a decentralized organization ______.
- top management can concentrate on issues such as overall strategy - lower-level managers are trained for higher positions. - changes in the operating environment can be responded to rapidly
Net operating income - (Average operating assets × Minimum required rate of return) = _____ _____
1. residual 2. income
Managers of cost centers are expected to ______.
minimize costs, while providing an acceptable level of service
The manager of a(n) _____ center has control over both costs and revenues, but not over the use of _____ funds.
1. profit 2. investment
Any part of an organization whose manager has control over and is accountable for cost, profit, or investments is a(n) _____ center.
responsibility
The manager of a(n) _____ center has control over costs, revenue, and investments in operating assets.
investment
ROI is a method used to evaluate ______.
investment centers, but not cost or profit centers
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.
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 _____%
1. increase 2. 10 3. 12
Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers?
- Return on investment (ROI) - Residual income
Which of the following ratios are part of the ROI formula?
- Sales ÷ Average operating assets - Net operating income ÷ Sales
Operating assets include ______
- accounts receivable - inventory - equipment
Disadvantages of decentralization include ______.
- lack of coordination - clashing objectives between departments and the organization - spreading innovative ideas may be difficult
ROI can be calculated as ______.
- net operating income ÷ average operating assets - margin × turnover
A company can increase its return on investment (ROI) by ______.
- reducing operating expenses - increasing sales
Valid criticisms of evaluating performance based on return on investment (ROI) include managers may:
- reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI - be put in charge of a business segment that includes committed costs over which a manager has no control - take actions that increase ROI in the short-run at the expense of long-term performance
Service departments, such as the accounting department, are generally considered _____ centers, while sales offices are often considered _____ centers.
1. cost 2. profit
In order to increase return on investment (ROI), the company must _____ (increase/decrease) sales, and/or _____ (increase/decrease) operating expenses and/or _____ (increase/decrease) average operating assets.
1. increase 2. decrease 3. decrease
Net operating income is income before _____ and _____.
1. interest 2. taxes
In order to fully understand how a manager's decisions can affect ROI, both _____ and _____ should be computed.
1. margin 2. turnover
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 $_____.
4,000
Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $_____.
6,000
Which of the following is not a characteristic of decentralization?
Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.
Residual income =
NOI - (Average operating assets × Minimum rate of return)
Return on investment =
Net operating income ÷ Average operating assets
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.
Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value?
Replacing an existing asset will not automatically decrease ROI
Which of the following business segments would not be considered a cost center?
Retail outlet
Net operating income ÷ Average operating assets =
Return on investment
The ROI formula typically uses ______.
average operating assets for the year
Decision-making authority lies mostly with higher-level managers in strongly _____ organizations.
centralized
Decision-making authority lies mostly with higher-level managers in strongly ______.
centralized organizations
Lower-level management goals that are inconsistent with company goals are a possible disadvantage of _____.
decentralization
An organization in which decision-making authority is spread throughout the organization is:
decentralized
In a _______ organization lower-level managers are empowered to make decisions which can ________ motivation and job satisfaction.
decentralized, increase
True or false: Adams, Inc. has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book values.
false
Using net book value (instead of gross cost) to calculate average operating assets ______.
increases ROI over time
Residual income is a measure used to evaluate managers of ______ centers.
investment
EBIT is another term for ______.
net operating income
When a manager is evaluated on residual income, an investment is acceptable when ______.
net operating income for the investment is above the minimum required return on average operating assets
Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through _____ accounting systems.
responsibility
Which of the following is not one of the three primary types of responsibility centers?
sales
Managers of cost centers are evaluated on ______.
their ability to control costs in their responsibility center
True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.
true
True or false: When ROI is calculated using the gross cost of assets, replacing a fully depreciated asset with a comparably priced new asset will not adversely affect ROI.
true
Garnett, Inc. has a required rate of return on new projects of 12%. The Western division of Garnett is currently earning a combined return on investment (ROI) of 14.5% on the projects in its division. The manager of the Western division is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct?
- Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment. - The manager may decide to reject the project because it will lower the current ROI earned by his division.
Managers can improve return on investment (ROI) by improving either _____ or _____.
1. margin 2. turnover
