Fundamental managerial accounting concepts 7th edition edmonds test bank 1 by laura.garica431

Solution Manual for Fundamental Managerial Accounting Concepts

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Chapter 09 Responsibility Accounting

Multiple Choice Questions

1. The practice of delegating authority and responsibility is referred to as:

A. Centralization of authority.

B. Standard costing.

C. Management by exception.

D. Decentralization.

2. A major benefit of a decentralized organization is that:

A. Lower level managers are more motivated to improve productivity.

B. Upper level managers are more involved in routine decisions.

C. It avoids the necessity for a managerial accounting system.

D. It avoids decision making by less experienced lower level managers.

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3. Thanks to his firm's decentralization and use of responsibility accounting, Matt has more time to review a proposed new joint venture with one of the firm's business partners. What advantage of decentralization does this illustrate?

A. Encourages upper level management to concentrate on strategic decisions

B. Trains lower level managers to accept higher responsibilities

C. Improves performance evaluation

D. Motivates managers to improve productivity

4. Which of the following is a potential disadvantage of decentralization?

A. Decentralization does not prepare lower level managers to accept higher level responsibilities.

B. Managers may neglect their own needs while working to achieve the objectives of the firm as a whole.

C. If authority is too widely disbursed, the cohesiveness of the overall organization may suffer.

D. All of these.

5. Which of the following is not typically found in a decentralized organization?

A. Cost center

B. Decision center

C. Investment center

D. Profit center

6. 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 profit center.

B. A revenue center.

C. A cost center.

D. An investment center.

7. The research and development department of Apple Computers would likely be organized as:

A. A profit center.

B. A cost center.

C. A revenue center.

D. An investment center.

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8. Contribution margin would be the most important variable in evaluating the performance of:

A. A cost center.

B. A production center.

C. An investment center.

D. A profit center.

9. 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. An asset center.

C. A cost center.

D. A profit center.

10. A tool that is often used to depict the lines of authority and responsibility within a firm is:

A. A variance report.

B. An organization chart.

C. A master budget.

D. A responsibility report.

11. Select the false statement regarding responsibility accounting (RA).

A. It calls for the preparation of reports containing detailed information regarding the performance of a responsibility center.

B. It is most effective in a decentralized business structure where many managers exert control over various segments of a company's operations.

C. It calls for the preparation of responsibility reports listing the budgeted and actual revenue and/or expense items over which the manager has control.

D. It requires top management to prepare a plan of expected performance for the entire company and communicate that plan to lower levels of management.

12. Which of the following is not a characteristic of an effective responsibility accounting system?

A. Reports that highlight areas that need corrective action

B. Reports that show revenue and/or expense items under a manager's control

C. Reports that show budgeted and actual amounts of controllable revenue and expense items

D. Reports that set goals for long-term strategic performance

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13. Management recently instituted a new training program for upper level managers. They budgeted the cost of the new program at $1,000 per employee trained but actual costs were $1,250 per employee trained. The difference between the budgeted cost for training and the actual cost of training is called a:

A. Period cost.

B. Loss.

C. Variance.

D. Controllable cost.

14. Responsibility reports are prepared:

A. for each manager who controls a responsibility center.

B. only at the end of the accounting period.

C. to identify and punish managers who fail to control their costs.

D. for senior level managers only.

15. A responsibility report provided to a manager typically includes:

A. A list of all the items under the manager's control.

B. The budgeted amount for each item on the report.

C. The differences between the budgeted and actual amounts for each item on the report.

D. All of these.

16. 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.

A. Prentiss Company is not large enough to benefit from preparing responsibility reports.

B. Responsibility reports should be prepared for Division Three only.

C. Responsibility reports should be prepared for all three divisions.

D. Responsibility reports should be prepared for Divisions One and Two only.

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17. The manager of the production department for Romulus Manufacturing has responsibility for all stages of the production process and does not have time to review all the operational details of his department. He has found it to be more productive to focus on the significant deviations from budget. This kind of management is called:

A. Management by exception.

B. Crisis management.

C. Controllable management.

D. Decentralized management.

18. Select the incorrect statement concerning responsibility reports.

A. The reports should be stated in simple terms.

B. The reports should show clearly the budgeted and actual amounts of controllable revenues and expenses.

C. At the corporate level, responsibility reports generally include year-to-date contribution format income statements.

D. The reports become more specific for higher levels within the organization.

19. Which of the following formats is typically used in year-to-date income statements prepared for internal use under a responsibility accounting system?

A. Sales - Cost of Goods Sold = Gross Margin; Gross Margin - Operating Expenses = Net Income

B. Sales - Manufacturing Costs = Manufacturing Margin; Manufacturing Margin - Selling and Administrative Costs = Net Income

C. Sales - Variable Costs = Contribution Margin; Contribution Margin - Fixed Costs = Net Income

D. None of these.

20. Marcy is plant manager for Diversified Industries. She and the managers of four other plants report to the vice president in charge of manufacturing operations. Three department managers report to Marcy. Select the incorrect statement regarding the preparation of responsibility reports.

A. Marcy's responsibility report should include a detailed account of the individual items for which she is personally responsible.

B. The vice president's responsibility report would contain information for Marcy's plant rolled together with that of the other four plants.

C. Marcy's administrative costs should be included on the reports of her three department managers.

D. Marcy's responsibility report should contain only summary information about the operations of the three departments in her chain of command.

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21. 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?

A. Controllable cost

B. Opportunity cost

C. Fixed cost

D. Product cost

22. Select the incorrect statement concerning the application of the controllability concept to responsibility accounting.

A. As a practical matter, control of costs or revenues may be shared rather than absolute.

B. The concept of control is crucial to an effective responsibility accounting system.

C. Managers lose motivation when they are held accountable for actions that are beyond their scope of control.

D. Each manager should be evaluated on the costs but not the revenues that are under his or her control.

23. Stephanie's responsibility report includes the salary and benefits of her secretary. Although Stephanie prepares a performance evaluation for the secretary each year, Stephanie's superior determines how much the secretary will be paid. This example is an illustration of the fact that:

A. Responsibility reporting systems are not perfect.

B. Managers sometimes are held responsible for items over which they have only limited control.

C. Control may be shared.

D. All of these.

24. Which of the following statements about return on investment (ROI) is false?

A. ROI = margin divided by investment turnover.

B. ROI is used to measure the performance of investment centers.

C. Seeking to maximize ROI can result in a conflict between the interest of a particular manager and the interest of the business as a whole.

D. Companies may minimize motivational problems by using original cost instead of book value in the denominator of the ROI formula.

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25. Huang Company reported the following information for 2014:

The company's return on investment for 2014 was:

A. 10%.

B. 6.25%.

C. 16%.

D. Cannot be ascertained from the information provided.

26. Campbell Candy Corporation desires a 16% return on investment (ROI) on all operations. The following information was available for the company in 2014:

What is the corporation's ROI?

A. 16.8%

B. 28%

C. 32%

D. Impossible to determine from the information given.

27. Joseph Company has an investment in assets of $450,000, income that is 10% of sales, and an ROI of 18%. From this information the amount of income would be:

A. $81,000.

B. $45,000.

C. $2,500,000.

D. Impossible to determine from the information given.

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28. The Family Restaurant chain had a 12% return on a $60,000 investment in new ovens. The investment resulted in increased sales and an increase in income that was 3% of the increase in sales. The increase in sales was:

A. $7,200.

B. $15,000.

C. $180,000.

D. $240,000.

29. Willis Company made a $200,000 investment in new machinery. Assuming the company's margin is 4%, what income will be earned if the investment generates $600,000 in additional sales?

A. $80,000.

B. $24,000.

C. $400,000.

D. None of these.

30. The Perez Company had a 12.5% return on a $100,000 investment in new equipment. The investment resulted in increased sales, and the resultant increase in income amounted to 5% of sales. The turnover(asset utilization) was:

31. The Cineplex Movie Theater has invested in a snack bar for its store, where individual pizzas would be prepared and sold. The investment cost the company $45,000. The company expects a sales volume for the new product to be 12,000 pizzas a year. Variable materials, preparation, and marketing costs are expected to be $1.50 per unit and fixed costs are estimated at $15,000 a year. Based on a desired 12% ROI, what should Cineplex charge as the selling price per pizza?

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A. 1. B. 17.5. C. 2.5. D. 7.5.

$3.00

$2.75

$5.20

$3.20

32. Ormand Organic Grocery has invested in a yogurt stand for its store. The investment cost the company $100,000. Variable materials, preparation, and marketing costs are expected to be $.60 per unit and fixed costs are estimated at $6,000 a year. If actual sales were 20,000 servings, what would the ROI be using the sales price of $1.80?

A. 30.0%

B. 22.0%

C. 18.0%

D. 24.0%

33. Howard Company provided the following selected information about its consumer products division for 2014:

Based on this information, the division's investment amount was:

A. $250,000.

B. $1,000,000.

C. $1,500,000.

D. $1,250,000.

34. Fairpoint Products provided the following selected information about its consumer products division for 2014:

Based on this information, the division's investment amount was:

A. $500,000.

B. $1,250,000.

C. $750,000.

D. $2,000,000.

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35. Payne Company reported the following information for 2014:

The company's residual income for 2014 was:

A. $(15,000).

B. $14,000.

C. $15,000.

D. $24,000.

36. Joseph Company reported the following information for 2014:

The company's operating income for 2014 was:

A. $94,440.

B. $56,250.

C. $45,000.

D. $33,750.

37. Which of the following would increase residual income? (Assume all other things are equal)

A. Decrease in investment

B. Decrease in operating income

C. Increase in the desired return on investment

D. None of these.

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38. To avoid suboptimization, many companies prefer to evaluate their investment centers using:

A. Residual income instead of return on investment.

B. Return on investment instead of residual income.

C. Gross margin instead of contribution margin.

D. Sales instead of income.

39. When using residual income (RI) as a project-screening tool, management should accept a project if:

A. RI is positive.

B. RI is negative.

C. RI equals ROI.

D. RI is greater than Net Income.

40. 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?

A. ROI

B. Residual income (RI)

C. Both ROI and RI will motivate the manager to accept the project.

D. Neither ROI nor RI will motivate the manager to accept the project.

41. Which of the following should not be included in the investment base used to compute residual income?

A. Accounts receivable

B. Inventory

C. Cash

D. Land held for future use

42. Which of the following may be used to establish transfer prices?

A. Standard cost of a product

B. A negotiated price

C. Market price

D. All of these.

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43. Which of the following is an advantage of using cost-based transfer prices?

A. Such prices are an objective measure and easy to compute.

B. Such prices motivate the buying division to control cost.

C. Such prices provide a sense of fairness.

D. Such prices will usually exceed the market based or negotiated transfer prices.

44. The preferred method for setting transfer prices generally is some form of:

A. Price based on negotiation.

B. Price based on industry cost averages.

C. Price based on historical costs.

D. Price based on market forces.

45. If a company is unable to use market-based transfer prices, the next best alternative is to use a price:

A. Based on negotiation.

B. Based on variable cost.

C. Based on standard cost.

D. Set by senior management.

46. Hu Corporation has two operating divisions, A and B. The following information is provided for Division A:

Division B uses the type of product produced by Division A and has approached Division A about buying the product internally. Division B is currently paying $180 to purchase the product from an outside source. If Division A sells internally it can save $5 per unit in variable costs. Assuming Division A is operating at capacity, what price should it charge Division B if the transfer is to be made?

A. $115

B. $195

C. $125

D. $200

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47. Estes Company has two operating divisions, A and B. The following information is provided for Division A:

Division B uses the type of product produced by Division A and has approached Division A about buying the product internally. Division B is currently paying $300 to purchase the product from an outside source. If Division A sells internally it can save $10 per unit in variable costs. Assuming that Division A has sufficient excess capacity to produce all of the units requested by Division B, which of the following is the lowest price Division A should consider for the transfer?

A. $300

B. $190

C. $260

D. $250

48. The Electronics Division of Anton Company reports the following results for 2014:

Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division.

The Electronic Division's return on investment is:

A. 11.25%.

B. 12%.

C. 66.7%.

D. 18%.

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49. The Electronics Division of Anton Company reports the following results for 2014:

Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division.

The Electronic Division's margin is:

A. 11.25%.

B. 12%.

C. 66.7%.

D. 18%.

50. The Electronics Division of Anton Company reports the following results for 2014:

Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division.

The Electronic Division's turnover (asset utilization) is:

A. 0.1125.

B. 0.12.

C. 0.667.

D. 0.18.

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51. Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions in 2014:

Terra Company has set a target return on investment (ROI) of 15% for both divisions. Based on ROI, which division appears to have performed better?

A. Retail division.

B. Wholesale division.

C. Both division have the same results.

D. The answer cannot be determined using the information provided.

52. Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions in 2014:

Assuming that these are the only divisions of Terra Company, calculate ROI for the company as a whole.

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16.6%

A. 15.7% B. 16.3% C.

D. 32.3%

53. Retail Sales and Wholesale Sales are the only divisions of Terra Company. The following information was gathered for the two divisions in 2014:

The company has $1,200,000 in operating assets that are not assigned to either of the divisions and $500,000 in corporate expenses that are not reflected in the information above. Based on this information, what is the ROI for the company as a whole?

A. 17.7%

B. 16.9%

C. 15%

D. The answer cannot be determined using the information provided.

54. Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions in 2014:

Terra Company has set a target return on investment (ROI) of 15% for both divisions Which of the following statements is accurate?

A. Residual income for the retail sales division was $100,000

B. Residual income for the wholesale sales division was $600,000

C. Residual income for the retail sales division was $600,000

D. None of these.

55. In the current year, the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is correct?

A. The New Products division yielded ROI that was lower than the target ROI.

B. Residual income for the New Products division was $832,000.

C. The New Products division yielded no residual income.

D. All of these are correct.

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56. 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?

A. 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.

B. The new product will yield residual income of $45,000.

C. The new product will decrease the company wide ROI.

D. The new product unacceptable because it will yield an ROI that is lower than the target ROI.

57. For 2014, the New Products Division, of Testar Company, had operating income of $8,000,000 and operating assets of $44,800,000. 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 division's ROI.

A. 17.6%

B. 17.9%

C. 16.5%

D. The answer cannot be determined using the information provided.

58. For 2014, the New Products Division, of Testar Company, had operating income of $8,000,000 and operating assets of $44,800,000. 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. $872,000

C. $528,000

D. $672,000

59. The process of evaluating the performance of individual managers is known as:

A. Responsibility accounting.

B. Management by exception.

C. Responsibility management.

D. Performance management.

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60. All of the following are characteristics that are required for effective responsibility accounting except:

A. motivation.

B. accountability.

C. centralization.

D. none of these.

61. Which of the following is an advantage of decentralization?

A. Decentralization encourages managers to focus on strategic decisions.

B. Authority and responsibility is not clear.

C. Decentralization motivates managers to improve productivity.

D. None of these.

62. Which of the following is a characteristic that is needed for decentralization to work well in an organization?

A. Clear lines of authority

B. Responsibility

C. Good communication

D. All of these.

63. A reporting unit of a decentralized business that controls identifiable revenue and/or expense items is known as a(n):

A. Management center.

B. Performance center.

C. Accounting center.

D. Responsibility center.

64. Vanessa Grant is responsible for controlling expenses, but is not responsible for generating revenues. Vanessa Grant is a manager of a(n):

A. Cost center.

B. Profit center.

C. Investment center.

D. Liability center.

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65. Which of the following statements regarding cost centers is incorrect?

A. Cost centers are units within a business that incur expense, but do not have responsibility for generating revenue.

B. Cost centers tend to be found at upper levels on a company's organization chart.

C. A manager of a cost center has less responsibility than a manager in an investment center.

D. Cost center managers are evaluated on their ability to control costs and keep within budget.

66. An organizational unit of a business that incurs costs and generates revenues is known as a(n):

A. Cost center.

B. Sales center.

C. Profit center.

D. Investment center.

67. Which of the following statements regarding profit centers is correct?

A. A manager of a profit center has more responsibility than a manager of an investment center.

B. A manager of profit center is evaluated only on his/her ability to control costs.

C. A manager of a profit center is evaluated on his/her ability to control costs and generate revenues.

D. A manager of a profit center is responsible for assets, liabilities, and earnings.

68. Delegating authority and responsibility throughout an organization is known as:

A. centralization.

B. decentralization.

C. management by exception.

D. suboptimization.

69. 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. Investment centers are commonly found at the higher levels of an organization chart.

C. A manager of an investment center should be accountable for assets, liabilities, earnings.

D. Return on investment and residual income are tools used to assess managers of an investment center.

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70. 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.

71. The concept says that 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.

72. Which of the following statements is incorrect?

A. ROI is calculated as revenue divided by operating assets.

B. Operating assets are assets that are actually used to generate revenue.

C. Non-operating assets are not included in the calculation of return on investment.

D. Operating assets include both current and long-term assets.

73. The manager of Pearless Company's Toy Division is not satisfied with the level of return on investment that the division achieved this year. What can be done to improve return on investment?

A. Decrease the investment in assets

B. Increase operating expenses

C. Increase sales

D. Both decrease the investment in assets and increase sales are correct.

74. The term that describes what occurs when a manager does what is in his/her best interests and not what is in the best interests of the company as a whole is known as:

A. suboptimization.

B. strategic planning.

C. lowballing.

D. goal alignment.

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75. Which of the following statements is incorrect?

A. Turnover is calculated by dividing sales by average operating assets.

B. Margin is a measure of the profits generated from sales.

C. Return on investment can be improved by increasing sales, decreasing expenses, or increasing the asset base.

D. If return on investment increases when sales increase, that change usually is due at least in part to the effect of fixed costs (operating leverage).

76. Which of the following statements about residual income is true?

A. Residual income = Operating Income - Sales

B. Residual income = Operating Income - Operating Assets

C. Residual income is the amount of income in excess of a target or desired return on investment

D. None of these.

77. 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 their mission.

B. A balanced scorecard includes financial performance measures such as ROI.

C. A balanced scorecard includes non-financial measures such as defect rates or on-time deliveries.

D. All of these.

True / False Questions

78. Clear lines of authority and responsibility are essential to establishing a responsibility accounting system.

True False

79. Decentralization encourages upper level management to concentrate on short-term decisions.

True False

80. An important disadvantage of decentralization is that managers may engage in suboptimal behavior.

True False

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81. Suboptimization refers to actions taken by a manager that are in the best interest of the firm as a whole but not in his/her own best interest.

True False

82. Organization charts are drawn in a hierarchical fashion with low level managers shown at the bottom of the chart, middle level managers in the middle of the chart, and senior level managers shown at the top of the chart.

True False

83. A disadvantage of decentralization is that it fails to motivate managers to improve the productivity of their division.

True False

84. A restaurant that is part of a retail store and managed by the retail manager would most likely be classified as a cost center.

True False

85. Liam manages a division that is part of a large, decentralized business. He has a substantial degree of control over the division's costs, revenues, and investment in assets. Based on this information, the division would be classified as a profit center.

True False

86. Investment centers are often evaluated on the basis of return on investment.

True False

87. In a decentralized firm, a responsibility report should be prepared for investment center managers, but are not useful for profit center managers.

True False

88. Cambridge Company has three divisions that all report to the Vice President of Manufacturing. Each division has two departments. On Cambridge's organization chart, there will be three lines leading to the Vice President of Manufacturing, one for each department.

True False

89. Patterson Company has three divisions that all report to the Vice President of Manufacturing. Each division has two departments. The Vice President of Manufacturing should receive detailed responsibility reports on all six of the departments.

True False

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90. Responsibility reports should be arranged in a manner that promotes management by exception.

True False

91. In a responsibility reporting system, the reports of a particular manager contain summary information about the revenue and cost items directly under his or her control and detailed data on the activities of the responsibility centers that fall under his or her chain of authority.

True False

92. Responsibility reports should be simple, show variances between the budgeted and actual amounts of controllable revenue and expense items, and be timely.

True False

93. When preparing responsibility reports, an accountant should remember that the utility of information tends to decrease with the length of time required to prepare and disseminate the information.

True False

94. In a responsibility report, a cost center's actual costs should be compared to its flexible budget.

True False

95. In responsibility accounting systems, managers never are held responsible for items over which they have less than absolute control.

True False

96. In an optimal responsibility accounting system managers are evaluated on only the revenues and costs that are under their control.

True False

97. The general formula for return on investment is revenue divided by investment in assets.

True False

98. If Pascal Company's turnover (asset utilization) measure is 2.5 and its margin is 7.5%, its ROI is 18.75%.

True False

99. Any investment opportunity with a return on investment that equals or exceeds the company's required rate of return should be accepted.

True False

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100.Any investment opportunity with a residual income that equals or exceeds the company's required rate of return should be accepted.

True False

101.The preferred method for establishing transfer prices for transactions between divisions of the same firm is to base the transfer price on some form of competitive market price.

True False

102.When a market-based transfer price is not possible, a transfer price imposed by upper management should preserve a sense of fairness among the divisions of the company affected by the transfer.

True False

103.A decentralized company should try to minimize autonomy among the managers of its divisions and departments.

True False

104.The most desirable way to set a transfer price is to base it on either variable cost or total cost.

True False

105.A cost-based transfer price should be based on standard unit costs, not actual costs.

True False

106.In a potential transfer price situation, if the supplying division is operating at capacity in making sales to outside customers, it should be required to accept a transfer price that would lower its overall profitability because doing so will increase total firm profitability.

True False

Essay Questions

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107.Describe the concept of decentralization as applied to large business organizations. Why do large organizations practice decentralization?

108.Frank and Brooke manage separate departments at Vantage Corporation. Frank's department is in charge of production of products, while Brooke's is responsible for sales of products. One of the company's objectives is to minimize its investment in inventory. Whose set of responsibility reports should include the cost of storing goods awaiting sale?

109.How should a responsibility report be prepared to support the practice of management by exception?

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110.Explain how the management by exception doctrine relates to responsibility accounting.

111.How might return on investment be used in making resource allocation decisions within an organization?

112.What methods are used to measure operating assets for calculating return on investment? Which of these approaches would you recommend? Explain your choice.

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113.Describe some of the factors and issues that must be considered in defining return and investment in calculating return on investment.

114.Mitchell Company has two divisions, Division A and Division B. Division A makes a product that Division B could use in making one of its products. Why do the managers of both divisions care about the amount of the transfer price?

115.What are the advantages of using a market-based transfer price? Why is it not always used?

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116.What are the different bases that can be used to establish transfer prices? Which would you generally recommend?

117.Indicate whether each of the following statements about decentralization is true or false.

Decentralization of an organization means that the organization has operations in many different places.

Decentralization allows lower-level managers to concentrate on strategic decisions rather than routine operating decisions.

Decentralization allows local managers to make more decisions.

Decentralization means delegating authority to managers and holding them responsible for their performance.

Increased decentralization within an organization generally leads to an increase in the level of employee and manager motivation.

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118.Indicate whether each of the following statements about responsibility centers is true or false.

A responsibility center controls identifiable revenue or expense items. To be designated as a responsibility center, a department need not be a large segment of an organization.

A cost center generates revenues and expenses. Investment centers are commonly found at upper levels of the organization chart. The manager of a profit center is evaluated based primarily on his/her ability to control costs.

119.Indicate whether each of the following statements is true or false.

Cost centers tend to be found in the upper levels of a company's organization chart. Managers of investment centers are accountable for assets, liabilities, and earnings.

Responsibility reports are prepared only for the top level managers of a business because they are responsible for the business as a whole.

Responsibility reports often show actual and budgeted revenues and expenses and the amounts of any variances.

Responsibility accounting supports using the management by exception approach.

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120.Indicate whether each of the following statements is true or false.

Responsibility reports prepared for higher-level managers have less detail than the reports prepared for lower-level managers.

The amount of detail in a responsibility report should be such that managers can focus on significant deviations from expectations.

The controllability concept means that managers should be evaluated based on revenues and costs they can control.

If a manager is to be held responsible for a revenue or expense, he/she must have complete control over that item.

A critical feature of responsibility reports is that they must be precise, even if it takes more time to prepare.

121.Indicate whether each of the following statements is true or false:

A responsibility accounting system is useful for controlling operations but not for evaluating the performance of managers.

Return on investment is usually calculated, Operating Income/Operating Assets.

Many businesses use the return on investment of departments and other segments in deciding how to allocate resources within the company.

The use of return on investment to allocate resources within an organization is unlikely to motivate segment managers to improve performance.

Return on investment for a division should be calculated based on factors the division manager can control.

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122.Indicate whether each of the following statements about return on investment is true or false.

Return on investment for a division is calculated by dividing net income by total assets. Using book value as the valuation base for calculating return on investment can distort ROI and cause motivational problems among managers.

Accounts receivable are not included in operating assets for the purpose of calculating return on investment.

Return on investment could be calculated based on historical cost or replacement cost for a division's assets.

Return on investment can be calculated by multiplying margin by turnover.

123.Indicate whether each of the following statements is true or false.

Margin is calculated by dividing operating income by net income.

Turnover is a measure of the profits generated from sales.

Return on investment can be improved by increasing sales, decreasing expenses, or decreasing the asset base.

If return on investment increases when sales increase, that change usually is due at least in part to the effect of fixed costs (operating leverage).

Return on investment blends many aspects of managerial performance into a single ratio.

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124.Indicate whether each of the following statements is true or false.

Return on investment often is used to evaluate cost centers within a company. Return on investment measures a manager's ability to maximize earnings above a target level. To calculate residual income, a company must first set a target or desired return on investment. Residual income is stated as a dollar amount. Suboptimization occurs when a departmental or division manager seeks maximize benefit for the company as a whole at the expense of his or her own best interest.

125.Indicate whether each of the following statements is true or false.

Use of residual income to evaluate managers of an investment center may avoid some of the suboptimization that can occur with use of return on investment as a performance measure. Residual income is stated as a ratio or percentage.

One disadvantage with residual income as a measure of performance is that it causes smaller divisions to appear to do better than larger divisions.

A balanced score card includes various non-financial performance measures as well as financial performance measures.

The balanced scorecard is a holistic approach to evaluating management and division performance.

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126.Indicate whether each of the following statements about transfer pricing is true or false.

When the selling division is currently operating at capacity, goods should not be transferred to other divisions within a company.

A transfer price is the price used in making sales between divisions or other segments in a company.

Most companies use a market-based price as the basis for setting transfer prices.

The lower the transfer price is, the higher the profit for the purchasing division.

The level of the transfer price affects the reported profits of the selling division and the purchasing division, as well as the company as a whole.

127.Indicate whether each of the following statements about transfer pricing is true or false.

A cost-based transfer price has the advantage of promoting efficiency and fairness.

A market-based transfer price may be adjusted to take into account cost savings that occur as a result of sales being made within the company.

A decentralized company should adopt a policy of requiring divisions in the company to make sales to other divisions when such sales will benefit the company as a whole.

The level of capacity at which the selling division is operating should not affect the level of the transfer price for a sale to another division in the same company. Companies with operations in two or more countries sometimes try to set transfer prices at a level that will reduce their overall income tax bill.

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128.Select the term from the list that best matches the description or definition. Enter the number of the best answer in "Your Answer" column.

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129.Thanks to generous financial support from an anonymous donor, the Department of Accounting and Law at Northern University plans to create a center for accounting research. The Center, which will be an administrative unit of the department, will maintain a collection of accounting books and journals and electronic databases that will be used by faculty doing research. The search committee charged with recruiting a director for the center has requested an organization chart to show the lines of authority and responsibility among the various units of the university.

The following units have been identified:

Center for Accounting Research (newly created)

College of Business Administration (COBA)

College of Education (COE)

College of Liberal Arts and Social Sciences (CLASS)

College of Science and Technology (COST)

Department of Accounting and Law (DAL)

Department of Finance and Economics (DFE)

Department of Management and Information Systems (DMIS)

Department of Marketing and Logistics (DML)

President of the University

Vice President for Academic Affairs (VPAA)

Vice President for Business Affairs (VPBA)

Vice President for Student Affairs (VPSA)

Required:

1) Construct an organization chart that depicts the units identified above. Because of space limitations, you may want to use the unit abbreviations. Note that deans of academic colleges report to the Vice President for Academic Affairs.

2) Describe several costs that might be controllable by the new center's director.

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130.Joanne Graves is manager of a production department of Fordham Company. Her department makes one product; the following information for her department was accumulated for 2014:

Required:

1) Prepare a flexible budget for the department's actual level of activity.

2) Use the flexible budget to evaluate the performance of Ms. Graves' department.

3) Why does the budget not include sales revenue and net income?

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131.The Premium Product Company has three production departments: machining, assembly, and finishing. The three departments are under the control of the vice president of manufacturing. Each department has a manager, and one or more supervisors report to each department manager. Accordingly, the chain of command goes from vice president to department manager to supervisor. The responsibility reports for the two supervisors in the Machining Department are provided below:

Other pertinent cost data are provided in the following table:

Required:

1) Prepare a responsibility report for the manager of the Machining Department.

2) Prepare a responsibility report for the Vice President of Manufacturing.

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132.Car City is divided into three divisions: new car sales (NCS), used car sales (UCS), and parts and service (PAS). Each division is supervised by a division manager. The three division managers report to the general manager. Each division is subdivided into different departments managed by a department manager. For example, the PAS division has a parts department manager and a service department manager and NCS has a department manager for auto sales and a department manager for truck sales. The following items were contained in the company's most recent responsibility report:

Required:

Identify the items that are likely considered to be controllable by the Parts and Service division.

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133.Most large organizations establish responsibility centers (sections, departments, divisions, etc.) in order to delegate decision-making authority to the individuals who are best suited to make decisions in those particular centers. Consider the following responsibility centers: Responsibility Center Description

Required:

1) Three commonly found responsibility centers are cost centers, profit centers, and investment centers. Describe each type of center.

2) Which type of center will each most likely be classified as: a cost center, profit center, or investment center?

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134.For 2014, an investment center of Lannigan Company reported operating income of $330,000 on total operating assets of $2,600,000. The company has established a target ROI of 13% for the investment center. Last year, the investment center's ROI was 12.2%.

Required:

Calculate the 2014 return on investment for the investment center. Compare its performance for 2014 with both the performance from the previous year and the target ROI.

135.For 2014, one division of Apex Company reported operating assets of $5,000,000 and operating income of $750,000. Apex has established a target return on investment (ROI) of 14% for the division.

Required:

1) Calculate the division's ROI for 2014. Did it achieve the target set by the company?

2) Assuming that operating assets for 2015 increase by 10%, by how much would operating income have to increase to reach the target of 14%?

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136.For 2014, Division C of Deerfield Company reported operating assets of $8,800,000, revenues of $6,600,000, and operating expenses of $5,760,000. The company has established a target return on investment (ROI) of 10% for the division.

Required:

1) Calculate the 2014 ROI for the division. Did the division achieve its target ROI for the year?

2) For 2015, Division C managers expect that its operating assets will stay at about the same level as for 2014. Variable expenses for 2014 were $3,960,000, and the remaining expenses were fixed. The managers expect that the contribution margin ratio for 2015 will be the same as for 2014 and that the amount of fixed expenses will not change. To what level must sales increase in 2015 to achieve the target ROI?

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137.Carver Company's balance sheet and income statement are provided below:

Required:

1) Compute the margin, turnover, and return on investment for Carver Company.

2) What is the advantage of expanding the ROI formula to measure margin and turnover separately?

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138.Perfect Products provided the following selected information about its consumer products division for 2014:

Required:

Based on this information, calculate the company's investment amount. Round your answer to the nearest dollar.

139.Sanford Company reported the following information for 2014:

Required:

Based on this information, calculate the company's residual income for 2014.

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140.Curtis Company's balance sheet and income statement are provided below:

The company pays its senior managers a bonus based on ROI.

Required:

1) Compute the company's ROI assuming that the amount of operating assets is measured at:

(a) cost;

(b) book value; and

Round ROI to one decimal place (i.e. 4.6%)

2) What is the lesson of this exercise?

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141.The Water Management Company has two operating divisions, the Service Division and the Irrigation Division. The company evaluates the performance of its divisions using the return on investment (ROI) measure. The following information pertains to the two divisions as of the end of the current year.

The average service fee was $50.00 per unit for the Service Division, while the average selling price of an irrigation system was $5,000 for the Irrigation Division. The company requires a minimum return on investment of 12%.

Required:

Compute the Return on Investment (ROI) measure for both divisions and the company as a whole. Based on ROI alone which division had the better performance? (Round ROI measures to the nearest whole percent.)

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