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Exam 9: Responsibility Accounting

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Question 71

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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 by dividing operating income by 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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Question 72

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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) Decrease the investment in assets and/or increase sales.

E) A) and B)
F) A) and C)

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Question 73

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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.

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.______

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 reports are arranged using the management by exception approach.______

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?

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

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

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:

The Consumer Services Division is one part of Vargas Corporation.The Consumer Services Division reported income of $112,000 on an investment in operating assets of $800,000 for Year 1.The division expects this level of performance to continue for Year 2.Senior management of Vargas Corporation has asked the Consumer Services Division to consider adding a new service line that would result in the following revenues and costs: $\begin{array} { l r } \text { Reveriues } & \$ 240,000 \\\text { Variable expenses } & 110,000 \\\text { Direct fixed expenses } & 70,000 \\\text { Average operating assets } & 500,000\end{array}$ Required: 1)Compute the ROI that would be generated by the new product line. 2)Compute the ROI for the Consumer Services Division without the new product line. 3)Compute the Consumer Services Division's residual income without the new product line and with the new product line.The target ROI is 11%. 4)Would the new product line benefit the company as a whole? ROI for the company as a whole is 10%.Will the Consumer Services Division likely add the new product line given the company's use of ROI as a performance measure? Why or why not? Which performance evaluation measure will more likely motivate the division manager to do what is best for the company as a whole?

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.______

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 to maximize benefit for the company as a whole at the expense of his or her own best interest.______

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

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

Huang Company reported the following information for the current year: $\begin{array}{lrr} \text { Sales } &\$400,000\\ \text {Average Operating Assets } &\$250,000\\ \text { Margin } &10\%\\\end{array}$ The company's return on investment was:

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?

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:

Which of the following is an advantage of decentralization?

Which of the following statements regarding a balanced scorecard is correct?

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: