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Exam 15: Performance Evaluation

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Question 1

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Assuming actual volume is 11,000 units and planned volume is 10,000 units, the sales volume variance

A) is 1,000 units favorable.
B) is 1,000 units unfavorable.
C) cannot be determined without additional information.
D) None of these

E) C) and D)
F) All of the above

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Question 2

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

A) True
B) False

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Question 3

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The Woods and Water 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: During the year, the Service Division repaired 8,000 units at an average service fee of $50.00 per unit. The Irrigation Division sold 250 units at an average price of $5,000. The company requires a minimum rate of return 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.

What should be the organizational purpose for identifying and calculating variances?

Who (what manager) in an organization is generally held responsible for volume variances?

Based on the information given, calculate the dollar amount of the variance and indicate whether it is favorable or unfavorable. $\begin{array} { | l | l | l | l | l | } \hline \text { Item } & \text { Budget } & \text { Actual } & \text { Variance } & \begin{array} { l } \text { Favorable or } \\\text { Unfavorable }\end{array} \\\hline \text { Sales Revenue } & \$ 820,000 & \$ 814,000 & & \\\hline\end{array}$

Describe how a flexible budget is useful in planning for an organization.

A restaurant that is part of a retail store would probably be classified as a profit center.

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

Indicate whether each of the following statements is true or false. _____ a) Return on investment often is used to evaluate investment centers within a company. _____ b) Residual income measures a manager's ability to maximize earnings above a target level. _____ c) To calculate residual income, a company must first set a target or desired rate of return on investment. _____ d) Residual income is stated as a percentage or ratio amount. _____ e) Suboptimization occurs when a departmental or division manager seeks to benefit himself/herself at the expense of the company as a whole.

Indicate whether each of the following statements about responsibility centers is true or false. _____ a) A responsibility center controls identifiable revenue or expense items. _____ b) To be designated as a responsibility center, a department must be a large segment of an organization. _____ c) A cost center generates revenues and expenses. _____ d) Cost centers are commonly found at all levels of the organization chart. _____ e) The manager of a profit center is evaluated based primarily on his/her ability to control costs.

Sales volume variances are attributable to differences between planned and actual activity volumes.

Athens Corporation desires a 12% ROI on all operations. The following information was available for the company in 2012: $\begin{array}{ll}\text { Sales } & \$ 14,000 \\\text { Operating Net Income } & \$ 2,800\\\text { Investment turnover }&.5\end{array}$ What is the corporation's ROI?

Creighton Company's balance sheet and income statement are provided below: Required: 1) Compute the margin, turnover, and return on investment for Creighton Company. 2) What is the advantage of expanding the ROI formula to measure margin and turnover separately?

Bane Accounting Services planned to charge its customers $120 per hour in 2012. The chief operating officer expected that the company would provide 40,000 hours of service to clients. However, the vice president for marketing argued that the actual number of hours might range from 36,000 to 44,000 hours. Bane's standard variable cost is $65 per hour, and its standard fixed cost is $1,500,000. Required: Prepare flexible budgets for 36,000, 40,000, and 44,000 hours.

Wheeler Company provided the following selected information about its consumer products division for 2012: $\begin{array} { l c } \text { Desired ROI } & 10 \% \\\text { Net Income } & \$ 140,000 \\\text { Residual Income } & \$ 100,000\end{array}$ a) Based on this information, what was the division's investment amount (amount of operating assets)? b) Based on residual income, did the division meet the target set by Wheeler?

Use of residual income to evaluate the performance of divisions may lead to a reduction in suboptimizing behavior by managers, compared to the use of return on investment to evaluate performance.

How does a flexible budget differ from a company's master budget?

Under what circumstances is a cost variance favorable?

Indicate whether each of the following statements is true or false: _____ a) A responsibility accounting system is useful for controlling operations but not for evaluating the performance of managers. _____ b) Return on investment is usually calculated, Contribution Margin/Operating Assets. _____ c) Many businesses use the return on investment of departments and other segments in deciding how to allocate resources within the company. _____ d) The use of return on investment in allocating resources within an organization may motivate segment managers to improve performance. _____ e) Return on investment for a division should be calculated based on factors the division manager can control.