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Exam 9: Responsibility Accounting

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Question 21

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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) .

E) B) and D)
F) C) and D)

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Question 22

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

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Question 23

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

Select the term from the list that best matches the description or definition. Enter the number of the best answer in "Your Answer" column. $\begin{array}{|l|l|l|}\hline \text { Your Answer } & \text { Definition or Description } & \text { Term } \\\hline & \begin{array}{l}\text { A. Practice of holdung a manager respons ible for revenue and } \\\text { expense items over which he or she exercises predominant control }\end{array} & \text { 1. Controllablity concept } \\\hline & \begin{array}{l}\text { B. Type of responsbility center where the manager influences only } \\\text { costs and is held acconntable for a specific output at a given level } \\\text { of cost }\end{array} & \text { 2. Cost-based transfer price } \\\hline & \begin{array}{l}\text { C. Measure of the ability of a firm or segment within a firm to } \\\text { utilize avalable resources effectrvely to generate a positive retrun } \\\text { for shareholders }\end{array} & \text { 3. Cost center } \\\hline & \begin{array}{l}\text { D. Transfer price based on the external market price less any cost } \\\text { savings }\end{array} & \text { 4. Decentralization } \\\hline & \begin{array}{l}\text { E. Situation that motivates a manager to act in his or her own best } \\\text { nterest even thongh the corporation as a whole may suffer }\end{array} & \text {. Investment center } \\\hline & \begin{array}{l}\text { F. The point in an organization where the control over reveme of } \\\text { expense items is located }\end{array} & \text { Management by exception } \\\hline & \begin{array}{l}\text { G. Transfer price that is based on the histonical or standard cost } \\\text { incured by the supplying segment }\end{array} & \text { 7. Market-based transfer price } \\\hline & \begin{array}{l}\text { H. Type of responsibility center where the manager can influence } \\\text { revemues, expenses, and capital invested in his or her center to } \\\text { attain the best performance possible }\end{array} & \text { 8. Negotinted transfer price } \\\hline & \begin{array}{l}\text { I. Type of responsibility center where the manager can influence } \\\text { both reverues and expenses for lis or her center }\end{array} & \text { 9. Profit center } \\\hline & \begin{array}{l}\text { J. Approach that evahates a manager on his or her ability to } \\\text { maxinize the dolbr valne of earnings above some targeted level of } \\\text { earnings }\end{array} & \text { 10. Residual income } \\\hline & \begin{array}{l}\text { K. Reports comparing bodgeted and actnal controllable costs for } \\\text { each center within a firm }\end{array} & \text { 11. Responsibulity center } \\\hline & \begin{array}{l}\text { L. When variances from the budget are emphasized in reporting } \\\text { procedures so that managenent concentrates its attention on those } \\\text { variances from the budget }\end{array} & \text { 12. Responsibility reports } \\\hline & \begin{array}{l}\text { M. Transfer price that is established by agreement of both the } \\\text { selling and buying segnents of the firm }\end{array} & \text { 13. Return on investment } \\\hline & \begin{array}{l}\text { N. Practice of delegating authority and responsibility for the } \\\text { geeration of bnsiness segments }\end{array} & \text { 14. Suboptimization } \\\hline\end{array}$

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

Joseph Company reported the following information for the current year: The company's operating income was: $\begin{array} { |l | r| } \hline\text { Sales } & \$ 787,000 \\\hline \text { Average Operating Assets } & \$ 375,000 \\\hline \text { Desired ROI } & 12 \% \\\hline\text { Residual Income } & \$ 11,250 \\\hline\end{array}$

Which of the following statements about residual income is true?

Hinton Corporation includes two divisions, Filter Division and Motor Division. The Filter Division makes specialized filters, including one that could be used by the Motor Division. Costs for the filter are: variable costs, $16; fixed costs, $20. Filter Division has capacity to make 20,000 of the filters, and it is operating at capacity. It sells the filters to other companies for $52 each. The Motor Division needs 8,000 filters per year, and it has been purchasing them from another company for $45 each.Required: 1) Businesses traditionally have used different bases for establishing transfer prices. What basis should be used in this case? 2) If a transfer were to occur between Filter Division and Motor Division, what is the maximum that Motor Division should be willing to pay for the filters? 3) If a transfer were to occur between Filter Division and Motor Division, what is the minimum price that Filter Division should be willing to accept? 4) Do you recommend that a transfer occur between Filter Division and Motor Division? If the transfer did occur, what would be the effect on the overall profits of Hinton Corporation?

For Year 1, 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 Year 1 ROI for the division. Did the division achieve its target ROI for the year? 2) For Year 2, Division C managers expect that its operating assets will stay at about the same level as for Year 1. Variable expenses for Year 1 were $3,960,000, and the remaining expenses were fixed. The managers expect that the contribution margin ratio for Year 2 will be the same as for Year 1 and that the amount of fixed expenses will not change. To what level must sales increase in Year 2 to achieve the target ROI?

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

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.

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.

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.

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

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:

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.

Campbell Candy Corporation desires a 16% return on investment (ROI) on all operations. The following information was available for the company for the current year: What is the corporation's ROI? $\begin{array} { | l | l r | } \hline \text { Sales } & \$ & 250,000 \\\hline \text { Operating Income } & \$ & 70,000 \\\hline \text { Turnover } & & 0.6 \\\hline\end{array}$

An investment center of Lannigan Company reported operating income of $330,000 on total operating assets of $2,600,000 during the current year. 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 return on investment for the investment center for the current year. Compare its performance with both the performance from the previous year and the target ROI.

The Electronics Division of Anton Company reports the following results for the current year: Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's margin is: $\begin{array} { | l | l r | } \hline \text { Revenues } & \$ & 800,000 \\\hline \text { Operating expenses } & \$ & 720,000 \\\hline \text { Operating income } & \$ & 144,000 \\\hline \text { Operating assets } & \$ & 1,200,000 \\\hline\end{array}$

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