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Exam 9: Responsibility Accounting

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Question 31

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Sanford Company reported the following information for the current year: Required: Based on this information, calculate the company's residual income. $\begin{array} { | l | l r | } \hline \text { Sales } & \$ & 880,000 \\\hline \text { Average operating assets } & \$ & 475,000 \\\hline \text { Desired ROI } & & 10 \% \\\hline \text { Net income } & \$ & 90,000 \\\hline\end{array}$

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Residual Income = Net Income -...

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Question 32

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

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B) False

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Question 33

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

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.

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.

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 $0.60 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 major benefit of a decentralized organization is that:

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

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.

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

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

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:

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: 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? $\begin{array}{|l|r|}\hline\text { Revenues }&\$240,000\\\hline \text { Variable expenses } & 110,000 \\\hline \text { Direct fixed expenses } & 70,000 \\\hline \text { Average operating assets } & 500,000 \\\hline\end{array}$

Hu Corporation has two operating divisions, A andB. 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? $\begin{array} { | l | l r | } \hline \text { Unit selling price } & \$ & 200 \\\hline \text { Unit variable costs } & \$ & 120 \\\hline \text { Unit fixed costs } & \$ & 40 \\\hline\end{array}$

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 the current year: 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? $\begin{array}{|l|r|r|}\hline &{\text { Static Budget }} & {\text { Actual Results }} \\\hline \text { Number of units } & 100,000 & 94,000 \\\hline\text { Direct materials cost }&\$400,000&\$380,000\\\hline \text { Direct labor cost } & 200,000 & 185,000 \\\hline \text { Variable manufacturing overhead } & 100,000 & 94,000 \\\hline \text { Fixed manufacturing overhead } & 145,000 & 148,000 \\\hline \text { Total } & \$ 845,000 & \$ 807,000 \\\hline\end{array}$

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?

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.

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.

The New Products Division, of Testar Company, had operating income of $8,000,000 and operating assets of $44,800,000 during the current year. 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.

Unless there are other factors to be considered, an investment opportunity with a return on investment that equals or exceeds the company's required rate of return would be accepted.