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Exam 9: Responsibility Accounting

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Question 1

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Terra Company has two divisions,the Retail Division and the Wholesale Division.The following information was gathered for the two divisions for the current year: $\begin{array}{|l|lr|lr|}\hline & {\text { Retail Division }} & &{\text { Wholesale Division }} \\\hline \text { Operating income } & \$ & 2,500,000 & \$ & 6,000,000 \\\hline \text { Operating assets } & \$ & 16,000,000 & \$ & 36,000,000 \\\hline\end{array}$ Assuming that these are the only divisions of Terra Company,what is the ROI for the company as a whole?

A) 15.7%
B) 16.3%
C) 16.6%
D) 32.3%

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

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Question 2

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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 {Defiution or Description }& \text {Term } \\\hline & \text { A. Practice of holding a manager responsible for reveme and expense items over which he or the exercises predominant control }& \text {1. Controllability concept } \\\hline & \text {B. Type of responsiblity center where the manager influences only costs and is held acconntable for a specific output at a given level of cost}& \text {2. Cost-based transfer price } \\\hline & \text {C. Measure of the abality of a firm or segment within a firm to utilize available resources effectively to genterate a positive retum for shareholders}& \text {3. Cost center } \\\hline & \text { D. Transfer price based on the external market price less any cost savings}& \text {4. Decentralization } \\\hline & \text {E. Situation that motivates a manager to act in his or her own best interest even though the corporation as a whole nay suffer}& \text {5. Investment center } \\\hline & \text {F. The point in an organization where the control over revenue or expense items is located }& \text {6. Management by exception } \\\hline & \text {G. Transfer price that is based on the listorical or standard cost incurred by the supplying segnent}& \text {7. Market-based transfer price } \\\hline & \text {H. Type of responsibility center where the manager can inflnence revenues, expenses, and capital invested in his or her center to attain the best performance possible }& \text {8. Negotiated transfer price } \\\hline & \text { I. Type of responsibility center where the manager can influence both revemes and expenses for his or her center }& \text {9. Profit center } \\\hline & \text { J. Approach that evahates a managet on lis or her ability to maxinize the dollar value of earnings above some targeted level of earnings }& \text {10. Residnal inconse} \\\hline & \text { K. Reports comparing bodgeted and actual controllable costs for each center within a firm }& \text {11. Responsibilty center } \\\hline & \text { L. When variances from the budget are emphasize d in reporting procedures so that management concentrates its attention on those variances from the budget }& \text {12. Responsibilty reports } \\\hline & \text { M. Transfer price that is established by agreement of both the selling and buying segments of the firm }& \text {13. Retum on investment } \\\hline & \text { N. Practice of delegating authority and responswility for the operation of business segments }& \text {14. Suboptinization} \\\hline\end{array}$

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Question 3

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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 residual income for the division.

Estes Company has two operating divisions,A and B.The following information is provided for Division A: $\begin{array}{|l|lr|}\hline \text { Unit selling price } & \$ & 350 \\\hline \text { Unit variable costs } & \$ & 200 \\\hline \text { Unit fived costs } & \$ & 70 \\\hline\end{array}$ 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?

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

A responsibility report provided to a manager typically includes:

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:

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: $\begin{array}{|l|lr|}\hline \text { Sales } & \$ & 250,000 \\\hline \text { Operating Income } & \$ & 70,000 \\\hline \text { Turnover } & & 0.6 \\\hline\end{array}$ What is the corporation's ROI?

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

Indicate whether each of the following statements about decentralization is

Which of the following is a not an advantage of decentralization?

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?

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. $\begin{array}{|l|r|r|r|}\hline&\underline {\text { Service }} &\underline { \text { Imigation } }& \\\hline& \underline {\text { Division }} & \underline {\text { Division }} & \underline {\text { Total }}\\\hline \text {Units repaired; Units produced and sold } &8,000&250\\\hline \text {Level of investment in operating assets} &400,000 & \$ 1,000,000 & \$ 1,400,000 \\\hline & & \\\hline \text {Expenses: } && & \\\hline \text {Direct materials} &40,000 & 400,000 & 440,000 \\\hline \text {Direct labor} &200,000 & 200,000 & 400,000 \\\hline \text { Overhead } &25,000 & 250,000 & 275,000 \\\hline \text {Selling/administrative (S\&A) costs } &\underline {15,000} & \underline {150,000} & \underline {165,000} \\\hline \text {Total Expenses } &\$ 280,000& \$ 1,000,000 & \$ 1,280,000\\\hline \end{array}$ 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. )

One of the divisions in Milsap Manufacturing Company is the Camera Division.The Camera Division is developing a new product that would require a lens not commercially available.The Camera Division believes it can sell 40,000 units of the new product each year at a selling price of $120.Variable costs for the new product would be $60,not including the filter,and there will be $160,000 of incremental fixed costs associated with the product.The Camera Division does not have the expertise to make the lenses.Milsap Manufacturing Company has a Lens Division that could make the lenses and has sufficient idle capacity.It estimates the variable cost per unit would be $16 and incremental fixed costs would be $120,000 each year. Required: 1)There are different bases that can be used in setting transfer prices,including market prices.What basis should be used in this situation? 2)What is the maximum transfer price Camera Division should be willing to pay? Note that,without the lenses,the Camera Division cannot make and sell its new product. 3)What is the minimum transfer price that Lens Division should be willing to accept? 4)Should the transfer be made? If not,why not? If so,what transfer price (or range of transfer prices)would you recommend?

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

Payne Company reported the following information for the current year: $\begin{array}{|l|lr|}\hline \text { Sales } & \$ & 1,600,000 \\\hline \text { Average Operating Assets } & \$ & 500,000 \\\hline \text { Desired ROI } & & 14 \% \\\hline \text { Net Income } & \$ & 85,000 \\\hline\end{array}$ The company's residual income was:

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

Indicate whether each of the following statements about transfer pricing is

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

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