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BUS 435 Test #2

STUDY
PLAY
Which of the following statements is (are) true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and implements decisions.
(B) Rational managers will always make decisions that are in the best interest of the organization employing them.
A. Only A is true.
Decentralization refers to the delegation of decision-making authority to
D. subordinates.
Which of the following is not a characteristic of a decentralized organization?
more decisions made by relatively few individuals
Which of the following statements is false?
A. The U.S. military is a good example of an organization that is highly decentralized.
Which of the following elements is not part of a management control system?
C. knowledge of local conditions
An operating unit of an organization is called a cost center if it is responsible
A. only for costs.
An operating unit of an organization is called an investment center if it is responsible
D. for investments in assets.
An operating unit of an organization is called a revenue center if it is responsible
B. only for revenues.
An operating unit of an organization is called a profit center if it is responsible
C. for costs and revenues.
An operating unit that is responsible for revenues and costs is commonly referred to as a(n)
C. profit center.
An operating unit that is responsible for revenues only is commonly referred to as a(n)
B. revenue center.
An operating unit that is responsible for only costs is commonly referred to as a(n)
A. cost center.
When managers are held responsible for costs but the input-output relationship is not well specified, a(n) ________________________ is established.
C. discretionary cost center
When managers are held responsible for costs and the input-output relationship is well specified, a(n) ________________________ is established.
A. standard cost center
Decentralized organizations can delegate authority and still maintain control and monitor managers' performance by designing appropriate management control systems. Which of the following responsibility centers would be evaluated similar to an independent business?
C. investment center
A manager makes a decision that is beneficial for a specific investment center but not for the entire organization. From the organization's perspective, this decision results in
A. goal congruence.
The controllability concept states that managers should be held responsible for
A. all items over which they have decision-making authority.
Relative performance evaluations (RPE) are not designed to
D. restate departmental goals so meaningful comparisons can be made.
Which of the following items would be classified as a fixed compensation item?
A. Administrative salaries
Which of the following items would not be classified as a contingent compensation item?
A. Administrative salaries
Which of the following statements is (are) true regarding compensation?
(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured performance.
(B) Properly designed management control systems have contingent compensation items but not fixed compensation items.
A. Only A is true.
The use of dual rates in a cost allocation system assumes that common costs can be
A. separated into their fixed and variable components.
Which of the following statements is (are) false regarding the effective use of management control systems?
(A) In general, single rate cost allocations should not be used in management control systems because clear control over the cost being allocated cannot be determined.
(B) The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control.
D. Neither A nor B is false.
Examples of pressures that can lead to financial fraud do not include
C. overemphasis on long-term results.
The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies
B. report on the adequacy of the company's internal controls over financial reporting.
Which of the following is not an internal control?
D. using absolute performance standards.
Internal controls include all of the following except:
A. using contingent compensation plans.
What is the allocation rate for the upcoming year assuming Boxes-2-Go uses the single-rate method and allocates common costs based on the number of calls?
D. $25.00
What is the allocation rate for the upcoming year assuming Boxes-2-Go uses the single-rate method and allocates common costs based on the time on the network?
B. $10.00
The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is the total communication network costs allocated to the Large Box Division assuming the company uses dual-rates to allocate common costs?
C. $1,980,000
The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is total communication network costs allocated to the Small Box Division assuming the company uses dual-rates to allocate common costs?
A. $2,520,000
If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Marketing Department?
D. $170,000
If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Economics Department?
A. $85,000
If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the Economics Department, assuming the Economics Department actually made 2,100,000 copies during the year?
B. $92,500
If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the Marketing Department, assuming the Marketing Department actually made 3,000,000 copies during the year?
C. $155,000
If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the Economics Department, assuming the Economics Department actually made 1,500,000 copies during the year?
A. $77,500
If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the Marketing Department, assuming the Marketing Department actually made 3,800,000 copies during the year?
D. $175,000
What is the allocation rate for the upcoming year assuming Fenway Telcom uses the single-rate method and allocates common costs based on the number of connections?
A. $10.00
Fenway Telcom uses the single rate method and allocates common costs based on the number of connections. What is the total computer server network cost allocated to the Commercial Division?
C. $600,000
What is the allocation rate for the upcoming year assuming Fenway Telcom uses the single-rate method and allocates common costs based on the time on the network?
C. $4.00
Fenway Telcom uses the single rate method and allocates common costs based on the time on the network. What is the total computer server network cost allocated to the Retail Division?
B. $600,000
The cost accountant determined $1,700,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to the Commercial Division assuming the company uses dual-rates to allocate common costs?
D. $565,000
The cost accountant determined $1,700,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is total server network costs allocated to the Retail Division assuming the company uses dual-rates to allocate common costs?
A. $741,667
The cost accountant determined $1,700,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is total server network costs allocated to the Consumer Division assuming the company uses dual-rates to allocate common costs?
B. $1,093,333
If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Software Development Department?
C. $112,000
If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Training Department?
B. $210,000
If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Management Department?
A. $168,000
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management Department, assuming the Management Department actually made 2,100,000 copies during the year?
C. $159,000
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management Department, assuming the Management Department actually made 2,950,000 copies during the year?
A. $184,500
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training Department, assuming the Training Department actually made 3,250,000 copies during the year?
C. $217,500
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training Department, assuming the Training Department actually made 2,770,000 copies during the year?
D. $203,100
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Software Development Department, assuming the Software Development Department actually made 1,160,000 copies during the year?
B. $98,800
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Software Development Department, assuming the Software Development Department actually made 1,780,000 copies during the year?
A. $117,400
In responsibility accounting, a center's performance is measured by those costs which are controllable. Controllable costs are best described as including (CMA adapted)
B. only those costs that the manager can influence in the current period.
Rockford Manufacturing Corporation uses a responsibility accounting system in its operations. Which one of the following items is least likely to appear in a performance report for a manager of one of Rockford's assembly lines? (CMA adapted)
D. depreciation on the manufacturing facility
Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n) (CMA adapted)
A. profit center.
When comparing performance report information for top management with that of lower-level management, (CMA adapted)
D. lower-level management reports are likely to contain more quantitative data and less financial data.
The least complex segment or area of responsibility for which costs are allocated is a(n) (CMA adapted)
D. cost center.
Which one of the following will not occur in an organization that gives managers throughout the organization maximum freedom to make decisions? (CMA adapted)
D. delays in securing approval for the introduction of new products
Which one of the following firms is likely to experience dysfunctional motivation on the part of its managers due to its allocation methods? (CMA adapted)
B. Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building. It also uses ROI to evaluate the divisional performance.
Which of the following statements is (are) true regarding the master budget?
(A) A master budget consists of (a) organizational goals, (b) strategic long-range profit plan, and (c) tactical short-range profit plan.
(B) A master budget consists of only a budgeted (a) income statement, (b) balance sheet, and (c) stockholder's equity statement.
D. Neither A nor B is true.
Long-range planning as a management function is more important
A. at top management levels.
Which of the following terms is not an alternative for master budget?
C. profit plan
A master budget
C. presents the plan for only one level of activity and does not adjust to changes in the level of activity.
A continuous (rolling) budget
D. drops the current month or quarter and adds a future month or quarter as the current month or quarter is completed.
Budgetary slack can best be defined as
B. underestimation of budgeted revenues.
Which of the following statements is (are) true regarding the benefits associated with participative budgeting?
(A) Goal congruence by divisions means top management need not be concerned with overall profitability.
(B) Budget assumptions and estimates are prepared by those closest to the budgeted activity.
B. Only B is true.
In general, the first budget prepared is the
C. sales budget.
In developing a master budget for a manufacturing company, which one of the following items should be done first?
A. development of a sales budget.
The forecasting method in which individual forecasts of group members are submitted anonymously and evaluated by the group as a whole is called
C. Delphi technique.
The statistical method of forecasting that relies heavily on regression models is called
A. econometric models.
The starting point in preparing a comprehensive budget for a manufacturing company limited by its ability to produce and not by its ability to sell is
B. an estimate of productive capacity.
The number of units required for production is equal to
B. budgeted sales plus units in the ending inventory minus the units in the beginning inventory.
The amount of materials to be purchased during the budget period is equal to budgeted
B. total production needs plus units in the ending materials inventory minus the units in the beginning materials inventory.
Which of the following budgets does not require the production budget?
D. Marketing and administrative expenses.
The manufacturing overhead budget requires that costs be separated into their fixed and variable components. Another budget that has this requirement is the
D. marketing and administrative expenses.
Which of the following statements does not reflect a difficulty in preparing the marketing and administrative budget?
D. Marketing and administrative expenses normally have a one year time horizon.
Which one of the following budgets would be the last one prepared in the master budget preparation process?
E. Cash budget.
Cash disbursements would not include payments for
C. accounts receivable.
Which of the following types of accounts would not be included on a budgeted balance sheet?
E. revenues
Which of the following budgets is not required in a wholesale organization?
C. production
Which of the following budgets is not required in a service organization?
D. cost of goods sold
Sensitivity analysis can best be used in the budgeting process to
C. answer "what-if" questions regarding key projections.
The Sledge Hammer Company manufactures a line of high quality tools. The company sold 1,000,000 hammers at a price of $4 per unit last year. The company estimates that this volume represents a 20% share of the current hammers market. The market is expected to increase by 5%. Marketing specialists have determined that, as a result of a new advertising campaign and packaging, the company will increase its share of this larger market to 24%. Due to changes in prices, the new price for the hammer will be $4.30 per unit. This new price is expected to be in line with the competition and have no effect on the volume estimates. What are the estimated sales revenues in the coming year?
C. $5,418,000.
TRS is a large securities dealer. Last year, the company made 120,000 trades with an average commission of $120. Because of the general economic climate, TRS expects trade volume to decline by 20%. Fortunately, the average commission per trade is likely to increase by 10% because trades are expected to be large in the coming year. What are the estimated commission's revenues for TRS in the coming year?
B. $12,672,000
TLC Credit, Inc. has $35.0 million in consumer loans with an average interest rate of 12.0%. The bank also has $30.0 million in home equity loans with an average interest rate of 8.0%. Finally, the bank owns $5.0 million in corporate securities with an average interest rate of 6%. Next year, consumer loans will increase to $40.0 million because of a rate decrease to 10.0%, while home equity loans will increase to $32.0 million at an average interest rate of 6.5%. Unfortunately, the investment in corporate securities will decrease by 20% and the average interest rate will be only 9.0%. What is TLC's estimated change in revenues next year?
A. $460,000 decrease
What are estimated net sales for 2010, assuming the sales return/gross sales relationship remains constant?
A. $646,893
What is the estimated cost of goods sold for 2010 assuming the number of units sold does not change?
D. $357,000
The ending inventory of finished goods for each quarter should equal 25% of the next quarter's budgeted sales in units. The finished goods inventory at the start of the year is 3,000 units. Scheduled production for the third quarter is (in units)
A. 17,500 units.
The ending inventory of finished goods for each quarter should equal 25% of the next quarter's budgeted sales in units. The finished goods inventory at the start of the year is 3,000 units. Scheduled production for the second quarter is (in units)
C. 15,000 units.
Four pounds of raw materials are required for each unit produced. Raw materials on hand at the start of the year total 4,000 lbs. The raw materials inventory at the end of each quarter should equal 10% of the next quarter's production needs in materials. Budgeted purchases of raw materials in the third quarter would be (in lbs.)
A. 63,200 lbs.
Four pounds of raw materials are required for each unit produced. Raw materials on hand at the start of the year total 4,000 lbs. The raw materials inventory at the end of each quarter should equal 10% of the next quarter's production needs in materials. Budgeted purchases of raw materials in the second quarter would be (in lbs.)
C. 49,600 lbs.
Kaufman Industries has just completed its sales forecasts and its marketing department estimates that the company will sell 36,000 units during the upcoming year. In the past, management has maintained inventories of finished goods at approximately three months' sales. However, the estimated inventory at the start of the year of the budget period is only 6,000 units. Sales occur evenly throughout the year. What is the estimated production level (units) for the first month of the upcoming budget year?
C. 6,000
What is the production budget (in units) for 2008?
B. 65,000
What are the materials requirements (in feet) for 2008?
B. 336,250
One pound of material is required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month's production needs. At the beginning of Month 1, there was 3,200 lbs. of materials on hand. Purchases of raw materials for Month 1 would be (in pounds)
C. 17,200.
What is the cash balance at year end?
C. $210,000
What is the amount of cash to be collected in the month of July?
B. $38,022
What is the amount of cash to be collected in the month of August?
A. $40,106
Assume the Task Company charges 1 1/2% on any balance that is not collected in the month following the month of sale. This charge will also change the collection percentages to 15% cash sales, 80% of the balance collected in the month following the sale, 16% the second month, 3% the third month. This stricter credit policy will reduce the estimated sales budgets by 7% each month. What is the amount of cash to be collected in July?
D. $36,242
Total cash receipts in Month 4 will be
D. $36,230.
Total cash receipts in Month 3 will be
B. $53,290.
The Richburn Manufacturing Company increased its merchandise inventory by $17,000 over the year. The company also granted its customers more liberal credit terms which increased the accounts receivable by $37,500. Sales were $975,000 and the accounts payable decreased by $27,500. The gross profit on sales is 45%. Selling and administrative expenses were $145,000; this included depreciation expense of $4,000. What were the cash disbursements for the year?
A. $721,750.
What are the estimated cash disbursements for inventories in June?
C. $335,250.
What are the estimated cash receipts from accounts receivable collections in June?
D. $239,250.
What are the estimated collections in July?
B. $131,250.
What are the budgeted merchandise purchases (in dollars) for May?
A. $338,250
What are the budgeted merchandise purchases (in dollars) for June?
C. $364,500
What are the budgeted cash disbursements during the month of June?
B. $419,400
What are the budgeted cash collections during the month of May?
A. $445,894
What are the budgeted number of inventory units that need to be purchased in July?
C. 12,250
The major objectives of any budget system are to (CIA adapted)
C. foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among organization segments.
From the perspective of corporate management, the use of budgetary slack (CMA adapted)
D. increases the likelihood of inefficient resource allocation.
The master budget process usually begins with the (CMA adapted)
D. sales budget.
What are total budgeted production costs for the year? (CIA adapted)
B. $2,180,000
Selana Company's total costs of operating five sales offices last year were $500,000, of which $70,000 represented fixed costs. Selana has determined that total costs are significantly influenced by the number of sales offices operated. Last year's costs and number of sales offices can be used as the basis for predicting annual costs. What would be the budgeted cost for the coming year if Selana were to operate seven sales offices? (CPA adapted)
B. $672,000
Normal cash collection experience has been that 50% of sales is collected during the month of sale and 45% in the month following sale. The remaining 5% of sales are never collected). Brown's budgeted cash collections for the third calendar quarter are (CMA adapted)
C. $414,000
What is the expected cash balance of the company at the end of the coming month? (CIA adapted)
B. $40,000
For the month of April, the total cash receipts from sales and collections on account would be (CIA adapted)
B. $3,781,600
The number of tables to be produced during August is
B. 2,340 tables.
Disregarding your response to the previous question, assume the required production for August and September is 1,600 and 1,800 units, respectively, and the July 31 raw materials (legs) inventory is 4,200 units. The number of table legs to be purchased in August is
A. 6,520 legs.
Assume that Lynndorf Corporation will produce 1,800 units in the month of September. How many employees will be required for the Assembly Department? (Fractional employees are acceptable since employees can be hired on a part-time basis. Assume a 40-hour week and a 4-week month.)
B. 3.75 employees.
Research has shown that having several levels of management participate in the budgetary process is beneficial to both the company and the employees. However, there are certain behavioral problems encountered in the process, one of which is the use of budgetary slack. Budgetary slack can best be described as (CMA adapted)
B. the planned overestimation of budgeted expenses.
Research has shown that having several levels of management participate in the budgetary process is beneficial to both the company and the employees. However, there are certain behavioral problems encountered in the process, one of which is the use of budgetary slack. The use of budgetary slack does not allow the preparer of the budgets to (CMA adapted)
D. use the budget to control subordinate performance.
Research has shown that having several levels of management participate in the budgetary process is beneficial to both the company and the employees. However, there are certain behavioral problems encountered in the process, one of which is the use of budgetary slack. From the perspective of corporate management, the use of budgetary slack (CMA adapted)
E. increases the likelihood of inefficient resource allocation.
Which of the following statements is (are) true?
(A) Divisional income statements do not include allocated common costs.
(B) The gross margin ratio is computed by dividing operating income by sales.
D. Neither A nor B is true.
After-tax income divided by sales is called the
B. profit margin ratio.
The measure (ratio) that reflects the performance of a manager regarding sales and cost of goods sold, but not other operating costs and income taxes, is called the
A. gross margin ratio.
If a division is evaluated using return on investment (ROI) without regard to how assets are financed, the denominator in the ROI calculation will be
C. total assets available.
Return on investment (ROI) can be decomposed into the asset turnover and the
B. profit margin ratio.
The asset turnover is a measure (ratio) of an investment center's ability to
B. generate sales.
Which of the following statements does not represent a limitation of using return on investment (ROI) for measuring and evaluating performance?
B. ROI cannot be used to compare divisions of different sizes.
How will increases in the following items affect return on investment (ROI)?
A. a
How will decreases in the following items affect return on investment (ROI)?
B. b
Which of the following statement(s) is/are true?
(A) If a division's return on investment (ROI) exceeds its cost of capital, then its residual income is positive.
(B) If a division's cost of capital equals its return on investment (ROI), then its residual income is zero.
C. both (A) and (B) are true
Residual income is similar to the _________ notion of profit as being the amount left over after all costs, including the cost of the capital employed in the division, are subtracted.
D. economist's
Which of the following statement(s) is/are false?
(A) Residual income can be used to compare divisions of different sizes.
(B) Residual income can be used to compare divisions that are profit centers.
C. both (A) and (B) are false
Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is that
B. Appropriate goal congruence behavior is more likely to occur when using residual income.
Which of the following should not be used for the cost of capital to compute residual income?
D. Return on investment (ROI).
A manager can always increase his/her return on investment (ROI) by
C. increasing the operating profit margin.
Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation?
A. Land being held by the division as a potential site for a new plant and parking lot.
Which of the following items would not be an example of an economic value added (EVA) adjustment to eliminate accounting distortions?
D. Common stock
Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)?
C. Preferred stock
Economic value added (EVA) is a concept that is closely related to residual income. EVA is computed by
A. subtracting the adjusted total cost of capital from the adjusted after-tax income.
Economic value added (EVA) assumes that which of the following GAAP expenses would not result in an adjustment to either the income or the capital employed?
B. Use of process costing rather than job costing
Which of the following statements regarding the use of historical costs and current costs to compute return on investment (ROI) is (are) true?
(A) Historical costs are based on the original costs to acquire a long-term asset, while current costs represent the costs to replace the long-term asset.
(B) For a specific multiple-period project, the return on investment (ROI) computed using current costs will generally be less than the ROI computed using historical costs.
C. both (A) and (B) are true
Level return on investments (ROI) over the life of a long-term project is more likely when ROI is computed using
D. current costs and gross book values.
Using ending balances for the investment base in computing return on investment (ROI) might encourage managers to acquire assets
A. early in the year and dispose of assets late in the year.
Using beginning balances for the investment base in computing return on investment (ROI) might encourage managers to acquire assets
A. early in the year and dispose of assets late in the year.
Which division has the smallest return on investment (ROI)?
B. West
Which division has the largest asset turnover?
B. West
Which division's profit margin is the highest?
A. South
What is the return on investment (ROI) assuming Delta (a) uses the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?
C. 22.2%
What is the return on investment (ROI) assuming Gamma (a) uses the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?
A. 11.1%
What is the return on investment (ROI) assuming Charlie (a) uses the straight-line method for depreciation and (b) average net book values to compute ROI?
D. 11.76%
Welsh Corporation's return on investment (ROI) on some new equipment was 20% using beginning-of-year net book value. The gross book value of the equipment is $250,000. Accumulated depreciation at the beginning of the year was $10,000. This represents one-half year's straight-line depreciation. What is the annual before-tax cash flow from the new equipment?
A. $68,000
Rayburn Corporation purchased a new machine for $120,000. The machine has an estimated useful life of 10-years with no salvage value and a return on investment (ROI) of 15%. ROI is computed using annual cash flows and straight-line depreciation. What is the annual cash flow using the gross book value method?
D. $30,000
The Najacht Division of the Rassbach Company has a return on investment (ROI) of 12%, sales of $200,000, and an asset turnover of 2.0. What was Najacht's operating income?
B. $12,000
What is Company X's return on investment (ROI)?
C. 15.0%
The FGH Company has an asset turnover of 3.0 times, using assets of $45,000. The company also has a return on investment (ROI) of 20%. What was the company's operating profit margin?
C. 6.7%
The FGH Company has an asset turnover of 3.0 times, using assets of $45,000. The company also has a return on investment (ROI) of 20%. If the residual income was $2,250, what was the company's cost of capital?
C. 15.0%
In 2008, Wishbone Corporation had an operating profit of $750,000 and a residual income of $300,000. If Wishbone's cost of capital is 15%, what is the amount of the invested capital?
B. $3,000,000
What is Company X's residual income?
A. $2,000
Compute the Green Division's residual income.
A. $1,800
Use the following information to compute residual income:
A. $12,000
What was A Division's residual income last year?
A. $12,000.
What was B Division's return on investment (ROI) last year?
B. 20.00%.
What was C Division's cost of capital last year?
B. 12%.
If sales each year average $840,000, what will be the asset turnover using gross book value?
C. 2.1
Residual income is a better measure for performance evaluation of an investment center manager than return on investment (ROI) because (CMA adapted)
B. desirable investment decisions will not be neglected by high return divisions.
A firm earning a profit can increase its return on investment by (CMA adapted)
D. increasing sales revenues and operating expenses by the same percentage.
Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation? (CMA Adapted)
B. Land being held by the division as a site for a new plant.
Return on investment (ROI) is a very popular measure employed to evaluate the performance of corporate segments because it incorporates all of the major ingredients of profitability (revenue, cost, investment) into a single measure. Under which one of the following combinations of actions regarding a segment's revenues, costs, and investment would a segment's ROI always increase? (CIA adapted)
D. d
Which of the following equations should be used to compute Bala's return on investment (ROI)?
B. (6/4) × (1/6) = ROI
Quest's return on investment was
C. 27.50%.
Residual income is a performance evaluation that is used in conjunction with, or instead of, return on investment (ROI). In many cases, residual income is preferred to ROI because (CIA adapted)
B. Residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI.
Residual income is a better measure for performance evaluation of an investment center manager than return on investment because (CMA adapted)
B. Desirable investment decisions will not be neglected by high-return divisions.
If the cost of capital is 15% and Webb wants to achieve a residual income target of $2,000,000, what will costs have to be in order to achieve the target?
C. $25,150,000
Based on the above information, which one of the following statements is correct? REB has a
D. Residual income of $(22,000).
Which of the following statements is (are) false?
(A) From an organization's viewpoint, transfer prices have no effect on total profits assuming the transfer occurs between the two responsibility centers.
(B) A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.
D. Neither A nor B is false.
Which of the following responsibility centers is affected by the use of market-based transfer prices?
B. profit center.
Transfer prices would not be used by
D. cost centers.
Which of the following statements is (are) true?
(A) If a transfer has no effect on divisional profit, managers will be indifferent between making the transfer or not.
(B) If an intermediate market exists but divisions are prohibited from buying or selling from the outside, the intermediate market can be ignored in determining the optimal transfer price.
C. Both A and B are true.
In general, if a potential transfer has no effect on divisional profits,
B. managers will be indifferent between making the transfer or not.
An intermediate market is perfect when
C. buyers and sellers can sell any quantity without affecting the market price.
When there is no intermediate market,
C. the buying division cannot purchase its goods externally.
The general principle on setting transfer prices that are in the organization's best interests is:
A. outlay cost plus opportunity cost of the resource at the point of transfer.
The optimal transfer price when there are intermediate markets is
D. market prices.
Which of the following is not an appropriate use of transfer pricing?
C. establishing standards
An internal transfer between two divisions is in the best economic interest of the entire organization when
B. the variable costs plus the opportunity cost of the selling division is less than the external price for the buying division.
Top management intervention in settling transfer pricing disputes between two divisions should be avoided unless
C. there is an extraordinarily large order.
The transfer price that should be used by top management in evaluating whether a division should buy within the company or from an outside supplier is
D. transfer price based on an open market price.
If the selling division has excess capacity, the transfer price should be set at its
A. differential outlay costs.
Some managers prefer to use cost rather than market price in controlling transfers between divisions. If cost is to be used, then it should be
D. standard cost.
Cost-based transfer prices that include a normal markup to the costs act as a surrogate for
D. market prices.
Given a competitive outside market for identical intermediate goods, what is the BEST transfer price, assuming all relevant information is readily available?
B. market price of the intermediate goods.
Multinational firms often face conflicting pressures when developing transfer pricing policies. Tax avoidance results when
A. inflated transfer prices are used to reduce the profits of divisions in high tax-rate countries.
Which of the following transfer pricing methods must be used in segment reporting by the oil and gas industry?
D. Market price.
A division can sell externally for $40 per unit. Its variable manufacturing costs are $15 per unit, and its variable marketing costs are $6 per unit. What is the opportunity cost of transferring internally, assuming the division is operating at capacity?
B. $19
Division A has variable manufacturing costs of $25 per unit and fixed costs of $5 per unit. Division A is operating at capacity, what is the opportunity cost of an internal transfer when the market price is $35?
B. $10
Chipper Division of Acme Corp. sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. Chipper has a capacity to produce 100,000 units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40. Jones has been approached by an outside supplier willing to supply the parts for $36. What is the effect on Acme's overall profit if Chipper REFUSES the outside price and Jones decides to buy outside?
B. $140,000 decrease in Acme profits
Chipper Division of Acme Corp. sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. Chipper has a capacity to produce 100,000 units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40. Jones has been approached by an outside supplier willing to supply the parts for $36. What is the effect on Acme's overall profit if Chipper ACCEPTS the outside price and Jones continues to buy inside?
A. no change
Chipper Division of Acme Corp. sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. Chipper has a capacity to produce 100,000 units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40. Jones has been approached by an outside supplier willing to supply the parts for $36. If Acme uses a negotiated transfer pricing system, what is the maximum transfer price that should be charged for this transaction?
B. $36
Chipper Division of Acme Corp. sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. Chipper has a capacity to produce 100,000 units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40. Jones has been approached by an outside supplier willing to supply the parts for $36. If Acme uses a negotiated transfer pricing system, what is the minimum transfer price that should be charged for this transaction?
D. $22
Redimix Corporation has two producing centers, (A and B) Division A has a variable cost of $12 for its products and a total fixed cost of $120,000. Division A also has idle capacity for up to 50,000 units per month. Division B would like to purchase 20,000 units of Division A's products per month, but is unable to convince Division A to transfer units to Division B at $16 per unit. Division A has consistently argued that the market price of $20 is nonnegotiable. What is A's opportunity cost of not transferring units to B?
D. $4
Division W would like to purchase all of its units internally. Division W needs 6,000 units each period and currently pays $42 per unit to an outside firm. What is the lowest price that Division X could accept from Division W? Assume that Division W wants to use a sole supplier and will not purchase less than 6,000 from a supplier.
C. $40.
Division Y would like to purchase 15,000 units each period from Division X. Division X has ample excess capacity to handle all of Division Y's needs. Division Y now purchases from an outside supplier at a price of $20. If Division X refuses to accept an $18 price internally, the company, as a whole, will be worse off by
D. $120,000.
Assume that Division A is selling all it can produce to outside customers. If it sells to Division B, $1 can be avoided in variable cost per unit. Division B is presently purchasing from an outside supplier at $38 per unit. From the point of view of the company as a whole, any sales to Division B should be priced at
E. The company would not want the transfer to take place.
Division N would like to purchase 10,000 units from Division L at a price of $125 per unit. Division L has no excess capacity to handle Division N's requirements. Division N currently purchases from an outside supplier at a price of $140. If Division L accepts a $125 price internally, the company, as a whole, will be better or worse off by
B. ($100,000)
What would be the profit impact to Avery Corporation as a whole if Division B purchased the 20,000 widgets it needs from the outside vendor for $45?
D. $500,000 decrease in profits
What is the minimum transfer price from Division A to Division B?
A. $20
What is the maximum transfer price from Division A to Division B?
C. $45
What is the minimum transfer price per hour that the repair division should obtain for its services, assuming it is operating at capacity?
E. $48.00
What is the maximum transfer price per hour that the management division should pay?
B. $30.00
If the repair division had idle capacity, what is the minimum transfer price that the repair division should obtain?
A. $28.50
What is the contribution margin for Division A without the transfer to Division B?
B. $650,000
What is the contribution margin for Division A if it transfers 25,000 units to Division B at $6.75 per unit?
D. $698,750
What is the minimum transfer price for the 25,000 unit order that Division A would accept if it wishes to maintain its pre-order contribution?
C. $4.80
A company is highly centralized. Division X, which is operating at capacity, produces a component that it currently sells in a perfectly competitive market for $13 per unit. At the current level of production, the fixed cost of producing this component is $4 per unit and the variable cost is $7 per unit. Division Y would like to purchase this component from Division X. The price that Division X should charge Division Y per unit for this component is
C. $13.
Division A is planning to raise its transfer price to $50 per unit. Division B can purchase units at $40 per unit from outsiders, but doing so would idle Division A's facilities (now committed to producing units for Division B), Division A cannot increase its sales to outsiders. From the perspective of the company as a whole, from who should Division B acquire the units, assuming Division B's market is unaffected?
D. Division A, in spite of the increased transfer price.
What is the cost impact to Cohasset as a whole of purchasing from R & M Steel? (CMA adapted)
B. increase the handle unit cost by $.15.
If Cohasset would like to develop a range of transfer prices, what would be the maximum transfer price that Ironwood would be willing to pay?
C. $1.25
If Cohasset would like to develop a range of transfer prices, what would be the minimum transfer price that Hurley would be willing to accept?
B. $1.10
Division L would like to purchase internally from Division K. Division L now purchases 5,000 units each period from outside suppliers at $49 per unit. Division K has ample excess capacity to handle all of Division L's needs. What is the lowest price that Division K could accept?
E. $30.00
A limitation of transfer prices based on actual cost is that they (CIA adapted)
B. charge inefficiencies to the department that is receiving the goods.
A large manufacturing company has several autonomous divisions that sell their products in perfectly competitive external markets as well as internally to the other divisions of the company. Top management expects each of its divisional managers to take actions that will maximize the organization's goal as well as their own goals. Top management also promotes a sustained level of management effort of all of its divisional managers. Under these circumstances, for products exchanged between divisions, the transfer price that will generally lead to optimal decisions for the manufacturing company would be a transfer price equal to the (CIA adapted)
D. market price of the product.
The Eastern division sells goods internally to the Western division of the same company. The quoted external price in industry publications from a supplier near Eastern is $200 per ton plus transportation. It costs $20 per ton to transport the goods to Western. Eastern's actual market cost per ton to buy the direct materials to make the transferred product is $100. Actual per-ton direct labor is $50. Other actual costs of storage and handling are $40. The company president selects a $220 transfer price. This is an example of (CIA adapted)
A. market-based transfer pricing.
Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA adapted)
D. May not promote long-term efficiencies.
What is the natural bargaining range for the two divisions?
A. Between $20 and $50
The minimum transfer price that should be charged to the Beta Division of the same company for each component is
D. $50
A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15, would
C. provide no profit incentive for the Video Cards Division to control or reduce costs.
Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit. The Video Cards Division, having excess capacity, agrees to lower its transfer price to $8.70 per unit. This action would
D. optimize the overall profit goals of Parkside Inc.
Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division. This price will
B. motivate both divisions as estimated profits are shared.
A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its variable marketing costs are $12 per unit. What is the opportunity cost of transferring internally, assuming the division is operating at capacity?
A. $13
A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its variable marketing costs are $12 per unit. What is the optimal transfer price for transferring internally, assuming the division is operating at capacity?
D. $60
Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division A is operating at capacity, what is the opportunity cost of an internal transfer when the market price is $75?
B. $25
Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division A is operating at capacity, what is the optimal transfer price of an internal transfer when the market price is $75?
E. $75
Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division A is operating significantly below capacity, what is the optimal transfer price of an internal transfer when the market price is $75?
C. $50
Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division B is operating significantly below capacity, what is the opportunity cost of an internal transfer when the market price is $75?
A. $0
What is the minimum transfer price per hour that the repair division should obtain for its services, assuming it is operating at capacity?
D. $70.00
What is the maximum transfer price per hour that the management division should pay?
C. $45.00
If the repair division had idle capacity, what is the minimum transfer price that the repair division should obtain?
B. $37.00
Division Buy would like to purchase all of its units internally. Division Buy needs 6,000 units each period and currently pays $84 per unit to an outside firm. What is the lowest price that Division Sell could accept from Division Buy? Assume that Division Buy wants to use a sole supplier and will not purchase less than 6,000 from a supplier.
C. $80.
Division T would like to purchase 15,000 units each period from Division M. Division M has ample excess capacity to handle all of Division T's needs. Division T now purchases from an outside supplier at a price of $40. If Division M refuses to accept an $18 price internally, the company, as a whole, will be worse off by
D. $240,000.
Which of the following statements is (are) true?
(A) A favorable variance is not necessarily good, and an unfavorable variance is not necessarily bad.
(B) The master budget includes operating budgets (e.g., production budget) and financial budgets (e.g., cash budget).
C. Both A and B are true.
An operating budget would not include a
A. cash budget.
A variance can best be described as
B. differences between planned results and actual results.
The most fundamental variance analysis compares
D. budgeted operating income with actual operating income.
In general, the terms favorable and unfavorable are used to describe the effect of a variance on
A. net income.
Which of the following statements regarding variances is (are) false?
(A) In general and holding all other things constant, an unfavorable variance decreases operating profits.
(B) A favorable variance is not always good, and an unfavorable variance is not always bad.
D. Neither A nor B is false.
Which of the following variances will always be favorable when actual sales exceeds budgeted sales?
C. sales activity
The purpose of the flexible budget is to
C. compare actual and budgeted results at virtually any level of production.
The basic difference between a master budget and a flexible budget is that a
D. master budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range.
The slope of the flexible budget-line is the
B. variable cost per unit.
The intercept of the flexible budget-line is total
C. fixed costs.
When using a flexible budget, what will happen to variable costs on a per-unit basis as production increases within the relevant range?
C. Remain unchanged.
The difference between operating profits in the master budget and operating profits in the flexible budget is called
A. sales activity variance.
Which of the following statements is (are) true regarding the sales activity variance?
(A) The sales activity variance is the actual selling price per unit times the difference between the budgeted units and actual units.
(B) If the sales activity variance for sales revenue is unfavorable, then the contribution margin sales activity variance will be unfavorable.
B. Only B is true.
The sales price variance is the difference between the actual sales revenues and the
B. budgeted selling price multiplied by the actual number of units sold.
If the total materials variance for a given operation is favorable, why must this variance be further evaluated as to price and usage?
D. A further evaluation lets management evaluate the activities of the purchasing and production functions.
Which department is customarily held responsible for an unfavorable materials quantity variance?
D. Production.
When are the following direct materials variances ideally reported?
D. d
In the general model, a price variance is calculated as
C. (AP × AQ) - (SP × AQ)
In the general model, an efficiency variance is calculated as
A. (SP × AQ) - (SP × SQ)
Which of the following direct labor variances uses the standard hours allowed for the actual number of units produced?
D. d
Which of the following is the most probable reason a company would experience an unfavorable labor rate variance and a favorable labor efficiency variance?
A. The mix of workers assigned to the particular job was heavily weighted towards the use of higher paid experienced individuals.
Which variance will be unfavorable due to employees working more hours than allowed for the actual number of units produced?
B. Efficiency
In general, the direct labor efficiency variance is the responsibility of the
C. production manager.
The variable overhead price variance is due to
C. both price and efficiency items.
If overhead is applied to production using direct labor hours and the direct labor efficiency variance is favorable, then the variable overhead efficiency variance is
A. favorable.
The production volume variance is computed by the difference between the
D. budget at actual levels of activity reached and fixed overhead applied.
Which of the following is not an alternative name for the production volume variance?
D. fixed overhead efficiency variance
The production volume variance must be computed when a company uses
D. full-absorption costing.
Which of these variances is least significant for cost control?
D. production volume variance
A debit balance in the labor-efficiency variance account indicates that
B. actual hours exceed standard hours.
If materials are carried in the direct materials inventory account at standard cost, then it is reasonable to assume that the
B. price variance is recognized when materials are purchased.
The Redrock Company uses flexible budgeting for cost control. Redrock produced 10,800 units of product during October, incurring indirect material costs of $13,000. Its master budget for the reflected indirect material costs of $180,000 at a production volume of 144,000 units. What was the flexible budget variance for the indirect material costs in October?
E. $500 favorable
What is the actual sales revenue?
B. $169,000.
What is the sales revenue in the flexible budget?
B. $156,000.
What is the flexible budget contribution margin?
A. $39,000.
What is the master budget sales revenue?
D. $180,000.
What is the master budget contribution margin?
C. $45,000.
What is the activity variance for the variable manufacturing costs?
B. $14,000
Is the activity variance for the variable manufacturing costs favorable or unfavorable?
A. favorable
What is the direct materials price variance for November?
C. $16,000
Is the direct materials price variance favorable or unfavorable?
B. unfavorable
What is the direct materials efficiency (quantity) variance for November?
D. $17,100
Is the direct materials efficiency (quantity) variance favorable or unfavorable?
A. favorable
What is the direct labor price (rate) variance for November?
E. $2,200
Is the direct labor price (rate) variance favorable or unfavorable?
A. favorable
What is the direct labor efficiency variance for November?
C. $2,000
Is the direct labor efficiency variance favorable or unfavorable?
B. unfavorable
What were the actual direct labor hours worked during the month?
A. 5,000.
What were the actual quantity of materials used during the month?
C. 2,225.
What was the actual price paid for the direct material during the month, assuming all materials purchased were put into production?
A. $4.34.
C. $4.11.
What was Goodman's actual direct-labor rate?
B. $3.80
What was Goodman's standard direct-labor rate?
C. $4.00
Blue Company produces Trivets. Based on its master budget, the company should produce 1,000 Trivets each month, working 2,500 direct labor hours. During May, only 900 Trivets were produced. The company worked 2,400 direct labor hours. The standard hours allowed for May production would be
C. 2,250 hours.
What is Barber's direct labor price (rate) variance?
B. $20,700
Is the direct labor price (rate) variance favorable or unfavorable?
B. unfavorable
What is the direct materials efficiency (quantity) variance?
D. $1,000 unfavorable
What is the labor rate variance for June?
B. $31 favorable
What is the total direct labor cost variance?
B. $3,160, unfavorable
What were the standard direct labor hours for February?
A. 70,000
What is the fixed overhead spending (budget) variance?
A. $200
Is the fixed overhead spending (budget) variance favorable or unfavorable?
A. favorable
What is the production volume variance?
B. $400
Is the production volume variance favorable or unfavorable?
B. unfavorable
What is the actual total overhead for the period?
D. $87,000
What is the fixed overhead spending (budget) variance for May?
B. $3,000 unfavorable
What is the production volume variance for May?
E. $9,000
Is the production volume variance favorable or unfavorable?
B. unfavorable
A standard cost system may be used in (CPA adapted)
B. either job-order costing or process costing.
When a manager is concerned with monitoring total cost, total revenue, and net profit conditioned upon the level of productivity, an accountant should normally recommend (CPA adapted)
A. a
In analyzing company operations, the controller of the Jason Corporation found a $250,000 favorable flexible budget revenue variance. The variance was calculated by comparing the actual results with the flexible budget. This variance can be wholly explained by (CMA adapted)
C. changes in unit selling prices.
The standard unit cost is used in the calculation of which of the following variance? (CPA adapted)
D. d
A favorable materials price variance coupled with an unfavorable materials usage variance would most likely result from (CMA adapted)
D. The purchase of lower-than-standard-quality materials.
Excess direct labor wages resulting from overtime premium will be disclosed in which type of variance? (CPA adapted)
D. Labor rate.
The budget for the month of May was for 9,000 units at a direct materials cost of $15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of $81,000. Actual output for the month was 8,500 units with $127,500 in direct materials and $77,775 in direct labor expense. The direct labor standard of 45 minutes was obtained throughout the month.
D. Unfavorable direct labor price (rate) variance of $1,275.
What were the actual hours worked for the month of October?
D. 2,200
The fixed factory overhead application rate is a function of a predetermined activity level. If standard hours allowed for good output equal this predetermined activity level for a given period, the volume variance will be (CPA adapted)
A. Zero.
Which one of the following variances is of least significance from a behavioral control perspective? (CMA adapted)
D. Fixed factory overhead volume variance resulting from management's decision midway through the fiscal year to reduce its budgeted output by 20%.
Which of the following organizational policies is most likely to result in undesirable managerial behavior? (CMA adapted)
B. Joe Walk, the chief executive officer of Eagle Rock Brewery, wrote a memorandum to his executives stating, "Operating plans are contracts and they should be met without fail."
The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be (CMA adapted)
D. $22,150