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Exam 9: Responsibility Accounting

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Question 41

Multiple Choice

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Responsibility reports are prepared:

A) for each manager who controls a responsibility center.
B) only at the end of the accounting period.
C) to identify and punish managers who fail to control their costs.
D) for senior level managers only.

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

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Question 42

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In the current year,the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000.Testar has set a target return on investment (ROI) of 16% for each of its divisions.Which of the following statements is correct?

A) The New Products division yielded ROI that was lower than the target ROI.
B) Residual income for the New Products division was $832,000.
C) The New Products division yielded no residual income.
D) All of these are correct.

E) C) and D)
F) A) and D)

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Question 43

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Which of the following statements about return on investment (ROI) is

One of the divisions of Phoenix Corporation is the Motor Division.This division currently is designing a new,energy-efficient motor that would require a specialized filter.An outside company has offered to provide the 40,000 filters needed each year at $12.50 each.Phoenix is considering setting up a separate division,the Filter Division,to make the filters.The variable cost per unit would be $4,and total fixed costs incurred by the Filter Division would be $240,000. Required: 1)If the Filter Division is established,Phoenix would need to determine the basis (market-based or other basis)to use in setting the transfer price.What basis would you recommend in this case? 2)What is the maximum transfer price that the Motor Division should be willing to pay for the filters? 3)What is the minimum transfer price that Filter Division should be willing to accept for the filters? 4)Should the transfer be made? What effect would the transfer have on the profits of Phoenix Corporation?

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

The kind of responsibility center that would be evaluated by comparing income on assets to the amount of assets invested is:

Which of the following would increase residual income? (Assume all other things are equal)

Hu Corporation has two operating divisions,A and B.The following information is provided for Division A: $\begin{array}{|l|lr|}\hline \text { Unit selling price } & \$ & 200 \\\hline \text { Unit variable costs } & \$ & 120 \\\hline \text { Unit fixed costs } & \$ & 40 \\\hline\end{array}$ 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 $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?

A reporting unit of a decentralized business that controls identifiable revenue and/or expense items is known as a(n) :

Brookings Company evaluates its managers on the basis of return on investment.Division Three has a return on investment (ROI) of 15% while the company as a whole has an ROI of only 10%.Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?

If a company is unable to use market-based transfer prices,the next best alternative is to use a price:

The manager of Pearless Company's Toy Division is not satisfied with the level of return on investment that the division achieved this year.What can be done to improve return on investment?

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

Most large organizations establish responsibility centers (sections,departments,divisions,etc. )in order to delegate decision-making authority to the individuals who are best suited to make decisions in those particular centers.Consider the following responsibility centers: Responsibility Center Description $\begin{array}{|l|l|}\hline \text { 1) } & \text { Louisville office of a regional CPA firm } \\\hline \text { 2) } & \text { Restaurant in a Nordstrom department store } \\\hline \text { 3) } & \text { Medical diagnostic equipment unit of General Electric } \\\hline \text { 4) } & \text { Maintenance department in a Toyota assembly plant } \\\hline 5) & \text { Cincinnati outlet of the Hampton Inn hotel chain } \\\hline \text { 6) } & \text { Home electronics division of Best Buy } \\\hline \text { 7) } & \text { Lawnmorver division of Honda } \\\hline \text { 8) } & \text { Finishing department of a company that makes wooden fencing } \\\hline 9) & \text { Engine assembly department of John Deere } \\\hline \text { 10) } & \text { Customer service department of United Airlines } \\\hline \text { 11) } & \text { Check processing department of Citibank } \\\hline \text { 12) } & \text { Casting department of a small steel mill } \\\hline \text { 13) } & \text { Jeep division of Chrysler Motors } \\\hline \text { 14) } & \text { Denver location of Barnes and Noble } \\\hline \text { 15) } & \text { Baltimore office of an investment banking firm } \\\hline\end{array}$ Required: 1)Three commonly found responsibility centers are cost centers,profit centers,and investment centers.Describe each type of center. 2)Which type of center will each most likely be classified as: a cost center,profit center,or investment center?

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)Cons

Indicate whether each of the following statements about transfer pricing is

The New Products Division,of Testar Company,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.Which of the following statements is accurate?

Marcy is plant manager for Diversified Industries.She and the managers of four other plants report to the vice president in charge of manufacturing operations.Three department managers report to Marcy.Select the incorrect statement regarding the preparation of responsibility reports.

For Year 1,one division of Apex Company reported operating assets of $5,000,000 and operating income of $750,000.Apex has established a target return on investment (ROI)of 14% for the division. Required: 1)Calculate the division's ROI for Year 1.Did it achieve the target set by the company? 2)Assuming that operating assets for Year 2 increase by 10%,by how much would operating income have to increase to reach the target of 14%?

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