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Exam 15: Performance Evaluation

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Question 41

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What are the responsibilities of the manager of an investment center? At what levels of an organization chart are investment centers most commonly found? What basis should be used for evaluating the manager of an investment center?

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Investment centers are organizational se...

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Question 42

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Use the following information to answer Question. The Furniture Division of Waverly Company reports the following results for 2012: $\begin{array} { l l } \text { Revenues } & \$ 400,000 \\\text { Operating expenses } & \$ 360,000 \\\text { Operating income } & \$ 40,000 \\\text { Operating assets } & \$ 500,000\end{array}$ Waverly Company has set a target return on investment (ROI) of 12% for the Furniture Division. Assume that the Furniture Division believes that it can reduce operating expenses by $25,000. If revenues and operating assets stay at the same level, what would the division's ROI be? Would it reach its target ROI?

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ROI = $65,000/$500,0...

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Question 43

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When would a variance be labeled as unfavorable?

Matching. Select the term from the list that best matches the description or definition. Enter the number of the best answer in "Your Answer" column.

For a product made by Parker Company, last year's standards for labor were 2 hours at $12 per hour. What should Parker take into account in setting the standards for this year?

When using residual income (RI) as a project-screening tool, management should accept a project if

O'Donnell Company makes computer chips. Sam is manager of the company's maintenance department. Because his maintenance technicians are so well trained in maintaining expensive and sensitive circuit board stamping equipment, Sam has been authorized to contract to perform maintenance for outside customers. In this company, the maintenance department is likely organized as

For performance evaluation, management compares actual results to a flexible budget based on the actual volume of activity.

The differences between the standard and actual amounts are called variances.

Erick Manufacturing Company established the following standard price and cost information: $\begin{array} { | l | r | } \hline \text { Sales price } & \$ 50 \text { per unit } \\\hline \text { Variable manufacturing cost } & \$ 32 \text { per unit } \\\hline \text { Fixed manufacturing cost } & \$ 100,000 \text { total } \\\hline \text { Fixed selling and administrative cost } & \$ 40,000 \text { total } \\\hline\end{array}$ Erick expected to produce and sell 10,000 units. Actual production and sales amounted to 9,500 units. Required: a) Prepare the pro forma income statement in contribution format that would appear in Erick's master budget for the year (based on the planned level of activity). b) Prepare the pro forma income statement in contribution format that would appear in Erick's flexible budget (based on the actual level of activity).

Dave manages a division that is part of a large, decentralized business. He has a substantial degree of control over the division's costs, revenues, and investment in assets. Based on this information, the division managed by Dave would be classified as a profit center.

Static and flexible budgets are similar in that

Shields Company reported the following information for 2012: $\begin{array}{lr}\text { Sales } & \$ 800,000 \\\text { Average Operating Assets } & \$ 400,000 \\\text { Desired ROI } & 8 \% \\\text { Operating Income } & \$ 50,000\end{array}$ What was the company's residual income for 2012?

The following static budget is provided: $\begin{array}{l}\begin{array}{lll}Units&& 20,000 units \\\hline Sales& \$ & 200,000\\Less variable costs:\\\text { Manufacturing costs } & \$ & 70,000 \\\text { Selling and administrative costs } && 40.000 \\\hline \text { contribution Margin } & \$ & 90,000\end{array}\\\text { Less fixed costs: }\\\begin{array}{lll}\text { Manufacturing costs } & \$ & 22,000 \\\text { Selling and administrative costs } & \$ & 17,000 \\\text { net income } & \$ & 51,000\end{array}\end{array}$ What will be the budgeted net income if 18,000 units are produced and sold?

For 2012, the New Products Division of Tellis Company had operating income of $7,000,000 and operating assets of $38,800,000. Tellis has set a target return on investment (ROI) of 14% for each of its divisions. 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. Assuming that the new product is put into production, calculate the division's ROI. Would the new product increase or decrease the division's ROI?

Select the correct statement concerning the human factor of performance evaluation.

Flexible budget amounts for costs and revenues come from multiplying standard per unit amounts by the actual volume of production.

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

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 and classify each as most likely being a cost center, profit center, or investment center.

The total sales variance includes both price and volume variances.