Management Accounting Ch 12 Problems Essay Example For Students

Management Accounting Ch 12 Problems Essay CHAPTER 12 FINANCIAL CONTROL TRUE/FALSE 1. Financial control involves the use of financial measures to assess organizational and management performance. a. True b. False 2. Financial measures identify what is wrong with an organization, not simply provide a signal that something needs attention. a. True b. False 3. Financial measures can highlight falling sales and profits in an organization, but only nonfinancial measures can identify why this is occurring. a. True b. False 4. Properly chosen nonfinancial measures anticipate and help to explain financial results in an organization. . True b. False 5. In a centralized organization, front-line employees are trained to respond to changes in the business environment. a. True b. False 6. The amount of decentralization in an organization reflects the organization’s trust in its employees and other factors. a. True b. False 7. When an organization moves to decentralized decision making, control moves from results control to task con trol. a. True b. False 8. For an organization to be successful, activities within sales, manufacturing, and customer service need to be coordinated. . True b. False 9. Organizations use nonfinancial control to provide a summary measure of how well their systems of operations control are working. a. True b. False 10. Properly chosen nonfinancial measures anticipate and explain financial results. a. True b. False 11. A support department, such as human resources, should be evaluated as a revenue center. a. True b. False 12. A major problem faced by cost centers is assigning jointly earned revenues. a. True b. False 13. A profit center is like an independent business. a. True b. False 14. The performance measures chosen should influence the employees’ decision-making behavior. a. True b. False 15. For the segment manager to be properly evaluated, common costs should be allocated to the various segments, even if an arbitrary allocation is required. a. True b. False 16. Contribution margin is the best measure of the controllable contribution of a profit center toward organizational profit. a. True b. False 17. If a product line was eliminated, forecasted annual corporate profits in the short run would decrease by the amount of that product line’s net income. . True b. False 18. In general, managers are motivated to influence generated revenues when those revenues are included in their performance measures. a. True b. False 19. Conventional segment margin income statements clearly capture the interactive effects among responsibility centers. a. True b. False 20. A major goal of transfer pricing is to motivate the decision maker to act in the organizationâ⠂¬â„¢s best interests. a. True b. False 21. Transfer prices based on actual costs provide no incentive to the supplying division to control costs. a. True b. False 22. If external markets exist, then cost-based transfer prices are the most appropriate. a. True b. False 23. Negotiated transfer prices, and therefore production decisions, may reflect the negotiating skills of the parties rather than economic considerations. a. True b. False 24. Return on investment (ROI) encourages segment managers to reject all capital projects with returns greater than the company’s cost of capital. a. True b. False 25. The most widely accepted definition of productivity is the ratio of output over input. a. True b. False 26. The financial measure, economic value added evaluates income relative to the level of investment required. a. True b. False 27. A sole ratio value is generally not very useful. a. True b. False 28. The net profit margin ratio for Wal-Mart, a discount store, is approximately 3%. This is low compared to Microsoft’s 20% net profit margin ratio, and therefore, indicates Wal-Mart is a poor investment. a. True b. False 29. In general, a discount retail store, such as K-mart, would be expected to have a greater inventory turnover ratio than an automotive retailer. a. True b. False 30. In general, a debt ratio of 60% indicates lower financial risk than a debt ratio of 80%. a. True b. False MULTIPLE CHOICE 31. Measure of financial control highlight: a. falling profits b. poor quality c. high prices d. unsatisfactory service 32. All of the following are reasons that financial control may be an ineffective scorecard EXCEPT that: a. it fails to identify the causes or drivers of performance b. it focuses on financial measures while ignoring other important attributes of performance c. it focuses on long-term rather than short-term performance measures d. t is an aggregate, rather than a detailed measure of performance 33. Performance measures for financial control include all of the following EXCEPT: a. reduced cycle times b. ROI ( return on investment) and economic value added c. profit d. cost 34. Which of the following statements is FALSE regarding financial and nonfinancial measures of performance? a. Nonfinancial measures may help to anticipate and explain financia l results. b. Financial measures include aggregate measures. c. Nonfinancial measures may help to identify the causes of financial results. . Financial measures are lead indicators of future success. 35. In a centralized organization: a. local-division managers have greater control over their business segments b. there are few deviations from the standardized way of doing things c. front-line employees are trained to respond to changes in the business environment d. decisions are made by the managers most familiar with the problems and opportunities 36. In a decentralized organization: a. local-division managers must receive higher approval for most business decisions b. ompany-wide standard operating procedures are common c. local-division managers have an opportunity to gain decision-making experience d. decisions are made by senior executives 37. A decentralized organization does all the following EXCEPT it: a. encourages local success rather than organizational success b. trains employees in skills needed for decision making c. assigns responsibility to front-line employees d. adapts to the local business environment 38. All of the following are true of responsibility centers EXCEPT that they: a. perate like a small business b. promote the interests of the larger organization c. coordinate activities with other responsibility centers d. are best used in a centralized organization 39. The MOST likely result of decentralization is to give local-division managers the responsibility for: a. evaluating strategic goals b. allocating joint costs c. operating decisions d. financial control 40. All of the following would likely be classified as cost centers except: a. Maintenance department at local grocery store. b. your university’s computer center . X-ray department of hospital d. All of the above are cost centers. 41. A local unit is evaluated as a profit center but the corporate office controls many facets of the operation. If local-unit performance is poor, it may reflect: a. poor corporate decisions b. poor local decisions c. conditions that no one can control d. All of the above are correct. 42. Measuring performance based on cost per unit will motivate performance that includes keeping __________ under control. a. only costs b. costs and on-time delivery c. costs and the amount of defects d. only quality 43. A cost center is a business segment: a. that usually evaluates employee performance by comparing the center’s actual costs with target or standard costs for the amount and type of work done b. in which interperiod cost comparisons can be misleading if the output level and production mix are constant c. that usually includes individual stores within a department-store chain d. that should be evaluated solely on its ability to control and reduce costs 44. All of the following are true of a revenue center EXCEPT that it: a. controls service quality and units sold . controls the acquisition cost of the product or service sold c. may control price, product mix, and promotional activities d. may incur sales and marketing costs 45. When responsibility centers are treated as profit centers: a. the segment manager has responsibility for pricing and product selection, but not for purchasing and promotion b. the corporate office makes most of the operating and pricing decisions c. the in formation technology group of a manufacturing firm would typically be treated as a profit center d. here are usually problems associated with assigning jointly earned revenues 46. A fully-owned subsidiary of a multinational firm reports return on investment four times a year. This is an example of: a. a revenue center b. a cost center c. an investment center d. a profit center 47. Segment margin includes: a. all costs traceable to the segment b. the segment’s share of allocated corporate costs c. the segment’s share of allocated unavoidable costs d. All of the above are correct. 48. Managers of cost centers are responsible for: a. costs and investments. b. evenues and costs. c. costs, revenues, and investments. d. costs. 49. Segment margin is calculated as follows: a. Revenues less flexible costs. b. Revenues less expenses. c. Revenues less direct costs. d. Revenues less variable costs. 50. Caution should be taken when interpreting a segment margin income statement bec ause: a. revenues may be based on transfer prices b. the interactive effects among responsibility centers are generally not clearly captured c. expenses may be a result of subjective allocation of jointly incurred costs d. All of the above are correct. 51. Utilities might be allocated to individual cost centers: a. based on the square footage each cost center uses b. based on the number of employees utilized by each individual center c. only if the allocation serves some decision-making purpose d. never, because it is a non-cash cost that should not be allocated THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 52 THROUGH 55. The management accountant for the Ortega Organics has prepared the following segmented income statement for the most current year. ProduceFish MeatSundriesTotal Sales$60,000$100,000$40,000$200,000 Variable expenses36,00065,00020,000121,000 Contribution margin24,00035,00020,00079,000 Other costs18,00021,000 8,00047,000 Segment margin6,00014,00012,00032,000 Allocated avoidable costs 2,000 3,000 3,0008,000 Segment income4,00011,0009,00024,000 Allocated corporate costs 7,000 7,000 7,00021,000 Corporate profit$(3,000)$ 4,000$ 2,000$ 3,000 52. If the Produce department had been eliminated prior to this year, the company would have reported: a. greater corporate profits b. the same amount of corporate profits c. less corporate profits d. resulting profits cannot be determined 53. If the Fish Meat department had been discontinued, the short-term effect on corporate profits would be a decrease of: a. $35,000 b. $14,000 c. $11,000 d. $4,000 54. Assume that the Sundries department has been discontinued and long-term capacity of the company has had time to adjust. The projected long-term effect of this action on annual corporate profits would be a decrease of: a. $20,000 b. $12,000 c. $9,000 d. $2,000 55. Assume an advertising campaign could increase revenues for any of the products by $15,000. To maximize corporate profits, the __________ department should receive the advertising dollars. Assume the cost of the advertising campaign is less than the revenues it generates. a. Sundries b. Fish Meat c. Produce d. From the information given, the correct product line cannot be determined. 56. If a company subscribes to the controllability principle, then it would be best to evaluate product line management on: a. contribution margin b. corporate profit c. segment income d. segment margin 57. The primary goal of transfer pricing is to: a. motivate the decision maker to act in the organization’s best interests b. obtain a high transfer price for the supplying unit c. btain a high transfer price for the receiving unit d. agree on a price for external sales 58. All of the following are true of market-based transfer prices EXCEPT that they: a. may lead to goods/services being purchased externally b. provide an independent valuation c. exist for all transferred products and services d. provide the proper economic incentives 59. All of the following are true of cost-based transfer prices EXCEPT that they: a. provide no incentive to the supplying division to control costs when actual costs are used b. ay use standard costs to help maintain operating efficiency c. promote the optimal level of transactions for the overall organization d. don’t give proper guidance when operating capacity is constrained 60. The MOST likely result of a negotiated transfer price is that it: a. takes away the ultimate responsibility of the resulting transfer price from the two parties b. may reflect the relative negotiating skills of the two parties c. generally results in transferring more than the optimum number of units d. reflects purely economic considerations 1. An administered transfer price: a. is most often used for infrequent transactions b. retains the accountability of both parties c. reflects pure economic considerations d. provides an arbitrary distribution of revenues and costs between the responsibility centers THE FOLLOWING INFORMATION APPLIES TO QUE STIONS 62 THROUGH 65. The Jordan Company manufacturers only one type of shoe and has two divisions, the Sole Division and the Assembly Division. The Sole Division manufactures soles and then sells them to the Assembly Division, which completes the shoes and sells them to retailers. The market price for the Assembly Division to purchase a pair of soles is $20. Fixed costs are per pair at 100,000 units. Soles costs per pair of soles are: Direct materials$4 Direct labor$3 Variable overhead$2 Division fixed costs$1 Assemblys costs per completed pair of shoes are: Direct materials$5 Direct labor$1 Variable overhead$1 Division fixed costs$9 62. If the cost-based transfer price is 180% of variable costs , what is the transfer price per pair of soles from the Sole Division to the Assembly Division? a. $14. 40 b. $12. 60 c. $16. 20 d. $28. 80 63. Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to customers. Scenario A: Negotiated transfer price of $15 per pair of soles Scenario B: Market-based transfer price a. $500,000 more net income under Scenario A b. $500,000 of net income using Scenario B c. $100,000 of net income using Scenario A d. None of the above is correct. 64. Assume the transfer price for a pair of soles is 180% of full costs of the Sole Division and 100,000 of soles are produced and transferred to the Assembly Division. The Water Cycle EssayCompute the operating income for each division and the company as a whole. Use market value as the transfer price. b. Are all managers happy with this concept? Explain. 97. Department income totals $200,000, investment in the department is $2,000,000, and the company’s cost of capital is 8%. Required: a. Calculate the return on investment (ROI). b. Calculate economic value added. c. Assume there is a capital project that requires a $200,000 investment for a $18,000 return. Would the department manager be more likely to accept the project if department performance was evaluated using ROI or economic value added? Why? 98. |Cash |$ 25,000 |Accounts receivable |$ 15,000 | |Inventory |$ 60,000 | |Equipment, net |$300,000 | |Accounts payable |$ 50,000 | |Bonds payable (long-term) |$180,000 | |Common stock |$ 40,000 | |Retained earnings |$ 130,000 | Required: Use the information above to calculate the following ratios: a. the quick ratio; b. the current ratio; c. the debt ratio; and d. the debt-to-equity ratio. CRITICAL THINKING/ESSAY 99. What is financial control and how does it relate to nonfinancial measures? 100. Discuss at least two inefficiencies of financial control. 101. Describe a cost center. What are some of the problems faced by cost centers? 102. What types of revenues and costs are used to calculate segment margin? 103. Is segment margin an appropriate measure of financial performance for segment management? Why? 104. Why are transfer prices used? What is a market-based transfer price? 105. A division reports a 24. 5% ROI, a 9. 6% return on sales, and a 2. 55 asset turnover ratio. How can the manager of this division determine whether these results are favorable or not? 106Ratio values standing by themselves have little to no meaning. Describe at least two different ways to make ratios more useful. CHAPTER 12 FINANCIAL CONTROL TRUE/FALSE LO11. a LO12. b LO13. a LO14. a LO25. b LO26. a LO27. b LO38. a LO39. b LO310. a LO311. b LO312. b LO313. a LO314. a LO415. b LO416. b LO417. b LO418. a LO419. b LO520. a LO521. a LO522. b LO523. a LO724. b LO725. a LO726. a LO827. a LO828. b LO829. a LO830. a MULTIPLE CHOICE LO131. a LO132. c LO133. a LO134. d LO235. b LO236. c LO237. a LO238. d LO239. c LO340. c LO341. d LO342. a LO343. a LO344. b LO345. d LO346. c LO447. a LO448. d LO449. c LO450. d LO451. a LO452. c LO453. a LO454. c LO455. a LO456. d LO557. a LO558. c LO559. c LO560. b LO561. d LO662. c LO663. d LO664. a LO665. b LO766. d LO767. c LO768. b LO769. b LO770. a LO771. b LO772. c LO773. b LO774. a LO775. c LO776. d LO777. a LO778. b LO779. c LO880. d LO881. a LO882. a LO883. b LO884. c LO885. d LO886. c LO887. b LO888. d LO889. c LO890. b LO891. a MULTIPLE CHOICE 62. $9 x 1. 8 = $16. 20 63. The net income would be the same under both scenarios. 64. Revenue Costs ($10 x 100,000) = $800,000 Operating income 65. Revenues ($60 x 100,000) Cost ($26 x 100,000) = $3,400,000 Operating income 72. $600,000 / $2,400,000 = 25% 73. $2,400,000 / $3,000,000 = 80% 74. $600,000 / $3,000,000 = 20% OR 25% x 80% = 20% 87. $10,000 net income / ($15,000 + $25,000) common equity = 25% 88. Debt to equity ratio = total liabilities ($40,000 + $160,000) / total equity ($60,000 + 140,000) = 100%. Quick ratio = ($20,000 + $30,000) / current liabilities $40,000 = 1. 25. Current ratio = ($20,000 + $30,000 + $50,000) / current liabilities $20,000 = 2. 50. Debt ratio = total liabilities ($40,000 + $160,000) / total assets $400,000 = 50%. 89. Accumulated depreciation will be greater for Company D, resulting in lower total assets. Sales divided by a lower total assets results in a greater asset turnover ratio for Company D. Asset turnover ratio = sales / total assets. 90. Cost of sales is greater when using LIFO and ending inventory is less when using LIFO. Therefore, cost of sales / inventory will be greater for Acton Company. EXERCISE/PROBLEM LO2 92. (C / D / Both)a. Freedom for managers at lower organizational levels to make decisions (C / D / Both)b. Best suited to organizations within stable environments (C / D / Both)c. Greater responsiveness to user needs (C / D / Both)d. Use the most efficient technologies (C / D / Both)e. Maximum constraints and minimum freedom for managers at lowest levels (C / D / Both)f. Maximization of benefits over costs (C / D / Both)g. Minimization of duplicate functions (C / D / Both)h. Standard operating procedures (C / D / Both)i. Requires trust in employees at all levels (C / D / Both)j. Primarily task control rather than results control LO4 93. a. No, I would not recommend dropping the Omegadon product line because the $70,000 segment margin indicates that this product line contributes $70,000 toward corporate costs and profits. Also, segment income is $40,000 (positive) which includes all available costs. b. If the Chacko product line were discontinued, corporate profits would immediately decrease by $140,000, the amount reported for the contribution margin. c. If the Fiefer product line were discontinued and long-term capacity has had time to adjust, corporate profits would decrease by $120,000, the amount reported for the segment income. d. To maximize corporate profits, the Feifer product line should receive the advertising dollars because it has a contribution margin of approximately 46%, the highest contribution margin of the three product lines. e. The current segment margin statement could be made more understandable if the allocated corporate costs were only listed under the company total column, and they were not part of the computation for each product line segment. It is obvious that the corporate costs are arbitrarily allocated equally to each product line and arbitrary allocations do not aid in decision making. LO5 94. (M / C / N / A / All)a. Bargaining between selling and buying units (M / C / N / A / All)b. Objective and provides the proper economic incentives (M / C / N / A / All)c. 145% of full costs (M / C / N / A / All)d. Avoids confrontation and generally used when a transaction occurs frequently (M / C / N / A / All)e. Internal product transfers are required (M / C / N / A / All)f. Prices listed in a trade journal (M / C / N / A / All)g. Prices do not reflect pure economic considerations nor accountability considerations (M / C / N / A / All)h. Goal is to motivate decision makers to act in the organization’s best interest (M / C / N / A / All)i. Provides no incentive to the supplying division (M / C / N / A / All)j. Reflects support of the controllability principle LO3,6 95. a. |Cutting |Assembly | |Revenue |$660,000* |$2,500,000 | |Cost of services: | | | | Incurred |$ 660,000 |$ 360,000 | | Transferred-in | 0 | 660,000 | | Total |$ 660,000 |$1,020,000 | | | | | | Operating income |$ 0 |$1,480,000 | * 60,000 cords x $11 = $660,000 b. |Cutting |Assembly | |Revenue |$540,000* |$2,500,000 | |Cost of service | | | |Incurred |$ 660,000 |$ 360,000 | |Transferred-in | 0 | 540,000 | | Total |$ 660,0 00 |$ 900,000 | | | | | |Operating income (loss) |$(120,000) |$1,600,000 | * 60,000 cords x $9 = $540,000 c. The manager of Cutting cares about the transfer price if the division is a profit center but not if it is a cost center. Under the circumstances, the division probably should be a cost center and it should not worry about the profit it pretends to make by selling to another division. LO6 96. a. | |Cover Division |Assembly Division |Company | |Revenue: | | | | | External |$ 4,000,000 |$7,200,000 |$11,200,000 | | Internal |6,000,000 | 0 | 0 | | Total |$10,000,000 |$7,200,000 |$11,200,000 | |Cost of goods: | | | | | Incurred |$ 6,000,000 |$1,500,000 |$ 7,500,000 | | Transferred-in | 0 |6,000,000 | 0 | | Total |$ 6,000,000 |$7,500,000 |$ 7,500,000 | | | | | | |Operating income (loss) |$ 4,000,000 |$ (300,000) |$ 3,700,000 | b. The Assembly manager is probably not happy because the division is showing a loss. The manager would probably argue for a transfer price at something less than market price. However, since the market is open and competitive, the market price can be justified. The division needs to either increase its price or reduce its costs if it expects to show a profit. LO7 97. a. ROI is 10% ($200,000 department income / $2,000,000 investment in the department). b. Economic value added is $40,000 . c. By accepting the proposed project, the department’s ROI will be reduced by 0. 1% to 9. 9%. The department manager being evaluated on ROI will probably reject the $200,000 investment proposal even though the investment exceeds the company’s 8% cost of capital. New ROI of 9. 9% = $218,000 segment income / $2,200,000 investment in the segment. By accepting the proposed project, the economic value added will be increased to $42,000, an increase of $2,000. The department manager being evaluated on economic value added will probably choose to accept the nvestment since it increases economic value added for the department. New economic value added is $42,000 . LO8 98. a. Quick ratio = ($25,000 + $15,000) / current liabilities $50,000 = 0. 80 b. Current ratio = ($25,000 + $15,000 + $60,000) / current liabilities $50,000 = 2. 00. c. Debt ratio = total liabil ities ($50,000 + $180,000) / total assets $400,000 = 57. 5%. d. Debt-to-equity ratio = total liabilities ($50,000 + $180,000) / total equity ($40,000 + $130,000) = 135. 3%. CRITICAL THINKING/ESSAY LO1 99. What is financial control and how does it relate to nonfinancial measures? Solution: Financial control involves the use of financial measures to assess organization and management performance. Financial measures provide a signal that something is wrong, while nonfinancial measures identify what is wrong. For example, falling sales, a financial measure, indicates that something is wrong. However, the falling sales may result from poor quality, poor service, or high prices, which would be identified by the nonfinancial measures of the organization. LO1 100. Discuss at least two inefficiencies of financial control. Solution: First, financial control focuses on financial measures that do not measure other important attributes such as product quality, employee satisfaction, and customer service. Because these elements and others are important to the organization’s long-term success, they also should be measured and monitored. Financial control measures the effect of the overall level of performance and ignores the performance achieved on a more detailed level. For this reason, financial control does not suggest how to improve performance, but only serves as a signal of potential problems and opportunities. Financial control is oriented to short-term performance and it only considers how well the organization has performed this quarter or this year. This preoccupation with short-term success is debilitating because little attention gets focused on long-term improvement. LO3 101. Describe a cost center. What are some of the problems faced by cost centers? Solution: Cost centers are responsibility centers in which managers and other employees control only the costs of the product or service provided. A cost center cannot influence revenues or the level of investment Problems faced by cost centers include the significant behavioral effects of setting standards and interpreting variances on employees who may try to misrepresent performance potential and performance results. Measures other than financial measures of cost may need to be evaluated as well in order to get a clear picture of the cost center’s performance. LO4 102. What types of revenues and costs are used to calculate segment margin? Solution: The revenues used to compute segment margin include those directly traceable to the segment. Also included is the segment’s allocation of jointly-earned revenues and revenues earned from other responsibility centers that may be based on transfer prices. The costs used to compute segment margin include those directly traceable to the segment. Also included is the segment’s allocation of jointly-incurred costs and costs of items received internally from other responsibility centers that may be based on transfer prices. Only those costs that are considered under the control of the segment manager should be included. LO4 103. Is segment margin an appropriate measure of financial performance for segment management? Why? Solution: Yes, it is an appropriate measure because all of the revenues and costs used to compute segment margin are directly traceable to the segment and are essentially under the control of the segment manager. Segment income is also a valuable measure of performance because it considers all costs that could be avoided without the segment. LO5 104. Why are transfer prices used? What is a market-based transfer price? Solution: Transfer prices are used internally to value goods and services provided (transferred) by one division to another. The goal of transfer prices is to motivate the decision maker to act in the organization’s best interests. A market-based transfer price transfers those goods from one division to another at their current market value. LO7 105. A division reports a 24% ROI, a 9. 6% return on sales, and a 2. 55 asset turnover ratio. How can the manager of this division determine whether these results are favorable or not? Solution: Meaning is added when ratios are compared to past performance and trends are revealed. Also, ratios can be compared to industry averages and ratios of comparable organizations. To keep ratios in proper perspective, a background check into a company’s external environment should include information about general economic conditions, political events and political climate, and industry outlook. The trends or comparative differences help to determine if the division is doing well and they also provide signals of where to look for potential problems and opportunities. LO8 106. Ratio values standing by themselves have little to no meaning. Describe at least two different ways to make ratios more useful. Solution: (1) Meaning is added when ratios are compared to past performance and trends are revealed. (2) To add meaning, compare ratios to other relevant information such as industry averages and ratios of peer companies. (3) To keep ratios in proper perspective, a background check into a company’s external environment should include information about general economic conditions, political events and political climate, and industry outlook.