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Exam 9: Responsibility Accounting

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Question 21

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Willis Company made a $200,000 investment in new machinery.Assuming the company's margin is 4%,what income will be earned if the investment generates $600,000 in additional sales?

A) $80,000.
B) $24,000.
C) $400,000.
D) None of these.

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

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Question 22

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All of the following are characteristics that are required for effective responsibility accounting except:

A) motivation.
B) accountability.
C) centralization.
D) none of these.

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

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Question 23

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The New Products Division,of Testar Company,had operating income of $8,000,000 and operating assets of $44,800,000 during the current year.The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year.Testar has set a target return on investment (ROI) of 16% for each of its divisions.Assuming that the new product is put into production,calculate the division's ROI.

Explain how the management by exception doctrine relates to responsibility accounting.

Indicate whether each of the following statements is

How might return on investment be used in making resource allocation decisions within an organization?

What methods are used to measure operating assets for calculating return on investment? Which of these approaches would you recommend? Explain your choice.

A tool that is often used to depict the lines of authority and responsibility within a firm is:

Terra Company has two divisions,the Retail Division and the Wholesale Division.The following information was gathered for the two divisions for the current year: $\begin{array}{|l|lr|lr|}\hline & {\text { Retail Division }} & &{\text { Wholesale Division }} \\\hline \text { Operating income } & \$ & 2,500,000 & \$ & 6,000,000 \\\hline \text { Operating assets } & \$ & 16,000,000 & \$ & 36,000,000 \\\hline\end{array}$ Terra Company has set a target return on investment (ROI) of 15% for both divisions Which of the following statements is accurate?

Select the incorrect statement concerning responsibility reports.

For Year 1,Division C of Deerfield Company reported operating assets of $8,800,000,revenues of $6,600,000,and operating expenses of $5,760,000.The company has established a target return on investment (ROI)of 10% for the division. Required: 1)Calculate the Year 1 ROI for the division.Did the division achieve its target ROI for the year? 2)For Year 2,Division C managers expect that its operating assets will stay at about the same level as for Year 1.Variable expenses for Year 1 were $3,960,000,and the remaining expenses were fixed.The managers expect that the contribution margin ratio for Year 2 will be the same as for Year 1 and that the amount of fixed expenses will not change.To what level must sales increase in Year 2 to achieve the target ROI?

The Premium Product Company has three production departments: machining,assembly,and finishing.The three departments are under the control of the vice president of manufacturing.Each department has a manager,and one or more supervisors report to each department manager.Accordingly,the chain of command goes from vice president to department manager to supervisor.The responsibility reports for the two supervisors in the Machining Department are provided below: $\quad$$\quad$$\quad$$\quad$$\quad$$\text { Machining Department - Shift Supervisor }$ $\begin{array}{|l|r|r|r|}\hline & \text {Flexible Budget } & \text {Actual Results} & \text {Variance} \\\hline \text {Materials} &\$ 18,000 & \$ 18.750 &750 \mathrm{U}\\\hline \text { Laber } & 37,500 & 41,250 & 3,750 \mathrm{U} \\\hline \text { Repairs } & 3,000 & 2,400 & 600 \mathrm{~F} \\\hline \text { Maintenance } & \underline {1,500} & \underline {1,400} & \underline {100 \mathrm{~F} }\\\hline \text { Total } & \$ 60,000 & \$ 63,800 & 3,800 \mathrm{U}\\\hline \end{array}$ $\quad$$\quad$$\quad$$\quad$$\quad$$\text { Machining Department - Shift Supervisor }$ $\begin{array}{l}\begin{array}{|l|}\hline\\\hline \text {Materials}\\\hline \text { Laber }\\\hline \text { Repairs } \\\hline \text { Maintenance } \\\hline \text { Total } \\\hline \end{array}\begin{array}{c|}\hline \text {Flexible Budget }\\\hline14,200 \\\hline 27,000 \\\hline 1,800 \\\hline \underline {1,000} \\\hline 44,000\\\hline\end{array}\begin{array}{c|}\hline \text {Actual Results} \\\hline 14,100 \\\hline 24,750 \\\hline 2,020 \\\hline \underline {1,330 }\\\hline 42,200 \\\hline\end{array}\begin{array}{c|}\hline \text {Variance} \\\hline 100 \mathrm{~F} \\\hline 2,250 \mathrm{~F} \\\hline 220 \mathrm{U} \\\hline \underline {330 \mathrm{U}} \\\hline 1,800 \mathrm{~F}\\\hline\end{array}\end{array}$ Other pertinent cost data are provided in the following table: $\begin{array}{l}\begin{array}{|l|}\hline\\\hline \text {Cost data of other departments:}\\\hline \text { Assembly }\\\hline \text { Finishang } \\\hline \text { Administrative costs associated with: } \\\hline \text { Machining Department Manager } \\\hline \text { Vice President of Manufacturing} \\\hline \end{array}\begin{array}{c|}\hline \text {Flexible Budget }\\\hline\\\hline \$302,500 \\\hline 176,250 \\\hline\\\hline 50,000 \\\hline 82,500 \\\hline\end{array}\begin{array}{c|}\hline \text {Actual Results} \\\hline\\\hline\$199,000 \\\hline 180,300 \\\hline\\\hline 48,500 \\\hline 85,650\\\hline\end{array}\begin{array}{c|}\hline \text {Variance} \\\hline\\\hline 3,500 \mathrm{~F} \\\hline 4,050 \mathrm{U} \\\hline\\\hline 1,500 \mathrm{~F} \\\hline 3,150 \mathrm{U} \\\hline\end{array}\end{array}$ Required: 1)Prepare a responsibility report for the manager of the Machining Department. 2)Prepare a responsibility report for the Vice President of Manufacturing.

Fairpoint Products provided the following selected information about its consumer products division for the current year: $\begin{array}{|l|rr|}\hline \text { Desired ROI } & & 8 \% \\\hline \text { Net Income } & \$ & 100,000 \\\hline \text { Residual Income } & \$ & 60,000 \\\hline\end{array}$ Based on this information,the division's investment amount was:

Curtis Company's balance sheet and income statement are provided below: $\begin{array}{c}\hline \text {Cutis Company}\\\hline \text {Balance Sheet}\\\hline \text {December 31,2014}\\\begin{array}{|l|l|} \hline \text { Assets } & \\\hline \text { Cash } & \$ 80,000 \\\hline \text { Accounts receivable } & 56,000 \\\hline \text { Inventory } & 30,000\\\hline \text { Plant and equipment} &440,000 \\\hline \text { Less accumulated depreciation } & \underline { 120,000 } \\\hline \text { Total assets } & \$ \underline { 486,000 } \\\hline & \\\hline \text { Liabilities and Stockholders' Equity } & \\\hline \text { Accounts payable } & \$ 24,000\\\hline \text { Notes payable } & 80,000\\\hline \text { Capital stock, no par } & 180,000\\\hline \text { Retained earuings } & \underline { 202,000 } \\\hline \text { Total habilities and stockholders' equity } & \$ \underline {486,000 }\\\hline\end{array}\end{array}$ Change date to Year 1 or current Year for 2014 on both statements. CHANGE NEEDS TO BE MADE TO TABLE Delete the ",2014" form the heading $\begin{array}{c}\hline {\text { Cutis Company }} \\\hline {\text { Income Statement }} \\\hline {\text { For the Year Ended December } 31,2014} \\\begin{array}{|l|lr|} \hline \text { Sales } & \$ & 480,000 \\\hline \text { Less variable costs: } & & \\\hline \text { Manufacturing } & & 120,000 \\\hline \text { Selling and administrative } & \$ & 110,000 \\\hline \text { Contribution margin } & & 250,000 \\\hline \text { Less fixed costs: } & & \\\hline {\text { Manufacturing }} & & 90,000 \\\hline \text { Selling and administrative } && 40,000 \\\hline \text { Net income } & \$&120,000 \\\hline\end{array}\end{array}$ The company pays its senior managers a bonus based on ROI. Required: 1)Compute the company's ROI assuming that the amount of operating assets is measured at: (a)cost; (b)book value;and (c)current replacement value,$700,000. Round ROI to one decimal place (i.e.4.6%) 2)What is the lesson of this exercise? CHANGE NEEDS TO BE MADE TO TABLE Delete the ",2014" form the heading

Jacob is a department manager who recently instituted a new recognition program for his employees.He budgeted the cost of the new program at $10 per employee,but actual costs were $15 per employee.The cost associated with the recognition program would be considered which of the following kinds of cost?

Which of the following statements regarding profit centers is correct?

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

The concept says that managers should be evaluated on the basis of revenues and/or expenses they can control is known as the:

Carver Company's balance sheet and income statement are provided below: $\begin{array}{c}\hline \text {Carver Company}\\\hline \text {Balance Sheet}\\\hline \text {December 31,2014}\\\begin{array}{|l|l|} \hline \text { Assets } & \\\hline \text { Cash } & \$ 40,000 \\\hline \text { Accounts receivable } & 52,000 \\\hline \text { Inventory } & 80,000\\\hline \text { Plant and equipment, net of depreciation } &280,000 \\\hline \text { Land held for future plant expansion } & \underline { 76,000 } \\\hline \text { Total assets } & \$ \underline { 528,000 } \\\hline & \\\hline \text { Liabilities and Stockholders' Equity } & \\\hline \text { Accounts payable } & \$ 45,000\\\hline \text { Notes payable } & 58,000\\\hline \text { Capital stock, no par } & 240,000\\\hline \text { Retained earuings } & \underline { 185,000 } \\\hline \text { Total habilities and stockholders' equity } & \$ \underline {528,000 }\\\hline\end{array}\end{array}$ Change date to Year 1 or current year from 2014 in both statements. CHANGE NEEDS TO BE MADE TO TABLE Delete the ",2014" form the heading $\begin{array}{c}\hline {\text { Carver Company }} \\\hline {\text { Income Statement }} \\\hline {\text { For the Year Ended December } 31,2014} \\\begin{array}{|l|lr|} \hline \text { Sales } & \$ & 330,000 \\\hline \text { Less variable costs: } & & \\\hline \text { Manufacturing } & & 68,000 \\\hline \text { Selling and administrative } & \$ & 48,000 \\\hline \text { Contribution margin } & & 214,000 \\\hline \text { Less fixed costs: } & & \\\hline {\text { Manufacturing }} & & 68,000 \\\hline \text { Selling and administrative } && 56,000 \\\hline \text { Net income } & \$&90,000 \\\hline\end{array}\end{array}$ Required: 1)Compute the margin,turnover,and return on investment for Carver Company. 2)What is the advantage of expanding the ROI formula to measure margin and turnover separately? CHANGE NEEDS TO BE MADE TO TABLE Delete the ",2014" form the heading

When using residual income as a project-screening tool,management should accept a project if the residual income is: