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Exam 9: Responsibility Accounting

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Question 1

Multiple Choice

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Contribution margin would be the most important variable in evaluating the performance of:

A) A cost center.
B) A production center.
C) An investment center.
D) A profit center.

E) B) and C)
F) None of the above

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D

Question 2

Multiple Choice

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Howard Company provided the following selected information about its consumer products division for the current year: Based on this information, the division's investment amount was: $\begin{array} { | l | l r | } \hline \text { Desired ROI } & & 12 \% \\\hline \text { Net Income } & \$ & 150,000 \\\hline \text { Residual Income } & \$ & 30,000 \\\hline\end{array}$

A) $250,000.
B) $1,000,000.
C) $1,500,000.
D) $1,250,000.

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

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Question 3

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Responsibility reports are prepared:

The most desirable way to set a transfer price is to base it on either variable cost or total cost.

Liam 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 would be classified as a profit center.

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

Patterson Company has three divisions that all report to the Vice President of Manufacturing. Each division has two departments. The Vice President of Manufacturing should receive detailed responsibility reports on all six of the departments.

The cellular phone division of Stegall Company had budgeted sales of $950,000 and actual sales of $900,000. Budgeted expenses were $600,000 while actual expenses were $550,000. Based on this information, the responsibility report for the manager of this profit center would show:

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

Which of the following is a characteristic that is needed for decentralization to work well in an organization?

In a potential transfer price situation, if the supplying division is operating at capacity in making sales to outside customers, it should be required to accept a transfer price that would lower its overall profitability because doing so will increase total firm profitability.

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?

Huang Company reported the following information for the current year: The company's return on investment was: $\begin{array} { | l | l r | } \hline \text { Sales } & \$ & 400,000 \\\hline \text { Average Operating Assets } & \$ & 250,000 \\\hline \text { Margin } & & 10 \% \\\hline\end{array}$

In a responsibility reporting system, the reports of a particular manager contain summary information about the revenue and cost items directly under his or her control and detailed data on the activities of the responsibility centers that fall under his or her chain of authority.

Which of the following statements regarding profit centers is correct?

Which of the following is an advantage of using cost-based transfer prices?

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

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 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? $\begin{array}{|l|l|}\hline \text { 1) } & \text { Louisville office of a regional CPA firm } \\\hline 2) & \text { Restaurant in a Nordstrom department store } \\\hline 3) & \text { Medical diagnostic equipment unit of General Electric } \\\hline 4) & \text { Maintenance department in a Toyota assembly plant } \\\hline 5) & \text { Cincinnati outlet of the Hampton Inn hotel chain } \\\hline 6) & \text { Home electronics division of Best Buy } \\\hline 7) & \text { Lawnmover division of Honda } \\\hline 8) & \text { Finishing department of a company that makes wooden fencing } \\\hline 9) & \text { Engine assembly department of John Deere } \\\hline 10) & \text { Customer service department of United Airlines } \\\hline 11) & \text { Check processing department of Citibank } \\\hline 12) & \text { Casting department of a small steel mill } \\\hline 13) & \text { Jeep division of Chrysler Motors } \\\hline 14) & \text { Denver location of Barnes and Noble } \\\hline 15) & \text { Baltimore office of an investment banking firm } \\\hline\end{array}$

If Pascal Company's turnover (asset utilization) measure is 2.5 and its margin is 7.5%, its ROI is 18.75%.

Organization charts are drawn in a hierarchical fashion with low level managers shown at the bottom of the chart, middle level managers in the middle of the chart, and senior level managers shown at the top of the chart.