Exam 14: Performance Evaluation for Decentralized Operations

It is beneficial for two related companies to use the cost price approach for transfer pricing when both the companies operate as cost centers and are not concerned with the revenue.

Materials used by Boone Company in producing Division C's product are currently purchased from outside suppliers at a cost of $20 per unit.However, the same materials are available from Division A.Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $17 per unit.A transfer price of $19 per unit is negotiated and 60,000 units of material are transferred, with no reduction in Division A's current sales. How much would Division C's operating income increase?

Zync Inc.had $1,150,000 in invested assets, sales of $1,300,000, operating income amounting to $185,000, and a minimum acceptable rate of return of 15% on its invested assets.Zync's profit margin is:

Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

Operating income for Division A is $520,000, total service department charges are $480,000, and operating expenses are $3,200,000.What are the revenues for Division A?

To calculate operating income, total service department charges are:

The objective of transfer pricing is to encourage each division's manager to transfer goods and services in such a manner that will increase the overall company income.

Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

If divisional operating income is $75,000, invested assets are $637,500, and the minimum rate of return on the invested assets is 6%, the residual income calculated would be $36,750.

The balanced scorecard evaluates managers on financial and nonfinancial measures of performance.

The performance of a profit center manager is evaluated by comparing the profit center's operating income:

A responsibility center in which the department manager has responsibility for and authority over costs in the department is termed a cost center.

When managers of separate divisions or units are delegated the responsibility for managing their operations, the operational responsibility is said to be _____.

A department store apportions payroll costs to the various departments on the basis of the number of payroll checks issued by each department.Accounting costs are apportioned on the basis of the number of reports generated for each department.The payroll costs for the year were $150,000, and the accounting costs for the year totaled $70,000.The number of payroll checks issued and the number of reports generated for each department are as follows: Number of Payroll Checks Number of Reports Department A 396 60 Department B 1,278 90 Department C 126 150 ​ Determine the amount of (a) payroll cost and (b) accounting cost to be apportioned to each department.

The budget for Department 5 of Plant M for the current month ending March 31 is as follows: Materials \ 206,000 Factory wages 265,000 Supervisory salaries 67,800 Depreciation of plant and equipment 35,000 Power and light 22,500 Insurance and property taxes 15,500 Maintenance 9,700 ? During March, the costs incurred in Department 5 of Plant M were materials, $204,000; factory wages, $285,000; supervisory salaries, $63,600; depreciation of plant and equipment, $35,000; power and light, $21,360; insurance and property taxes, $14,400; maintenance, $9,456. (a)Prepare a budget performance report for the supervisor of Department 5 of Plant M for the month of March. (b)Are there any significant variances (greater than 5%) of the budgeted amounts that should be examined by the supervisor?

Division R reported operating income of $800,000 and total service department charges of $275,000.Therefore its:

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover would be 5.0.

The ratio of operating income to sales is termed the profit margin, a component of the rate of return on investment.

A profit center calculates the service department charges to be paid by it:

Identify a disadvantage of decentralization of operations.