Deck 18: Organizational Design, Responsibility Accounting, and Evaluation of Divisional Performance

Question 1

Responsibility accounting refers to the various concepts and tools used to measure the performance of people and departments in order to foster goal or behavioral congruence.

Answer 1

True

Question 2

Goal congruence results when the managers of subunits throughout an organization have incentives to perform in the common interest.

Answer 2

True

Question 3

The fundamental purpose of a responsibility accounting system is to help an organization reap the benefits of decentralization while minimizing the costs.

Answer 3

True

Question 4

The manager of an investment center is held accountable for the subunit's profits and the invested capital used by the subunit to generate its profit.

Question 5

A responsibility center is a subunit in an organization whose manager is held accountable for specified financial and non-financial results of the subunit's activities.

Question 6

A cost center is an organizational subunit whose manager is held accountable for costs, but the subunit's input-output relationship is not well specified.

Question 7

The check processing department in a bank might be called a cost center.

Question 8

An airline's reservation department is an example of a profit center.

Question 9

A company-owned hotel in a hotel chain is an investment center.

Question 10

The primary goals of any profit-making enterprise include maximizing its profitability and using its invested capital as effectively as possible.

Question 11

Under activity-based responsibility accounting management's attention is directed not only to the cost incurred in an activity, but also to the activity itself.

Question 12

A performance report shows the budgeted and actual amounts of key financial results appropriate for the type of responsibility center involved.

Question 13

The proper focus of a responsibility accounting system is an emphasis on blame.

Question 14

In evaluating the investment center manager's performance, only revenues and costs that the manager can control or significantly influence should be included in the profit measure.

Question 15

The economic value added (EVA) of an investment center is its after-tax operating income minus the center's total assets (net of its current liabilities) times the company's ROI.

Question 16

Residual income is the amount of an investment center's profit that remains after subtracting an imputed interest charge.

Question 17

Residual income should not be used to compare the performance of different sized investment centers.

Question 18

The incentives of an investment center manager are not affected by the tendency for net book value to produce a misleading increase in return on investment over time.

Question 19

For purposes of measuring invested capital, centrally controlled assets are allocated to the investment centers.

Question 20

The myopia of a single-period measure such as return on investment is avoided by evaluating periodic profit through flexible budgeting and variance analysis coupled with a postaudit of major investment decisions.

Question 21

When computing ROI, it is may be appropriate to use average total assets as the denominator.

Question 22

The primary purpose of Responsibility Accounting is to access blame for suboptimal results.

Question 23

In order to properly calculate the Residual Income for an investment center, it is necessary to know the imputed interest rate.

Question 24

When computing Residual Income, it is not correct to eliminate non-productive assets in the calculation.

Question 25

Because the accounting department provides information necessary to improve profitability, it is an example of a profit center.

Question 26

A department that has responsibility for both sales and expense is an example of a cost center.

Question 27

All other things remaining equal, increasing the imputed interest will increase residual income.

Question 28

What is the return on investment if the division manager only utilizes the productive assets? Bollwerk Company's records for Department Q provided the following information for last year:

A) 13.00%
B) 12.00%
C) 8.00%
D) 6.00%

Question 29

Use the following to answer questions:
McGowan Inc. has two divisions that operate as investment centers. The data for each follows:


-What is the return on investment for the Trim Line Division?

A) 45.90%
B) 22.00%
C) 12.00%
D) 7.00%

Question 30

Use the following to answer questions:
McGowan Inc. has two divisions that operate as investment centers. The data for each follows:


-What is the capital turnover for the Regular Division?

A) 1.35
B) 5.00
C) 6.20
D) 6.60

Question 31

Which of the following actions will not increase the return on investment?

A) Increase sales
B) Decrease invested capital
C) Increase long-term liabilities
D) Decrease costs

Question 32

The Cherry Division of the Jolly Fruit Candies had profits of $618,000 last year while the Pineapple Division had $176,000. Using this information, which division had the better return on investment.

A) Jolly Fruit Candies
B) Cherry Division
C) Pineapple Division
D) Insufficient information provided

Question 33

Use the following to answer questions:
The records of the Barnholtz Division of Silberman Corporation showed the following for last year:


-What is the sales margin for the Barnholtz Division?

A) 6.00%
B) 12.00%
C) 15.00%
D) 25.00%

Question 34

Use the following to answer questions:
The records of the Barnholtz Division of Silberman Corporation showed the following for last year:


-What is the capital turnover for the Barnholtz Division?

A) 2.50
B) 6.00
C) 12.00
D) 15.00

Question 35

Use the following to answer questions:
The records of the Barnholtz Division of Silberman Corporation showed the following for last year:


-What is the return on investment for the Barnholtz Division?

A) 6.00%
B) 12.00%
C) 15.00%
D) 25.00%

Question 36

The _______is more likely to promote goal congruence when used as a performance measure.

A) Inventory turnover
B) Marginal income
C) Residual income
D) Return on investment

Question 37

Use the following to answer questions:
Daniels Co. uses long-term debt and equity capital as primary sources of funds. The long-term debt has a market value and book value of $8.5 million and was issued at a 9 percent interest rate. The equity capital has a book value of $3 million and a market value of $7.5 million. Daniels has 3 major centers located around the country with the following operating income, total assets and current liabilities:

The cost of equity capital is 12 percent, with a 40 percent tax rate.

-What is the EVA for the Midwest Division?

A) $213,740
B) $143,300
C) $ 75,460
D) $487,240

Question 38

Use the following to answer questions:
Daniels Co. uses long-term debt and equity capital as primary sources of funds. The long-term debt has a market value and book value of $8.5 million and was issued at a 9 percent interest rate. The equity capital has a book value of $3 million and a market value of $7.5 million. Daniels has 3 major centers located around the country with the following operating income, total assets and current liabilities:

The cost of equity capital is 12 percent, with a 40 percent tax rate.

-What is the EVA for the West Division?

A) $213,740
B) $143,300
C) $(43,450)
D) $487,240

Question 39

Activity-based responsibility accounting attempts to

A) Improve the efficiency of necessary activities
B) Identify and eliminate activities deemed unnecessary
C) Add new activities that will increase value
D) Do all of the above

Question 40

Use the following to answer questions:
Belsky Bay Inc. has two divisions. The company, in trying to develop performance measures has noted that different accounting methods and inflation rates exist for the assets of the divisions. Because of the difference, the company is considering the use of multiple performance measures. The following information for the divisions for last year is below:

The company's required rate of return is 12 percent.

-What are Division A and B's ROIs based on net book values, respectively (round to two decimals)?

A) 64.65%; 23.23%
B) 48.55%; 41.74%
C) 41.74%; 46.38%
D) 23.65%; 65.00%

Question 41

Use the following to answer questions:
Belsky Bay Inc. has two divisions. The company, in trying to develop performance measures has noted that different accounting methods and inflation rates exist for the assets of the divisions. Because of the difference, the company is considering the use of multiple performance measures. The following information for the divisions for last year is below:

The company's required rate of return is 12 percent.

-What are Division A and B's ROIs based on gross book values, respectively (round to two decimals)?

A) 64.65%; 23.23%
B) 48.55%; 41.74%
C) 41.74%; 48.55%
D) 23.65%; 65.00%

Question 42

Use the following to answer questions:
Belsky Bay Inc. has two divisions. The company, in trying to develop performance measures has noted that different accounting methods and inflation rates exist for the assets of the divisions. Because of the difference, the company is considering the use of multiple performance measures. The following information for the divisions for last year is below:

The company's required rate of return is 12 percent.

-What are Division A and B's residual income, based on gross book values, respectively?

A) $ 85,500; $126,100
B) $126,100; $ 85,500
C) $ 55,600; $130,300
D) $130,300; $ 55,600

Question 43

Use the following to answer questions:
Belsky Bay Inc. has two divisions. The company, in trying to develop performance measures has noted that different accounting methods and inflation rates exist for the assets of the divisions. Because of the difference, the company is considering the use of multiple performance measures. The following information for the divisions for last year is below:

The company's required rate of return is 12 percent.

-What are Division A and B's residual income, based on net book values, respectively?

A) $ 85,500; $126,100
B) $126,100; $ 85,500
C) $ 55,600; $130,300
D) $130,300; $ 55,600

Question 44

Which of the following must occur before one can calculate the return on investment ratios for the subunits of an organization?

A) All investment costs must be collected and divided according to the number of subunits in the organization
B) The total revenues must be allocated according to the number of subunits that will be calculating a return on investment
C) The total costs of the organization must be allocated evenly to all subunits of the organization
D) The corporate assets must be allocated appropriately to each responsibility subunit of the organization

Question 45

A cost center is a subunit

A) In which managers are evaluated on their ability to generate revenues
B) In which managers are evaluated on their ability to keep costs and expenses on budget
C) In which managers are evaluated on their ability to generate profits
D) Both A and B

Question 46

Which of the following amounts is most likely subject to the control of the profit center's manager? The following is a summarized income statement for Royal Manor Co.'s profit center 12608 for April

A) Contribution Margin of $175,000
B) Contribution Margin of $175,000 and Period Expenses of $11,000
C) Contribution Margin of $175,000 and Period Expenses of $13,000
D) Contribution Margin of $175,000 and Period Expenses of $21,000

Question 47

If the capital turnover increases by 20 percent and the sales margin decreases by the same percentage, the return on investment will

A) Increase by 20 percent
B) Decrease by 4 percent
C) Increase by 4 percent
D) Stay the same

Question 48

In order to improve the return on investment, which of the following changes should be made?

A) Decrease sales revenue and expenses by the same percentage
B) Decrease sales revenue and expenses by the same dollar amount
C) Increase sales revenue and expenses by the same percentage
D) Increase sales dollars by the same amount as expenses

Question 49

One possible disadvantage that arises in a decentralized organization is that

A) Divisional managers are not specialists
B) Divisional managers have less motivation
C) Divisional managers suboptimize in their decision making in that they make decisions that benefit themselves
D) All of the above are disadvantages

Question 50

Which of the following is considered a disadvantage of return on investment (ROI)?

A) ROI encourages managers to look carefully at relationships between sales
B) revenues, expenses, and investment
C) ROI encourages cost efficiency
D) ROI discourages managers of subunits with high ROIs to invest in projects with low ROIs that are . acceptable to the organization as a whole
E) ROI discourages excessive investment in operating assets

Question 51

If the sales margin of .4 percent remained unchanged and the capital turnover of 4.0 increased by 15 percent, the return on investment would

A) Increase by 10 percent
B) Decrease by 15 percent
C) Increase by 15 percent
D) Stay the same

Question 52

Use the following to answer questions:
Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's.

-The ROI for the Boxed Candy Division, before the proposed purchase of Truffles Inc. is:

A) 11.00%
B) 13.00%
C) 17.00%
D) 20.00%

Question 53

Use the following to answer questions:
Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's.

-The ROI for the Boxed Candy Division, after the purchase of Truffles Inc. would be:

A) 11.00%
B) 13.00%
C) 17.00%
D) 20.00%

Question 54

Use the following to answer questions:
Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's.

-The Residual Income for the Boxed Candy Division, before the purchase of Truffles Inc. would be:

A) $200,000
B) $204,000
C) $400,000
D) $504,000

Question 55

Use the following to answer questions:
Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's.

-The Residual Income for the Boxed Candy Division, after the purchase of Truffles Inc. would be:

A) $196,000
B) $200,000
C) $224,000
D) $504,000

Question 56

Use the following to answer questions:
Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's.

-If the Boxed Candy Division purchases Truffle, Inc., and income increases as expected, what will happen to the ROI of Chocolate Enterprise?

A) It will go down
B) It will stay the same
C) It will go up
D) Cannot be determined from the information given

Question 57

Use the following to answer questions:
Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's.

-Given the current bonus structure within Chocolate Enterprise and assuming the managing of the Boxed Candy Division is a self maximizing individual, you would expect the Boxed Candy Division to:

A) Purchase Truffles, Inc. with the current bonus structure
B) Not purchase Truffles, Inc. with the current bonus structure
C) Purchase Truffles, Inc. if bonuses are based upon increasing Residual Income
D) Not purchase Truffles Inc. if bonuses are based upon increasing EVA

Question 58

The Gold Division of the Currency Company has net income in the amount of $500,000, an average total asset base of $3,000,000 and residual income of $50,000. The imputed interest would be

A) 20%
B) 15%
C) 10%
D) 5%

Question 59

Use the following to answer questions:
The Mercury Division of Planet Enterprises had pre-tax income of $1,500,000. Total assets were $13,000,000 while current liabilities were $3,000,000. The weighted average cost of capital is 10.0%. The tax rate for Planet Enterprises is 25%

-What is the EVA for the Mercury Division?

A) ($125,000)
B) $125,000
C) $500,000
D) $750,000

Question 60

Use the following to answer questions:
The Mercury Division of Planet Enterprises had pre-tax income of $1,500,000. Total assets were $13,000,000 while current liabilities were $3,000,000. The weighted average cost of capital is 10.0%. The tax rate for Planet Enterprises is 25%

-What is the ROI for the Mercury Division?

A) 6.72%
B) 10.00%
C) 11.54%
D) 15.00%

Question 61

Which of the following is not a benefit of decentralization?

A) Allowing managers some autonomy in decision making provides managerial training for future higher-level managers
B) In a decentralized organization some tasks or services may be duplicated unnecessarily
C) Managers with some decision-making authority usually exhibit greater motivation than those who . merely execute the decisions of others
D) Managers of the organization's subunits are specialists, thereby enabling them to manage their departments most effectively

Question 62

Which of the following is not a cost of decentralization?

A) Managers in a decentralized organization might have a narrow focus on their own unit's performance rather than the attainment of their organization's overall goals
B) Managers might have a tendency to ignore the consequences of their actions on the organization's other subunits
C) Delegating decision making to the lowest level possible enables an organization to respond in a timely . way to opportunities and problems
D) Both A and B

Question 63

Use of activity-based responsibility accounting leads to which of the following questions about the activity?

A) Is the activity necessary?
B) Can the activity be improved?
C) Does the activity add value to the organization's product or service?
D) All are possible questions

Question 64

Which of the following is not used to evaluate investment center performance?

A) Return on investment
B) Cash
C) Residual income
D) Economic value added

Question 65

Which of the following is not a possible measure of divisional invested capital?

A) Total assets
B) Stockholders' equity
C) Total assets less current liabilities
D) Total productive assets

Question 66

Last year Buchanan Company's divisional operating income was $400,000. The investment for the year was $5,000,000. What is the return on investment?

A) 7.750%
B) 8.000%
C) 12.500%
D) 12.500

Question 67

What is meant by the hierarchy of performance reports?

Question 68

Briefly discuss the possible measures that can be used for divisional invested capital.

Question 69

Briefly describe the advantages and disadvantages of using net book value as a measure of invested capital.

Question 70

Eiffel Inc. has two divisions it treats as investment centers. The results for last year were as follows:

Required: Compute the following amounts for each division:
1) Return on investment, desired rate of return is 11%
2) Residual income, desired rate of return is 18%
3) Capital turnover, desired rate of return is 25%
4) Sales margin, desired rate of return is 10%

Question 71

You are given partial information for three investment centers of Carter Co. Find the missing information.

Question 72

Engels, Inc. has the following data available for two of its divisions for last year:

The imputed interest for Marx Inc. is 24%. The tax rate for Marx Inc. is 18%. Required:
(1) Compute the following for each division
(a) Sales margin
(b) Capital turnover
(c) ROI
(d) Residual income
(e) EVA, (Assume there are no current liabilities)
(2) Briefly discuss which division appears most successful and why?

Question 73

What are advantages and disadvantages of ROI and residual income as performance measures?

Question 74

Briefly describe EVA.

Question 75

Discuss the problems involved in measuring investment center income for evaluating the performance of the investment center and evaluating the center's manager.

Question 76

Traffic Services Company has recently expanded by acquiring two smaller companies in the transportation industry. Prior to these acquisitions, Traffic Services used a centralized style of organization because it was small enough that the top management team was heavily involved in the day-to-day activities of the firm. Ms. Causeway, the CEO, feels that this style is no longer suitable to the larger, more diverse organization.
She has hired a consultant to help her and her management team create a new structure which, when developed on paper, will be described to the affected employees and their inputs will be sought. Since no one in the company knows much about management styles, Ms. Causeway felt this would be an efficient way to get the ball rolling but realized the consultants would not have the specialized knowledge about her company plus the two acquisitions.
One of the first things she feels she will need to do is explain the benefits of decentralization that will accrue to both the company and the affected employees. She asks you, as the consultant, to provide her with a general list of advantages of decentralization that she will tailor to her company before presenting it.

Question 77

Ladue, Inc. has used a decentralized form of organizational structure for the past five years. The controller, Ms. Trevino, has noticed that some of the divisions are still using fixed assets that are fully depreciated and that there has been little acquisition activity in these divisions. Coupled with this are very high ROIs, especially when compared to the other divisions that seem to have a regular program of disposition and replacement of fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will review her findings and look into the problem.
Required:
1) What are the potential negative effects of decentralization?
2) Specifically discuss the issues involved in suboptimization.

Question 78

Mr. Chang is the production V.P. of Katrina Company. It is the beginning of the month and he storms into the controllers department, clutching a large folder of reports. "Why am I getting so many reports? I don't need them nor do I want all the details. I've delegated responsibility to my managers so I don't have to worry about details. You've got to do something about this, Juan."
Juan, the controller, starts to think about the problem that seems to have come about as the company decentralized with many layers of responsibility. He has a vague memory of something he learned from his old cost accounting class and has called you, his former professor, for some advice or suggestions in order to reduce the paper flow.
Required: Briefly describe the concept of the hierarchy of performance reports.

Question 79

Ricardo, Inc. is just starting up. The management team has decided from the beginning that decentralization was the preferred organizational style and has made this clear in all interviews and discussions with potential employees. Mr. Pangea, the CEO, is unsure about the best way to evaluate his division managers. He has heard the terms return on investment, residual income, economic value added, and flexible budgets but wants to know the pros and cons of each.
Required: Briefly describe ROI, residual income, EVA and other approaches to performance evaluation. Bring in, where appropriate, how to calculate the measure and problem areas in the development of some of the numbers.

Question 80

Mrs. Young is the manager of the Children's Toy division of Ferguson Corporation. Every year she just misses the cut off established by the company for the awarding of bonuses. She is concerned inasmuch as she believes she is running her division effectively and her income has been increasing slowly but steadily over the years she has been with the company.
She knows that the company uses ROI as the performance measure to evaluate divisions and begins to study the formula to see what she should do to improve the ROI for her division.
Required: Briefly discuss several ways to improve ROI.