Exam 9: Responsibility Accounting

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 1) Louisville office of a regional CPA firm 2) Restaurarat in a Nordstron department store 3) Medical diaprostic equipment unit of General Electric 4) Maintenance department in a Toyota assembly plant 5) Cincinnati outlet of the Hampton Inn hotel chain 6) Home electronics division of Best Buy 7) Lawnmower division of Honda 8) Finishing department of a company that makes wooden fencing 9) Engine assembly department of John Deere 10) Customer service department of United Airlines 11) Check processing department of Citibank 12) Casting department of a small steel mill 13) Jeep division of Chrysler Motors 14) Derver location of Barnes and Noble 15) Baltimore office of an investment barking firm Required: 1)Three commonly found responsibility centers are cost centers,profit centers,and investment centers.Describe each type of center. 2)Which of each type of center will most likely be classified as: a cost center,profit center,or investment center?

The term that describes what occurs when a manager does what is in his/her best interests and not what is in the best interests of the company as a whole is known as:

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

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.

The research and development department of Apple Computers would likely be organized as:

What are the advantages of using a market-based transfer price? Why is it not always used?

Describe some of the factors and issues that must be considered in defining return and investment in calculating return on investment.

An investment opportunity with a residual income that equals or exceeds the company's required rate of return should be accepted.

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: Retail Division Wholesale Division Operating income \ 2,500,000 \ 6,000,000 Operating assets \ 16,000,000 \ 36,000,000 Terra Company has set a target return on investment (ROI)of 15% for both divisions. Which of the following statements is accurate?

Thanks to his firm's decentralization and use of responsibility accounting,Matt has more time to review a proposed new joint venture with one of the firm's business partners.What advantage of decentralization does this illustrate?

Responsibility reports are prepared:

What are the different bases that can be used to establish transfer prices? Which would you generally recommend?

How should a responsibility report be prepared to support the practice of management by exception?

One of the divisions in Milsap Manufacturing Company is the Camera Division.The Camera Division is developing a new product that would require a lens not commercially available.The Camera Division believes it can sell 40,000 units of the new product each year at a selling price of $120.Variable costs for the new product would be $60,not including the lens,and there will be $160,000 of incremental fixed costs associated with the product.The Camera Division does not have the expertise to make the lenses.Milsap Manufacturing Company has a Lens Division that could make the lenses and has sufficient idle capacity.It estimates the variable cost per unit would be $16 and incremental fixed costs would be $120,000 each year. Required: 1)There are different bases that can be used in setting transfer prices,including market prices.What basis should be used in this situation? 2)What is the maximum transfer price Camera Division should be willing to pay? Note that,without the lenses,the Camera Division cannot make and sell its new product. 3)What is the minimum transfer price that Lens Division should be willing to accept? 4)Should the transfer be made? If not,why not? If so,what transfer price (or range of transfer prices)would you recommend?

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

Campbell Candy Corporation desires a 16% return on investment (ROI)on all operations.The following information was available for the company for the current year: Sales \ 250,000 Operating Income \ 70,000 Tumover 0.6 What is the corporation's ROI?

The preferred method for establishing transfer prices for transactions between divisions of the same firm is to base the transfer price on some form of competitive market price.

The kind of responsibility center that would be evaluated by comparing income on assets to the amount of assets invested is:

Suboptimization refers to actions taken by a manager that are in the best interest of the firm as a whole but not in his/her own best interest.

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?