Exam 24: Performance Evaluation for Decentralized Operations

Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10 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 $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales. How much would Division A's income from operations increase?

Service department charges are similar to the expenses of a profit center that purchased services from a source outside the company.

In an investment center, the manager has the responsibility for and the authority to make decisions that affect:

The following is a measure of a manager's performance working in a cost center.

The amount of detail presented in a budget performance report for a cost center depends upon the level of management to which the report is directed.

Responsibility accounting reports for profit centers will include

If divisional income from operations is $100,000, invested assets are $850,000, and the minimum rate of return on invested assets is 8%, the residual income is $68,000.

Operating expenses incurred for the entire business as a unit that are not subject to the control of individual department managers are called indirect expenses.

The major advantage of the rate of return on investment over income from operations as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated.

A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n):

ABC Corporation has three service departments with the following costs and activity base: ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information are as follows: What is the service department charge rate for the Personnel Department?

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

If divisional income from operations is $75,000, invested assets are $737,500, and the minimum rate of return on invested assets is 6%, the residual income is $36,750.

Several items are missing from the following table of rate of return on investment and residual income. Determine the missing items, identifying each item by the appropriate letter. Round percentage values to one decimal point.

If income from operations for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.

Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $302,500, and a desired minimum rate of return of 15%. The profit margin for Chicks is:

Investment centers differ from profit centers in that they

The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers.

Three measures of investment center performance are income from operations, rate of return on investment, and residual income.

The process of measuring and reporting operating data by areas of responsibility is termed responsibility accounting.