Exam 9: Responsibility Accounting

The manager of Pearless Company's Toy Division is not satisfied with the level of return on investment that the division achieved this year. What can be done to improve return on investment?

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

A responsibility report provided to a manager typically includes:

Indicate whether each of the following statements is true or false.Responsibility reports prepared for higher-level managers have less detail than the reports prepared for lower-level managers.The amount of detail in a responsibility report should be such that managers can focus on significant deviations from expectations.The controllability concept means that managers should be evaluated based on revenues and costs they can control.If a manager is to be held responsible for a revenue or expense, he/she must have complete control over that item.A critical feature of responsibility reports is that they must be precise, even if it takes more time to prepare.

Indicate whether each of the following statements about transfer pricing is true or false.When the selling division is currently operating at capacity, goods should not be transferred to other divisions within a company.A transfer price is the price used in making sales between divisions or other segments in a company.Most companies use a market-based price as the basis for setting transfer prices.The lower the transfer price is, the higher the profit for the purchasing division.The level of the transfer price affects the reported profits of the selling division and the purchasing division, as well as the company as a whole.

Which of the following statements regarding responsibility accounting is not correct?

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?

Indicate whether each of the following statements is true or false.Cost centers tend to be found in the upper levels of a company's organization chart.Managers of investment centers are accountable for assets, liabilities, and earnings.Responsibility reports are prepared only for the top level managers of a business because they are responsible for the business as a whole.Responsibility reports often show actual and budgeted revenues and expenses and the amounts of any variances.Responsibility accounting reports are arranged using the management by exception approach.

Stephanie's responsibility report includes the salary and benefits of her secretary. Although Stephanie prepares a performance evaluation for the secretary each year, Stephanie's superior determines how much the secretary will be paid. This example is an illustration of the fact that:

The concept says that managers should be evaluated on the basis of revenues and/or expenses they can control is known as the:

Marcy is plant manager for Diversified Industries. She and the managers of four other plants report to the vice president in charge of manufacturing operations. Three department managers report to Marcy. Select the incorrect statement regarding the preparation of responsibility reports.

Prentiss Company is decentralized with three divisions. While all three division managers have responsibility for costs, only the Division Three manager has responsibility for generating revenues. Select the correct statement from the following.

The manager of the production department for Romulus Manufacturing has responsibility for all stages of the production process and does not have time to review all the operational details of his department. He has found it to be more productive to focus on the significant deviations from budget. This kind of management is called:

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: Assuming that these are the only divisions of Terra Company, what is the ROI for the company as a whole? Retail Division Wholesale Division Operating income \ 2,500,000 \ 6,000,000 Operating assets \ 16,000,000 \ 36,000,000

If a company is unable to use market-based transfer prices, the next best alternative is to use a price:

An important disadvantage of decentralization is that managers may engage in suboptimal behavior.

Estes Company has two operating divisions, A andB. The following information is provided for Division A: Division B uses the type of product produced by Division A and has approached Division A about buying the product internally. Division B is currently paying $300 to purchase the product from an outside source. If Division A sells internally it can save $10 per unit in variable costs. Assuming that Division A has sufficient excess capacity to produce all of the units requested by Division B, which of the following is the lowest price Division A should consider for the transfer? Unit selling price \ 350 Unit variable costs \ 200 Unit fixed costs \ 70

To avoid suboptimization, many companies prefer to evaluate their investment centers using:

Cambridge Company has three divisions that all report to the Vice President of Manufacturing. Each division has two departments. On Cambridge's organization chart, there will be three lines leading to the Vice President of Manufacturing, one for each department.

The Water Management Company has two operating divisions, the Service Division and the Irrigation Division. The company evaluates the performance of its divisions using the return on investment (ROI) measure. The following information pertains to the two divisions as of the end of the current year.The average service fee was $50.00 per unit for the Service Division, while the average selling price of an irrigation system was $5,000 for the Irrigation Division. The company requires a minimum return on investment of 12%.Required: Compute the return on investment (ROI) measure for both divisions and the company as a whole. Based on ROI alone which division had the better performance? (Round ROI measures to the nearest whole percent.)