Deck 11: Financial Control

Question 1

Financial measures identify what is wrong with an organization,not simply provide a signal that something needs attention.

Answer 1

False

Question 2

A decentralized organization does all the following EXCEPT it:

A)encourages local success rather than organizational success.
B)trains employees in skills needed for decision making.
C)assigns responsibility to front-line employees.
D)adapts to the local business environment.

Answer 2

encourages local success rather than organizational success.

Question 3

In a decentralized organization,front-line employees are trained to respond to changes in the business environment.

Answer 3

True

Question 4

For each of the following activities,characteristics,and applications,identify whether they are found in a (C)entralized organization,a (D)ecentralized organization,or (Both)types of organizations.
(C / D / Both) a.Freedom for managers at lower organizational levels to make decisions
(C / D / Both) b.Best suited to organizations within stable environments
(C / D / Both) c.Greater responsiveness to users' needs
(C / D / Both) d.Use the most efficient technologies
(C / D / Both) e.Maximum constraints and minimum freedom for managers at lowest levels
(C / D / Both) f.Maximization of benefits over costs
(C / D / Both) g.Minimization of duplicate functions
(C / D / Both) h.Standard operating procedures
(C / D / Both) i.Requires trust in employees at all levels
(C / D / Both) j.Primarily task control rather than results control

Question 5

Which of the following statements is FALSE regarding financial and nonfinancial measures of performance?

A)Nonfinancial measures may help to anticipate and explain financial results.
B)Financial measures include aggregate measures.
C)Nonfinancial measures may help to identify the causes of financial results.
D)Financial measures are lead indicators of future success.

Question 6

When an organization moves to decentralized decision making,control moves from results control to task control.

Question 7

Properly chosen nonfinancial measures anticipate and help to explain financial results in an organization.

Question 8

The MOST likely result of decentralization is to give local-division managers the responsibility for:

A)evaluating strategic goals.
B)allocating joint costs.
C)operating decisions.
D)financial control.

Question 9

What is financial control and how does it relate to nonfinancial measures?

Question 10

Discuss at least two inefficiencies of financial control.

Question 11

In a decentralized organization:

A)local-division managers have less control over their business segments.
B)there are few deviations from the standardized way of doing things.
C)front-line employees are not trained to respond to changes in the business environment.
D)decisions are made by the managers most familiar with the problems and opportunities.

Question 12

In a centralized organization:

A)local-division managers do not need higher approval for most business decisions.
B)company-wide standard operating procedures are common.
C)local-division managers have an opportunity to gain decision-making experience.
D)decisions are made by local division managers.

Question 13

Measure of financial control highlight:

A)falling profits.
B)poor quality.
C)high prices.
D)unsatisfactory service.

Question 14

All of the following are true of responsibility centers EXCEPT that they:

A)operate like a small business.
B)promote the interests of the larger organization.
C)coordinate activities with other responsibility centers.
D)are best used in a centralized organization.

Question 15

Nonfinancial measures can highlight falling sales and profits in an organization,but only financial measures can identify why this is occurring.

Question 16

Financial control involves the use of financial measures to assess organizational and management performance.

Question 17

Performance measures for financial control include all of the following EXCEPT:

A)reduced cycle times.
B)ROI ( return on investment)and economic value added.
C)profit.
D)cost.

Question 18

For an organization to be successful,activities within sales,manufacturing,and customer service need to be coordinated.

Question 19

All of the following are reasons that financial control may be an ineffective scorecard EXCEPT that:

A)it fails to identify the causes or drivers of performance.
B)it focuses on financial measures while ignoring other important attributes of performance.
C)it focuses on long-term rather than short-term performance measures.
D)it is an aggregate,rather than a detailed measure of performance.

Question 20

The amount of decentralization in an organization reflects the organization's trust in its employees and other factors.

Question 21

A local unit is evaluated as a profit center but the corporate office controls many facets of the operation.If local-unit performance is poor,it may reflect:

A)poor corporate decisions.
B)poor local decisions.
C)conditions that no one can control.
D)All of the above are correct.

Question 22

Contribution margin is the best measure of the controllable contribution of a profit center toward organizational profit.

Question 23

Organizations use nonfinancial control to provide a summary measure of how well their systems of operations control are working.

Question 24

For the segment manager to be properly evaluated,common costs should NOT be allocated to the various segments,even if an arbitrary allocation is required.

Question 25

In general,managers are motivated to influence generated revenues when those revenues are included in their performance measures.

Question 26

All of the following would likely be classified as cost centers except:

A)maintenance department at local grocery store.
B)your university's computer center.
C)surgical department of hospital.
D)All of the above are cost centers.

Question 27

A fully-owned subsidiary of a multinational firm reports return on investment four times a year.This is an example of:

A)a revenue center.
B)a cost center.
C)an investment center.
D)a profit center.

Question 28

A cost center is a business segment:

A)that usually evaluates employee performance by comparing the center's actual costs with target or standard costs for the amount and type of work done.
B)in which interperiod cost comparisons can be misleading if the output level and production mix are constant.
C)that usually includes individual stores within a department-store chain.
D)that should be evaluated solely on its ability to control and reduce costs.

Question 29

Conventional segment margin income statements clearly capture the interactive effects among responsibility centers.

Question 30

When responsibility centers are treated as profit centers:

A)the segment manager has responsibility for pricing and product selection, but not for purchasing and promotion.
B)the corporate office makes most of the operating and pricing decisions.
C)the information technology group of a manufacturing firm would typically be treated as a profit center.
D)there are usually problems associated with assigning jointly earned revenues.

Question 31

If a product line was eliminated,forecasted annual corporate profits in the short run would decrease by the amount of that product line's contribution margin.

Question 32

A major problem faced by cost centers is assigning jointly earned revenues.

Question 33

Segment margin includes:

A)all costs traceable to the segment.
B)the segment's share of allocated corporate costs.
C)the segment's share of allocated unavoidable costs.
D)All of the above are correct.

Question 34

Properly chosen nonfinancial measures anticipate and explain financial results.

Question 35

The performance measures chosen should influence the employees' decision-making behavior.

Question 36

Describe a cost center.What are some of the problems faced by cost centers?

Question 37

All of the following are true of a revenue center EXCEPT that it:

A)controls service quality and units sold.
B)controls the acquisition cost of the product or service sold.
C)may control price, product mix, and promotional activities.
D)may incur sales and marketing costs.

Question 38

A revenue center is like an independent business.

Question 39

A support department,such as human resources,should be evaluated as a cost center.

Question 40

Measuring performance based on cost per unit will motivate performance that includes keeping ________ under control.

A)only costs
B)costs and on-time delivery
C)costs and the amount of defects
D)only quality

Question 41

Is segment margin an appropriate measure of financial performance for segment management? Why?
Yes,it is an appropriate measure because all of the revenues and costs used to compute segment margin are directly traceable to the segment and are essentially under the control of the segment manager.Segment income is also a valuable measure of performance because it considers all costs that could be avoided without the segment.

Question 42

What types of revenues and costs are used to calculate segment margin?

Question 43

Transfer prices based on actual costs provide no incentive to the supplying division to control costs.

Question 44

The primary goal of transfer pricing is to:

A)motivate the decision maker to act in the organization's best interests.
B)obtain a high transfer price for the supplying unit.
C)obtain a high transfer price for the receiving unit.
D)agree on a price for external sales.

Question 45

The management accountant for Tony's Skateboard Company has prepared the following segmented income statement for each of its three product lines.

Required:
a. Do you recommend dropping the Cruise product line? Why or why not?
b. If the Jammer product line had been discontinued,the short-term effect on corporate profits would be a decrease of what amount?
c. Assume that the Flight product line has been discontinued and long-term capacity has had time to adjust.The projected long-term effect of this action on annual corporate profits would be a decrease of what amount?
d. Assume that an advertising campaign could increase revenues for any of the products by $15,000.To maximize corporate profits,which product line should receive the advertising dollars? Why?
e. How would you change the format of the segment margin statement above to make it more understandable?

Question 46

Caution should be taken when interpreting a segment margin income statement because:

A)revenues may be based on transfer prices.
B)the interactive effects among responsibility centers are generally not clearly captured.
C)expenses may be a result of subjective allocation of jointly incurred costs.
D)All of the above are correct.

Question 47

If external markets exist,then market-based transfer prices are the most appropriate.

Question 48

The MOST likely result of a negotiated transfer price is that it:

A)takes away the ultimate responsibility of the resulting transfer price from the two parties.
B)may reflect the relative negotiating skills of the two parties.
C)generally results in transferring more than the optimum number of units.
D)reflects purely economic considerations.

Question 49

The management accountant for the Martino Organics has prepared the following segmented income statement for the most current year.

Assume that the Sundries department has been discontinued and long-term capacity of the company has had time to adjust.The projected long-term effect of this action on annual corporate profits would be a decrease of:

A)$40,000.
B)$32,000.
C)$29,000.
D)$22,000.

Question 50

The management accountant for the Martino Organics has prepared the following segmented income statement for the most current year.

If the Fish & Meat department had been discontinued,the short-term effect on corporate profits would be a decrease of:

A)$55,000.
B)$34,000.
C)$31,000.
D)$24,000.

Question 51

If a company subscribes to the controllability principle,then it would be best to evaluate product line management on:

A)contribution margin.
B)corporate profit.
C)segment income.
D)segment margin.

Question 52

Negotiated transfer prices,and therefore production decisions,may reflect the negotiating skills of the parties rather than economic considerations.

Question 53

All of the following are true of cost-based transfer prices EXCEPT that they:

A)provide no incentive to the supplying division to control costs when actual costs are used.
B)may use standard costs to help maintain operating efficiency.
C)promote the optimal level of transactions for the overall organization.
D)don't give proper guidance when operating capacity is constrained.

Question 54

A major goal of transfer pricing is to motivate the decision maker to act in the organization's best interests.

Question 55

Managers of profit centers are responsible for:

A)costs and investments.
B)revenues and costs.
C)costs, revenues, and investments.
D)costs.

Question 56

Segment margin is calculated as follows:

A)Revenues less flexible costs.
B)Revenues less expenses.
C)Revenues less direct costs.
D)Revenues less variable costs

Question 57

Human resources costs might be allocated to individual cost centers:

A)based on the square footage each cost center uses.
B)based on the number of employees utilized by each individual center.
C)only if the allocation serves some decision-making purpose.
D)never,because it is a non-cash cost that should not be allocated.

Question 58

All of the following are true of market-based transfer prices EXCEPT that they:

A)may lead to goods/services being purchased externally.
B)provide an independent valuation.
C)exist for all transferred products and services.
D)provide the proper economic incentives.

Question 59

The management accountant for the Martino Organics has prepared the following segmented income statement for the most current year.

If the Produce department had been eliminated prior to this year,the company would have reported:

A)greater corporate profits.
B)the same amount of corporate profits.
C)less corporate profits.
D)resulting profits cannot be determined.

Question 60

The management accountant for the Martino Organics has prepared the following segmented income statement for the most current year.

Assume an advertising campaign could increase revenues for any of the products by $15,000.To maximize corporate profits,the ________ department should receive the advertising dollars.Assume the cost of the advertising campaign is less than the revenues it generates.

A)Sundries
B)FIsh & Meat
C)Produce
D)From the information given,the correct product line cannot be determined.

Question 61

All of the following equations represent return on investment (ROI)EXCEPT:

A)efficiency × productivity.
B)operating income / investment.
C)return on sales × inventory turnover.
D)(operating income / sales)× (sales / investment).

Question 62

Asset turnover,the productivity component of return on investment (ROI),is:

A)20%.
B)80%.
C)25%.
D)125%.

Question 63

Residual income equals reported accounting income less the economic cost of the investment used to generate that income.

Question 64

The MAJOR criticism of using return on investment (ROI)for financial control is that it:

A)gives managers an incentive to reject projects with an ROI greater than the company's required rate of return but less than the department's current ROI.
B)usually uses the blended rate of capital as the required rate of return.
C)encourages competition among segment managers.
D)is a measure of overall performance.

Question 65

Assume the transfer price for a pair of soles is 180% of full costs of the Sole Division and 100,000 of soles are produced and transferred to the Assembly Division.The Sole Division's operating income is:

A)$1,600,000.
B)$1,800,000.
C)$2,560,000.
D)$3,600,000.

Question 66

Return on sales,the efficiency component of return on investment (ROI),is:

A)20%.
B)80%.
C)25%.
D)125%.

Question 67

Why are transfer prices used? What is a market-based transfer price?

Question 68

Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $120 per pair to customers. Scenario A: Negotiated transfer price of $30 per pair of soles
Scenario B: Market-based transfer price

A)$1,000,000 more net income under Scenario A
B)$1,000,000 of net income using Scenario B
C)$200,000 of net income using Scenario A
D)None of the above is correct.

Question 69

If the Assembly Division sells 100,000 pairs of shoes at a price of $120 a pair to customers,what is the operating income of both divisions together?

A)$8,800,000
B)$6,800,000
C)$6,000,000
D)indeterminable

Question 70

The financial measure,economic value added,evaluates income relative to the level of investment required.

Question 71

Bedtime Bedding Company manufactures pillows.The Cover Division makes covers and the Assembly Division makes the finished pillows.The covers can be sold separately for $5.00. The pillows sell for $6.00.The information related to manufacturing for the most recent year is as follows:

Required:
a. Compute the operating income for each division and the company as a whole.Use market value as the transfer price.
b. Are all managers happy with this concept? Explain.

Question 72

Return on investment (ROI)can be increased by:

A)increasing sales.
B)decreasing operating assets.
C)decreasing operating income.
D)decreasing asset turnover.

Question 73

Assume an organization's cost of capital is 8% and Department A currently has a 12% return on investment (ROI).The manager of Department A,who is evaluated on ROI,would MOST likely accept an investment that is expected to return:

A)more than 8%.
B)more than 12%.
C)more than 8% but less than 12%.
D)less than 12%.

Question 74

The Jordan Company manufacturers only one type of shoe and has two divisions, the Sole Division and the Assembly Division. The Sole Division manufactures soles and then "sells" them to the Assembly Division, which completes the shoes and sells them to retailers. The market price for the Assembly Division to purchase a pair of soles is $40. Fixed costs are per pair at 100,000 units.

If the cost-based transfer price is 180% of variable costs ,what is the transfer price per pair of soles from the Sole Division to the Assembly Division?

A)$28.8
B)$25.20
C)$32.40
D)$57.60

Question 75

The Crandon Mill has two divisions.The Cutting Division prepares timber at its sawmills.The Assembly Division prepares the cut lumber into finished wood for the furniture industry.During the year,the Cutting Division prepared 60,000 cords of wood at a cost of $660,000.All the lumber was transferred to the Assembly Division where additional operating costs of $6 per cord were incurred.The 600,000 boardfeet of finished wood were sold for $2,500,000.
Required:
a.Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost,$11 a cord.
b.Determine the operating income for each division if the transfer price is $9 per cord.
c.Since the Cutting Division sells all of its wood internally to the Assembly Division,does the manager care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the circumstances?

Question 76

To discover where to make improvements in productivity,managers might do all of the following EXCEPT:

A)calculate the ratio of output over input.
B)compare return on sales to a competitor's return on sales.
C)use trend analysis.
D)compare the asset turnover ratio for this accounting period to an industry norm.

Question 77

Problems of using investment centers include all of the problems associated with profit centers plus all of the following EXCEPT:

A)how to identify the assets used by each investment center.
B)how to assign the responsibility for jointly-used assets such as buildings.
C)how to determine the value of the assets used by each investment center.
D)what method to use to depreciate the assets.

Question 78

An administered transfer price:

A)is most often used for infrequent transactions.
B)retains the accountability of both parties.
C)reflects pure economic considerations.
D)provides an arbitrary distribution of revenues and costs between the responsibility centers.

Question 79

For each of the following,identify whether it BEST relates to (M)arket-based,(C)ost-based,(N)egotiated,(A)dministered,or (All)types of transfer pricing.
(M / C / N / A / All) a.Bargaining between selling and buying units
(M / C / N / A / All) b.Objective and provides the proper economic incentives
(M / C / N / A / All) c.145% of full costs
(M / C / N / A / All) d.Avoids confrontation and generally used when a transaction occurs frequently
(M / C / N / A / All) e.Internal product transfers are required
(M / C / N / A / All) f.Prices listed in a trade journal
(M / C / N / A / All) g.Prices do not reflect pure economic considerations nor accountability considerations
(M / C / N / A / All) h.Goal is to motivate decision makers to act in the organization's best interest
(M / C / N / A / All) i.Provide no incentive to the supplying division
(M / C / N / A / All) j.Reflects support of the controllability principle

Question 80

Return on investment is the ratio of income to investment,with varying definitions of income and investment.