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Exam 14: Performance Evaluation for Decentralized Operations

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Question 21

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Assume that divisional operating income amounts to $325,000 and top management has established 10% as the minimum rate of return on divisional assets totaling $1,250,000.The residual income for the division is:

A) $200,000.
B) $292,500.
C) $125,000.
D) $0.

E) A) and C)
F) None of the above

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Question 22

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Materials used by Meeta-Products Inc.in producing Division A's product are currently purchased from outside suppliers at a cost of $12 per unit.However, the same materials are available from Division B.Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $7 per unit.A transfer price of $9 per unit is established, and 35,000 units of material are transferred with no reduction in Division B's current sales. How much would Division A's operating income increase?

A) $175,000
B) $70,000
C) $105,000
D) $75,000

E) None of the above
F) A) and C)

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Question 23

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Service department charges are similar to the expenses that would be incurred if the profit center purchased the services from outside the company.

If divisional operating income is $100,000, invested assets are $850,000, and the minimum rate of return on invested assets is 8%, the residual income would be $32,000.

Which of the following would not be considered as an internal centralized service department?

The three common types of responsibility centers are referred to as asset centers, liabilities centers, and equity centers.

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

The financial performance of responsibility centers is evaluated in the balanced scorecard under the financial section of the scorecard.

By using the rate of return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals that will increase the overall rate of return for the company.

The following financial information was summarized from the accounting records of Globe Corporation for the current year ended December 31: $\begin{array} { l r r r } & \text { Northern } & \text { Southern } & \text { Corporate } \\& \text { Division } & \text { Division } & \text { Total } \\\text { Cost of goods sold } & \$ 310,000 & \$ 175,000 & \\\text { Direct operating expenses } & 250,000 & 115,000 & \\\text { Net sales } & 600,000 & 410,000 & \\\text { Interest expense } & & & \$ 12,000 \\\text { General overhead } & && 101,000 \\\text { Income tax } & && 26,700\end{array}$ ? The net income for Globe Corporation is:

A responsibility center in which the authority and responsibility for costs and revenues is vested on the department manager is termed an investment center.

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

Investment turnover (as used in determining the rate of return on investment) focuses on the rate of profit earned on each sales dollar.

The primary accounting tool for controlling and reporting for cost centers is a budget performance report.

The manager of a cost center has the responsibility for making decisions affecting:

Materials used by Meeta-Products Inc.in producing Division A's product are currently purchased from outside suppliers at a cost of $12 per unit.However, the same materials are available from Division B.Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $7 per unit.A transfer price of $9 per unit is established, and 35,000 units of material are transferred with no reduction in Division B's current sales. How much would Meeta-Products total operating income increase?

It is beneficial for related companies to negotiate a transfer price when the supplying company has unused capacity in its plant.

The balanced scorecard attempts to evaluate the underlying financial drivers of nonfinancial performance.

Division Z of Stark Inc.has a rate of return on investment of 17% and a profit margin of 9%.What is its investment turnover?