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Exam 9: Responsibility Accounting

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Question 1

True/False

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In an optimal responsibility accounting system,managers are evaluated on only the revenues and costs that are under their control.

A) True
B) False

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Question 2

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Hu Corporation has two operating divisions,A and B.The following information is provided for Division A: $\begin{array}{lrr} \text { Unit selling price } &\$200\\ \text { Unit variable costs} &\$120\\ \text { Unit fixed costs } &\$40\\\end{array}$ 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 $180 to purchase the product from an outside source.If Division A sells internally,it can save $5 per unit in variable costs.Assuming Division A is operating at capacity,what price should it charge Division B if the transfer is to be made?

A) $115
B) $195
C) $125
D) $200

E) A) and B)
F) A) and C)

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Question 3

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Curtis Company's balance sheet and income statement are provided below: $\begin{array}{c}\text { Curtis Company}\\\text { Balance Sheet }\\\text { December 31 , Year 1}\\\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 80,000 \\\text { Accounts receivable } & 56,000 \\\text { Inventory } & 30,000 \\\text { Plant and equipment } & 440,000 \\\text { Less accumulated depreciation } & \underline{(120,000)} \\\text { Total assets } & \underline{ \$ 486,000 }\\\\\text { Liabilities and Stockholders'Equity }\\\text { Accounts payable } & \$ 24,000 \\\text { Notes payable } & 80,000 \\\text { Capital stock, no par } & 180,000 \\\text { Retained earnings } &\underline{ 202,000} \\\text { Total liabilities and stockholders' equity } & \underline{\$ 486,000}\end{array}\end{array}$ $\begin{array}{c} \text { Curtis Company }\\ \text { Income Statement}\\ \text { For the Year Ended December 31 Year 1}\\\\\begin{array}{lrr} \text { Sales } &\$480,000\\ \text { Less variable costs: } &\\ \text { Manufacturing} &120,000\\ \text { Selling and administrative } &\underline{110,000}\\ \text {Contribution margin } &\$250,000\\ \text { Less fixed costs: } &\\ \text {Manufacturing } &90,000\\ \text { Selling and administrative} &\underline{40,000}\\ \text { Net income} &\underline{\$120,000}\\\end{array}\end{array}$ The company pays its senior managers a bonus based on ROI. Required: 1)Compute the company's ROI assuming that the amount of operating assets is measured at: (a)cost; (b)book value; and (c)current replacement value,$700,000. Round ROI to one decimal place (i.e.,4.6%) 2)What is the lesson of this exercise?

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

An organizational unit of a business that incurs costs and generates revenues is known as a(n) :

Explain how the management by exception doctrine relates to responsibility accounting.

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 decentralization is true or false. Decentralization of an organization means that the organization has operations in many different places.______ Decentralization allows lower-level managers to concentrate on strategic decisions rather than routine operating decisions.______ Decentralization allows local managers to make more decisions.______ Decentralization means delegating authority to managers and holding them responsible for their performance.______ Increased decentralization within an organization generally leads to an increase in the level of employee and manager motivation.______

Responsibility reports should be arranged in a manner that promotes management by exception.

In a potential transfer price situation,if the supplying division is operating at capacity in making sales to outside customers,it should be required to accept a transfer price that would lower its overall profitability,because doing so will increase total firm profitability.

Willis Company made a $200,000 investment in new machinery.Assuming the company's margin is 4%,what income will be earned if the investment generates $600,000 in additional sales?

Jacob is a department manager who recently instituted a new recognition program for his employees.He budgeted the cost of the new program at $10 per employee,but actual costs were $15 per employee.The cost associated with the recognition program would be considered which of the following kinds of cost?

Which of the following statements is incorrect?

Joseph Company reported the following information for the current year: $\begin{array} { l c c } \text { Sales } & \$ 787,000 \\\text { Average Operating Assets } & \$ 375,000 \\\text { Desired ROI } & 12 \% \\\text { Residual Incone } & \$ 11,250\end{array}$ The company's operating income was:

Delegating authority and responsibility throughout an organization is known as:

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.______

Management recently instituted a new training program for upper-level managers.They budgeted the cost of the new program at $1,000 per employee trained,but actual costs were $1,250 per employee trained.The difference between the budgeted cost for training and the actual cost of training is called a:

Which of the following statements regarding profit centers is correct?

Belfield Corporation includes two divisions,Motor Division and Lawnmower Division.The Motor Division makes specialized motors,including one that could be used by the Lawnmower Division.Costs for the motor are variable costs,$16; fixed costs,$20.The Motor Division has capacity to make 20,000 of the motors,and it is operating at capacity.It sells the motors to other companies for $52 each.If a sale were made to the Lawnmower Division,variable costs would be reduced by $4 per motor on those units.The Lawnmower Division needs 8,000 motors per year,and it has been purchasing them from another company for $45 each. Required: 1)If a transfer were to occur between Motor Division and Lawnmower Division,what is the maximum that Lawnmower Division should be willing to pay for the motors? 2)If a transfer were to occur between Motor Division and Lawnmower Division,what is the minimum price that Motor Division should be willing to accept? 3)Do you recommend that a transfer occur between Motor Division and Lawnmower Division? If the transfer did occur,what would be the effect on the overall profits of Belfield Corporation?

Clear lines of authority and responsibility are essential to establishing a responsibility accounting system.