Accounting For It (Chapter 4)

Front 1

What are the benefits of Decentralization in Organizations?

Back 1

1.Lower-level managers gain experience in decision making.

2.Top manage free to concentrate on strategy

3.Decision making authority leads to job satisfaction

4.Lower level decisions often based on better information

5.Lower level managers can respond quickly to customers

Front 2

What are disadvantages of Decentralization in Organizations?

Back 2

1. lower level managers may make decisions without seeing the "Big Picture"

2. May be a lack of coordination among autonomous managers

3. lower level manager's objectives may not be those of the organization

4. may be difficult to spread innovation ideas in the organization

Front 3

What is a segment?

Back 3

any part or activity of an organization where a manager seeks cost, revenue, or profit data.

Examples:

individual store

sales territory

service center

Front 4

What are the two keys to building a segment income statement? Explain what they are for.

Back 4

Contribution Format: used to separate fixed from variable costs and allows calculations of CM

Traceable Fixed Costs separate from common fixed costs: Allows the calculation of a segment margin.

Front 5

What are Traceable costs?

Back 5

Costs that appear because of the existence of a particular segment. Disappears over time if that segment disappeared.

Front 6

What are common costs?

Back 6

Costs that appear because of the overall operation of the company. Does not disappear if any segment disappears.

Do not allocate common costs to segment

Front 7

What is Segment Margin?

Back 7

The best gauge of long-run profitability of a segment.

Traceable fixed costs - CM

Front 8

What some hindrances to proper cost assignment?

Back 8

1.Commission of some costs in assignment process

2.Assignment to segments of costs are are really common costs of the entire organization.

3. Use of inappropriate methods for allocating costs among segments

Front 9

What are Omission of costs?

Back 9

Costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain.

The value chain is the whole line from designing to customer service.

Front 10

What are two ways that companies incorrectly handle traceable fixed expenses on segmented income statements?

Back 10

1. They may not trace fixed expenses to segments even when it is feasible to do so.

2. they may use inappropriate allocation bases to allocate traceable fixed expenses to segments.

Front 11

Name two reasons why common costs should not be arbitrarily allocated.

Back 11

1.this practice may make a profitable business segment appear to be unprofitable.

2. Allocating common fixed costs forces managers to be heal accountable for costs they cannot control

Front 12

Howmuch of the common fixed cost of $200,000 can be avoided by eliminating thebar?a.None of it.b.Some of it.c.All of it.

Back 12

a. None of it

Common costs do not go away with one segment going away

Front 13

Supposesquare feet is used as the basis for allocating the common fixed cost of$200,000. How much would be allocated to the bar if the bar occupies 1,000square feet and the restaurant 9,000 square feet?a.$20,000b.$30,000c.$40,000d.$50,000

Back 13

a. $20,000

1000 is 10% of the square footage.

200000*0.10 = $20000

Front 14

What is a Responsibility centre?

Back 14

any part of an organization whose manager has control over and is accountable for cost, profit or investment

Front 15

What are the 3 primary types of Responsibility centre? Explain each.

Back 15

Cost centres: segment where manager controls costs, but not revenue or investment funds

Profit centres: segment where manager has control of BOTH costs and revenues but not investment funds

inventment centres: segment where manager has control over costs,revenue and investments in operating assets.

Front 16

What is Return on investment? (definition and equation)

Back 16

metric used to measure performance of departments in relative terms. It calculates departments' return on their average operating assets.

ROI = Operating income/ average operating assets

operating income = income before interest and taxes

average operating assets= cash, accounts receivable, inventory, etc..

Front 17

What are the benefits of Net Book Value (NBV)?

Back 17

consistent with how plant and equipment are reports on balance sheet

consistent with calculation of operating income, which includes depreciation as an operating expense

Front 18

What are the benefits of Gross cost?

Back 18

Eliminates age of equipment and method of depreciation as factors in RIO calculations

Does not discourage replacement of old, worn-out equipement

Front 19

Useful Formulas Write on sheet

Back 19

ROI = operating income/ average operating assets

Margin = operating income/sales

Turnover = sales/ average operating assets

ROI = Margin x Turnover

Front 20

What are the 3 ways to increase ROI?

Back 20

Increase Sales

Reduce Operating Expenses

Reduce Operating Assets

Front 21

Back 21

If another wuestion changes values, just sub those values into their proper spot, recalculate

Front 22

What are the criticisms of ROI?

Back 22

absense of balance scorecard = not knowing how to increase ROI

Managers often inherit many committed costs over which they have no control

Manager evaluated on ROI may reject profitable investment opportunities.

Front 23

What is Residual Income? (Definition and equation)

Back 23

Definition: net operating income of a department or investment center.

Equation:

Residual income = operating income - (Average operating assets x minimum required rate of return)

Front 24

Back 24

Front 25

RedmondAwnings, a division of Wrap-up Corp., has an operating income of $60,000 andaverage operating assets of $300,000. The required rate of return for thecompany is 15%. What is the division’s ROI?a.25%b. 5%c.15%d.20%

Back 25

ROI = operating income/ average operating assets

60,000/300,000 = 0.20 = 20%

d. 20%

Front 26

RedmondAwnings, a division of Wrap-up Corp., has an operating income of $60,000 andaverage operating assets of $300,000. The required rate of return for thecompany is 15%. What is the division’s residual income?a.$240,000b.$ 45,000c.$ 15,000d.$ 51,000

Back 26

Residual Income= operating income - (average operating assets * minimum rate f return)

60,000 - (300,000 * 0.15) = 15,000

c.$15,000

Front 27

True or False: Residual Income cannot compare performance of divisions of different sizes?

Back 27

True: If the division are of different sizes it cannot compare their performances (Redundant sentence)

Front 28

What arae some criticisms of Residual Income?

Back 28

RI is based on historical accounting data which can lead to inflated amount for residual income in periods of rising prices

RI does not indicate what earning should be

Calculating RI requires numerous adjustments to GAAP increasing the cost of preparing information

RI does not incorporate important leading non-financial indicators