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Exam 23: Performance Evaluation for Decentralized Operations

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Question 1

True/False

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The underlying principle of allocating direct operating expenses to departments is to assign to each department an amount of expense proportional to the revenues of that department.

A) True
B) False

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Question 2

Multiple Choice

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Match each definition that follows with the term a-e) it defines. -Income from operations divided by invested assets

A) Controllable revenues
B) Profit margin
C) Investment turnover
D) Rate of return on investments
E) Residual income

F) A) and E)
G) A) and B)

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Question 3

Multiple Choice

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

The balanced scorecard measures four areas of financial and nonfinancial performance of a business. Identify one of the following that is not included as a performance measurement.

The profit margin for Central Division is 20% and the investment turnover is 2.8. What is the rate of return on investment for Central Division?

If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on investment is 9.6%.

The materials used by the Hibiscus Company's Division A are currently purchased from an outside supplier at $55 per unit. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The two divisions have recently negotiated a transfer price of $48 per unit for the 20,000 units. a) By how much will each division's income increase as a result of this transfer? b) What is the total increase in income for Hibiscus Company?

Controllable expenses are those that can be influenced by the decisions of the profit center management.

ABC Corporation has three service departments with the following costs and activity base: ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information are as follows: $\begin{array} { | l | l | l | l | } \hline & \text { Micro } & \text { Macro } & \text { Super } \\\hline \text { Direct revenues } & \$ 700,000 & \$ 850,000 & \$ 650,000 \\\hline \text { Direct operating expenses } & 50,000 & 70,000 & 100,000 \\\hline \text { Number of copies made } & 20,000 & 30,000 & 50,000 \\\hline \text { Number of invoices processed } & 700 & 800 & 500 \\\hline \text { Number of employees } & 130 & 145 & 125 \\\hline\end{array}$ -What is the service department charge rate for the Accounting Department?

The ratio of sales to invested assets is termed the investment turnover component of the rate of return on investment.

Match each definition that follows with the term a-e) it defines. -Ratio of income from operations to sales

ABC Corporation has three service departments with the following costs and activity base: ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information are as follows: $\begin{array} { | l | l | l | l | } \hline & \text { Micro } & \text { Macro } & \text { Super } \\\hline \text { Direct revenues } & \$ 700,000 & \$ 850,000 & \$ 650,000 \\\hline \text { Direct operating expenses } & 50,000 & 70,000 & 100,000 \\\hline \text { Number of copies made } & 20,000 & 30,000 & 50,000 \\\hline \text { Number of invoices processed } & 700 & 800 & 500 \\\hline \text { Number of employees } & 130 & 145 & 125 \\\hline\end{array}$ -How much service department cost would be allocated to the Macro Division?

The transfer price approach that uses a variety of cost concepts is the

How much will Square Yard Products total income from operations increase?

The residual income for Mason is

If Division Q's yearly income from operations was $30,000 on invested assets of $200,000, the rate of return on investment is 15%.

What is the investment turnover?

An activity base is used to charge service department expenses. Match each of the following activity bases with the appropriate department a-h) . -Number of work orders

Using the data below for the Coffee & Cocoa Company, a) determine the divisional income from operations for the three regions by allocating the service department expenses proportional to the sales of the regions. b) determine the increase or decrease in net income if C Region did not operate.

The formula for the rate of return on investment is