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Exam 15: Performance Evaluation

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Question 21

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What are responsibility centers? What are the three levels of responsibility centers commonly found in organizations?

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A responsibility center is a reporting u...

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Question 22

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Based on the information given, calculate the dollar amount of the variance and indicate whether it is favorable or unfavorable. $\begin{array} { | l | l | l | l | l | } \hline \text { Item } & \text { Budget } & \text { Actual } & \text { Variance } & \begin{array} { l } \text { Favorable or } \\\text { Unfavorable }\end{array} \\\hline \text { Sales Revenue } & \$ 820,000 & \$ 835,000 & & \\\hline\end{array}$

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Question 23

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Which of the following would increase residual income?

Athens Corporation desires a 12% ROI on all operations. The following information was available for the company in 2012: $\begin{array}{ll}\text { Sales } & \$ 14,000 \\\text { Operating Net Income } & \$ 2,800\\\text { Investment turnover }&.5\end{array}$ What is the corporation's margin?

Indicate whether each of the following statements about return on investment is true or false. _____ a) Return on investment for a division is calculated by dividing net income by total assets. _____ b) Using book value as the valuation base for calculating return on investment can distort ROI and cause motivational problems among managers. _____ c) Using return on investment to make direct comparisons among organizational segments can result in inequities and motivational problems. _____ d) Return on investment could be calculated based on historical cost or replacement cost for a division's assets. _____ e) Return on investment can be calculated by dividing margin by turnover.

Perfecto Products provided the following selected information about its consumer products division for 2012. $\begin{array} { l c } \text { Desired ROI } & 9 \% \\\text { Net Income } & \$ 160,000 \\\text { Residual Income } & \$ 70,000\end{array}$ Required: Based on this information, calculate the company's investment amount (amount of operating assets).

An investment opportunity with a residual income that equals or exceeds zero should be accepted.

Butler Company developed a static budget at the beginning of the company's accounting period based on an expected volume of 4,000 units: $\begin{array}{l}\begin{array} {ll } & \text {pre unit }\\\hline\text { Revenue}&\$4.00\\\text {Variable costs }&1.50\\\text {Contribution margin }&\$2.50\\\text {Fixed costs }&2.00\\\text {Net income }&\$0.50\end{array}\end{array}$ If actual production totals 5,000 units, the flexible budget would show fixed costs of:

Indicate whether each of the following statements about decentralization is true or false. _____ a) Decentralization of an organization means that the organization has operations in many different places. _____ b) Decentralization allows local managers to make more decisions. _____ c) Decentralization means delegating authority to managers and holding them responsible for their performance. _____ d) Investment centers tend to appear in the upper levels of a company's organization chart. _____ e) Managers of investment centers are accountable for assets, liabilities, and earnings.

Use the following information to answer Question. The Furniture Division of Waverly Company reports the following results for 2012: $\begin{array} { l l } \text { Revenues } & \$ 400,000 \\\text { Operating expenses } & \$ 360,000 \\\text { Operating income } & \$ 40,000 \\\text { Operating assets } & \$ 500,000\end{array}$ Waverly Company has set a target return on investment (ROI) of 12% for the Furniture Division. Based on the information provided for Furniture, calculate the return on investment for 2012. Did the division achieve its target ROI of 12%?

Indicate whether each of the following statements is true or false. _____ a) A flexible budget can be viewed as an extension of a company's master budget. _____ b) The master budget is a static budget because it generally is prepared for a single volume of activity. _____ c) Standards are established for a company's costs but not for the selling prices of its goods and services. _____ d) If direct materials are budgeted at $34,000 for 10,000 units, direct materials would also be budgeted at $34,000 for 11,000 units. _____ e) Flexible and static budgets use different per unit standard amounts for variable costs.

What are margin and turnover? If a division can increase turnover with margin constant, how will return on investment be affected?

Chance Company estimates sales of 13,000 units for the upcoming period. At this sales volume its budgeted income is as follows: During the period the company actually produced and sold 14,000 units. Required: 1) The manager now wants to evaluate the company's performance by comparing actual costs and revenues to those shown above but you have advised against it. Explain your reasoning. 2) Prepare a flexible budget based on 14,000 units. 3) If management compares actual revenues and costs to the appropriate flexible budget, will they be able to fully understand what went right and what went wrong with the operation during the period? Why or why not?

A difference between the static budget based on planned volume and a flexible budget prepared at actual volume is called a

Use the following information to answer Question. The Furniture Division of Waverly Company reports the following results for 2012: $\begin{array} { l l } \text { Revenues } & \$ 400,000 \\\text { Operating expenses } & \$ 360,000 \\\text { Operating income } & \$ 40,000 \\\text { Operating assets } & \$ 500,000\end{array}$ Waverly Company has set a target return on investment (ROI) of 12% for the Furniture Division. Assume that 60% of the Furniture Division's operating expenses are variable. To what level would revenues have to increase to achieve the desired 12% ROI? Assume that the amount of operating assets will continue to be $500,000.

Use the following information to answer Question. The Furniture Division of Waverly Company reports the following results for 2012: $\begin{array} { l l } \text { Revenues } & \$ 400,000 \\\text { Operating expenses } & \$ 360,000 \\\text { Operating income } & \$ 40,000 \\\text { Operating assets } & \$ 500,000\end{array}$ Waverly Company has set a target return on investment (ROI) of 12% for the Furniture Division. Assume that the division believes its revenues and operating expenses will continue to be $400,000 and $360,000, respectively. To what level would the Furniture Division have to reduce its operating assets to achieve the target ROI?

The kind of responsibility center that would be evaluated by comparing the amount of income earned to the amount of assets invested is

Engle Manufacturing Company established the following standard price and cost information: $\begin{array} { | l | r | } \hline \text { Sales price } & \$ 50 \text { per unit } \\\hline \text { Variable manufacturing cost } & \$ 32 \text { per unit } \\\hline \text { Fixed manufacturing cost } & \$ 100,000 \text { total } \\\hline \text { Fixed selling and administrative cost } & \$ 40,000 \text { total } \\\hline\end{array}$ Engle expected to produce and sell 15,000 units. Actual production and sales amounted to 16,000 units. Required: a) Determine the sales volume variances, including variances for sales revenue and variable manufacturing cost. b) Classify the variances as favorable (F) or unfavorable (U).

A budget prepared at a single volume of activity is referred to as a

If the master budget prepared at a volume level of 10,000 units includes direct labor of $10,000, a flexible budget based on a volume of 9,000 units would include direct labor of $9,000.