# Chapter 11 - Performance Measurement in Decentralized Organizations Flashcards

1
Q

What 3 centers are known as responsibility centers?

A
1. Cost Centers
2. Profit Centers
3. Investment Centers
2
Q

What do cost center managers have control over?

A

Costs

3
Q

What do profit center managers have control over?

A

Costs and Revenues

4
Q

What do investment center managers have control over?

A

Costs, Revenues, and Investments in operating assets

5
Q

What are the 2 formulas to find the return on investment?

A
1. Net operating income / Average operating assets

2. Margin x Turnover

6
Q

List 4 average operating assets

A
1. Cash
2. Accounts receivable
3. Inventory
4. Plant and equipment
7
Q

What is the formula to find the margin?

A

Net operating income / Sales

8
Q

What is the formula to find the turnover?

A

Sales / Average operating assets

9
Q

What is the formula to find net operating income?

A

Sales - Operating expenses

10
Q
```Regal Company reports the following:
Net operating income = \$30,000
Average operating assets = \$200,000
Sales = \$500,000
Operating expenses = \$470,000```

What is the Regal Company’s ROI?

A
```ROI = (NOI / AOA) x 100
ROI = (30,000 / 200,000) x 100
ROI = 15%```
11
Q

Assume that Regal’s manager invests in a \$30,000 piece of equipment that increases sales by \$35,000, while increasing operating expenses by \$15,000.

```Regal Company reports the following:
Net operating income = \$50,000
Average operating assets = \$230,000
Sales = \$535,000
Operating expenses = \$485,000```

What is the Regal Company’s ROI?

A
```ROI = (NOI / AOA) x 100
ROI = (50,000 / 230,000) x 100
ROI = 21.8%```
12
Q

What measures net operating income above some minimum return on operating assets?

A

The residual income

13
Q

What is the formula to find the residual income?

A

NOI - (Average operating assets x Min. required rate of return)

14
Q

The Retail Division of Zephyr, Inc. has average operating assets of \$100,000 and is required to earn a return of 20% on these assets.
In the current period, the division earns \$30,000.

Calculate the residual income

A
```RI = NOI - (AOA X Min. req RoR)
RI = 30,000 - (100,000 x 20%)
RI = 30,000 - 20,000
RI = \$10,000```
15
Q

What encourages managers to make profitable investments that would be rejected by managers using ROI?

A

Residual income

16
Q

Redmond Awnings, a division of Wrap-up Corp., has a net operating income of \$60,000 and average operating assets of \$300,000. The required rate of return for the company is 15%. What is the division’s ROI?

A. 25%
B. 5%
C. 15%
D. 20%

A

D. 20%

```ROI = (NOI / AOA) x 100
ROI = (60,000 / 300,000) x 100
ROI = 20%```
17
Q

Redmond Awnings, a division of Wrap-up Corp., has a net operating income of \$60,000 and average operating assets of \$300,000. If the manager of the division is evaluated based on ROI, will she want to make an investment of \$100,000 that would generate additional net operating income of \$18,000 per year?

A. Yes
B. No

A

B. No

```ROI = (NOI / AOA) x 100
ROI = (60,000 / 300,000) x 100
ROI = 20%```
```ROI = (NOI / AOA) x 100
ROI = (78,000 / 400,000) x 100
ROI = 19.5%```

19.5% < 20%

No

18
Q

The company’s required rate of return is 15%. Would the company want the manager of the Redmond Awnings division to make an investment of \$100,000 that would generate additional net operating income of \$18,000 per year?

A. Yes
B. No

A
```ROI = (NOI / AOA) x 100
ROI = (18,000 / 100,000) x 100
ROI = 18%```

18% > 15% (Req. RoR)

Yes

19
Q

Redmond Awnings, a division of Wrap-up Corp., has a net operating income of \$60,000 and average operating assets of \$300,000. The required rate of return for the company is 15%. What is the division’s residual income?

A. \$240,000
B. \$45,000
C. \$15,000
D. \$51,000

A

C. \$15,000

```RI = NOI - (OAO x Min. Req. RoR)
RI = 60,000 - (300,000 x 15%)
RI = 60,000 - 45,000
RI = 15,000```
20
Q

Will an increase in net operating income increase or decrease residual income?

A

Increase

21
Q

Redmond Awnings has a net operating income of \$60,000 and average operating assets of \$300,000. The required rate of return for the company is 15%. If the manager of the Redmond Awnings division is evaluated based on residual income, will she want to make an investment of \$100,000 that would generate additional net operating income of \$18,000 per year?

A. Yes
B. No

A

A. Yes

```RI = NOI - (OAO x Min. Req. RoR)
RI = 60,000 - (300,000 x 15%)
RI = 60,000 - 45,000
RI = 15,000```
```RI = NOI - (OAO x Min. Req. RoR)
RI = 78,000 - (400,000 x 15%)
RI = 78,000 - 60,000
RI = 18,000```

18,000 > 15,000

Yes

22
Q

What is the major disadvantage of the residual income approach?

A

It cannot be used to compare the performance of divisions of different sizes

23
Q

Why can’t the residual income approach be used to compare the performance of divisions of different sizes?

A

It says that the larger division has the larger residual income

24
Q

What are 2 ways that are used to evaluate performance?

A
1. Return on Investment (ROI)

2. Residual Income

25
Q

What links decision-making authority with accountability?

A

Responsibility Accounting

26
Q

Is a larger or smaller residual income an indication of better management?

A

A smaller residual income

27
Q

Is margin a percentage?

A

Yes

28
Q

Is asset turnover a percentage?

A

No

29
Q

List the 2 formulas used to find average operating assets

A
1. Net operating income / Return on investments

2. (Beg total assets + End total assets) / 2

30
Q

What is the amount that we exceed the minimum required return?

A

Residual income

31
Q

Is residual income a percentage?

A

Yes

32
Q

List 5 advantages of decentralization in organizations

A
1. Lower-level decisions are based on better information
2. Lower-level managers gain experience in decision-making
3. Top management is freed to concentrate on strategy
4. Lower-level managers can respond quickly to customers
5. Job satisfaction
33
Q

List 3 disadvantages of decentralization in organizations

A
1. Lack of coordination
2. Lower-level manager’s objectives may not “line up” with business objectives
3. Lower-level managers may make decisions without seeing the “big picture”
34
Q

What are the 3 criticisms of return on investments?

A
1. In the absence of the balanced scorecard, management may not know how to increase ROI
2. Managers often inherit many committed costs that they have no control over
3. Managers evaluated on ROI may reject profitable investment opportunities