chapter 14

Question 1

is a means of gathering and using information.

Answer 1

management control system

Question 2

MANAGEMENT CONTROL SYSTEMS

Answer 2

financial data
nonfinancial data
formal control system
informal conroll system

Question 3

evaluating management control systems

Answer 3

motivation
goal congruence
effort

Question 4

responsibility centers

Answer 4

cost center
revenue center
profit center
investment center

Question 5

price one subunit charges for a product or service supplied to another subunit of the same organization.

Answer 5

transfer price

Question 6

are the products transferred between subunits of an organization.

Answer 6

intermediate products

Question 7

are the products transferred between subunits of an organization.

Answer 7

intermediate products

Question 8

transfer pricing results to

Answer 8

1. help achieve company’s strategies and goals
2. fit the organization’s structure
3. promote goal congruence
4. promote sustained high level of management effort

Question 9

three different methods of transfer pricing

Answer 9

market based
cost based
negotiated transfer

Question 10

By using market-based transfer prices in a perfectly competitive market, a company can achieve the following:

Answer 10

Goal congruence
Management effort
Subunit performance evaluation
Subunit autonomy

Question 11

When supply outstrips demand, market prices may drop well below their .

Answer 11

historical average

Question 12

process by which managers at all levels gain information about the performance against pre established criteria as set out in budgets, plans and goals

Answer 12

performance evaluation

Question 13

performance is evaluated at many different levels in the firm

Answer 13

top management
mid managemenf
operating level

Question 14

evaluation by upper level managers of the performance of mid level managers

Answer 14

management control

Question 15

evaluation of operating level employees by mid level managers

Answer 15

operational control

Question 16

objectives of management control

Answer 16

1. motivate managers to exert a high level of effort to achieve the goals set by top management
2. provide the right incentive for managers to make decisions consistent with the goals set by top management
3. determine fairly the rewards earned by managers for their effort and skill and the effectiveness of their decision making

Question 17

a specific unit of an organization assigned to a manager who is held accountable for its operations and resources

Answer 17

Strategic Investment Unit (SIU); Responsibility Center

Question 18

central to any effective profit planning and control system

Answer 18

performance evaluation and control

Question 19

also known as responsibility accounting

Answer 19

strategic performance measurement

Question 20

system used by top management to evaluate SIU Managers

Answer 20

strategic performance measurement

Question 21

one in which decision making is not confined to a few top executives but rather spread throughout the organization, with managers at various levels making key operating decisions relating their sphere of responsibility

Answer 21

decentralized organizations

Question 22

basic conditions necessary for an effective strategic performance measurement

Answer 22

1. a well-defined organization structure
2. well-defined and established standards of performance in revenues, cost, and investments
3. a system of accounting that identifies any revenues, expenses, and assets to specific units in the organization
4. a system that provides for the preparation of regular performance reports

Question 23

a unit within the organization which has control over costs, revenues, profits, and investment funds

Answer 23

strategic business unit

Question 24

unit within organization wherein the manager is responsible for minimizing costs subject to some output constraints

Answer 24

COST SBU

Question 25

a unit that has no control over generating revenue or the use of investment funds

Answer 25

COST SBU

Question 26

a unit or segment within the organization wherein the manager is responsible for the generation of revenues and control of costs incurred in that SBU

Answer 26

Profit SBU

Question 27

unit or segment within the organization where the manager is responsible for the control of revenues, cost, and investment made in that SBU

Answer 27

investment SBU

Question 28

ROI Formula

Answer 28

net operating income/average operating assets

Question 29

ROI formula another

Answer 29

operating profit margin x asset turnover (return on sales)

Question 30

limitations of ROI

Answer 30

1. emphasize short run performance rather than long run profitability 2. results to disincentive for high ROI units to invest in projects with ROI greater than the minimum rate of return but less than units current ROI

Question 31

other criteria in evaluating performance rather than relying on ROI only

Answer 31

1. growth in market share 2. increase in productivity 3. product innovation 4. peso profit 5. receivable and inventory turnover 6. ability to venture into new and profitable areas

Question 32

is the net operating income that an investment SBU is able to earn above some minimum return on the operating assets

Answer 32

residual income

Question 33

larger residual income figure results to

Answer 33

better performance rating received by division's manager

Question 34

advantages of residual income

Answer 34

1. a unit pursues an investment opportunity costs as long as the return from the investment > minimum rate of return set by the firm 2. the firm can adjust the required rates of return for differences in risk and types of assets 3. possible to calculate different investment charge for different types of assets

Question 35

limitations of residual income

Answer 35

1. since RI not %, it is not useful for composing units of significantly different sizes. if large unit, large RI, even with poor performance. 2. not as intuitive as ROI 3. difficult to obtain minimum rate of return

Question 36

a business unit's income after taxes and after deducting the cost of capital

Answer 36

Economic Value Added (EVA)

Question 37

usually obtained by calculating a weighted average of the cost of the firm's two sources of funds - borrowing and selling stocks

Answer 37

cost of capital

Question 38

main advantage of EVA

Answer 38

focuses manager's attention of creating value for shareholders by earning profit greater than the firm cost of capital

Question 39

a unit/segment within an organization where the manager is responsible for selling budgeted quantities of various products or services at budgeted price

Answer 39

revenue SBU

Question 40

three types of variances useful to revenue SBU in meeting their goals

Answer 40

sales price variance sales volume variance sales mix variance

Question 41

this variance shows how much of the difference between the actual and budgeted CM is caused by the difference between the actual and budgeted sales prices

Answer 41

sales price variance

Question 42

measures the difference between actual unit sales and budgeted unit sales

Answer 42

sales volume variance

Question 43

this variance is a measure of the change in CM caused by selling products in proportion (mix) different from those that were budgeted

Answer 43

sales mix variance

Question 44

which will transfer price affect

Answer 44

not directly effect on company's effect indirect effect on company profit by influencing decisions of the division manager

Question 45

four general approaches are used on setting transfer price

Answer 45

-minimum transfer price -market-based transfer price -cost based transfer price *variable cost *full cost *alternative cost measures -negotiated transfer price

Question 46

general rule for making transfers to maximize a company's profits in either perfect or imperfect market uses the formula

Answer 46

minimum transfer price

Question 47

from buying division's perspective, maximum acceptable transfer price is equivalent to

Answer 47

price offered by outside supplier

Question 48

transfer price is the price at which goods are sold on the the open market

Answer 48

market based

Question 49

correspondence or consistency of individual subgoals with company goals

Answer 49

goal congruence

Question 50

eliminates the negative effect of fluctuations in production efficiency in one division on the reported income of another division

Answer 50

standard full cost

Question 51

sales price variance formula

Answer 51

(actual sales price - master budget sales price) x actual unit sales

Question 52

sales volume variance formula

Answer 52

(actual unit sales - master budget unit sales) x master budget average contribution margin per unit

Question 53

master budget average contribution margin per unit

Answer 53

master budget total CM / master budget sales

Question 54

transfer price formula if without excess capacity

Answer 54

differential cost pee unit + lost CM per unit on outside sales

Question 55

sales mix variance formula

Answer 55

(actual sales mix percentage for product - budgeted sales mix percentage for product) x actual total units of all products + budgeted units CM of product

Question 56

sales quantity variance

Answer 56

(actual total units of all products sold - budgeted total sales units of all products) x budgeted sales mix % of product x budgeted CM per unit of product

Question 57

market size variance formula

Answer 57

(actual total units of market - budgeted total units of market) x budgeted market share x weighted average budgeted CM per unit

Question 58

market share variance formula

Answer 58

(actual market share - budgeted market share) x actual total units of industry x weighted average budgeted CM per unit

Question 59

EVA formula

Answer 59

operating income*after tax - (average operating assets x WACC)

Question 60

residual income formula

Answer 60

operating income - (average operating assets x minimum rate of return)