Chapter 24: Performance evaluation for decentralized operations Flashcards
What are service department charges?
Indirect dispenses to a profit center
 Service department charge rate =
Service department expense / total service department usage
Service department charge =
Service usage × service department charge rate
Return on investment =
Income from operations / invested assets
A higher rate of return means what?
The better the division is using its assets to generate income
DuPont formula is used when…
Analyzing differences in the rate of investment across divisions
DuPont Formula ROI =
Profit Margin * Investment Turnover ((income from operations / sales) * (sales / invested Assets))
How is the minimum acceptable Income from Operations found.
 minimum return × invested assets
Residual income =
Excess of income from operations / a minimum acceptable income from operations
Transfer price is….
Used to charge for the products or services when divisions transfer products or window services to each other,
Transfer price = Market Price when ?
If an outside market exist for the product or service transferred
When using the negotiate a price approach what must be?
 Transfer price must be less than market price for more than the division’s variable costs per unit
Cost Price approach is used when?
When the Responsibility centers are organized as cost centers
Increase in supplying divisions Income from Operations =
(Transfer price - variable cost per unit) * # of units transferred
Increase in purchasing divisions income from operations =
(Market price - transfer price) * units transferred
