Managerial Accounting Ch. 10 Exam verified solutions and explanations.

Managerial Accounting Ch. 10 Exam verified solutions and explanations Responsibility accounting - Correct Answers: System for evaluating the performance of each responsibility center and its manager Compares budgets with actual results. Evaluate how well manager controlled operations. Cost center (Responsibility Center) - Correct Answers: Managers are accountable for costs only. Ex.Frito-Lay plant--controls costs by using lean thinking to eliminate waste. Compare budgeted costs to actual costs. Revenue Center (Responsibility Center) - Correct Answers: Managers are accountable primarily for revenues. Compare actual revenues to budgeted revenues. Profit Center (Responsibility Center) - Correct Answers: Managers are accountable for both revenues and costs, and therefore profits. Ex:Manager may be responsible for entire line of brand products. Compare actual revenues, expenses, and profits to the budget. Investment Center (RC) - Correct Answers: Managers are responsible for generating revenues, controlling costs, and efficiently managing the division's assets. Responsible for generating as much profit as manager can with assets. Overall master budget variance - Correct Answers: Actual - budget May be favorable or unfavorable. Management by exception - Correct Answers: Managers will only investigate budget variances that are relatively large. Segment margin - Correct Answers: The operating income generated by a profit or investment center BEFORE subtracting common fixed costs that have been allocated to the center. Contribution margin - direct fixed expenses (Fixed manufacturing overhead, fixed operating expenses) Direct fixed expenses - Correct Answers: Those fixed expenses that can be traced to the profit center. Ex: Advertisements for Tropicana orange juice. Common fixed expenses - Correct Answers: Fixed expenses that cannot be traced to the profit center. Incurred by the overarching investment center that have been that have been allocated among the different profit centers in the division. Ex.Division's cost of providing a common computer information system, human resources department, pay roll department, and legal department. Sharing the services helps different product lines avoid duplication of the costs and assets that would need to be maintained individually. Goal congruence - Correct Answers: When the goals of the segment managers align with the goals of top management. Centralize - Correct Answers: In small companies. Owner/top manager often makes all planning and operating decisions. Decentralize - Correct Answers: Split operations into different operating segments. Top management delegates decision-making to segment managers. May be based on: -Geographic area -Product line -Distribution channel (retail sales vs. online sales) -Customer base -Business function Responsibility center - Correct Answers: Part of an organization whose manager is accountable for planning and controlling certain activities. Return on Investment (ROI) - Correct Answers: Operating income/total assets or sales margin X capital turnover Measures amount of income an investment center earns relative to the size of its assets. Sales Margin (Return on Sales) - Correct Answers: Operating income/sales Focuses on profitability by showing how much operating income the division earns on every $1 of sales revenue. Capital turnover - Correct Answers: Sales/total assets Focuses on how efficiently the division uses its assets to generate sales revenue. Residual income - Correct Answers: Operating income - (Target rate of return X Total assets) Minimum acceptable income= target rate of return X total assets If positive: Operating income exceeds top management's target rate of return If negative: Division is not meeting the target rate of return. Determines whether the division has created any excess income above and beyond management's expectations. Investment center uses - Correct Answers: ROI, Capital turnover, Residual income. Profit center uses - Correct Answers: Sales margin Preparing a flexible budget - Correct Answers: Use actual quantity sold times budgeted price. There is NO difference between master budget fixed costs and flexible budget fixed costs due to it not being impacted by volume. Sales volume variance - Correct Answers: Difference between master budget and flexible budget. Flexible budget variance - Correct Answers: Difference between the flexible budget amounts and actual. Master budget variance - Correct Answers: Master budget amount versus actual amount. Balanced scorecard - Correct Answers: Management must consider BOTH financial and operational performance measures. Major shift: Financial indicators are no longer the sole measure of performance. Perspectives: 1. Financial 2. Customer 3. Internal business 4. Learning and growth Lag indicators - Correct Answers: Reveal the results of past actions and decisions. Lead indicators - Correct Answers: Predict future performance. Key performance indicator - Correct Answers: Summary performance metric Assesses how well the company is achieving its goals. Continually measured. Reported on performance scorecard or dashboard. Financial perspective - Correct Answers: "How do we look to shareholders?" Must continually attempt to increase profits -Increase revenues -Control costs -Increase productivity Customer perspective - Correct Answers: "How do customers see us?" Concerned with four product/service attributes: -Price -Quality -Sales service -Delivery time Internal business perspective - Correct Answers: "At what business processes must we excel to satisfy customer and financial objectives?" Three factors: -Innovation -Operations -Post-sales support Learning and growth perspective - Correct Answers: "Can we continue to improve and create value?" Three factors: -Employee capabilities -Information system capabilities -Company's "climate for action"