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Chapter 16 - Allocation of Support-Department
Costs, Common Costs, and Revenues
•
An advantage of the single-rate method is that it is the most accurate method of cost-
allocation? Answer
: False
•
Complete reciprocated costs is the support department’s own costs plus any interdepartmental cost allocations? Answer
: True
•
If management wants to choose a method of revenue allocation that best captures the “benefits received” by customers then they would use ____ to allocate revenue to products in a bundle. Answer
: Stand-alone revenue-allocation based on selling price.
•
Revenue allocation is used when________ Answer
: revenues are related to a particular revenue object but cannot be traced to it in an economically feasible way.
•
The best method to determining weights
for the stand−alone revenue−allocation
method is _____. Answer
: Selling prices revenue−allocation method because the weights explicitly consider the prices customers are willing to pay for the individual products
•
The cost-allocation method that allocates each support-department’s costs to operating departments only is the direct method. Answer
: True
•
The costs of unused capacity are highlighted when______. Answer: practical capacity – based allocations are used.
•
The direct methos is conceptually the most precise method because it considers the mutual services provided among all support departments. Answer: False
•
The dual-rate cost -allocation method provides better information for decision making than the single – rate method as it differentiates between fixed and variable costs and its allocation. Answer:
True
•
The dual−rate cost−allocation method
classifies costs in each cost pool into a ________. Answer
: variable−cost pool and a
fixed−cost pool
•
The method that allocates each department's budgeted costs to operating departments only is called _______. Answer
: direct method
•
The price of a bundled product is typically more than the sum of the individual products sold separately. Answer
: False •
The selling prices method under stand−alone revenue−allocation method is best because the weights explicitly consider the prices customers are willing to pay for the individual products Answer
: true
•
The single cost -allocation method makes no distinction between fixed and variable costs. Answer
: False
•
The stand−alone method of allocating determines the weights for cost allocation by considering each user of the cost as a separate entity. Answer
: True
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•
The step−down method allocates support department costs to only operating departments in a sequential manner. Answer
: False
•
To discourage unnecessary use of a support department, management might ________.Answer
: allocate support department costs based upon user department usage
•
To give more weight to the product that most likely drives the sale of the bundled product, the revenue allocation should be weighted using ________. Answer
: Stand – alone product revenues
•
Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then? Answer
: variations in one division’s usage affect another division’s allocation.
•
Under the incremental method, the first incremental user receives the largest allocation
of the common costs. Answer
: False
•
Under which allocation method are one-
way reciprocal support services recognized? Answer
: Step-down Method.
•
When actual cost−allocation rates are used, managers of the supplier division are
motivated to improve efficiency. Answer
: False
•
When actual cost−allocations rates are used, which of the following would be true? Answer
: user divisions are unaware of
the allocated amounts until the end of the budget period
•
When budgeted cost−allocations rates are used ______. Answer
: user departments can determine the amount of service to request and if allowed, can determine whether to use an internal or external resource
•
When budgeted fixed costs are allocated
based on actual usage, user departments will not know their fixed-cost allocations until the end of the budget period. Answer
: True
•
When using the direct allocation method, a cost accountant would ________.
Answer: not allocate support department costs
to other support departments
•
When using the dual – rate method, the fixed cost allocation is based on ________. Answer: budgeted usage
•
When using the dual−rate method, the fixed cost allocation is based on ________.Answer
: budgeted usage
•
Which of the following describes the direct allocation method’s allocation of support-department costs? Answer
: it allocates each support-department’s costs to operating departments only.
•
Which of the following is a DISADVANTAGE
of a dual
−rate method? Answer
: It allocates fixed costs on the basis of
budgeted long−run usage, which may tempt some managers to underestimate their planned
usage.
•
Which of the following is a DISADVANTAGE
of single
– rate method? Answer: it may lead operating department
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managers to make sub – optimal decisions that
are in their own best interest
•
Which of the following is an ADVANTAGE
of a dual
-rate method? Answer
: It allocates fixed cost as per the budgeted usage that helps in short and long-
run planning.
•
Which of the following is an example of
a bundled product? Answer
: an accounting textbook with an access code to a homework/study system
•
Which of the following is an example of
revenue object? Answer
: Products
•
Which of the following is disadvantage of single -rate method? Answer
: It may lead operating department managers to make sub-
optimal decisions that are in their own best interest,
•
Which of the following is not one of the
methods used to allocate the revenues of a bundled product? Answer: direct revenue method
•
Which of the following is one of the methods of allocating support department costs to operating departments that partially recognizes mutual service provided among all support departments? Answer
: Sequential allocation method (AKA step-down/waterfall)
•
Which of the following methods ranks individual products in a bundle for revenue allocation? Answer
: incremental revenue−allocation method
•
Which of the following would be considered the biggest advantage of using practical capacity to allocate costs? Answer
: focuses management's attention on unused capacity
•
Which of the following would be the case under the stand-alone method of allocating common costs? Answer
: Each party bears a proportionate share of the total costs in relation to their individual stand-alone
costs.
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Chapter 22 - Capital Budgeting and Cost Analysis
•
A “what-if” technique that examines how a result will change if the original predicted data are NOT achieved or if an underlying assumption changes is called _______ Answer: sensitivity analysis
•
A general rule in capital budgeting is that a project is accepted only if the internal rate of return equals or__________ Answer
: exceeds the required rate of return. •
Accrual accounting rate of return is calculated by dividing ______ Answer
: An increase in expected average annual after-tax operating income by the net initial investment
•
Accrual accounting rate of return is calculated by dividing an increase in expected average annual after−tax operating income by the net initial or average investment. Answer
: True •
Ambinu Flowers Company provides flowers and other nursery products for
decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $203,750 with a six- year life. The expected a additional cash inflows are $72,500 per year. What is the payback period for this investment? Answer: 2.8 years
203,750 / 72,750 = 2.810
•
As cash flows and time value of money are central to capital budgeting decisions., the AARR method is regarded as better than the IRR method? Answer
: False
•
Capital budgeting is the process of making long – run planning decisions for investments in projects. Answer: True
•
Discounted cash flow methods do not consider the present value of the cash flows after the recovery of the initial investment. Answer
: False
•
Discounted cash flow methods of evaluating capital expenditures focuses on the
operating income as calculated under accrual accounting rules. Answer
: False •
If internal rate of return is less than required rate of return, the net present value is positive? Answer
: False
•
If the net present value for a project is positive, which of the following is true? Answer: the project should be accepted because its expected rate of return is greater than the cost of capital
•
In situations where the required rate of return is not constant for each year of the project, it is advantageous to use ________. Answer
: the net present value method
•
In using the net present value method, only projects with a zero or positive net present value are acceptable because ________. Answer
: the return from these projects equals or exceeds the cost of capital
•
Malive Park Department is considering
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a new capital investment. The following information is available on the investment. The cost of the machine will be $119,000. The
annual cost savings if the new machine is acquired will be $35,000. The machine will have a 7−year life, at which time the terminal disposal value is expected to be zero. Malive Park is assuming no tax consequences. Malive
Park has a 15% required rate of return. What is the payback period for the investment? Answer
: 3.4 years 119,000 / 35,000 = 3.4 •
Net present value is calculated using which of the following? Answer
: required rate
of return as a discount rate.
•
Pearl Manufacturing Company provides
glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of seven years and the new equipment has a value of $269,400 with a
seven−year life. The expected additional cash inflows are $113,000 per year. What is the payback period for this investment? Answer
: 2.4 years
269,400 / 113,000 = 2.4
•
Pearl manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of nine years and the new equipment has a value of $239,400 with a nine-year life. The expected additional cash inflows are $73,000 per year. What is the payback period for this investment? Answer
: 3.3 years.
•
rate−of−return (AARR)? Answer
: increase in expected average annual after−tax operating income
•
The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it
does NOT track cash flows and it ignores the time value of money. Answer
: True •
The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________. Answer
: internal rate of return method
•
The focus in capital budgeting should be on ________. Answer
: expected future cash flows that differ between alternatives
•
The minimum annual acceptable rate of
return on an investment is the ________. Answer
: Hurdle rate
•
The net present value method assumes that project cash flows can be reinvested at the company’s_________. Answer
: required rate of return.
•
The net present value method can be used in situations where the required rate of return varies over the life of the project. Answer
: True
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•
The net present value method, pre-tax cash flows should be used instead of after-tax cash flows. Answer
: False
•
The net present value NPV method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of
return. Answer
: True
•
The Required Rate of Return (RRR) is set externally by creditors as the interest rate on long term liabilities. Answer
: False •
Upon which of the following items does
discounted cash flow methods for capital budgeting focus? Answer
: cash inflows and required rate of return
•
Which of the following best describes the internal rate-of-return (IRR) method? Answer
: it calculates the discount rate at which sum of an investment’s present value of all expected cash inflows equals the present value of its expected cash outflows.
•
Which of the following best explains why the net present value method of capital budgeting is preferred over the internal-rate-
of-return method? Answer
: The net present values of individual projects can be added to determine the effects of accepting a combination of projects. •
Which of the following capital budgeting methods uses discounted cash flows? Answer
: net present value method
•
Which of the following is a component of net – initial – investment cash flows? Answer:
initial working capital investment
•
Which of the following is a limitation of AARR method? Answer: it does not consider time value of money
•
Which of the following is a stage of the capital budgeting process that forecasts all potential cash flows attributable to the alternative projects? Answer
: make predictions
stage
•
Which of the following is a stage of the
capital budgeting process in which a firm obtains funding for the project? Answer: implement the decision, evaluate performance,
and learn stage
•
Which of the following is a stage of the capital−budgeting process that tracks realized cash flows and compares those against estimated numbers? Answer
: implement the decision, evaluate performance, and learn stage
•
Which of the following is an advantage of internal rate of return method? Answer: the percentage returns computed under the IRR method are easy to understand and compare
•
Which of the following is the first stage to the capital budgeting process? Answer
: identify potential capital investments that agree with the organization's strategy
•
Which of the following is the numerator
in the mathematical expression for accrual accounting •
Which of the following methods is
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described as follows “it calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present in time using the required rate of return? Answer
: Net present value method
•
While calculating terminal recovery of working capital there are no tax consequences as there is no gain or loss on working capital. Answer
: True
Chapter 23 - Management Control Systems,
Transfer Pricing, and Multinational
Considerations
•
A benefit of using a market−based transfer price is that the ________ Answer
: economic viability and profitability of each division can be evaluated individually
•
A company should use cost−based transfer prices ________. Answer
: when a company's product is specialized
•
A perfectly competitive market exists when which of the following conditions are present? Answer
: there is a homogeneous product with buying prices equal to selling prices
•
A product may be passed from one subunit to another subunit in the same organization. The product is known as a(n) ________. Answer
: intermediate product
•
A transfer-pricing method leads to goal congruence when______ . Answer
: managers
act in their own best interest and the decision is in the long-term best interest of the company •
An advantage of a negotiated transfer price of a product to be transferred between divisions is the __________ Answer
: negotiated transfer price preserves divisional autonomy •
An advantage of using budgeted costs for transfer pricing among divisions is that______ Answer
: the divisions know the transfer price in advance
•
Both the market−based transfer pricing approach and cost−based methods are useful for evaluating subunit performance. Answer
: False
•
Cost−based transfer prices are helpful when markets are not perfectly competitive. Answer
: True
•
Cost−based transfer prices are often used when markets for the product are not competitive or when the quality of the internal
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product is different from the externally available products. Answer
: True
•
Hybrid transfer prices can be arrived at through negotiations. Answer
: True
•
Hybrid transfer prices take into account both cost and market information. Answer
: true
•
Market−based transfer prices are helpful when ________. Answer
: the interdependencies of subunits are minimal
•
One concern with dual pricing is that it leads to disputes about which price should be used when computing the taxable income of subunits located in different tax jurisdictions. Answer
: True
•
The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions. Answer
: False
•
The cost used in cost−based transfer prices can be actual cost or budgeted cost. Answer
: True
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•
The costs used in cost−based transfer prices ________. Answer
: can either be actual
or budgeted costs
•
The full cost plus a markup transfer−pricing method can sometimes lead to goal incongruence. Answer
: True
•
The minimum transfer price equals_____ Answer
: incremental cost plus opportunity costs
•
The range over which two divisions will
negotiate a transfer price is ________. Answer
: between the supplying division's variable cost and the market price of the product
•
The transfer price creates revenues for the selling subunit and costs for the buying subunit affecting each subunit's operating income. Answer
: True
•
Transfer−pricing systems enable managers to focus on maximizing the performance of their subunits. Answer
: True
•
Transferring products internally at a
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market price leads to optimal decisions when all of the following conditions are prevalent except _____ Answer
: there are additional benefits to the company by selling in the external markets instead of transferring internally.
•
When using transfer prices based on costs rather than market prices, management can better determine profitability of the investment made in the intermediate producing division.. Answer
: False
•
Which of the following denotes minimum transfer price? Answer
: Minimum Transfer price= incremental cost per unit up to
the point of transfer + opportunity cost per unit to the selling subunit.
•
Which of the following is true of hybrid
transfer prices? Answer
: They take into account both cost and market information. •
Which of the following is true of transfer pricing? Answer
: it helps top managers evaluate the performance of
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individual subunits.
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Chapter 24 - Performance Measurement,
Compensation, and Multinational Considerations
•
"Levers of control," in addition to a diagnostic control system, are needed in an organization because ________ Answer
: pressure to perform on diagnostic controls may lead to unethical behavior
•
A major weakness of comparing two companies using only operating incomes as the basis of comparison is that it ignores the differences in the size of the investment and therefore any concept of yield or return on investment. Answer
: True
•
A report that measures financial and nonfinancial performance measures for various organization units in a single report is called a(n)________. Answer
: balanced scorecard
•
Aaron Corp's net income is $50,000. What is the amount of the investment if the return on investment is 30%? Answer
:
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$166,667 50,000 / 0.30 = 166,666.6667 •
Aeralia inc., has two regional offices. The data for each are as follows: Maryland New Jersey
Revenues 290,000
299,000
Operating assets 2,900,000
4,500,000
Net Operating income 1,300,000
1,500,000
What is the Maryland division’s return on Investment?
Answer
: 44.8%
•
All of the following are ways to calculate different versions of ROI except ________. Answer
: Revenues/Total Assets
•
All other things held constant, increase in assets such as receivables or decreases in
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operating income results in increase in return on investment. Answer
: False
•
An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks. Answer
: True
•
Companies that adopt the EVA concept define investment as total assets employed minus current liabilities. Answer
: True
•
Higher inflation will lead to higher prices for goods or services, which will increase a company's operating income and lead to a higher ROI. Answer
: True •
In an EVA calculation, the appropriate measure of a division’s profit would be that division’s pre-tax operating income. Answer
:
True
•
In an EVA calculation, the appropriate measure of a divisions profit would be that divisions pre-tax income Answer
: False
•
Inflation and fluctuation in foreign currency exchange rates affect performance
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measurement Answer
: True
•
Inflation clouds the real economic returns on an asset and _________. Answer
: makes historical – cost – based ROI higher
•
Return on investment can be increased by ________
Answer
: increasing return on sales
•
Return on sales can provide how effectively costs are managed and is part of the
DuPont method of profitability analysis. Answer
: True
•
Sensitive performance measures ________. Answer
: motivate the manager as well as limit the manager's exposure to risk, reducing the cost of providing incentives.
•
Some companies present financial and nonfinancial performance measures for various organization units in a single report called the balanced scorecard. Answer
: True
•
The ______ method of profitability analysis recognizes the two basic ingredients
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in profit – making: increasing income per dollar of revenues and using assets to generate more revenues. Answer
: DuPont
•
The balanced scorecard in most organizations is broken down into the following categories: commercial perspective, supplier perspective, external business-process
perspective, and productivity perspective. Answer
: False
•
The cybertronics corp. reported the following information for its cyclotron division:
Revenues 2,300,000
Operating costs
1,600,000
Operating assets
1,300,000
What is the cyclotron division’s investment turnover ratio
?
Answer
: 1.77
•
The Cybertronics Corporation reported the following information for its Cyclotron Division
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Revenues
2,400,000
Operating costs 1,300,000
Operating assets 1,200,000
Income is defined as operating income What is the Cyclotron Divisions’ return on sales
? Answer
: 45.8%
•
The Cybertronics Corporation reported the following information for its Cyclotron Division Revenues
2,500,000
Operating costs 1,400,000
Operating assets 1,200,000
Income is defined as operating income What is the Cyclotron Divisions’ return on investment
? Answer
: 91.7%
•
The DuPont method recognizes the two basic ingredients in profit making: increasing the income per dollar of revenues and using assets to generate more revenues. Answer
:
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True
•
The more owners have access to sensitive performance measures, the more they can rely on incentive compensation for their managers. Answer
: True
•
The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from
the viewpoint of the overall organization should be accepted. Answer
: True
•
The return on investment is usually considered the most popular approach to measure performance because _____. Answer
:
it blends all the ingredients of profitability into a single percentage
•
To evaluate overall performance, return on investment and residual income measures are more appropriate than return on sales. Answer
: True
•
Total assets employed includes all assets, regardless of their intended purpose. Answer
: False
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•
Using net book value as an investment base will result in a lower ROI than using gross book value as an investment base Answer
: False
•
Using net book value as an investment base will result in a lower ROI (AKA Accounting Rate of Return) than using gross book value as an investment base. Answer
: False
•
Which of the following best describes a belief control system? Answer
: it articulates the mission, purpose, and core values of a company
•
Which of the following best describes interactive control systems? Answer
: they are formal information systems managers use to focus the company’s attention and learning on key strategic issues
•
Which of the following describes a situation in which an employee prefers to exert
less effort than the effort the owner desires because the employee's effort cannot be
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accurately monitored and enforced? Answer
: Moral Hazard •
Which of the following statements is true? Answer
: The economic, legal, political, social, and cultural environments differ across countries.
•
Which of the following steps in designing an accounting−based performance measure includes decisions such as defining assets as total assets or net assets in the calculation of return on assets? Answer
: choosing the details for each performance measure
•
Zenith Corporation's net income is $80,000. What is the return on investment if the amount of the investment is $520,000? Answer
: 15.38% 80,000 / 520,000 = 0.153846
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1. Mastery Problem: Contribution Margin, Cost-Volume-Profit Analysis and Break-Even Point (Overview)
Fixed, Variable and Mixed Costs
An appreciation of cost behavior is needed in order for management to understand and predict profitability as the costs of material, labor and other operating expenses and levels of production and sales change. It's important to review the cost behavior of fixed, variable and mixed costs before contribution margins, cost-volume-profit analysis, and break-even points.
1. In the table below, Have-A-Seat Inc. has outlined many of the costs associated with producing office chairs. With respect to the production and sale of office chairs, classify each cost as fixed, mixed, or variable.
a. Pressure-molded plastic for chair frames
b. Pension cost: $0.50 per employee hour on the job
c. Insurance premiums for inventory: $2,100 per month plus $0.01 for each dollar of inventory over $2 million
d. Property taxes: $120,000 per…
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Question 1 Part 2
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● Is a variable costing income statement applicable to service operations? If so, provide a hypothetical example of variable costing income statements in a service operation.
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When allocating support department costs, managers must identify cost pools. The choice of cost pools is:
Question 2 options:
not influenced by the allocation base.
not important, because all support department costs will eventually be allocated anyway.
influenced by the design of the accounting information system.
determined by whether a company uses IFRS or ASPE.
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