Fundementals Of Cost Accounting Seventh Edition-McGraw Hill- ACCT521 CH 14 QUESTIONS Week 7

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When developing performance measures, considerations include Blank______. Multiple select question. whether the measure ensures that managers who perform above standards will receive a bonus whether managers are taking actions that improve reported performance but are detrimental to organizational performance correct whether the measure is consistent with the manager's decision authority incorrect whether the measure reflects the results of actions that improve organizational performance correct Correct Answer  whether managers are taking actions that improve reported performance but are detrimental to organizational performance  whether the measure is consistent with the manager's decision authority  whether the measure reflects the results of actions that improve organizational performance Divisional income statements Blank______. Multiple select question. may use firmwide averages for some accounts incorrect may ignore income taxes incorrect must be prepared using GAAP are internal performance measures correct Correct Answer  may use firmwide averages for some accounts  may ignore income taxes  are internal performance measures

Advantages of using after-tax divisional income as a performance measure include the Blank______. Multiple select question. the results of decisions affecting revenues and costs are summarized correct ease of comparing division of different sizes Reason: The measure makes it difficult to compare divisions of different sizes. income computation matches the way the firm's income is computed correct measure fully reflects the manager's decision authority Reason: The measure does not fully reflects the manager's decision authority which is a disadvantage of this method. Correct Answer  the results of decisions affecting revenues and costs are summarized  income computation matches the way the firm's income is computed Given the following information, calculate the gross margin ratio. Sales $275,0 00 Cost of goods sold $150,0 00 Operating income $65,00 0 After-tax income $45,50 0 Multiple choice question. 45.45% correct Reason: ($275,000 – $150,000) ÷ $275,000 = 45.45% 54.55%

Reason: ($275,000 – $150,000) ÷ $275,000 = 45.45% 23.64% Reason: ($275,000 – $150,000) ÷ $275,000 = 45.45% 43.33% Reason: ($275,000 – $150,000) ÷ $275,000 = 45.45% Correct Answer 45.45% Operating income divided by sales is the formula for the operating Blank 1 Blank 1 operating , Correct Unavailable margin Blank 2 Blank 2 margin , Correct Unavailable ratio. (Enter only one word per blank.) Correct Answer  Blank 1: operating  Blank 2: margin Which of the following are true of developing performance measures? Multiple select question. In developing performance measures, we must consider whether the measures reflect the results of actions that improve the performance of the organization. incorrect The only effective performance measurement systems are those that perfectly align the manager’s and organization’s interests. Reason: No performance measurement system perfectly aligns the manager’s and organization’s interests. Systems designers must be aware of possibly dysfunctional decisions that managers might make. correct

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In developing performance measures, we must consider actions managers might be taking that improve reported performance but are actually detrimental to organizational performance. correct Correct Answer  In developing performance measures, we must consider whether the measures reflect the results of actions that improve the performance of the organization.  Systems designers must be aware of possibly dysfunctional decisions that managers might make.  In developing performance measures, we must consider actions managers might be taking that improve reported performance but are actually detrimental to organizational performance. Which of the following are true of divisional income statements? Multiple select question. Common bases for organizing firms are geographical responsibility units and product lines. correct Taxes are a required component of divisional income statements. They are subject to compliance with GAAP. Divisional income statements are internal performance measures. correct Correct Answer  Common bases for organizing firms are geographical responsibility units and product lines.  Divisional income statements are internal performance measures. Disadvantages of using divisional income as a performance measure include the Blank______. Multiple select question. measure does not fully reflect the manager's decision authority correct computation is the same as income for the firm Reason: This is an advantage.

results of decisions affecting revenues and costs are summarized Reason: This is an advantage. difficulty in measuring divisions of different sizes correct Correct Answer  measure does not fully reflect the manager's decision authority  difficulty in measuring divisions of different sizes After-tax income divided by sales is the formula for the profit Blank 1 Blank 1 profit , Correct Unavailable margin Blank 2 Blank 2 margin , Correct Unavailable ratio. (Enter only one word per blank.) Correct Answer  Blank 1: profit  Blank 2: margin (Sales minus cost of goods sold) divided by sales is the formula for the gross Blank 1 Blank 1 gross , Correct Unavailable margin Blank 2 Blank 2 margin , Correct Unavailable ratio. (Enter only one word per blank.) Correct Answer  Blank 1: gross  Blank 2: margin or profit After-tax income divided by divisional assets is the formula for return Blank 1 Blank 1 return , Correct Unavailable on investment Blank 2 Blank 2 investment , Correct Unavailable. (Enter only one word per blank.)

Correct Answer  Blank 1: return  Blank 2: investment or investments Given the following information, calculate the operating margin ratio. Sales $275,0 00 Cost of goods sold $150,0 00 Operating income $65,00 0 After-tax income $45,50 0 Multiple choice question. 43.33% Reason: $65,000 ÷ $275,000 = 23.64% 45.45% incorrect Reason: $65,000 ÷ $275,000 = 23.64% 23.64% Reason: $65,000 ÷ $275,000 = 23.64% 16.55% Reason: $65,000 ÷ $275,000 = 23.64% Correct Answer 23.64% When developing performance measures, considerations include Blank______.

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Multiple select question. whether the measure ensures that managers who perform above standards will receive a bonus whether managers are taking actions that improve reported performance but are detrimental to organizational performance correct whether the measure reflects the results of actions that improve organizational performance correct whether the measure is consistent with the manager's decision authority correct Correct Answer  whether managers are taking actions that improve reported performance but are detrimental to organizational performance  whether the measure reflects the results of actions that improve organizational performance  whether the measure is consistent with the manager's decision authority Divisional income statements Blank______. Multiple select question. may use firmwide averages for some accounts correct may ignore income taxes correct are internal performance measures correct must be prepared using GAAP Correct Answer  may use firmwide averages for some accounts  may ignore income taxes  are internal performance measures

A measure of an investment center's ability to control its cost for a given level of revenue is Blank______. Multiple choice question. profit margin ratio correct residual income EVA asset turnover Correct Answer profit margin ratio Given the following information, calculate the profit margin ratio. Sales $275,0 00 Cost of goods sold $150,0 00 Operating income $65,00 0 After-tax income $45,50 0 Multiple choice question. 16.55% Reason: $45,500 ÷ $275,000 = 16.55% 23.64% incorrect Reason: $45,500 ÷ $275,000 = 16.55% 30.33% Reason: $45,500 ÷ $275,000 = 16.55% 36.40% Reason: $45,500 ÷ $275,000 = 16.55%

Correct Answer 16.55% After-tax income divided by divisional assets is the formula for Blank______ . Multiple choice question. return on investment correct residual income EVA profit margin Correct Answer return on investment Which of the following is NOT a problem with accounting measures? Multiple choice question. Accounting for intangibles results in early recognition of the costs but not the benefits. Some expenditures with long-term returns are expensed when incurred. Accounting information omits benefits and costs of actions of a particular year. Accounting income is forward looking. correct Reason: Accounting income is backward looking. Correct Answer Accounting income is forward looking. Operating income divided by sales is the formula for the operating Blank 1 Blank 1 operating , Correct Unavailable margin Blank 2 Blank 2 margin , Correct Unavailable ratio. (Enter only one word per blank.) Correct Answer  Blank 1: operating

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 Blank 2: margin If the NPV of a project is positive, Blank______. Multiple select question. the firm will benefit from the project correct managers will always choose to accept the project it is an acceptable investment correct the ROI always exceeds the required rate of return Correct Answer  the firm will benefit from the project  it is an acceptable investment Which of the following are true of developing performance measures? Multiple select question. Systems designers must be aware of possibly dysfunctional decisions that managers might make. correct In developing performance measures, we must consider whether the measures reflect the results of actions that improve the performance of the organization. correct In developing performance measures, we must consider actions managers might be taking that improve reported performance but are actually detrimental to organizational performance. correct The only effective performance measurement systems are those that perfectly align the manager’s and organization’s interests. Reason: No performance measurement system perfectly aligns the manager’s and organization’s interests. Correct Answer

 Systems designers must be aware of possibly dysfunctional decisions that managers might make.  In developing performance measures, we must consider whether the measures reflect the results of actions that improve the performance of the organization.  In developing performance measures, we must consider actions managers might be taking that improve reported performance but are actually detrimental to organizational performance. Cost of invested capital equals Blank______. Multiple choice question. invested assets divided by the cost of capital the cost of capital multiplied by the division's assets correct after-tax income less (cost of capital multiplied by the division's assets) Reason: This is residual income. after-tax income divided by the division's assets Reason: This is ROI. Correct Answer the cost of capital multiplied by the division's assets Which of the following are true of decomposing ROI? Multiple select question. It allows managers to anticipate where problems will occur in achieving acceptable ROIs and can take action early. correct The profit margin ratio is a measure of the investment center’s ability to generate sales for each dollar of assets invested in the center. ROI can be decomposed into profit margin times asset turnover. correct It allows managers to determine whether a change in ROI is due to changes in profit margin or asset turnover. correct Correct Answer

 It allows managers to anticipate where problems will occur in achieving acceptable ROIs and can take action early.  ROI can be decomposed into profit margin times asset turnover.  It allows managers to determine whether a change in ROI is due to changes in profit margin or asset turnover. After-tax income – (Cost of capital × Divisional assets) is the formula for a Blank 1 Blank 1 a , Incorrect Unavailable a Blank 2 Blank 2 a , Incorrect Unavailable. (Enter only one word per blank.) Correct Answer  Blank 1: residual  Blank 2: income Given the following information, calculate the residual income assuming the cost of capital is 15%. Sales $575,0 00 Cost of goods sold $320,0 00 Operating income $165,0 00 After-tax income $110,0 00 Divisional investment $650,0 00 Multiple choice question. $16,500 Reason: $110,000 – ($650,000 × 15%) = $12,500 $67,500

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Reason: $110,000 – ($650,000 × 15%) = $12,500 $97,500 Reason: $110,000 – ($650,000 × 15%) = $12,500 $12,500 correct Reason: $110,000 – ($650,000 × 15%) = $12,500 Correct Answer $12,500 One issue with accounting information is that it treats Blank______ costs as providing benefits in the future. Multiple choice question. opportunity Reason: Opportunity costs are not recorded in accounting. sunk correct intangible asset Reason: Intangible assets often provide future benefits but most costs associated with them are expensed as incurred. Correct Answer sunk Residual income Blank______ the suboptimization problem. Multiple choice question. eliminates has no impact on reduces correct increases Correct Answer

reduces Which of the following statements are true? Multiple select question. Evaluation using ROI could cause a manager to reject a project that adds value to the firm. correct If a project has a positive NPV, it will also have an acceptable ROI. Two managers evaluating the same investment could make different decisions. correct A manager with a current ROI of 14% will have an incentive not to accept a project with an ROI of 12%. correct Correct Answer  Evaluation using ROI could cause a manager to reject a project that adds value to the firm.  Two managers evaluating the same investment could make different decisions.  A manager with a current ROI of 14% will have an incentive not to accept a project with an ROI of 12%. "Accounting distortions" such as the treatment of inventory costs and expensing of intangibles are eliminated in the calculation of Blank______. Multiple choice question. economic value added (EVA) correct residual income return on investment (ROI) Correct Answer economic value added (EVA)

The opportunity cost of equity and debt resources invested in the business is the company's cost of capital Blank 1 Blank 1 capital , Correct Unavailable. (Enter only one word per blank.) Correct Answer  Blank 1: capital Economic value added (EVA) does not resolve the suboptimization problem because Blank______. Multiple choice question. it is based on accounting income while investment decisions are based on the present value of cash flows correct managers may have an incentive not to invest in a project that benefits the organization as a whole Reason: This is true with ROI. deciding how to make adjustments - such as the appropriate life of R&D - may prove difficult Reason: This is true, but is not a suboptimization issue. Correct Answer it is based on accounting income while investment decisions are based on the present value of cash flows The economist's notion of profit as being the amount left over after all costs, including the cost of capital employed, are subtracted is similar to the concept of Blank______. Multiple choice question. accounting income return on investment residual income correct Correct Answer

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residual income A company had sales of $850,000, gross margin of $475,000, operating income of $365,000, and after-tax income of $250,000. Given a divisional investment of $1,000,000 and a cost of capital of 20%, the company's residual income is $ 1 Blank 1 Blank 1 1 , Incorrect Unavailable. (Enter your answer as a whole number.) Correct Answer  Blank 1: 50,000 or 50000 Which of the following statements are true? Multiple select question. Residual income solves the problem of distortions in incentives resulting from accounting measures. incorrect Reason: This is the idea behind economic value added (EVA). A project with a positive net present value can have negative residual income in some years. correct Residual income does not eliminate the suboptimization problem. incorrect Correct Answer  A project with a positive net present value can have negative residual income in some years.  Residual income does not eliminate the suboptimization problem. The idea that accounting distortions need to be adjusted from divisional income and invested capital in order to compute an appropriate measure of performance is the basis of economic Blank 1 Blank 1 economic , Correct Unavailable value Blank 2 Blank 2 value , Correct Unavailable added. (Enter only one word per blank.)

Correct Answer  Blank 1: economic  Blank 2: value Assume a company uses straight-line depreciation for assets, all operating profits are earned at the end of the year, ROI is based on year-end investment value, and there is no income tax. Even without any operational changes, ROI will increase each year if the company uses the Blank______ book value method. Multiple choice question. net correct gross Reason: With the net book value method the numerator remains constant while the denominator decreases as depreciation accumulates. Correct Answer net Economic value added (EVA) Blank______. Multiple select question. addresses many problems associated with ROI and residual income correct replaces one accounting system for another correct may lead to disagreements regarding how adjustments should be made correct resolves the problem of suboptimization regarding which investments should be made is not a ratio correct

Correct Answer  addresses many problems associated with ROI and residual income  replaces one accounting system for another  may lead to disagreements regarding how adjustments should be made  is not a ratio Using the current cost method instead of historical cost Blank______. Multiple choice question. causes ROI to increase even if no operating changes take place Reason: This is true of historical cost. can be difficult and expensive correct may encourage managers not to replace assets Reason: This is true of historical cost. Correct Answer can be difficult and expensive After-tax income – (Cost of capital × Divisional assets) is the formula for 1 Blank 1 Blank 1 1 , Incorrect Unavailable 1 Blank 2 Blank 2 1 , Incorrect Unavailable. (Enter only one word per blank.) Correct Answer  Blank 1: residual  Blank 2: income Incentives to manipulate purchases and dispositions exist if a company chooses to use the Blank______ balance of assets for the investment base for performance evaluation.

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Multiple select question. ending correct beginning correct average Correct Answer  ending  beginning Residual income Blank______ the suboptimization problem. Multiple choice question. eliminates increases reduces correct has no impact on Correct Answer reduces One problem with divisional income, ROI, residual income, and EVA is that they Blank______. Multiple choice question. ignore the effect of decisions on other business units correct do not account for the independent activities of the individual business units emphasize the company as a whole rather than the individual business decisions Correct Answer ignore the effect of decisions on other business units To prevent ROI from increasing each year due to accumulated depreciation, a company should choose to use the Blank______ book value method.

Multiple choice question. gross correct net Reason: With the net book value method the numerator remains constant while the denominator decreases as depreciation accumulates, thereby increasing ROI. Correct Answer gross Assuming no inflation, ROI will increase each year under the Blank______ cost method even if no operating changes take place. Multiple choice question. current Reason: Under the historical cost method the numerator is measured in current dollars while the denominator and depreciation charges are based on current costs. historical correct Correct Answer historical Divisional income less the cost of the investment required to operate the division is residual Blank 1 Blank 1 residual , Correct Unavailable income Blank 2 Blank 2 income , Correct Unavailable. (Enter only one word per blank.) Correct Answer  Blank 1: residual  Blank 2: income

Using average investments as the investment base for performance evaluation Blank______. Multiple choice question. is the most cost effective method encourages asset acquisitions early in the year encourages asset dispositions at the end of the year minimizes problems related to acquisitions and dispositions correct Correct Answer minimizes problems related to acquisitions and dispositions Using ROI, residual income, and EVA as performance measures Blank______. Multiple select question. ignores the effect of decisions on other business units correct recognizes that business units are part of a firm considers that business units rely on each other helps prevent decisions that are suboptimal for the firm as a whole considers the activities of each business unit independently correct Correct Answer  ignores the effect of decisions on other business units  considers the activities of each business unit independently

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Fundementals Of Cost Accounting Seventh Edition-McGraw Hill- ACCT521 CH 14 QUESTIONS Week 7

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