16.2 Performance Measures -- Cost, Revenue, and Profit Centers Flashcards
The University recently hired a new Chief Information Officer (CIO) of the University Computing Services Department. His assigned task is to help reduce the recurrent problem of cost overruns due to uncontrolled computer usage by the user community, while at the same time, not curtailing the use of information technology for research and teaching. To ensure goal congruence which one of the following algorithms should be used to allocate the cost of the University Computing Services Department to other departments within the university?
A. Actual rate times actual hours of computer usage
B. Actual rate times budgeted hours of computer usage
C. Budgeted rate times actual hours of computer usage
D. Budgeted rate times budgeted hours of computer usage
C. Budgeted rate times actual hours of computer usage
The segment margin of the Wire Division of a manufacturer should not include
A. Net sales of the Wire Division.
B. Fixed selling expenses of the Wire Division.
C. Variable selling expenses of the Wire Division.
D. The Wire Division’s fair share of the salary of the manufacturer’s president.
D. The Wire Division’s fair share of the salary of the manufacturer’s president.
Segment margin is the contribution margin for a segment of a business minus fixed costs. It is a measure of long-run profitability. Thus, an allocation of the corporate officers’ salaries should not be included in segment margin because they are neither variable costs nor fixed costs that can be rationally allocated to the segment. Other items that are often not allocated include corporate income taxes, interest, company-wide R&D expenses, and central administration costs.
When using a contribution margin format for internal reporting purposes, the major distinction between segment manager performance and segment performance is
A. Unallocated fixed costs.
B. Direct variable costs of producing the product.
C. Direct fixed costs controllable by the segment manager.
D. Direct fixed costs controllable by others.
D. Direct fixed costs controllable by others.
The performance of the segment is judged on all costs assigned to it, but the segment manager is only judged on costs that (s)he can control. Some fixed costs are imposed on segments by the organization’s upper management, and they are thus beyond the segment manager’s control. These direct costs controllable by others make up the difference between segment manager performance and segment performance.
An entity’s income statement for profit center No. 12 for August includes
* Contribution margin: $84,000
* Manager’s salary: 24,000
* Depreciation on accommodations: 9,600
* Allocated corporate expenses: 6,000
The profit center’s manager is most likely able to control which of the following?
A. $84,000
B. $68,400
C. $60,000
D. $44,400
A. $84,000
A profit center is a segment of a company responsible for both revenues and expenses. A profit center has the authority to make decisions concerning markets (revenues) and sources of supplies (costs). However, the profit center’s manager does not control his or her salary, investment and the resulting costs (e.g., depreciation of plant assets), or expenses incurred at the corporate level. Consequently, profit center No. 12 is most likely to control the $84,000 contribution margin (Sales – Variable costs) but not the other items in the summarized income statement.
Which of the following techniques would be best for evaluating the management performance of a department that is operated as a cost center?
A. Return on assets ratio.
B. Return on investment ratio.
C. Payback method.
D. Variance analysis.
D. Variance analysis.
A cost center is a responsibility center that is responsible for costs only. Of the alternatives given, variance analysis is the only one that can be used in a cost center. Variance analysis involves comparing actual costs with predicted or standard costs.
A company has divided its customers into two groups. Group 1 consists of 20% of the company’s most loyal and reliable customers. Group 2 consists of 80% of the company’s customers who are either small customers or larger customers who order small quantities to test the product before placing larger orders. The most recent results are shown below.
Group 1
Sales: $7,500,000
Sales discounts: 375,000
Cost of sales: 5,250,000
Order processing: 40,000
Delivery: 120,000
Income (loss): $1,715,000
Group 2
Sales: $2,000,000
Sales discounts: 0
Cost of sales: 1,400,000
Order processing: 150,000
Delivery: 500,000
Income (loss): $ (50,000)
The best way for the company to improve profitability is to
A. Raise the selling price of the product.
B. Eliminate discounts for Group 1 customers.
C. Discontinue sales to Group 2 customers.
D. Charge a separate fee for the delivery of small quantities.
D. Charge a separate fee for the delivery of small quantities.
Gross profit of Group 2 is $600,000. Operating loss results from deducting order processing costs and delivery costs. If the company charges a separate fee for delivery of small quantities, delivery costs of Group 2 can be reduced or eliminated.
The performance of a supervisor of claims processing for a health care system is evaluated using various measures agreed upon in advance with the general manager. The general manager asked the supervisor to recommend several measures to evaluate the performance of his unit next year. Which one of the following performance measures would likely have the least positive effect on the supervisor’s motivation and performance?
A. Total dollar amount of claims processed per month.
B. Average processing time per claim.
C. Percentage of claims processed accurately the first time.
D. Processing cost per claim.
A. Total dollar amount of claims processed per month.
To be effective, a performance measure should be based on a cause-and-effect relationship between the outcome being measured and a driver that is under the supervisor’s control. The supervisor has no control over the number or amount of claims submitted by customers.
