Ch 11

Question 0

Responsibility center

Answer 0

Used for any part of organization whose manager has

Control over and is accountable for cost, profit, investments

Question 1

Decentralized organization

Answer 1

Decision making authority is spread throughout
The organization rather than being confined
To a few top executives

Question 2

Cost center, 5 examples?

Answer 2

Has control over costs, but not
revenue or use of investment funds

Ex. Accounting, finance, general administration, legal,
Personnel

Question 3

Profit center, example 1?

Answer 3

Has control over both costs and revenue, but not
Over investment funds

Ex. Manager in charge of six flags amusement park

Question 4

Investment center, example 1?

Answer 4

Has control over cost, revenue and investments
In operating assets

Ex. Vice president of manufacturing at General Motors

Question 5

Return on investment (ROI), 2 equations?

Answer 5

ROI = (net operating income)/(average operating assets)

ROI = margin X turnover

The higher the business segment’s ROI, the greater
The profit earned per dollar invested in the segments
Operating assets

Question 6

Net operating income (EBIT)

Answer 6

Income before interest and taxes

EBIT = earnings before interest and taxes

Question 7

Operating assets

Answer 7

Include cash, A/R, inventory, plant and equipment

And all other assets held for operating purposes

Question 8

Margin

Answer 8

Margin = (Net operating income)/(sales)

Question 9

Turnover

Answer 9

Turnover = (sales)/(average operating assets)

Question 10

2 approaches to measure and investment center’s performance?

Answer 10

Residual income, ROI

Question 11

Residual income

Answer 11

Residual income = (net operating income)

- (average operating assets X minimum required rate of return)

Question 12

Economic value added (EVA), objective? 1 example?

Answer 12

Adaption of residual income, where companies modify
Their accounting principles

Objective is to maximize EVA

Ex. Funds used for research and development are
treated as investments instead of expenses

Question 13

Delivery cycle time

Answer 13

Amount of time from when a customer order is received

To when completed order is shipped

Question 14

Through put time AKA Manufacturing cycle time

Answer 14

Amount of time required to turn raw materials into

completed products

Question 15

Manufacturing cycle efficiency (MCE)

Answer 15

MCE = value-added time (AKA process time)/throughput time

.15 MCE means that 85% of total time on unit is spent
On activities that do not add value to product

Question 16

Value added activity

Answer 16

Process time = amount of work actually done on product

Question 17

Non-value added time activities?

Answer 17

Wait time
Inspection time
Move time
Queue time

Question 18

Balanced scorecard

Answer 18

Consists of integrated set of performance measures

That are derived from and support a company’s strategy

Question 19

Transfer price

Answer 19

Price charged when one segment of a company
Provides goods or services to another segment of
Same company

Question 20

Suboptimization

Answer 20

When managers don’t act in best interest of company

Or even their own division

Question 21

Negotiated transfer price, 2 advantages?

Answer 21

Results from discussions btw selling and buying divisions

1) Preserves autonomy of divisions and consistent
of Spirit of decentralization

2) managers of affected divisions have better cost
And benefit info

Question 22

Range of acceptable transfer prices

Answer 22

Range of transfer prices where profits of both divisions

Participating in transfer would increase

Question 23

Market price

Answer 23

Price charged for an item on the open market

Question 24

Operating departments

Answer 24

The central purpose of organization carried out in

Operating department

Question 25

Service departments

Answer 25

Don’t engage in operating activities
They provide services or assistance to
Operating departments