Chapter 11

Question 1

What is a benefit of decentralization?

Answer 1

Top Management can think about strategy, lower-level decisions are better

Question 2

What is a disadvantage of decentralization?

Answer 2

May be difficult to spread innovative ideas in the organization.

Question 3

What is a segment?

Answer 3

Any part of where the manager sees profits, cost and revenue data

Question 4

What is the first key to building a segmented income?

Answer 4

A contribution format must be used to get contribution margin

Question 5

What is the second key to building a segmented income?

Answer 5

We must separate traceable costs from fixed to segment margin

Question 6

What is a segment margin?

Answer 6

Its shows us the longevity of the organization

Question 7

How do we calculate the segment margin?

Answer 7

Contribution margin - Traceable Fixed Costs = Segment Margin

Question 8

Should we allocate common costs?

Answer 8

Nope, it stays in the company section of income statement

Question 9

Why shouldn’t we allocate Common Costs into segments?

Answer 9

Allocating common fixed costs forces managers to be held accountable for costs they cannot control.

Question 10

What does a responsibility center include?

Answer 10

Costs, Profits and Investments

Question 11

What is a cost center?

Answer 11

Manager has control only over costs not revenue

Question 12

What is a profit center?

Answer 12

Manager has control over costs and revenue

Question 13

What is an investment center?

Answer 13

Control over the entire responsibility centre

Question 14

What is a transfer price?

Answer 14

The cost of service one segment offers the other

Question 15

What are the 3 approach’s to setting transfer price?

Answer 15

Negotiated, Market Price and transfers to cost of selling division

Question 16

How do we calculate the lowest acceptable transfer price?

Answer 16

Variable cost per unit + (Total CM on lost sales / # units transferred)

Question 17

How do we calculate the highest acceptable transfer price?

Answer 17

Less than buying from an outside supplier

Question 18

Domestic Transfer Pricing

Answer 18

Greater motivation and performance for managers

Question 19

International Transfer Pricing

Answer 19

Less taxes and competition

Question 20

Return on Investment Formula

Answer 20

ROI = Operating Income / Average operating assets

Question 21

Margin Formula

Answer 21

Operating Income / Sales

Question 22

Turnover Formula

Answer 22

Sales / Average Operating Assets

Question 23

2nd Return on Investment Formula

Answer 23

Margin * Turnover

Question 24

3 ways to increase ROI?

Answer 24

Increase Sales, Reduce Operating expense and assets

Question 25

Flaws of ROI?

Answer 25

Managers evaluated on ROI may not be long term profitable

Question 26

Residual Income Formula

Answer 26

OI - (Average Operating Assets * Minimum Required Rate of Return)

Question 27

Flaw in Residual Income

Answer 27

It cannot be used to compare different sized divisions

Question 28

How do managers evaluate performance?

Answer 28

Financial, Internal Business Process, Customers and Learning/Growth

Question 29

What is a prevention cost?

Answer 29

Supports to reduce the number of defects

Question 30

What is an appraisal cost?

Answer 30

Identify defective products before they are shipped

Question 31

What is an Internal Failure Cost?

Answer 31

Identifying defect in product before its shipped

Question 32

What is an External Failure Cost?

Answer 32

Incurred when customer receives defective product

Question 33

What is the advantage to Quality Costs?

Answer 33

Helps see financial importance in defects

Question 34

What is the Limitations to Quality Costs?

Answer 34

Lost sales is often omitted from this system