Chapter 11: Responsibility Accounting Systems

Question 1

Benefits of Decentralization

Answer 1

1. Top management is freed to work on strategy
2. Lower-level decisions are based on better information
3. Lower level managers gain experience in decision making which leads to job satisfaction
4. lower level managers can respond quickly to customers

Question 2

Disadvantages of Decentralization

Answer 2

1. Lower level managers may make decisions without seeing the bigger picture
2. May be a lack of coordination between autonomous managers
3. lower level managers may not have the company’s objectives in mind
4. May be difficult to spread innovative ideas in the organization

Question 3

What is responsibility accounting

Answer 3

Managers are held responsible for those items that the manager can control to a significant extent

Question 4

What is a responsibility center used for

Answer 4

its used for any part of an organization whose manager has control over and is accountable for cost, profits, or investments

Question 4

What is a cost center

Answer 4

a segment whose manager has control over costs, but not over revenue or investment funds

Question 5

What is a profit center

Answer 5

A segment whose manager has control over both costs and revenue but not investment funds

Question 6

What is an investment center

Answer 6

A segment whose manager has control over costs, revenue, and investments in operating assets

Question 7

What is net operating income

Answer 7

Income before interest and taxes

Question 8

What are average operating assets

Answer 8

Cash, accounts receivable, inventory, plant and equipment, and other productive assets

Question 9

Importance of Net Book Value in Calculating Average Operating Cost

Answer 9

Accumulated depreciation is subtracted from the acquisition cost

Question 10

What is ROI

Answer 10

Return On Investment

= Net Operating Income / Average Operating assets

= Turnover * Margin

= (Net Operating Income / Sales) * (Sales / Average Operating assets)

Question 11

What is Margin

Answer 11

Net Operating Income / Sales

Question 12

What is turnover

Answer 12

Sales / Average operating assets

Question 13

What are some criticisms of ROI

Answer 13

1. Management may not know how to increase ROI without a balanced scorecard
2. Managers often inherit many committed costs they have no control over
3. Managers evaluated on ROI may reject profitable investments opportunities

Question 14

What is residual income

Answer 14

net operating income above some minimum return on operating assets

Question 15

How do you calculate residual income

Answer 15

Net operating income - (average operating assets * minimum required rate of return)

Question 16

Benefit of residual income over ROI

Answer 16

residual income encourages managers to make profitable investments that would be rejected by managers using ROI