Exam 2018, questions PDF

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Garrison Management Accounting...

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1. Allocating common fixed costs to segments on segmented income statements reduces the usefulness of such statements. 2. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. 3. A responsibility center is a business segment whose manager has control over costs, revenues, or investments in operating assets. 4. Residual income is used in the numerator to compute turnover in an ROI analysis. 5. Net operating income is earnings before interest and taxes. 6. Land held for possible plant expansion would be included as an operating asset in the ROI calculation. 7. Margin equals Stockholders' Equity divided by Sales. 8. The use of return on investment (ROI) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole. 9. Residual income is equal to the difference between total revenues and operating expenses. 10. When using residual income as a measure of performance, it is not meaningful to compare the residual incomes of divisions of different sizes. 11. The transfer price used for internal transfers between divisions of the same company can increase or decrease each division's reported profits. 12. For performance evaluation purposes, the lump-sum amount of fixed service department costs charged to an operating department should usually be based on either the operating department's peak-period or long-run average needs. 13. In service department cost allocations, sales dollars should be used as an allocation base whenever possible. 14. A cost center is also a responsibility center. 15. The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he has control. Multiple Choice Questions 16. The impact on net operating income of short-run changes in sales for a segment can be most clearly predicted by analyzing: A) the contribution margin ratio. B) the segment margin. C) the ratio of the segment margin to sales. D) net sales less segment fixed costs. 17. In a segmented contribution format income statement, what is the best measure of the long-run profitability of a segment? A) its gross margin B) its contribution margin C) its segment margin D) its segment margin minus an allocated portion of common fixed expenses 18. In order to properly report segment margin as a guide to long-run segment profitability and performance, fixed costs must be separated into two broad categories. One category is common fixed costs. What is the other category? A) discretionary fixed costs B) committed fixed costs C) traceable fixed costs D) specialized fixed costs 19. Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment?

A ) B)

Return on Investment

Residual Income

Yes No

Yes Yes

C) Yes No D ) No No 20. Which of the following segment performance measures will increase if there is a decrease in the selling expenses for that segment?

A ) B) C) D )

Return on Investment

Residual Income

Yes No Yes

Yes Yes No

No

No

21. Some investment opportunities that should be accepted from the viewpoint of the entire company may be rejected by a manager who is evaluated on the basis of: A) return on investment. B) residual income. C) contribution margin. D) segment margin. 22. Consider the following three conditions: I. II. III.

An increase in sales An increase in operating assets A reduction in expenses

Which of the above conditions provide a way in which a manager can improve return on investment? A) Only I B) Only I and II C) Only I and III D) Only II and III 23. When calculating a segment's return on investment (ROI), which of the following assets of that segment would be considered a part of average operating assets? A) cash B) accounts receivable C) plant and equipment D) all of the above 24. Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets? A) return on investment B) transfer pricing C) the contribution approach D) residual income 25. Residual income is: A) Net operating income plus the minimum required return on average operating assets. B) Net operating income less the minimum required return on average operating assets. C) Contribution margin plus the minimum required return on average operating assets. D) Contribution margin less the minimum required return on average operating assets. 26. Which of the following is NOT a common approach used to set transfer prices?

A) B) C) D)

market price variable cost negotiation suboptimization

27. For performance evaluation purposes, the variable costs of a service department should be charged to operating departments using: A) the actual variable rate and the budgeted level of activity for the period. B) the budgeted variable rate and the actual level of activity for the period. C) the budgeted variable rate and the budgeted level of activity for the period. D) the actual variable rate and the peak-period or long-run average servicing capacity.

28. Which of the following companies is following a policy with respect to the costs of service departments that is not recommended? A) To charge operating departments with the depreciation of forklifts used at its central warehouse, Shalimar Electronics charges predetermined lump-sum amounts calculated on the basis of the long-term average use of the services provided by the warehouse to the various segments. B) Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building. C) Rainier Industrial does not allow its service departments to pass on the costs of their inefficiencies to the operating departments. D) Golkonda Refinery separately allocates fixed and variable costs incurred by its service departments to its operating departments. 29. A segment of a business responsible for both revenues and expenses would be called: A) a cost center. B) an investment center. C) a profit center. D) residual income. 30. Devlin Company has two divisions, C and D. The overall company contribution margin ratio is 30%, with sales in the two divisions totaling $500,000. If variable expenses are $300,000 in Division C, and if Division C's contribution margin ratio is 25%, then sales in Division D must be: A) $50,000 B) $100,000 C) $150,000 D) $200,000 31. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia generated net operating income of $40,000. The following information was taken from last year's income statement segmented by flavor (brackets indicate a negative amount):

Contribution margin......... Segment margin............... Segment margin less allocated common fixed expenses..............

Wimpy $(2,000) $(16,000)

Mild $45,000 $(5,000)

Medium $35,000 $7,000

Hot $50,000 $10,000

Atomic $162,000 $94,000

$(26,000)

$(15,000)

$(3,000)

$0

$84,000

Toxemia expects similar operating results for the upcoming year. If Toxemia wants to maximize its profitability in the upcoming year, which flavor or flavors should Toxemia discontinue? A) no flavors should be discontinued B) Wimpy C) Wimpy and Mild D) Wimpy, Mild, and Medium 32. Uchimura Corporation has two divisions: the AFE Division and the GBI Division. The corporation's net operating income is $42,000. The AFE Division's divisional segment margin is $15,700 and the GBI Division's divisional segment margin is $175,400. What is the amount of the common fixed expense not traceable to the individual divisions? A) $149,100 B) $57,700 C) $217,400 D) $191,100 33. Younie Corporation has two divisions: the South Division and the West Division. The corporation's net operating

income is $26,900. The South Division's divisional segment margin is $42,800 and the West Division's divisional segment margin is $29,900. What is the amount of the common fixed expense not traceable to the individual divisions? A) $56,800 B) $69,700 C) $72,700 D) $45,800 34. Dukelow Corporation has two divisions: the Governmental Products Division and the Export Products Division. The Governmental Products Division's divisional segment margin is $255,000 and the Export Products Division's divisional segment margin is $59,800. The total amount of common fixed expenses not traceable to the individual divisions is $163,700. What is the company's net operating income? A) $314,800 B) ($314,800) C) $151,100 D) $478,500 35. Miscavage Corporation has two divisions: the Beta Division and the Alpha Division. The Beta Division has sales of $580,000, variable expenses of $301,600, and traceable fixed expenses of $186,500. The Alpha Division has sales of $510,000, variable expenses of $178,500, and traceable fixed expenses of $222,100. The total amount of common fixed expenses not traceable to the individual divisions is $235,500. What is the company's net operating income? A) $374,400 B) $201,300 C) $609,900 D) ($34,200) 36. J Corporation has two divisions. Division A has a contribution margin of $79,300 and Division B has a contribution margin of $126,200. If total traceable fixed costs are $72,400 and total common fixed costs are $34,900, what is J Corporation's net operating income? A) $168,000 B) $170,600 C) $133,100 D) $98,200 37. Kop Corporation has provided the following data: Return on investment (ROI)............................. Sales.................................................................. Average operating assets.................................. Minimum required rate of return...................... Margin on sales.................................................

15% $120,000 $60,000 12% 7.5%

Kop Corporation's residual income is: A) $1,800 B) $5,400 C) $2,700 D) $3,600 38. Spar Company has calculated the following ratios for one of its investment centers: Margin.......................... 25% Turnover....................... 0.5 times What is Spar's return on investment for this investment center?

A) B) C) D)

50.0% 12.5% 15.0% 25.0%

39. Mike Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 14%. In January, the Commercial Products Division had average operating assets of $970,000 and net operating income of $143,700. What was the Commercial Products Division's residual income in January? A) $7,900 B) -$20,118 C) $20,118 D) -$7,900 40. In November, the Universal Solutions Division of Keaffaber Corporation had average operating assets of $480,000 and net operating income of $46,200. The company uses residual income, with a minimum required rate of return of 11%, to evaluate the performance of its divisions. What was the Universal Solutions Division's residual income in November? A) -$6,600 B) $5,082 C) $6,600 D) -$5,082 41. If operating income is $60,000, average operating assets are $240,000, and the minimum required rate of return is 20%, what is the residual income? A) 40% B) 25% C) $12,000 D) $48,000 42. Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: Selling price to outside customers........................... Variable cost per unit............................................... Total fixed costs....................................................... Capacity in units......................................................

$40 $30 $10,000 20,000

Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A is already selling all of the units it can produce to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost per unit would be $1 lower. What is the lowest acceptable transfer price from the standpoint of the selling division? A) $40 B) $39 C) $38 D) $37 43. Product A, which is produced by the Parts Division of BYP Corporation, sells for $14.25 on the outside market. The costs to make Product A as recorded by the company's cost accounting system are: Direct materials........................................................ Direct labor.............................................................. Variable manufacturing overhead............................

$7.25 $2.25 $1.50

Fixed manufacturing overhead................................

$2.50

The Assembly Division of BYP Corporation requires a part much like Product A to make one of its products. The Assembly Division can buy this part from an outside supplier for $14.15. However, the Assembly Division could use Product A instead of this part purchased from an outside supplier. What is the most the Assembly Division would be willing to pay the Parts Division for Product A? A) $13.50 B) $14.25 C) $14.15 D) $14.00

44. Macumber Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $36 per shipment. The Logistics Department's fixed costs are budgeted at $234,000 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.

Atlantic Division.................. Pacific Division...................

Percentage of Peak Period Capacity Required 30% 70%

Actual Shipments 1,100 3,400

How much Logistics Department cost should be charged to the Altlantic Division at the end of the year for performance evaluation purposes? A) $198,000 B) $109,800 C) $118,800 D) $96,800 45. Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $31 per shipment. The Logistics Department's fixed costs are budgeted at $411,800 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.

Atlantic Division......................... Pacific Division...........................

Percentage of Peak Period Capacity Required 35% 65%

Budgeted Shipments 1,900 5,200

At the end of the year, actual Logistics Department variable costs totaled $290,700 and fixed costs totaled $431,950. The Atlantic Division had a total of 3,900 shipments and the Pacific Division had a total of 5,100 shipments for the year. How much Logistics Department cost should be charged to the Pacific Division at the END of the year for performance evaluation purposes? A) $391,453 B) $425,770 C) $445,498 D) $409,502 46. Gretter Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $36 per shipment. The Logistics Department's fixed costs are budgeted at $399,600 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.

Atlantic Division.................. Pacific Division...................

Percentage of Peak Period Capacity Required 25% 75%

Budgeted Shipments 1,600 5,800

At the end of the year, actual Logistics Department variable costs totaled $305,040 and fixed costs totaled $418,680. The Atlantic Division had a total of 2,600 shipments and the Pacific Division had a total of 5,600 shipments for the year. For performance evaluation purposes, how much actual Logistics Department cost should NOT be charged to the operating divisions at the END of the year? A) $28,920 B) $9,840 C) $19,080 D) $0

47. Bockoven Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Customer Service Department provides services to both divisions. The variable costs of the Customer Service Department are budgeted at $46 per order. The Customer Service Department's fixed costs are budgeted at $181,500 for the year. The fixed costs of the Customer Service Department are determined based on the peak period orders.

Consumer Division..................... Commercial Division..................

Percentage of Peak Period Capacity Required 40% 60%

Actual Orders 1,100 2,200

How much Customer Service Department cost should be charged to the Consumer Division at the beginning of the year for performance evaluation purposes? A) $123,200 B) $166,650 C) $111,100 D) $133,320 48. Levar Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Order Fulfillment Department provides services to both divisions. The variable costs of the Order Fulfillment Department are budgeted at $73 per order. The Order Fulfillment Department's fixed costs are budgeted at $470,400 for the year. The fixed costs of the Order Fulfillment Department are determined based on the peak period orders.

Consumer Division..................... Commercial Division..................

Percentage of Peak Period Capacity Required 25% 75%

Budgeted Orders 1,800 6,600

At the end of the year, actual Order Fulfillment Department variable costs totaled $621,600 and fixed costs totaled $473,970. The Consumer Division had a total of 1,840 orders and the Commercial Division had a total of 6,560 orders for the year. For purposes of evaluation performance, how much Order Fulfillment Department cost should be charged to the Commercial Division at the END of the year? A) $831,680 B) $855,588 C) $840,918 D) $846,240 49. Schabel Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Customer Service Department provides services to both divisions. The variable costs of the Customer Service Department are budgeted at $72 per order. The Customer Service Department's fixed costs are budgeted at $695,400 for the year. The fixed costs of the Customer Service Department are determined based on the peak period orders.

Consumer Division..................... Commercial Division..................

Percentage of Peak Period Capacity Required 25% 75%

Budgeted Orders 2,600 9,600

At the end of the year, actual Customer Service Department variable costs totaled $891,089 and fixed costs totaled $709,820. The Consumer Division had a total of 2,610 orders and the Commercial Division had a total of 9,580 orders for the year. For performance evaluation purposes, how much actual Customer Service Department cost should NOT be charged to the operating divisions at the END of the year? A) $13,409 B) $0 C) $14,420

D)

$27,829

50. Mangiamele Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments during the peak period. Data appear below: Maintenance Department Budgeted variable cost....................................................... Budgeted total fixed cost....................................................

$4 per case $693,000

Paints Division Percentage of peak period capacity required...................... Actual cases........................................................................

30% 18,000

...