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Exam 15: Performance Evaluation

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Question 31

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Contribution margin would be one of the most important measurements used in evaluating the performance of a

A) cost center.
B) profit center.
C) investment center.
D) organizational center.

E) All of the above
F) A) and B)

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Question 32

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For 2012, the New Products Division of Tellis Company had operating income of $7,000,000 and operating assets of $38,800,000. Tellis has set a target return on investment (ROI) of 14% for each of its divisions. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Assuming that the new product is put into production, calculate the residual income for the division. Would the new product increase or decrease the division's residual income?

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Residual income = ($7,000,000 ...

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Question 33

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Management by exception means that only unfavorable cost variances are investigated.

Prater Company made a $100,000 investment in new machinery. Assuming the company's margin is 4%, what income will be earned if the investment generates $300,000 in additional sales?

An investment opportunity with a return on investment that equals or exceeds zero should be accepted.

What are profit centers? How should the manager of a profit center be evaluated?

Performance evaluation of the segments of an organization should be done in a manner that promotes management by exception.

Select the incorrect statement regarding flexible budgets.

Based on the information given for a variance, indicate whether the variance is favorable or unfavorable. $\begin{array} { | l | l | l | l | } \hline \text { Item to classify } & \text { Flexible budget } & \text { Actual } & \begin{array} { l } \text { Variance - Favorable or } \\\text { Unfavorable? }\end{array} \\\hline \text { Cost of direct materials } & \$ 8,500 & \$ 8,350 & \\\hline\end{array}$

What causes the sales price variance to be unfavorable?

How might return on investment be used in making resource allocation decisions within an organization?

A standard is the amount a price, cost, or quantity should be.

Indicate whether each of the following statements is true or false. _____ a) Use of residual income to evaluate managers of an investment center may avoid some of the suboptimization that can occur with use of return on investment as a performance measure. _____ b) Residual income is stated as an absolute amount, not a ratio or percentage. _____ c) One disadvantage with residual income as a measure of performance is that it causes larger divisions to appear to do better than smaller divisions. _____ d) A balanced score card includes various nonfinancial performance measures but no financial performance measures. _____ e) The balanced scorecard is a holistic approach to evaluating management and division performance.

Volume variances are computed for which of the following costs?

For 2012, one division of Ashton Company reported operating assets of $5,000,000 and operating income of $620,000. Ashton has established a target return on investment (ROI) of 14% for the division. Required: a) Calculate the division's ROI for 2012. Did it achieve the target set by the company? b) Assuming that operating assets for 2013 increase by 5%, by how much would operating income have to increase to reach the target of 14%?

The Lester Company has requested a performance report that reports both sales activity variances and flexible budget variances. The following table of information is provided: Required: 1) Compute and enter variances in columns 3 and 6. In column 3, enter the variance (difference) between column 2 and column 5; in column 4, label the variance as favorable (F) or unfavorable (U). In column 6, enter the variance between columns 5 and 8, and in column 7 indicate whether this variance is favorable or unfavorable. 2) Which column contains sales volume variances and which column contains flexible budget variances? 3) Comment on this company's performance.

Greenville Company estimates sales of 12,000 units for the upcoming period. At this sales volume its budgeted income is as follows: During the period the company actually produced and sold 13,000 units. Required: Prepare a flexible budget based on 13,000 units.

How should the manager of a cost center be evaluated?

Davies Company provided the following budgeted information for 2012. $\begin{array} { | l | r | } \hline \text { Sales price } & \$ 50 \text { per unit } \\\hline \text { Variable manufacturing cost } & 32 \text { per unit } \\\hline \text { Fixed manufacturing cost } & \$ 100,000 \text { total } \\\hline \text { Fixed selling and administrative cost } & \$ 40,000 \text { total } \\\hline\end{array}$ Davies predicted that sales would be 20,000 units, but the sales actually were 22,000 units. The actual sales price was $48.50 per unit, and the actual variable manufacturing cost was $33 per unit. Actual fixed manufacturing cost and fixed selling and administrative cost were $104,000 and $39,000, respectively. Required: a) Using the form below, prepare a flexible budget; show actual results; calculate the flexible budget variances; and indicate whether the variances are favorable (F) or unfavorable (U). $\begin{array} { | l | l | l | l | l | } \hline & \begin{array} { l } \text { Flexible } \\\text { Budget }\end{array} & \text { Actual Results } & \begin{array} { l } \text { Flexible Budget } \\\text { Variance }\end{array} & \begin{array} { l } \text { Favorable or } \\\text { unfavorable }\end{array} \\\hline \text { Number of units } & & & & \\\hline \text { Sales Revenue } & & & & \\\hline \begin{array} { l } \text { Variable } \\\text { manufacturing } \\\text { costs }\end{array} & & & & \\\hline \begin{array} { l } \text { Contribution } \\\text { margin }\end{array} & & & & \\\hline \begin{array} { l } \text { Fixed } \\\text { manufacturing cost }\end{array} & & & & \\\hline \begin{array} { l } \text { Fixed selling and } \\\text { administrative cost }\end{array} & & & & \\\hline \text { Net income } & & & & \\\hline\end{array}$ b) Assess the company's performance compared to the flexible budget.

In order to avoid suboptimization, many companies prefer to evaluate their investment centers using