accy chap 11

accy chap 11 - CHAPTER 11 PERFORMANCE EVALUATION, VARIABLE...

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CHAPTER 11 PERFORMANCE EVALUATION, VARIABLE COSTING, AND DECENTRALIZATION DISCUSSION QUESTIONS 1. In centralized decision making, decisions are made at the very top level, and lower-level managers are responsible for implementing these decisions. For decentralized decision making, decisions are made and implemented by lower-level managers. 2. Decentralization is the delegation of decision- making authority to lower levels. 3. Reasons for decentralization include access to local information, cognitive limitations, more timely responses, focusing of central manage- ment, training, and motivation. 4. Margin = Operating income/Sales and Turnover = Sales/Average operating assets. By breaking ROI into margin and turnover, more information is available to assess per- formance. Knowledge of margin and turnover gives more insight into why the ROI may change from one period to the next. 5. ROI (1) encourages managers to pay atten- tion to the relationships among sales, ex- penses, and investment; (2) encourages cost efficiency; and (3) discourages excessive in- vestment in operating assets. Increased profit- ability can be achieved (all else being equal) by increasing revenues, decreasing ex- penses, or lowering investment. 6. Residual income is equal to operating income minus the minimum cost of capital multiplied by the average operating assets. EVA (eco- nomic value added) requires the company to calculate its actual cost of capital and use it as the minimum cost of capital in the residual in- come calculation. In addition, EVA always uses after-tax income. 7. Yes, residual income and EVA can be negat- ive. This means that the company earned less than its minimum cost of capital or, in the case of EVA, its actual cost of capital. 8. A transfer price is the price charged for goods that are transferred from one division to an- other. 9. Agree. At least one division will be made bet- ter off, and firm profits will increase. 10. The only difference is the way in which fixed overhead costs are assigned. Under variable costing, fixed overhead is a period cost; under absorption costing, it is a product cost. 11. Absorption-costing income is greater because some of the period’s fixed overhead is placed in inventory and not recognized on the absorption-costing income statement. 12. A segment is any subunit of sufficient import- ance to warrant production of performance re- ports. 13. Contribution margin is the amount available to cover fixed expenses and provide for profit. Segment margin is the amount available to cover common fixed expenses and provide for profit. Contribution margin is the difference between revenues and variable expenses. Segment margin is contribution margin less direct fixed expenses. 14.
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This note was uploaded on 02/24/2009 for the course ACCY 202 taught by Professor Mccaffrey during the Spring '08 term at Ole Miss.

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accy chap 11 - CHAPTER 11 PERFORMANCE EVALUATION, VARIABLE...

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