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Unformatted text preview: McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. Managerial Accounting, 6/e 13-1 CHAPTER 13 Investment Centers and Transfer Pricing ANSWERS TO REVIEW QUESTIONS 13-1 The managerial accountant's primary objective in designing a responsibility- accounting system is to provide incentives for the organization's subunit managers to strive toward achieving the organization's goals. 13-2 Goal congruence means a meshing of objectives, in which the managers throughout an organization strive to achieve goals that are consistent with the goals set by top management. Goal congruence is important for organizational success because managers often are unaware of the effects of their decisions on the organization's other subunits. Also, it is natural for people to be more concerned with the performance of their own subunit than with the effectiveness of the entire organization. In order for the organization to be effective, it is important that everyone in it be striving for the same ultimate objectives. 13-3 Under the management-by-objectives (MBO) philosophy, managers participate in setting goals that they then strive to achieve. These goals may be expressed in financial or other quantitative terms, and the responsibility-accounting system is used to evaluate performance in achieving them. The MBO approach is consistent with an emphasis on obtaining goal congruence throughout an organization. 13-4 An investment center is a responsibility-accounting center, the manager of which is held accountable not only for the investment center's profit but also for the capital invested to earn that profit. Examples of investment centers include a division of a manufacturing company, a large geographical territory of a hotel chain, and a geographical territory consisting of several stores in a retail company. 13-5 capital invested revenue sales revenue sales income capital invested income (ROI) investment on Return = = 13-6 A division's ROI can be improved by improving the sales margin, by improving the capital turnover, or by some combination of the two. The manager of the Automobile Division of an insurance company could improve the sales margin by increasing the profit margin on each insurance policy sold. As a result, every sales dollar would generate more income. The capital turnover could be improved by increasing sales of insurance policies while keeping invested capital fixed, or by decreasing the invested assets required to generate the same sales revenue. McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. 13- 2 Solutions Manual 13-7 Example of the calculation of residual income: Suppose an investment center's profit is $100,000, invested capital is $800,000, and the imputed interest rate is 12 percent: = rate interest imputed capital invested s center' investment profit s center' investment income Residual Residual income = $100,000 ($800,000) (12%) = $4,000 The imputed interest rate is used in calculating residual income, but it is not used in ...
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