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Management Accounting Information for Decision-Making and Strategy Execution 6th Edition Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young - Solutions
1. What are the four bases for setting a transfer price?2. What is return on investment?
Why do organizations allocate revenues to responsibility centers?
Why do organizations allocate costs to responsibility centers?
1. How does efficiency (the ratio of income to sales) affect return on investment?2. How does productivity (the ratio of sales to investment) affect return on investment?
1. How is residual income computed?2. What control problem does decentralization create in organizations?
How does economic value added differ from residual income?
Describe specific examples of how firms are using economic value added to evaluate their investments in product lines or divisions, or to evaluate operating strategies.
What are three reasons financial control alone may provide an ineffective control scorecard?
Give an example of a responsibility center in a university.
Give an example of a responsibility center that is properly treated as a cost center.
Give an example of a responsibility center that is properly treated as a revenue center.
Based on your understanding of how chains are managed, would you agree or disagree that an outlet of a large department store chain should be treated as an investment center? What about the maintenance department within that outlet? What about a single department within the store?
Many multinational companies create wholly owned subsidiaries to do business in the countries or regions where they operate. Are these wholly owned subsidiaries examples of investment centers? Explain.
Identify three responsibility centers in a fast-food restaurant and explain how they may interact.
Based on your understanding, which of the following does the manager of a cinema control: costs, revenues, profits, and investment?
A home services company offers renovations, as well as heating, air conditioning, and plumbing services, to its customers. Imagine that you are in the process of computing the income for the renovations division. What problems might you encounter in computing this income?
Suppose you are the manager of a fitness center that is one of many in a chain. Give one example of a cost that you control and one example of a cost you do not control. Why is it important in this setting to distinguish between costs that are controllable and costs that are not controllable?
Give an example of a situation for which invoking the controllability principle would have a desirable motivational effect. Also give an example of a situation for which suspending the controllability principle would have a desirable motivational effect.
McCann Company has two divisions, Division C and Division D. Division C manufactures Part C82 and sells it to Division D, and also sells the same part to the outside market for $50 per unit. Division C has capacity to make 400,000 units of C82 per year. The division’s fixed costs are $5,000,000
Organizations might desire to use one transfer pricing system designed to support international transfer pricing and another domestic transfer pricing system designed to achieve motivational objectives. Give a reason why you think organizations would not use two transfer pricing systems—one for
How might a transfer price for logs be chosen in an organization that cuts down trees and processes the logs either in a sawmill to make lumber or in a pulp mill to make paper?
In a fishing products company, the harvesting division catches and delivers the fish to the processing division that, in turn, delivers the processed fish to the selling division to sell to customers. How can you determine the appropriate transfer price between harvesting and processing and between
What is the main advantage and the main obstacle in using market-based transfer prices?
Why did accountants develop the expression “soft number”?
1. A store is divided into four departments: automotive products, home products, paint, and lumber. How would you assign the building costs, such as depreciation, to each of these departments?2. A business whose investors require a return on investment of 8% reports an income of $1 million on an
Green Company has prepared the following information for three of its divisions: Required(a) Compute each division??s return on investment and residual income, assuming a 10% cost of capital.(b) Suppose the net book value of each division??s investments is half of the historical cost. Using net
Eta Company would like to examine the sales margin and asset components of return on investment for three of its divisions and has accordingly prepared the following information: Required(a) Compute each division's return on investment, sales margin, and turnover.(b) Comment on the divisions'
Division Q’s current turnover is 2 and its return on sales ratio is 0.8. The division is considering a sales promotion that would increase its current return on sales ratio by 20%, but decrease its turnover by 20%.Required(a) If the division undertakes this promotion, by what percentage would the
The following information pertains to VI Division, which has $1,400,000 in investments.Division sales revenue $900,000Less division expenses 480,000Division income $420,000The company’s cost of capital is 10%.Required(a) What is the division’s return on investment?(b) What is the
For-profit organizations face a requirement to earn at least a minimum-level return on investment. Some businesses rely on high ratios of income to sales; other businesses rely on high ratios of sales to investment. Give an example of each of these types of businesses and explain what this
Give an example of why using units, rather than the value of the products produced, in the numerator of a productivity ratio may give a misleading picture of the process that produced that output.
Based on an analysis of operations, a company making sporting goods has determined that the income provided by its golf, ski, tennis, and football product lines are $3.5 million, $7.8 million, $2.6 million, and $1.7 million, respectively. The accountant believes that the investment levels in these
For each of the following units, identify whether the most appropriate responsibility center form is a cost center, a profit center, or an investment center and why you have made that choice.a. A laboratory in a hospitalb. A restaurant in a department storec. The computer services group in an
You have decided to divide a factory into cost centers. How would you allocate depreciation expense on the factory building to its individual cost centers?
One of the most widely accepted and longest held beliefs is the controllability principle, which says that organization units and people should be held accountable only for things that they can control.Required(a) For any job you choose, give one example of something you should be expected to
Following is the information on Paragon Company??s three product lines: Required(a) Construct a segment margin statement for Paragon Company.(b) Explain why the segment margins reported for an organization unit must be interpretedcarefully.
Perform an Internet search on “close underperforming stores” or similar phrase to locate an example of a company that has closed unprofitable stores or other segments. Explain what issues the company considered in dropping the unprofitable segments and improving profitability of the remaining
You are a government controller. A division manager being audited objects to the transfer price he is being charged by the audit group for the audit services. The manager observes, “If I have to pay for these services, I should be allowed to buy them from an outside supplier who is prepared to
Deseronto Electronics manufactures motherboards for computers. The company is divided into two divisions: manufacturing and programming. The manufacturing division makes the board, and the programming division makes the adjustments required to meet the customer’s specifications. The average total
Michelle Gutierrez, manager of the Components Division of FX Corporation, is considering a new investment for her division. The division has an investment base of $4,000,000 and operating income of $600,000. The new investment of $500,000 supports corporate strategy and is expected to increase
The Newburg Flyers operate a major sports franchise from a building in downtown Newburg. The building was built in 1940 at a cost of $5,000,000 and is fully depreciated so that it is shown on the company’s balance sheet at a nominal value of $1. The land on which the building was built in 1940
A bank is thinking of using economic value added to identify services that require improvement or elimination. What problems may the bank have in computing the economic value added of any of the services that it offers to its customers?
The owner of a chain of fast-food restaurants has decided to use economic value added to evaluate the performance of the managers of each of the restaurants. What do you think of this idea?
As a result of a residual income analysis, the owner of a company that makes and installs swimming pools has decided to shut down the manufacturing operations that show a negative residual income for the current year. Is this necessarily the proper response to this information? Why or why not?
Strathcona Paper rewards its managers on the basis of the after-tax return on investment of the assets that they manage—the higher the reported return on investment, the higher the reward. The company uses net book value to value the assets employed in the return on investment calculation. The
Many people believe that the focus of control in a successful organization reflects the strategic initiatives in the organization. For each of the following organizations, identify what you think are the three most important items assessed by the organization’s financial control system and why
Researchers have defined two extreme forms of organizations. Organic organizations are highly decentralized with few rules. Most people agree that software development companies are very organic. Mechanistic organizations are highly centralized and use many rules to prescribe behavior. Most people
Think of an example of an organization in which it is important that the various functional areas be closely coordinated to promote the organization’s overall success. Show how performance measures that focus solely on the performance of an individual unit could create problems in this
For many years, automobile companies were highly decentralized in terms of functions. The most obvious effect of this heavy decentralization of function was apparent when all the groups needed to work together to accomplish a goal. The highest order of integration occurs in the design of a new
Bennington Home Products sells home products. It buys products for resale from suppliers all over the world. The products are organized into groups. A few examples of these groups are floor care products, kitchen products, tool products, and paper products. The company sells its products all over
Some people and organizations believe that the discussion of controllable and uncontrollable events is distracting in the sense that it encourages finger-pointing and an excessive preoccupation with assigning blame. These observers argue that it is more important to find solutions than to identify
Plevna Manufacturing makes and distributes small prefabricated homes in kits. The kits contain all pieces needed to assemble the home. All that is required is that the builder erect the home on a foundation. Plevna Manufacturing is organized into two divisions: the manufacturing division and the
You are the controller of a chain of dry-cleaning establishments. You are computing the return on investment for each outlet. Outlet A, located in a city core, reported a net profit of $130,000. The land on which Outlet A is located was essentially rural when it was purchased for $100,000. Since
Shellie??s Lawn and Gardening performs various lawn and garden maintenance activities, including lawn mowing, tree and shrub pruning, fertilizing, and treating for pests. Unlike other lawn and garden businesses in the city, Shellie also specializes in landscape design and planting. Shellie is
You are a senior manager responsible for overall company operations in a large courier company. Your company has 106 regional offices (terminals) scattered around the country and a main office (hub) located in the geographical center of the country. Your operations are strictly domestic. You do not
Baden is a city with a population of 450,000. It has a distinct organization group, called the Public Utilities Commission of the city of Baden, or Baden PUC, whose responsibility is to provide the water and electrical services to the businesses and homes in the city. Baden PUC’s manager is
Transactions for the Daniel Hudson Company for the month of June are presented below. Identify the accounts to be debited and credited for each transaction. June 1 Dan Hudson invests $5,000 cash in a small welding business of which he is the sole proprietor. 2 Purchases equipment on account for
What is the total-life-cycle costing approach? Why is it important?
What are the three major stages of the total life-cycle costing approach in a manufacturing situation?
What is the difference between committed costs and incurred costs?
What are the three substages of the RD&E stage of total-life-cycle costing?
What three substages typically occur in the postsale service and disposal stage of totallife-cycle costing?
What is target costing?
What are the two essential financial elements needed to arrive at a target cost?
What is a quality function deployment matrix, and how does it relate to value index computations for target costing?
What is value engineering?
1. In which stage of the total life cycle of a product is target costing most applicable? 2. What is the profitability measure most widely used to develop the target profit margin under target costing?
What roles do cross-functional teams and supply chain management play in target costing?
What does the breakeven time (BET) metric for the product development process measure?
What three critical elements does the BET metric bring together?
What desirable behavioral consequences are likely as people focus on improving the BET metric?
Explain why using percentage of revenues from new products as a performance metric may fail to stimulate the creation of highly innovative products.
What are some nonfinancial measures that a company might use in order to motivate achieving the objective of anticipating future customer needs?
What are some nonfinancial measures that a company might use in order to motivate achieving the objective of reducing product development cycle time across an array of products?
What activities are included in environmental costing?
What are some examples of explicit and implicit environmental costs?
Explain how the total-life-cycle costing approach differs from traditional product costing.
Explain the benefits of using a total-lifecycle costing approach to product costing.
What is the traditional accounting focus in managing costs over the total life cycle of a product? What is the problem with this focus?
Review Exhibit 8-2, showing the relationship between committed costs and incurred costs over the total life cycle of a product. Explain what the diagram means and what the implications are for managing costs.
When does the disposal phase of the postsale service and disposal stage of a product begin and end?
Explain how target costing differs from traditional cost reduction methods.
What is the relationship between value engineering and target costing?
From a behavioral point of view, what potential problems can occur when implementing a target costing system?
As a manager asked to benchmark another organization’s target costing system, on what factors would you gather information? Why?
Express the target costing relationship in equation form. How does this equation differ from the two other types of traditional equations relating to cost reduction? Why is this significant?
Refer to the Kitchenhelp Coffeemaker example in the chapter. Suppose that Exhibits 8-6 and 8-7 remain the same but that engineers developed different numerical correlations, shown below, for the QFD matrix in Exhibit 8-8. Required(a) Prepare an exhibit similar to Exhibit 8-9 showing percentage
Refer to Exhibit 8-14 regarding Greyson Technology??s launch of a new digital communications device. Suppose that Greyson reduced the quarterly spending on product development in panel A, which delayed launching the new product for two quarters, at which time the selling price and sales volume
Refer to Exhibit 8-14 regarding Greyson Technology??s launch of a new digital communications device. Suppose that Greyson reduced the quarterly spending on product development in panel A, which delayed launching the new product for two quarters, at which time the selling price and sales volume
How can a firm use activity-based costing to help control and reduce environmental costs?
A major car manufacturer developed the following information as part of its target costing efforts: Required(a) Prepare an exhibit similar to Exhibit 8-9 showing percentage contributions of each function group to categories of customer requirements.(b) Prepare a value index exhibit similar to
Consider the following situation: Your manager comes to you and says, “I don’t understand why everyone is talking about the total-life-cycle costing approach to product costing. As far as I am concerned, this new approach is a waste of time and energy. I think we should just stick to what we
Gregoire Grant is a traditional manufacturing manager who is concerned only with managing costs over the manufacturing cycle of the product. He argues that since traditional accounting methods are focused on this cycle, he should not bother with the RD&E cycle because it is separate from his area
Calcutron Company is contemplating introducing a new type of calculator to complement its existing line of scientific calculators. The target price of the calculator is $75; annual sales volume of the new calculator is expected to be 500,000 units. Calcutron has a 15% returnon-sales
Stacy Yoo, president of Caremore, Inc., an appliance manufacturer in Seattle, Washington, has been trying to decide whether one of her product-line managers, Bill Mann, has been achieving the companywide return-on-sales target of 45%. Stacy has just received data from the new target costing system
Pierre LeBlanc, manager of Centaur Corporation, is thinking about implementing a target costing system in his organization. Several managers have taken him aside and have expressed concerns about implementing target costing in their organization. Required As an expert in target costing, you have
Traditional cost reduction versus target costing Traditional cost reduction in the United States differs significantly from the Japanese method of target costing. Required Discuss the similarities and differences in the process by which cost reduction under both systems occurs. Be specific in your
As a manager interested in implementing target costing, you are contemplating three approaches. The first is to bring in an outside consultant; the second is to develop your own system inside your organization with little to no outside assistance; and the third is to engage in a benchmarking
According to this chapter, the target costing and traditional cost reduction methods approach the relationships among cost, selling price, and profit margin quite differently.RequiredWrite an essay that illustrates how the target costing and traditional cost reduction methods differ, using the
Imagine that you are the manager of a large bank. Having heard about a management accounting method called target costing, you are wondering whether it can be applied to the banking industry. In particular, you are trying to determine how to benchmark other organizations to gain more
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