ACCY Final

Question 1

Responsibility Center

Answer 1

cost, profit, and investment centers are all known as responsibility centers

Question 2

Cost Center

Answer 2

-a segment whose manager has control over costs, but not over revenues or investment funds
-evaluated by flexible budget and standard cost variances

Question 3

Profit Center

Answer 3

-a segment whose manager has control over both costs and revenues but no control over investment funds
-evaluated by comparing actual profit to targeted or budgeted profit (generally)

Question 4

Investment Center

Answer 4

-a segment whose manager has control over costs, revenue, and investments in operating assets
- evaluated by return on investment (ROI) or residual income

Question 5

Net Book Value

Answer 5

most companies use the net book value of depreciate assets to calculate average operating assets

Question 6

Motivation for Residual Income

Answer 6

residual income encourages managers to make investments that are profitable for the entire company but would be rejected by managers who are evaluated using ROI

Question 7

Disadvantage of residual income

Answer 7

cannot be used to compare the performance of divisions of different sizes

Question 8

Static Planning Budget

Answer 8

-produced at beginning of the period primarily for planning purposes
-calculate budgeted revenues and expenses based off a planned level of activity

Question 9

Deficiencies of Static Planning Budget

Answer 9

-prepared for a single, planned level of activity
-performance evaluation is difficult when actual activity differs from the planned level of activity

Question 10

Flexible Budget

Answer 10

-can be prepared for any activity level in the relevant range
-show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. Produced at period end once actual activity level is known
-help managers control costs
-improve performance evaluation

Question 11

Cost-volume profit analysis

Answer 11

study of the effects of changes in costs and volume on a company’s profits

what happens to profit if we change: price, volume, unit cost, fixed cost, sales mix