Chapter 8 - Responsibility centres

Question 1

What are the objectives of decentralisation?

Answer 1

• Ensure goal congruence
• Increase managerial motivation
• Reduce head office bureaucracy
• Provide better training

Question 2

What are the disadvantages of decentralisation?

Answer 2

• Lack of goal congruence
• Loss of head office control
• Higher costs

Question 3

How can the potential for dysfunctional decision making be overcome?

Answer 3

Performance evaluation

Question 4

What are the different types of responsibility centres?

Answer 4

• Cost
• Revenue
• Profit
• Investment (within profit)

Question 5

What costs are generally considered controllable?

Answer 5

• Variable costs
• Directly attributable FC

Question 6

Are committed FC controllable or uncontrollable?

Answer 6

• Uncontrollable short term
• Controllable long term

Question 7

What are the pros of profit centres?

Answer 7

Managers made aware of other overheads and need to earn sufficient profit

Question 8

What are the cons of profit centres?

Answer 8

• Can’t control other overheads
• Apportionment of overheads is a matter of judgement

Question 9

What is the formula for ROCE?

Answer 9

PBIT/Capital employed

Question 10

Does ROCE want to be higher or lower?

Answer 10

Higher

Question 11

What is the formula for the operating margin?

Answer 11

(PBIT/ Sales) x 100%

Question 12

What is the formula for asset turnover?

Answer 12

Sales/ Capital employed

Question 13

What is the relationship between ROCE, Asset turnover and Operating margin?

Answer 13

Operating margin x Asset turnover = ROCE

Question 14

What is the formula employed?

Answer 14

Equity + Long term finance

Question 15

What is the formula for the current ratio?

Answer 15

Current assets/ current liabilities

Question 16

What is the formula for the quick ration?

Answer 16

(Current assets - inventory)/current liabilities

Question 17

What is the manager of a cost centre responsible for?

Answer 17

Costs incurred

Question 18

What is the manager of a revenue centre responsible for?

Answer 18

Generation of revenue

Question 19

What is the manager of a profit centre responsible for?

Answer 19

• Costs
• Revenues

Question 20

What is the manager of an investment centre responsible for?

Answer 20

• Costs
• Revenues
• Profits
• Investments in NCA

Question 21

What is the ROI formula?

Answer 21

(Divisional controllable PBIT/ divisional cap employed) x 100

Question 22

What is the formula for capital employed?

Answer 22

Total assets - current liabilities

Question 23

What are the advantages of ROI?

Answer 23

• Widely used and accepted
• Enables comparisons between divisions

Question 24

What are the disadvantages of ROI?

Answer 24

• May lead to dysfunctional decision making
• Potentially misleading performance signals

Question 25

What is the formula for residual income?

Answer 25

Operating profit − (capital invested x cost of capital)

Question 26

What are the advantages of RI?

Answer 26

- Resolves dysfunctional decision making - Cost of financing captured

Question 27

What are the disadvantages of RI?

Answer 27

- Absolute so doesn't aid comparisons - Potentially misleading performance signals - Difficult to determine cost of capital

Question 28

What other methods can be used to evaluate divisional performance?

Answer 28

- Variance analysis - Ratio analysis - Other management ratios - Other information

Question 29

What is EVA calculated?

Answer 29

NOPAT - (economic value of capital employed x cost of capital)

Question 30

What are the advantages of EVA?

Answer 30

- Aligns with maximisation of shareholder wealth - Removes distortion from accounting policies - Encourages ‘investment’ expenditure e.g. R&D

Question 31

What are the underlying principles of EVA?

Answer 31

- Objective of a company is to maximize shareholder wealth - Share price depends on expectations of EVA - EVA reflected in share price

Question 32

What are the 2 key fundamental areas to quality reporting?

Answer 32

- Data and master data subject to robust control - Standards in reporting set organisation wide

Question 33

What are the 5 principles for effective report visualisation?

Answer 33

- Data is optimised for report visualisation - Relevant visualisation tool applied - Appropriate report layout chosen - Reader experience optimised - Visualisation to appropriate delivery channel optimised

Question 34

What are the advantages of decentralisation?

Answer 34

- Quality of decisions - Speed of decisions - Reduce head office burden - Good training for junior managers

Question 35

What is the main advantage of a flexed budget over a fixed one?

Answer 35

Allows for a fairer comparison

Question 36

What are the 2 ratios ROI can be broken down into?

Answer 36

- Operating profit margin - Asset turnover

Question 37

What is the formula for operating profit?

Answer 37

sales – cos – other operating costs

Question 38

What are the weaknesses of RI and ROI?

Answer 38

- Profits may need adjusting - Tax ignored - Intagible assets ignored

Question 39

What are the adjustments needed when starting from PAT to reach NOPAT if given a P/L?

Answer 39

Add back: - Goodwill amortisation - R&D/Advertising - Accounting depreciation - Interest net of tax Either: - Non-cash items Deduct: - Economic depreciation

Question 40

What are the adjustments when starting from PBIT needed to reach NOPAT if given a P/L?

Answer 40

Add back: - Goodwill amortisation - R&D/Advertising - Accounting depreciation Either: Non cash items Deduct: - Cash taxes paid - Economic depreciation

Question 41

How are net assets valued?

Answer 41

Opening year value replacement cost

Question 42

What are the disadvantages of EVA?

Answer 42

- Complex adjustments and calculation - Historical calculation e.g. lagged indicator - Absolute measure making comparisons difficult

Question 43

What are the advantages of ROCE?

Answer 43

-Readily understood - Calculated easily from standard financial data - Compares divisions fairly - Cheap to monitor and reliable

Question 44

What is the double entry for fixed overhead?

Answer 44

- Debit Production overhead control account - Credit P/L