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Exam 18: Organizational Design, Responsibility Accounting, and Evaluation of Divisional Performance

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Question 41

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Mr. Chang is the production V.P. of Katrina Company. It is the beginning of the month and he storms into the controllers department, clutching a large folder of reports. "Why am I getting so many reports? I don't need them nor do I want all the details. I've delegated responsibility to my managers so I don't have to worry about details. You've got to do something about this, Juan." Juan, the controller, starts to think about the problem that seems to have come about as the company decentralized with many layers of responsibility. He has a vague memory of something he learned from his old cost accounting class and has called you, his former professor, for some advice or suggestions in order to reduce the paper flow. Required: Briefly describe the concept of the hierarchy of performance reports.

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The hierarchy of performance reports sta...

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Question 42

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Ladue, Inc. has used a decentralized form of organizational structure for the past five years. The controller, Ms. Trevino, has noticed that some of the divisions are still using fixed assets that are fully depreciated and that there has been little acquisition activity in these divisions. Coupled with this are very high ROIs, especially when compared to the other divisions that seem to have a regular program of disposition and replacement of fixed assets. She takes her concerns and observations to the Financial Vice President who says he will review her findings and look into the problem. Required: 1) What are the potential negative effects of decentralization? 2) Specifically discuss the issues involved in suboptimization.

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(1) (a) Managers in a decentralized orga...

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Question 43

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Which of the following amounts is most likely subject to the control of the profit center's manager? The following is a summarized income statement for Royal Manor Co.'s profit center 12608 for April

Which of the following is considered a disadvantage of return on investment (ROI) ?

Traffic Services Company has recently expanded by acquiring two smaller companies in the transportation industry. Prior to these acquisitions, Traffic Services used a centralized style of organization because it was small enough that the top management team was heavily involved in the day-to-day activities of the firm. Ms. Causeway, the CEO, feels that this style is no longer suitable to the larger, more diverse organization. She has hired a consultant to help her and her management team create a new structure which, when developed on paper, will be described to the affected employees and their inputs will be sought. Since no one in the company knows much about management styles, Ms. Causeway felt this would be an efficient way to get the ball rolling but realized the consultants would not have the specialized knowledge about her company plus the two acquisitions. One of the first things she feels she will need to do is explain the benefits of decentralization that will accrue to both the company and the affected employees. She asks you, as the consultant, to provide her with a general list of advantages of decentralization that she will tailor to her company before presenting it.

Use the following to answer questions: McGowan Inc. has two divisions that operate as investment centers. The data for each follows: -What is the capital turnover for the Regular Division?

Use the following to answer questions: Daniels Co. uses long-term debt and equity capital as primary sources of funds. The long-term debt has a market value and book value of $8.5 million and was issued at a 9 percent interest rate. The equity capital has a book value of $3 million and a market value of $7.5 million. Daniels has 3 major centers located around the country with the following operating income, total assets and current liabilities: The cost of equity capital is 12 percent, with a 40 percent tax rate. -What is the EVA for the Midwest Division?

Use the following to answer questions: The records of the Barnholtz Division of Silberman Corporation showed the following for last year: -What is the capital turnover for the Barnholtz Division?

The economic value added (EVA) of an investment center is its after-tax operating income minus the center's total assets (net of its current liabilities) times the company's ROI.

Use the following to answer questions: Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's. -The ROI for the Boxed Candy Division, after the purchase of Truffles Inc. would be:

The _______is more likely to promote goal congruence when used as a performance measure.

Briefly describe EVA.

Ricardo, Inc. is just starting up. The management team has decided from the beginning that decentralization was the preferred organizational style and has made this clear in all interviews and discussions with potential employees. Mr. Pangea, the CEO, is unsure about the best way to evaluate his division managers. He has heard the terms return on investment, residual income, economic value added, and flexible budgets but wants to know the pros and cons of each. Required: Briefly describe ROI, residual income, EVA and other approaches to performance evaluation. Bring in, where appropriate, how to calculate the measure and problem areas in the development of some of the numbers.

Goal congruence results when the managers of subunits throughout an organization have incentives to perform in the common interest.

In order to properly calculate the Residual Income for an investment center, it is necessary to know the imputed interest rate.

What are advantages and disadvantages of ROI and residual income as performance measures?

The Gold Division of the Currency Company has net income in the amount of $500,000, an average total asset base of $3,000,000 and residual income of $50,000. The imputed interest would be

A responsibility center is a subunit in an organization whose manager is held accountable for specified financial and non-financial results of the subunit's activities.

Which of the following is not a possible measure of divisional invested capital?

One possible disadvantage that arises in a decentralized organization is that