Chapter 11 Flashcards

A collection of important vocabulary terms related to financial management and organizational structure.

Cost center

A business segment whose manager has control over cost but not revenue or investments in operating assets.

Decentralized organization

An organization in which decision-making authority is spread throughout the organization rather than being confined to a few top executives.

Investment center

A business segment whose manager has control over cost, revenue, and investments in operating assets.

Margin

Net operating income divided by sales.

Market price

The price charged for an item on the open market.

Negotiated transfer price

A transfer price agreed on between buying and selling divisions.

Net operating income

Income before interest and income taxes have been deducted.

Operating assets

Cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes.

Operating department

A department that performs an organization’s central purposes.

Profit center

A business segment whose manager has control over cost and revenue but not investments in operating assets.

Range of acceptable transfer prices

The range of transfer prices that increases profits for the selling and buying divisions.

Residual income

The net operating income an investment center earns above the minimum required return on its operating assets.

Responsibility accounting

A manager should be held responsible for those items—and only those items—that the manager can actually control.

Responsibility center

Any business segment whose manager has control over costs, revenues, or investments in operating assets.

Return on investment (ROI)

Net operating income divided by average operating assets; equals margin multiplied by turnover.

Service department

A department that does not perform operating activities; rather, it provides services to operating departments.

Suboptimization

An overall profit that is less than a segment or a company is capable of earning.

Transfer price

The price charged when one responsibility center provides goods or services to another responsibility center in the same company.

Turnover

Sales divided by average operating assets.