Deck 10: Decentralized Performance Evaluation

Question 1

The balanced scorecard approach, which includes a broad set of financial and non-financial performance indicators is not compatible with sustainability accounting

Answer 1

False

Question 2

The hurdle rate is also called economic value added

Answer 2

False

Question 3

Segment margin and profit margin are identical terms

Answer 3

False

Question 4

Residual income is a leading indicator of financial performance

Question 5

Residual income can mitigate the problems of goal incongruence

Question 6

The DuPont method breaks residual income into profit margin and investment turnover

Question 7

A profit center manager often also supervises revenue and cost center managers

Question 8

The controllability principle holds that managers should be held responsible for what they can control and for allocated costs

Question 9

Profit margin is defined as the ratio of sales revenue to operating income

Question 10

One of the most important concepts in responsibility accounting is the:

A) balanced scorecard.
B) controllability principle.
C) related-party transactions.
D) transfer price.

Question 11

Which of the following is a disadvantage of decentralization?

A) Develops managerial expertise
B) Managers have specialized knowledge
C) Potential duplication of resources
D) Allows top managers to focus on strategic issues

Question 12

In a decentralized organization, lower-level managers are given a great deal of autonomy in decision-making

Question 13

In transfer pricing, the manager of the buying division is motivated to pay the highest price possible, while the manager of the selling division is motivated to sell at the lowest price possible

Question 14

In what type of organization is decision-making authority spread throughout the organization?

A) Centralized organization
B) Decentralized organization
C) Participative organization
D) Top-down organization

Question 15

The balanced scorecard attempts to focus managers' attention on more than just financial measures

Question 16

A legal services department would be an example of a cost center

Question 17

Which of the following is considered a disadvantage of decentralization?

A) Upper-level managers with more knowledge about lower-level managers' areas of responsibility are further away from the day-to-day decisions.
B) Decentralization does not foster managerial expertise since upper level managers manage less.
C) Decentralization does not empower upper-level managers to focus on strategy because they are too busy managing lower-level managers.
D) Lower-level managers may have an opportunity to make decisions in their own best interest without considering the overall health of the company.

Question 18

Return on investment is calculated as the return on the segment's assets divided by the value of those assets

Question 19

Investment center managers have control over the investment of assets

Question 20

Which of the following is not an advantage of decentralization?

A) Allows top managers to focus on strategic issues
B) Potential duplication of resources
C) Allows for development of managerial expertise
D) Managers can react quickly to local information

Question 21

The balanced scorecard includes both leading and lagging indicators. Which of the following correctly places each indicator on the spectrum of most leading to most lagging?

A) Financial → Customer → Internal business process → Learning and growth
B) Financial → Learning and growth → Internal business process → Customer
C) Customer → Learning and growth → Internal business process → Financial
D) Learning and growth → Internal business process → Customer → Financial

Question 22

The part of the organization for which managers are responsible is called a:

A) related-party center.
B) responsibility center.
C) cost center.
D) shared center.

Question 23

Which of the following statements best represents the controllability principle?

A) A profit center manager should be evaluated based on residual income, not return on investment.
B) An investment center manager should be evaluated based on return on investment, not residual income.
C) A profit center manager should be evaluated based on segment margin, not profit margin.
D) A cost center manager should be evaluated on costs and revenues, not just costs.

Question 24

The most common method of evaluating a profit center manager is the:

A) segmented income statement.
B) budgetary planning and control system.
C) sales system.
D) return on investment.

Question 25

The responsibility center in which the manager has responsibility and authority over revenues and costs, but not assets, is the:

A) cost center.
B) investment center.
C) profit center.
D) revenue center.

Question 26

The responsibility center in which the manager has responsibility and authority over revenues, costs and assets is the:

A) cost center.
B) investment center.
C) profit center.
D) revenue center.

Question 27

The responsibility center in which the manager does not have responsibility and authority over costs is the:

A) cost center.
B) investment center.
C) profit center.
D) revenue center.

Question 28

Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the percentage of revenue from repeat sales. Which balanced scorecard perspective would this measure most likely fit into?

A) Customer perspective
B) Learning and growth perspective
C) Internal business perspective
D) Financial perspective

Question 29

The responsibility center in which the manager does not have responsibility and authority over revenues is:

A) a cost center.
B) an investment center.
C) a profit center.
D) a revenue center.

Question 30

Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the average education level of the firm's managers. Which balanced scorecard perspective would this measure most likely fit into?

A) Customer perspective
B) Learning and growth perspective
C) Internal business perspective
D) Financial perspective

Question 31

Which of the following statement is correct about the functions that fall within various responsibility centers?

A) A revenue center manager is responsible for more functions than a profit center manager is.
B) A revenue center manager is responsible for fewer functions than a profit center manager is.
C) A revenue center manager is responsible for the same number of functions as a profit center manager is.
D) A revenue center manager is not responsible for any functions; only the profit center manager is responsible for functions.

Question 32

Which of the following responsibility centers will use a segmented income statement as an evaluation tool?

A) The cost center
B) The revenue center
C) The profit center
D) The administrative center

Question 33

Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the average age of raw materials inventory. Which balanced scorecard perspective would this measure most likely fit into?

A) Customer perspective
B) Learning and growth perspective
C) Internal business perspective
D) Financial perspective

Question 34

Which of the following is not a perspective used by the balanced scorecard?

A) Financial
B) Short-term
C) Customer
D) Learning and growth

Question 35

Which of the following statements is correct about the connection between cost centers and revenue?

A) Cost centers directly generate revenue from customers.
B) Cost centers do not directly generate revenue from customers, and they have no impact on the customer experience.
C) Cost centers do not directly generate revenue from customers, but they may have an impact on revenue through customer satisfaction and overall quality.
D) Cost centers are the primary driver of revenue from customers.

Question 36

Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the change in stock price. Which balanced scorecard perspective would this measure most likely fit into?

A) Customer perspective
B) Learning and growth perspective
C) Internal business perspective
D) Financial perspective

Question 37

Which of the following balanced scorecard perspectives measures how an organization satisfies its stakeholders?

A) Customer
B) Internal business processes
C) Learning and growth
D) Financial

Question 38

Which of the following is not something that should be compiled for each dimension of the balanced scorecard?

A) Performance measures
B) Targets
C) Strategic vision
D) Specific objectives

Question 39

Which of the following balanced scorecard perspectives measures an organization's ability to change?

A) Customer
B) Internal business processes
C) Learning and growth
D) Financial

Question 40

Which of the following is the primary tool used by cost centers to manage costs?

A) Return on investment
B) Budgetary control system
C) Balanced scorecard
D) Transfer pricing

Question 41

Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average invested assets are $500,000 and Avocado Company has an 8% cost of capital. What is the profit margin?

A) 8%
B) 10%
C) 16%
D) 20%

Question 42

Miami Corp. has an operating income of $120,000, average invested assets of $600,000, and a cost of capital of 7%. What is the residual income?

A) $100,000
B) $166,667
C) $78,000
D) $42,000

Question 43

Florida Inc. has revenues of $1,500,000 resulting in an operating income of $105,000. Average invested assets total $750,000; the cost of capital is 10%. Return on investment is:

A) 7%
B) 14%
C) $75,000
D) $30,000

Question 44

Residual income is the difference between:

A) net operating income and the minimum profit the organization must earn to cover the ROI.
B) net operating income and the minimum acceptable profit.
C) net operating income and the hurdle rate.
D) net operating income times the hurdle rate, less average invested assets.

Question 45

Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average invested assets are $500,000 and Avocado Company has an 8% cost of capital. What is the residual income?

A) $100,000
B) $20,000
C) $120,000
D) $40,000

Question 46

Investment turnover is defined as:

A) the ratio of sales revenue to average invested assets.
B) the ratio of net operating income to average invested assets.
C) the ratio of net operating income to sales revenue.
D) the ratio of profit margin to return on investment.

Question 47

Devon Inc. has a profit margin of 12% and an investment turnover of 2.5. Sales revenue is $600,000. What is the amount of average invested assets?

A) $240,000
B) $1,500,000
C) $50,000
D) $72,000

Question 48

Investment turnover can be calculated as:

A) sales revenue/average invested assets.
B) operating income/sales revenue.
C) operating income/average invested assets.
D) average invested assets/sales revenue.

Question 49

Palm Inc. has a profit margin of 15% and an investment turnover of 2. Sales revenue is $800,000. What is the amount of average invested assets?

A) $240,000
B) $400,000
C) $120,000
D) $60,000

Question 50

Palm Inc. has a profit margin of 15% and an investment turnover of 2. Sales revenue is $800,000. What is the operating income?

A) $240,000
B) $60,000
C) $120,000
D) $400,000

Question 51

Return on investment can be calculated as:

A) sales revenue/average invested assets.
B) operating income/sales revenue.
C) operating income/average invested assets.
D) average invested assets/sales revenue.

Question 52

Investment turnover is defined as:

A) the ratio of sales revenue to average invested assets.
B) the ratio of net operating income to average invested assets.
C) the ratio of net operating income to sales revenue.
D) the ratio of profit margin to return on investment.

Question 53

Devon Inc. has a profit margin of 12% and an investment turnover of 2.5. Sales revenue is $600,000. What is the operating income?

A) $180,000
B) $28,800
C) $72,000
D) $240,000

Question 54

Residual income can be calculated as:

A) Operating income - (hurdle rate × average invested assets)
B) Segment margin - (hurdle rate × average invested assets)
C) Operating income - (ROI × average invested assets)
D) Operating income - investment turnover

Question 55

Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average invested assets are $500,000, and Avocado Company has an 8% cost of capital. What is the return on investment?

A) 8%
B) 10%
C) 16%
D) 20%

Question 56

Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average invested assets are $500,000 and Avocado Company has an 8% cost of capital. What is the investment turnover?

A) 10
B) 5
C) 2
D) 16

Question 57

Profit margin can be calculated as:

A) sales revenue/average invested assets.
B) operating income/sales revenue.
C) operating income/average invested assets.
D) average invested assets/sales revenue.

Question 58

Crawford Corp. has an ROI of 15% and a residual income of $10,000. If operating income equals $30,000, what is the amount of average invested assets?

A) $200,000
B) $66,667
C) $450,000
D) $150,000

Question 59

Which of the following statements is not correct about using the balanced scorecard for sustainability accounting?

A) The company could add an additional category to the existing balanced scorecard to capture sustainability objectives and metrics.
B) The company could create a separate balanced scorecard that focuses exclusively on sustainability objectives and metrics within the existing categories.
C) The company could focus exclusively on short-term metrics, creating sustainability in its operations.
D) The company could incorporate sustainability metrics within the existing balanced scorecarD.
The balance scorecard approach is aligned with sustainability accounting because it focuses on long-term goals (not short-term goals) that focus attention on more than simply financial or economic results.

Question 60

If the ROI of a project is greater than the hurdle rate, the residual income will be:

A) equal to operating income.
B) greater than zero.
C) greater than operating income.
D) greater than average invested assets.

Question 61

Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could use in the production of units that cost $175 in variable costs, plus the cost of the widget, to manufacture. Fern's variable costs are $60 per widget, and fixed manufacturing costs are applied at a rate of $36 per widget. Widgets sell on the open market for $105 each. Evergreen's policy is that internal transfers will be made at variable cost plus 20%. If Bark purchases the widgets from Fern, what will be the transfer price?

A) $72.00
B) $115.20
C) $126.00
D) $210.00

Question 62

Which of the following is not a limitation of return on investment?

A) Use of ROI may lead to goal incongruence.
B) ROI is a lagging indicator of financial performance.
C) ROI evaluates the short-term.
D) ROI is a commonly used measure for financial performance.

Question 63

Coral has a profit margin of 16% based on revenues of $400,000 and an investment turnover is 2. What is the residual income when the cost of capital is 10%?

A) $44,000
B) $20,000
C) $40,000
D) $64,000

Question 64

Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could use in the production of units that cost $175 in variable costs, plus the cost of the widget, to manufacture. Fern's variable costs are $60 per widget, and fixed manufacturing costs are applied at a rate of $36 per widget. Widgets sell on the open market for $105 each. Evergreen's policy is that internal transfers will be made at full cost. If Bark purchases the widgets from Fern, what will be the transfer price?

A) $60
B) $96
C) $105
D) $175

Question 65

Dade Corp. has residual income of $10,000. If operating income equals $30,000 and the minimum required rate of return is 8%, what are average invested assets?

A) $125,000
B) $375,000
C) $250,000
D) $500,000

Question 66

Colonial has an ROI of 18% based on revenues of $300,000. The investment turnover is 1.5 and residual income is $20,000. What is the hurdle rate?

A) 18%
B) 12%
C) 8%
D) 15%

Question 67

Howard has an ROI of 16% based on revenues of $400,000. The investment turnover is 2. What is the residual income if the cost of capital is 9%?

A) $64,000
B) $36,000
C) ($4,000)
D) $14,000

Question 68

Pine Corp. has revenues of $500,000 resulting in an operating income of $54,000. Invested assets total $600,000. Residual income is $18,000. Calculate the new residual income if sales increase by 10% and the profit margin and invested assets remain the same.

A) $23,400
B) $0
C) $3,240
D) $36,000

Question 69

King Corp. has revenues of $1,500,000 resulting in an operating income of $105,000. Average invested assets total $750,000, and the hurdle rate is 6%. Calculate the residual income if sales increase by 10% and the profit margin and invested assets remain constant.

A) $115,500
B) $45,000
C) $0
D) $70,500

Question 70

Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could use in the production of units that cost $175 in variable costs, plus the cost of the widget, to manufacture. Fern's variable costs are $60 per widget, and fixed manufacturing costs are applied at a rate of $36 per widget. Widgets sell on the open market for $105 each. Evergreen's policy is that internal transfers will be made at full cost plus 20%. If Bark purchases the widgets from Fern, what will be the transfer price?

A) $72.00
B) $115.20
C) $126.00
D) $210.00

Question 71

Killian Corp. has a residual income of $30,000 on invested assets of $450,000. If the hurdle rate is 10%, what is the operating income?

A) $30,000
B) $45,000
C) $3,000
D) $75,000

Question 72

Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could use in the production of units that cost $175 in variable costs, plus the cost of the widget, to manufacture. Fern's variable costs are $60 per widget, and fixed manufacturing costs are applied at a rate of $36 per widget. Widgets sell on the open market for $105 each. Evergreen's policy is that internal transfers will be made at variable cost. If Bark purchases the widgets from Fern, what will be the transfer price?

A) $60
B) $96
C) $100
D) $175

Question 73

Which of the following statements contrasting residual income with return on investment is correct?

A) ROI may lead to goal incongruence while residual income does not.
B) ROI is a lagging indicator while residual income is a leading indicator.
C) Residual income is a financial measure while return on investment emphasizes the customer perspective.
D) Residual income is a long-term measure while ROI is a short-term measure.

Question 74

Estate has an ROI of 16% based on revenues of $400,000. The residual income is $14,000 and the investment turnover is 2. What is the hurdle rate?

A) 16%
B) 8%
C) 9%
D) 18%

Question 75

A ________________ is the amount that one division charges when it sells goods or services to another division within the same company.

A) residual income
B) negotiated price
C) related price
D) transfer price

Question 76

The transfer pricing method that uses the price the company would charge external customers is the:

A) market price method.
B) cost-based method.
C) negotiation method.
D) balanced scorecard methoD.
The market price is the price that a company would charge to external customers; using that price for internal sales is the market price method of transfer pricing.

Question 77

The transfer pricing method that uses either the variable cost or the full cost as the basis for setting the transfer price is the:

A) market price method.
B) cost-based method.
C) negotiation.
D) balanced scorecard methoD.
The cost-based method uses cost as a basis for setting the transfer price.

Question 78

Reef Corp. has revenues of $500,000 resulting in an operating income of $54,000. Invested assets total $600,000, and the cost of capital is 6%. Calculate the increase in residual income if sales increase by 10% and the profit margin and invested assets remain the same.

A) $5,400
B) $24,000
C) $0
D) $7,500

Question 79

When negotiating a transfer price, the highest price the buyer will be willing to pay is the _____________, while the lowest price the seller will be willing to accept is the _______________.

A) market price; full cost
B) full cost; variable cost
C) market price; variable cost
D) variable cost; market price

Question 80

Which of the following is not a method used to determine transfer prices?

A) The market price method
B) The cost-based method
C) Negotiation
D) The balanced scorecard method