Deck 12: Fundamentals of Management Control Systems

Question 1

Rational managers will always make decisions that are in the best interest of the organization employing them.

Answer 1

False

Question 2

In general, profit centers are found at higher levels in an organization than investment centers.

Answer 2

False

Question 3

Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured performance.

Answer 3

True

Question 4

Managers in a cost center are held responsible for both the costs and volumes of inputs used to produce a product or provide a service.

Question 5

The primary reason to use a dual-rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control.

Question 6

Delegated decision authority is the specification of what decisions a subordinate can make in the organization.

Question 7

Cost allocations based on dual rates assume that a common cost can be separated into a fixed component and a variable component.

Question 8

Properly designed management control systems will eliminate fraudulent behavior by maximizing goal congruence within the organization.

Question 9

Properly designed management control systems can totally eliminate the inherent conflict between individual behavior and organizational goals.

Question 10

The design and use of management control systems affects how an individual makes and implements decisions.

Question 11

Properly designed management control systems have both fixed compensation and contingent compensation.

Question 12

It is important to not consider an organization's compensation and reward system when designing its performance evaluation system.

Question 13

Decentralization is the delegation of the authority to make decisions in the organization's name to subordinates.

Question 14

Properly developed and implemented management control systems influence subordinates to act in the organization's best interest.

Question 15

One advantage of centralization is better use of top management's time on strategic decisions.

Question 16

One advantage of decentralization is faster response time to changes in the organization's environment by local managers.

Question 17

There is no single accounting measure that can fully measure the performance of a profit or investment center.

Question 18

In general, organizations are more centralized in the early stages of their existence and more decentralized as they grow.

Question 19

In general, there is a direct relationship between the quality of the information provided to managers and the quality of decisions made using that information.

Question 20

It is possible for performance evaluation systems and/or management control systems to contribute to unethical or fraudulent behavior.

Question 21

One of the key internal controls for any organization is separation of duties.

Question 22

Which of the following elements is not part of a management control system?

A) Delegated decision authority.
B) Performance evaluation system.
C) Knowledge of local conditions.
D) Compensation and reward system.

Question 23

The design and use of management control systems uses concepts from which of the following disciplines?

A) Demography.
B) Economics.
C) Trigonometry.
D) Physics.

Question 24

Which one of the following will not occur in an organization that gives managers throughout the organization maximum freedom to make decisions? (CMA adapted)

A) More effective solutions to operational problems.
B) Individual managers regard the managers of other segments as they do external parties.
C) Two divisions of the organization having competing models that aim for the same market segments.
D) Delays in securing approval for the introduction of new products.

Question 25

Which of the following statements is/are true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and implements decisions.
(B) Rational managers will always make decisions that are in the best interest of the organization employing them.

A) Only A is true.
B) Only B is true.
C) Both of these are true.
D) None of these is true.

Question 26

Which of the following statements is false?

A) The U.S. military is a good example of an organization that is highly decentralized.
B) The degree of decentralization depends on how many decisions principals delegate to agents.
C) Management control systems are used to measure the performance of an agent's decisions.
D) Most organizations have some operating units that are centralized and some that are decentralized.

Question 27

An operating unit of an organization is called an investment center if it is responsible:

A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.

Question 28

Internal controls are not legally required for publicly traded companies.

Question 29

Decentralization refers to the delegation of decision-making authority to:

A) top management.
B) superiors.
C) board of directors.
D) subordinates.

Question 30

What is the purpose of a management control system?

A) To align more closely the interests of the manager and the interests of the organization.
B) To allow individuals to obtain business experience.
C) To define the performance measures for employees.
D) To focus on the well-being of employees.

Question 31

Which of the following statements is true regarding decentralization?

A) Decentralization increases the complexity of problems.
B) Managers in a decentralized organization have less knowledge about local business advantages.
C) Decentralization limits fast responses to business changes.
D) Decentralization allows managers to receive on-the-job training in decision-making.

Question 32

An operating unit of an organization is called a cost center if it is responsible:

A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.

Question 33

Which of the following would be considered a principal in the principal-agent relationship?

A) A stockbroker in an investment arrangement.
B) A real estate agent for someone buying a house.
C) A customer leasing a car.
D) An employer hiring an employee.

Question 34

What is the primary managerial responsibility in an organization?

A) Development of employees.
B) Development of profits.
C) Decision making.
D) Development of performance measurements.

Question 35

Which of the following correctly defines a principal-agent relationship?

A) The relationship between a superior and a subordinate.
B) The relationship between two superiors.
C) The relationship between two subordinates.
D) The relationship between a supervisor and a subversive.

Question 36

________ is the delegation of decision-making authority to lower management levels within the organization.

A) Transfer pricing
B) Centralization
C) Decentralization
D) Goal congruence

Question 37

Which of the following is not a benefit of decentralization?

A) Allowing managers some autonomy in decision-making provides managerial training for future higher-level managers.
B) In a decentralized organization some tasks or services may be duplicated unnecessarily.
C) Managers with some decision-making authority usually exhibit greater motivation than those who merely execute the decisions of others.
D) Managers of the organization's subunits are specialists, thereby enabling them to manage their departments most effectively.

Question 38

Which of the following is not a cost of decentralization?

A) Managers in a decentralized organization might have a narrow focus on their own unit's performance rather than the attainment of their organization's overall goals.
B) Managers in a decentralized organization might make the same types of decisions that are being made at headquarters resulting in administrative duplication.
C) Delegating decision making to the lowest level possible enables an organization to respond in a timely way to opportunities and problems.
D) Delegating decision making to the lowest level possible may lead to poor decisions based on incomplete information.

Question 39

What does dysfunctional decision-making refer to?

A) Administrative duplication.
B) Local managers making decisions in their interests, which can differ from those of the organization.
C) Delegated decision authority.
D) Poor decisions based on incomplete information.

Question 40

Which of the following is not a characteristic of a decentralized organization?

A) Better use of local knowledge.
B) Better use of top management's time.
C) Reduced response time to environmental changes.
D) More decisions made by relatively few individuals.

Question 41

Assets invested in a responsibility center are included in a performance report of a:
$\begin{array} { cc} &\text { Profit Center } & \text { Investment Center } \\\end{array}$

A) $\begin{array} { cc} && \text { Yes } &&&&&& \text { No } \\\end{array}$
B) $\begin{array} { cc} && \text { Yes } &&&&&& \text { Yes } \\\end{array}$
C) $\begin{array} { cc} && \text { No } &&&&&& \text { No } \\\end{array}$
D) $\begin{array} { cc} && \text { No } &&&&&& \text { Yes } \\\end{array}$

Question 42

Decentralized organizations can delegate authority and still maintain control and monitor managers' performance by designing appropriate management control systems. Which of the following responsibility centers would be evaluated similar to an independent business? (CMA, adapted)

A) Profit center.
B) Revenue center.
C) Investment center.
D) Discretionary cost center.

Question 43

Which of the following statements is/are correct?
I) A profit center has control over both costs and revenues.
II) An investment center has control over invested funds, but not over costs and revenues.
III) A cost center has no control over sales.

A) Only I.
B) Only II.
C) Only I and III.
D) Only I and II.

Question 44

The purpose of the Data Processing Department of Haslam Corporation is to assist the various departments of the corporation with their information needs free of charge. The Data Processing Department would best be evaluated as a(n):

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

Question 45

A manager makes a decision that is beneficial for a specific investment center and for the entire organization. From the organization's perspective, this decision results in:

A) goal congruence.
B) decentralization.
C) contingent compensation.
D) fixed compensation.

Question 46

The least complex segment or area of responsibility for which costs are allocated is a(n): (CMA adapted)

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

Question 47

When managers are held responsible for costs and the input-output relationship is well specified, a(n) ________ is established.

A) cost center
B) revenue center
C) discretionary cost center
D) asset center

Question 48

Assets invested in a responsibility center are included in a performance report of a:
$\begin{array} { cc} &\text { Profit Center } & \text {Cost Center } \\\end{array}$
A. $\begin{array} { cc} && \text { Yes } &&&&&& \text { No } \\\end{array}$
B. $\begin{array} { cc} && \text { Yes } &&&&&& \text { Yes } \\\end{array}$
C. $\begin{array} { cc} && \text { No } &&&&&& \text { No } \\\end{array}$
D. $\begin{array} { cc} && \text { No } &&&&&& \text { Yes } \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 49

Controllable revenue is included in a performance report of a:
$\begin{array} {cc} &{ \text { Profit Center } } & { \text { Investment Center } } \\\end{array}$
A. $\begin{array} {cc} && \text { Yes } &&&&&& \text { No } \\\end{array}$
B. $\begin{array} {cc} && \text { Yes } &&&&&& \text { Yes } \\\end{array}$
C. $\begin{array} {cc} && \text { No } &&&&&& \text { No } \\\end{array}$
D. $\begin{array} {cc} && \text { No } &&&&&& \text { Yes } \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 50

An operating unit of an organization is called a revenue center if it is responsible:

A) only for costs.
B) for selling a product.
C) for all costs and revenues.
D) for investments in assets.

Question 51

Controllable revenue is included in a performance report of a:
$\begin{array} { cc} &{ \text { Revenue Center } } & { \text { Cost Center } } \\\end{array}$
A. $\begin{array} { cc} && \text { Yes } &&&&&& \text { No } \\\end{array}$
B. $\begin{array} { cc} && \text { Yes } &&&&&& \text { Yes } \\\end{array}$
C. $\begin{array} { cc} && \text { No } &&&&&& \text { No } \\\end{array}$
D. $\begin{array} { cc} && \text { No } &&&&&& \text { Yes } \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 52

When managers are held responsible for costs but the input-output relationship is not well specified, a(n) ________ is established.

A) standard cost center
B) revenue center
C) discretionary cost center
D) asset center

Question 53

An operating unit that is responsible for revenues only is commonly referred to as a(n):

A) expense center.
B) revenue center.
C) profit center.
D) asset center.

Question 54

An operating unit that is responsible for only costs is commonly referred to as a(n):

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

Question 55

Controllable revenue is included in a performance report of a:
$\begin{array} { cc} &\text { Cost Center } & \text { Profit Center } \\\end{array}$
A. $\begin{array} { cc} && \text { Yes } &&&&&& \text { No } \\\end{array}$
B. $\begin{array} { cc} && \text { Yes } &&&&&& \text { Yes } \\\end{array}$
C. $\begin{array} { cc} && \text { No } &&&&&& \text { No } \\\end{array}$
D. $\begin{array} { cc} && \text { No } &&&&&& \text { Yes } \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 56

An operating unit of an organization is called a profit center if it is responsible:

A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.

Question 57

An operating unit that is responsible for revenues and costs is commonly referred to as a(n):

A) expense center.
B) revenue center.
C) profit center.
D) asset center.

Question 58

Which of the following departments would not be a cost center?

A) County fire department.
B) University book store.
C) University power plant.
D) City building and grounds department.

Question 59

Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n): (CMA adapted)

A) profit center.
B) revenue center.
C) division.
D) operating unit.

Question 60

Which of the following subunits would most likely be considered a cost center?

A) Jewelry department.
B) Parts department.
C) Legal department.
D) Electronics department.

Question 61

Barrington Box Enterprises has two divisions, large and small, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year:
$$\begin{array} { | l | r | c | } \hline & { \text { Calls } } &{ \text { Time on Network (hours) } } \\\hline \text { Large } & 100,000 &120,000 \\\hline \text { Small } & 80,000 & 320,000 \\\hline\end{array}$$


-
The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is the total communication network costs allocated to the Large Box Division, assuming the company uses dual-rates to allocate common costs?

A) $2,700,000.
B) $2,520,000.
C) $1,980,000.
D) $1,500,000.

Question 62

Which of the following items would be classified as a fixed compensation item?

A) Administrative salaries.
B) Sales commissions.
C) Stock options.
D) Piece rates.

Question 63

When comparing performance report information for top management with that of lower-level management: (CMA adapted)

A) top management reports are more detailed.
B) lower-level management reports are typically for longer time periods.
C) top management reports show control over fewer costs.
D) lower-level management reports are likely to contain more quantitative data and less financial data.

Question 64

The Copy Department in the College of Business at State University provides photocopying services for both the Marketing and Economics Departments. The following budget has been prepared for the year.
$$\begin{array} { l c } \text { Available capacity } & 6,000,000 \text { pages } \\\text { Budgeted usage: } & \\\text { Marketing } & 3,600,000 \text { pages } \\\text { Economics } & 1,800,00 \text { pages } \\\text { Cost equation } & \$ 120,000 + \$ 0.025 \text { per page }\end{array}$$

-
If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Marketing Department?

A) $85,000.
B) $90,000.
C) $150,000.
D) $170,000.

Question 65

Barrington Box Enterprises has two divisions, large and small, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year:
$$\begin{array} { | l | r | c | } \hline & { \text { Calls } } &{ \text { Time on Network (hours) } } \\\hline \text { Large } & 100,000 &120,000 \\\hline \text { Small } & 80,000 & 320,000 \\\hline\end{array}$$


-
The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is total communication network costs allocated to the Small Box Division, assuming the company uses dual-rates to allocate common costs?

A) $2,520,000.
B) $1,800,000.
C) $1,320,000.
D) $1,200,000.

Question 66

Barrington Box Enterprises has two divisions, large and small, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year:
$$\begin{array} { | l | r | c | } \hline & { \text { Calls } } &{ \text { Time on Network (hours) } } \\\hline \text { Large } & 100,000 &120,000 \\\hline \text { Small } & 80,000 & 320,000 \\\hline\end{array}$$

-
What is the allocation rate for the upcoming year, assuming Barrington Box uses the single-rate method and allocates common costs based on the number of calls?

A) $10.00.
B) $15.00.
C) $20.00.
D) $25.00.

Question 67

In responsibility accounting, a center's performance is measured by those costs which are controllable. Controllable costs are best described as including: (CMA adapted)

A) direct materials and direct labor only.
B) only those costs that the manager can influence in the current period.
C) only discretionary costs.
D) those costs about which the manager is knowledgeable and informed.

Question 68

Which of the following statements is/are false regarding the effective use of management control systems?
(A) In general, single rate cost allocations should not be used in management control systems because clear control over the cost being allocated cannot be determined.
(B) The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control.

A) Only A is false.
B) Only B is false.
C) Both of these are false.
D) None of these is false.

Question 69

The use of dual rates in a cost allocation system assumes that common costs can be:

A) separated into their fixed and variable components.
B) traced directly to a specific division or manager.
C) allocated based on a physical quantities measure.
D) assigned to an investment responsibility center.

Question 70

Revenue center and profit center managers are both responsible for meeting:

A) Budgeted income.
B) Budgeted costs.
C) Budgeted revenues.
D) Minimum return on investment as established by the company as a whole.

Question 71

Which of the following items would not be classified as a contingent compensation item?

A) Administrative salaries.
B) Sales commissions.
C) Stock options.
D) Piece rates.

Question 72

Which of the following subunits is most likely to be considered an investment center?

A) Accounting department.
B) Assembly department.
C) Petrochemical division.
D) Research and development department.

Question 73

Banglor Manufacturing Corporation uses a responsibility accounting system in its operations. Which one of the following items is least likely to appear in a performance report for a manager of one of Banglor's assembly lines? (CMA adapted)

A) Direct labor.
B) Materials.
C) Repairs and maintenance.
D) Depreciation on the manufacturing facility.

Question 74

The following is a summarized income statement for McClaron Manor Co.'s profit center 12608 for April:
$\begin{array}{l}\text { Contribution Margin }&&\$175,000\\\text { Period Expenses } & \$ 11,000\\\text { Manager' s Salary } & \$ 2,000 \\\text { Corporate Expense Allocation } & \$ 8,000&\$(21,000)\\\text { Net Income }&&\$154,000\end{array}$
Which of the following amounts is most likely subject to the control of the profit center's manager? (CPA, adapted)

A) Contribution Margin of $175,000.
B) Contribution Margin of $175,000 and Period Expenses of $11,000.
C) Contribution Margin of $175,000 and Period Expenses of $13,000.
D) Contribution Margin of $175,000 and Period Expenses of $21,000.

Question 75

Relative performance evaluations (RPE) are not designed to:

A) compare managers to other comparable managers.
B) compare divisions with other comparable divisions.
C) remove the effect of environmental factors that are beyond a manager's control.
D) restate departmental goals so meaningful comparisons can be made.

Question 76

The controllability concept states that managers should be held responsible for:

A) all items over which they have decision-making authority.
B) costs and revenues, but not investments in assets used in their division.
C) only items that are allocated to their divisions on a per-unit basis.
D) fixed compensation items, but not contingent compensation items.

Question 77

Which of the following is the purpose of relative performance evaluation (RPE)?

A) To ensure that all managers are subjected to identical evaluations.
B) To hold managers accountable for all divisions, regardless of control or responsibility.
C) To evaluate management on internal targets only to avoid ambiguity.
D) To compare managers or divisions to other comparable managers and divisions.

Question 78

A successful responsibility accounting reporting system is dependent upon (CMA adapted):

A) The correct allocation of controllable variable costs.
B) Identification of the management level at which all costs are controllable.
C) The proper delegation of responsibility and authority.
D) A reasonable separation of costs into their fixed and variable components since fixed costs are not controllable and must be eliminated from the responsibility report.

Question 79

Barrington Box Enterprises has two divisions, large and small, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year:
$$\begin{array} { | l | r | c | } \hline & { \text { Calls } } &{ \text { Time on Network (hours) } } \\\hline \text { Large } & 100,000 &120,000 \\\hline \text { Small } & 80,000 & 320,000 \\\hline\end{array}$$


-
What is the allocation rate for the upcoming, year assuming Barrington Box uses the single-rate method and allocates common costs based on the time on the network ?

A) $10.98.
B) $10.00.
C) $8.00.
D) $7.14.

Question 80

Which of the following statements is/are true regarding compensation?
(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured performance.
(B) Properly designed management control systems have contingent compensation items but not fixed compensation items.

A) Only A is true.
B) Only B is true.
C) Both of these are true.
D) None of these is true.