Deck 23: Decentralized Operations

Question 1

Operating expenses incurred for the entire business as a unit that are not subject to the control of individual department managers are called indirect expenses.

Answer 1

True

Question 2

A centralized business organization is one in which all major planning and operating decisions are made by top management.

Answer 2

True

Question 3

Separation of businesses into more manageable operating units is termed decentralization.

Answer 3

True

Question 4

The process of measuring and reporting operating data by responsibility centers is termed responsibility accounting.

Question 5

A decentralized business organization is one in which all major planning and operating decisions are made by top management.

Question 6

Developing and retaining quality managers are advantages of decentralization.

Question 7

Responsibility accounting reports that are given to lower-level managers are usually very detailed; in turn, higher-level managers will be given a summary report.

Question 8

One of the advantages of decentralization is that delegating authority to managers closest to the operation always results in better decisions.

Question 9

A responsibility center in which the authority over and responsibility for costs and revenues is vested in the department manager is termed a profit center.

Question 10

The plant managers in a cost center can be held responsible for major differences between budgeted and actual costs in their plants.

Question 11

A manager in a cost center also has responsibility and authority over the revenues.

Question 12

A responsibility center in which the department manager has responsibility for and authority over costs, revenues, and assets invested in the department is termed a cost center.

Question 13

The primary accounting tool for controlling and reporting for cost centers is a budget.

Question 14

The amount of detail presented in a budget performance report for a cost center depends on the level of management to which the report is directed.

Question 15

Sales commission expense for a department store is an example of a direct expense.

Question 16

The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers.

Question 17

The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer.

Question 18

Budget performance reports prepared for the vice president of production would generally contain less detail than reports prepared for the various plant managers.

Question 19

Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed direct operating expenses.

Question 20

In an investment center, the manager has the responsibility and the authority to make decisions that affect not only costs and revenues, but also the plant assets invested in the center.

Question 21

If the profit margin for a division is 8% and the investment turnover is 1.2, the return on investment is 9.6%.

Question 22

Depreciation expense on store equipment for a department store is an indirect expense.

Question 23

The profit center income statement should include only controllable revenues and expenses.

Question 24

Responsibility accounting reports for profit centers are normally in the form of income statements.

Question 25

The return on investment may be computed by multiplying investment turnover by the profit margin.

Question 26

Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of activity bases.

Question 27

Investment turnover (as used in determining the return on investment) focuses on the rate of profit earned on each sales dollar.

Question 28

The profit center income statement should include only revenues and expenses that are controlled by the manager.

Question 29

Controllable expenses are those that can be influenced by the decisions of the profit center management.

Question 30

The manager of the Furniture Department of a leading retailer does not control the salaries of departmental personnel.

Question 31

If the profit margin for a division is 11% and the investment turnover is 1.5, the return on investment is 7.3%.

Question 32

The underlying principle of allocating direct operating expenses to departments is to assign to each department an amount of expense proportional to the revenues of that department.

Question 33

The major shortcoming of income from operations as an investment center performance measure is that it ignores the amount of revenues earned by the center.

Question 34

The rates at which centralized services are charged to each division are called service department charge rates.

Question 35

Three measures of investment center performance are income from operations, return on investment, and residual income.

Question 36

Office salaries expense for a department store is an indirect expense.

Question 37

Service department charges are similar to the expenses of a profit center that purchased services from a source outside the company.

Question 38

Property tax expense for a department store's store equipment is an example of a direct expense.

Question 39

The manager of a profit center does not make decisions concerning the fixed assets invested in the center.

Question 40

If Division Q's yearly income from operations is $30,000 on invested assets of $200,000, the return on investment is 15%.

Question 41

The ratio of income from operations to sales is termed the profit margin component of the return on investment.

Question 42

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2.

Question 43

By using the return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals that will increase the overall return for the company.

Question 44

The profit margin component of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar.

Question 45

The major advantage of the return on investment over income from operations as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated.

Question 46

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum return on investment but also the total magnitude of income from operations earned by each division.

Question 47

If income from operations for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.

Question 48

If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3.

Question 49

The minimum acceptable divisional income from operations is set by top management by establishing a minimum return considered acceptable for invested assets.

Question 50

If divisional income from operations is $75,000, invested assets are $737,500, and the minimum return on invested assets is 6%, the residual income is $36,750.

Question 51

The minimum accepted divisional income from operations is set by top management by establishing a maximum return considered acceptable for invested assets.

Question 52

The excess of divisional income from operations over a minimum acceptable income from operations is termed the residual income.

Question 53

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.

Question 54

If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3.

Question 55

The ratio of sales to investment is termed the return on investment.

Question 56

In return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and indicates the rate at which sales are being generated for each dollar of invested assets.

Question 57

If divisional income from operations is $100,000, invested assets are $850,000, and the minimum return on invested assets is 8%, the residual income is $68,000.

Question 58

The ratio of sales to invested assets is termed the investment turnover component of the return on investment.

Question 59

A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable return on assets set by upper management.

Question 60

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 5.

Question 61

The negotiated price approach allows the managers of decentralized units to agree on the transfer price.

Question 62

The DuPont formula uses financial information to measure the performance of a business.

Question 63

The DuPont formula uses financial and nonfinancial information to measure the performance of a business.

Question 64

Which of the following is not a disadvantage of a decentralized operation?

A) competition among managers
B) duplication of operations
C) price cutting by departments that are competing in the same product market
D) top management freed from everyday tasks to do strategic planning

Question 65

The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so.

Question 66

A manager is responsible for costs only in a (n)

A) profit center
B) investment center
C) volume center
D) cost center

Question 67

The balanced scorecard is a set of financial and nonfinancial measures that reflect the performance of the business.

Question 68

The cost price approach for transfer pricing is most often used between responsibility centers organized as cost centers that are not concerned with the revenue.

Question 69

Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers.

Question 70

Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

Question 71

Which of the following is the best example of a decentralized operation?

A) one owner who prepares, plans, and makes decisions for the entire company
B) each unit is responsible for its own operations and decision making
C) in a major company, operating decisions are made by top management
D) None of these choices

Question 72

It is beneficial for divisions in a company to negotiate a transfer price when the supplying division has unused capacity in its plant.

Question 73

Which of the following would be most effective in a small owner-manager-operated business?

A) profit centers
B) centralization
C) investment centers
D) cost centers

Question 74

A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a (n)

A) profit center
B) investment center
C) volume center
D) cost center

Question 75

Which of the following is a disadvantage of decentralization?

A) Decisions made by one manager may negatively affect the profitability of the entire company.
B) Decentralization helps retain quality managers.
C) Managers closest to the operations make decisions.
D) Managers are able to acquire expertise in their areas of responsibility.

Question 76

Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

Question 77

All of the following are advantages of decentralization except

A) managers make better decisions when closer to the operations of the company
B) expertise in all areas of the business is difficult; decentralization makes it better to delegate certain responsibilities
C) each decentralized operation purchases its own assets and pays for operating costs
D) decentralized managers can respond quickly to customer needs

Question 78

In a cost center, the manager has responsibility and authority for making decisions that affect

A) revenues
B) investments in assets
C) both costs and revenues
D) costs

Question 79

Businesses that are separated into two or more manageable units in which managers have authority and responsibility for operations are said to be

A) decentralized
B) consolidated
C) diversified
D) centralized

Question 80

Which of the following is not one of the common types of responsibility centers?

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