Deck 24: Evaluating Decentralized Operations

Question 1

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

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

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

Answer 3

False

Question 4

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

Question 5

Operating expenses incurred by support departments are indirect expenses to a profit center.

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

Developing and retaining quality managers are advantages of decentralization.

Question 11

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

Question 12

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 13

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

Question 14

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 15

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

Question 16

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

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

The Human Resources Department in a department store is an example of a support department.

Question 19

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 20

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

Question 21

The rates at which centralized services are charged to each division are called support department allocation rates.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of cost drivers.

Question 29

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 on investment for the company.

Question 30

Support department allocations are similar to the expenses of a profit center that purchases services from a source outside the company.

Question 31

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

Question 32

The major shortcoming of operating income as an investment center performance measure is that it ignores the amount of assets invested in the center.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 to the total magnitude of operating income earned by each division.

Question 42

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 43

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

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

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 46

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

Question 47

The minimum accepted divisional operating income is set by top management by establishing a maximum return considered acceptable on invested assets.

Question 48

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 49

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 50

If divisional operating income 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 ratio of operating income to sales is termed the profit margin component of the return on investment.

Question 52

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

Question 53

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

Question 54

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

Question 55

The minimum acceptable divisional operating income is set by top management by establishing a minimum return considered acceptable on invested assets.

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

Most manufacturing plants are considered cost centers because they have control over

A)sales and costs
B)fixed assets and costs
C)costs only
D)fixed assets and sales

Question 62

For higher levels of management, responsibility accounting reports

A)are more detailed than for lower levels of management
B)are more summarized than for lower levels of management
C)contain about the same level of detail as reports for lower levels of management
D)are rarely provided or reviewed

Question 63

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 64

The right or license granted to an individual or group to market another company's goods or services is called a franchise.

Question 65

Which of the following statements best describes a decentralized company?

A)One owner prepares plans and makes decisions for the entire company.
B)Each of many units is responsible for its own operations and decision making.
C)For a major company, operating decisions are made by top management.
D)None of these choices describe a decentralized company.

Question 66

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

Question 67

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

Question 68

A franchise fee is often expressed as a percent of revenues earned by the franchisee.

Question 69

The right or license granted to an individual or group to market another company's goods or services is called a patent.

Question 70

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

Question 71

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 72

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 73

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

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

Question 74

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 75

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 76

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

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

Question 77

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

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 78

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 79

The right or license granted to an individual or group to market another company's goods or services is called a franchise.

Question 80

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.