Deck 9: Evaluating Decentralized Operations

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

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 8

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.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

Developing and retaining quality managers are advantages of decentralization.

Question 17

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

Question 18

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

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

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

The manager of the furniture department of a leading retailer does not control the salaries of departmental personnel.

Question 29

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 30

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 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on investment is 9.6%.

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

In rate of 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

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

Question 44

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

Question 45

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 46

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

Question 47

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

Question 48

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 49

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 50

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

Question 51

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 52

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 53

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

Question 54

The major advantage of the rate of 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 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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 61

Which of the following is not a disadvantage of 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 62

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 63

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 64

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 65

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 66

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 67

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

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

Question 68

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 69

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

Question 70

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

Question 71

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

Question 72

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

Question 73

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

Question 74

Which 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 their own operations and decision making
C) in a major company, operating decisions are made by top management
D) none of these, all are examples of a centralized operation

Question 75

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

Question 76

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 77

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 78

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 79

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 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.