Deck 10: Management Control in Decentralized Organizations

Question 1

Decentralization is most successful when an organization's segments are relatively independent of one another.

Answer 1

True

Question 2

Which of the following statements is NOT a benefit of decentralization?

A)Lower-level managers are able to make faster and better decisions on local decisions than higher-level managers.
B)By delegating decision-making authority to local managers,higher-level managers free up time to deal with larger issues and fundamental strategy.
C)Local managers who are given more authority often have greater motivation and job satisfaction.
D)Managers in decentralized units may spend time negotiating transfer prices for goods transferred between units.

Answer 2

D

Question 3

________ is the process by which organizations concentrate decision making within a particular location or group.

A)Management by objective
B)Balanced scorecard
C)Decentralization
D)Centralization

Answer 3

D

Question 4

A firm is a good candidate for decentralization if ________.

A)segments buy from the same suppliers
B)segments sell to the same customers
C)there is frequent transferring of products between segments
D)an organization's segments are relatively independent of each other

Question 5

The decentralization of organizations has several disadvantages that include ________.

A)lower level managers can make faster decisions than higher level managers.
B)innovative ideas are less likely to be shared in decentralized organizations.
C)local managers are given the opportunity to develop decision making skills so they can move up in the organization.
D)higher level managers are given more time to pursue strategy issues.

Question 6

The increasing sophistication of telecommunications facilitates decentralization in organizations.

Question 7

The lower in the organization that the freedom to make decisions exists,the greater the centralization.

Question 8

Segment autonomy means that the activities of segment managers are directed by top managers.

Question 9

Decentralization may increase a firm's costs because ________.

A)lower level managers duplicate services that may be less expensive if centralized
B)information costs rise as top management needs additional reports to learn about decentralized units
C)lower level managers may make decisions that are not in the best interests of the firm as a whole
D)all of the above

Question 10

The costs of accumulating and processing information frequently decline under decentralization.

Question 11

Local managers in decentralized organizations tend to duplicate services that may be less expensive if centralized.

Question 12

Decentralization is more popular in nonprofit organizations than profit-seeking organizations.

Question 13

Managers in decentralized units may waste time negotiating with other units about goods or services one unit transfers to the other.

Question 14

If the segments in a firm buy from the same outside suppliers all the time,they are good candidates for decentralization.

Question 15

________ is the delegation of decision-making power to segment managers of an organization.

A)Goal congruence
B)Segment autonomy
C)Managerial effort
D)Segment contribution

Question 16

Decentralization is the delegation of freedom to make decisions.

Question 17

Higher-level managers have the best information concerning local conditions.

Question 18

Some level of decentralization in an organizational structure creates benefits for most organizations.

Question 19

Define decentralization and identify its expected benefits.

Question 20

When compared to a decentralized organization,there are really no advantages to a centralized organization.

Question 21

Employees have a higher incentive to work when the bonus portion of an employment contract is larger than the guaranteed portion of the contract.

Question 22

An ideal performance metric would measure and reward the manager for ________ factors and neither reward nor punish the manager for ________ factors.

A)allocated; unallocated
B)controllable; uncontrollable
C)unallocated; allocated
D)uncontrollable; controllable

Question 23

The greater the influence of noncontrollable factors on responsibility center results,the more problems there are in using the results to measure and reward a manager's performance.

Question 24

Frazier Company's revenues are $300 on invested capital of $240.Expenses are currently 84% of sales.If Frazier Company can reduce its expenses to 70% of sales,return on investment will be ________.

A)20%
B)37.5%
C)70%
D)93.75%

Question 25

According to agency theory,employment contracts will balance three factors that include ________.

A)cost-benefit,risk and uncontrollable factors
B)goal congruence,incentive and risk
C)cost of measuring performance,cost-benefit and risk
D)incentive,risk and cost of measuring performance

Question 26

Profit centers can exist only in a decentralized organization.

Question 27

Companies must pay managers more if the managers bear more risk,assuming the managers are risk averse.

Question 28

Managers' incentives for performance are defined as the ________.

A)relationship between cost and perceived benefit
B)relationship between goal congruence and managerial effort
C)rewards for managerial effort and actions
D)influence of uncontrollable factors on a manager's performance

Question 29

Incentives do not increase managerial effort toward goal congruence.

Question 30

Jewel Company's revenues are $300 and invested capital is $240.Expenses are currently 60% of sales.Jewel Company's current return on investment is ________.

A)50%
B)60%
C)80%
D)100%

Question 31

Identify the disadvantages of decentralization.

Question 32

Which of the following statements about management control systems is FALSE?

A)In designing management control systems,top managers must consider the system's impact on the employee behavior desired by the organization.
B)The management control system should be designed to achieve the best possible alignment between local manager decisions and the actions central management seeks.
C)The design of a management control system should consider the responsibilities of managers and the amount of autonomy they have.
D)Profit-center managers always have more decentralized decision-making authority than cost-center managers.

Question 33

Performance-based rewards can be monetary or nonmonetary.

Question 34

In agency theory,risk to the manager is defined as ________.

A)probability that a desired outcome will not be achieved
B)possibility that performance will be measured inaccurately
C)probability that a desired outcome will be achieved
D)the influence of uncontrollable factors on a manager's performance

Question 35

According to agency theory,employment contracts will balance three factors that include risk,incentive and the cost of measuring performance.

Question 36

In return on investment calculations,we should measure invested capital ________ because ________.

A)at the end of the period; it is easiest
B)at the end of the period; income is measured at the end of the period
C)at the beginning of the period; it is a lead indicator
D)as an average for the period under review; income is measured over a period of time

Question 37

Organizations should choose performance metrics that improve the alignment of managerial incentives with ________.

A)managerial effort
B)organizational objectives
C)ethical behavior
D)goal congruence

Question 38

In designing accounting control systems,top managers should consider the system's impact on the behavior of employees.

Question 39

Which statement is FALSE about performance metrics?

A)The cost benefit criterion leads companies to rely on imperfect performance metrics.
B)The more a manager's reward depends on a performance metric,the more incentives the manager has to take actions to maximize that measure.
C)Top management should define the performance metric to promote goal congruence and base enough reward on it to achieve managerial effort.
D)The more uncontrollable factors affect a manager's reward,the less risk the manager bears.

Question 40

Managers tend to focus their efforts in areas where performance is measured and where their performance affects rewards.

Question 41

Which of the following adjustments to after-tax operating income is used to approximate cash income for EVA?

A)expensing research and development costs
B)using LIFO inventory method
C)deducting interest payable
D)using taxes paid rather than tax expense

Question 42

The following information is available for the Super Company: What is the operating income?

A)$62,500
B)$100,000
C)$312,500
D)$687,500

Question 43

Return on investment can be computed as ________ times ________.

A)residual income; capital turnover
B)cost of capital; EVA
C)return on sales; capital turnover
D)net income; cost of capital

Question 44

Yun Company reports the following information: The adjusted figures reflect adjustments used by Stern Stewart & Company.What is the EVA for Yun Company?

A)$330,000
B)$340,000
C)$500,000
D)$510,000

Question 45

SS Company's revenues are $300 on invested capital of $240.Expenses are currently 70% of sales.If SS Company can reduce its invested capital by 25%,return on investment will be ________.

A)18.75%
B)50.00%
C)75.00%
D)93.75%

Question 46

Pearson Company reports the following information: What is the residual income for Pearson Company?

A)$30,000
B)$50,000
C)$250,000
D)$450,000

Question 47

Julio Company's after-tax operating income was $882 million.Total assets were $5,900 million and total stockholders' equity was $4,050 million.Julio Company's cost of capital was 10%.Julio Company uses total assets as the measure of invested capital.What is Julio Company's EVA?

A)$187 million
B)$292 million
C)$597 million
D)$667 million

Question 48

Economic profit is ________ less ________.

A)net operating profit; capital charge
B)residual income; capital charge
C)income before interest expense and taxes; capital charge
D)income before interest expense but after taxes; capital charge

Question 49

Residual income is defined as ________.

A)sales less operating expenses
B)operating income divided by revenue
C)net operating profit after tax less a capital charge
D)net operating profit after tax

Question 50

Why do some companies prefer the use of economic profit over return on investment in decision-making?

A)The calculations for economic profit are easier.
B)The data needed to calculate return on investment are not always available.
C)Return on investment can motivate managers to make investment decisions that are not in the best interests of the company as a whole.
D)The concept behind economic profit is more logical.

Question 51

An increase in either capital turnover or return on sales,without changing the other,will also ________ the ________.

A)increase; gross book value of long-term assets
B)increase; return on investment
C)increase; cost of capital
D)increase: net book value of long-term assets

Question 52

Trompeter Company reports the following information: What is the residual income for Trompeter Company?

A)$30,000
B)$50,000
C)$150,000
D)$250,000

Question 53

The following information is available for the Peter Company: What is the return on sales?

A)10.00%
B)10.42%
C)62.50%
D)100.00%

Question 54

Yoon Company reports the following information: The adjusted figures reflect adjustments used by Stern Stewart & Company.
What is the EVA for Yoon Company?

A)$430,000
B)$450,000
C)$600,000
D)$620,000

Question 55

The following information is available for the Trompeter Company: What is the capital turnover ratio?

A)0.10
B)0.35
C)0.50
D)2.00

Question 56

Anne Company reports the following information: What is the economic profit for Anne Company?

A)$30,000
B)$50,000
C)$250,000
D)$450,000

Question 57

Operating income divided by sales is ________.

A)residual income
B)capital turnover
C)return on investment
D)return on sales

Question 58

To calculate economic value added,several adjustments are made to after tax operating profit that include ________ and ________.

A)the use of LIFO inventory valuation; capitalization of research and development costs
B)taxes paid rather than tax expense; capitalization of research and development costs
C)the use of average cost inventory valuation; current costs of fixed assets
D)the use of LIFO inventory valuation; current costs of fixed assets

Question 59

________ is a measure of income divided by the investment required to obtain that income.

A)Return on sales
B)Capital turnover
C)Return on investment
D)Residual income

Question 60

The following information pertains to the Voyager Company: Return on sales equals ________.

A)12.5%
B)50.0%
C)75.0%
D)133.0%

Question 61

Return on sales can be increased by increasing expenses.

Question 62

From the view of the company as a whole,managers should accept investment projects that earn more than the ________.________ should not be used for investment decisions.

A)return on investment; Return on sales
B)return on sales; Capital turnover
C)cost of capital; Return on investment
D)capital turnover; Return on sales

Question 63

The following data are available for three divisions of Beck Company:
Required:
Compute the missing data.

Question 64

Return on investment equals income divided by investment.

Question 65

When a company measures performance using economic profit,managers tend to invest in any project earning more than the cost of capital and,as a result,increase the firm's total profits.

Question 66

Nelson Company has two divisions.The following information is available:
Required:
Compute the following for each division:

A)Return on investment
B)Return on sales
C)Capital turnover
D)Residual income

Question 67

Return on sales can be computed by multiplying return on investment by the capital turnover.

Question 68

In general,use of economic profit or EVA will promote goal congruence and lead to better investment decisions than the use of ROI.

Question 69

Cost of capital is the company's cost of inventory multiplied by the amount of investment.

Question 70

Return on investment equals return on sales divided by capital turnover.

Question 71

In all return on investment calculations,invested capital should be measured as an average for the period under review.

Question 72

Return on investment tells how much a company's operating income exceeds what it is paying for capital.

Question 73

Increasing capital turnover is one of the advantages of implementing the JIT philosophy.

Question 74

Return on sales equals revenue divided by income.

Question 75

EVA uses after-tax numbers for operating income.

Question 76

Companies using EVA consider research and development to be a capital investment.

Question 77

EVA equals adjusted after-tax operating income minus capital turnover.

Question 78

The following information is available for the Jaeger Company:
Required:

A)Compute capital turnover.
B)Compute operating income.
C)Compute return on sales.

Question 79

Capital turnover equals revenue divided by invested capital.

Question 80

Capital turnover can be increased by decreasing investment.