Deck 10: Management Control in Decentralized Organizations

Question 1

________ 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

Answer 1

B

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 can develop management skills.
D) Managers in decentralized units may spend time negotiating transfer prices for goods transferred between units.

Answer 2

D

Question 3

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

Answer 3

True

Question 4

The lower in the organization that authority is delegated,the greater the decentralization.

Question 5

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

Question 6

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 7

All of the following are disadvantages of decentralization EXCEPT for ________.

A) Local managers make decisions that are not in the organization's best interests.
B) Managers spend time negotiating transfer prices for goods and services transferred between divisions and segments.
C) Local managers duplicate services.
D) Local managers have more authority and greater levels of job satisfaction.

Question 8

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 managerial effort and goal congruence.
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 9

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

Question 10

The concentration of decision-making authority only at the highest levels of the organization is called ________.

A) management by objective
B) balanced scorecard
C) decentralization
D) centralization

Question 11

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

Question 12

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

Question 13

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

Question 14

Decentralization is more successful in organizations when ________.

A) multiple segments buy from the same outside suppliers
B) multiple segments sell to the same customers
C) there are frequent purchases and sales made between segments of the organization
D) an organization's segments are relatively independent of each other

Question 15

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

Question 16

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

Question 17

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

Question 18

The management control system should be designed to achieve the best possible alignment between ________ and ________.

A) cost centers; profit centers
B) local managers' decisions; upper managers' bonuses
C) employee behavior; agency theory
D) local managers' decisions; the actions upper management seeks

Question 19

A disadvantage of decentralization in organizations is higher overhead costs due to duplication.

Question 20

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

Question 21

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

Question 22

The following information is available for the Thompson Company:
$\begin{array} { l } \text { Sales for year}&\$ 1,000,000\\ \text { Average invested capital for year}&\$500,000\\ \text {return on investment }&10\%\end{array}$

What is the capital turnover ratio?

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

Question 23

Julie Company's revenues for the year are $300 and average invested capital for the year is $240.Expenses are currently 50% of revenues.Julie Company's current return on investment is ________.

A) 50%
B) 62.5%
C) 80%
D) 100%

Question 24

Sterling Company's revenues are $300 for the year.Average invested capital for the year is $240.Expenses are currently 70% of revenues.If Sterling Company can reduce its average invested capital by 25%,return on investment will be ________.

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

Question 25

Maury Company's revenues are $300 for the year.Average invested capital for the year is $240.Expenses are currently 84% of revenues.If Maury Company can reduce its expenses to 70% of revenues,return on investment will be ________.

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

Question 26

Which of the following statements is FALSE about performance metrics?

A) The cost benefit criterion leads companies to rely on imperfect, low-cost performance metrics.
B) The more a manager's reward depends on a performance metric, the more incentive 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 27

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 28

Profit-center managers always have more decentralized decision-making authority than cost-center managers.

Question 29

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

A) managerial effort
B) organizational objectives
C) ethical behavior
D) agency theory

Question 30

Incentives do not increase managerial effort toward goal congruence.

Question 31

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

Question 32

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 33

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 an undesirable outcome will be achieved
D) the influence of uncontrollable factors on a manager's performance

Question 34

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 35

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 36

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

Question 37

The following information is available for the Paul Ryan Company:
$\begin{array}{ll}\text { Sales for year } & \$ 150,000 \\\text { Average invested capital for year } & \$ 156,250 \\\text { Returnon investment } & 10 \%\end{array}$
What is the return on sales?

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

Question 38

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 39

Performance-based rewards can be monetary or nonmonetary.

Question 40

The following information is available for the Stanley Company:
$\begin{array} { l } \text { Sales for year}&\$ 1,000,000\\ \text { Average invested capital for year}&\$312,500\\ \text {return on investment }&20\%\end{array}$

What is the operating income?

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

Question 41

The following information pertains to Sanjay Company:
$\begin{array}{ll}\text { Total assets } & \$ 50,000 \\\text { Total current liabilities } & \$ 30,000 \\\text { Total expenses } & \$ 60,000 \\\text { Total liabilities } & \$ 45,000 \\\text { Total revenues } & \$ 100,000\end{array}$
Invested capital is defined as total assets.What is the capital turnover?

A) 0.40
B) 0.63
C) 1.79
D) 2.00

Question 42

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

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

Question 43

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 44

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 45

The following information pertains to Garcia Company:
$\begin{array}{ll}\text { Total assets } & \$ 50,000 \\\text { Net operating profit after taxes } & \$ 10,000 \\\text { Total current liabilities } & \$ 10,000 \\\text { Total expenses } & \$ 60,000 \\\text { Total liabilities } & \$ 15,000 \\\text { Total revenues } & \$ 80,000\end{array}$
Invested capital is defined as total assets minus current liabilities.The after-tax cost of capital is 20%.What is the residual income?

A) $2,000
B) $4,000
C) $12,000
D) $20,000

Question 46

The following information pertains to the Vertigo Company:
$\begin{array}{ll}\text { Total assets } & \$ 150,000 \\\text { Total current liabilities } & \$ 110,000 \\\text { Total expenses } & \$ 70,000 \\\text { Total liabilities } & \$ 115,000 \\\text { Total revenues } & \$ 80,000\end{array}$
Return on sales equals ________.

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

Question 47

The following information pertains to Arnez Company:
$\begin{array}{ll}\text { Total assets } & \$ 150,000 \\\text { Net operating profit after taxes } & \$ 12,000 \\\text { Total current liabilities } & \$ 110,000 \\\text { Total expenses } & \$ 160,000 \\\text { Total liabilities } & \$ 115,000 \\\text { Total revenues } & \$ 180,000\end{array}$
Invested capital is defined as total assets minus current liabilities.The after-tax cost of capital is 10%.What is the economic profit?

A) $8,000
B) $20,000
C) $40,000
D) $50,000

Question 48

Return on investment can be computed as ________ times ________.

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

Question 49

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 50

Operating income divided by sales is ________.

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

Question 51

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 after tax interest expense
D) using taxes paid rather than tax expense

Question 52

Gonzalez Company reports the following information:
$\begin{array}{ll}\text { Net operating income after taxes } & \$ 200,000 \\\text { Before-tax operating income } & \$ 300,000 \\\text { Average invested capital } & \$ 500,000 \\\text { After-tax cost of capital } & 10 \%\end{array}$
What is the residual income for Gonzalez Company?

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

Question 53

________ 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 54

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

A) $187 million
B) $292 million
C) $477 million
D) $667 million

Question 55

When measuring invested capital for purposes of calculating return on investment,managers in practice predominantly use ________.

A) net book value at current cost
B) net book value at historical cost
C) gross book value at historical cost
D) gross book value at replacement cost

Question 56

Garcia Company reports the following information:
$\begin{array}{ll}\text { Net operating income after taxes } & \$ 100,000 \\\text { Before-tax operating income } & \$ 300,000 \\\text { Average invested capital } & \$ 500,000 \\\text { After-tax cost of capital } & 10 \%\end{array}$
What is the residual income for Garcia Company?

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

Question 57

Gokey Company reports the following information:
$\begin{array} { l } \text {Net operating profit after taxes }&\$400,000 \\ \text {Adjusted net operating profit after taxes }&\$570,000 \\ \text {Average invested capital }&\$ 600,000\\ \text {Adjusted average invested capital }&\$700,000 \\ \text { After-taxcost of capital}&10\%\\\end{array}$

The adjusted figures reflect adjustments used by Stern Stewart & Company.What is the EVA for Gokey Company?

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

Question 58

Sanchez Company reports the following information:
$\begin{array} { l } \text {Net operating profit after taxes }&\$500,000 \\ \text {Adjusted net operating profit after taxes }&\$670,000 \\ \text {Average invested capital }&\$ 500,000\\ \text {Adjusted average invested capital }&\$700,000 \\ \text { After-taxcost of capital}&10\%\\\end{array}$

The adjusted figures reflect adjustments used by Stern Stewart & Company.What is the EVA for Sanchez Company?

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

Question 59

The following information pertains to Kumperor Company:
$\begin{array}{ll}\text { Average total assets } & \$ 100,000 \\\text { Total current liabilities } & \$ 30,000 \\\text { Total expenses } & \$ 60,000 \\\text { Total liabilities } & \$ 35,000 \\\text { Total revenues } & \$ 80,000\end{array}$
Invested capital is defined as total assets.What is the return on investment?

A) 20%
B) 60%
C) 70%
D) 160%

Question 60

The following information pertains to Singh Company:
$\begin{array}{ll}\text { Average total assets } & \$ 50,000 \\\text { Net operating profit after taxes } & \$ 15,000 \\\text { Total current liabilities } & \$ 30,000 \\\text { Total expenses } & \$ 60,000 \\\text { Total liabilities } & \$ 35,000 \\\text { Total revenues } & \$ 80,000\end{array}$
Invested capital is defined as total assets.The capital charge is 10%.What is the residual income?

A) $1,600
B) $10,000
C) $15,000
D) $20,000

Question 61

The proponents of gross book value for purposes of calculating return on investment maintain that it facilitates comparisons between years and between plants or divisions.

Question 62

Capital turnover can be increased by decreasing investment.

Question 63

The following information is available for Pohler Company:
$\begin{array}{lclc}\text { Current assets } & \$ 100,000 &{\text { Current liabilities }} & \$ 75,000 \\\text { Property, plant and } & & \text { Long-term liabilities } & 100,000 \\\text { equipment } & 50,000 & \text { Stockholders'equity } & 125,000 \\\text { Other assets } & {150,000} & \text { Total liabilities and } \\\text { Total assets } &{\$ 300,000}& \text { stockholders'equity } & \$ 300,000\\\end{array}$
Invested capital is defined as total assets.Before-tax operating profit is $175,000.After-tax operating profit is $125,000.The after-tax cost of capital is 10%.What is economic profit?

A) $95,000
B) $125,000
C) $145,000
D) $175,000

Question 64

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

Question 65

Possible definitions of invested capital for purposes of calculating return on investment include total assets and total stockholders' equity.

Question 66

Return on sales can be increased by increasing expenses.

Question 67

Historical cost is widely used for asset valuation in calculating return on investment because ________.

A) it reports the replacement cost of long-term assets
B) it is more subjective than other approaches
C) it requires additional data collection
D) the cost of obtaining additional data exceeds the benefit

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

Managers evaluated using net book value for plant assets will tend to replace assets sooner than managers evaluated using gross book value.

Question 70

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

Question 71

Return on investment equals operating income divided by investment.

Question 72

The following information is available for Arnett Company:
$\begin{array}{lclr}\text { Current assets } & \$ 100,000 & \text { Current liabilities } & \$ 175,000 \\\text { Property, plant and } & & \text { Long-term liabilities } & 100,000 \\\text { equipment } & 150,000 & \text { Stockholders' equity } & 25,000\\\text { Other assets }&50,000&\text { Total liabilities and }\\\text { Total assets }&\$300,000&\text { stockholders' equity }&\$300,000\end{array}$
Invested capital is defined as total assets.Net operating income is $60,000.What is ROI?

A) 20%
B) 30%
C) 50%
D) 120%

Question 73

The rate of return on net book value for equipment decreases as the equipment ages.

Question 74

EVA uses after-tax numbers for operating income.

Question 75

The following information is available for Applegate Company:
$\begin{array}{llll}\text { Current assets } & \$ 100,000 & \text { Current liabilities } & \$ 175,000 \\\text { Property, plant and } & & \text { Long-term liabilities } & 100,000 \\\text { equipment } & 150,000 & \text { Stockholders'equity } & \underline{25,000}\\\text { Other assets } & {50,000}&\text { Total liabilities and }\\\text { Total assets } & \$ 300,000&\text { stockholders'equity }&\$ 300,000\end{array}$
Invested capital is defined as total assets less current liabilities.The after-tax operating income is $150,000.The after-tax cost of capital is 20%.The before-tax operating income is $200,000.What is the residual income?

A) $90,000
B) $120,000
C) $125,000
D) $175,000

Question 76

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

Question 77

Return on sales equals revenue divided by income.

Question 78

Capital turnover equals revenue divided by invested capital.

Question 79

The use of net book value for plant assets promotes a more conservative approach to asset replacement when compared to gross book value.

Question 80

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