Deck 14: Performance Evaluation for Decentralized Operations

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Personnel administration expense for a department in a store is an indirect expense.

Answer 3

True

Question 4

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

Question 5

The service department will determine its service department charge rate and charge the company's divisions or departments according to their use of that particular service department.

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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 17

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

Question 18

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

Question 19

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 20

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 indirect expenses.

Question 21

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

Question 22

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

Question 23

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

Question 24

Responsibility accounting reports for profit centers are normally in the form of balance sheets.

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

If income from operations for a division is $30,000,sales are $243,750,and invested assets are $187,500,the investment turnover is 1.3.

Question 27

If income from operations for a division is $6,000,invested assets are $25,000,and sales are $30,000,the investment turnover is 5.0.

Question 28

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

Question 29

The ratio of sales to invested assets is termed investment turnover.

Question 30

If Division Q's income from operations was $60,000 on invested assets of $400,000,the rate of return on investment is 15%.

Question 31

Depreciation expense on store equipment for a department store is a direct expense.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

If the profit margin for a division is 8% and the investment turnover is 1.20,the rate of return on investment is 6.7%.

Question 37

If income from operations for a division is $6,000,invested assets are $25,000,and sales are $30,000,the profit margin is 24%.

Question 38

If the profit margin for a division is 11% and the investment turnover is 1.5,the rate of return on investment is 16.5%.

Question 39

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 40

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 41

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 42

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

Question 43

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

Question 44

If divisional income from operations is $75,000,invested assets are $637,500,and the minimum rate of return on invested assets is 6%,the residual income is $36,750.

Question 45

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

Question 46

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 47

The balanced scorecard attempts to evaluate the underlying financial drivers of nonfinancial performance.

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 6.3.

Question 49

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

Question 50

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

Question 51

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 $32,000.

Question 52

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

Question 53

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 54

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 55

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

Question 56

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 57

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 58

The financial performance of responsibility centers is evaluated in the balanced scorecard under the financial section of the scorecard.

Question 59

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 60

The balanced scorecard evaluates managers on financial and nonfinancial measures of performance.

Question 61

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 62

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

Question 63

In evaluating the profit center manager,the income from operations should be compared

A)across profit centers.
B)to historical performance or budget.
C)to the competition's net income.
D)to the total company earnings per share.

Question 64

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

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

Question 65

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

A)Competition among managers decreases profits
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 66

Responsibility accounting reports for a profit center typically show

A)revenues,expenses,and profit controlled by the manager of the center.
B)only the controllable revenues.
C)revenues,expenses,profit,and investment in assets controlled by the manager of the center.
D)all revenues and expenses of the profit center.

Question 67

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

A)liabilities.
B)assets.
C)equity.
D)costs.

Question 68

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

A)miscellaneous administrative expenses.
B)indirect expenses.
C)direct expenses.
D)operating expenses.

Question 69

Income from operations of the Commercial Aviation Division is $2,500,000.If income from operations before service department charges is $3,250,000,

A)operating expenses are $1,025,000.
B)total service department charges are $750,000.
C)noncontrollable charges are $1,025,000.
D)direct manufacturing charges are $1,025,000.

Question 70

In large businesses,decentralization is often advantageous because

A)it allows top management to make all decisions,thus ensuring that overall operational goals are met.
B)it prevents decisions from one unit to negatively affect the profitability of the entire company.
C)it allows departmental managers to focus on acquiring expertise in their areas of responsibility.
D)all of these are advantages of decentralization.

Question 71

It is beneficial for two related companies to use the cost price approach for transfer pricing when both of the companies operate as cost centers and are not concerned with the revenue.

Question 72

The costs of services charged to a profit center on the basis of its use of those services
Are called

A)operating expenses.
B)noncontrollable charges.
C)service department charges.
D)activity charges.

Question 73

The negotiated price approach allows the managers of decentralized units to agree among themselves as to the transfer price.

Question 74

Which of the following expenses incurred by a department store is an indirect expense?

A)Insurance on merchandise inventory
B)Sales salaries
C)Depreciation on store equipment
D)Salary of vice-president of finance

Question 75

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

A)revenues.
B)assets.
C)costs.
D)both costs and revenues.

Question 76

To calculate income from operations,total service department charges are

A)subtracted from income from operations before service department charges.
B)subtracted from operating expenses.
C)added to income from operations before service department charges.
D)subtracted from gross profit margin.

Question 77

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 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

Which of the following expenses incurred by the sporting goods department of a department store is a direct expense?

A)Depreciation expense--office equipment
B)Insurance on inventory of sporting goods
C)Uncollectible accounts expense
D)Office salaries

Question 80

In a profit center,the department manager has responsibility for and the authority to make decisions that affect

A)not only costs and revenues,but also assets invested in the center.
B)the assets invested in the center,but not costs and revenues.
C)both costs and revenues for the department or division.
D)costs and assets invested in the center,but not revenues.