Deck 8: Performance Evaluation for Decentralized Operations

Question 1

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

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

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

Answer 3

True

Question 4

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

Question 5

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 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

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

Question 8

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

Question 9

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 10

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

Question 11

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.

Question 12

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

Question 13

Developing and retaining quality managers is an advantage of decentralization.

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 expenses.

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

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

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

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 22

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

Question 23

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

Question 24

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

Question 25

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 26

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

Question 27

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 28

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 29

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

Question 30

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

Question 31

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

Question 32

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 33

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 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

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

Question 43

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 44

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 45

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

Question 46

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

Question 47

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 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 1.3.

Question 49

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 50

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 51

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 52

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 53

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

Question 54

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 55

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 56

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 57

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 58

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 59

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 60

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

Question 61

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 62

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

Question 63

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 64

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 65

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

Question 66

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 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

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 69

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

Question 70

All of the following are advantages of decentralization except:

A) Managers make better decisions when closer to the operation 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 their own assets and pays for operating costs.
D) Decentralized managers can respond quickly to customer satisfaction and quality service.

Question 71

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 72

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) Helps retain quality managers.
C) Decision making by managers closest to the operations.
D) Managers are able to acquire expertise in their areas of responsibility.

Question 73

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 74

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 75

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 the above. All are examples of a centralized management.

Question 76

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

Question 77

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

Question 78

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

Question 79

Income from operations of the Commercial Aviation Division is $2,225,000. 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 $1,025,000
C) noncontrollable charges are $1,025,000
D) direct manufacturing charges are $1,025,000

Question 80

The following data are taken from the management accounting reports of Dulcimer Co.: If an incentive bonus is paid to the manager who achieved the highest income from operations before service department charges, it follows that:

A) Division A's manager is given the bonus
B) Division B's manager is given the bonus
C) Division C's manager is given the bonus
D) The managers of Divisions B and C divide the bonus