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 service department will determine its service department charge rate and charge the company's divisions or departments based on the usage of the service by each department.

Answer 2

True

Question 3

The amount of details presented in a budget performance report for a cost center depends upon the level of management to which the report is directed.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

The three common types of responsibility centers are referred to as asset centers, liabilities centers, and equity centers.

Question 12

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

Question 13

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

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 indirect expenses.

Question 15

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

Question 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover would be 1.2.

Question 23

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

Question 24

Service department charges are similar to the expenses that would be incurred if the profit center purchased the services from outside the company.

Question 25

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

Question 26

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

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 would be 5.0.

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin calculated would be 20%.

Question 34

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

Question 35

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

Question 36

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

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 calculated would be 24%.

Question 38

If Division Q's income from operations was $60,000 and invested assets amounted to $400,000, the rate of return on investment calculated would be 15%.

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover would be 6.3.

Question 44

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

Question 45

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 to the total magnitude of income from operations earned by each division.

Question 46

The objective of transfer pricing is to encourage each division's manager to transfer goods and services in such a manner that will increase the overall company income.

Question 47

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

Question 48

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 49

The minimum amount of desired divisional income from operations is set by top management by establishing a maximum rate of return that is expected from the invested assets.

Question 50

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

Question 51

In the rate of return on investment analysis, the investment turnover component focuses on the efficiency in the use of assets and indicates the number of sales dollar generated for each dollar of invested assets.

Question 52

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 53

The ratio of income from operations to sales is termed the profit margin, a 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 that will increase the overall rate of return for the company.

Question 55

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

Question 56

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

Question 57

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 58

The major advantage of using 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 59

Since transfer prices will affect a division's financial performance, it is used by decentralized segments of a business.

Question 60

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 would be $32,000.

Question 61

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 competitor's net income.
D) to the total company's earnings per share.

Question 62

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 the investment in assets controlled by the manager of the center.

Question 63

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 almost the same level of detail as reports for lower levels of management.
D) are rarely provided or reviewed.

Question 64

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) it prevents duplication of assets and expense.

Question 65

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

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

Question 66

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 67

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 68

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.

Question 69

The costs of services charged to a profit center based on the usage of the service are called:

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

Question 70

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

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

Question 71

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) variable expenses.

Question 72

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

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

Question 73

Which type of organization would be most effective for a small owner/manager-operated business?

A) Decentralized
B) Centralized
C) Matrix
D) Segmented

Question 74

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 75

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

Question 76

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

Question 77

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

A) Competition among managers decreases profits of the company
B) Duplication of operations
C) Price cutting by departments that are competing in the same product market
D) Top management has less time to devote to long range strategic planning.

Question 78

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 79

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

Question 80

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