Deck 12: Fundamentals of Management Control Systems

Question 1

It is important to not consider an organization's compensation and reward system when designing its performance evaluation system.

Answer 1

False

Question 2

Managers in a cost center are held responsible for both the costs and volumes of inputs used to produce a product or provide a service.

Answer 2

True

Question 3

One advantage of centralization is better use of top management's time on strategic decisions

Answer 3

False

Question 4

There is no single accounting measure that can fully measure the performance of a profit or investment center.

Question 5

The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control.

Question 6

Fixed compensation is generally not linked to measured performance;i.e. ,it is independent of measured performance.

Question 7

Properly designed management control systems will eliminate fraudulent behavior by maximizing goal congruence within the organization.

Question 8

In general,there is a direct relationship between the quality of the information provided to managers and the quality of decisions made using that information.

Question 9

Properly developed and implemented management control systems influence subordinates to act in the organization's best interest.

Question 10

In general,profit centers are found at higher levels in an organization than investment centers.

Question 11

Decentralization is the delegation of the authority to make decisions in the organization's name to subordinates.

Question 12

It is possible for performance evaluation systems and/or management control systems to contribute to unethical or fraudulent behavior.

Question 13

One advantage of decentralization is faster response time to changes in the organization's environment by local managers.

Question 14

The design and use of management control systems affects how an individual makes and implements decisions.

Question 15

Cost allocations based on dual rates assume that a common cost can be separated into a fixed and variable component.

Question 16

Properly designed management control systems have both fixed compensation and contingent compensation.

Question 17

Properly designed management control systems can totally eliminate the inherent conflict between individual behavior and organizational goals.

Question 18

Rational managers will always make decisions that are in the best interest of the organization employing them.

Question 19

Delegated decision authority is the specification of what decisions a subordinate can make in the organization.

Question 20

In general,organizations are more centralized in the early stages of their existence and more decentralized as they grow.

Question 21

Which of the following statements is(are)true regarding managerial decisions? (A)The design and use of management control systems affects how an individual makes and implements decisions.(B)Rational managers will always make decisions that are in the best interest of the organization employing them.

A) Only A is true.
B) Only B is true.
C) Both A and B are true.
D) Neither A nor B is true.

Question 22

Decentralization refers to the delegation of decision-making authority to:

A) top management.
B) superiors.
C) board of directors.
D) subordinates.

Question 23

Which of the following elements is not part of a management control system?

A) Delegated decision authority.
B) Performance evaluation system.
C) Knowledge of local conditions.
D) Compensation and reward system.

Question 24

An operating unit of an organization is called an investment center if it is responsible:

A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.

Question 25

One of the key internal controls for any organization is segregation of duties.

Question 26

An operating unit of an organization is called a cost center if it is responsible:

A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.

Question 27

What does dysfunctional decision making refer to?

A) Administrative duplication.
B) Local managers making decisions in their interests,which can differ from those of the organization.
C) Delegated decision authority.
D) Poor decisions based on incomplete information.

Question 28

Which of the following statements is false?

A) The U.S.military is a good example of an organization that is highly decentralized.
B) The degree of decentralization depends on how many decisions principals delegate to agents.
C) Management control systems are used to measure the performance of an agent's decisions.
D) Most organizations have some operating units that are centralized and some that are decentralizeD.
The U.S.military is a centralized organization.

Question 29

____________ is the delegation of decision-making authority to lower management levels within the organization.

A) Transfer pricing
B) Centralization
C) Decentralization
D) Goal congruence

Question 30

Which of the following would be considered a principal in the principal-agent relationship?

A) A stockbroker in an investment arrangement.
B) A real estate agent for someone buying a house.
C) A customer leasing a car.
D) An employer hiring an employee.

Question 31

Which of the following is not a benefit of decentralization?

A) Allowing managers some autonomy in decision making provides managerial training for future higher-level managers.
B) In a decentralized organization some tasks or services may be duplicated unnecessarily.
C) Managers with some decision-making authority usually exhibit greater motivation than those who merely execute the decisions of others.
D) Managers of the organization's subunits are specialists,thereby enabling them to manage their departments most effectively.

Question 32

Which of the following statements is true regarding decentralization?

A) Decentralization increases the complexity of problems.
B) Managers in a decentralized organization have less knowledge about local business advantages.
C) Decentralization limits fast responses to business changes.
D) Decentralization allows manag­ers to receive on-the-job training in decision making.

Question 33

Which of the following correctly defines a principal-agent relationship?

A) The relationship between a superior and a subordinate.
B) The relationship between two superiors.
C) The relationship between two subordinates.
D) The relationship between a supervisor and a subversive.

Question 34

Which one of the following will not occur in an organization that gives managers throughout the organization maximum freedom to make decisions? (CMA adapted)

A) More effective solutions to operational problems.
B) Individual managers regarding the managers of other segments as they do external parties.
C) Two divisions of the organization having competing models that aim for the same market segments.
D) Delays in securing approval for the introduction of new products.

Question 35

What is the primary managerial responsibility in an organization?

A) development of employees.
B) development of profits.
C) decision making.
D) development of performance measurements.

Question 36

An operating unit of an organization is called a revenue center if it is responsible:

A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.

Question 37

What is the purpose of the management control system?

A) To align more closely the interests of the manager and the interests of the organization.
B) To allow individuals to obtain business experience.
C) To define the performance measures for employees.
D) To focus on the well-being of employees.

Question 38

Internal controls are not legally required for publicly traded companies.

Question 39

The design and use of management con­trol systems uses concepts from which of the following disciplines?

A) demography
B) economics
C) trigonometry
D) physics

Question 40

Which of the following is not a characteristic of a decentralized organization?

A) Better use of local knowledge.
B) Better use of top management's time.
C) Reduced response time to environmental changes.
D) More decisions made by relatively few individuals.

Question 41

When managers are held responsible for costs but the input-output relationship is not well specified,a(n)________________________ is established.

A) standard cost center
B) revenue center
C) discretionary cost center
D) asset center

Question 42

An operating unit that is responsible for revenues and costs is commonly referred to as a(n):

A) expense center.
B) revenue center.
C) profit center.
D) asset center.

Question 43

An operating unit that is responsible for only costs is commonly referred to as a(n):

A) cost center.
B) revenue center.
C) profit center.
D) asset center.

Question 44

Controllable revenue is included in a performance report of a: $$\begin{array} { | l | c | c | } \hline & \text { Proft Center } & \text { Investment Center } \\\hline \text { A. } & \text { Yes } & \text { No } \\\hline \text { B. } & \text { Yes } & \text { Yes } \\\hline \text { C. } & \text { No } & \text { No } \\\hline \text { D. } & \text { No } & \text { Yes } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 45

Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n): (CMA adapted)

A) profit center.
B) revenue center.
C) division.
D) operating unit.

Question 46

Assets invested in a responsibility center are included in a performance report of a: $$\begin{array} { | l | c | c | } \hline & \text { Profit Center } & \text { Cost Center } \\\hline \text { A. } & \text { Yes } & \text { No } \\\hline \text { B. } & \text { Yes } & \text { Yes } \\\hline \text { C. } & \text { No } & \text { No } \\\hline \text { D. } & \text { No } & \text { Yes } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 47

Assets invested in a responsibility center are included in a performance report of a: $$\begin{array} { | l | c | c | } \hline & \text { Proft Center } & \text { Investment Center } \\\hline \text { A. } & \text { Yes } & \text { No } \\\hline \text { B. } & \text { Yes } & \text { Yes } \\\hline \text { C. } & \text { No } & \text { No } \\\hline \text { D. } & \text { No } & \text { Yes } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 48

Which of the following departments would not be a cost center?

A) County fire department
B) University book store
C) University power plant
D) City building and grounds department

Question 49

Controllable revenue is included in a performance report of a: $$\begin{array} { | l | c | c | } \hline & \text { Cost Center } & \text { Profit Center } \\\hline \text { A. } & \text { Yes } & \text { No } \\\hline \text { B. } & \text { Yes } & \text { Yes } \\\hline \text { C. } & \text { No } & \text { No } \\\hline \text { D. } & \text { No } & \text { Yes } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 50

Controllable revenue is included in a performance report of a: $$\begin{array} { | l | c | c | } \hline & \text { Revenue Center } & \text { Cost Center } \\\hline \text { A. } & \text { Yes } & \text { No } \\\hline \text { B. } & \text { Yes } & \text { Yes } \\\hline \text { C. } & \text { No } & \text { No } \\\hline \text { D. } & \text { No } & \text { Yes } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 51

An operating unit that is responsible for revenues only is commonly referred to as a(n):

A) expense center.
B) revenue center.
C) profit center.
D) asset center.

Question 52

The least complex segment or area of responsibility for which costs are allocated is a(n): (CMA adapted)

A) profit center.
B) investment center.
C) contribution center.
D) cost center.

Question 53

Decentralized organizations can delegate authority and still maintain control and monitor managers' performance by designing appropriate management control systems.Which of the following responsibility centers would be evaluated similar to an independent business? (CMA,adapted)

A) Profit center.
B) Revenue center.
C) Investment center.
D) Discretionary cost center.

Question 54

An operating unit of an organization is called a profit center if it is responsible:

A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.

Question 55

Which of the following subunits would most likely be considered a only cost center?

A) Jewelry department.
B) Parts department.
C) Legal department.
D) Electronics department.

Question 56

Which of the following statements is(are)correct?
I.A profit center has control over both cost and revenue.
II.An investment center has control over invested funds,but not over costs and revenue.
III.A cost center has no control over sales.

A) Only I
B) Only II
C) Only I and III
D) Only I and II

Question 57

When managers are held responsible for costs and the input-output relationship is well specified,a(n)________________________ is established.

A) standard cost center
B) revenue center
C) discretionary cost center
D) asset center

Question 58

A successful responsibility accounting reporting system is dependent upon (CMA adapted):

A) The correct allocation of controllable variable costs.
B) Identification of the management level at which all costs are controllable.
C) The proper delegation of responsibility and authority.
D) A reasonable separation of costs into their fixed and variable components since fixed costs are not controllable and must be eliminated from the responsibility report.

Question 59

The purpose of the Data Processing Department of Haslam Corporation is to assist the various departments of the corporation with their information needs free of charge.The Data Processing Department would best be evaluated as a(n):

A) cost center.
B) revenue center.
C) profit center.
D) investment center.

Question 60

A manager makes a decision that is beneficial for a specific investment center and for the entire organization.From the organization's perspective,this decision results in:

A) goal congruence.
B) decentralization.
C) contingent compensation.
D) fixed compensation.

Question 61

Which of the following statements is(are)true regarding compensation?
(A)Fixed compensation is generally not linked to measured performance;i.e. ,it is independent of measured performance.
(B)Properly designed management control systems have contingent compensation items but not fixed compensation items.

A) Only A is true.
B) Only B is true.
C) Both A and B are true.
D) Neither A nor B is true.

Question 62

Revenue center and profit center managers are both responsible for meeting:

A) Budgeted income.
B) Budgeted costs.
C) Budgeted revenues.
D) Minimum return on investment as established by the company as a whole.

Question 63

Relative performance evaluations (RPE)are not designed to:

A) compare managers to other comparable managers.
B) compare divisions with other comparable divisions.
C) remove the effect of environmental factors that are beyond a manager's control.
D) restate departmental goals so meaningful comparisons can be made.

Question 64

Barrington Box Enterprises has two divisions,large and small,that share the common costs of the company's communications network.The annual common costs are $4,500,000.You have been provided with the following information for the upcoming year:
$$\begin{array} { | l | r | r | } \hline & \text { Calls } & \begin{array} { r } \text { Time on } \\\text { Network (hous) }\end{array} \\\hline \text { Large } & 100,000 & 120,000 \\\hline \text { Small } & 80,000 & 330,000 \\\hline\end{array}$$ What is the allocation rate for the upcoming year,assuming Barrington Box uses the single-rate method and allocates common costs based on the number of calls?

A) $10.00.
B) $15.00.
C) $20.00.
D) $25.00.

Question 65

Barrington Box Enterprises has two divisions,large and small,that share the common costs of the company's communications network.The annual common costs are $4,500,000.You have been provided with the following information for the upcoming year:
$$\begin{array} { | l | r | r | } \hline & \text { Calls } & \begin{array} { r } \text { Time on } \\\text { Network (hous) }\end{array} \\\hline \text { Large } & 100,000 & 120,000 \\\hline \text { Small } & 80,000 & 330,000 \\\hline\end{array}$$ The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls.The remaining costs should be allocated based on the time on the network.What is total communication network costs allocated to the Small Box Division,assuming the company uses dual-rates to allocate common costs?

A) $2,520,000.
B) $1,800,000.
C) $1,320,000.
D) $1,200,000.

Question 66

The following is a summarized income statement for McClaron Manor Co.'s profit center 12608 for April:
$$\begin{array} { | l | r | r | } \hline \text { Contribution Margin } & & \$ 175,000 \\\hline \text { Period Expenses } & \$ 11,000 & \\\hline \text { Manager' s Salary } & \$ 2,000 & \\\hline \text { Corporate Expense Allocation } & \$ 8,000 & \underline { ( \$ 21,0000 } \\\hline & & \$ 154,000 \\\hline\end{array}$$ Which of the following amounts is most likely subject to the control of the profit center's manager? (CPA,adapted)

A) Contribution Margin of $175,000.
B) Contribution Margin of $175,000 and Period Expenses of $11,000.
C) Contribution Margin of $175,000 and Period Expenses of $13,000.
D) Contribution Margin of $175,000 and Period Expenses of $21,000.

Question 67

When comparing performance report information for top management with that of lower-level management: (CMA adapted)

A) top management reports are more detailed.
B) lower-level management reports are typically for longer time periods.
C) top management reports show control over fewer costs.
D) lower-level management reports are likely to contain more quantitative data and less financial data.

Question 68

Which of the following subunits is most likely to be considered an investment center?

A) Accounting department.
B) Assembly department.
C) Petrochemical division.
D) Research and development department.

Question 69

Barrington Box Enterprises has two divisions,large and small,that share the common costs of the company's communications network.The annual common costs are $4,500,000.You have been provided with the following information for the upcoming year:
$$\begin{array} { | l | r | r | } \hline & \text { Calls } & \begin{array} { r } \text { Time on } \\\text { Network (hous) }\end{array} \\\hline \text { Large } & 100,000 & 120,000 \\\hline \text { Small } & 80,000 & 330,000 \\\hline\end{array}$$ What is the allocation rate for the upcoming,year assuming Barrington Box uses the single-rate method and allocates common costs based on the time on the network?

A) $10.98.
B) $10.00.
C) $8.00.
D) $7.14.

Question 70

Barrington Box Enterprises has two divisions,large and small,that share the common costs of the company's communications network.The annual common costs are $4,500,000.You have been provided with the following information for the upcoming year:
$$\begin{array} { | l | r | r | } \hline & \text { Calls } & \begin{array} { r } \text { Time on } \\\text { Network (hous) }\end{array} \\\hline \text { Large } & 100,000 & 120,000 \\\hline \text { Small } & 80,000 & 330,000 \\\hline\end{array}$$ The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls.The remaining costs should be allocated based on the time on the network.What is the total communication network costs allocated to the Large Box Division,assuming the company uses dual-rates to allocate common costs?

A) $2,700,000.
B) $2,520,000.
C) $1,980,000.
D) $1,500,000.

Question 71

In responsibility accounting,a center's performance is measured by those costs which are controllable.Controllable costs are best described as including: (CMA adapted)

A) direct materials and direct labor only.
B) only those costs that the manager can influence in the current period.
C) only discretionary costs.
D) those costs about which the manager is knowledgeable and informeD.
A controllable cost is one that can be influenceD.

Question 72

The controllability concept states that managers should be held responsible for:

A) all items over which they have decision-making authority.
B) costs and revenues,but not investments in assets used in their division.
C) only items that are allocated to their divisions on a per-unit basis.
D) fixed compensation items,but not contingent compensation items.

Question 73

Which of the following items would be classified as a fixed compensation item?

A) Administrative salaries.
B) Sales commissions.
C) Stock options.
D) Piece rates.

Question 74

Which of the following items would not be classified as a contingent compensation item?

A) Administrative salaries.
B) Sales commissions.
C) Stock options.
D) Piece rates.

Question 75

The Copy Department in the College of Business at State University provides photocopying service for both the Marketing and Economics Department.The following budget has been prepared for the year. $$\begin{array} { | l | l | } \hline \text { Available capacity } & 6,000,000 \text { pages } \\\hline \text { Budgeted us age: } & \\\hline \text { Marketing } & 3,600,000 \text { pages } \\\hline \text { Economics } & 1,800,000 \text { pages } \\\hline \text { Cost equation } & \$ 120,000 + \$ 0.025 \text { per page } \\\hline\end{array}$$ If the Copy Department uses a dual rate for allocating its costs based on usage,how much cost will be allocated to the Economics Department?

A) $85,000.
B) $90,000.
C) $105,000.
D) $120,000.

Question 76

Banglor Manufacturing Corporation uses a responsibility accounting system in its operations.Which one of the following items is least likely to appear in a performance report for a manager of one of Banglor's assembly lines? (CMA adapted)

A) Direct labor.
B) Materials.
C) Repairs and maintenance.
D) Depreciation on the manufacturing facility.

Question 77

The use of dual rates in a cost allocation system assumes that common costs can be:

A) separated into their fixed and variable components.
B) traced directly to a specific division or manager.
C) allocated based on a physical quantities measure.
D) assigned to an investment responsibility center.

Question 78

The Copy Department in the College of Business at State University provides photocopying service for both the Marketing and Economics Department.The following budget has been prepared for the year $$\begin{array} { | l | l | } \hline \text { Available capacity } & 6,000,000 \text { pages } \\\hline \text { Budgeted us age: } & \\\hline \text { Marketing } & 3,600,000 \text { pages } \\\hline \text { Economics } & 1,800,000 \text { pages } \\\hline \text { Cost equation } & \$ 120,000 + \$ 0.025 \text { per page } \\\hline\end{array}$$ .If the Copy Department uses a dual rate for allocating its costs based on usage,how much cost will be allocated to the Marketing Department?

A) $85,000.
B) $90,000.
C) $150,000.
D) $170,000.

Question 79

Which of the following statements is(are)false regarding the effective use of management control systems?
(A)In general,single rate cost allocations should not be used in management control systems because clear control over the cost being allocated cannot be determined.
(B)The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control.

A) Only A is false.
B) Only B is false.
C) Both A and B are false.
D) Neither A nor B is false.

Question 80

Which of the following is considered a responsibility center?

A) Investment center.
B) Profit center.
C) Revenue center.
D) All are responsibility centers.