Question 1

Choices about decision-making authority and about organisational structure are often related.

Accepted Answer

Choices about decision-making authority often influence the design of an organization's structure, as decisions on centralization or decentralization of authority affect how an organization is structured and operates.

Question 2

Which of the following best describes "general knowledge" in a decision-making context?
A) Customer lists and preferences kept by individual departments in retail sales
B) Knowledge that is easily transferred between employees
C) Detailed information about manufacturing processes
D) Knowledge that can be obtained only outside the organisation

Accepted Answer

General knowledge in a decision-making context refers to information that is easily transferred between employees, encompassing broad concepts applicable across various situations rather than being highly specific or confined to a particular domain.

Question 3

Investment centre managers are held responsible only for their costs.

Accepted Answer

Investment centre managers are responsible for costs, revenues, and investments, not just costs.

Question 4

An ideal transfer price would be the opportunity cost of internal transfers.

Accepted Answer

An ideal transfer price reflects the opportunity cost of internal transfers, as it represents the best alternative foregone by transferring the product or service internally rather than selling it externally or procuring it from an external source.

Question 5

If a supplying division has excess capacity, the best transfer price is the product's variable cost.

Accepted Answer

When a supplying division has excess capacity, the best transfer price is often considered to be the product's variable cost because this covers the additional costs incurred from producing the extra units without requiring a contribution to the fixed costs, which are already covered by other production. This approach encourages internal trade by ensuring the buying division gets the products at a low cost, maximizing the company's overall profitability.

Question 6

Economic value added can be measured so that it reduces most of the problems that arise under residual income.

Accepted Answer

Economic Value Added (EVA) is a financial performance metric that calculates the value created beyond the required return of the company's shareholders, and it is designed to address and reduce many of the issues associated with the residual income method, such as not accounting for the cost of equity.

Question 7

When decision making is decentralised:
A) Decision-making authority is delegated throughout the organisation
B) The important information in an organisation is very general
C) Upper management does not make decisions
D) Organisations are less likely to experience agency costs concerning goal congruence

Accepted Answer

Decentralisation involves delegating decision-making authority throughout the organisation, allowing lower-level managers and employees to make decisions relevant to their roles and responsibilities. This approach can lead to more responsive and flexible decision-making processes.

Question 8

Return on investment can be decomposed into two ratios: investment turnover and return on sales.

Accepted Answer

Return on investment (ROI) can indeed be decomposed into two components: investment turnover (which measures how efficiently a company uses its assets to generate sales) and return on sales (which measures how efficiently a company converts sales into profits). This decomposition helps in understanding the drivers behind a company's ROI.

Question 9

Technical details about complex manufacturing processes are examples of specific knowledge.

Accepted Answer

Specific knowledge refers to detailed, specialized information or skills that are not widely known or easily transferable, such as technical details about complex manufacturing processes.

Question 10

In a profit centre, managers' primary goal is to maximise revenues.

Accepted Answer

In a profit centre, the primary goal of managers is to maximize profits, not just revenues. This involves both increasing revenues and managing costs effectively.

Question 11

Return on investment is typically calculated as net profit divided by total sales.

Accepted Answer

Return on investment (ROI) is typically calculated as net profit divided by total investment cost, not total sales.

Question 12

If manufacturing departments are only responsible for production decisions, they are considered cost centres.

Accepted Answer

Cost centers are departments that do not directly generate revenue but incur costs, such as manufacturing departments focused solely on production decisions.

Question 13

Residual income measures a company's profits given a required rate of return.

Accepted Answer

Residual income is a measure of profitability that calculates how much money a company has made after accounting for the cost of its capital, essentially the required rate of return.

Question 14

Which type of knowledge is most costly to transfer within an organisation?
A) Decentralised
B) Financial
C) Centralised
D) Specific

Accepted Answer

Specific knowledge is most costly to transfer within an organization because it is often tacit, deeply embedded in individual experiences, and requires extensive training or personal interaction to be effectively communicated.

Question 15

If a product has an external market and divisions are treated as profit centres, cost-based transfer prices can often lead to suboptimal decisions.

Accepted Answer

Cost-based transfer prices may not reflect the external market price, leading divisions to make decisions that are optimal for them individually but suboptimal for the company as a whole, as they might not trade with each other in a way that maximizes the overall company profit.

Question 16

In a dual-rate transfer pricing system, the selling department is credited for the market price and the buying department is charged the product's variable cost.

Accepted Answer

In a dual-rate transfer pricing system, the selling department is credited with the market price to reflect its opportunity cost, while the buying department is charged the variable cost to encourage internal transactions and cost efficiency.

Question 17

Responsibility accounting is the process of using financial information to justify pay increases and promotions for managers.

Accepted Answer

Responsibility accounting is a system of accounting in which different sections, divisions, and departments of an organization are set up as responsibility centers, with managers being accountable for their financial performance, rather than being used to justify pay increases and promotions.

Question 18

Transfer pricing policies can affect a company's tax liability, particularly if it does business internationally.

Accepted Answer

Transfer pricing policies determine how goods and services are priced within transactions between related entities within the same multinational group, affecting where profits are reported and thus influencing the company's overall tax liability across different jurisdictions.

Question 19

Return on investment cannot be used effectively to evaluate profit centres because it motivates managers to make suboptimal decisions from the viewpoint of the organisations' owners.

Accepted Answer

Return on investment (ROI) can lead managers to focus on short-term gains or avoid necessary investments that might lower ROI but benefit the organization in the long run, thus potentially misaligning with the owners' broader objectives.

Question 20

A transfer price is required only when goods or services are transferred between cost centres in the same organisation.

Accepted Answer

Transfer pricing is also used for transactions between divisions or subsidiaries of the same organization that are located in different countries, not just for transfers between cost centers within the same organization. It is a crucial aspect for tax purposes and profit allocation within multinational companies.

Quiz 16: Responsibility Accounting, Performance Evaluation and Transfer Pricing