Question 1

The rates at which centralized services are charged to each division are called support department allocation rates.

Accepted Answer

Support department allocation rates are used to distribute the costs of centralized services to the various divisions within an organization, reflecting the extent to which each division utilizes those services.

Question 2

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

Accepted Answer

The return on investment (ROI) is calculated by dividing the operating income by the invested assets, so $30,000 / $200,000 = 0.15, or 15%.

Question 3

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

Accepted Answer

The formula for calculating return on investment is ROI = (Net Profit / Total Investment) x 100. Investment turnover multiplied by profit margin gives us the net profit margin, which is a different metric.

Question 4

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

Accepted Answer

The answer of The ratio of sales to investment is...

Question 5

The manager of the Furniture Department of a leading retailer does not control the salaries of departmental personnel.

Accepted Answer

The manager of the Furniture Department of a leading retailer does control the salaries of departmental personnel.

Question 6

If the profit margin for a division is 8% and the investment turnover is 1.2, the return on investment is 9.6%.

Accepted Answer

Return on investment (ROI) = Profit margin x Investment turnover
ROI = 0.08 x 1.2 = 0.096 or 9.6%
Therefore, the statement is true.

Question 7

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

Accepted Answer

The profit center income statement should reflect the revenues and expenses that are directly attributable to the manager's decisions and actions. This means that only the revenues and expenses that are under the manager's control should be included in the profit center income statement. This helps to ensure that the manager is held accountable for the financial performance of the profit center.

Question 8

Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of cost drivers.

Accepted Answer

Cost drivers are factors that cause costs to change, and in these examples, the number of purchase requisitions can drive costs in purchasing, while the number of payroll checks can drive costs in payroll accounting.

Question 9

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

Accepted Answer

Using return on investment (ROI) as the sole divisional performance measure can sometimes discourage managers from investing in projects that, while potentially profitable and beneficial to the company as a whole, might result in a lower divisional ROI compared to existing projects or the division's current ROI. This can lead to underinvestment in projects that are beneficial but do not meet the division's ROI threshold.

Question 10

Support department allocations are similar to the expenses of a profit center that purchases services from a source outside the company.

Accepted Answer

Support department allocations are similar to the expenses of a profit center that purchases services from a source outside the company because they are both indirect costs that are allocated to different departments or cost centers based on some predetermined method.

Question 11

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

Accepted Answer

Controllable expenses are directly influenced by the decisions and actions of a profit center manager, as they have the authority to make decisions that can increase or decrease these costs.

Question 12

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

Accepted Answer

Operating income does not take into account the assets invested in the center, which can lead to an incomplete assessment of the center's performance relative to the resources it uses.

Question 13

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

Accepted Answer

The answer of The manager of a profit center does...

Question 14

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

Accepted Answer

The profit center income statement should only include revenues and expenses that the profit center can control. This means that non-controllable expenses, such as corporate overhead costs, should not be included in the profit center income statement. By only including controllable revenues and expenses, the profit center income statement allows managers to focus on the aspects of the business that they can influence and improve.

Question 15

The major advantage of the return on investment over operating income as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated.

Accepted Answer

Return on Investment (ROI) takes into account both the operating income and the investment made in the division, allowing for a more comprehensive comparison across divisions by considering how efficiently each division uses its assets to generate earnings.

Question 16

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

Accepted Answer

Investment turnover focuses on the total sales generated by the investment, not specifically on the rate of profit per sales dollar. The rate of profit per sales dollar is known as profit margin.

Question 17

If the profit margin for a division is 11% and the investment turnover is 1.5, the return on investment is 7.3%.

Accepted Answer

The return on investment (ROI) is calculated by multiplying the profit margin by the investment turnover. Therefore, ROI = 11% * 1.5 = 16.5%.

Question 18

Three measures of investment center performance are operating income, return on investment, and residual income.

Accepted Answer

Operating income, return on investment (ROI), and residual income are indeed three common measures used to evaluate the performance of an investment center, as they provide insights into profitability, efficiency in using assets, and the generation of value over and above a minimum required return, respectively.

Question 19

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

Accepted Answer

Responsibility accounting involves breaking down an organization into various subunits or responsibility centers, such as profit centers. The goal of responsibility accounting is to hold each center accountable for its performance, and income statements are a common way to report that performance. Income statements show revenue, expenses, and profits for a given period, and they are useful for evaluating the financial success of a profit center.

Question 20

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

Accepted Answer

The underlying principle is to allocate indirect operating expenses based on the cause-and-effect relationship, benefit received, fairness, or ability to bear, rather than strictly on revenue proportionality.

Quiz 24: Evaluating Decentralized Operations