Question 1

Which of the following three statements 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

Accepted Answer

A profit center controls both costs and revenues, while an investment center controls costs, revenues, and invested funds. A cost center does not control sales.

Question 2

Turnover is computed by dividing average operating assets into:
A)invested capital.
B)total assets.
C)net operating income.
D)sales.

Accepted Answer

Turnover is calculated by dividing sales by average operating assets, which measures how efficiently a company uses its assets to generate sales.

Question 3

Consider a company that has only variable costs.All other things the same,an increase in unit sales will result in no change in the return on investment.

Accepted Answer

An increase in unit sales will increase the total contribution margin, leading to higher profits and an increased return on investment, assuming all other factors remain constant.

Question 4

In computing the margin in a ROI analysis,which of the following is used?
A)Sales in the denominator
B)Net operating income in the denominator
C)Average operating assets in the denominator
D)Residual income in the denominator

Accepted Answer

The answer of In computing the margin in a ROI...

Question 5

Managers of cost centers are evaluated according to the profits which their departments are able to generate.

Accepted Answer

Managers of cost centers are not evaluated based on profits, but rather on how effectively they manage costs and resources allocated to their department. Their goal is to produce goods or services at the lowest possible cost, without compromising on quality or efficiency. Profit generation is usually the responsibility of managers of revenue centers or profit centers.

Question 6

If expenses exceed revenues in a department,then it would be considered a cost center.

Accepted Answer

A cost center is a department that does not directly generate revenue but incurs costs. Whether expenses exceed revenues does not determine if a department is a cost center; rather, it is based on its function within the organization.

Question 7

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because:
A)the problems associated with measuring the asset base are eliminated.
B)desirable investment decisions will not be rejected by divisions that already have a high ROI.
C)only the gross book value of assets needs to be calculated.
D)returns do not increase as assets are depreciated.

Accepted Answer

Residual income considers the cost of capital and encourages managers to make decisions that increase overall firm value, even if it reduces their division's ROI, thus avoiding the rejection of beneficial investments.

Question 8

A balanced scorecard should contain every performance measure that can be expected to influence a company's profits.

Accepted Answer

A balanced scorecard should contain performance measures that cover various aspects of the company's operations such as financial, customer, internal processes, and learning and growth. While profitability is an important aspect of the financial perspective, it is not the only measure that can influence a company's profits. Other financial measures like return on investment, cash flow, and revenue growth, as well as non-financial measures such as customer satisfaction, employee engagement, and innovation can also impact a company's profitability. Therefore, a balanced scorecard should have a mix of measures from different perspectives that collectively contribute to the company's success.

Question 9

Residual income equals average operating assets multiplied by the difference between the return on investment and the minimum required rate of return.

Accepted Answer

This formula for calculating residual income is correct.

Question 10

Residual income should not be used to evaluate a cost center.

Accepted Answer

Residual income is a measure used to evaluate the financial performance of profit centers or investment centers, not cost centers. Cost centers are evaluated based on their ability to control costs and operate efficiently, rather than generating profits.

Question 11

Which of the following is not an operating asset?
A)Cash
B)Inventory
C)Plant equipment
D)Common stock

Accepted Answer

Common stock is not an operating asset, but rather a component of shareholder's equity on the balance sheet. Operating assets refer to assets that are used in the regular course of a business to generate revenue, such as cash, inventory, and plant equipment.

Question 12

The performance measures on a balanced scorecard tend to fall into four groups: financial measures,customer measures,internal business process measures,and external business process measures.

Accepted Answer

The four groups of performance measures on a balanced scorecard are financial measures, customer measures, internal business process measures, and learning and growth measures, not external business process measures.

Question 13

The use of return on investment as a performance measure may lead managers to make decisions that are not in the best interests of the company as a whole.

Accepted Answer

Return on investment (ROI) as a performance measure focuses on the profitability of an investment or project, which may not necessarily align with the overall goals and objectives of the company. This can lead managers to prioritize short-term gains over long-term growth and sustainability, potentially harming the company in the long run.

Question 14

In determining the dollar amount to use for operating assets in the return on investment (ROI)calculation,companies will generally use either net book value or gross cost of the assets.Which of the following is an argument for the use of net book value rather than gross cost?
A)It is consistent with how assets are reported on the balance sheet.
B)It eliminates the depreciation method as a factor in ROI calculations.
C)It encourages the replacement of old,worn-out equipment.
D)All of the above.

Accepted Answer

The answer of In determining the dollar amount to use...

Question 15

Residual income is the net operating income that an investment center earns above the minimum required return on the investment in operating assets.

Accepted Answer

Residual income is indeed the net operating income that exceeds the required return on investment in operating assets.

Question 16

Which of the following will not result in an increase in the residual income,assuming other factors remain constant?
A)An increase in sales.
B)An increase in the minimum required rate of return.
C)A decrease in expenses.
D)A decrease in operating assets.

Accepted Answer

An increase in the minimum required rate of return would result in a higher cost of capital and therefore a lower residual income. The other choices either increase revenue or decrease expenses, which would increase the residual income.

Question 17

All other things the same,which of the following would increase residual income?
A)Increase in average operating assets.
B)Decrease in average operating assets.
C)Increase in minimum required return.
D)Decrease in net operating income.

Accepted Answer

Residual income is calculated as net operating income minus a minimum required return multiplied by average operating assets. Therefore, decreasing average operating assets would increase residual income because there would be less assets to spread the required return over. All other choices would decrease residual income - increasing average operating assets would increase the amount of assets the required return is spread over, increasing the required return would increase the amount subtracted from net operating income, and decreasing net operating income would decrease the overall amount of income available to offset the required return.

Question 18

Which of the following statements provide(s)an argument in favor of including only a plant's net book value rather than gross book value as part of operating assets in the ROI computation? 
I.Net book value is consistent with how plant and equipment items are reported on a balance sheet.
II.Net book value is consistent with the computation of net operating income,which includes depreciation as an operating expense.
III.Net book value allows ROI to decrease over time as assets get older.
A)Only I.
B)Only III.
C)Only I and II.
D)Only I and III.

Accepted Answer

Net book value aligns with balance sheet reporting and net operating income calculations, which include depreciation.

Question 19

Residual income is superior to return on investment as a means of measuring performance because it encourages managers to make investment decisions that are more consistent with the interests of the company as a whole.

Accepted Answer

Residual income takes into account the cost of capital and encourages managers to make investments that generate returns above that cost, whereas return on investment only measures the return generated by the investment itself. This helps to ensure that investments are made in projects that add value to the company as a whole, rather than just generating a high return on investment.

Question 20

The performance measures on an individual's scorecard should not be overly influenced by actions taken by others in the company or by events that are outside of the individual's control.

Accepted Answer

The purpose of a scorecard is to evaluate an individual's performance based on their own actions and responsibilities, rather than external factors. Therefore, performance measures should be designed to assess the extent to which an individual is achieving their own goals and objectives, rather than being influenced by the actions of others or uncontrollable events.

Quiz 10: Performance Measurement in Decentralized Organizations

Which of the following three statements 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.

Turnover is computed by dividing average operating assets into:

Consider a company that has only variable costs.All other things the same,an increase in unit sales will result in no change in the return on investment.

In computing the margin in a ROI analysis,which of the following is used?

Managers of cost centers are evaluated according to the profits which their departments are able to generate.

If expenses exceed revenues in a department,then it would be considered a cost center.

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because:

A balanced scorecard should contain every performance measure that can be expected to influence a company's profits.

Residual income equals average operating assets multiplied by the difference between the return on investment and the minimum required rate of return.

Residual income should not be used to evaluate a cost center.

Which of the following is not an operating asset?

The performance measures on a balanced scorecard tend to fall into four groups: financial measures,customer measures,internal business process measures,and external business process measures.

The use of return on investment as a performance measure may lead managers to make decisions that are not in the best interests of the company as a whole.

In determining the dollar amount to use for operating assets in the return on investment (ROI) calculation,companies will generally use either net book value or gross cost of the assets.Which of the following is an argument for the use of net book value rather than gross cost?

Residual income is the net operating income that an investment center earns above the minimum required return on the investment in operating assets.

Which of the following will not result in an increase in the residual income,assuming other factors remain constant?

All other things the same,which of the following would increase residual income?

Residual income is superior to return on investment as a means of measuring performance because it encourages managers to make investment decisions that are more consistent with the interests of the company as a whole.

The performance measures on an individual's scorecard should not be overly influenced by actions taken by others in the company or by events that are outside of the individual's control.