Question 1

The biggest challenge in making a decentralised organisation function effectively is:
A) to earn maximum profits through fair practices.
B) to minimise organisational losses.
C) taking advantage of the specialised knowledge and skills of a manager.
D) obtaining goal congruence among the organisation's autonomous managers.

Accepted Answer

The biggest challenge in making a decentralised organisation function effectively is obtaining goal congruence among the autonomous managers. Since the managers in a decentralised organisation have the authority to make decisions, it is essential to ensure that their goals align with the overall goals of the organisation. Without this, the organisation may experience conflicts and inefficiencies, and the decision-making process may become slow and bureaucratic. Therefore, obtaining goal congruence is critical for a decentralised organisation to function effectively. A, B, and C are not the most significant challenges in making a decentralised organisation function effectively.

Question 2

Which of the following managers is held accountable for only the revenue attributed to a unit?
A) Cost centre manager
B) Revenue centre manager
C) Sales manager
D) Investment centre manager

Accepted Answer

Revenue centre managers are held accountable for the revenue attributed to a specific unit or department. Cost centre managers are held accountable for controlling costs within a unit, while sales managers are responsible for generating sales revenue. Investment centre managers are responsible for both revenue and costs, as well as the capital investments made in a unit.

Question 3

Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.
Assume the Bottle Division has no excess capacity and can sell everything produced externally. What is the maximum amount Cologne Division would be willing to pay for the bottles?
A) $2.00
B) $2.10
C) $2.50
D) $2.90

Accepted Answer

The Cologne Division has the option to either buy bottles from the Bottle Division or externally. If it buys from the Bottle Division, it saves on shipping costs, but incurs a cost of $2.00 per unit, which is just a little less than the external price of $2.50 per unit. Therefore, the maximum amount that the Cologne Division should be willing to pay for the bottles is the external price of $2.50 per unit. Any more than that and it would just be cheaper to buy from the external market. Therefore, the correct choice is C) $2.50.

Question 4

Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.
Assume the Bottle Division has no excess capacity and can sell everything produced externally. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:
A) $2.10
B) $2.50
C) $2.90
D) $3.00

Accepted Answer

The transfer price should be set at the market price for external sales, which is $3.00 per unit. However, the Bottle Division incurs variable manufacturing cost per unit of $2.00 and shipping costs of $0.10 per unit for external sales. Therefore, the minimum acceptable transfer price for the Bottle Division would be $2.10 per unit ($2.00 variable cost + $0.10 shipping cost).

Since the Cologne Division can purchase similar bottles in the external market for $2.50, they would only be willing to purchase from the Bottle Division if the transfer price is lower than that. However, the Bottle Division has no excess capacity and can sell everything produced externally, so they would only be willing to sell to the Cologne Division if the transfer price is higher than their minimum acceptable transfer price of $2.10.

Therefore, the best option is to set the transfer price at the market price for external sales of $3.00 per unit, which is higher than the minimum acceptable transfer price for the Bottle Division and lower than the external market price for the Cologne Division. This results in a transfer price of $2.90 per unit ($3.00 external price - $0.10 shipping cost), which is the correct answer.

Question 5

An opportunity cost can best be described as the:
A) pricing of goods as per market trends.
B) direct expenses incurred in producing goods.
C) total difference in cost of production between two divisions.
D) the benefit that is foregone for one alternative in order to pursue another alternative.

Accepted Answer

An opportunity cost refers to the benefit that is lost or foregone when choosing one alternative over another. It is the cost of the next best alternative that is forgone. Therefore, choice D is the correct description of opportunity cost. Choices A, B, and C are not accurate descriptions of opportunity cost.

Question 6

Which of the following is not an example of a responsibility centre?
A) Corporate centre
B) Revenue centre
C) Profit centre
D) Investment centre

Accepted Answer

Corporate centre is not an example of a responsibility centre as it is typically the head office or central management of a company that oversees and coordinates the activities of its various divisions and subsidiaries. It is not a specific unit that can be held responsible for its own performance. The other options (B, C, and D) are all examples of different types of responsibility centres.

Question 7

What is a negative consequence of decentralisation?
A) Narrow focus
B) Services may be duplicated
C) Suboptimal decisions may be made
D) All of the given answers

Accepted Answer

All of the given answers are negative consequences of decentralisation. With a narrow focus, the organisation may not consider the big picture and miss important aspects. Duplication of services can result in inefficiencies and wasted resources. Suboptimal decisions may be made if each individual unit is making decisions without considering the impact on the entire organisation. Therefore, all of these negative consequences should be carefully considered before implementing a decentralisation strategy.

Question 8

Responsibility accounting:
A) fosters goal congruence.
B) involves using the various concepts and tools used by management accountants for planning and control.
C) is used to measure the performance of units.
D) All of the given answers

Accepted Answer

Responsibility accounting fosters goal congruence by allowing managers to hold their subordinates accountable for their own areas of responsibility. It involves using concepts and tools such as budgets, performance reports, and variance analysis for planning and control. It is used to measure the performance of units, such as departments or divisions, based on the revenues, costs, and profits that they generate. Therefore, all the given answers are correct.

Question 9

The amount charged when one business unit sells goods or services to another business unit is called:
A) an opportunity cost.
B) a transfer price.
C) a standard variable cost.
D) a residual price.

Accepted Answer

The amount charged when one business unit sells goods or services to another business unit is called a transfer price. This price can be determined through several methods, including cost-based, market-based, or negotiated pricing. It is important to establish an appropriate transfer price to ensure that both business units are fairly compensated and that overall profitability is maximized.

Question 10

An example of a profit centre is the:
A) painting department.
B) sales department.
C) company-owned restaurant in a fast-food chain.
D) All of the given answers

Accepted Answer

A company-owned restaurant in a fast-food chain is a profit center because it is responsible for generating its own revenue and profits, unlike departments like painting or sales which are typically cost centers.

Question 11

Which of the following statements is false?
A) Goal congruence is difficult to achieve because managers are often unaware of the effects of their decisions on the organisation's units.
B) The development of performance measures to evaluate a unit and its managers will help achieve goal congruence.
C) People are naturally concerned with the performance of all units within the organisation.
D) Goal congruence can be achieved by having a reward system tied to a manager's performance.

Accepted Answer

People are not necessarily naturally concerned with the performance of all units within the organization, as they may be primarily focused on their own individual goals or tasks. Achieving goal congruence may require managerial efforts to align individual and unit goals with the overall objectives of the organization.

Question 12

Which of the following statements about transfer prices is/are true?
i. When the producing division has excess capacity and the external market is imperfectly competitive, the general transfer-pricing rule and the external market price will be the same.
ii. If the transfer price is set at the market price, the supplying division will be indifferent to selling internally or externally.
iii. If the transfer price is set at the market price, the buying division will usually purchase goods from inside its organisation, if product specifications are met.
A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Accepted Answer

ii and iii are true. Setting the transfer price at the market price makes the supplying division indifferent to selling internally or externally, and the buying division will usually prefer purchasing internally if product specifications are met, assuming equal conditions. Statement i is incorrect because when there's excess capacity and an imperfectly competitive external market, the general transfer-pricing rule may not align with the external market price due to factors like marginal cost pricing or negotiated prices within the company.

Question 13

Delegating decision making to lower-level managers, thereby enabling an organisation to react quickly to opportunities and problems as they arise, is a characteristic of:
A) a decentralised organisation.
B) a centralised organisation.
C) a corporation.
D) responsibility accounting.

Accepted Answer

Decentralisation refers to the delegation of decision-making authority to lower-level managers or employees. It allows for faster decision making and can increase employee motivation and engagement. In contrast, a centralised organisation is one in which decision-making authority is held at the top of the organisation. Responsibility accounting is a management control system that assigns responsibility for various aspects of organisational performance to different departments or individuals. A corporation is a type of business entity that is legally distinct from its owners.

Question 14

Which of the following managers is held responsible for only the costs incurred in the unit?
A) Cost centre manager
B) Revenue centre manager
C) Profit centre manager
D) Investment centre manager

Accepted Answer

A cost centre manager is responsible for controlling and minimizing costs within their unit, without necessarily having direct control over generating revenue or making investment decisions. The focus is on operational efficiency and ensuring that expenses stay within budget. The other options (B, C, and D) are responsible for generating revenue or achieving a profit, and therefore have a wider range of responsibilities beyond just managing costs.

Question 15

When managers within the various units of an organisation are committed to aligning their goals with the goals set by top management, the result is:
A) goal congruence.
B) planning and control.
C) responsibility accounting.
D) delegation of decision making.

Accepted Answer

Goal congruence refers to the alignment of goals between different levels within an organization, such as aligning the goals set by top management with the goals of lower level managers. This ensures that everyone is working towards the same overall objective and can help improve collaboration and outcomes. Planning and control, responsibility accounting, and delegation of decision making may all be related to achieving goal congruence, but they are not the specific result of managers aligning their goals with those of top management.

Question 16

Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.
The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Using the general rule, the minimum transfer price from the Bottle Division to the Cologne Division would be:
A) $2.00
B) $2.10
C) $2.50
D) $2.90

Accepted Answer

The minimum transfer price should cover the variable costs of the selling division, which in this case is the Bottle Division. The variable manufacturing cost per unit is $2.00, and since no shipping costs are incurred on internal transfers, the minimum transfer price is $2.00.

Question 17

A sales department manager is an example of a:
A) cost centre manager
B) revenue centre manager
C) profit centre manager
D) investment centre manager

Accepted Answer

A sales department manager is responsible for generating revenue for the company through the sales of products or services. Therefore, they are classified as revenue centre managers.

Question 18

Which of the following is not a benefit of decentralisation?
A) Specialised information about the local markets
B) Motivation
C) Relief to upper-level management
D) Narrow focus on the manager's own unit

Accepted Answer

A narrow focus on the manager's own unit can lead to a lack of coordination and cooperation between different units, which can be detrimental to overall organizational success. The other options, specialized information about local markets, motivation, and relief to upper-level management, are all benefits of decentralization.

Question 19

Which of the following managers is held accountable for the profit of the unit?
A) Revenue centre manager
B) Profit centre manager
C) Investment centre manager
D) Both B and C

Accepted Answer

Profit centre managers and investment centre managers are held accountable for the profit of the unit.

Question 20

Which of the following managers is held accountable for the unit's profit and invested capital?
A) Investment centre manager
B) Revenue centre manager
C) Profit centre manager
D) Sales manager

Accepted Answer

Investment centre managers are responsible for both the profits and the invested capital of their units, making decisions that affect both income and the assets used to generate that income.

Quiz 12: Managing and Reporting Performance

The biggest challenge in making a decentralised organisation function effectively is:

Which of the following managers is held accountable for only the revenue attributed to a unit?

An opportunity cost can best be described as the:

Which of the following is not an example of a responsibility centre?

What is a negative consequence of decentralisation?

Responsibility accounting:

The amount charged when one business unit sells goods or services to another business unit is called:

An example of a profit centre is the:

Which of the following statements is false?

Delegating decision making to lower-level managers, thereby enabling an organisation to react quickly to opportunities and problems as they arise, is a characteristic of:

Which of the following managers is held responsible for only the costs incurred in the unit?

When managers within the various units of an organisation are committed to aligning their goals with the goals set by top management, the result is:

A sales department manager is an example of a:

Which of the following is not a benefit of decentralisation?

Which of the following managers is held accountable for the profit of the unit?

Which of the following managers is held accountable for the unit's profit and invested capital?