Question 1

Managers are held responsible for revenues in: $\begin{array}{llcc}
 \text { I } &    \text { Revenue centres} \
 \text { II } & \text { Profit centres} \
 \text { III } & \text {Investment centres} \
\end{array}$

Accepted Answer

Managers in revenue centers are directly responsible for revenues as their primary metric. In profit centers, managers are responsible for both revenues and costs, making revenue management part of their responsibility. Similarly, in investment centers, managers are accountable for revenues, costs, and investments, thus encompassing revenue management as well. Therefore, managers in all three types of centers (I, II, and III) are held responsible for revenues.

Question 2

Residual income is calculated as:

Accepted Answer

Residual income is calculated as operating profit minus the product of the required rate of return and average operating assets. This measures the excess income generated above the required return on operating assets.

Question 3

A segment with an ROI of 30% has a profit of $84,000. The company's required rate of return on segment investments is 18%. The segment's residual income is:

Accepted Answer

Residual income is calculated as the actual profit minus the product of the required rate of return and the investment. Given an ROI of 30% and a profit of $84,000, we can find the investment by rearranging the ROI formula: ROI = Profit / Investment. Thus, Investment = Profit / ROI = $84,000 / 0.30 = $280,000. The residual income is then calculated as $84,000 - ($280,000 * 0.18) = $84,000 - $50,400 = $33,600.

Question 4

An advantage of centralised decision making is:

Accepted Answer

Centralized decision making can lead to less monitoring of decisions because decisions are made by a central authority, reducing the need for oversight at multiple levels.

Question 5

PNY Pty Ltd reported operating profit of $30,000, revenue of $50,000, and average operating assets of $40,000 for a recent year. Which of the following is true?

Accepted Answer

Return on investment (ROI) is calculated as Operating Profit / Average Operating Assets. For PNY, ROI = $30,000 / $40,000 = 0.75 or 75%.

Question 6

A corporate accounting department would most often be considered a:

Accepted Answer

A corporate accounting department is typically considered a cost centre because it provides essential support services without directly generating revenue.

Question 7

Budgets can be used to evaluate managerial performance in: $\begin{array}{llcc}
 \text { I } &    \text { Cost centres} \
 \text { II } & \text { Profit centres } \
 \text { III } & \text { Investment centres } \
\end{array}$

Accepted Answer

Budgets are a key tool in evaluating managerial performance across different types of centers: cost centers (where the focus is on controlling costs), profit centers (which are evaluated based on their profitability), and investment centers (which are assessed based on their return on investment).

Question 8

The Herbert Division of PNY reported net profit of $2,500, operating profit of $4,000, average equity of $24,000, and average operating assets of $30,000 in a recent accounting period. If Herbert's required rate of return is 12%, its residual income was:

Accepted Answer

The answer of The Herbert Division of PNY reported net...

Question 9

Economic value added uses "adjusted after-tax operating profit" as one of its inputs. One purpose of using after-tax profit, rather than operating profit, is to B:

Accepted Answer

After-tax profit is used to remove the bias from the EVA calculation. This is because taxes can vary significantly from company to company, and using operating profit would not take this into account. By using after-tax profit, the EVA calculation is more accurate and can be used to compare companies on a more level playing field.

Question 10

Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure?

Accepted Answer

Revenue centers are primarily focused on generating sales, making growth in sales a key performance measure for evaluating their success.

Question 11

PNY Pty Ltd reported operating profit of $80,000 and average operating assets of $120,000 in a recent accounting period. Which of the following transactions would definitely increase PNY's return on investment?

Accepted Answer

The answer of PNY Pty Ltd reported operating profit of...

Question 12

Herbert Feigl Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pre-tax) profit was

Accepted Answer

Residual income is calculated as Operating Income - (Investment * Required Rate of Return). Given the residual income ($5,000), investment turnover (Sales/Investment = 2.5), and required rate of return (15%), we can find the operating income. First, find the investment: $500,000 / 2.5 = $200,000. Then, calculate the charge for the required return: $200,000 * 15% = $30,000. Finally, add the residual income to the charge for the required return to find the operating income: $30,000 + $5,000 = $35,000.

Question 13

Herbert Feigl Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The capital investment was:

Accepted Answer

The capital investment can be calculated using the formula for residual income: Residual Income = Net Operating Income - (Capital Investment * Required Rate of Return). We are given the Residual Income ($5,000), the Required Rate of Return (15%), and the Investment Turnover (Sales/Capital Investment = 2.5). First, we find the Net Operating Income (NOI) by rearranging the Investment Turnover formula: Capital Investment = Sales / Investment Turnover. Since we don't directly have NOI, we use the given information to find Capital Investment first: Capital Investment = $500,000 / 2.5 = $200,000. This calculation directly gives us the capital investment without needing to calculate NOI, as the question primarily seeks the value of the capital investment.

Question 14

Decision-making based on general knowledge is more likely to occur in this type of organisation:

Accepted Answer

In a centralised organisation, decision-making is concentrated at the top levels, where leaders rely on their general knowledge and expertise to make decisions for the entire organisation.

Question 15

Efficiency measures, such as number of new products developed, may be more useful than financial measures in:

Accepted Answer

Discretionary cost centres focus on activities where the output is not directly related to financial measures, making efficiency measures like the number of new products developed more relevant for assessing performance.

Question 16

Which of the following responsibility centres can be evaluated using residual income?

Accepted Answer

Residual income is a measure used to evaluate the performance of investment centres. It calculates the net operating income that an investment centre earns above the minimum required return on its operating assets. This method is not directly applicable to profit, revenue, or cost centres, as these do not typically involve assessments of returns on investment in the same way.

Question 17

How are research and development costs treated for financial reporting and for economic value added (EVA) calculations? $\begin{array}{llcc}
\underline{\text { Financial Reporting}}&\quad\quad \underline{\text { EVA} }
\end{array}$

a.$\begin{array}{llcc}
  \text { Capitalised } &  \quad\quad\quad \text {  Capitalised} \
\end{array}$

b. $\begin{array}{ll}
\text { Expensed } & \quad\quad\quad\quad\text { Expensed } 
\end{array}$

c.$\begin{array}{ll}
\text { Capitalised } & \quad\quad\quad\text { Expensed }
\end{array}$

d.$\begin{array}{ll}
\text { Expensed } & \quad\quad\quad\text { Capitalised }
\end{array}$

Accepted Answer

For financial reporting, research and development costs are typically expensed as incurred. However, for EVA calculations, these costs are often capitalized to reflect their long-term value creation potential.

Question 18

The Bright Division of the Wingbury Pty Ltd requires a 12% rate of return. During a recent year Grant had a net profit of $400,000 and a residual income of $250,000. What was its ROI?

Accepted Answer

The answer of The Bright Division of the Wingbury Pty...

Question 19

Specific knowledge is: $\begin{array}{ll}
\text { I } & \text { More detailed tharn general knowledge} \
\text { I } & \text {  More costly to transfer than general kuowledge } \
\text {III } & \text {  An exarnple of an agency cost}
\end{array}$

Accepted Answer

Specific knowledge is indeed more detailed than general knowledge and more costly to transfer due to its complexity and the need for specialized understanding. However, it is not an example of an agency cost, which relates to the costs associated with resolving conflicts of interest between parties, such as between owners and managers in a corporation.

Question 20

Responsibility accounting includes: $\begin{array}{llcc}
 \text { I } &    \text { Monitoring primarily for mistakes} \
 \text { II } & \text { Assigring authority to divisional maragers } \
 \text { III } & \text { Mearuring the performance of divisional managers } \
\end{array}$

Accepted Answer

Responsibility accounting involves assigning authority to divisional managers (II) and measuring their performance (III). It is not primarily focused on monitoring for mistakes (I), but rather on evaluating and improving performance.

Quiz 16: Responsibility Accounting, Performance Evaluation and Transfer Pricing

Managers are held responsible for revenues in: $\begin{array}{llcc} \text { I } & \text { Revenue centres} \\ \text { II } & \text { Profit centres} \\ \text { III } & \text {Investment centres} \\\end{array}$