Question 1

Direct expenses require allocation across departments because they cannot be readily traced to one department.

Accepted Answer

Direct expenses can be directly traced to a specific department or cost center, unlike indirect expenses which require allocation.

Question 2

Investment center is another name for profit center.

Accepted Answer

An investment center is responsible for generating profits and making decisions about asset investments, while a profit center focuses only on generating profits without responsibility for investment decisions.

Question 3

Indirect expenses are allocated to departments based upon the benefits received by each department.

Accepted Answer

Indirect expenses, such as rent, utilities, and administrative salaries, are not directly traceable to a specific department. Therefore, they need to be allocated to departments based on how much each department benefits from or uses these expenses.

Question 4

Product lines are often evaluated as profit centers.

Accepted Answer

Product lines are evaluated as profit centers to determine their contribution to the overall profitability of a company. This helps in making decisions about which products to continue producing or discontinuing, and also in setting prices and budgets.

Question 5

A selling department is usually evaluated as a profit center.

Accepted Answer

A selling department is responsible for generating revenue for the company, and is typically assessed based on its ability to generate profits. Therefore, it is generally evaluated as a profit center.

Question 6

Direct expenses are incurred for the joint benefit of more than one department; they cannot be readily traced to only one department.

Accepted Answer

Direct expenses are expenses that can be directly attributed to a specific department or product. Indirect expenses, on the other hand, benefit multiple departments and cannot be easily traced to a single one. Therefore, the statement is false.

Question 7

The concepts of direct expenses and uncontrollable costs are essentially the same; also, indirect expenses and controllable costs are essentially the same.

Accepted Answer

Direct expenses are those that are directly related to the production of goods or services, while uncontrollable costs are those that cannot be managed by the company. Indirect expenses, on the other hand, are expenses that are not directly related to the production of goods or services, while controllable costs are those that can be managed by the company. Therefore, direct expenses and uncontrollable costs as well as indirect expenses and controllable costs are not essentially the same.

Question 8

Direct expenses are costs readily traced to a department because they are incurred for that department's sole benefit.

Accepted Answer

Direct expenses are costs that can be easily assigned to a particular department or product because they are incurred for the sole benefit of that department or product. Examples of direct expenses include direct labor costs, direct materials costs, and direct expenses for a specific project.

Question 9

Indirect expenses are incurred for the joint benefit of more than one department; they cannot be readily traced to only one department.

Accepted Answer

Indirect expenses are costs that are not directly associated with a specific department or product, but are incurred for the purpose of supporting multiple departments or aspects of the business as a whole. As such, they cannot be easily traced to a single department or activity. Examples of indirect expenses include rent, utilities, and administrative salaries.

Question 10

Advertising expense can be reasonably allocated to departments on the basis of each department's proportion of sales.

Accepted Answer

This method of allocation, where the advertising expense is proportionally allocated to each department based on their sales, is commonly used as it is a reasonable way to distribute the cost. It allows departments that generate higher sales to bear a larger share of the expense while also helping to align incentives for the departments to achieve sales targets.

Question 11

Profit center managers are evaluated on their ability to generate revenues in excess of costs.

Accepted Answer

Profit center managers are responsible for generating profits for their division or department, which means producing revenues that exceed the costs associated with running their operations. Therefore, their performance is measured by how well they achieve this objective.

Question 12

A department can never be considered to be a profit center.

Accepted Answer

A department can be considered a profit center if it generates revenue and incurs expenses that can be directly attributed to it. By managing its expenses effectively and increasing its revenue, a department can contribute to the overall profitability of the organization.

Question 13

Departmental information is usually distributed to the public as part of the company's annual report and footnotes.

Accepted Answer

The answer of Departmental information is usually distributed to the...

Question 14

A cost center does not directly generate revenues.

Accepted Answer

A cost center is a department or function within a company that incurs expenses but does not directly generate revenues. Its purpose is to support and facilitate the operations of revenue-generating departments. Examples of cost centers include accounting, human resources, and facilities management.

Question 15

Departmental salary expenses are direct expenses of that department.

Accepted Answer

Departmental salary expenses are expenses that are incurred by a specific department and are directly attributable to that department. Therefore, they are considered direct expenses of that department.

Question 16

A profit center generates revenue, incurs costs, and has the authority to make significant investing decisions.

Accepted Answer

A profit center generates revenue and incurs costs, but it typically does not have the authority to make significant investing decisions; that is usually the role of an investment center.

Question 17

The number of hours that a department uses equipment and machinery is a reasonable basis for allocating depreciation.

Accepted Answer

The number of hours that equipment or machinery is used is a commonly accepted basis for allocating depreciation because the more a piece of equipment is used, the more it depreciates in value. This method is referred to as "units of production" depreciation. Therefore, option A is correct.

Question 18

Evaluation of the performance of an investment center involves only financial measures.

Accepted Answer

Performance evaluation of an investment center should also include non-financial measures such as quality, customer satisfaction, employee engagement, and innovation.

Question 19

Cost center managers are evaluated on their success in controlling costs compared to budgeted costs.

Accepted Answer

Cost center managers are responsible for controlling costs within their designated area of the organization. They are evaluated based on how effectively they are able to keep costs within the budgeted amount.

Question 20

Investment center managers are evaluated on their use of investment center assets to generate income.

Accepted Answer

Investment center managers are responsible for generating income from the assets under their control, so they are evaluated on how well they use those assets to generate revenues and profits. This is typically measured using financial performance measures such as return on investment (ROI) or economic value added (EVA).

Quiz 24: Performance Measurement and Responsibility Accounting