Question 1

The measurement most often used to evaluate a business unit organized as an investment center consists of:
A) Contribution margin stated as a percentage of average total assets.
B) Responsibility margin stated as a percentage of net sales.
C) Contribution margin stated as a percentage of net sales.
D) Responsibility margin stated as a percentage of average total assets.

Accepted Answer

An investment center is evaluated based on its ability to generate returns on the assets it controls, so the responsibility margin (operating income) as a percentage of average total assets is the most relevant measure.

Question 2

Company MHF operates subsidiaries in two countries. One of the subsidiaries consumes the output of the other in the production of a good for sale to the public. The company could increase cash flows by:
A) Using a transfer price based on full cost.
B) Using a transfer price to transfer as much income as possible to the subsidiary located in the lower tax country.
C) Using a transfer price based on market value.
D) Using a transfer price to transfer as much income as possible to the subsidiary located in the higher tax country.

Accepted Answer

Transfer pricing strategies that shift income to lower tax jurisdictions can help multinational companies reduce their overall tax burden, thereby increasing cash flows. By setting a transfer price that moves as much income as possible to the subsidiary in the lower tax country, the company can lower its total tax expense.

Question 3

Responsibility accounting systems are characterized by:
A) The intercompany target pricing charged among the centers.
B) The relationship of the corporate office with its customers or clients.
C) The relationship of each center with its customers or clients.
D) The preparation of timely performance reports.

Accepted Answer

The answer of Responsibility accounting systems are characterized by:
A) The...

Question 4

Division X supplies partially completed units of product to division Y. The divisions' negotiated price is $30 plus 20% per unit. Assuming Division X completed and transferred 5,000 units to division Y, the total transfer price on this transaction is:
A) $180,000.
B) $120,000.
C) $50,000.
D) $5,000.

Accepted Answer

The transfer price per unit is $30 plus 20% which is $6, therefore the transfer price for 1 unit is $30 + $6 = $36. 
If Division X completed and transferred 5,000 units, the total transfer price would be $36 x 5,000 = $180,000. Therefore, the correct answer is A.

Question 5

Many companies view performance margin as a more useful tool than responsibility margin for evaluating segment managers. This is because:
A) Managers have no control over traceable fixed costs.
B) Performance margin is not affected by the size of the department.
C) Performance margin indicates the change in operating income that would result from closing the department.
D) Performance margin includes only those revenue and costs under the manager's direct control.

Accepted Answer

Performance margin includes only those revenue and costs under the manager's direct control, making it a more accurate measure of their effectiveness. Responsibility margin includes traceable fixed costs, which managers may have little control over. Performance margin is also not affected by the size of the department and can indicate the impact of closing the department, making it a more practical tool for evaluation.

Question 6

Refer to the above information. The contribution margin of the local branch is:
A) $5,500,000
B) $2,400,000.
C) $2,246,000.
D) $3,254,000.

Accepted Answer

Contribution margin is calculated as sales revenue minus variable expenses. Since the local branch's sales revenue is $6,500,000 and its variable expenses are $4,254,000, the contribution margin would be $2,246,000 (which is choice C).

Question 7

Responsibility income statement-cost classification
Milton's, a large department store, prepares income statements by sales department. These statements follow the contribution margin approach, showing contribution margin and responsibility margin for each profit center as well as monthly income from operations for the store. Indicate the classification of each of the costs listed below by inserting the appropriate code letters in the space provided.
Costs
______ (a) The cost of merchandise sold in the Women's Sportswear Department.
______ (b) Advertising a sale in the Housewares Department (classify as a fixed cost).
______ (c) Depreciation on equipment used in the Automotive Service Department.
______ (d) Depreciation on the store's heating and air conditioning system.
_____ (e) Monthly salary of the manager of the Toy Department.
_____ (f) Sales taxes collected from customers and paid to local tax authorities.
_____ (g) Monthly salaries of store security guards.
 $$\begin{array}{l}
\text { Code Letters }\
\begin{array} { | l | l | l | l | } 
\hline \text { VC } & \text { = Variable costs } & \text { CF } & \text { = Common fixed costs } \
\hline \text { TF } & \text { = Traceable fixed costs } & \mathrm { X } & \text { = None of the above } \
\hline
\end{array}
\end{array}$$

Accepted Answer

The answer of Responsibility income statement-cost classification
Milton's, a large department...

Question 8

The bookstore of a university would be considered:
A) A cost center.
B) A profit center.
C) An investment center.
D) A revenue center.

Accepted Answer

The bookstore of a university is considered a profit center because it generates revenue for the university by selling books, supplies, and merchandise to students, faculty, and staff. Unlike cost centers, which consume resources without generating revenue, profit centers are expected to generate income that covers their costs and generates a profit for the organization.

Question 9

Accounting terminology
Listed below are seven technical accounting terms introduced or emphasized in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.
______ (a) Costs that jointly benefit several responsibility centers of the business and that do not vary significantly with changes in sales volume.
______ (b) The amount charged by a responsibility center for the goods it sells to another responsibility center.
______ (c) A common measure of investment center performance.
______ (d) A responsibility center of a business that may be evaluated by the return earned on assets.
______ (e) The subtotal in a responsibility income statement that is most useful in evaluating the short-term effects of various marketing strategies on profitability.
 $$\begin{array} { | l | l | } 
\hline \text { Cost Center } & \text { Contribution Margin } \
\hline \text { Residual Income } & \text { Committed Costs } \
\hline \text { Profit Center } & \text { Common Fixed Costs } \
\hline & \text { Transfer Price } \
\hline
\end{array}$$

Accepted Answer

The answer of Accounting terminology
Listed below are seven technical accounting...

Question 10

Responsibility accounting systems measures the performance of:
A) The entire company.
B) Each center individually.
C) Both the entire company and each center individually.
D) Neither the entire company nor each center individually.

Accepted Answer

Responsibility accounting systems are designed to measure the performance of each center (such as a department, division or product line) individually, allowing management to take appropriate actions to improve performance in each area. It does not measure the performance of the entire company as a whole.

Question 11

After the closing of Profit Center 3, the monthly income from operations for Profit Center 1, as measured by Dalton Co. should be approximately:
A) $25,000.
B) $17,500.
C) $10,000.
D) $80,000.

Accepted Answer

The answer of After the closing of Profit Center 3,...

Question 12

Responsibility income statement
Classico's Pizza, a chain of pizza parlors, views each branch location as an investment center. The local branch reported the following results for the current year:
Compute the following measures for this investment center:
(a) Contribution margin: $________________
(b) Contribution margin ratio: ________________%
(c) Responsibility margin: $________________
(d) Increase in annual responsibility margin that would be expected to result from a 10% increase in sales volume: $________________

Accepted Answer

The answer of Responsibility income statement
Classico's Pizza, a chain of...

Question 13

The human resources department of a large company would be considered:
A) A cost center.
B) A profit center.
C) An investment center.
D) A revenue center.

Accepted Answer

The human resources department is responsible for managing employee-related activities such as recruitment, training, compensation, benefits, and performance management, which are all viewed as costs incurred by the organization. Therefore, it is considered a cost center.

Question 14

In deciding how the store will benefit most from increasing the sales of selected departments, the store manager should be most interested in the:
A) Total sales of each department.
B) Contribution margin ratios of each department.
C) Fixed costs traceable to each department.
D) Responsibility margins of each department.

Accepted Answer

The contribution margin ratios of each department are important because it shows how much of the sales revenue is available to cover fixed costs and contribute towards profit. By increasing sales in departments with high contribution margin ratios, the store can increase its profitability. Total sales of each department may not be as relevant if the contribution margin ratios are low, and fixed costs traceable to each department and responsibility margins may not provide as clear of a picture of profitability as contribution margin ratios.

Question 15

Division X supplies partially completed units of product to division Y. The divisions' negotiated price is $30 per unit. Assuming Division X completed and transferred 3,000 units to division Y, the total transfer price on this transaction is:
A) $30,000.
B) $60,000.
C) $90,000.
D) $3,000.

Accepted Answer

The answer of Division X supplies partially completed units of...

Question 16

Closing Profit Center 3 should cause Dalton's monthly operating income to:
A) Increase by $5,000.
B) Decrease by $15,000.
C) Decrease by $7,000.
D) Change by some other amount.

Accepted Answer

The answer of Closing Profit Center 3 should cause Dalton's...

Question 17

In the short run, the greatest increase in profitability will result from increasing sales in those profit centers with the:
A) Highest performance margins.
B) Lowest traceable fixed costs.
C) Highest contribution margin ratios.
D) Highest responsibility margins.

Accepted Answer

Increasing sales in profit centers with the highest contribution margin ratios will result in the greatest increase in profitability in the short run. Contribution margin is the amount of revenue that is left over after deducting variable costs. The higher the contribution margin ratio, the more revenue is available to cover fixed costs and contribute to profit. Therefore, focusing on increasing sales in profit centers with high contribution margin ratios will have a greater impact on overall profitability in the short run.

Question 18

Responsibility accounting systems should begin with:
A) A budget by center.
B) A performance report by center.
C) A measure of corporate performance.
D) A company-wide income statement.

Accepted Answer

Responsibility accounting systems are based on budgets by center, which assign specific responsibilities and accountability to each department or center within the organization. These budgets provide the foundation for performance evaluation and help managers to identify areas where improvements can be made to achieve corporate goals. A performance report by center is also an important component of responsibility accounting, providing information on how well each center is meeting its budget targets and highlighting areas for improvement. However, this report can only be developed once the budget has been established. A measure of corporate performance or a company-wide income statement is not the starting point for responsibility accounting systems, as they focus on the performance of individual departments or centers rather than the overall performance of the organization.

Question 19

The margin of the local branch is:
A) $5,500,000.
B) $1,926,000.
C) $2,246,000.
D) $2,400,000.

Accepted Answer

The margin of the local branch can be calculated by subtracting the cost of goods sold from the total revenue. 
Margin = $10,200,000 - $8,274,000 = $1,926,000. 
Therefore, the best choice is B.

Question 20

The contribution margin ratio of the local branch is:
A) 50%.
B) 41%.
C) 49%.
D) 52%.

Accepted Answer

The answer of The contribution margin ratio of the local...

Quiz 22: Responsibility Accounting and Transfer Pricing

The measurement most often used to evaluate a business unit organized as an investment center consists of:

Company MHF operates subsidiaries in two countries. One of the subsidiaries consumes the output of the other in the production of a good for sale to the public. The company could increase cash flows by:

Responsibility accounting systems are characterized by:

Division X supplies partially completed units of product to division Y. The divisions' negotiated price is $30 plus 20% per unit. Assuming Division X completed and transferred 5,000 units to division Y, the total transfer price on this transaction is:

Many companies view performance margin as a more useful tool than responsibility margin for evaluating segment managers. This is because:

Refer to the above information. The contribution margin of the local branch is:

The bookstore of a university would be considered:

Responsibility accounting systems measures the performance of:

After the closing of Profit Center 3, the monthly income from operations for Profit Center 1, as measured by Dalton Co. should be approximately:

The human resources department of a large company would be considered:

In deciding how the store will benefit most from increasing the sales of selected departments, the store manager should be most interested in the:

Division X supplies partially completed units of product to division Y. The divisions' negotiated price is $30 per unit. Assuming Division X completed and transferred 3,000 units to division Y, the total transfer price on this transaction is:

Closing Profit Center 3 should cause Dalton's monthly operating income to:

In the short run, the greatest increase in profitability will result from increasing sales in those profit centers with the:

Responsibility accounting systems should begin with:

The margin of the local branch is:

The contribution margin ratio of the local branch is: