Deck 12: Performance Evaluation and Decentralization

Question 1

The direct comparison of the performance of two different investment centers is difficult using residual income because residual income is an absolute measure.

Answer 1

True

Question 2

Unlike ROI, residual income does not encourage a short-run orientation.

Answer 2

False

Question 3

Turnover is the most common measure of performance for an investment center.

Answer 3

False

Question 4

Decentralization is usually achieved by creating units called divisions.

Question 5

Decreasing inventories leads to a reduction in return on investment (ROI).

Question 6

A production department within the factory, such as assembly, is an example of a profit center.

Question 7

The net income reduced by the total annual cost of capital is equal to the economic value added.

Question 8

Turnover is the ratio of sales to average operating assets.

Question 9

Basically, EVA is residual income with the cost of capital equal to the actual cost of capital for the firm (as opposed to some minimum rate of return desired by the company for other reasons).

Question 10

Residual income is the difference between operating income and the product of the hurdle rate and the company's average operating assets.

Question 11

A key feature of economic value added (EVA) is that it emphasizes after-tax operating income and the actual cost of capital.

Question 12

Residual income is sometimes used to overcome the tendency of ROI to discourage investments that are profitable for the company, but that lower the division's ROI.

Question 13

In a decentralized company, overall profit margins can mask inefficiencies within the various subdivisions.

Question 14

Economic value added is just a specific way of calculating residual income.

Question 15

The use of residual income encourages managers to accept any project that earns above the minimum rate.

Question 16

Return on investment (ROI) can be calculated by multiplying margin times turnover.

Question 17

In calculating residual income, the minimum rate of return is set by top management and is the same as the hurdle rate used for return on investment.

Question 18

In a decentralized company, central management is able to focus on strategic planning and decision making.

Question 19

Economic value added (EVA) is similar to ROI in that it links net income to capital employed.

Question 20

The practice of delegating decision-making authority to lower levels of management in a company is called centralization.

Question 21

Several transfer pricing policies are used in practice. These transfer pricing policies include market price, cost-based transfer prices, and negotiated transfer prices.

Question 22

Select the appropriate definition for each of the items listed below.
a.Turnover
b.Margin
c.ROI
d.Residual income
The ratio of operating income to sales.

Question 23

The price charged for the transferred good affects the costs of the buying division and the revenues of the selling division.

Question 24

Select the term from below to match with the correct statement.
a.centralization
b.revenue center
c.profit center
d.cost center
e.investment center
f.decentralization
A(n) ___________ is a responsibility center in which a manager is responsible for revenues, costs, and investments.

Question 25

When the selling division can sell and the buying division can buy externally at the market price, the company as a whole will be in the same position whether or not a market price transfer takes place internally.

Question 26

Transfer pricing is a complex issue.

Question 27

Select the term from below to match with the correct statement.
a.centralization
b.revenue center
c.profit center
d.cost center
e.investment center
f.decentralization
A(n) ___________ is a responsibility center in which a manager is responsible only for costs.

Question 28

A transfer price is the price charged for a component by the selling division to the buying division of the same company.

Question 29

Select the term from below to match with the correct statement.
a.centralization
b.revenue center
c.profit center
d.cost center
e.investment center
f.decentralization
A(n) ___________ is a responsibility center in which a manager is responsible only for sales, or revenues.

Question 30

In negotiated transfer pricing, the selling division sets the ceiling (maximum possible transfer price) for the bargaining range.

Question 31

When a product is transferred at market price, the transfer will optimize both divisional and company-wide profits.

Question 32

Select the appropriate definition for each of the items listed below.
a.Turnover
b.Margin
c.ROI
d.Residual income
The most common measure of performance for an investment center.

Question 33

In terms of operating income for the company as a whole, the transfer price set by the buying and selling divisions nets out.

Question 34

The selling division is forced to transfer a product internally when a cost-based transfer pricing policy is set by top management.

Question 35

In negotiated transfer pricing, the buying division sets the ceiling (maximum possible transfer price) for the bargaining range.

Question 36

Select the term from below to match with the correct statement.
a.centralization
b.revenue center
c.profit center
d.cost center
e.investment center
f.decentralization
The practice of delegating decision-making authority to lower levels is __________.

Question 37

The selling division would never agree to a transfer price below its full manufacturing cost.

Question 38

Select the term from below to match with the correct statement.
a.centralization
b.revenue center
c.profit center
d.cost center
e.investment center
f.decentralization
The manager of a(n) ___________ is evaluated on the basis of income.

Question 39

Using EVA to calculate residual income, the dollar cost of capital employed is the actual percentage cost of capital multiplied by the total capital employed.

Question 40

If there is a competitive outside market for the transferred product, then the best transfer price is the cost-based transfer price.

Question 41

Select the appropriate definition for each of the items listed below.
a.Turnover
b.Margin
c.ROI
d.Residual income
The ratio of sales to average operating assets.

Question 42

_________________ is found by dividing sales by average operating assets.

Question 43

A _________________ is the price charged for a component by the selling division to the buying division of the same company.

Question 44

______________________ occurs whenever managers receive information about the effectiveness of strategy implementation as well as the validity of the assumptions underlying the strategy.

Question 45

The ________________ is a strategic management system that defines a strategic-based responsibility accounting system.

Question 46

When a manager is responsible for only costs it is known as a(n) _______________.

Question 47

Select the appropriate definition for each of the items listed below.
a.Turnover
b.Margin
c.ROI
d.Residual income
The dollar difference between operating income and minimum required return on a company's operating assets.

Question 48

Typically, investment centers are evaluated on the basis of __________________.

Question 49

_______________ indicate the minimum ROI necessary to accept an investment.

Question 50

In _______________ decision making, decisions are made at the very top level, and lower-level managers are charged with implementing these decisions.

Question 51

________________ decision making allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility.

Question 52

A ____________________ is a segment of the business whose manager is accountable for specific sets of activities.

Question 53

___________________ is after tax operating income minus the dollar cost of capital employed.

Question 54

Decentralization usually is achieved by creating units called ___________.

Question 55

If there is a competitive outside market for the transferred product, then the best transfer price is the _____________.

Question 56

The difference between operating income and the minimum dollar return required on a company's operating assets is the _______________.

Question 57

A(n) ________________ is when a manager is responsible only for sales.

Question 58

An ______________________ is when a manager is responsible for revenues, costs and investments.

Question 59

_____________________ refers to earnings before interest and taxes.

Question 60

_____________ is the ratio of operating income to sales.

Question 61

The practice of delegating decision-making authority to the lower levels of management in a company is

A) centralization.
B) decentralization.
C) performance evaluation.
D) authorization.
E) hierarchy flattening.

Question 62

A responsibility center in which a manager is responsible for both revenues and costs is a(n)

A) cost center.
B) revenue center.
C) profit center.
D) investment center
E) None of these.

Question 63

Margin is calculated as

A) operating income/sales.
B) average operating assets/operating income.
C) (beginning operating assets + ending operating assets)/2.
D) sales/average operating assets.
E) operating income/average operating assets operating income/sales.

Question 64

Divisions in a decentralized company can be created along which of the following lines?

A) geographical
B) types of goods or services produced
C) type of responsibility given to divisional manager
D) two or more of the other answers are correct
E) None of these.

Question 65

A segment of Mega Inc., manufactures and sells blankets. The various models of blankets are produced in a single factory using stable technology. They are sold by the sales department, also located in the factory. The segment is most probably accounted for as a(n)

A) cost center.
B) revenue center.
C) profit center.
D) investment center.
E) None of these.

Question 66

________________ is the difference between realization and sacrifice, where realization is what the customer receives and sacrifices is what is given up in return.

Question 67

A responsibility center in which a manager is responsible for revenues, cost, and investment is a(n)

A) cost center.
B) revenue center.
C) profit center.
D) investment center.
E) None of these.

Question 68

The decision-making approach that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility is

A) responsibility accounting.
B) controllable accounting.
C) decentralization.
D) optimal strategic accounting.
E) None of these.

Question 69

Decentralization is frequently chosen by companies because it

A) allows higher management to make all decisions.
B) allows higher management to gather local information to make better decisions.
C) protects segments of the company from competitive pressures.
D) allows for training and motivation of local managers.
E) allows the CEO to make all important decisions.

Question 70

JetSky Airways has three divisions, the Western Division, the Eastern Division, and the Northern Division. The manager of the Western Division had wanted to purchase replacement airplanes for the division. However, he decided against it because, although revenues would increase and the new planes would be less expensive to operate, the initial cost of the planes was quite large. The Western Division is most probably accounted for as a(n)

A) cost center.
B) investment center.
C) profit center.
D) revenue center.
E) None of these.

Question 71

A responsibility center in which a manager is responsible only for sales is a(n)

A) cost center.
B) revenue center.
C) profit center.
D) investment center.
E) None of these.

Question 72

Division A had ROI of 15% last year. The manager of Division A is considering an additional investment for the coming year. What step will the manager likely choose to take?

A) Accept the investment as long as it provides positive operating income.
B) Accept the investment as long as its ROI is positive.
C) Reject the investment if it returns more than 15% ROI.
D) Reject the investment if it returns less than 15% ROI.
E) Reject the investment if it returns an ROI equal to 15%.

Question 73

A responsibility center in which a manager is responsible only for costs is a(n)

A) investment center.
B) revenue center.
C) profit center.
D) cost center.
E) center not presented here.

Question 74

Turnover is calculated as

A) operating income/average operating assets.
B) average operating assets/operating income.
C) (beginning operating assets + ending operating assets)/2.
D) sales/average operating assets.
E) operating income/sales.

Question 75

Which of the following is a disadvantage of a focus on return on investment?

A) It can encourage managers to focus on cost cutting efforts.
B) It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm.
C) It can encourage managers to cut inventories and reduce overall investment.
D) It can encourage managers to focus on the long run at the expense of the short run.
E) It can accomplish all of these disadvantages.

Question 76

A positive result that stems from the use of return on investment (ROI) is that it encourages managers to focus on

A) the relationship among sales, expenses, and investment.
B) cost efficiency.
C) operating asset efficiency.
D) the efficient use of resources in generating income.
E) All of these.

Question 77

The manager of a division is displeased with the ROI of the division. One step that would increase ROI (holding everything else constant) is

A) increasing investment.
B) increasing sales.
C) increasing costs.
D) decreasing operating income.
E) None of these.

Question 78

Which of the following is a reason for decentralization?

A) Ease of gathering and using local information.
B) Focusing of central management.
C) Training and motivating segment managers.
D) Exposing segments to market forces.
E) All of these.

Question 79

_________________ emphasizes only effectiveness of implementation.

Question 80

Return on investment (ROI) is calculated as

A) operating income/average operating assets.
B) average operating assets/operating income.
C) (beginning operating assets + ending operating assets)/2.
D) sales/average operating assets.
E) operating income/sales.