Deck 9: Performance Measurement and Responsibility Accounting

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Investment center is another name for profit center.

Question 8

A cost center does not directly generate revenues.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

A selling department is usually evaluated as a profit center.

Question 14

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

Question 15

Departmental salary expenses are direct expenses of that department.

Question 16

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

Question 17

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

Question 18

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

Question 19

Product lines are often evaluated as profit centers.

Question 20

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

Question 21

A responsibility accounting performance report usually compares actual costs to budgeted costs amounts by management level.

Question 22

In producing oat bran, the joint cost of milling the oats into bran, oatmeal, and animal feed is considered a direct cost to the oat bran, because the oat bran cannot be produced without incurring the joint cost.

Question 23

Return on investment is a useful measure to evaluate the performance of a cost center manager.

Question 24

Joint costs are costs incurred in producing or purchasing a single product.

Question 25

Measures used to evaluate the manager of an investment center include investment turnover and profit margin.

Question 26

Allocating costs to service departments involves accumulating revenues and direct expenses, allocating indirect expenses, and preparing the department income statement.

Question 27

A department's direct expenses are usually considered uncontrollable costs.

Question 28

An example of a controllable cost is equipment depreciation expense.

Question 29

Departmental income statements are prepared for service departments but not operating departments.

Question 30

Since service departments do not generate revenues, it is unnecessary to accumulate and allocate their costs.

Question 31

Departmental contribution to overhead is the amount of sales for that department, less its direct expenses.

Question 32

No standard rule identifies the best basis of allocating expenses across departments, so it is impossible to allocate costs in a manner that will be perceived as fair.

Question 33

Departmental income statements are prepared for operating departments (profit centers) but not service departments (cost centers).

Question 34

No standard rule identifies the best basis of allocating expenses across departments.

Question 35

An example of a service department is the human resources department.

Question 36

A joint cost of producing two products can be allocated between those products on the basis of the relative physical quantities of each product produced.

Question 37

Investment center managers are typically evaluated using performance measures that combine income and assets.

Question 38

Joint costs can be allocated either using a physical basis or a value basis.

Question 39

A useful measure used to evaluate the performance of an investment center is investment center residual income.

Question 40

The process of preparing departmental income statements begins with allocating service department expenses.

Question 41

Expenses that are easily traced and assigned to a specific department because they are incurred for the sole benefit of that department are called:

A) Direct expenses.
B) Indirect expenses.
C) Controllable expenses.
D) Uncontrollable expenses.
E) Fixed expenses.

Question 42

Which of the following is not a step in creating operating department income statements?

A) Prepare the departmental income statements.
B) Accumulate revenues and direct expenses by department.
C) Allocate indirect expenses across departments.
D) Allocate service department expenses to operating departments.
E) Eliminate the uncontrollable costs for each department.

Question 43

Decentralization refers to companies that have multiple locations.

Question 44

A department that incurs costs without directly generating revenues is a:

A) Service center.
B) Production center.
C) Profit center.
D) Cost center.
E) Performance center.

Question 45

An accounting system that accumulates and reports costs incurred by each service department for management to evaluate the performance of a department is a:

A) Departmental accounting system.
B) Cost accounting system.
C) Service accounting system.
D) Revenue accounting system.
E) Standard accounting system.

Question 46

An expense that is readily traced to a department because it is incurred for that department's sole benefit is a(n):

A) Common expense.
B) Indirect expense.
C) Direct expense.
D) Administrative expense.
E) Recurring expense.

Question 47

A challenge in calculating the total costs and expenses of a department is:

A) Determining the gross profit ratio.
B) Assigning direct costs to the department.
C) Allocating indirect expenses to the department.
D) Determining the amount of sales of the department.
E) Determining the direct expenses of the department.

Question 48

A company has two departments, Y and Z that incur wage expenses. An analysis of the total wage expense of $19,000 indicates that Dept. Y had a direct wage expense of $2,000 and Dept. Z had a direct wage expense of $3,500. The remaining expenses are indirect and analysis indicates they should be allocated evenly between the two departments. Departmental wage expenses for Dept. Y and Dept. Z, respectively, are:

A) $8,750; $10,250.
B) $10,250; $8,750.
C) $9,500; $9,500.
D) $2,000; $3,500.
E) $6,750; $6,750.

Question 49

Departmental contribution to overhead is the same as gross profit generated by that department.

Question 50

The difference between a profit center and an investment center is

A) An investment center incurs costs, but does not directly generate revenues.
B) An investment center incurs no costs but does generate revenues.
C) An investment center is responsible for investments made in operating assets.
D) An investment center provides services to profit centers.
E) There is no difference; investment center and profit center are synonymous.

Question 51

Expenses that are not easily traced to a specific department, and which are incurred for the joint benefit of more than one department, are:

A) Fixed expenses.
B) Indirect expenses.
C) Direct expenses.
D) Uncontrollable expenses.
E) Variable expenses.

Question 52

A company has two departments, Y and Z that incur delivery expenses. An analysis of the total delivery expense of $9,000 indicates that Dept. Y had a direct expense of $1,000 for deliveries and Dept. Z had no direct expense. The indirect expenses are $8,000. The analysis also indicates that 40% of regular delivery requests originate in Dept. Y and 60% originate in Dept. Z. Departmental delivery expenses for Dept. Y and Dept. Z, respectively, are:

A) $4,500; $4,500.
B) $4,200; $4,800.
C) $5,500; $3,500.
D) $4,800; $4,200.
E) $5,400; $3,600.

Question 53

Costs that the manager has the power to determine or significantly affect are called:

A) Uncontrollable costs.
B) Controllable costs.
C) Joint costs.
D) Direct costs.
E) Indirect costs.

Question 54

A unit of a business that generates revenues and incurs costs is called a:

A) Performance center.
B) Profit center.
C) Cost center.
D) Responsibility center.
E) Expense center.

Question 55

Regardless of the system used in departmental cost analysis:

A) Direct costs are allocated, indirect costs are not.
B) Indirect costs are allocated, direct costs are not.
C) Both direct and indirect costs are allocated.
D) Neither direct nor indirect costs are allocated.
E) Total departmental costs will always be the same.

Question 56

In a decentralized organization, decisions are made by managers throughout the company rather than by a few top executives.

Question 57

A cost center is a unit of a business that incurs costs without directly generating revenues. All of the following are considered cost centers except:

A) Accounting department at Warner Bros.
B) Purchasing department at Best Buy.
C) Research department at Microsoft.
D) Advertising department at Hertz.
E) Juice division at Coca Cola.

Question 58

The type of department that generates revenues and incurs costs, and its manager is responsible for the investments made in operating assets is called a(n):

A) Profit center
B) Cost center
C) Service department
D) Investment center
E) Responsibility center

Question 59

The most useful allocation basis for the departmental costs of an advertising campaign for a storewide sale is likely to be:

A) Floor space of each department.
B) Relative number of items each department had on sale.
C) Number of customers to enter each department.
D) An equal amount of cost for each department.
E) Proportion of sales of each department.

Question 60

The salaries of employees who spend all their time working in one department are:

A) Variable expenses.
B) Indirect expenses.
C) Direct expenses.
D) Responsibility expenses.
E) Unavoidable expenses.

Question 61

In regard to joint cost allocation, the "split-off point" is:

A) A physical basis method to allocate costs based on ratio of some physical characteristic.
B) The difference between the actual and market value of joint costs.
C) The point at which some products are sold and some remain in inventory.
D) The point at which separate products can be identified.
E) Not acceptable when using the value basis for allocating joint costs.

Question 62

Costs that the manager does not have the power to determine or at least significantly affect are:

A) Variable costs.
B) Uncontrollable costs.
C) Indirect costs.
D) Direct costs.
E) Joint costs.

Question 63

Differential Chemical produced 10,000 gallons of Preon and 20,000 gallons of Paron. Joint costs incurred in producing the two products totaled $7,500. At the split-off point, Preon has a market value of $6.00 per gallon and Paron $2.00 per gallon. Compute the portion of the joint costs to be allocated to Preon if the value basis is used.

A) $2,500.
B) $3,000.
C) $4,500.
D) $5,625.
E) $1,500.

Question 64

Responsibility accounting performance reports:

A) Become more detailed at higher levels of management.
B) Are usually summarized at higher levels of management.
C) Are equally detailed at all levels of management.
D) Are useful in any format.
E) Are irrelevant at the highest level of management.

Question 65

All of the following are associated with reporting controllable costs except:

A) At lower levels, management have fewer controllable costs.
B) Responsibility and control broaden for higher-level managers.
C) Lower-level managers are responsible for detailed costs and so receive detailed reports.
D) Uncontrollable costs are allocated equally.
E) Higher-level managers receive summarized reports for focusing on broader issues.

Question 66

In a responsibility accounting system:

A) Managers are responsible for their departments' controllable costs.
B) Each accounting report contains all items allocated to a responsibility center.
C) Organized and clear lines of authority and responsibility are only incidental.
D) All managers at a given level have equal authority and responsibility.
E) Outputs of the departments are not part of the evaluation process.

Question 67

A lumber mill bought a shipment of logs for $40,000. When cut, the logs produced a million board feet of lumber in the following grades. Compute the cost to be allocated to Type 1 and Type 2 lumber, respectively, if the value basis is used. Type 1-400,000 bd. ft. priced to sell at $0.12 per bd. ft.
Type 2- 400,000 bd. ft. priced to sell at $0.06 per bd. ft.
Type 3- 200,000 bd. ft. priced to sell at $0.04 per bd. ft.

A) $16,000; $16,000.
B) $13,333; $4,444.
C) $40,000; $24,000.
D) $24,000; $12,000.
E) $24,000; $8,000.

Question 68

Which of the following is not true regarding a responsibility accounting system?

A) It is designed to measure the performance of managers in terms of controllable costs.
B) It assigns responsibility for costs to the appropriate managerial level that controls those costs.
C) It should not hold a manager responsible for costs over which the manager has no influence.
D) It can be applied at any level of an organization.
E) It is only relevant in manufacturing companies.

Question 69

An accounting system that is set up to control costs and evaluate managers' performance by assigning costs to the managers responsible for controlling them is called a(n):

A) Cost accounting system.
B) Managerial accounting system.
C) Responsibility accounting system.
D) Financial accounting system.
E) Activity-based accounting system.

Question 70

A granary allocates the cost of unprocessed wheat to the production of feed, flour, and starch. For the current period, unprocessed wheat was purchased for $120,000, and the following quantities of product and sales revenues were produced. $$\begin{array} { l c c } \text { Product } & \text { Pounds } & \text { Price per pound } \\\text { Feed } & 100,000 & \$ 0.70 \\\text { Flour } & 50,000 & 2.20 \\\text { Starch } & 20,000 & 1.00\end{array}$$ How much of the $120,000 cost should be allocated to flour if the value basis is used?

A) $24,500.
B) $84,000.
C) $66,000.
D) $70,000.
E) $200,000.

Question 71

A cost incurred to produce or purchase two or more products at the same time is a(n):

A) Product cost.
B) Incremental cost.
C) Differential cost.
D) Joint cost.
E) Fixed cost.

Question 72

Data pertaining to a company's joint production for the current period follows: Compute the cost to be allocated to Product M for this period's $660 of joint costs if the value basis is used.

A) $264.
B) $396.
C) $330.
D) $1,364.
E) $796.

Question 73

The most useful data for evaluation of a manager's cost performance is based on:

A) Controllable costs.
B) Contribution percentages.
C) Departmental contributions to overhead.
D) Uncontrollable expenses.
E) Direct costs.

Question 74

A responsibility accounting performance report displays:

A) Only actual costs.
B) Only budgeted costs.
C) Both actual costs and budgeted costs.
D) Only direct costs.
E) Only indirect costs.

Question 75

Data pertaining to a company's joint production for the current period follows: Compute the cost to be allocated to Product L for this period's $660 of joint costs if the value basis is used. (Do not round your intermediate calculations.)

A) $264.
B) $396.
C) $330.
D) $1,364.
E) $796.

Question 76

A report that accumulates the actual expenses that a manager is responsible for and their budgeted amounts is a:

A) Segmental accounting report.
B) Managerial cost report.
C) Controllable expense report.
D) Departmental accounting report.
E) Responsibility accounting performance report.

Question 77

Allocating joint costs to products using a value basis method is based on their relative:

A) Sales values.
B) Direct costs.
C) Gross margins.
D) Total costs.
E) Variable costs.

Question 78

Within an organizational structure, the person most likely to be evaluated in terms of controllable costs would be:

A) A payroll clerk.
B) A cost center manager.
C) A production line worker.
D) A maintenance worker.
E) A sales representative.

Question 79

A granary allocates the cost of unprocessed wheat to the production of feed, flour, and starch. For the current period, unprocessed wheat was purchased for $120,000, and the following quantities of product and sales revenues were produced. How much of the $120,000 cost should be allocated to feed if the value basis is used?

A) $12,250.
B) $42,000.
C) $45,000.
D) $70,000.
E) $100,000.

Question 80

A lumber mill paid $70,000 for logs that produced 200,000 board feet of lumber in 3 different grades and amounts as follows: Compute the portion of the $70,000 joint cost to be allocated to No. 2 Common if the value basis is used.

A) $0.
B) $17,500.
C) $23,333.
D) $35,000.
E) $70,000.