Deck 14: Performance Evaluation for Decentralized Operations

Question 1

A responsibility center in which the department manager has responsibility for and authority over costs in the department is termed a cost center.

Answer 1

True

Question 2

Budget performance reports prepared for the vice-president of production would generally contain less detail than the reports prepared for the various plant managers.

Answer 2

True

Question 3

Separation of businesses into more manageable operating units is termed centralization.

Answer 3

False

Question 4

A centralized business organization is one in which all major planning and operating decisions are made by top management.

Question 5

Controllable expenses are those that can be influenced by the decisions of the profit center management.

Question 6

The amount of details presented in a budget performance report for a cost center depends upon the level of management to which the report is directed.

Question 7

Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed indirect expenses.

Question 8

Property tax expense for a department store's store equipment is an example of a direct expense.

Question 9

A responsibility center in which the authority and responsibility for costs and revenues is vested on the department manager is termed an investment center.

Question 10

The service department will determine its service department charge rate and charge the company's divisions or departments based on the usage of the service by each department.

Question 11

A decentralized business organization is one in which all major planning and operating decisions are made by top management.

Question 12

The profit center income statement should include only controllable revenues and expenses.

Question 13

The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer.

Question 14

The three common types of responsibility centers are referred to as asset centers, liabilities centers, and equity centers.

Question 15

Personnel administration expense for a department in a store is an indirect expense.

Question 16

The primary accounting tool for controlling and reporting for cost centers is a budget performance report.

Question 17

Operating expenses incurred for the entire business as a unit that are not subject to the control of individual department managers are called indirect expenses.

Question 18

Sales commissions expense for a department store is an example of a direct expense.

Question 19

The underlying principle of allocating operating expenses to departments is to assign each department an amount of expense proportional to the revenues of that department.

Question 20

The process of measuring and reporting operating data by areas of responsibility is termed responsibility accounting.

Question 21

Depreciation expense on store equipment for a department store is a direct expense.

Question 22

The ratio of sales to invested assets is termed investment turnover.

Question 23

Service department charges are similar to the expenses that would be incurred if the profit center purchased the services from outside the company.

Question 24

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin calculated would be 20%.

Question 25

The rate of return on investment can be computed by dividing investment turnover by the profit margin.

Question 26

If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on investment computed would be 6.7%.

Question 27

If Division Q's operating income was $60,000 and invested assets amounted to $400,000, the rate of return on investment calculated would be 15%.

Question 28

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover would be 1.2.

Question 29

The manager of the furniture department of a leading retailer does not have control on salaries of the department personnel.

Question 30

If the profit margin for a division is 11% and the investment turnover is 1.5, the rate of return on investment computed would be 16.5%.

Question 31

Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of activity bases.

Question 32

Investment turnover (as used in determining the rate of return on investment) focuses on the rate of profit earned on each sales dollar.

Question 33

Responsibility accounting reports for profit centers are normally in the form of balance sheets.

Question 34

The profit center income statement should include only those revenues and expenses that can be controlled by the manager.

Question 35

The rates at which services are charged to each division are called service department charge rates.

Question 36

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover would be 5.0.

Question 37

The major shortcoming of using operating income as an investment center performance measure is that, it ignores the amount of assets invested in each center.

Question 38

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin calculated would be 24%.

Question 39

The manager of a profit center does not make decisions concerning the fixed assets invested in the center.

Question 40

If operating income for a division is $30,000, sales are $243,750, and invested assets are $187,500, the investment turnover would be 1.3.

Question 41

It is beneficial for two related companies to use the cost price approach for transfer pricing when both the companies operate as cost centers and are not concerned with the revenue.

Question 42

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also to the total magnitude of operating income earned by each division.

Question 43

The excess of divisional operating income over a minimum amount of desired operating income is termed residual income.

Question 44

Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

Question 45

The profit margin, a component of the rate of return on investment, focuses on the profitability by indicating the rate of profit earned on each sales dollar.

Question 46

In the rate of return on investment analysis, the investment turnover component focuses on the efficiency in the use of assets and indicates the number of sales dollar generated for each dollar of invested assets.

Question 47

If operating income for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover would be 6.3.

Question 48

The minimum amount of desired divisional operating income is set by top management by establishing a maximum rate of return that is expected from the invested assets.

Question 49

The negotiated price approach allows the managers of decentralized units to agree among themselves on a transfer price.

Question 50

By using the rate of return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals that will increase the overall rate of return for the company.

Question 51

If divisional operating income is $75,000, invested assets are $637,500, and the minimum rate of return on the invested assets is 6%, the residual income calculated would be $36,750.

Question 52

The objective of transfer pricing is to encourage each division's manager to transfer goods and services in such a manner that will increase the overall company income.

Question 53

The ratio of operating income to sales is termed the profit margin, a component of the rate of return on investment.

Question 54

The major advantage of using the rate of return on investment over operating income as a divisional performance measure is that, divisional investment is directly considered and thus comparability of divisions is facilitated.

Question 55

The minimum amount of desired divisional operating income is set by top management by establishing a minimum rate of return considered acceptable for invested assets.

Question 56

It is beneficial for related companies to negotiate a transfer price when the supplying company has unused capacity in its plant.

Question 57

The ratio of sales to invested assets is termed the investment turnover, a component of the rate of return on investment.

Question 58

Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

Question 59

If divisional operating income is $100,000, invested assets are $850,000, and the minimum rate of return on invested assets is 8%, the residual income would be $32,000.

Question 60

Since transfer prices will affect a division's financial performance, it is used by decentralized segments of a business.

Question 61

The financial performance of responsibility centers is evaluated in the balanced scorecard under the financial section of the scorecard.

Question 62

To calculate operating income, total service department charges are:

A) subtracted from operating income before service department charges.
B) subtracted from operating expenses.
C) added to operating income before service department charges.
D) subtracted from gross profit margin.

Question 63

The manager of a cost center has the responsibility for making decisions affecting:

A) the center's revenues and investments.
B) the center's revenues only.
C) the center's costs only.
D) the center's costs and revenues.

Question 64

The balanced scorecard attempts to evaluate the underlying financial drivers of nonfinancial performance.

Question 65

The balanced scorecard evaluates managers on financial and nonfinancial measures of performance.

Question 66

​Identify the type of organization in which all major planning and operating decisions are made by top management. ​

A) Decentralized
B) Centralized
C) Consolidated
D) Segmented

Question 67

Responsibility accounting for a profit center focuses on reporting:

A) the controllable revenues only.
B) controllable revenues, controllable expenses, and controllable profits.
C) controllable revenues, controllable expenses, controllable profits, and investment in assets controlled by the manager of the center.
D) controllable expenses, and controllable profits, but not controllable revenues.

Question 68

A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n):

A) profit center.
B) investment center.
C) volume center.
D) cost center.

Question 69

Which of the following expenses incurred by the sporting goods department of a department store is a direct expense?

A) Depreciation expense--office equipment
B) Insurance on inventory of sporting goods
C) Uncollectible accounts expense
D) Office salaries

Question 70

The manager of a profit center has the responsibility for making decisions that affect the center's _____.

A) costs, revenues, and investment in fixed assets.
B) investment in fixed assets, but not costs.
C) costs and revenues, but not investment in fixed assets.
D) revenues and investment in fixed assets, but not costs.

Question 71

Operating income of the Commercial Aviation Division is $3,300,000.If operating income before service department charges is $3,900,000:

A) operating expenses are $600,000.
B) total service department charges are $600,000.
C) noncontrollable charges are $7,200,000.
D) direct manufacturing charges are $3,900,000.

Question 72

The costs of services charged to a profit center based on the usage of the service are called:

A) operating expenses.
B) noncontrollable charges.
C) service department charges.
D) activity charges.

Question 73

For higher levels of management, responsibility accounting reports:

A) are more detailed than for lower levels of management.
B) are more summarized than for lower levels of management.
C) contain almost the same level of detail as reports for lower levels of management.
D) are rarely provided or reviewed.

Question 74

Which of the following expenses incurred by a department store is an indirect expense?

A) Insurance on merchandise inventory
B) Sales salaries
C) Depreciation on store equipment
D) Salary of vice-president of finance

Question 75

When managers of separate divisions or units are delegated the responsibility for managing their operations, the operational responsibility is said to be _____.

A) amalgamated
B) accumulated
C) negotiated
D) decentralized

Question 76

Identify a disadvantage of decentralization of operations.

A) Managers do not have the scope to become experts in their area of operation.
B) Managerial creativity and customer relations are hampered.
C) Managers closest to the operations are not allowed to make decisions.
D) Decisions made by one manager may negatively affect the profits of the company.

Question 77

The performance of a profit center manager is evaluated by comparing the profit center's operating income:

A) with the other profit centers' operating income.
B) with the profit center's budgeted operating income.
C) with the organization's budgeted net income.
D) with the organization's non-operating income.

Question 78

In large businesses, decentralization is often advantageous because:

A) it allows top management to make all decisions, thus ensuring that overall operational goals are met.
B) it prevents decisions from one unit to negatively affect the profitability of the entire company.
C) it allows departmental managers to focus on acquiring expertise in their areas of responsibility.
D) it prevents duplication of assets and expense.

Question 79

A profit center calculates the service department charges to be paid by it:

A) as the difference between its controllable expenses and controllable revenues.
B) as the difference between its direct operating expenses and controllable expenses.
C) as a product of service usage and total service department expense.
D) as a product of service usage and service department charge rate.

Question 80

Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed:

A) miscellaneous administrative expenses.
B) indirect expenses.
C) direct expenses.
D) variable expenses.