Question 1

Managers who are evaluated favorably when profit is used as the performance measure will most likely be evaluated favorably when return on investment is used as the performance measure.

Accepted Answer

Profit and return on investment (ROI) are different performance measures. A manager can increase profit while ROI might decrease if the investment base grows faster than profits. ROI takes into account both the profit and the investment made to earn that profit, providing a more comprehensive view of efficiency and effectiveness.

Question 2

A profit center is a subunit that has responsibility for controlling costs and revenues and generating a return on assets invested in the subunit.

Accepted Answer

False

Question 3

One of the primary tools for evaluating the performance of profit centers is residual income.

Accepted Answer

False

Question 4

Most service departments, such as machine maintenance and computer services, are considered cost centers.

Accepted Answer

Cost centers are departments or units within a company that incur costs but do not directly generate revenue. Service departments such as machine maintenance and computer services are necessary for the operation of the company, but they do not directly generate revenue, making them cost centers.

Question 5

In decentralized organizations, upper level corporate managers provide substantial authority to subunits because they have the most expertise.

Accepted Answer

In decentralized organizations, authority is given to subunits because those closer to the operations often have more relevant expertise and can make quicker, more informed decisions.

Question 6

One disadvantage of evaluating performance using return on investment is that assets are measured at their market value.

Accepted Answer

The statement is incorrect. Assets are typically measured at their historical cost, not their market value, when calculating return on investment.

Question 7

Evaluating the performance of a subunit is the same as evaluating the performance of the subunit manager.

Accepted Answer

While the performance of the subunit manager is one factor to consider when evaluating the performance of a subunit, there may be other factors such as the performance of the individuals within the subunit, the resources allocated to the subunit, and external factors that could affect their performance.

Question 8

Managers of cost centers are evaluated in order to decide if a division should be expanded, contracted, or changed.

Accepted Answer

Managers of cost centers are primarily evaluated based on their ability to control costs, not on revenue generation or investment decisions, which would be more relevant to decisions about expanding, contracting, or changing a division.

Question 9

An advantage of decentralization is that subunit managers can respond more quickly to changing circumstances.

Accepted Answer

Decentralization allows for decision-making and action to occur closer to the situation or problem, which can result in quicker responses to changes. Subunit managers have more autonomy to make decisions without needing to consult higher-ups or wait for approval, which can further speed up the process.

Question 10

One of the primary tools for evaluating the performance of investment centers is residual income.

Accepted Answer

Residual income is a common tool for measuring the financial performance of investment centers. It is calculated as the difference between the actual income earned by the center and the income that the center was expected to earn, based on its assets and liabilities.

Question 11

A profit margin of 12 percent indicates that each dollar of assets invested generated 12 cents of profit.

Accepted Answer

Profit margin measures how much out of every dollar of sales a company actually keeps in earnings, not the profit generated per dollar of assets invested. That would be a measure of return on assets (ROA).

Question 12

In a decentralized organization, performance evaluations encourage managers to behave as if their own personal goals are congruent with the goals of the company as a whole.

Accepted Answer

In a decentralized organization, managers are given more autonomy to make decisions and hence, they are more likely to align their personal goals with the goals of the company as a whole. Performance evaluations help in reinforcing this alignment and encourage managers to work towards the overall success of the company.

Question 13

Lack of goal incongruence is a problem in decentralized organizations.

Accepted Answer

Lack of goal congruence is a problem in decentralized organizations because without proper coordination and communication, different individuals or departments may have conflicting goals or priorities, which can hinder overall organizational success.

Question 14

Return on investment can be improved by increasing net income or increasing the assets invested.

Accepted Answer

Return on investment (ROI) can be improved by increasing net income or decreasing the assets invested, not by increasing the assets.

Question 15

Managers tend to over invest when profit is used to evaluate them.

Accepted Answer

Managers may prioritize short-term profits and overlook long-term investment opportunities in order to achieve higher profit numbers and meet performance targets that evaluate their success. This is known as the agency problem in corporate finance.

Question 16

If managers are evaluated using return on investment, they are often over aggressive of accepting new investments because the investment will provide an increase in net income.

Accepted Answer

Using return on investment (ROI) as a metric can actually make managers more cautious about accepting new investments, as they might be concerned that the new investment could lower the overall ROI if it does not perform as well as existing assets.

Question 17

Responsibility accounting holds managers responsible for all direct and allocated costs charged to their operational unit.

Accepted Answer

Responsibility accounting typically holds managers accountable for costs and revenues directly under their control, not for allocated costs over which they have no influence or control.

Question 18

Cost centers, profit centers, and investment centers are all responsible for controlling costs in the respective subunit.

Accepted Answer

Yes, cost centers, profit centers, and investment centers are all responsible for controlling costs in their respective subunits. Cost centers focus on minimizing costs and maximizing efficiency, profit centers aim to generate more revenue than expenses, and investment centers balance cost control with investments in projects that will bring a return on investment.

Question 19

Increased motivation of managers is an advantage of decentralization.

Accepted Answer

Decentralization empowers managers with greater decision-making power, which often leads to increased accountability and ownership of their role. This, in turn, can increase their motivation and commitment to their job.

Question 20

An investment center manager is responsible for controllable revenues and costs, and controllable investments.

Accepted Answer

An investment center manager is responsible for making decisions about the investments, revenue, and costs of the center. They have control over these factors and are held accountable for their performance.

Quiz 12: Decentralization and Performance Evaluation