Question 1

If manufacturing departments are only responsible for production decisions, they are considered cost centers.

Accepted Answer

Manufacturing departments focused solely on production decisions are considered cost centers because they primarily incur costs and do not directly generate revenue.

Question 2

Return on investment is typically calculated as net income divided by total sales.

Accepted Answer

Return on investment (ROI) is typically calculated as net income divided by total investment, not total sales.

Question 3

Compensation contracts can be based on accounting and / or non-accounting measurements.

Accepted Answer

Compensation contracts can be based on both accounting and non-accounting measurements, depending on the specific performance indicators that the company wants to incentivize. Accounting measurements may include financial ratios like net income or earnings per share, while non-accounting measurements may include operational metrics such as customer satisfaction or product quality.

Question 4

In a profit center, managers' primary goal is to maximize revenues.

Accepted Answer

In a profit center, managers aim to maximize profits, which involves both increasing revenues and controlling costs.

Question 5

Agency theory is an analytical framework that tells managers how to solve potential conflicts with shareholders.

Accepted Answer

The answer of Agency theory is an analytical framework that...

Question 6

Agency theory is related to accounting because organizations incur costs, including the costs to produce accounting information, to solve conflicts that might arise between managers and owners.

Accepted Answer

Agency theory is related to accounting as it addresses conflicts of interest between managers (agents) and owners (principals), and accounting information helps mitigate these conflicts by providing transparency and accountability.

Question 7

A transfer price is required only when goods or services are transferred between cost centers in the same organization.

Accepted Answer

A transfer price is required whenever goods or services are transferred between divisions or subsidiaries within the same organization, not just cost centers.

Question 8

Responsibility accounting is the process of using financial information to justify pay increases and promotions for managers.

Accepted Answer

Responsibility accounting is a system for tracking the performance of various segments or departments within a company, and holding the responsible managers accountable for that performance. It is not primarily focused on justifying pay increases and promotions, although this information may be used in those decisions.

Question 9

An ideal transfer price would be the opportunity cost of internal transfers.

Accepted Answer

An ideal transfer price would be the opportunity cost of internal transfers. This means that the transfer price should reflect the value of the goods or services being transferred to the receiving department, and should not be set to simply maximize profits or benefit one department over another. By setting the transfer price at the opportunity cost, the company can ensure that each department is making decisions that are in the best interests of the business as a whole.

Question 10

Investment center managers are held responsible only for their costs.

Accepted Answer

Investment center managers are responsible for revenues, costs, and the efficient use of assets, not just costs.

Question 11

Economic value added can be measured so that it reduces most of the problems that arise under residual income.

Accepted Answer

Economic value added (EVA) is a measure of a company's financial performance based on the residual income calculated after deducting the cost of capital from its operating profit. EVA is generally considered to be a superior measure to residual income because it takes into account the cost of capital and sets a benchmark for minimum acceptable return. Therefore, EVA reduces most of the problems that arise under residual income.

Question 12

Executive compensation is typically set by the shareholders at the annual meeting.

Accepted Answer

The answer of Executive compensation is typically set by the...

Question 13

Return on investment cannot be used effectively to evaluate profit centers because it motivates managers to make suboptimal decisions from the viewpoint of the organizations' owners.

Accepted Answer

Return on investment (ROI) can lead managers to focus on short-term gains or avoid necessary investments that could lower ROI, which may not align with the long-term interests of the organization's owners.

Question 14

Residual income measures a company's profits given a required rate of return.

Accepted Answer

Residual income measures the amount of income that a company generates above a minimum rate of return required by the investors or owners. It is a measure of profitability that takes into account the cost of capital.

Question 15

Decentralization typically eliminates agency costs from for-profit organizations.

Accepted Answer

Decentralization can reduce agency costs by aligning incentives, but it does not eliminate them entirely as there are still potential conflicts of interest and monitoring challenges.

Question 16

An organization's chief executive officer can be both a principal and an agent.

Accepted Answer

A CEO can be a principal when making decisions for the organization and an agent when representing the interests of shareholders or the board.

Question 17

Technical details about complex manufacturing processes are examples of specific knowledge.

Accepted Answer

Technical details about complex manufacturing processes require specific knowledge and expertise in that field, making it an example of specific knowledge.

Question 18

Return on investment can be decomposed into two ratios: investment turnover and return on sales.

Accepted Answer

Investment turnover measures how efficiently a company is using its assets to generate revenue, while return on sales measures profitability by comparing net income to total sales revenue. Combining these two ratios gives the overall return on investment.

Question 19

Managers can reduce agency costs through the use of compensation contracts.

Accepted Answer

Compensation contracts can align the interests of managers and shareholders, creating incentives for the managers to act in the best interests of the company and reduce agency costs.

Question 20

Choices about decision-making authority and about organizational structure are often related.

Accepted Answer

The allocation of decision-making authority often impacts the organizational structure, such as the hierarchy of positions and reporting relationships. For example, a more centralized decision-making structure may have a taller hierarchy with more layers of management, while a more decentralized structure may have a flatter hierarchy with fewer layers of management. Therefore, choices about decision-making authority and organizational structure are often related.

Quiz 15: Performance Evaluation and Compensation