Question 1

Setting transfer prices at full cost can lead to bad decisions because, among other reasons, full cost does not take into account opportunity costs.

Accepted Answer

Full cost includes direct and indirect costs, but it does not consider the opportunity cost of selling a product or service internally versus externally. Opportunity cost refers to the value of the next best alternative that is given up when a choice is made. Therefore, setting transfer prices at full cost may not reflect the true value of a product or service and can result in suboptimal decision-making.

Question 2

In service department cost allocations, sales dollars should be used as an allocation base whenever possible.

Accepted Answer

Sales dollars may not be the most appropriate allocation base for service department costs as they may not be directly related to service department activities. Other bases such as labor hours or machine hours may be more appropriate.

Question 3

Which of the following would be considered an operating asset in return on investment computations?
A) Land being held for plant expansion.
B) Treasury stock.
C) Accounts receivable.
D) Common stock.

Accepted Answer

Operating assets are those that are used to generate revenue in the normal course of business operations. Accounts receivable is an example of an operating asset as it represents money owed to the company for goods or services already provided. Land being held for plant expansion and common stock are not operating assets as they are not directly used to generate revenue. Treasury stock is a contra-equity account and not an asset.

Question 4

If transfer prices are to be based on cost, then the costs should be actual costs rather than standard costs.

Accepted Answer

Using standard costs for transfer pricing can provide consistency and predictability, allowing for better planning and performance evaluation, whereas actual costs can vary and may introduce unpredictability.

Question 5

Which of the following performance measures will increase if inventory decreases and all else remains the same? 
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Accepted Answer

The answer of Which of the following performance measures will...

Question 6

Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment? 
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Accepted Answer

The answer of Which of the following segment performance measures...

Question 7

Which of the following will not result in an increase in return on investment (ROI), assuming other factors remain the same?
A) A reduction in expenses.
B) An increase in net operating income.
C) An increase in operating assets.
D) An increase in sales.

Accepted Answer

An increase in operating assets will result in a decrease in ROI, as ROI is calculated by dividing net operating income by total assets. Therefore, increasing the denominator (operating assets) will decrease ROI.

Question 8

All other things equal, which of the following would increase a division's residual income?
A) Increase in expenses.
B) Decrease in average operating assets.
C) Increase in minimum required return.
D) Decrease in net operating income.

Accepted Answer

Residual income is calculated as net operating income minus a minimum required return multiplied by average operating assets. Therefore, decreasing average operating assets would increase residual income. Increasing expenses or decreasing net operating income would decrease residual income. Increasing the minimum required return could go either way, depending on whether the new minimum required return is lower or higher than the current return.

Question 9

A segment of a business responsible for both revenues and expenses would be called:
A) a cost center.
B) an investment center.
C) a profit center.
D) residual income.

Accepted Answer

A profit center is responsible for generating revenues and incurring expenses, and has the goal of making a profit. Profit centers are often used by businesses to evaluate the performance of certain segments or divisions within the company. A cost center is responsible only for incurring expenses, while an investment center is responsible for generating revenues and making investments. Residual income is a financial measurement that evaluates the profitability of an investment after accounting for the cost of capital.

Question 10

For performance evaluation purposes, the actual fixed costs of a service department should be charged to the departments that consume the service in proportion to the actual services provided to the consuming departments during the period.

Accepted Answer

Fixed costs are typically allocated based on budgeted, rather than actual, service consumption to ensure stability and predictability in the allocation process.

Question 11

All charges for services computed using budgeted rather than actual rates should be removed from an operating department's performance report.

Accepted Answer

Using budgeted rates for charging services in an operating department's performance report is a common practice for planning and control purposes. It allows for consistent comparison against the budget, regardless of actual rate fluctuations, helping in assessing the department's efficiency and performance without penalizing or benefiting it for variances outside its control.

Question 12

The transfer price used for internal transfers between divisions of the same company cannot affect the divisions' reported profits.

Accepted Answer

The transfer price used for internal transfers between divisions can affect the selling division's reported profit and the buying division's cost of goods sold, which can in turn affect their reported profits. Therefore, the statement is false.

Question 13

Some investment opportunities that should be accepted from the viewpoint of the entire company may be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.

Accepted Answer

If a manager is evaluated solely on the basis of return on investment (ROI), they may prioritize investments that have high short-term returns, even if they don't align with the strategy or long-term goals of the entire company. This can result in the rejection of investment opportunities that may have a lower ROI in the short term, but would have greater benefit for the company as a whole in the long term.

Question 14

Which of the following would be an argument for using the gross cost of plant and equipment as part of operating assets in return on investment (ROI) computations?
A) It is consistent with the computation of net operating income, which includes depreciation as an operating expense.
B) It is consistent with the balance sheet presentation of plant and equipment.
C) It eliminates the age of equipment as a factor in return on investment (ROI) computations.
D) It discourages the replacement of old, worn-out equipment because of the dramatic, adverse effect on return on investment.

Accepted Answer

Using the gross cost of plant and equipment in ROI computations removes the impact of depreciation and thus the age of the equipment, making comparisons more consistent regardless of how old the equipment is.

Question 15

Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets?
A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income

Accepted Answer

Residual income measures the income earned by an investment center above and beyond the minimum required return on average operating assets. This encourages continued expansion as long as the investment center is able to earn a return in excess of the minimum required return. Return on investment (A) also considers the amount of assets invested, but may not encourage expansion if the investment center cannot earn a return that meets the required rate. Transfer pricing (B) and the contribution approach (C) do not directly relate to encouraging expansion or measuring the profitability of an investment center.

Question 16

Since sales dollars represents "ability to pay," it is superior to most other bases used for allocating or charging service department costs.

Accepted Answer

Sales dollars as a basis for allocating service department costs may not accurately reflect the actual use or benefit derived from the services provided, making it not necessarily superior to other allocation bases that might more closely match the cause-and-effect relationship between the service provided and the costs incurred.

Question 17

For performance evaluation purposes, variable service department costs should be charged to operating departments in predetermined, lump-sum amounts.

Accepted Answer

Variable service department costs should be allocated to operating departments based on usage or other appropriate allocation bases, rather than predetermined lump-sum amounts. This provides a more accurate and fair distribution of costs based on the actual amount of resources used by each operating department.

Question 18

Whenever possible, service department costs should be separated into fixed and variable costs and charged separately to operating departments.

Accepted Answer

Separating service department costs into fixed and variable costs and charging them separately to operating departments allows for more accurate cost allocation and promotes better decision making.

Question 19

For performance evaluation purposes, any variance over budgeted fixed costs in a service department should be the responsibility of the service department and should not be charged to the departments that use the service.

Accepted Answer

Variance over budgeted fixed costs in a service department should be absorbed by the department itself as it is not directly related to the usage of services by other departments. Therefore, it should not be charged to other departments.

Question 20

When a dispute arises over a transfer price, top managers should intervene to keep divisional managers from making a costly mistake, even though the divisions are evaluated as profit centers.

Accepted Answer

The answer of When a dispute arises over a transfer...

Quiz 11: Responsibility Accounting Systems

Setting transfer prices at full cost can lead to bad decisions because, among other reasons, full cost does not take into account opportunity costs.

In service department cost allocations, sales dollars should be used as an allocation base whenever possible.

Which of the following would be considered an operating asset in return on investment computations?

If transfer prices are to be based on cost, then the costs should be actual costs rather than standard costs.

Which of the following performance measures will increase if inventory decreases and all else remains the same?

Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment?

Which of the following will not result in an increase in return on investment (ROI) , assuming other factors remain the same?

All other things equal, which of the following would increase a division's residual income?

A segment of a business responsible for both revenues and expenses would be called: