Question 1

Many companies view performance margin as a more useful tool than responsibility margin for evaluating segment managers.This is because:
A)Managers have no control over traceable fixed costs.
B)Performance margin is not affected by the size of the department.
C)Performance margin indicates the change in operating income that would result from closing the department.
D)Performance margin includes only those revenue and costs under the manager's direct control.

Accepted Answer

Performance margin includes only those revenue and costs under the manager's direct control, whereas responsibility margin also includes traceable fixed costs that a manager may not have control over. Therefore, performance margin is a more useful tool for evaluating segment managers as it directly reflects their ability to influence the financial results of their segment.

Question 2

Depreciation on the factory would be an example of a:
A)Controllable fixed cost.
B)Period cost.
C)Responsibility cost.
D)Committed fixed cost.

Accepted Answer

Depreciation on factory is a committed fixed cost, meaning it cannot be easily adjusted in the short term and is necessary for the production process.

Question 3

The dollar amount used by one division which supplies a good or a service to another division within a company is called a:
A)Market price.
B)Transfer price.
C)Fair price.
D)Agreed-upon price.

Accepted Answer

The dollar amount used by one division which supplies a good or a service to another division within a company is called a transfer price. This price is agreed upon by both divisions and should be set at a fair market value to ensure that the supplying division is compensated properly and the receiving division doesn't overpay.

Question 4

A responsibility income statement generally does not show the:
A)Contribution margin of each responsibility center.
B)Traceable fixed costs allocated to each responsibility center.
C)Segment margin of each responsibility center.
D)Net income of each responsibility center.

Accepted Answer

A responsibility income statement is used to analyze the profitability of different segments or responsibility centers within an organization. It typically shows the contribution margin and traceable fixed costs allocated to each responsibility center, as well as the segment margin, which represents the profit or loss of each center before common costs are allocated. However, the responsibility income statement does not show the net income of each responsibility center, as this information would be included in the overall income statement of the organization.

Question 5

Company MHF operates subsidiaries in two countries.One of the subsidiaries consumes the output of the other in the production of a good for sale to the public.The company could increase cash flows by:
A)Using a transfer price based on full cost.
B)Using a transfer price to transfer as much income as possible to the subsidiary located in the lower tax country.
C)Using a transfer price based on market value.
D)Using a transfer price to transfer as much income as possible to the subsidiary located in the higher tax country.

Accepted Answer

Transfer pricing strategies that shift income to lower tax jurisdictions can help multinational companies reduce their overall tax burden, thereby increasing cash flows. By setting a transfer price that moves as much income as possible to the subsidiary in the lower tax country, the company can lower its total tax expense.

Question 6

The most common value used for transfer pricing is:
A)Total fixed costs.
B)Total fixed and variable costs.
C)Market value less fixed costs.
D)Market value.

Accepted Answer

The most common value used for transfer pricing is market value, which is the price at which goods or services are bought and sold between unrelated parties in a free and open market. This method ensures that transactions between related parties are conducted at arm's length and reflects the true market value of the goods or services being transferred. Total fixed costs and total fixed and variable costs are not commonly used in transfer pricing, as they do not take into account the true market value of the goods or services being transferred. Market value less fixed costs may be used in certain circumstances, but it is not as commonly used as market value alone.

Question 7

The responsibility margin is calculated by:
A)Subtracting fixed costs traceable to a center from its contribution margin.
B)Subtracting common fixed costs from the contribution margin.
C)Subtracting variable costs from sales.
D)Subtracting common fixed costs from variable costs.

Accepted Answer

The responsibility margin is calculated by subtracting fixed costs that are traceable to a center from its contribution margin. This helps in evaluating the performance of a profit or investment center by considering only the revenues and costs directly under the control of the center's manager.

Question 8

Responsibility accounting systems should begin with:
A)A budget by center.
B)A performance report by center.
C)A measure of corporate performance.
D)A company-wide income statement.

Accepted Answer

Responsibility accounting systems are designed to allocate responsibility for costs and revenues to the individuals or departments that have direct control over them. Therefore, the system should begin with a budget by center, which outlines the expected costs and revenues for each department or individual within the organization. Once this budget has been established, a performance report by center can be generated to compare actual results against the budgeted amounts. This helps to identify areas where corrective action may be necessary. Eventually, a company-wide income statement will be generated, but this is not the starting point for responsibility accounting systems.

Question 9

If a company wanted to evaluate the manager's ability to control costs,the company would probably look at the:
A)Performance margin.
B)Responsibility margin.
C)Contribution margin.
D)Segment margin.

Accepted Answer

The answer of If a company wanted to evaluate the...

Question 10

Responsibility accounting systems measures the performance of:
A)The entire company.
B)Each center individually.
C)Both the entire company and each center individually.
D)Neither the entire company nor each center individually.

Accepted Answer

Responsibility accounting systems are designed to measure the performance of individual centers or departments within a company. This allows managers to identify areas that are performing well and those that need improvement, and take appropriate action to optimize performance. While responsibility accounting systems may provide some insight into the overall performance of the company, their primary focus is on the performance of individual centers. Therefore, the correct answer is B.

Question 11

In preparing a responsibility income statement that shows contribution margin and responsibility margin,generally two concepts are involved in allocating costs to the various centers.These concepts are:
A)Whether the costs are variable or fixed and whether they are material in dollar amount.
B)Whether the costs are traceable to the responsibility center and whether the responsibility center is organized as a profit center or an investment center.
C)Whether the costs are variable or fixed and whether they are directly traceable to the responsibility center.
D)Whether the costs are traceable to the responsibility center and whether they are material in dollar amount.

Accepted Answer

The two concepts involved in allocating costs are whether the costs are variable or fixed, and whether they are directly traceable to the responsibility center. Materiality of the cost is not considered in the allocation process. The organization of the responsibility center as a profit center or an investment center is also not relevant to the allocation of costs. Therefore, option C is the best choice.

Question 12

In the short run,the greatest increase in profitability will result from increasing sales in those profit centers with the:
A)Highest performance margins.
B)Lowest traceable fixed costs.
C)Highest contribution margin ratios.
D)Highest responsibility margins.

Accepted Answer

The highest increase in profitability in the short run will be gained by increasing sales in profit centers with the highest contribution margin ratios. The contribution margin is calculated as sales minus variable costs and represents the portion of sales that contributes towards covering fixed costs and generating profit. Therefore, by increasing sales in profit centers with high contribution margin ratios, the business can generate higher profits while covering fixed costs. Choice A (Highest performance margins) does not necessarily indicate high profitability as performance margins only measure profitability before fixed costs are accounted for. Choice B (Lowest traceable fixed costs) may not result in the greatest increase in profitability as it only focuses on reducing costs rather than increasing revenue. Choice D (Highest responsibility margins) is not a common financial term and is therefore not applicable in this context.

Question 13

Sloan Sporting Goods has stores in four geographic regions.Each region has at least 20 stores.In the company's responsibility accounting system,sales are recorded separately for each sales department within each store.The total sales for a particular region are determined by:
A)Combining the total sales of all stores in that region.
B)Using a separate revenue account to record the sales transaction for each region.
C)Taking a percentage of the company's total sales that is equal to the percentage of the company's stores located in that region.
D)Adding together the sales tickets for all sales transactions in the region.

Accepted Answer

The question states that the total sales for a particular region are determined by combining the total sales of all stores in that region. Therefore, the best choice is A. B and D are incorrect because they do not reflect the method described in the question. C is incorrect because the percentage of stores in a region does not necessarily correlate with the percentage of sales in that region.

Question 14

Parker's newly hired director of accounting services feels that the property taxes on the Cairo factory should be allocated to the fabricating,assembly,and finishing departments based upon the square footage they occupy.Of the following,which is not a valid reason to reject this recommendation?
A)The property taxes would not change even if one or more of the departments were eliminated.
B)Such an allocation violates GAAP.
C)The property taxes are not under the control of department managers.
D)The allocation may imply changes in efficiency that are unrelated to center performance.

Accepted Answer

The violation of GAAP (Generally Accepted Accounting Principles) is a valid reason to reject the recommended allocation method. The other options (A, C, D) are not necessarily relevant to the appropriateness of the allocation method.

Question 15

The contribution margin is calculated by:
A)Subtracting fixed costs from sales.
B)Subtracting variable costs from sales.
C)Subtracting fixed and variable costs from sales.
D)Subtracting common costs from sales.

Accepted Answer

The contribution margin is the amount of revenue remaining after deducting variable expenses. Therefore, the correct calculation is to subtract variable costs from sales.

Question 16

In a responsibility income statement,the term common fixed costs describes fixed costs that:
A)Are under the manager's immediate control.
B)Jointly benefit several responsibility centers of the business.
C)Occur in virtually every responsibility center of the business (such as salaries).
D)Are easily traceable to specific profit centers.

Accepted Answer

Common fixed costs are costs that benefit multiple responsibility centers or profit centers in the business. These costs cannot be easily allocated to a single center, so they are not under the immediate control of any one manager. Examples of common fixed costs include rent for a shared facility, insurance, and property taxes.

Question 17

The concept of contribution margin applies:
A)Only to investment centers.
B)Only to profit centers.
C)Only to cost centers.
D)To all types of responsibility centers.

Accepted Answer

The answer of The concept of contribution margin applies:
A)Only to...

Question 18

Successful operation of a responsibility accounting system requires all of the following except:
A)Budgets prepared for each responsibility center.
B)The use of a bonus pool based on ROA (return on assets).
C)An accounting system which measures the performance of each responsibility center.
D)The preparation of timely performance reports.

Accepted Answer

While budgets, performance measurements, and timely reports are all essential components of a responsibility accounting system, the use of a bonus pool based on ROA is not necessary. There are other ways to incentivize and reward employees for their performance in a responsibility center, such as bonuses based on meeting or exceeding specific goals or objectives. Therefore, option B is not required for a successful operation of a responsibility accounting system.

Question 19

Traceable fixed costs that the manager of a department cannot change are called:
A)Controllable.
B)Committed.
C)Conditional.
D)Common.

Accepted Answer

Committed costs are fixed costs that cannot be changed by the manager of a department. They are typically long-term investments or contracts that have already been made by the organization, such as lease payments, salaries of key personnel, and insurance premiums. Controllable costs are those within the power of a manager to change or influence, such as discretionary spending on supplies or training. Conditional and common costs are not related to fixed costs that cannot be changed.

Question 20

Responsibility margin is equal to:
A)Revenue,less contribution margin and traceable fixed costs.
B)Revenue,less variable costs.
C)Revenue,less variable costs and traceable fixed costs.
D)Revenue,less variable fixed costs,traceable fixed costs,and common costs.

Accepted Answer

Responsibility margin is the amount of revenue remaining after subtracting the variable costs and traceable fixed costs associated with a particular responsibility center. Common costs are not included in the computation of responsibility margin because they cannot be directly traced to a particular center. Therefore, Choice C which includes revenue, less variable costs and traceable fixed costs is the correct answer.

Quiz 22: Responsibility Accounting and Transfer Pricing

Many companies view performance margin as a more useful tool than responsibility margin for evaluating segment managers.This is because:

Depreciation on the factory would be an example of a:

The dollar amount used by one division which supplies a good or a service to another division within a company is called a:

A responsibility income statement generally does not show the:

Company MHF operates subsidiaries in two countries.One of the subsidiaries consumes the output of the other in the production of a good for sale to the public.The company could increase cash flows by:

The most common value used for transfer pricing is:

The responsibility margin is calculated by:

Responsibility accounting systems should begin with:

If a company wanted to evaluate the manager's ability to control costs,the company would probably look at the:

Responsibility accounting systems measures the performance of:

In preparing a responsibility income statement that shows contribution margin and responsibility margin,generally two concepts are involved in allocating costs to the various centers.These concepts are:

In the short run,the greatest increase in profitability will result from increasing sales in those profit centers with the:

Sloan Sporting Goods has stores in four geographic regions.Each region has at least 20 stores.In the company's responsibility accounting system,sales are recorded separately for each sales department within each store.The total sales for a particular region are determined by:

Parker's newly hired director of accounting services feels that the property taxes on the Cairo factory should be allocated to the fabricating,assembly,and finishing departments based upon the square footage they occupy.Of the following,which is not a valid reason to reject this recommendation?

The contribution margin is calculated by:

In a responsibility income statement,the term common fixed costs describes fixed costs that:

The concept of contribution margin applies:

Successful operation of a responsibility accounting system requires all of the following except:

Traceable fixed costs that the manager of a department cannot change are called:

Responsibility margin is equal to: