Fundamentals of Cost Accounting, 6e (Lanen)
Chapter 12 Fundamentals of Management Control Systems
1) The design and use of management control systems affects how an individual makes and
implements decisions.
2) In general, there is a direct relationship between the quality of the information provided to
managers and the quality of decisions made using that information.
3) Rational managers will always make decisions that are in the best interest of the organization
employing them.
4) Decentralization is the delegation of the authority to make decisions in the organization’s
name to subordinates.
5) In general, organizations are more centralized in the early stages of their existence and more
decentralized as they grow.
6) One advantage of decentralization is faster response time to changes in the organization’s
environment by local managers.
7) One advantage of centralization is better use of top management’s time on strategic decisions.
8) Properly developed and implemented management control systems influence subordinates to
act in the organization’s best interest.
9) Delegated decision authority is the specification of what decisions a subordinate can make in
the organization.
10) It is important to not consider an organization’s compensation and reward system when
designing its performance evaluation system.
11) Managers in a cost center are held responsible for both the costs and volumes of inputs used
to produce a product or provide a service.
12) In general, profit centers are found at higher levels in an organization than investment
centers.
13) Properly designed management control systems can totally eliminate the inherent conflict
between individual behavior and organizational goals.
14) There is no single accounting measure that can fully measure the performance of a profit or
investment center.
15) Fixed compensation is generally not linked to measured performance; i.e., it is independent
of measured performance.
16) Properly designed management control systems have both fixed compensation and
contingent compensation.
17) Cost allocations based on dual rates assume that a common cost can be separated into a fixed
component and a variable component.
18) The primary reason to use a dual-rate allocation system is to focus a manager’s performance
evaluation on factors under the manager’s direct control.
19) It is possible for performance evaluation systems and/or management control systems to
contribute to unethical or fraudulent behavior.
20) Properly designed management control systems will eliminate fraudulent behavior by
maximizing goal congruence within the organization.
21) One of the key internal controls for any organization is separation of duties.
22) Internal controls are not legally required for publicly traded companies.
23) The design and use of management control systems uses concepts from which of the
following disciplines?
A) Demography.
B) Economics.
C) Trigonometry.
D) Physics.
24) What is the purpose of a management control system?
A) To align more closely the interests of the manager and the interests of the organization.
B) To allow individuals to obtain business experience.
C) To define the performance measures for employees.
D) To focus on the well-being of employees.
25) Which of the following correctly defines a principal-agent relationship?
A) The relationship between a superior and a subordinate.
B) The relationship between two superiors.
C) The relationship between two subordinates.
D) The relationship between a supervisor and a subversive.
26) What is the primary managerial responsibility in an organization?
A) Development of employees.
B) Development of profits.
C) Decision making.
D) Development of performance measurements.
27) Which of the following would be considered a principal in the principal-agent relationship?
A) A stockbroker in an investment arrangement.
B) A real estate agent for someone buying a house.
C) A customer leasing a car.
D) An employer hiring an employee.
28) Which of the following statements is/are true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and
implements decisions.
(B) Rational managers will always make decisions that are in the best interest of the organization
employing them.
A) Only A is true.
B) Only B is true.
C) Both of these are true.
D) None of these is true.
29) Decentralization refers to the delegation of decision-making authority to:
A) top management.
B) superiors.
C) board of directors.
D) subordinates.
30) Which of the following is not a characteristic of a decentralized organization?
A) Better use of local knowledge.
B) Better use of top management’s time.
C) Reduced response time to environmental changes.
D) More decisions made by relatively few individuals.
31) Which of the following statements is false?
A) The U.S. military is a good example of an organization that is highly decentralized.
B) The degree of decentralization depends on how many decisions principals delegate to agents.
C) Management control systems are used to measure the performance of an agent’s decisions.
D) Most organizations have some operating units that are centralized and some that are
decentralized.
32) Which of the following is not a cost of decentralization?
A) Managers in a decentralized organization might have a narrow focus on their own unit’s
performance rather than the attainment of their organization’s overall goals.
B) Managers in a decentralized organization might make the same types of decisions that are
being made at headquarters resulting in administrative duplication.
C) Delegating decision making to the lowest level possible enables an organization to respond in
a timely way to opportunities and problems.
D) Delegating decision making to the lowest level possible may lead to poor decisions based on
incomplete information.
33) Which one of the following will not occur in an organization that gives managers throughout
the organization maximum freedom to make decisions? (CMA adapted)
A) More effective solutions to operational problems.
B) Individual managers regard the managers of other segments as they do external parties.
C) Two divisions of the organization having competing models that aim for the same market
segments.
D) Delays in securing approval for the introduction of new products.
34) ________ is the delegation of decision-making authority to lower management levels within
the organization.
A) Transfer pricing
B) Centralization
C) Decentralization
D) Goal congruence
35) Which of the following is not a benefit of decentralization?
A) Allowing managers some autonomy in decision-making provides managerial training for
future higher-level managers.
B) In a decentralized organization some tasks or services may be duplicated unnecessarily.
C) Managers with some decision-making authority usually exhibit greater motivation than those
who merely execute the decisions of others.
D) Managers of the organization’s subunits are specialists, thereby enabling them to manage their
departments most effectively.
36) Which of the following statements is true regarding decentralization?
A) Decentralization increases the complexity of problems.
B) Managers in a decentralized organization have less knowledge about local business
advantages.
C) Decentralization limits fast responses to business changes.
D) Decentralization allows managers to receive on-the-job training in decision-making.
37) What does dysfunctional decision-making refer to?
A) Administrative duplication.
B) Local managers making decisions in their interests, which can differ from those of the
organization.
C) Delegated decision authority.
D) Poor decisions based on incomplete information.
38) Which of the following elements is not part of a management control system?
A) Delegated decision authority.
B) Performance evaluation system.
C) Knowledge of local conditions.
D) Compensation and reward system.
39) An operating unit of an organization is called a cost center if it is responsible:
A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.
40) An operating unit of an organization is called an investment center if it is responsible:
A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.
41) An operating unit of an organization is called a revenue center if it is responsible:
A) only for costs.
B) for selling a product.
C) for all costs and revenues.
D) for investments in assets.
42) An operating unit of an organization is called a profit center if it is responsible:
A) only for costs.
B) only for revenues.
C) for costs and revenues.
D) for investments in assets.
43) An operating unit that is responsible for revenues and costs is commonly referred to as a(n):
A) expense center.
B) revenue center.
C) profit center.
D) asset center.
44) An operating unit that is responsible for revenues only is commonly referred to as a(n):
A) expense center.
B) revenue center.
C) profit center.
D) asset center.
45) An operating unit that is responsible for only costs is commonly referred to as a(n):
A) cost center.
B) revenue center.
C) profit center.
D) asset center.
46) When managers are held responsible for costs but the input-output relationship is not well
specified, a(n) ________ is established.
A) standard cost center
B) revenue center
C) discretionary cost center
D) asset center
47) When managers are held responsible for costs and the input-output relationship is well
specified, a(n) ________ is established.
A) cost center
B) revenue center
C) discretionary cost center
D) asset center
48) Decentralized organizations can delegate authority and still maintain control and monitor
managers’ performance by designing appropriate management control systems. Which of the
following responsibility centers would be evaluated similar to an independent business? (CMA,
adapted)
A) Profit center.
B) Revenue center.
C) Investment center.
D) Discretionary cost center.
49) Controllable revenue is included in a performance report of a:
Profit Center Investment Center
A. Yes No
B. Yes Yes
C. No No
D. No Yes
A) Option A
B) Option B
C) Option C
D) Option D
50) Controllable revenue is included in a performance report of a:
Revenue Center Cost Center
A. Yes No
B. Yes Yes
C. No No
D. No Yes
A) Option A
B) Option B
C) Option C
D) Option D
51) Controllable revenue is included in a performance report of a:
Cost Center Profit Center
A. Yes No
B. Yes Yes
C. No No
D. No Yes
A) Option A
B) Option B
C) Option C
D) Option D
52) Assets invested in a responsibility center are included in a performance report of a:
Profit Center Investment Center
A. Yes No
B. Yes Yes
C. No No
D. No Yes
A) Option A
B) Option B
C) Option C
D) Option D
53) Assets invested in a responsibility center are included in a performance report of a:
Profit Center Cost Center
A. Yes No
B. Yes Yes
C. No No
D. No Yes
A) Option A
B) Option B
C) Option C
D) Option D
54) A manager makes a decision that is beneficial for a specific investment center and for the
entire organization. From the organization’s perspective, this decision results in:
A) goal congruence.
B) decentralization.
C) contingent compensation.
D) fixed compensation.