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Name:
Class:
Date:
chapter 14
Indicate whether the statement is true or false.
1. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover
would be 1.2.
a. True
b. False
2. Service department charges are similar to the expenses that would be incurred if the profit center purchased the services
from outside the company.
a. True
b. False
3. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin
calculated would be 24%.
a. True
b. False
4. The ratio of operating income to sales is termed the profit margin, a component of the rate of return on investment.
a. True
b. False
5. Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be
sold to outside buyers.
a. True
b. False
6. Controllable expenses are those that can be influenced by the decisions of the profit center management.
a. True
b. False
7. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin
calculated would be 20%.
a. True
b. False
8. A responsibility center in which the authority and responsibility for costs and revenues is vested on the department
manager is termed an investment center.
a. True
b. False
9. The rate of return on investment can be computed by dividing investment turnover by the profit margin.
a. True
b. False
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chapter 14
10. The manager of the furniture department of a leading retailer does not have control on salaries of the department
personnel.
a. True
b. False
11. If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on investment computed
would be 6.7%.
a. True
b. False
12. The underlying principle of allocating operating expenses to departments is to assign each department an amount of
expense proportional to the revenues of that department.
a. True
b. False
13. The rates at which services are charged to each division are called service department charge rates.
a. True
b. False
14. Investment turnover (as used in determining the rate of return on investment) focuses on the rate of profit earned on
each sales dollar.
a. True
b. False
15. The financial performance of responsibility centers is evaluated in the balanced scorecard under the financial section
of the scorecard.
a. True
b. False
16. The minimum amount of desired divisional operating income is set by top management by establishing a minimum
rate of return considered acceptable for invested assets.
a. True
b. False
17. The major shortcoming of using operating income as an investment center performance measure is that it ignores the
amount of assets invested in each center.
a. True
b. False
18. The balanced scorecard evaluates managers on financial and nonfinancial measures of performance.
a. True
b. False
19. A responsibility center in which the department manager has responsibility for and authority over costs in the
department is termed a cost center.
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chapter 14
a. True
b. False
20. If divisional operating income is $75,000, invested assets are $637,500, and the minimum rate of return on the
invested assets is 6%, the residual income calculated would be $36,750.
a. True
b. False
21. The objective of transfer pricing is to encourage each division's manager to transfer goods and services in such a
manner that will increase the overall company income.
a. True
b. False
22. Personnel administration expense for a department in a store is an indirect expense.
a. True
b. False
23. The primary disadvantage of decentralized operations is that decisions made by one manager may affect other
managers in such a way that the profitability of the entire company may suffer.
a. True
b. False
24. Property tax expense for a department store's equipment is an example of a direct expense.
a. True
b. False
25. By using the rate of return on investment as a divisional performance measure, divisional managers will always be
motivated to invest in proposals that will increase the overall rate of return for the company.
a. True
b. False
26. It is beneficial for related companies to negotiate a transfer price when the supplying company has unused capacity in
its plant.
a. True
b. False
27. The profit center income statement should include only controllable revenues and expenses.
a. True
b. False
28. The service department will determine its service department charge rate and charge the company's divisions or
departments based on the usage of the service by each department.
a. True
b. False
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chapter 14
29. If the profit margin for a division is 11% and the investment turnover is 1.5, the rate of return on investment computed
would be 16.5%.
a. True
b. False
30. The ratio of sales to invested assets is termed the investment turnover, a component of the rate of return on
investment.
a. True
b. False
31. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment
turnover would be 5.0.
a. True
b. False
32. The manager of a profit center does not make decisions concerning the fixed assets invested in the center.
a. True
b. False
33. If operating income for a division is $30,000, sales are $243,750, and invested assets are $187,500, the investment
turnover would be 1.3.
a. True
b. False
34. Responsibility accounting reports for profit centers are normally in the form of balance sheets.
a. True
b. False
35. The minimum amount of desired divisional operating income is set by top management by establishing a maximum
rate of return that is expected from the invested assets.
a. True
b. False
36. The ratio of sales to invested assets is termed investment turnover.
a. True
b. False
37. Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold
to outside buyers.
a. True
b. False
38. It is beneficial for two related companies to use the cost price approach for transfer pricing when both the companies
operate as cost centers and are not concerned with the revenue.
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a. True
b. False
39. Depreciation expense on store equipment for a department store is a direct expense.
a. True
b. False
40. The profit center income statement should include only those revenues and expenses that can be controlled by the
manager.
a. True
b. False
41. If divisional operating income is $100,000, invested assets are $850,000, and the minimum rate of return on invested
assets is 8%, the residual income would be $32,000.
a. True
b. False
42. Since transfer prices will affect a division's financial performance, it is used by decentralized segments of a business.
a. True
b. False
43. The major advantage of using the rate of return on investment over operating income as a divisional performance
measure is that divisional investment is directly considered, and, thus, comparability of divisions is facilitated.
a. True
b. False
44. The major advantage of residual income as a performance measure is that it gives consideration to not only a
minimum rate of return on investment but also to the total magnitude of operating income earned by each division.
a. True
b. False
45. The negotiated price approach allows the managers of decentralized units to agree among themselves on a transfer
price.
a. True
b. False
46. Sales commissions expense for a department store is an example of a direct expense.
a. True
b. False
47. If Division Q's operating income was $60,000 and invested assets amounted to $400,000, the rate of return on
investment calculated would be 15%.
a. True
b. False
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48. In the rate of return on investment analysis, the investment turnover component focuses on efficiency of use of assets
and indicates the number of sales dollar generated for each dollar of invested assets.
a. True
b. False
49. If operating income for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment
turnover would be 6.3.
a. True
b. False
50. A decentralized business organization is one in which all major planning and operating decisions are made by top
management.
a. True
b. False
51. The three common types of responsibility centers are referred to as asset centers, liabilities centers, and equity centers.
a. True
b. False
52. Operating expenses incurred for the entire business as a unit that are not subject to the control of individual
department managers are called indirect expenses.
a. True
b. False
53. Budget performance reports prepared for the vice president of production would generally contain less detail than the
reports prepared for the various plant managers.
a. True
b. False
54. The amount of details presented in a budget performance report for a cost center depends upon the level of
management to which the report is directed.
a. True
b. False
55. The primary accounting tool for controlling and reporting for cost centers is a budget performance report.
a. True
b. False
56. The profit margin, a component of the rate of return on investment, focuses on profitability by indicating the rate of
profit earned on each sales dollar.
a. True
b. False
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chapter 14
57. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to
the control of the department manager are termed indirect expenses.
a. True
b. False
58. Separation of businesses into more manageable operating units is termed centralization.
a. True
b. False
59. The process of measuring and reporting operating data by areas of responsibility is termed responsibility accounting.
a. True
b. False
60. The balanced scorecard attempts to evaluate the underlying financial drivers of nonfinancial performance.
a. True
b. False
61. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of activity
bases.
a. True
b. False
62. A centralized business organization is one in which all major planning and operating decisions are made by top
management.
a. True
b. False
63. The excess of divisional operating income over a minimum amount of desired operating income is termed residual
income.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
64. Which of the following expenses incurred by the sporting goods department of a department store is a direct expense?
a. Depreciation expense of office equipment
b. Insurance on inventory of sporting goods
c. Uncollectible accounts expense
d. Office salaries
65. The costs of services charged to a profit center based on the usage of the service are called _____.
a. operating expenses
b. noncontrollable charges
c. service department charges
d. activity charges
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66. The following financial information was summarized from the accounting records of Globe Corporation for the
current year ended December 31:
Northern Southern Corporate
Division
Division
Total
Cost of goods sold $310,000 $175,000
Direct operating expenses 250,000 115,000
Net sales 600,000 410,000
Interest expense $12,000
General overhead 101,000
Income tax 26,700
The net income for Globe Corporation is _____.
a. $59,000
b. $160,000
c. $19,400
d. $47,000
67. Zync Inc. had $1,150,000 in invested assets, sales of $1,300,000, operating income amounting to $185,000, and a
minimum acceptable rate of return of 15% on its invested assets. Zync's profit margin is _____.
a. 26.0%
b. 18.8%
c. 16.5%
d. 14.2%
68. Assume that divisional operating income amounts to $325,000, and top management has established 10% as the
minimum rate of return on divisional assets totaling $1,250,000. The residual income for the division is _____.
a. $200,000
b. $292,500
c. $125,000
d. $0
69. A responsibility center in which the department manager has responsibility for and authority over costs and revenues
is called a(n) _____.
a. profit center
b. investment center
c. volume center
d. cost center
70. The performance of a profit center manager is evaluated by comparing the profit center's operating income _____.
a. and the other profit centers' operating income
b. and the profit center's budgeted operating income
c. and the organization's budgeted net income
d. and the organization's non-operating income
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chapter 14
71. Responsibility accounting for a profit center focuses on reporting _____.
a. the controllable revenues only
b. controllable revenues, controllable expenses, and controllable profits
c. controllable revenues, controllable expenses, controllable profits, and investment in assets controlled by the
manager of the center
d. controllable expenses, and controllable profits, but not controllable revenues
72. Materials used by Meeta-Products Inc. in producing Division A's product are currently purchased from outside
suppliers at a cost of $12 per unit. However, the same materials are available from Division B. Division B has unused
capacity and can produce the materials needed by Division A at a variable cost of $7 per unit. A transfer price of $9 per
unit is established, and 35,000 units of material are transferred with no reduction in Division B's current sales.
How much would Division A's operating income increase?
a. $175,000
b. $70,000
c. $105,000
d. $75,000
73. The best measure of managerial efficiency in the use of investments in assets is _____.
a. rate of return on stockholders' equity
b. rate of return on investment
c. operating income
d. inventory turnover
74. Two divisions of Crowson Company (Divisions X and Y) have the same profit margins. Division X's investment
turnover is larger than that of Division Y (1.2 to 1.0). Which of the following statements is true?
a. Division Y will have a higher return on investment, as it is using its assets more efficiently in generating sales.
b. Division X will have a higher return on investment, as it is generating more operating income.
c. Division X will have a higher return on investment, as it is using its assets more efficiently in generating sales.
d. Division Y will have a higher return on investment, as it is generating more operating income.
75. Materials used by Boone Company in producing Division C's product are currently purchased from outside suppliers
at a cost of $20 per unit. However, the same materials are available from Division A. Division A has unused capacity and
can produce the materials needed by Division C at a variable cost of $17 per unit. A transfer price of $19 per unit is
negotiated and 60,000 units of material are transferred, with no reduction in Division A's current sales.
How much would Division A's operating income increase?
a. $0
b. $180,000
c. $60,000
d. $120,000
76. Responsibility accounting reports for profit centers will include _____.
a. only costs
b. only revenues
c. both expenses and fixed assets
d. revenues, expenses, and net income or loss from operations
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77. Some organizations use internal service departments to provide services to several divisions or departments within an
organization. Which of the following would probably not lend itself as a service department?
a. Inventory Control
b. Payroll Accounting
c. Information Systems
d. Human Resources
78. Identify the formula used to calculate profit margin.
a. Profit margin = Sales ÷ Operating income
b. Profit margin = Operating income ÷ Invested assets
c. Profit margin = Invested assets ÷ Operating income
d. Profit margin = Operating income ÷ Sales
79. Which transfer price approach is used when the transfer price is set at the amount sold to outside buyers?
a. Market price
b. Cost price
c. Negotiated price
d. Variable price
80. Which component of the balanced scorecard evaluates the economic performance of the responsibility centers?
a. Internal process
b. Financial
c. Innovation and learning
d. Customer
81. Operating income for Division M is $150,000, and operating income before service department charges is $975,000.
Therefore, _____.
a. total operating expenses are $825,000
b. total manufacturing expenses are $825,000
c. direct materials, direct labor, and factory overhead total $825,000
d. total service department charges are $825,000
82. Identify a disadvantage of decentralization of operations.
a. Managers do not have the scope to become experts in their area of operation.
b. Managerial creativity and customer relations are hampered.
c. Managers closest to the operations are not allowed to make decisions.
d. Decisions made by one manager may negatively affect the profits of the company.
83. For higher levels of management, responsibility accounting reports _____.
a. are more detailed than for lower levels of management
b. are more summarized than for lower levels of management
c. contain almost the same level of detail as reports for lower levels of management
d. are rarely provided or reviewed
84. Operating income of the Commercial Aviation Division is $3,300,000. If operating income before service department
charges is $3,900,000, _____.
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a. operating expenses are $600,000
b. total service department charges are $600,000
c. noncontrollable charges are $7,200,000
d. direct manufacturing charges are $3,900,000
85. Zygot Inc. had $650,000 invested in assets, sales of $1,250,000, operating income amounting to $140,000, and a
minimum acceptable rate of return of 12% on its invested assets. The rate of return on investment for Zygot is _____.
a. 16.2%
b. 21.5%
c. 14.5%
d. 25.0%
86. What additional information is needed to find the rate of return on investment if operating income is known?
a. Invested assets
b. Residual income
c. Direct expenses
d. Sales
87. Identify the type of organization in which all major planning and operating decisions are made by top management.
a. Decentralized
b. Centralized
c. Consolidated
d. Segmented
88. Division X's profit margin is 17%, and its investment turnover is 4.2. What is the rate of return on investment for
Division X?
a. 4.0%
b. 71.4%
c. 26.8%
d. 38.2%
89. The excess of actual operating income over a minimum acceptable operating income is called _____.
a. net profit
b. gross profit
c. non-operating income
d. residual income
90. Which of the following expenses incurred by a department store is an indirect expense?
a. Insurance on merchandise inventory
b. Sales salaries
c. Depreciation on store equipment
d. Salary of vice president of finance
91. To calculate operating income, total service department charges are _____.
a. subtracted from operating income before service department charges
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c. added to operating income before service department charges
d. added to gross profit margin
92. A profit center calculates the payment of service department _____.
a. using the difference between its controllable expenses and controllable revenues
b. using the difference between its direct operating expenses and controllable expenses
c. using a product of service usage and total service department expense
d. using a product of service usage and service department charge rate
93. The following data are taken from the management accounting reports of Dancer Co.:
Div. A Div. B Div. C
Operating income $1,800,000 $1,350,000 $1,900,000
Total service department charges 1,700,000 1,050,000 1,100,000
If an incentive bonus is paid to the manager who achieved the highest operating income before service department
charges, _____.
a. division A's manager is given the bonus
b. division B's manager is given the bonus
c. division C's manager is given the bonus
d. the managers of Divisions B and C divide the bonus
94. When managers of separate divisions or units are delegated the responsibility for managing their operations, the
operational responsibility is said to be _____.
a. amalgamated
b. accumulated
c. negotiated
d. decentralized
95. In large businesses, decentralization is often advantageous because _____.
a. it allows top management to make all decisions, thus ensuring that overall operational goals are met
b. it prevents decisions from one unit to negatively affect the profitability of the entire company
c. it allows departmental managers to focus on acquiring expertise in their areas of responsibility
d. it prevents duplication of assets and expense
96. Which of the following statements is used to measure the performance of a profit center's manager?
a. A divisional statement of cash flows
b. A divisional bank reconciliation statement
c. A divisional balance sheet
d. A divisional income statement
97. Which of the following expressions is termed the investment turnover factor as used in determining the rate of return
on investment?
a. Invested assets/Sales
b. Operating income/Invested assets
c. Operating income/Sales
d. Sales/Invested assets
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98. Division B's profit margin is 16%, and the investment turnover is 1.80. What is Division B's rate of return on
investment?
a. 15.7%
b. 28.8%
c. 17.0%
d. 10.6%
99. Which of the following is not a approach used for setting transfer prices?
a. Market price approach
b. Revenue price approach
c. Negotiated price approach
d. Cost price approach
100. Which of the following would not be considered as an internal centralized service department?
a. Payroll accounting department
b. Manufacturing department
c. Information systems department
d. Purchasing department
101. The manager of a cost center has the responsibility for making decisions affecting _____.
a. the center's revenues and investments
b. the center's revenues only
c. the center's costs only
d. the center's costs and revenues
102. Materials used by Meeta-Products Inc. in producing Division A's product are currently purchased from outside
suppliers at a cost of $12 per unit. However, the same materials are available from Division B. Division B has unused
capacity and can produce the materials needed by Division A at a variable cost of $7 per unit. A transfer price of $9 per
unit is established, and 35,000 units of material are transferred with no reduction in Division B's current sales.
How much would Meeta-Products total operating income increase?
a. $70,000
b. $175,000
c. $105,000
d. $100,000
103. The investment turnover is calculated as the ratio of sales to _____.
a. operating income
b. invested assets
c. marketable investments
d. profit margin
104. A common balanced scorecard measures performance in all of the following areas except _____.
a. education
b. internal process
c. financial
d. innovation and learning
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105. Division M for Movism Company has a rate of return on investment of 20% and an investment turnover of 1.5. What
is the profit margin?
a. 20%
b. 13%
c. 15%
d. 30%
106. The following financial information was summarized from the accounting records of Globe Corporation for the
current year ended December 31:
Northern Southern Corporate
Division
Division
Total
Cost of goods sold $310,000 $175,000
Direct operating expenses 250,000 115,000
Net sales 600,000 410,000
Interest expense $12,000
General overhead 101,000
Income tax 26,700
The operating income for the Southern Division is _____.
a. $150,000
b. $120,000
c. $295,000
d. $154,400
107. In an investment center, the manager has responsibility and authority for making decisions that affect _____.
a. only costs
b. both costs and revenues
c. only assets
d. costs, revenues, and assets
108. How do the responsibilities of a manager in an investment center compare to the responsibilities of managers in a
cost or profit center?
a. Investment center managers have more authority and responsibility than managers of a cost or profit center.
b. Investment center managers have more authority and responsibility than managers of a cost center but less than
managers of a profit center.
c. Investment center managers have about the same authority and responsibility as managers of a cost or profit
center.
d. Investment center managers have more authority and responsibility than managers of a profit center but less than
managers of a cost center.
109. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject
to the control of the department manager are termed _____.
a. miscellaneous administrative expenses
b. indirect expenses
