CHAPTER 14: PERFORMANCE EVALUATION FOR DECENTRALIZED
OPERATIONS
1. Separation of businesses into more manageable operating units is termed centralization.
a. True
b. False
2. The process of measuring and reporting operating data by areas of responsibility is termed
responsibility accounting.
a. True
b. False
3. A decentralized business organization is one in which all major planning and operating
decisions are made by top management.
a. True
b. False
4. 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
5. A centralized business organization is one in which all major planning and operating decisions
are made by top management.
a. True
b. False
6. The three common types of responsibility centers are referred to as asset centers, liabilities
centers, and equity centers.
a. True
b. False
7. A responsibility center in which the department manager has responsibility for and authority
over costs in the department is termed a cost center.
a. True
b. False
Chapter 14: Performance Evaluation for Decentralized Operations
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. 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
10. 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
11. The primary accounting tool for controlling and reporting for cost centers is a budget
performance report.
a. True
b. False
12. 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
13. Sales commissions expense for a department store is an example of a direct expense.
a. True
b. False
14. 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
Chapter 14: Performance Evaluation for Decentralized Operations
15. Personnel administration expense for a department in a store is an indirect expense.
a. True
b. False
16. 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
17. 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
18. The profit center income statement should include only controllable revenues and expenses.
a. True
b. False
19. Property tax expense for a department store’s store equipment is an example of a direct
expense.
a. True
b. False
20. Controllable expenses are those that can be influenced by the decisions of the profit center
management.
a. True
b. False
21. Depreciation expense on store equipment for a department store is a direct expense.
a. True
b. False
Chapter 14: Performance Evaluation for Decentralized Operations
22. Responsibility accounting reports for profit centers are normally in the form of balance sheets.
a. True
b. False
23. The manager of a profit center does not make decisions concerning the fixed assets invested in
the center.
a. True
b. False
24. The profit center income statement should include only those revenues and expenses that can
be controlled by the manager.
a. True
b. False
25. The manager of the furniture department of a leading retailer does not have control on salaries
of the department personnel.
a. True
b. False
26. 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
27. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting
are examples of activity bases.
a. True
b. False
28. The rates at which services are charged to each division are called service department charge
rates.
a. True
b. False
Chapter 14: Performance Evaluation for Decentralized Operations
29. The major shortcoming of using income from operations as an investment center performance
measure is that, it ignores the amount of assets invested in each center.
a. True
b. False
30. If Division Q’s income from operations was $60,000 and invested assets amounted to
$400,000, the rate of return on investment calculated would be 15%.
a. True
b. False
31. The rate of return on investment can be computed by dividing investment turnover by the
profit margin.
a. True
b. False
32. 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
33. 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
34. The ratio of sales to invested assets is termed investment turnover.
a. True
b. False
35. 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
Chapter 14: Performance Evaluation for Decentralized Operations
36. If income from operations 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
37. If income from operations 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
38. If income from operations 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
39. If income from operations 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
40. If income from operations 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
41. If income from operations 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
42. The major advantage of using the rate of return on investment over income from operations as
a divisional performance measure is that, divisional investment is directly considered and thus
comparability of divisions is facilitated.
a. True
b. False
Chapter 14: Performance Evaluation for Decentralized Operations
43. If divisional income from operations 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
44. 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
45. The excess of divisional income from operations over a minimum amount of desired income
from operations is termed residual income.
a. True
b. False
46. The minimum amount of desired divisional income from operations is set by top management
by establishing a maximum rate of return that is expected from the invested assets.
a. True
b. False
47. 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 income from operations earned by each division.
a. True
b. False
48. The ratio of income from operations to sales is termed the profit margin, a component of the
rate of return on investment.
a. True
b. False
49. 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
Chapter 14: Performance Evaluation for Decentralized Operations
50. If divisional income from operations 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
51. The profit margin, a component of the rate of return on investment, focuses on the profitability
by indicating the rate of profit earned on each sales dollar.
a. True
b. False
52. In the rate of return on investment analysis, the investment turnover component focuses on the
efficiency in the use of assets and indicates the number of sales dollar generated for each
dollar of invested assets.
a. True
b. False
53. The minimum amount of desired divisional income from operations is set by top management
by establishing a minimum rate of return considered acceptable for invested assets.
a. True
b. False
54. The balanced scorecard attempts to evaluate the underlying financial drivers of nonfinancial
performance.
a. True
b. False
55. The balanced scorecard evaluates managers on financial and nonfinancial measures of
performance.
a. True
b. False
56. The financial performance of responsibility centers is evaluated in the balanced scorecard
under the financial section of the scorecard.
a. True
b. False
Chapter 14: Performance Evaluation for Decentralized Operations
57. 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
58. Since transfer prices will affect a division’s financial performance, it is used by decentralized
segments of a business.
a. True
b. False
59. 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
60. 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
61. The negotiated price approach allows the managers of decentralized units to agree among
themselves on a transfer price.
a. True
b. False
62. 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
63. 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.
a. True
b. False
Chapter 14: Performance Evaluation for Decentralized Operations
64. Which type of organization would be most effective for a small owner/manager-operated
business?
a. Decentralized
b. Centralized
c. Matrix
d. Segmented
65. Businesses that are separated into two or more manageable units and in which managers have
authority and responsibility for operations are said to be:
a. centralized.
b. consolidated.
c. diversified.
d. decentralized.
66. Which of the following is a disadvantage of decentralized operation?
a. It does not allow managers to become experts in their area of operation.
b. Top management has less time to devote to long range strategic planning.
c. It does not allow managers closest to the operations to make decisions.
d. It may result in duplicate assets and expenses.
67. 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.
68. In a cost center, the manager has responsibility and authority for making decisions that affect:
a. both cost and investment.
b. only investment.
c. only costs.
d. both costs and revenues.
Chapter 14: Performance Evaluation for Decentralized Operations
69. 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.
70. 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.
71. In a profit center, the department manager has responsibility for and the authority to make
decisions that affect:
a. not only costs and revenues, but also assets invested in the center.
b. the assets invested in the center, but not costs and revenues.
c. both costs and revenues for the department or division.
d. costs and assets invested in the center, but not revenues.
72. Responsibility accounting reports for a profit center typically show:
a. revenues, expenses, and profit controlled by the manager of the center.
b. only the controllable revenues.
c. revenues, expenses, profit, and investment in assets controlled by the manager of the center.
d. all the investment in assets controlled by the manager of the center.
73. Which of the following expenses incurred by the sporting goods department of a department
store is a direct expense?
a. Depreciation expense—office equipment
b. Insurance on inventory of sporting goods
c. Uncollectible accounts expense
d. Office salaries
Chapter 14: Performance Evaluation for Decentralized Operations
74. 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
75. In a profit center, the manager has responsibility and authority for making decisions that
affect:
a. only costs.
b. only assets.
c. both costs and assets.
d. both costs and revenues.
76. 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.
c. direct expenses.
d. variable expenses.
77. In evaluating the profit center manager, the income from operations should be compared:
a. across profit centers.
b. to historical performance or budget.
c. to the competitor’s net income.
d. to the total company’s earnings per share.
78. 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.
Chapter 14: Performance Evaluation for Decentralized Operations
79. To calculate income from operations, total service department charges are:
a. subtracted from income from operations before service department charges.
b. subtracted from operating expenses.
c. added to income from operations before service department charges.
d. subtracted from gross profit margin.
80. Income from operations of the Commercial Aviation Division is $3,300,000. If income from
operations before service department charges is $3,900,000:
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.
81. Division T reported income from operations of $900,000 and total service department charges
of $575,000. Therefore:
a. net income was $325,000.
b. the gross profit margin was $325,000.
c. income from operations before service department charges was $1,475,000.
d. consolidated net income was $325,000.
82. Income from operations for Division X is $280,000, total service department charges are
$570,000, and operating expenses are $2,530,000. What are the revenues for Division X?
a. $2,810,000
b. $2,240,000
c. $2,530,000
d. $3,380,000
83. Income from operations for Division M is $150,000, and income from operations 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.
Chapter 14: Performance Evaluation for Decentralized Operations
84. 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.
85. 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
86. Which of the following is used to measure a manager’s performance working in a profit
center?
a. Balance sheet
b. Rate of return and residual income
c. Budget performance report
d. Divisional income statements
87. 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
Chapter 14: Performance Evaluation for Decentralized Operations
88. The following data are taken from the management accounting reports of Dancer Co.:
Div. A
Div. B
Div. C
Income from operations
$3,600,000
$3,700,000
$2,700,000
Total service department charges
3,400,000
2,100,000
2,200,000
If an incentive bonus is paid to the manager who achieved the highest income from operations
before service department charges, it follows that:
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.
89. The following data are taken from the management accounting reports of Dancer Co.:
Div. A
Div. B
Div. C
Income from operations
$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 income from operations
before service department charges, it follows that
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.