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Chapter 14
42. 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
43. 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
Chapter 14
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 operating income over a minimum amount of desired operating income is termed residual
income.
a.
True
b.
False
Chapter 14
46. 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
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 operating income earned by each division.
a.
True
b.
False
Chapter 14
48. 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
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
50. 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
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
Chapter 14
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 operating income is set by top management by establishing a minimum
rate of return considered acceptable for invested assets.
a.
True
b.
False
Chapter 14
54. 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
55. Since transfer prices will affect a division's financial performance, it is used by decentralized segments of a business.
a.
True
b.
False
Chapter 14
56. 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
57. 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
Chapter 14
58. The negotiated price approach allows the managers of decentralized units to agree among themselves on a transfer
price.
a.
True
b.
False
59. 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
Chapter 14
60. 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
61. The balanced scorecard attempts to evaluate the underlying financial drivers of nonfinancial performance.
a.
True
b.
False
Chapter 14
62. The financial performance of responsibility centers is evaluated in the balanced scorecard under the financial section
of the scorecard.
a.
True
b.
False
63. The balanced scorecard evaluates managers on financial and nonfinancial measures of performance.
a.
True
b.
False
Chapter 14
64. 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
65. 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
Chapter 14
66. 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.
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.
Chapter 14
68. 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.
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.
Chapter 14
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. The manager of a profit center has the responsibility for making decisions that affect the center's _____.
a.
costs, revenues, and investment in fixed assets.
b.
investment in fixed assets, but not costs.
c.
costs and revenues, but not investment in fixed assets.
Chapter 14
d.
revenues and investment in fixed assets, but not costs.
72. 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.
73. Which of the following expenses incurred by the sporting goods department of a department store is a direct expense?
Chapter 14
a.
Depreciation expense--office equipment
b.
Insurance on inventory of sporting goods
c.
Uncollectible accounts expense
d.
Office salaries
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
Chapter 14
75. A profit center calculates the service department charges to be paid by it:
a.
as the difference between its controllable expenses and controllable revenues.
b.
as the difference between its direct operating expenses and controllable expenses.
c.
as a product of service usage and total service department expense.
d.
as a product of service usage and service department charge rate.
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.
Chapter 14
77. The performance of a profit center manager is evaluated by comparing the profit center's operating income:
a.
with the other profit centers' operating income.
b.
with the profit center's budgeted operating income.
c.
with the organization's budgeted net income.
d.
with the organization's non-operating income.
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
79. To calculate operating income, total service department charges are:
a.
subtracted from operating income before service department charges.
b.
subtracted from operating expenses.
c.
added to operating income before service department charges.
d.
subtracted from gross profit margin.
80. Operating income of the Commercial Aviation Division is $3,300,000. If operating income 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.
