Chapter 24
PERFORMANCE MEASUREMENT AND RESPONSIBILITY
ACCOUNTING
1. Evaluation of the performance of a department involves only financial measures.
2. Evaluation of the performance of managers of profit centers assumes that the managers can
control or influence both costs and revenue generation.
3. Departmental information is important and always disclosed to the public as part of the
company’s annual report and footnotes.
4. Investment center is another name for profit center.
5. A department can never be considered to be a profit center.
6. A cost center does not directly generate revenues.
7. A selling department is usually evaluated as a profit center.
8. A department that is responsible for maximizing revenues is known as a profit center.
9. Indirect expenses should be allocated to departments based upon the benefits received by
each department.
10. Direct costs require allocation across departments.
11. Departmental wage expenses are direct expenses of that department.
12. The concepts of direct costs and controllable costs are essentially the same; also, indirect
costs and uncontrollable costs are essentially the same.
13. The number of hours that a department uses equipment and machinery is a reasonable
basis for allocating depreciation.
14. Advertising expense can be reasonably allocated to departments on the basis of sales.
15. Generally, it does not matter how cost allocations are designed and explained, because
most managers do not care whether the allocations appear to be fair or not.
16. A department’s direct expenses can be entirely avoided if the department manager
carefully controls and monitors operations.
17. Controllable costs are the same as direct costs.
18. A responsibility accounting performance report usually compares actual costs to budgeted
costs amounts.
19. Joint costs are a group of several costs incurred in producing or purchasing a single
product.
20. Joint costs can be allocated either using a physical basis or a value basis.
21. A joint cost of producing two products can be allocated between those products on the
basis of the relative physical quantities of each product produced.
22. In producing oat bran, the joint cost of milling the oats into bran, oatmeal, and animal feed
is considered a direct cost to the oat bran, because the oat bran cannot be produced without
incurring the joint cost.
23. Investment center managers are evaluated on their use of center assets to generate
income.
24. Return on investment is a useful measure to evaluate the performance of a cost center
manager.
25. A measure used to evaluate the manager of an investment center is return on total costs for
the investment center.
26. A useful measure used to evaluate the performance of an investment center is investment
center residual income.
27. An example of a service department is the human resources department.
28. Traditional two-stage cost allocation means that indirect costs are first allocated to both
operating and service departments, then operating department costs are allocated to service
departments.
29. A single basis for allocating service department costs to production departments should
be used for all service departments.
30. The process of preparing departmental income statements starts with allocating service
departments.
31. Departmental income statements are prepared for operating as well as service
departments.
32. Departmental contribution to overhead is the amount of revenues for that department less
its direct expenses.
33. Departmental contribution to overhead is the same as gross profit generated by that
department.
34. A cost center is a unit of a business that incurs costs but does not directly generate
revenues. All of the following are considered cost centers except:
A. Accounting department.
B. Purchasing department.
C. Research department.
D. Advertising department.
E. All of these could be considered cost centers.
24–10
35. A unit of a business that not only incurs costs, but also generates revenues, is called a:
A. Performance center.
B. Profit center.
C. Cost center.
D. Responsibility center.
E. Expense center.
36. A profit center:
A. Incurs costs, but does not directly generate revenues.
B. Incurs costs and directly generates revenues.
C. Has a manager who is evaluated solely on efficiency in controlling costs.
D. Incurs only indirect costs and directly generates revenues.
E. Incurs only indirect costs and generates revenues.
37. An accounting system that provides information that management can use to evaluate the
profitability and/or cost effectiveness of a department’s activities is a:
A. Departmental accounting system.
B. Cost accounting system.
C. Service accounting system.
D. Revenue accounting system.
E. Standard accounting system.
38. A department that incurs costs without directly generating revenues is a:
A. Service center.
B. Production center.
C. Profit center.
D. Cost center.
E. Performance center.
39. The difference between a profit center and an investment center is
A. an investment center incurs costs, but does not directly generate revenues.
B. an investment center incurs no costs but does generate revenues.
C. an investment center is responsible for effectively using center assets.
D. an investment center provides services to profit centers.
E. There is no difference; investment center and profit center are synonymous.
40. An expense that does not require allocation between departments is a(n):
A. Common expense.
B. Indirect expense.
C. Direct expense.
D. Administrative expense.
E. All of the options are correct.
41. Expenses that are easily traced and assigned to a specific department because they are
incurred for the sole benefit of that department are called:
A. Direct expenses.
B. Indirect expenses.
C. Controllable expenses.
D. Uncontrollable expenses.
E. Fixed expenses.
42. Expenses that are not easily associated with a specific department, and which are incurred
for the benefit of more than one department, are:
A. Fixed expenses.
B. Indirect expenses.
C. Direct expenses.
D. Uncontrollable expenses.
E. Variable expenses.
43. Regardless of the system used in departmental cost analysis:
A. Direct costs are allocated, indirect costs are not.
B. Indirect costs are allocated, direct costs are not.
C. Both direct and indirect costs are allocated.
D. Neither direct nor indirect costs are allocated.
E. Total departmental costs will always be the same.
44. The salaries of employees who spend all their time working in one department are:
A. Variable expenses.
B. Indirect expenses.
C. Direct expenses.
D. Responsibility expenses.
E. Unavoidable expenses.
45. A difficult problem in calculating the total costs and expenses of a department is:
A. Determining the gross profit ratio.
B. Assigning direct costs to the department.
C. Assigning indirect expenses to the department.
D. Determining the amount of sales of the department.
E. Determining the direct expenses of the department.
46. A company has two departments, A and B that incur delivery expenses. An analysis of the
total delivery expense of $9,000 indicates that Dept. A had a direct expense of $1,000 for
deliveries and Dept. B had no direct expense. The indirect expenses are $8,000. The analysis
also indicates that 60% of regular delivery requests originate in Dept. A and 40% originate in
Dept. B. Departmental delivery expenses for Dept. A and Dept. B, respectively, are:
A. $4,500; $4,500.
B. $5,800; $3,200.
C. $5,500; $3,500.
D. $5,500; $4,500.
E. $5,400; $3,600.
47. The allocation bases for assigning indirect costs include:
A. Only physical bases.
B. Only cost bases.
C. Only value bases.
D. Only unit bases.
E. Any appropriate and reasonable bases.
48. The most useful allocation basis for the departmental costs of an advertising campaign for
a storewide sale is likely to be:
A. Floor space of each department.
B. Relative number of items each department had on sale.
C. Number of customers to enter each department.
D. An equal amount of cost for each department.
E. Proportion of sales of each department.
49. Costs that the manager has the power to determine or at least strongly influence are
called:
A. Uncontrollable costs.
B. Controllable costs.
C. Joint costs.
D. Direct costs.
E. Indirect costs.
50. A report that accumulates the actual costs that a manager is responsible for and their
budgeted amounts is a:
A. Segmental accounting report.
B. Managerial cost report.
C. Controllable expense report.
D. Departmental accounting report.
E. Responsibility accounting performance report.
51. An accounting system that provides information that management can use to evaluate the
performance of a department’s manager is called a:
A. Cost accounting system.
B. Managerial accounting system.
C. Responsibility accounting system.
D. Financial accounting system.
E. Activity-based accounting system.
52. Costs that the manager does not have the power to determine or at least strongly influence
are:
A. Variable costs.
B. Uncontrollable costs.
C. Indirect costs.
D. Direct costs.
E. Joint costs.
53. Plans that identify costs and expenses under each manager’s control prior to the reporting
period are called:
A. Cost accounting systems.
B. Managerial accounting systems.
C. Responsibility accounting systems.
D. Responsibility accounting budgets.
E. Activity-based accounting systems.
54. Within an organizational structure, the person most likely to be evaluated in terms of
controllable costs would be:
A. A payroll clerk.
B. A cost center manager.
C. A production line worker.
D. A maintenance worker.
E. All of the individuals would be evaluated in terms of controllable costs.
55. The most useful evaluation of a manager’s cost performance is based on:
A. Controllable costs.
B. Contribution percentages.
C. Departmental contributions to overhead.
D. Uncontrollable expenses.
E. Direct costs.
24–18
56. In a responsibility accounting system:
A. Controllable costs are assigned to managers who are responsible for them.
B. Each accounting report contains all items allocated to a responsibility center.
C. Organized and clear lines of authority and responsibility are only incidental.
D. All managers at a given level have equal authority and responsibility.
E. All of the choices are correct.
57. Responsibility accounting performance reports:
A. Become more detailed at higher levels of management.
B. Become less detailed at higher levels of management.
C. Are equally detailed at all levels of management.
D. Are useful in any format.
E. Are irrelevant.
58. A responsibility accounting performance report displays:
A. Only actual costs.
B. Only budgeted costs.
C. Both actual costs and budgeted costs.
D. Only direct costs.
E. Only indirect costs.
59. A responsibility accounting system:
A. Is designed to measure the performance of managers in terms of controllable costs.
B. Assigns responsibility for costs to the appropriate managerial level that controls those
costs.
C. Should not hold a manager responsible for costs over which the manager has no influence.
D. Can be applied at any level of an organization.
E. All of the choices are correct.
60. A cost incurred in producing or purchasing two or more products at the same time is a(n):
A. Product cost.
B. Incremental cost.
C. Differential cost.
D. Joint cost.
E. Fixed cost.
61. Allocations of joint product costs can be based on the relative sales values of the
products:
A. And never on the relative physical quantities of the products.
B. Plus an adjustment for future excess margins.
C. And not on any other basis.
D. At the “split–off point”.
E. Only if the products contain both direct and indirect costs.
62. Allocating joint costs to products can be based on their relative:
A. Sales values.
B. Direct costs.
C. Gross margins.
D. Total costs.
E. Variable costs.
63. General Chemical produced 10,000 gallons of Breon and 20,000 gallons of Baron. Joint
costs incurred in producing the two products totaled $7,500. At the split-off point, Breon has a
market value of $6.00 per gallon and Baron $2.00 per gallon. Compute the portion of the joint
costs to be allocated to Breon if the value basis is used.
A. $2,500.
B. $3,000.
C. $4,500.
D. $5,625.
E. $1,500.