Chapter 10—Performance Evaluation, Variable Costing, and
Decentralization Key
1. The practice of delegating decision-making authority to lower levels of management in a company is called
decentralization.
2. In a decentralized company, overall profit margins can mask inefficiencies within the various subdivisions.
3. Decentralization is usually achieved by creating units called divisions.
4. A production department within the factory, such as assembly, is an example of a profit center.
5. In a decentralized company, central management is able to focus on strategic planning and decision making.
6. Variable costing and absorption costing income statements may differ because of their treatment of fixed
selling and administrative costs.
7. Inventory costs under variable costing include only direct materials, direct labor, and variable factory
overhead.
8. Inventory under absorption costing includes direct materials, direct labor, variable factory overhead, and
fixed factory overhead.
9. If the number of units produced in a period is larger than the number of units sold in a period, absorption
costing income will be higher than variable costing income.
10. If the number of units produced in a period is smaller than the number of units sold in period, absorption
costing income will be higher than variable costing income.
11. Product cost includes all costs of the company.
12. On a segmented income statement, fixed costs are broken down into direct fixed costs and common fixed
costs.
13. Return on investment (ROI) is the most common measure of performance for an investment center.
14. Return on investment (ROI) can be calculated by multiplying margin times turnover.
15. Turnover is the ratio of operating income to sales.
16. Decreasing inventories leads to a reduction in return on investment (ROI).
17. Residual income is sometimes used to overcome the tendency of ROI to discourage investments that are
profitable for the company, but that lower the division’s ROI.
18. Unlike ROI, residual income does not encourage a short-run orientation.
19. Economic value added (EVA) is similar to ROI in that it links net income to capital employed.
20. A key feature of economic value added (EVA) is that it emphasizes after-tax operating income and the
actual cost of capital.
21. In terms of operating income for the company as a whole, the transfer price set by the buying and selling
divisions nets out.
22. The market price is always the best transfer pricing policy.
23. In negotiated transfer pricing, the buying division sets the ceiling (maximum possible transfer price) for the
bargaining range.
24. In negotiated transfer pricing, the selling division sets the ceiling (maximum possible transfer price) for the
bargaining range.
25. The selling division would never agree to a transfer price below its full manufacturing cost.
26. A transfer price is the price charged for a component by the selling division to the buying division of the
same company.
27. Transfer pricing does not affect divisional profits.
28. Transfer pricing is a simple issue.
29. The company as a whole may be harmed when divisions refuse to transfer goods with a market price
transfer policy.
30. Two transfer pricing policies are used in practice. These transfer pricing policies include cost-based transfer
prices and negotiated transfer prices.
31. The selling division is forced to transfer a product internally when a cost-based transfer pricing policy is set
by top management.
32. When a product is transferred at market price, the transfer will optimize both divisional and company-wide
profits.
33. Residual income is the difference between operating income and the product of the hurdle rate and the
company’s average operating assets.
34. In calculating residual income, the minimum rate of return is set by top management and is the same as the
hurdle rate used for return on investment.
35. The use of residual income encourages managers to accept any project that earns below the minimum rate.
36. The direct comparison of the performance of two different investment centers is difficult using residual
income because residual income is an absolute measure.
37. Economic value added is just a specific way of calculating residual income.
38. The net income reduced by the total annual cost of capital is equal to the economic value added.
39. Basically, EVA is residual income with the cost of capital equal to the minimum rate of return for the firm.
40. Using EVA to calculate residual income, the dollar cost of capital employed is the actual percentage cost of
capital multiplied by the total capital employed.
41. The practice of delegating decision-making authority to the lower levels of management in a company is
42. Which of the following is a reason for decentralization?
43. Divisions in a decentralized company can be created along which of the following lines?
44. A responsibility center in which a manager is responsible only for costs is a(n)
45. A responsibility center in which a manager is responsible only for sales is a(n)
46. A responsibility center in which a manager is responsible for both revenues and costs is a(n)
47. A responsibility center in which a manager is responsible for revenues, cost, and investment is a(n)
48. Which of the following types of costs does not appear on a variable costing income statement?
49. Which of the following is never included in product cost?
50. Fixed costs that are jointly caused by two or more segments are
51. Segment margin is equal to segment sales revenue minus
52. Return on investment (ROI) is calculated as follows:
53. Margin is calculated as follows:
54. Turnover is calculated as follows:
55. A positive result that stems from the use of return on investment (ROI) is that it encourages managers to
focus on
56. Division A had ROI of 15% last year. The manager of Division A is considering an additional investment
for the coming year. What step will the manager likely choose to take?
57. The manager of a division is displeased with the ROI of the division. One step that would increase ROI
(holding everything else constant) is
58. Which of the following is a disadvantage of a focus on return on investment?
59. Residual income is calculated as
60. The performance measure that uses after-tax operating income and the actual cost of capital employed is
61. Which of the following is an absolute dollar measure rather than a percentage?
62. A price charged for a component by the selling division to the buying division of the same company is
called a
63. The level of the transfer price can affect the overall company because
64. If there is a competitive outside market for the transferred product, then the best transfer price is the
65. If the selling division is operating at less than full capacity, the floor of the bargaining range would most
probably set at
66. The decision-making approach that allows managers at lower levels to make and implement key decision
pertaining to their areas of responsibility is
67. The traditional organizational chart of a company is being flattened. This likely represents a movement
toward
68. Decentralization is frequently chosen by companies because it
69. A segment of Mega, Inc., manufactures and sells blankets. The various models of blankets are produced in a
single factory using stable technology. They are sold by the sales department, also located in the factory. The
segment is most probably accounted for as a(n)
70. JetSky Airways has three divisions, the Western Division, the Eastern Division, and the Northern Division.
The manager of the Western Division had wanted to purchase replacement airplanes for the division. However,
he decided against it because, although revenues would increase and the new planes would be less expensive to
operate, the initial cost of the planes was quite large. The Western Division is most probably accounted for as a
71. Generally Accepted Accounting Principles (GAAP) require the use of which accounting method for external
reporting?
72. Variable costing is
73. The strategic management system that translates an organization’s mission and strategy into operational
objectives and performance measures is
74. The Balanced Scorecard perspective that describes the internal processes needed to provide value for
customers and owners is the ____ perspective.
75. The Balanced Scorecard perspective that describes the economic consequences of actions taken in the other
three perspectives is the ____ perspective.
76. The Balanced Scorecard perspective that defines the customer and market segments in which the business
unit will compete is the ____ perspective.
77. The Balanced Scorecard perspective that defines the capabilities than an organization needs to create long–
term growth and improvement is the ____ perspective.
78. Figure 10-1.
Last year, Delbert Company produced 10,000 units and sold 9,000 units at a price of $9. Costs for last year were
as follows:
Direct materials
$10,000
Direct labor
15,000
Variable factory overhead
5,000
Fixed factory overhead
20,000
Variable selling expense
7,200
Fixed selling expense
5,000
Fixed administrative expense
12,000
Fixed factory overhead is applied based on expected production. Last year, Delbert expected to produce 10,000 units.
Refer to Figure 10-1. Assuming that beginning inventory was zero, what is the value of ending inventory under absorption costing?
79. Figure 10-1.
Last year, Delbert Company produced 10,000 units and sold 9,000 units at a price of $9. Costs for last year were
as follows:
Direct materials
$10,000
Direct labor
15,000
Variable factory overhead
5,000
Fixed factory overhead
20,000
Variable selling expense
7,200
Fixed selling expense
5,000
Fixed administrative expense
12,000
Fixed factory overhead is applied based on expected production. Last year, Delbert expected to produce 10,000 units.
Refer to Figure 10-1. Assuming that beginning inventory was zero, what is the value of ending inventory under variable costing?
80. Figure 10-1.
Last year, Delbert Company produced 10,000 units and sold 9,000 units at a price of $9. Costs for last year were
as follows:
Direct materials
$10,000
Direct labor
15,000
Variable factory overhead
5,000
Fixed factory overhead
20,000
Variable selling expense
7,200
Fixed selling expense
5,000
Fixed administrative expense
12,000
Fixed factory overhead is applied based on expected production. Last year, Delbert expected to produce 10,000 units.
Refer to Figure 10-1. What is operating income for last year under absorption costing?
81. Figure 10-1.
Last year, Delbert Company produced 10,000 units and sold 9,000 units at a price of $9. Costs for last year were
as follows:
Direct materials
$10,000
Direct labor
15,000
Variable factory overhead
5,000
Fixed factory overhead
20,000
Variable selling expense
7,200
Fixed selling expense
5,000
Fixed administrative expense
12,000
Fixed factory overhead is applied based on expected production. Last year, Delbert expected to produce 10,000 units.
Refer to Figure 10-1. What is operating income for last year under variable costing?
82. Figure 10-2.
Loring Company had the following data for the month:
Variable costs per unit:
Direct materials
$4.00
Direct labor
3.20
Variable overhead
1.00
Fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000 units. During the month, 2,000 units were
produced. Loring started the month with 300 units in beginning inventory, with unit product cost equal to this month’s unit product cost. A total of
2,100 units were sold during the month at price of $14. Selling and administrative expense for the month, all fixed, totaled $3,600.
Refer to Figure 10-2. What is the unit product cost under absorption costing?
83. Figure 10-2.
Loring Company had the following data for the month:
Variable costs per unit:
Direct materials
$4.00
Direct labor
3.20
Variable overhead
1.00
Fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000 units. During the month, 2,000 units were
produced. Loring started the month with 300 units in beginning inventory, with unit product cost equal to this month’s unit product cost. A total of
2,100 units were sold during the month at price of $14. Selling and administrative expense for the month, all fixed, totaled $3,600.
Refer to Figure 10-2. What is operating income under variable costing?
84. Figure 10-2.
Loring Company had the following data for the month:
Variable costs per unit:
Direct materials
$4.00
Direct labor
3.20
Variable overhead
1.00
Fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000 units. During the month, 2,000 units were
produced. Loring started the month with 300 units in beginning inventory, with unit product cost equal to this month’s unit product cost. A total of
2,100 units were sold during the month at price of $14. Selling and administrative expense for the month, all fixed, totaled $3,600.
Refer to Figure 10-2. What is the unit product cost under variable costing?
85. Figure 10-2.
Loring Company had the following data for the month:
Variable costs per unit:
Direct materials
$4.00
Direct labor
3.20
Variable overhead
1.00
Fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000 units. During the month, 2,000 units were
produced. Loring started the month with 300 units in beginning inventory, with unit product cost equal to this month’s unit product cost. A total of
2,100 units were sold during the month at price of $14. Selling and administrative expense for the month, all fixed, totaled $3,600.
Refer to Figure 10-2. What is operating income under absorption costing?