Chapter 22—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
centralization.
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
factory overhead.
7. Inventory costs under variable costing include only direct materials, direct labor, and variable factory
overhead.
8. Inventory under absorption costing includes only direct materials and direct labor.
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 not a common measure of performance for an investment center.
14. Return on investment (ROI) can be calculated by multiplying margin by turnover.
15. Turnover is the ratio of sales to average operating assets.
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. Residual income is the difference between operating income and the product of the hurdle rate and the
company’s average operating assets.
22. 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.
23. The use of residual income encourages managers to accept any project that earns above the minimum rate.
24. The direct comparison of the performance of two different investment centers is difficult using residual
income because residual income is an absolute measure.
25. Economic value added is just a specific way of calculating residual income.
26. The net income reduced by the total annual cost of capital is equal to the economic value added.
27. Basically, EVA is residual income with the cost of capital equal to the actual cost of capital for the firm (as
opposed to some minimum rate of return desired by the company for other reasons).
28. 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.
29. In terms of operating income for the company as a whole, the transfer price set by the buying and selling
divisions nets out.
30. Several transfer pricing policies are used in practice including market price, cost-based transfer prices, and
negotiated transfer prices.
31. In negotiated transfer pricing, the buying division sets the ceiling (maximum possible transfer price) for the
bargaining range.
32. In negotiated transfer pricing, the selling division sets the ceiling (maximum possible transfer price) for the
bargaining range.
33. The selling division would never agree to a transfer price below its full manufacturing cost.
34. A transfer price is the price charged for a component by the selling division to the buying division of the
same company.
35. The price charged for the transferred good affects the costs of the buying division and the revenues of the
selling division.
36. Transfer pricing is a complex issue.
37. When the selling division can sell and the buying division can buy externally at the market price, the
company as a whole will be in the same position whether or not a market price transfer takes place internally.
38. The selling division is forced to transfer a product internally when a cost-based transfer pricing policy is set
by top management.
39. When a product is transferred at market price, the transfer will optimize both divisional and company-wide
profits.
40. Match each term with the correct statement from below.
1. A(n) ___________ is a responsibility center in which a
2. The practice of delegating decision-making authority to
3. The manager of a(n) ___________ is evaluated on the
investment
4. A(n) ___________ is a responsibility center in which a
5. A(n) ___________ is a responsibility center in which a
41.
Select the appropriate definition for each of the items listed below.
1. The most common measure of performance for an
4. The dollar difference between operating income and
Residual
42. In _______________ decision making, decisions are made at the very top level, and lower-level managers
are charged with implementing these decisions.
43. ________________ decision making allows managers at lower levels to make and implement key decisions
pertaining to their areas of responsibility.
44. Decentralization usually is achieved by creating units called ___________.
45. A ____________________ is a segment of the business whose manager is accountable for specific sets of
activities.
46. When a manager is responsible for only costs it is known as a(n) _______________.
47. A(n) ________________ is when a manager is responsible only for sales.
48. A(n) ______________________ is when a manager is responsible for revenues, costs and investments.
49. _______________ assigns all manufacturing costs to the product.
50. When using _______________ a company only assigns variable manufacturing costs to the product.
51. Generally accepted accounting principles require ______________ for external reporting.
52. Variable costing treats fixed factory overhead as a ______________.
53. Expenses that persist even if one of the segments to which they relate is eliminated are known as
________________.
54. The profit contribution each segment makes toward covering a company’s common fixed costs is called
______________.
55. Typically, investment centers are evaluated on the basis of __________________.
56. _____________ is the ratio of operating income to sales.
57. ___________________ is after tax operating income minus the dollar cost of capital employed.
58. The difference between operating income and the minimum dollar return required on a company’s operating
assets is the _______________.
59. A _________________ is the price charged for a component by the selling division to the buying division
of the same company.
60. If there is a competitive outside market for the transferred product, then the best transfer price is the
_____________.
61. The ________________ is a strategic management system that defines a strategic-based responsibility
accounting system.
62. The practice of delegating decision-making authority to the lower levels of management in a company is
63. Which of the following is a reason for decentralization?
64. Divisions in a decentralized company can be created along which of the following lines?
65. A responsibility center in which a manager is responsible only for costs is a(n)
66. A responsibility center in which a manager is responsible only for sales is a(n)
67. A responsibility center in which a manager is responsible for both revenues and costs is a(n)
68. A responsibility center in which a manager is responsible for revenues, cost, and investment is a(n)
69. The decision-making approach that allows managers at lower levels to make and implement key decision
pertaining to their areas of responsibility is
70. The traditional organizational chart of a company is being flattened. This likely represents a movement
toward
71. Decentralization is frequently chosen by companies because it
72. 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)
73. 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(n)
74. Which of the following types of costs does not appear on a variable costing income statement?
75. Which of the following is never included in product cost?
76. Fixed expenses that are jointly caused by two or more segments are
77. Segment margin is equal to segment sales revenue minus
78. Generally Accepted Accounting Principles (GAAP) require the use of which accounting method for external
reporting?
79. Variable costing is
80. Figure 22-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last year
were as follows:
Direct materials
$25,000
Direct labor
35,000
Variable factory overhead
12,000
Fixed factory overhead
37,000
Variable selling expense
9,000
Fixed selling expense
7,500
Fixed administrative expense
15,500
Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 20,000 units.
Refer to Figure 22-1. Assuming that beginning inventory was zero, what is the value of ending inventory under absorption costing?
81. Figure 22-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last year
were as follows:
Direct materials
$25,000
Direct labor
35,000
Variable factory overhead
12,000
Fixed factory overhead
37,000
Variable selling expense
9,000
Fixed selling expense
7,500
Fixed administrative expense
15,500
Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 20,000 units.
Refer to Figure 22-1. Assuming that beginning inventory was zero, what is the value of ending inventory under variable costing?
82. Figure 22-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last year
were as follows:
Direct materials
$25,000
Direct labor
35,000
Variable factory overhead
12,000
Fixed factory overhead
37,000
Variable selling expense
9,000
Fixed selling expense
7,500
Fixed administrative expense
15,500
Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 20,000 units.
Refer to Figure 22-1. What is operating income for last year under absorption costing?
83. Figure 22-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last year
were as follows:
Direct materials
$25,000
Direct labor
35,000
Variable factory overhead
12,000
Fixed factory overhead
37,000
Variable selling expense
9,000
Fixed selling expense
7,500
Fixed administrative expense
15,500
Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 20,000 units.
Refer to Figure 22-1. What is operating income for last year under variable costing?
84. Figure 22-2.
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
Variable selling expense
.40
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 22-2. What is the unit product cost under absorption costing?
85. Figure 22-2.
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
Variable selling expense
.40
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 22-2. What is operating income under variable costing?
86. Figure 22-2.
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
Variable selling expense
.40
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 22-2. What is the unit product cost under variable costing?
87. Figure 22-2.
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
Variable selling expense
.40
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 22-2. What is operating income under absorption costing?
88. Return on investment (ROI) is calculated as
89. Margin is calculated as
90. Turnover is calculated as
91. A positive result that stems from the use of return on investment (ROI) is that it encourages managers to
focus on
92. 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?
93. The manager of a division is displeased with the ROI of the division. One step that would increase ROI
(holding everything else constant) is
94. Which of the following is a disadvantage of a focus on return on investment?
95. Castor Company had income of $10,000, average assets of $100,000 and sales of $40,000. What is Castor’s
ROI?
96. Shandling Company had operating income of $70,000, sales of $218,750, and turnover of 0.5. What is
Shandling’s ROI?
97. Figure 22-3.
Dempsey Company provided the following information for last year:
Operating income
$86,000
Sales
$225,000
Beginning operating assets
$390,000
Ending operating assets
$420,000
Refer to Figure 22-3. Dempsey’s margin for last year was
98. Figure 22-3.
Dempsey Company provided the following information for last year:
Operating income
$86,000
Sales
$225,000
Beginning operating assets
$390,000
Ending operating assets
$420,000
Refer to Figure 22-3. Dempsey’s turnover ratio for last year was
99. Figure 22-3.
Dempsey Company provided the following information for last year:
Operating income
$86,000
Sales
$225,000
Beginning operating assets
$390,000
Ending operating assets
$420,000
Refer to Figure 22-3. Dempsey’s return on investment for last year was
100. Residual income is calculated as
101. The performance measure that uses after-tax operating income and the actual cost of capital employed is
102. Which of the following is an absolute dollar measure rather than a percentage?
103. Economic Value Added is residual income with the cost of capital equal to the firm’s
104. In calculating residual income, the variable set by top management is called the
105. The calculation of Economic Value Added is
106. Using Economic Value Added (EVA) to calculate residual income, the cost of capital employed is
107. Figure 22-4.
The manager of Stock Division projects the following for next year:
Sales
$185,000
Operating income
$60,000
Operating assets
$375,000
The manager can invest in an additional project that would require $40,000 investment in additional assets and would generate $6,000 of additional
income. The company’s minimum rate of return is 14%.
Refer to Figure 22-4. What is the residual income for Stock Division without the additional investment?
108. Figure 22-4.
The manager of Stock Division projects the following for next year:
Sales
$185,000
Operating income
$60,000
Operating assets
$375,000
The manager can invest in an additional project that would require $40,000 investment in additional assets and would generate $6,000 of additional
income. The company’s minimum rate of return is 14%.
Refer to Figure 22-4. What is the residual income for Stock Division with the additional project?