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CHAPTER 23(8): PERFORMANCE EVALUATION FOR DECENTRALIZED
OPERATIONS
1.
Separation of businesses into more manageable operating units is termed decentralization.
a.
True
b.
False
2.
The process of measuring and reporting operating data by responsibility centers 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.
A centralized business organization is one in which all major planning and operating decisions are made by
top
management.
a.
True
b.
False
5.
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
6.
The three common types of responsibility centers are referred to as cost centers, profit centers, and investment
centers.
a.
True
b.
False
7.
One of the advantages of decentralization is that delegating authority to managers closest to the operation always
results in better decisions.
a.
True
b.
False
8.
Developing and retaining quality managers are advantages of decentralization.
a.
True
b.
False
9.
A responsibility center in which the department manager has responsibility for and authority over costs,
revenues,
and assets invested in the department is termed a cost center.
a.
True
b.
False
10.
A responsibility center in which the authority over and responsibility for costs and revenues is vested in
the
department manager is termed a profit center.
a.
True
b.
False
11.
In an investment center, the manager has the responsibility and the authority to make decisions that affect not
only
costs and revenues, but also the plant assets invested in the center.
a.
True
b.
False
12.
Budget performance reports prepared for the vice president of production would generally contain less detail
than
reports prepared for the various plant managers.
a.
True
b.
False
13.
The amount of detail 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
14.
The primary accounting tool for controlling and reporting for cost centers is a budget.
a.
True
b.
False
15.
Responsibility accounting reports that are given to lower level managers are usually very detailed, in turn,
higher
level managers will be given a summary report.
a.
True
b.
False
16.
A manager in a cost center also has responsibility and authority over the revenues.
a.
True
b.
False
17.
The plant managers in a cost center can be held responsible for major differences between budgeted and actual
costs in their plants.
a.
True
b.
False
18.
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 direct operating expenses.
a.
True
b.
False
19.
Sales commission expense for a department store is an example of a direct expense.
a.
True
b.
False
20.
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
21.
Office salaries expense for a department store is an indirect expense.
a.
True
b.
False
22.
The underlying principle of allocating direct operating expenses to departments is to assign to each department
an
amount of expense proportional to the revenues of that department.
a.
True
b.
False
23.
Property tax expense for a department store's store equipment is an example of a direct expense.
a.
True
b.
False
24.
Depreciation expense on store equipment for a department store is an indirect expense.
a.
True
b.
False
25.
Responsibility accounting reports for profit centers are normally in the form of income statements.
a.
True
b.
False
26.
The manager of a profit center does not make decisions concerning the fixed assets invested in the center.
a.
True
b.
False
27.
The profit center income statement should include only revenues and expenses that are controlled by the manager.
a.
True
b.
False
28.
The manager of the furniture department of a leading retailer does not control the salaries of departmental
personnel.
a.
True
b.
False
29.
Service department charges are similar to the expenses of a profit center that purchased services from a source
outside the company.
a.
True
b.
False
30.
Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples
of
activity bases.
a.
True
b.
False
31.
The rates at which centralized services are charged to each division are called service department charge rates.
a.
True
b.
False
32.
The profit center income statement should include only controllable revenues and expenses.
a.
True
b.
False
33.
Controllable expenses are those that can be influenced by the decisions of the profit center management.
a.
True
b.
False
34.
Three measures of investment center performance are income from operations, rate of return on investment, and
residual income.
a.
True
b.
False
35.
The major shortcoming of income from operations as an investment center performance measure is that it
ignores
the amount of revenues earned by the center.
a.
True
b.
False
36.
If Division Q's yearly income from operations was $30,000 on invested assets of $200,000, the rate of return
on
investment is 15%.
a.
True
b.
False
37.
The rate of return on investment may be computed by multiplying investment turnover by the profit margin.
a.
True
b.
False
38.
If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on investment
is
9.6%.
a.
True
b.
False
39.
If the profit margin for a division is 11% and the investment turnover is 1.5, the rate of return on investment
is
7.3%.
a.
True
b.
False
40.
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
41.
The ratio of sales to investment is termed the rate of return on investment.
a.
True
b.
False
42.
The major advantage of 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
43.
By using the rate of return on investment as a divisional performance measure, divisional managers will always
be
motivated to invest in proposals which will increase the overall rate of return for the company.
a.
True
b.
False
44.
The excess of divisional income from operations over a minimum acceptable income from operations is termed
the
residual income.
a.
True
b.
False
45.
The minimum accepted divisional income from operations is set by top management by establishing a maximum
rate
of return considered acceptable for invested assets.
a.
True
b.
False
46.
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 the total magnitude of income from operations earned by
each
division.
a.
True
b.
False
47.
The ratio of income from operations to sales is termed the profit margin component of the rate of return
on
investment.
a.
True
b.
False
48.
The ratio of sales to invested assets is termed the investment turnover component of the rate of return on
investment.
a.
True
b.
False
49.
If income from operations for a division is $5,000, invested assets are $25,000, and sales are $30,000, the
profit
margin is 20%.
a.
True
b.
False
50.
If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the
profit
margin is 20%.
a.
True
b.
False
51.
If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000,
the
investment turnover is 1.2.
a.
True
b.
False
52.
If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000,
the
investment turnover is 5.
a.
True
b.
False
53.
If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500,
the
investment turnover is 1.3.
a.
True
b.
False
54.
If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000,
the
investment turnover is 1.3.
a.
True
b.
False
55.
If divisional income from operations is $75,000, invested assets are $737,500, and the minimum rate of return
on
invested assets is 6%, the residual income is $36,750.
a.
True
b.
False
56.
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 is $68,000.
a.
True
b.
False
57.
The profit margin component of rate of return on investment analysis focuses on profitability by indicating the
rate
of profit earned on each sales dollar.
a.
True
b.
False
58.
In rate of return on investment analysis, the investment turnover component focuses on efficiency in the use
of
assets and indicates the rate at which sales are being generated for each dollar of invested assets.
a.
True
b.
False
59.
The minimum acceptable 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
60.
A disadvantage to using the residual income performance measure is that it encourages managers to spend only
the
minimum acceptable rate of return on assets set by upper management.
a.
True
b.
False
61.
The DuPont formula uses financial information to measure the performance of a business.
a.
True
b.
False
62.
The DuPont formula uses financial and nonfinancial information to measure the performance of a business.
a.
True
b.
False
63.
The balanced scorecard is a set of financial and nonfinancial measures that reflect the performance of the
business.
a.
True
b.
False
