Chapter 23—Performance Evaluation for Decentralized Operations
Key
1. Separation of businesses into more manageable operating units is termed decentralization.
2. The process of measuring and reporting operating data by areas of responsibility is termed responsibility
accounting.
3. A decentralized business organization is one in which all major planning and operating decisions are made by
4. A centralized business organization is one in which all major planning and operating decisions are made by
top management.
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.
6. The three common types of responsibility centers are referred to as cost centers, profit centers, and
investment centers.
7. One of the advantages of decentralization is that delegating authority to managers closest to the operation
always results in better decisions.
8. Developing and retaining quality managers is an advantage of decentralization.
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.
10. Budget performance reports prepared for the vice-president of production would generally contain less
detail than reports prepared for the various plant managers.
11. 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.
12. The primary accounting tool for controlling and reporting for cost centers is a budget.
13. 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.
14. A manager in a cost center also has responsibility and authority over the revenues and the costs.
15. The plant managers in a cost center can be held responsible for major differences between budgeted and
actual costs in their plants.
16. 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.
17. 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 expenses.
18. Sales commissions expense for a department store is an example of a direct expense.
19. 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.
20. Office salaries expense for a department store is an indirect expense.
21. The underlying principle of allocating operating expenses to departments is to assign to each department an
amount of expense proportional to the revenues of that department.
22. Property tax expense for a department store’s store equipment is an example of a direct expense.
23. Depreciation expense on store equipment for a department store is an indirect expense.
24. Responsibility accounting reports for profit centers are normally in the form of income statements.
25. The manager of a profit center does not make decisions concerning the fixed assets invested in the center.
26. The profit center income statement should include only revenues and expenses that are controlled by the
manager.
27. The manager of the furniture department of a leading retailer does not control the salaries of departmental
personnel.
28. Service department charges are similar to the expenses of a profit center that purchased services from a
source outside the company.
29. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples
of activity bases.
30. The rates at which services are charged to each division are called service department charge rates.
31. The service department will determine its service department charge rate and charge the company’s
divisions or departments according to their use of that particular service department.
32. The profit center income statement should include only controllable revenues and expenses.
33. Controllable expenses are those that can be influenced by the decisions of the profit center management.
34. 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.
35. Three measures of investment center performance are income from operations, rate of return on investment,
and residual income.
36. 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.
37. If Division Q’s income from operations was $30,000 on invested assets of $200,000, the rate of return on
investment is 15%.
38. The rate of return on investment may be computed by multiplying investment turnover by the profit margin.
39. 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%.
40. 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%.
41. Investment turnover (as used in determining the rate of return on investment) focuses on the rate of profit
earned on each sales dollar.
42. The ratio of sales to investment is termed the rate of return on investment.
43. 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.
44. 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.
45. The excess of divisional income from operations over a minimum amount of desired income from
operations is termed the residual income.
46. The minimum amount of desired divisional income from operations is set by top management by
establishing a maximum rate of return considered acceptable for invested assets.
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 the total magnitude of income from operations earned by each
division.
48. The ratio of income from operations to sales is termed the profit margin component of the rate of return on
investment.
49. The ratio of sales to invested assets is termed the investment turnover component of the rate of return on
investment.
50. 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%.
51. 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%.
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 1.2.
53. 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.
54. 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.
55. 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.
TRUE
56. If divisional income from operations is $75,000, invested assets are $737,500, and the minimum rate of
57. 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.
58. The profit margin component of rate of return on investment analysis focuses on profitability by indicating
59. 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.
60. The minimum amount of desired divisional income from operations is set by top management by
establishing a minimum rate of return considered acceptable for invested assets.
61. 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.
62. The DuPont formula uses financial information to measure the performance of a business.
63. The DuPont formula uses financial and nonfinancial information to measure the performance of a business.
64. The balanced scorecard is a set of financial and nonfinancial measures that reflect the performance of the
business.
65. The objective of transfer pricing is to encourage each division manager to transfer goods and services
between divisions if overall company income can be increased by doing so.
66. Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers.
67. Under the cost price approach, the transfer price is the price at which the product or service transferred
could be sold to outside buyers.
68. Under the negotiated price approach, the transfer price is the price at which the product or service
transferred could be sold to outside buyers.
69. The negotiated price approach allows the managers of decentralized units to agree among themselves as to
the transfer price.
70. It is beneficial for divisions in a company to negotiate a transfer price when the supplying division has
unused capacity in its plant.
71. It is beneficial for two related companies to use the cost price approach for transfer pricing when both of the
companies operate as cost centers and are not concerned with the revenue.
72. An activity base is used to charge service department expenses. Match each of the following questions with
an activity base.
73. Match the following terms with the best definition given below.
1. Income from operations divided by invested
Rate of return on
4. Income from operations minus minimum
74. Which of the following would be most effective in a small owner/manager-operated business?
75. Businesses that are separated into two or more manageable units in which managers have authority and
responsibility for operations are said to be:
76. Which of the following is NOT a disadvantage of decentralized operation?
77. Which is the best example of a decentralized operation?
78. All of the following are advantages of decentralization except:
79. Which of the following is not one of the common types of responsibility centers?
80. Which of the following is a disadvantage of decentralization?
81. A manager is responsible for costs only in a(n):
82. In a cost center, the manager has responsibility and authority for making decisions that affect:
83. For higher levels of management, responsibility accounting reports:
84. Most manufacturing plants are considered cost centers because they have control over
85. The following is a measure of a manager’s performance working in a cost center.
86. A responsibility center in which the department manager has responsibility for and authority over costs and
revenues is called a(n):
87. In a profit center, the department manager has responsibility for and the authority to make decisions that
affect:
88. Which of the following expenses incurred by the sporting goods department of a department store is a direct
expense?
89. Which of the following expenses incurred by a department store is an indirect expense?
90. In a profit center, the manager has responsibility and authority for making decisions that affect:
91. 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:
92. In evaluating the profit center manager, the income from operations should be compared:
93. Income from operations of the Commercial Aviation Division is $2,225,000. If income from operations
before service department charges is $3,250,000:
94. The costs of services charged to a profit center on the basis of its use of those services are called:
95. Division X reported income from operations of $975,000 and total service department charges of $575,000.
Therefore:
96. To calculate income from operations, total service department charges are:
97. Income from operations for Division Z is $250,000, total service department charges are $400,000 and
operating expenses are $2,266,000. What are the revenues for Division Z?
98. Income from operations for Division K is $220,000, and income from operations before service department
charges is $975,000. Therefore:
99. The following data are taken from the management accounting reports of Dulcimer Co.:
Div. A
Div. B
Div. C
$1,900,000
$1,450,000
$1,450,000
1,700,000
1,050,000
1,100,000
If an incentive bonus is paid to the manager who achieved the highest income from operations before service department charges, it follows that:
100. What is the term used to describe expenses that are incurred for the benefit of a specific department?
101. The following financial information was summarized from the accounting records of Train Corporation for
the current year ended December 31:
Rails
Division
Locomotive
Division
Corporate
Total
$47,200
$30,720
27,200
20,040
108,000
78,000
$ 2,040
18,160
4,700
The gross profit for the Rails Division is:
102. The following financial information was summarized from the accounting records of Train Corporation for
the current year ended December 31:
Rails
Division
Locomotive
Division
Corporate
Total
Cost of goods sold
$47,200
$30,720
Direct operating expenses
27,200
20,040
Net sales
108,000
78,000
Interest expense
$ 2,040
General overhead
18,160
Income tax
4,700
The income from operations for the Rails Division is:
103. The following financial information was summarized from the accounting records of Train Corporation for
the current year ended December 31:
Rails
Division
Locomotive
Division
Corporate
Total
Cost of goods sold
$47,200
$30,720
Direct operating expenses
27,200
20,040
Net sales
108,000
78,000
Interest expense
$ 2,040
General overhead
18,160
Income tax
4,700
The gross profit for the Locomotive Division is:
104. The following financial information was summarized from the accounting records of Train Corporation for
the current year ended December 31:
Rails
Division
Locomotive
Division
Corporate
Total
$47,200
$30,720
27,200
20,040
108,000
78,000
$ 2,040
18,160
4,700
The income from operations for the Locomotive Division is:
105. The following financial information was summarized from the accounting records of Train Corporation for
the current year ended December 31:
Rails
Division
Locomotive
Division
Corporate
Total
$47,200
$30,720
27,200
20,040
108,000
78,000
$ 2,040
18,160
4,700
The net income for Train Corporation is:
106. Responsibility accounting reports for profit centers will include
107. Some organizations use internal service departments to provide like services to several divisions or
departments within an organization. Which of the following would probably not lend itself as a service
department?
108. The following is a measure of a manager’s performance working in a profit center.
109. Which of the following would not be considered an internal centralized service department?
110. Avey Corporation had $275,000 in invested assets, sales of $330,000, income from operations amounting
to $49,500 and a desired minimum rate of return of 7.5%. The rate of return on investment for Avey
Corporation is:
111. Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting
to $99,000, and a desired minimum rate of return of 15%.
The profit margin for Mason is:
112. Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting
to $99,000, and a desired minimum rate of return of 15%.
The investment turnover for Mason is:
113. Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting
to $99,000, and a desired minimum rate of return of 15%.
The residual income for Mason is:
114. Hamlin Corporation had $220,000 in invested assets, sales of $242,000, income from operations
amounting to $70,400, and a desired minimum rate of return of 3%. The rate of return on investment for Hamlin
is:
115. Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations
amounting to $302,500, and a desired minimum rate of return of 15%.
The profit margin for Chicks is:
116. Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations
amounting to $302,500, and a desired minimum rate of return of 15%.
The investment turnover for Chicks is:
117. Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations
amounting to $302,500, and a desired minimum rate of return of 15%.
The residual income for Chicks is:
118. The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating
expenses of $3,600,000. The company has established a minimum rate of return of 7%.
What is Clydesdale Company’s profit margin?
119. The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating
expenses of $3,600,000. The company has established a minimum rate of return of 7%.
What is Clydesdale Company’s investment turnover?
120. The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating
expenses of $3,600,000. The company has established a minimum rate of return of 7%.
What is Clydesdale Company’s rate of return on investment?
121. The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating
expenses of $3,600,000. The company has established a minimum rate of return of 7%.
What is Clydesdale Company’s residual income?
122. Managers of what type of decentralized units have authority and responsibility for revenues, costs, and
assets invested in the unit?
123. A responsibility center in which the department manager is responsible for costs, revenues, and assets for a
department is called:
124. In an investment center, the manager has the responsibility for and the authority to make decisions that
affect: