Management Accounting Review

Quizzer on Responsibility Accounting, Segment Reporting and Common Cost Allocation

Techniques Theory

1. In decentralized organizations, it is necessary to prepare reports on the performance of managers. The term
used to describe the reporting process is:
a. responsibility accounting
b. decentralized accounting
c. performance accounting
d. accounting decentralization

2. Benefits of decentralization and responsibility accounting include all of the following except:
a. Decision making at the level where managers are aware of problems and have the relevant
information needed for the decision.
b. The opportunity for managers to gain skills that may eventually be useful to the organization at
higher managerial levels.
c. High morale and job satisfaction because of participation in decision making.
d. That a firm can usually make a much wider variety of products.

3. A cost center is a segment of an organization:

a. That does not produce a profit.
b. Whose costs cannot be matched with the profits of a specific period.
c. Whose managers are held responsible for costs but not for profits.
d. That does not involve any investment of fixed assets.

4. An investment center is a segment of a business in which:

a. Managers are responsible for investing the segments profit.
b. The emphasis is on revenue and cost rather than on profit.
c. Managers are responsible for the return on the resources invested in the segment
d. Profit cannot easily be related to the amount of resources used by the segment.

5. Which of the following expenses should not be on a monthly cost control report of a department manager?
a. department labor costs
b. department supplies costs
c. depreciation cost on department equipment
d. cost of materials used in the department

6. A segment of an organization is referred to as an investment center if it has:

a. Authority to make decisions affecting the major determinants of profit including the power to
choose its markets and sources of supply.
b. Authority to make decisions affecting the major determinants of profit including the power to
choose its market and sources of supply and significant control over the amount of invested
capital.
c. Authority to make decisions over the most significant costs of operations including the power to
choose the sources of supply.
d. Authority to provide specialized support to other units within the organization.

7. Which of the following items would most likely not be incorporated into the calculation of a divisions
investment base when using the residual income approach for performance measurement and evaluation?
a. Vacant land being held by the division as a potential site for a new plant.
b. Fixed assets employed in division operations
c. Division inventories when division management exercises control over the inventory levels.
d. Division accounts payable when division management exercises control over the amount of short
term credit utilized.
8. The disadvantage of using market price as a transfer price is that:
a. Market prices are usually too high.
b. There is no market price for some products or services
c. The buying division may be tempted to look for a lower market price and therefore not buy
products or services from the selling division.
d. The final cost of the product tends to be noncompetitive.

9. A transfer price consisting of negotiated prices:

a. Requires that each entity have complete freedom to bargain.
b. Is most suitable for divisions that must deal solely with each other.
c. Is a price imposed by management
d. Is especially suitable in a bilateral monopoly situation.

10. The performance of an investment center manager is measured by all of the following except:
a. asset turnover
b. return on investment
c. return on cash funds
d. residual income

11. A manager of an investment center can improve ROI by which of the following means:
a. increasing expenses
b. increasing operating assets
c. increasing return on sales
d. reducing asset turnover

12. Which of the following is a common problem in measuring the net earnings of an investment center?
a. determining which items to include in the centers investment
b. choosing a target rate of return
c. choosing an appropriate transfer pricing policy
d. measuring the investment in operating assets.

13. Market based transfer prices are appropriate when:

a. There is no demand for the product.
b. The center has idle capacity
c. Market for the product exists
d. It is agreed upon by both the buying and selling divisions

14. Which of the following is a disadvantage of allocating corporate costs to investment centers?
a. Corporate costs are usually not controllable by the investment center manager.
b. Earnings become less comparable with independent companies
c. Allocating corporate costs to an investment center helps ensure that services are not wasted
d. All of the above.

15. If a segment has a negative segment margin:

a. The segment should be dropped
b. The segment should be retained only if it has a positive contribution margin
c. The segment is not covering its own traceable costs but it still may be of benefit to the company.
d. It should not be dropped because it will increase the allocated costs to other departments.

16. The basic purpose of responsibility accounting is

a. budgeting.
b. motivation.
c. authority.
d. variance analysis.
17. Rockford Manufacturing Corporation uses a responsibility accounting system in is operations. Which one
of the following items is least likely to appear in a performance report for a manager of one of Rockfords
assembly lines?
a. Direct labor
b. Materials
c. Depreciation on the manufacturing facility
d. Repairs and maintenance

18. The segment margin of an investment center after deducting the imputed interest on the assets used by the
investment center is known as
a. return on investment.
b. residual income
c. operating income
d. return on assets.

19. Which of the following techniques would be best for evaluating the management performance of a
department that is operated as a cost center?
a. Return on assets ratio
b. Return on investment ratio
c. Payback method
d. Variance analysis

20. The segment margin of the Wire Division of Lerner Corporation should not include
a. net sales of the Wire Division.
b. fixed selling expenses of the Wire Division.
c. variable selling expenses of the Wire Division.
d. Wire Divisions fair share of the salary of Lerner Corporations president.

21. A management decision may be beneficial for a given profit center but not for the entire company. From the
overall company viewpoint, this decision leads to
a. sub-optimization.
b. goal congruence.
c. centralization.
d. maximization.

22. In a responsibility accounting system, a feedback report that focuses on the difference between budgeted
amounts and actual amounts is an example of
a. management by exception.
b. assessing blame.
c. granting rewards to successful managers.
d. ignoring other variables for which the budgeted goals were met.

23. In evaluating an investment center, top management should concentrate on

a. Peso sales.
b. return on investment.
c. profit percentages.
d. net income.

24. Which one of the following statements pertaining to the return on investment (ROI) as a performance
measurement is incorrect?
a. When the average age of asset differs substantially across segments of a business, the use of ROI
may not be appropriate.
b. ROI relies on financial measures that are capable of being independently verified while other
forms of performance measures are subject to manipulation.
 c. The use of ROI may lead managers to reject capital investment projects that can be justified by
using discounted cash flow models.
d. The use of ROI can make it undesirable for a skillful manager to take on trouble-shooting
assignments such as those involving turning around unprofitable divisions.

25. A successful responsibility accounting system is dependent upon

a. the correct allocation of controllable variable costs.
b. identification of the management level at which all costs are controllable.
c. the proper delegation of responsibility and authority.
d. a reasonable separation of costs into their fixed and variable components since fixed costs are not
controllable and must be eliminated from the responsibility report.

26. Using a contribution margin format for internal reporting purposes, the major distinction between segment
manager performance and segment performance is
a. unallocated fixed cost.
b. direct variable costs of producing the product.
c. direct fixed cost controllable by the segment manager.
d. direct fixed cost controllable by others.

27. Micro Manufacturers uses a performance reporting system that combines both financial and non-financial
measures to evaluate division performance. All of the following measure operational efficiency except:
a. Operating leverage
b. Days sales in accounts receivable
c. Inventory turnover
d. Residual Income

28. In responsibility accounting, a centers performance is measured by controllable costs. Controllable costs
are best described as including:
a. Direct materials and Direct Labor
b. Only those costs that the manager can influence in the current period of time.
c. Only discretionary costs
d. Those costs about which the manager is knowledgeable and informed.

29. The least complex segment or area of responsibility for which costs are allocated is a(n)
a. Profit center
b. Investment center
c. Revenue center
d. Cost center

30. The budgeting process that uses management by objectives and input from the individual manager is an
example of the application of
a. Flexible budgeting
b. Responsibility Accounting
c. Segment Reporting
d. Capital Budgeting

31. Which of the following techniques would be best for evaluating the management performance of a
department that is operated as a cost center?
a. Return on assets ratio
b. Return on investment ratio
c. Payback method
d. Variance analysis

32. A successful responsibility accounting reporting system is dependent upon

a. The correct allocation of controllable variable costs.
 b. Identification of the management level at which all costs are controllable.
c. The proper delegation of responsibility and authority.
d. A reasonable separation of costs into their fixed and variable components since fixed costs are not
controllable and must be eliminated from the responsibility report.

33. The return on investment calculation considers only the following components
S = Sales I = investment NI = Net Income

Which of the following formulas best describes the return on investment calculation?
a. (I S) x (S NI) = I NI
b. (S I) x (NI S) = NI I
c. (I S) x (NI S) = (I x NI) x (S x S)
d. (S I) x (S NI) = (S x S) (I x NI)

34. A firm earning a profit can increase its return on investment by:
a. Increasing sales revenue and operating expenses by the same dollar amount.
b. Decreasing sales revenues and operating expenses by the same percentage.
c. Increasing investment and operating expenses by the same dollar amount
d. Increasing sales revenues and operating expenses by the same percentage.

35. Which one of the following items would most likely not be incorporated into the calculation of a divisions
investment base when using the residual income approach for performance measurement and evaluation?
a. Fixed assets employed in division operations.
b. Land being held by the division as a site for a new plant.
c. Division inventories when division management exercises control over the inventory levels.
d. Division accounts payable when division management exercises control over the amount of short
term credit used.

36. The segment margin of an investment center after deducting the imputed interest on the assets used by the
investment center is known as:
a. Return on Investment
b. Residual income
c. Operating income
d. Return on Assets

37. Residual income is a better measure for performance evaluation of an investment center manager than
return on investment because
a. The problems associated with measuring the asset base are eliminated
b. Desirable investment decisions will not be neglected by high return divisions.
c. Only the gross book value of assets needs to be calculated.
d. The arguments about the implicit cost of interest are eliminated.

38. Goal congruence:

a. The desire and the commitment to achieve a specific goal.
b. The sharing of goals by supervisors and subordinates.
c. The extent to which individuals have the authority to make decisions.
d. The extent of the attempt to accomplish a specific goal.

39. The most fundamental responsibility center affected by the use of market based transfer prices is a(n)
a. Production center
b. Investment center
c. Cost center
d. Profit center
 40. A carpet manufacturer maintains a retail division consisting of stores stocking its brand and other brands
and a manufacturing division that makes carpets and pads. An outside market exists for carpet padding
material in which all padding produced can be sold. The proper transfer price for padding transferred from
the manufacturing division to the retail division is:
a. Variable manufacturing division production cost.
b. Variable manufacturing division production cost plus allocated fixed factory overhead.
c. Variable manufacturing division production cost plus variable selling and administrative costs.
d. The market price at which the retail division could purchase padding.

41. All other things being equal, if a division's traceable fixed expenses increase:
a. the division's contribution margin ratio will decrease.
b. the division's segment margin ratio will remain the same.
c. the division's segment margin will decrease.
d. the overall company profit will remain the same.

42. Which of the following statements provide(s) an argument in favor of including only a plant's net book
value rather than gross book value as part of operating assets in the ROI computation?

I. Net book value is consistent with how plant and equipment items are reported on a balance sheet.
II. Net book value is consistent with the computation of net operating income, which includes depreciation as an
operating expense.
III. Net book value allows ROI to decrease over time as assets get older.

a. Only I.
b. Only III.
c. Only I and II.
d. Only I and III.

43. Net operating income is defined as:

a. sales minus variable expenses.
b. sales minus variable expenses and traceable fixed expenses.
c. contribution margin minus traceable and common fixed expenses.
d. net income plus interest and taxes.

44. Delmar Corporation is considering the use of residual income as a measure of the performance of its
divisions. What major disadvantage of this method should the company consider before deciding to
institute it?
a. this method does not make allowance for difference in the size of compared divisions.
b. opportunities may be undertaken which will decrease the overall return on investment.
c. the minimum required rate of return may eliminate desirable opportunities from consideration.
d. residual income does not measure how effectively the division manager controls costs.

45. When the selling division in an internal transfer has unsatisfied demand from outside customers for the
product that is being transferred, then the lowest acceptable transfer price as far as the selling division is
concerned is:
a. variable cost of producing a unit of product.
b. the full absorption cost of producing a unit of product.
c. the market price charged to outside customers, less costs saved by transferring internally.
d. the amount that the purchasing division would have to pay an outside seller to acquire a similar
product for its use.

46. Which of the following are benefits of decentralization?

I. Giving a manager of a division greater decision making control over his/her division provides vital training for
a manager who is on the rise in the company.
 II. Managers at corporate headquarters have greater control in seeing that the goals of the company are realized.
III. Added decision-making authority and responsibility often leads to increased job satisfaction and often
persuades a manager to put forth his/her best efforts.

a. Only I and II.

b. Only II and III.
c. Only I and III.
d. Only I.

47. Which of these assertions refer to responsibility accounting?

I. Costs and revenues are identified with individuals for better control and performance appraisal.
II. Performance reports under this concept includes variances of actual amounts versus plan.
III. Third parties who are external users are the main recipients of information.
IV. Only expenses which are directly under the control of managers should ideally be charged to them.

a. Assertions I, II and IV only.

b. Assertions I and IV only.
c. Assertions I and II only
d. All four assertions.

48. In responsibility accounting, there are two types of reports distinguished as to goals or objectives:
a. Trend analysis reporting and comparative reporting.
b. Responsibility performance and information reporting.
c. Operations reporting and financial condition reporting.
d. Horizontal reporting and vertical reporting.

49. When used for performance evaluation, the generated reports in a responsibility accounting system should:

a. Not be related to the organization structure.

b. Not include variances between actual results and budgeted amounts of controllable costs.
c. Not distinguish between controllable and uncontrollable costs.
d. Not include allocated fixed manufacturing overhead.

50. All of the following are elements of responsibility accounting except:

a. Control reports
b. Responsibility center definition.
c. Planning systems and systematic approaches
d. Chart of accounts classifications.