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[19] Source: CIA 1190 IV-20 [22] Source: CIA 0589 IV-16
A limitation of transfer prices based on Division A of a company is currently
actual cost is that they operating at 50% capacity. It produces a
single product and sells all its production to
A. Charge inefficiencies to the outside customers for $13 per unit. Variable
department that is transferring the costs are $7 per unit, and fixed costs are $6
goods. per unit at the current production level.
Division B, which currently purchases this
B. Can lead to suboptimal decisions for product from an outside supplier for $12 per
the company as a whole. unit, would like to purchase the product
from Division A. Division A will operate at
C. Must be adjusted by some markup. 80% capacity to meet outside customers'
and Division B's demand. What is the
D. Lack clarity and administrative minimum price that Division A should
convenience. charge Division B for this product?
B. $34
[27] Source: CIA 0594 III-40
C. $46 Which of the following is not true about
international transfer prices for a
D. $50 multinational firm?
D. Costs over which they have [35] Source: CIA 1190 IV-21
significant influence. When comparing the residual income of
several investment centers, the validity of
comparisons may be destroyed by
[32] Source: Publisher
In a responsibility accounting system, a A. Peculiarities of each investment
feedback report that focuses on the center.
difference between budgeted amounts and
actual amounts is an example of B. Consistent use of an imputed interest
rate.
A. Management by exception.
C. Common amounts of invested capital
B. Assessing blame. for each investment center.
B. 20.8%
[Fact Pattern #1]
C. 33%
Segment A Segment B Segment C
Segment D D. 8.3%
????????? ????????? ????????? ??????
????
Net income $5,000 -- -- $90,000 [42] Source: Publisher
Sales 60,000 $750,000 $135,000 1,800,000 (Refers to Fact Pattern #1)
Investment 24,000 500,000 45,000 -- For Segment B, ROI is
Net income as % of sales -- -- -- --
Turnover of investment -- -- -- -- A. 6%
ROI -- -- 20% 7.5%
Minimum ROI--dollars -- -- -- $120,000 B. 25%
Minimum ROI--% 20% 6% -- --
Residual income -- -0- $2,250 -- C. 20%
B. 6.67% A. $30,000
C. 4% B. $6,750
D. 20% C. $4,800
D. $45,000
[39] Source: Publisher
(Refers to Fact Pattern #1)
For Segment C, the turnover of investment is [45] Source: Publisher
(Refers to Fact Pattern #1)
A. 3 For Segment C, the minimum dollar ROI is
B. 1.5 A. $6,750
C. 2.5 B. $4,800
D. 4 C. $120,000
D. $9,000
[40] Source: Publisher
(Refers to Fact Pattern #1)
For Segment D, the turnover of investment is [46] Source: Publisher
(Refers to Fact Pattern #1)
A. 1.5 Assume that the minimum dollar ROI is
$6,750. In Segment C, the minimum
B. 2.5 percentage of ROI is
A. 20% Cost Investment Profit
Centers Centers Centers
B. 6% ??????? ?????????? ???????
A.
C. 15%
Yes Yes Yes
D. 10% B.
Yes No No
[47] Source: Publisher C.
(Refers to Fact Pattern #1)
In Segment D, the minimum percentage of No Yes Yes
ROI is D.
A. 20% No No No
B. 6%
[52] Source: Publisher
C. 15% Periodic internal reports used for
performance evaluation purposes and based
D. 10% on a responsibility accounting system should
not include
D. $(60,000)
[53] Source: Publisher
Responsibility centers accumulate costs for
[49] Source: Publisher control purposes when using
(Refers to Fact Pattern #1)
In Segment D, the residual income is Process Job-Order Activity-
Costing Costing Based Costing
A. $12,000. ??????? ????????? ?????????????
A.
B. $(30,000)
Yes Yes Yes
C. $(60,000) B.
A. $84,000
[51] Source: Publisher
Which of the following types of B. $68,400
responsibility centers include controllable
revenues in their performance reports? C. $60,000
Direct labor 180,000
D. $44,400 Factory overhead 84,000 $ 50,400
General, selling, and
administrative 36,000 57,600
[55] Source: Publisher ???????? ????????
Suboptimization occurs when a management Total $540,000 $108,000
decision benefits the ======== ========
During year 2, Ash produced 360,000
Company Profit Investment hammers, which were sold for $2.40 each.
As a Whole Center Center Georgia's investment in Ash was $600,000
?????????? ?????? ?????????? and $840,000 at January 1, year 1 and
A. January 1, year 2, respectively. Georgia
normally imputes interest on investments at
Yes Yes Yes 18% of average invested capital.
B.
[58] Source: Publisher
Yes No No (Refers to Fact Pattern #2)
C. For the year ended December 31, year 2,
Ash's return on average investment was
No No No
D. A. 18%
C. 30%
[56] Source: Publisher
The following information pertains to D. 36%
Andrew Co. for the year ended December
31:
[59] Source: Publisher
Sales $720,000 (Refers to Fact Pattern #2)
Net income 120,000 Assume that Ash's net operating income was
Capital investment 480,000 $72,000 and its average invested capital
To determine Andrew's return on was $720,000. Determine Ash's residual
investment, which of the following income (loss) for the year ended December
equations should be used? 31, year 2.
A. (720,000/480,000) x A. $(57,600)
(720,000/120,000) = ROI
B. $(79,200)
B. (480,000/720,000) x
(720,000/120,000) = ROI C. $72,000
C. (720,000/480,000) x D. $(36,000)
(120,000/720,000) = ROI
C. $189,600 A. $350,000
D. $230,400 B. $324,000
C. $309,600
[Fact Pattern #2]
Georgia Co.'s tool division, Ash, incurred D. $216,000
the following costs for year 2:
B. $10,000
[68] Source: CMA 0694 3-24
C. $520,000 Decentralized firms can delegate authority
and yet retain control and monitor managers'
D. $120,000 performance by structuring the organization
into responsibility centers. Which one of the
following organizational segments is most
[64] Source: CMA 1291 3-10 like an independent business?
A segment of an organization is referred to
as a service center if it has A. Revenue center.
C. Flexible budgeting.
[75] Source: CMA 0691 3-28
D. Responsibility accounting. The basic purpose of a responsibility
accounting system is
B. Only those costs that the manager can [76] Source: CMA 0693 3-29
Which one of the following firms is likely to
influence in the current time period. experience dysfunctional motivation on the
part of its managers due to its allocation
C. Only discretionary costs. methods?
B. Materials.
[77] Source: CMA 0686 4-14
C. Repairs and maintenance. The segment margin of the Wire Division of
Lerner Corporation should not include
D. Depreciation on the manufacturing
facility. A. Net sales of the Wire Division.
[79] Source: CMA 0691 3-26 [83] Source: CMA 1292 3-21
If a manufacturing company uses A firm earning a profit can increase its
responsibility accounting, which one of the return on investment by
following items is least likely to appear in a
performance report for a manager of an A. Increasing sales revenue and
assembly line? operating expenses by the same dollar
amount.
A. Supervisory salaries.
B. Decreasing sales revenues and
B. Materials. operating expenses by the same
percentage.
C. Repairs and maintenance.
C. Increasing investment and operating
D. Depreciation on equipment. expenses by the same dollar amount.
[85] Source: CMA 0693 3-11 A. Divided by the current year's capital
(Refers to Fact Pattern #3) expenditures plus cost of capital.
If the Deed Corporation evaluates
managerial performance using return on B. Minus imputed interest charged for
investment, what will be the preference for invested capital.
taking on the proposed cosmetics line by
Edith Carolina and Michael Sanders? C. Divided by fixed assets.
Fabricating Division
Market price of subassembly $50 [95] Source: CMA 0696 3-27
Variable cost of subassembly $20 (Refers to Fact Pattern #4)
Excess capacity (in units) 1,000 Assume that the Entertainment Division is
Assembling Division able to purchase a large quantity of video
Number of units needed 900 cards from an outside source at $8.70 per
What is the natural bargaining range for the unit. The Video Cards Division, having
two divisions? excess capacity, agrees to lower its transfer
price to $8.70 per unit. This action would
A. Between $20 and $50.
A. Optimize the profit goals of the
B. Between $50 and $70. Entertainment Division while
subverting the profit goals of Parkside
C. Any amount less than $50. Inc.
B. Incremental cost.
[102] Source: CIA 1191 IV-19
C. Budgeted cost with or without a A carpet manufacturer maintains a retail
markup. division consisting of stores stocking its
brand and other brands, and a manufacturing
D. Market price. division that makes carpets and pads. An
outside market exists for carpet padding
material in which all padding produced can
[98] Source: CIA 1188 IV-23 be sold. The proper transfer price for
The price that one division of a company padding transferred from the manufacturing
charges another division for goods or division to the retail division is
services provided is called the
A. Variable manufacturing division
A. Market price. production cost.
B. The price representing the cash [104] Source: CIA 0595 III-96
outflows of the supplying division plus Which of the following techniques would be
the contribution to the supplying best for evaluating the management
division from an outside sale. performance of a department that is operated
as a cost center?
C. The price usually set by an
absorption-costing calculation. A. Return on assets ratio.
C. 19.79%
[109] Source: Publisher
D. 16.67% Charlie's Service Co. is a service center.
For the month of June, Charlie's had the
following operating statistics:
[106] Source: CMA 0697 3-24
Residual income is a better measure for Sales $750,000
performance evaluation of an investment Operating income 25,000
center manager than return on investment Net profit after taxes 8,000
because Total assets available 500,000
Shareholders' equity 200,000
A. The problems associated with Cost of capital 6%
measuring the asset base are eliminated. Charlie's has a
A. 8% No No
B.
B. 8.89%
No Yes
C. 9% C.
B. $1,620,000
[117] Source: CIA 1195 II-36
C. $1,830,000 To make goal setting effective and
worthwhile, the goals should be
D. $3,000,000
A. Just beyond what subordinates are
likely to reach.
[114] Source: CMA 0697 3-30
(Refers to Fact Pattern #5) B. Qualitative and approximate.
James Webb is the general manager of the
Industrial Product Division, and his C. Based on superior performers'
performance is measured using the residual output.
income method. Webb is reviewing the
following forecasted information for his D. Specific, objective, and verifiable.
division for next year:
[119] Source: CMA 0693 3-21 C. Work best when threatened with
Which one of the following organizational punishment.
policies is most likely to result in
undesirable managerial behavior? D. Are self-motivated.
C. Historical cost.
[132] Source: Publisher
D. Present value. A large corporation allocates the costs of its
headquarters staff to its decentralized
divisions. The best reason for this allocation
[128] Source: Publisher is to
An organization's managerial
decision-making model for capital budgeting A. More accurately measure divisional
is based on the net present value of operating results.
discounted cash flows. The same
organization's managerial performance B. Improve divisional managements'
evaluation model is based on annual morale.
divisional return on investment. Which of
the following is true? C. Remind divisional managers that
common costs exist.
A. Divisional managers are likely to
maximize the measures in the D. Discourage any use of central
decision-making model. support services.
A. Teams provide support to the team [140] Source: CIA 0594 III-83
members. An organization's management perceives the
need to change fundamentally. Which of the
B. Teams make decisions that are more following factors is management least likely
easily accepted. to change?
B. Smoothing.
[137] Source: CIA 0594 III-81
Which of the following would not be C. Problem solving.
considered a conflict trigger?
D. Compromise.
A. Ambiguous jurisdictions.
B. I and II only.
[139] Source: CIA 0594 III-89
The process of disciplining employees is C. III only.
made less effective by:
D. I, II, and III.
A. Stating the offending behavior
specifically.
[143] Source: CIA 0595 II-35
B. Postponing the start of disciplinary The manager faces two potentially
procedures. conflicting trends when formulating the
presentation of audit reports: (A) the
C. Permitting employees to challenge information age and the increase in
information available for decision making; based on this observation?
and (B) the concept of "bounded
rationality," which pertains to the ability of A. This supervisor is too lenient in
the individuals to process data and make performance ratings.
decisions. Which of the following
approaches to developing a report would be B. The performance appraisal forms
consistent with the notion of bounded probably have too many leading
rationality? questions.
A. Just beyond what subordinates are C. Group members bring more complete
likely to reach. information and knowledge into the
decision process.
B. Qualitative and approximate.
D. Group members avoid expressing
C. Based on superior performers' opinions that deviate from what appears
output. to be the group consensus.
D. Values are established in early years A. Define the desired outcome and the
and are unlikely to change. approach precisely and in writing.
D. The manager must believe in the B. The relationship between the parties
teamwork approach. is likely to continue.
B. Expansion of resources.
[160] Source: CIA 1196 II-34
A manager believes that positive C. Authoritative command.
reinforcement is the most appropriate way
to deal with professional staff of the type D. Altering the human variable.
working in his/her department. Which of the
following actions demonstrates the principle
of positive reinforcement? [164] Source: CIA 0596 II-27
A worker receives outstanding performance
A. An employee is given a 2-day evaluations from his first three supervisors.
suspension without pay if errors exceed He tries hard to please his fourth supervisor,
a predefined level. but the more he accomplishes, the more
critical his new supervisor becomes. The
B. Employees are praised when the new supervisor is generally considered a
detected error rate in their work stays marginal performer. Which of the following
below a pre-defined level. is the most likely source of the problem?
[161] Source: CIA 0596 II-22 [165] Source: CIA 1196 II-28
Which of the following criteria for C. Inventory increases or decreases.
measuring the quality of employee
performance would be appropriate for use D. Changes in fixed manufacturing
with a group of professionals, such as a overhead.
college faculty?
A. $1,500.
[167] Source: Publisher
Net income is lower under variable costing B. $2,500.
than under absorption costing when
C. $4,000.
A. Production increases from the
previous period. D. $10,000.
A. $1,500.
[168] Source: Publisher
If a company uses variable costing instead B. $4,000.
of absorption costing, it will always report
a C. $30,000.
B. Lower income.
[173] Source: Publisher
C. Higher finished goods inventory. If inventory quantities increase during a
period,
D. Lower finished goods inventory.
A. Variable costing profits will exceed
absorption costing profits.
of production levels.
[179] Source: Publisher
B. Allocation of fixed production costs If unit costs remain unchanged and sales
is arbitrary. volume and sales price per unit both
increase from the preceding period when
C. Production costs are uncontrollable operating profits were earned, operating
and should not be charged to profits must
production.
A. Increase under the absorption costing
D. Period costs are not necessary to method.
produce a product.
B. Increase under the variable costing
method.
[175] Source: Publisher
Although the absorption costing method is C. Decrease under the absorption
ordinarily required by GAAP, a company
may also want to prepare statements under costing method.
the variable costing method to
D. Decrease under the variable costing
A. Report a greater income. method.
B. $3,400 unfavorable.
[188] Source: Publisher
C. $3,000 favorable. Corporate social responsibility is
B. $3,000 favorable.
[189] Source: Publisher
C. $1,000 unfavorable.
A common argument against corporate
D. $3,000 unfavorable. involvement in socially responsible
behavior is that
Answer (C) is incorrect because ROI is [9] Source: CMA 1294 3-22
more widely used than residual income.
Answer (A) is incorrect because the
Answer (D) is incorrect because both manager of an assembly line is likely to
measures consider the same items. be responsible for the salaries of
supervisors, which is to some degree
controllable by the manager.
[7] Source: CMA 0694 3-27
Answer (B) is incorrect because the
Answer (A) is incorrect because manager of an assembly line is likely to
transfer prices are amounts charged by be responsible for the materials, which
one segment of an organization for is to some degree controllable by the
goods or services provided to another manager.
segment.
Answer (C) is incorrect because the
Answer (B) is incorrect because manager of an assembly line is likely to
flexible budgeting is simply a series of be responsible for the repairs and
budgets for varying levels of activity. maintenance, which is to some degree
controllable by the manager.
Answer (C) is correct. A well-designed
responsibility accounting system Answer (D) is correct. Responsibility
establishes responsibility centers within accounting holds managers responsible
an organization. Managerial only for factors under their control. The
performance should be evaluated only depreciation of equipment will
on the basis of those factors probably not appear on the performance
controllable by the manager. Managers report of an assembly-line manager
may control revenues, costs, and/or because the manager usually has no
investment activities. A departmental control over the investment in the
equipment.
Answer (C) is incorrect because
increasing sales volume while holding
[10] Source: Publisher other factors constant improves return
on investment.
Answer (A) is incorrect because dollar
sales do not give a measure of operating Answer (D) is correct. ROI equals net
performance based on resources income divided by investment.
required. Increasing net income (e.g., by
decreasing expenses or by increasing
Answer (B) is incorrect because net prices or sales volume) or decreasing
income does not give a measure of the investment base improves ROI.
operating performance based on Hence, any of the actions listed
resources required. increases the return on investment.
Management and the accounting
Answer (C) is incorrect because profit profession are very concerned with
percentages do not give a measure of classification of expenses and assets
operating performance based on and other decisions involving the
resources required. accounting for these items to achieve a
proper calculation of return on
Answer (D) is correct. Each investment investment.
center of a business should be evaluated
based upon return on investment to
judge operating performance. ROI is [13] Source: CMA 0684 4-9
comparable to calculations made both
within and without a particular Answer (A) is incorrect because ROI
organization. Management may review (NI ÷ I) will decrease if investment
the investment opportunities available (total assets) increases while NI
within or without the firm. In essence, remains the same.
net income is stated as a proportion of
investment capital (resources required). Answer (B) is correct. The basic
formula for return on investment is (S ÷
I) x (NI ÷ S) = NI ÷ I. If NI increases
[11] Source: Publisher (because expenses have decreased) by
the same amount that I increases
Answer (A) is incorrect because I ÷ NI (because total assets have increased),
is the reciprocal of return on ROI will increase. For example, if NI
investment. equals 100 and I equals 1,000, the ROI
is 10%. An increase of 20 in each term
Answer (B) is correct. The first term in raises the ROI to 11.8%.
the formula for return on investment is
the number of times investment capital Answer (C) is incorrect because a
has turned over through the sales reduction in NI causes a decrease in
mechanism (S ÷ I). This amount is ROI if investment is constant.
multiplied by the net income expressed
as a percentage of sales (NI ÷ S) to give Answer (D) is incorrect because ROI
the return on investment (NI ÷ I). The (NI ÷ I) does not change if the company
basic formula for return on investment originally had a net profit and the net
is therefore profit on sales (sales - expenses)
increases by the same percentage as the
(S ÷ I) x (NI ÷ S) = NI ÷ I. total assets.
Answer (D) is incorrect because net Answer (B) is incorrect because using
income must be expressed as a greater divisional ROIs in the less
percentage of sales (NI ÷ S), which profitable divisions to motivate those
results in NI ÷ I as return on investment. divisions to achieve higher ROIs would
not necessarily improve divisional
performance.
[12] Source: Publisher
Answer (C) is incorrect because lower
Answer (A) is incorrect because divisional ROIs in more profitable
decreasing expenses or assets while divisions in which motivation is
holding other factors constant improves unnecessary would likely suboptimize
return on investment. divisional performance.
Answer (D) is correct. The calculation Answer (D) is correct. The variable
of transfer prices in the international computer cost can be included. The
arena must be systematic. A scheme for segments are charged for actual usage,
which is under each segment's control. revenues and expenses (s)he can
The predetermined standard rate is set control. Controllability is the basic
at the beginning of the year and is concept of responsibility accounting.
known by the segment managers.
Moreover, the efficiencies and
inefficiencies of the computer [32] Source: Publisher
department are not passed on to the
segments. Both procedures promote a Answer (A) is correct. A responsibility
degree of control by the segments. accounting system should have certain
controls that provide for feedback
reports indicating deviations from
[30] Source: CIA 1192 IV-22 expectations. Management may then
focus on those deviations (exceptions)
Answer (A) is incorrect because for either reinforcement or correction.
contribution margin reporting separates
costs by behavior; variable costs are Answer (B) is incorrect because the
listed first followed by fixed costs. responsibility accounting system should
Some responsibility accounting systems not be used exclusively to assess blame.
use a contribution margin reporting
format, but contribution margin Answer (C) is incorrect because the
reporting alone can include costs not responsibility accounting system should
controllable by a manager. not be used exclusively to give
rewards.
Answer (B) is incorrect because
segment reporting is preparation of Answer (D) is incorrect because
performance reports by reportable feedback reports concentrate on
segments. Segment reports often include deviations, but not to the total exclusion
allocated costs that are not controllable of other budgeted variables.
by managers.
Answer (A) is incorrect because all [34] Source: CIA 1191 IV-17
variable costs may not be controllable,
but some, if not all, fixed costs might be Answer (A) is correct. The
controllable. responsibility accounting report should
list only the costs over which the
Answer (B) is incorrect because not all warehousing supervisor exercises
budgeted costs are controllable by control. The supervisor's salary should
managers. therefore be excluded because it is
controlled by the warehouse
Answer (C) is incorrect because all supervisor's superior. Moreover, only
product costs may not be controllable, the product costs are to be considered.
but some, if not all, period costs might These exclude the shipping clerks'
be controllable. wages and fringe benefits because they
are period costs (shipping is a selling
Answer (D) is correct. The most expense). Thus, the only product cost
desirable measure for evaluating a under the control of the warehouse
departmental manager is one that holds supervisor is the receiving clerks'
the manager responsible for the wages ($75,000) and the related fringe
benefits (.3 x $75,000 = $22,500), or a
total of $97,500.
[37] Source: Publisher
Answer (B) is incorrect because
$128,700 equals 130% of the sum of Answer (A) is incorrect because net
60% of the supervisor's salary, and income as a percentage of sales is
100% of the receiving clerks wages. calculated by dividing 6% (minimum
ROI) of the investment by the sales of
Answer (C) is incorrect because Segment B.
$130,000 is the sum of the wages of the
receiving and shipping clerks. Answer (B) is incorrect because 6.67%
is the net income as a percentage of
sales for Segment C.
Answer (D) is incorrect because
$169,000 includes the shipping and Answer (C) is correct. Residual income
receiving clerks' wages and their was zero, indicating that net income
employee benefit costs. These should was equal to the minimum ROI. Given a
be treated as period costs. 6% minimum ROI as a percentage of
investment, 6% of the $500,000
investment is $30,000. Sales were
[35] Source: CIA 1190 IV-21 $750,000, so net income ($30,000) is
4% of sales.
Answer (A) is correct. Residual income
is income of an investment center, Answer (D) is incorrect because 10%
minus an imputed interest charge for is the minimum ROI percentage for
invested capital. The theory is that Segment D.
earning an income greater than residual
income indicates that expansion is
desirable. However, comparisons of [38] Source: Publisher
investment centers based on residual
income may be misleading because of Answer (A) is incorrect because 5% is
differences in products, markets, costs, the net income as a percentage of sales
and local conditions. for Segment D.
Answer (B) is incorrect because use of Answer (B) is correct. Net income as a
the same imputed interest rate provides percentage of sales is the ROI divided
a consistent objective against which by turnover of investment. The turnover
each investment can be measured. of the investment is sales ($135,000)
divided by the investment ($45,000), or
Answer (C) is incorrect because 3. Hence, net income is 6.67% (20% ÷
common amounts of invested capital 3) as a percentage of sales for Segment
would eliminate a major factor causing C.
differences in residual income.
Answer (C) is incorrect because 4% is
Answer (D) is incorrect because the net income as a percentage of sales
comparisons of investment centers for Segment B.
based on residual income may be
misleading because of peculiarities of Answer (D) is incorrect because 20%
each investment center (i.e. differences is the ROI for Segment C.
in products, markets, costs, and local
conditions).
[39] Source: Publisher
Answer (A) is correct. Segment A's Answer (A) is incorrect because a cost
residual income is equal to the net center is not responsible for revenues.
income ($5,000) minus the minimum
ROI in dollars. Minimum ROI in Answer (B) is incorrect because the
dollars equals the minimum ROI performance reports of an investment
percentage (20%) times the investment center and a profit center but not a cost
($24,000), or $4,800. Residual income center include controllable revenues.
is therefore $200.
Answer (C) is correct. In investment
Answer (B) is incorrect because centers, managers are responsible for
$12,000 is the minimum ROI percentage all activities, including costs, revenues,
multiplied by sales. and investments. An investment center
is a profit center with significant
Answer (C) is incorrect because control over the amount of capital
$(30,000) is the residual income for invested. This control extends to
Segment D. investments such as receivables and
property, plant, and equipment, as well
Answer (D) is incorrect because the as entry into new markets. A cost
residual income for Segment A is center, for example, a production
determined by subtracting the minimum department, is responsible for costs
ROI dollars from net income. only. A profit center, for example, the
appliance department in a retail store,
is responsible for both revenues and
[49] Source: Publisher expenses.
Answer (B) is incorrect because the Answer (B) is incorrect because the
profit center manager does not control imputed interest charge of $9,600 (8% x
depreciation on accommodations $120,000) must be deducted.
($9,600) or the allocated corporate
expenses ($6,000). Answer (C) is incorrect because the
imputed interest charge of $9,600
Answer (C) is incorrect because the should be subtracted from, not added to,
profit center manager does not control net income.
his/her $24,000 salary.
Answer (D) is incorrect because the [60] Source: Publisher
traceable fixed costs must be deducted.
Answer (A) is correct. The breakeven
point in units is total fixed costs divided
[58] Source: Publisher by the unit contribution margin (UCM).
The UCM is the selling price minus
Answer (A) is incorrect because 18% variable costs per unit. Variable costs
is the rate at which Ash imputes interest
on investments. per unit equal $1.50 ($540,000 ÷
360,000 units). Thus, the UCM equals
Answer (B) is incorrect because 25.7% $.90 ($2.40 - $1.50). Dividing the
results from using year 2 year-end $108,000 of fixed costs by the $.90
invested capital instead of average UCM yields a breakeven point of
invested capital. 120,000 units.
Answer (C) is correct. The return on Answer (B) is incorrect because selling
average investment equals net income 110,000 units would result in a loss of
from operations divided by average $.08 per unit.
invested capital. Average invested
capital is $720,000 [($600,000 + Answer (C) is incorrect because selling
$840,000) ÷ 2]. 100,000 units would result in a loss of
$.18 per unit.
Sales (360,000 units x $2.40) $864,000
Minus: Answer (D) is incorrect because selling
Variable costs (540,000) 90,000 units would result in a loss of
???????? $.30 per unit.
Contribution margin $324,000
Minus:
Fixed costs (108,000) [61] Source: Publisher
????????
Net operating income $216,000 Answer (A) is incorrect because
======== contribution margin is sales minus total
Therefore, the return on average variable costs.
investment was 30% ($216,000 ÷
$720,000). Answer (B) is correct. The contribution
margin is sales of $864,000 (360,000
Answer (D) is incorrect because 36% units x $2.40) minus variable costs of
results from using year 1 year-end $540,000, or $324,000.
invested capital instead of average
invested capital. Answer (C) is incorrect because
contribution margin is sales minus total
variable costs.
[59] Source: Publisher
Answer (D) is incorrect because
Answer (A) is correct. Residual income contribution margin is sales minus total
is equal to net operating income minus variable costs.
imputed interest on invested capital.
Net operating income and average
investment were $72,000 and $720,000, [62] Source: Publisher
respectively. The imputed interest rate
is 18%. Thus, Answer (A) is incorrect because
$648,000 is the total costs and expenses
Net operating income $ 72,000 for year 2 based on a production of
Minus: 360,000 hammers.
Imputed interest (18% x $720,000) (129,600)
????????? Answer (B) is correct. Over the
Residual income $ (57,600) relevant range, fixed costs will not
========= fluctuate. The variable cost per unit was
$1.50. Thus, total costs and expenses
Answer (B) is incorrect because the will be
imputed interest is 18% of the average
invested capital of $720,000, not of the Variable ($1.50 x 400,000 units) $600,000
year-end invested capital of $840,000. Fixed 108,000
????????
Answer (C) is incorrect because the Total costs and expenses $708,000
imputed interest of $129,600 (18% x ========
Answer (A) is incorrect because fixed Answer (C) is correct. Residual income
operating assets are controlled by the is the excess of the return on an
division manager and contribute to investment over a targeted amount,
profits. which is equal to an imputed interest
charge on invested capital (in this case,
Answer (B) is correct. An evaluation of 8%). The rate is usually the
an investment center is based upon the weighted-average cost of capital. Some
return on the investment base. These enterprises prefer to measure
assets include plant and equipment, managerial performance in terms of the
inventories, and receivables. Most amount of residual income rather than
likely, however, an asset, such as land, the percentage ROI. The principle is
that is being held by the division as a that the enterprise is expected to benefit
site for a new plant would not be from expansion as long as residual
included in the investment base because income is earned. Using a percentage
it is not currently being used in ROI approach, expansion might be
operations. Total assets in use rather rejected if it lowered ROI, even though
than total assets available is preferable residual income would increase. Using
when the investment center has been residual income, both Carolina and
forced to carry idle assets. Sanders would accept the new project
because residual income will increase
Answer (C) is incorrect because if a 12% return is earned when the
inventories are operating assets that target ROI is only 8%.
contribute to profits and are controlled
by the division manager. Answer (D) is incorrect because
Sanders and Carolina would accept the
Answer (D) is incorrect because the project.
level of accounts payable is an
operating decision that should be
considered in the evaluation of the [85] Source: CMA 0693 3-11
division manager.
Answer (A) is correct. A company with
an 8% ROI threshold should obviously
[83] Source: CMA 1292 3-21 accept a project yielding 12% because
the company's overall ROI would
Answer (A) is incorrect because increase. The manager being evaluated
increasing sales and expenses by the on the basis of ROI who is already
same dollar amount will not change earning 14% will be unwilling to
income or ROI. accept a 12% return on a new project
because the overall ROI for the division
Answer (B) is incorrect because would decline slightly. This absence of
decreasing revenues and expenses by goal congruence suggests a weakness in
the same percentage will reduce income ROI-based performance evaluation.
and lower ROI.
Answer (B) is incorrect because
Answer (C) is incorrect because Carolina would accept a project
increasing investment and operating yielding a return greater than 8%, and
expenses by the same dollar amount Sanders would reject a return yielding
will lower ROI. The higher investment less than 14%.
increases the denominator, and the
increased expenses reduce the Answer (C) is incorrect because
numerator. Carolina would accept a project
yielding a return greater than 8%, and
Answer (D) is correct. ROI equals Sanders would reject a return yielding
income divided by invested capital. If a less than 14%.
company is already profitable,
increasing sales and expenses by the Answer (D) is incorrect because
same percentage will increase ROI. For Carolina would accept a project
example, if a company has sales of yielding a return greater than 8%, and
$100 and expenses of $80, its net Sanders would reject a return yielding
income is $20. Given invested capital less than 14%.
of $100, ROI is 20% ($20 ÷ $100). If
sales and expenses both increase 10%
to $110 and $88, respectively, net [86] Source: CMA 0693 3-27
income increases to $22. ROI will then
be 22% ($22 ÷ $100). Answer (A) is incorrect because ROI
can be misleading when the quality of
the investment base differs among
[84] Source: CMA 0693 3-12 segments.
Answer (C) is correct. Residual income Answer (C) is incorrect because ROI is
is the excess of the return on an commonly based on before-tax income.
investment over a targeted amount equal
to an imputed interest charge on Answer (D) is incorrect because
invested capital. The rate used is $(22,000) equals the difference
ordinarily set as a target return by between net profit after taxes and
management but is often equal to the targeted income.
weighted average cost of capital. Some
enterprises prefer to measure
managerial performance in terms of the [90] Source: CMA 1296 3-2
amount of residual income rather than
the percentage ROI because the firm Answer (A) is incorrect because these
will benefit from expansion as long as ROI computations do not subtract
residual income is earned. imputed interest on capital used from
the investment base.
Answer (D) is incorrect because the
rate should be based on cost of capital, Answer (B) is correct. Residual income
not investment returns of preceding is the excess of the amount of return on
years. investment (ROI) over a targeted
amount equal to an imputed interest
charge on invested capital. The rate
[88] Source: CMA 0694 3-29 used to impute the interest is usually the
weighted-average cost of capital. The
Answer (A) is incorrect because ROI is advantage of using residual income
based on all assets, not just current rather than percentage ROI is that the
investment expenditures. former emphasizes maximizing an
amount instead of a percentage.
Answer (B) is incorrect because the Managers are encouraged to accept
calculation of ROI does not adjust for projects with returns exceeding the cost
imputed interest on invested capital. of capital even if the investments reduce
the percentage ROI.
Answer (C) is incorrect because the
denominator would not be limited to Answer (C) is incorrect because
fixed assets. operating income equals operating
revenues minus operating costs.
Answer (D) is correct. ROI is
calculated by dividing income by Answer (D) is incorrect because these
invested capital. It is a key performance ROI computations do not subtract
measure of an investment center. imputed interest on capital used from
Invested capital may be defined in the investment base.
various ways, such as shareholders'
achieve its goals while functioning in
[91] Source: CMA 1296 3-27 the best interest of the overall company.
Transfer prices can be determined in a
Answer (A) is incorrect because they number of ways, including normal
reflect an assumption that the subunit market price, negotiated price, variable
manager does not influence the resource costs, or full absorption costs. The
base (denominator of the ROI capacity of the Selling Division is often
calculation). a determinant of the ideal transfer price.
If the Fabricating Division had no
Answer (B) is correct. ROI equals excess capacity, it would charge the
income divided by invested capital. The Assembling Division the regular market
denominator may be defined in various price. However, if the Fabricating
ways, e.g., total assets available, assets Division has excess capacity of 1,000
employed, working capital plus other units, negotiation is possible because
assets, and shareholders' equity. If any transfer price greater than the
shareholders' equity (total assets - total variable cost of $20 would absorb
liabilities) is chosen, a portion of some of its fixed costs and result in
long-term liabilities must be allocated increased divisional profits. Thus, any
to the investment center to determine the price between $20 and $50 is
manager's resource base. One problem acceptable to the Fabricating Division.
with this definition of the resource base Any price under $50 is acceptable to
is that, although it has the advantage of the Assembling Division because that is
emphasizing return to owners, it reflects the price that would be paid to an
decisions at different levels of the outside supplier.
entity: short-term liabilities incurred by
the responsibility center (operating Answer (B) is incorrect because the
decisions) and long-term liabilities Assembling Division would not pay
controlled at the corporate level more than the market price of $50.
(long-term financing decisions).
Answer (C) is incorrect because
Answer (C) is incorrect because Fabricating will not be willing to
working capital plus other assets accept less than its variable cost of $20.
reflects the assumption that the manager
controls short-term credit. However, no Answer (D) is incorrect because
corporate-level decision to allocate Fabricating should be willing to accept
long-term liabilities to subunits is any price between $20 and $50.
necessary.
Answer (D) is incorrect because they [94] Source: CMA 0696 3-26
reflect an assumption that the subunit
manager does not influence the resource Answer (A) is incorrect because
base (denominator of the ROI evaluating the seller is difficult if it can
calculation). pass along all costs to the buyer.
[96] Source: CMA 0696 3-28 Answer (A) is incorrect because market
price is an approach to determine a
Answer (A) is incorrect because this transfer price.
arrangement creates no disincentive for
the seller. It will make a profit on every Answer (B) is correct. A transfer price
unit transferred. is the price charged by one segment of
an organization for a product or service
Answer (B) is correct. Given that the supplied to another segment of the same
Plastics Division (the seller) has excess organization.
capacity, transfers within the company
entail no opportunity cost. Accordingly, Answer (C) is incorrect because outlay
the transfer at the negotiated price will price is an approach to determine a
improve the performance measures of transfer price.
the transferor. Purchasing internally at
below the market price also benefits the Answer (D) is incorrect because
transferee, so the motivational purpose distress price is an approach to
of transfer pricing is achieved. The goal determine a transfer price.
congruence purpose is also achieved
because the internal transaction benefits
the company. [99] Source: Publisher
Answer (A) is incorrect because the [103] Source: CIA 1190 IV-20
price on the open market is the
definition of the market price. Answer (A) is incorrect because
inefficiencies are charged to the buying
Answer (B) is incorrect because outlay department.
cost plus opportunity cost is the price
representing the cash outflows of the Answer (B) is correct. The optimal
supplying division plus the contribution transfer price of a selling division
to the supplying division from an should be set at a point that will have
outside sale. the most desirable economic effect on
the firm as a whole while at the same
time continuing to motivate the
Answer (C) is incorrect because the management of every division to
full-cost price is the price usually set by perform efficiently. Setting the transfer
an absorption-costing calculation. price based on actual costs rather than
standard costs would give the selling
Answer (D) is correct. The division little incentive to control costs.
variable-cost-plus price is the price set
by charging for variable cost plus either Answer (C) is incorrect because, by
a lump sum or an additional markup but definition, cost-based transfer prices
less than the full markup price. This are not adjusted by some markup.
permits top management to enter the
decision process and dictate that a Answer (D) is incorrect because
division transfer at variable cost plus cost-based transfer prices provide the
some appropriate amount. advantages of clarity and administrative
convenience.
[136] Source: CIA 1193 III-2 [139] Source: CIA 0594 III-89
Answer (C) is incorrect because the Answer (B) is incorrect because group
company has not effectively decision making almost always takes
implemented the strategic constituencies more time than individual decision
approach. Only one of the organization's making, except when the need for
important constituencies is considered. diverse views is so great that an
individual decision maker needs to
Answer (D) is incorrect because the consult many people or perform
company has not effectively research.
implemented the strategic constituencies
approach. Only one of the organization's Answer (C) is incorrect because group
important constituencies is considered. members usually have diverse views,
but their common need to be accepted
and respected by the group often
[143] Source: CIA 0595 II-35 restrains the full, open expression of
their views when they fear strong
Answer (A) is incorrect because the disagreement.
most available information may not be
the best and most useful. Answer (D) is correct. Groups tend to
be more creative than individuals.
Diversity of member views, cheaper, but it may disrupt the
experiences, and abilities usually workplace and cause increased errors.
results in considering more solutions to Classroom lectures are appropriate
a problem. when the skill training is too complex to
be conducted on the job.
Answer (C) is correct. The only [156] Source: CIA 0596 II-32
legitimate grounds on which the
supervisor may take action is the Answer (A) is incorrect because
employee's behavior. Personal beliefs, defining the task decreases both
such as those on religious and political acceptance and understanding of the
matters, cannot be the basis of assignment. The staff member should
personnel actions. Discrimination on participate in the decision and be able
the basis of personal beliefs could to discuss and clarify the assignment.
expose the organization to legal action.
Answer (B) is correct. The supervisor's
Answer (D) is incorrect because expectations should be clear. The staff
personal beliefs alone are not an member should also be involved in
appropriate basis for managerial action. determining how to reach the desired
outcome, thereby increasing both
acceptance and understanding of the
[154] Source: CIA 1196 II-37 assignment.
[158] Source: CIA 1196 II-27 Answer (D) is incorrect because not
requiring employees to work overtime
Answer (A) is incorrect because the is negative reinforcement, which is the
participative approach assumes that elimination of something unpleasant
workers are positively motivated. when a desired behavior occurs.
Answer (A) is incorrect because faculty Answer (D) is incorrect because, when
members have no control over cost. sales exceed production, net income is
lower under absorption costing. Some
Answer (B) is correct. The fixed costs from the prior period are
performance of professional employees, included in beginning inventory.
such as a college faculty, should be
measured using criteria over which they
have some control. In the case of a [168] Source: Publisher
college faculty, the quantity and quality
of output and the timeliness of output Answer (A) is incorrect because
income will be lower under variable
costing when production exceeds sales. Answer (B) is incorrect because ending
inventory is $4,000 under absorption
Answer (B) is incorrect because costing.
income will be higher under variable
costing. Answer (C) is correct. Under
absorption costing, the unit cost of
Answer (C) is incorrect because ending inventory is $40 [$10,000 raw
finished goods inventory will be higher materials + $20,000 direct labor +
under absorption costing. $20,000 variable factory overhead +
$30,000 fixed factory overhead) ÷
Answer (D) is correct. Absorption 2,000 units produced]. Given no
costing always results in a higher beginning inventory, ending inventory is
finished goods inventory because it 100 units (2,000 units produced - 1,900
inventories fixed manufacturing units sold). Hence, ending inventory is
overhead. Under variable costing, $4,000 (100 units x $40).
inventory valuation is lower because
those costs are expensed as incurred. Answer (D) is incorrect because ending
inventory is $4,000 under absorption
costing.
[169] Source: Publisher
Answer (C) is incorrect because sales Answer (B) is incorrect because $4,000
volume is directly related to profit is ending inventory under absorption
under variable costing. costing.
Answer (A) is incorrect because all Answer (B) is correct. Under variable
variable manufacturing costs are costing, profit always moves in the
product costs under variable costing. same direction as sales volume.