Question 1

Describe the concept of decentralization as applied to large business organizations.Why do large organizations practice decentralization?

Accepted Answer

The level of complexity in the operatio

Question 2

Indicate whether each of the following statements about transfer pricing is true or false.
A cost-based transfer price has the advantage of promoting efficiency and fairness.______
A market-based transfer price may be adjusted to take into account cost savings that occur as a result of sales being made within the company.______
A decentralized company should adopt a policy of requiring divisions in the company to make sales to other divisions when such sales will benefit the company as a whole.______
The level of capacity at which the selling division is operating should not affect the level of the transfer price for a sale to another division in the same company.______
Companies with operations in two or more countries sometimes try to set transfer prices at a level that will reduce their overall income tax bill.______

Accepted Answer

A cost-based transfer price has the adva

Question 3

Sanford Company reported the following information for the current year:
 $$\begin{array} { l c c } 
\text { Sales } & \$ 880,000 \
\text { Average operating assets } & \$ 475,000 \
\text { Desired ROI } &  10 \% \
\text { Net Income } & \$  90,000
\end{array}$$ Required:
Based on this information,calculate the company's residual income.

Accepted Answer

Residual Income = Net Income ?

Question 4

In the current year,the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000.Testar has set a target return on investment (ROI)of 16% for each of its divisions.Which of the following statements is correct?

Accepted Answer

A)  The New Products division yielded ROI that was lower than the target ROI. 
B)  Residual income for the New Products division was $832,000. 
C)  The New Products division yielded no residual income. 
D)  All of these answers are correct. 
A)  The New Products division yielded ROI that was lower than the target ROI. 
B)  Residual income for the New Products division was $832,000. 
C)  The New Products division yielded no residual income. 
D)  All of these answers are correct.

Question 5

Which of the following is not typically found in a decentralized organization?

Accepted Answer

A)  Cost center 
B)  Decision center 
C)  Investment center 
D)  Profit center 
A)  Cost center 
B)  Decision center 
C)  Investment center 
D)  Profit center

Question 6

The Water Management Company has two operating divisions,the Service Division and the Irrigation Division.The company evaluates the performance of its divisions using the return on investment (ROI)measure.The following information pertains to the two divisions as of the end of the current year.
 $\begin{array}{l}
&\text { Service } & \text { Irrigation } & \
&\text { Division } & \text { Division } & \text { Total }\
\text {Units repaired; Units produced}\
\text {and sold}&8,000&250\
\text {Level of investment in operating}\
\text {assets}&\$400,000&\$1,000,000&\$1,400,000\
\
\text { Expenses: }\
\text { Direct materials } & 40,000 & 400,000 & 440,000 \
\text { Direct labor } & 200,000 & 200,000 & 400,000 \
\text { Overhead } & 25,000 & 250,000 & 275,000\
\text { Selling/administrative (S\&A) }\
\text { costs } & \underline{15,000 }&  \underline{150,000} & \underline{ 165,000} \
\text { Total expenses } & \underline{ \$ 280,000} &  \underline{\$ 1,000,000 }& \underline{ \$ 1,280,000}
\end{array}$
 The average service fee was $50.00 per unit for the Service Division,while the average selling price of an irrigation system was $5,000 for the Irrigation Division.The company requires a minimum return on investment of 12%.
Required:
Compute the return on investment (ROI)measure for both divisions and the company as a whole.Based on ROI alone,which division had the better performance? (Round ROI measures to the nearest whole percent.)

Accepted Answer

ROI measures:
 Based

Question 7

Which of the following may be used to establish transfer prices?

Accepted Answer

A)  Standard cost of a product 
B)  A negotiated price 
C)  Market price 
D)  All of these are correct answers. 
A)  Standard cost of a product 
B)  A negotiated price 
C)  Market price 
D)  All of these are correct answers.

Question 8

Terra Company has two divisions,the Retail Division and the Wholesale Division.The following information was gathered for the two divisions for the current year: $$\begin{array} { l l c } 
& \text { Retail Division } & \text { Wholesale Division } \
\text { Operating income } & \$ 2,500,000 & \$ 6,000,000 \
\text { Operating assets } & \$ 16,000,000 & \$ 36,000,000
\end{array}$$ Assuming that these are the only divisions of Terra Company,what is the ROI for the company as a whole?

Accepted Answer

A)  15.7% 
B)  16.3% 
C)  16.6% 
D)  32.3% 
A)  15.7% 
B)  16.3% 
C)  16.6% 
D)  32.3%

Question 9

Patterson Company has three divisions that all report to the vice president of manufacturing.Each division has two departments.The vice president of manufacturing should receive detailed responsibility reports on all six of the departments.

Accepted Answer

A) True 
 B)False

Question 10

Select the incorrect statement concerning the application of the controllability concept to responsibility accounting.

Accepted Answer

A)  As a practical matter, control of costs or revenues may be shared rather than absolute. 
B)  The concept of control is crucial to an effective responsibility accounting system. 
C)  Managers lose motivation when they are held accountable for actions that are beyond their scope of control. 
D)  Each manager should be evaluated on the costs but not the revenues that are under his or her control. 
A)  As a practical matter, control of costs or revenues may be shared rather than absolute. 
B)  The concept of control is crucial to an effective responsibility accounting system. 
C)  Managers lose motivation when they are held accountable for actions that are beyond their scope of control. 
D)  Each manager should be evaluated on the costs but not the revenues that are under his or her control.

Question 11

Investment centers are often evaluated on the basis of return on investment.

Accepted Answer

A) True 
 B)False

Question 12

Cambridge Company has three divisions that all report to the vice president of manufacturing.Each division has two departments.On Cambridge's organization chart,there will be three lines leading to the vice president of manufacturing,one for each division.

Accepted Answer

A) True 
 B)False

Question 13

The Electronics Division of Anton Company reports the following results for the current year: $$\begin{array} { l c c } 
\text { Revenues } & \$ & 800,000 \
\text { Operating expenses } & \$ & 656,000 \
\text { Operating income } & \$ & 144,000 \
\text { Operating assets } & \$ & 1,200,000
\end{array}$$ Anton Company has set a target return on investment (ROI)of 11% for the Electronics Division.
The Electronic Division's margin is:

Accepted Answer

A)  11.25%. 
B)  12%. 
C)  66.7%. 
D)  18%. 
A)  11.25%. 
B)  12%. 
C)  66.7%. 
D)  18%.

Question 14

Fairpoint Products provided the following selected information about its consumer products division for the current year: $$\begin{array} { l c c } 
\text { Desired ROI } &  8 \% \
\text { Net Income } & \$100,000 \
\text { Residual Income } & \$  60,000
\end{array}$$ Based on this information,the division's investment amount was:

Accepted Answer

A)  $500,000. 
B)  $1,250,000. 
C)  $750,000. 
D)  $2,000,000. 
A)  $500,000. 
B)  $1,250,000. 
C)  $750,000. 
D)  $2,000,000.

Question 15

The Electronics Division of Anton Company reports the following results for the current year: $$\begin{array} { l c c } 
\text { Revenuses } & \$ & 800,000 \
\text { Operating expenses } & \$ & 656,000 \
\text { Operating income } & \$ & 144,000 \
\text { Operating assets } & \$ & 1,200,000
\end{array}$$ Anton Company has set a target return on investment (ROI)of 11% for the Electronics Division.
The Electronic Division's turnover (asset utilization)is:

Accepted Answer

A)  0.1125. 
B)  0.12. 
C)  0.667. 
D)  0.18. 
A)  0.1125. 
B)  0.12. 
C)  0.667. 
D)  0.18.

Question 16

Which of the following statements about return on investment (ROI)is false?

Accepted Answer

A)  ROI equals margin divided by investment turnover. 
B)  ROI is used to measure the performance of investment centers. 
C)  Seeking to maximize ROI can result in a conflict between the interest of a particular manager and the interest of the business as a whole. 
D)  Companies may minimize motivational problems by using original cost instead of book value in the denominator of the ROI formula. 
A)  ROI equals margin divided by investment turnover. 
B)  ROI is used to measure the performance of investment centers. 
C)  Seeking to maximize ROI can result in a conflict between the interest of a particular manager and the interest of the business as a whole. 
D)  Companies may minimize motivational problems by using original cost instead of book value in the denominator of the ROI formula.

Question 17

Marcy is plant manager for Diversified Industries.She and the managers of four other plants report to the vice president in charge of manufacturing operations.Three department managers report to Marcy.Select the incorrect statement regarding the preparation of responsibility reports.

Accepted Answer

A)  Marcy's responsibility report should include a detailed account of the individual items for which she is personally responsible. 
B)  The vice president's responsibility report would contain information for Marcy's plant rolled together with that of the other four plants. 
C)  Marcy's administrative costs should be included on the reports of her three department managers. 
D)  Marcy's responsibility report should contain only summary information about the operations of the three departments in her chain of command. 
A)  Marcy's responsibility report should include a detailed account of the individual items for which she is personally responsible. 
B)  The vice president's responsibility report would contain information for Marcy's plant rolled together with that of the other four plants. 
C)  Marcy's administrative costs should be included on the reports of her three department managers. 
D)  Marcy's responsibility report should contain only summary information about the operations of the three departments in her chain of command.

Question 18

An important disadvantage of decentralization is that managers may engage in suboptimal behavior.

Accepted Answer

A) True 
 B)False

Question 19

Payne Company reported the following information for the current year: $$\begin{array} { l l} 
\text { Sales } & \$ 1,600,000 \
\text { Average Operating Assets } & \$  500,000 \
\text { Desired ROI } &  14 \% \
\text { Net Income } & \$ 85,000
\end{array}$$ The company's residual income was:

Accepted Answer

A)  $(15,000). 
B)  $14,000. 
C)  $15,000. 
D)  $24,000. 
A)  $(15,000). 
B)  $14,000. 
C)  $15,000. 
D)  $24,000.

Question 20

Retail Sales and Wholesale Sales are the only divisions of Terra Company.The following information was gathered for the two divisions for the current year: $$\begin{array} { l l c } 
& \text { Retail Division } & \text { Wholesale Division } \
\text { Operating income } & \$ 2,500,000 & \$ 6,000,000 \
\text { Operating assets } & \$ 16,000,000 & \$ 36,000,000
\end{array}$$ The company has $1,200,000 in operating assets that are not assigned to either of the divisions and $500,000 in corporate expenses that are not reflected in the information above.Based on this information,what is the ROI for the company as a whole?

Accepted Answer

A)  17.7% 
B)  16.9% 
C)  15.0% 
D)  The answer cannot be determined using the information provided. 
A)  17.7% 
B)  16.9% 
C)  15.0% 
D)  The answer cannot be determined using the information provided.

Describe the concept of decentralization as applied to large business organizations.Why do large organizations practice decentralization?

Sanford Company reported the following information for the current year: Sales \ 880,000 Average operating assets \ 475,000 Desired ROI 10\% Net Income \ 90,000 Required: Based on this information,calculate the company's residual income.

In the current year,the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000.Testar has set a target return on investment (ROI)of 16% for each of its divisions.Which of the following statements is correct?

Which of the following is not typically found in a decentralized organization?

Which of the following may be used to establish transfer prices?

Patterson Company has three divisions that all report to the vice president of manufacturing.Each division has two departments.The vice president of manufacturing should receive detailed responsibility reports on all six of the departments.

Select the incorrect statement concerning the application of the controllability concept to responsibility accounting.

Investment centers are often evaluated on the basis of return on investment.

Cambridge Company has three divisions that all report to the vice president of manufacturing.Each division has two departments.On Cambridge's organization chart,there will be three lines leading to the vice president of manufacturing,one for each division.

Fairpoint Products provided the following selected information about its consumer products division for the current year: Desired ROI 8\% Net Income \1 00,000 Residual Income \ 60,000 Based on this information,the division's investment amount was:

Which of the following statements about return on investment (ROI)is false?

Marcy is plant manager for Diversified Industries.She and the managers of four other plants report to the vice president in charge of manufacturing operations.Three department managers report to Marcy.Select the incorrect statement regarding the preparation of responsibility reports.

An important disadvantage of decentralization is that managers may engage in suboptimal behavior.

Payne Company reported the following information for the current year: Sales \ 1,600,000 Average Operating Assets \ 500,000 Desired ROI 14\% Net Income \ 85,000 The company's residual income was:

Management Accounting and Corporate Governance

Cost Behavior, operating Leverage, and Profitability Analysis

Analysis of Cost, volume, and Pricing to Increase Profitability

Cost Accumulation,tracing,and Allocation

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Planning for Capital Investments

Product Costing in Service and Manufacturing Entities

Job-Order, process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters

Exam 9: Responsibility Accounting

Describe the concept of decentralization as applied to large business organizations.Why do large organizations practice decentralization?

Sanford Company reported the following information for the current year: Sales \ 880,000 Average operating assets \ 475,000 Desired ROI 10\% Net Income \ 90,000 Required: Based on this information,calculate the company's residual income.

In the current year,the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000.Testar has set a target return on investment (ROI)of 16% for each of its divisions.Which of the following statements is correct?

Which of the following is not typically found in a decentralized organization?

Which of the following may be used to establish transfer prices?

Patterson Company has three divisions that all report to the vice president of manufacturing.Each division has two departments.The vice president of manufacturing should receive detailed responsibility reports on all six of the departments.

Select the incorrect statement concerning the application of the controllability concept to responsibility accounting.

Investment centers are often evaluated on the basis of return on investment.

Cambridge Company has three divisions that all report to the vice president of manufacturing.Each division has two departments.On Cambridge's organization chart,there will be three lines leading to the vice president of manufacturing,one for each division.

Fairpoint Products provided the following selected information about its consumer products division for the current year: Desired ROI 8\% Net Income \1 00,000 Residual Income \ 60,000 Based on this information,the division's investment amount was:

Which of the following statements about return on investment (ROI)is false?

Marcy is plant manager for Diversified Industries.She and the managers of four other plants report to the vice president in charge of manufacturing operations.Three department managers report to Marcy.Select the incorrect statement regarding the preparation of responsibility reports.

An important disadvantage of decentralization is that managers may engage in suboptimal behavior.

Payne Company reported the following information for the current year: Sales \ 1,600,000 Average Operating Assets \ 500,000 Desired ROI 14\% Net Income \ 85,000 The company's residual income was:

Management Accounting and Corporate Governance

Cost Behavior, operating Leverage, and Profitability Analysis

Analysis of Cost, volume, and Pricing to Increase Profitability

Cost Accumulation,tracing,and Allocation

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Planning for Capital Investments

Product Costing in Service and Manufacturing Entities

Job-Order, process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters