MODULE 7
RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING
A. DECENTRALIZATION AND PERFORMANCE EVALUATION
THEORIES:
Centralization vs. decentralization
Centralization
3. In a company with a centralized approach to
responsibility accounting, upper-level managers typically
A. make key decisions only
B. implement key decisions only
C. both make and implement key decisions
D. review the outcomes of key decisions only
Decentralization
1. Why
would a company decentralize?
A. to train and motivate division managers
B. to focus top management’s attention to
operating decisions
C. to allow division managers to concentrate on
strategic planning
D. all of the above
2. Advantages of decentralization include all
of the following except
A. divisional management is able to react to changing market
conditions more rapidly than top management
B. divisional management is a source of personnel for promotion to
top management positions
C. decentralization can motivate divisional managers
D. decentralization permits divisional management to concentrate on
company-wide problems and long-range planning
4. In a company with a decentralized approach
to responsibility accounting, lower-level managers typically
A. make key decisions only
B. implement key decisions only
C. both make and implement key decisions
D. review the outcomes of key decisions only
7. Decentralization occurs when
A. the firm’s operations are located over a large geographic area to
reduce risk
B. authority for important decisions is delegated to lower segments
of the organization
C. important decisions are made at the upper levels and the lower
levels of the organization are responsible for implementing the decisions
D. none of the above
Goal congruence,
Suboptimization & management by objectives
Goal congruence
8. Consistency between goals of the firm and
the goals of its employees is:
A. goal optimization C. goal congruence
B. goal conformance D. goal compensation
16. Goal congruence is most likely to result when
A. reports to managers include all costs
B. managers’ behavior is affected by the
criteria used to judge their performance
C. performance evaluation criteria encourage
behavior in the company’s best interests as well as in the manager’s best
interests
D. a manager knows the criteria used to judge
his or her performance
35. When a manager takes an action that benefits
his or her responsibility center, but not the company as a whole,
A. it is a non-controllable action
B. there is a lack of goal congruence
C. the center must be an artificial profit center
D. the manager should be fired
Suboptimization
19. A management decision may be beneficial for a
given profit center, but not for the entire company. From the overall company viewpoint, this
decision would lead to
A. goal congruence C. centralization
B. suboptimization D. maximization
Management by objectives
17. An emphasis on obtaining goal congruence is
consistent with a broad managerial approach called
A. management by crisis
B. management by objectives
C. management through goal congruence
D. just-in-time philosophy
38. In a responsibility accounting system, the
process in which a supervisor and a subordinate jointly determine the
subordinate’s goals and plans for achieving these goals is
A. Top-down budgeting C. Bottom-up budgeting
B. Imposed budgeting D. Management by objectives
Responsibility
Accounting
5. Responsibility accounting is a system whose
attributes include
A. responsibility, liability, and culpability
B. liability, accountability, and performance evaluation
C. performance evaluation, accountability, and responsibility
D. culpability, liability, and accountability
6. Some basic elements of responsibility
accounting are
A. chart of accounts classification C. control-based reports
B. budgeting system D. all of the above
9. What term identifies an accounting system in which the
operations of the business are broken down into reportable segments and the
control functions of a foreperson, sales managers, or supervisor is emphasized?
A. Responsibility
accounting C. Operations-research
accounting
B. Control
accounting D. Budgetary accounting
10. The Atwood Company uses a performance
reporting system that reflects the company’s decentralization of decision
making. The departmental performance
report shows one line of data for each subordinate who reports to the group
vice-president. The data presented shows
the actual costs incurred during the period, the budgeted costs, and all
variances from budget for that subordinate’s department. The Atwood Company is using a type of system
called
A. Flexible budgeting C. Responsibility accounting
B. Contribution budgeting D. Cost-benefit accounting
14. The accumulation of accounting data on the
basis of the individual manager who has the authority to make day-to-day
decisions about activities in an area is called
A. static
reporting. C. responsibility accounting.
B. flexible
accounting. D. master budgeting.
36. Which of the following is critically important
for a responsibility accounting system to be effective?
A. Each employee should receive a separate performance report.
B. Service department costs should be allocated to the operating
departments that use the service.
C. Each manager should know the criteria used for evaluating his or
her performance.
D. The details on the performance reports for individual managers
should add up to the totals on the report to their supervisor.
Responsibility report
13. The report to a territorial sales manager
which shows the contribution to profit by each salesperson in the territory is
called
A. a profit reportA. C. an absorption profit report
B. a responsibility report D. a distribution report
Responsibility
centers
15. A responsibility center
A. is an organization unit where management
control exists over incurring costs or generating revenue
B. is responsible for all other departments
C. has a responsible manager in charge of it
D. all of the above
Activity center
32. A segment of an organization for which
management wants to report the cost of the activities performed separately is
called a(n)
A. cost center C. activity-based costing center
B. activity center D. batch activity center
Cost center
20. The sequence that reflects increasing breadth
of responsibility is
A. cost center, investment center, profit center
B. cost center, profit center, investment center
C. profit center, cost center, investment center
D. investment center, cost center, profit center
30. A cost center is used to
A. show responsibility for scheduling materials, labor, and overhead
B. collect costs incurred performing a set of homogeneous activities
C. show authority for choosing product markets and sources of supply
D. assign responsibility for setting the chart of accounts
31. Cost centers in a responsibility accounting
system
A. will organize the company into the smallest units of activity –
the individual worker
B. will have a specific manager in charge of every cost center
C. should have the same code number for similar units wherever they
appear in an organization
D. should show the contribution margin in its control report
Profit center
21. A profit center is
A. a responsibility center that always reports
a profit.
B. a responsibility center that incurs costs
and generates revenues.
C. evaluated by the rate of return earned on
the investment allocated to the center.
D. referred to as a loss center when operations
do not meet the company's objectives.
22. A responsibility center having control over
generating revenue is
A. a cost center C. a profit center
B. an investment center D. an operation center
Investment center
24. A distinguishing characteristic of an
investment center is that
A. revenues are generated by selling and buying
stocks and bonds.
B. interest revenue is the major source of
revenues.
C. the profitability of the center is related
to the funds invested in the center.
D. it is a responsibility center which only
generates revenues.
Comprehensive
25. In which type of responsibility center is the
manager held accountable for its profits?
A. Cost center C. Investment center
B. Profit center D. Profit
centers or Investment centers
26. Which of the following responsibility centers
have managers who are held accountable for costs?
A. Cost centers
and Investment centers
B. Revenue centers
and Profit centers
C. Revenue centers
and Investment centers
D. Cost centers and
Profit centers
Controllable &
noncontrollable costs
27. In responsibility accounting the most relevant
classification of costs is
A. fixed and variable C. discretionary and committed
B. incremental and nonincremental D. controllable and
noncontrollable
Controllable costs
29. Controllable costs are costs that
A. fluctuate in total in response to small
changes in the rate of capacity utilization.
B. will be unaffected by current managerial
decisions.
C. management decides to incur in the current
period to enable the company to achieve objectives other than filling
customers’ orders.
D. are likely to respond to the amount of
attention devoted to them by a specified manager.
23. Overtime conditions and pay were recently set
by the personnel department. The
production department has just received a request for a rush order from the
sales department. The production
department protests that additional overtime costs would be incurred as a
result of the order. The sales
department argues the order is from an important customer. The production department processes the
order. In order to control costs, which
department should be charged with the overtime costs generated as a result of
the rush order?
A. Personnel department
B. Production department
C. Sales department
D. Shared by production department and sales department
34. Which one of the following would NOT usually
be considered a controllable cost for the product or division manager?
A. factory wages C. maintenance
B. plant salaries D. plant rent expense
Profitability
accounting
28. Micro Manufacturing uses an accounting system
that charges costs to the manager who has been delegated the authority to make
the decisions incurring the costs. For
example, if the sales manager accepts a rush order that requires the incurrence
of additional manufacturing costs, these additional costs are charged to the
sales manager because the authority to accept or decline the rush order was
given to the sales manager. This type of
accounting system is known as
A. Functional accounting C. Contribution accounting
B. Reciprocal allocation D. Profitability accounting
Budgeting
system
33. A basic budgeting system includes
A. a planning schedule C. involvement of all managers
B. follow-up plan steps D. all of these
Segmented
income statements
11. Segmented income statements are most
meaningful to managers when they are prepared
A. on an absorption cost basis C. on a cost behavior basis
B. on a cash basis D. in a multi-step format
Performance
evaluation
37. The criteria used for evaluating performance
A. should be designed to help achieve goal congruence
B. can be used only with profit centers and investment centers
C. should be used to compare past performance with current
performance
D. motivate people to work in the company’s best interest
42. Of most relevance in deciding how or which
costs should be assigned to a responsibility center is the degree of
A. Avoidability C. Causality
B. Controllability D. Variability
41. Internal reports prepared under the
responsibility accounting approach should be limited to which of the following
costs?
A. Only variable costs of production
B. Only conversion costs
C. Only controllable costs
D. Only costs properly allocable to the cost center under generally
accepted accounting principles
49. The best measure of the performance of the
manager of a profit center is the
A. rate of return on investment.
B. success in meeting budgeted goals for
controllable costs.
C. amount of controllable margin generated by
the profit center.
D. amount of
contribution margin generated by the profit center.
12. When used for performance evaluation, periodic
internal reports based on a responsibility accounting system should not
A. be related to the organization chart
B. include allocated fixed overhead
C. include variances between actual and budgeted controllable costs
D. distinguish between controllable and noncontrollable costs
39. the most desirable measure of departmental
performance for evaluating the departmental manager is departmental
A. Revenue less controllable departmental expenses
B. Net income
C. Contribution to indirect expenses
D. Revenue less departmental variable expenses
40. Of little or no relevance in evaluating the
performance of an activity would be
A. Flexible budgets for mixed costs
B. Fixed budgets for mixed costs
C. The difference between planned and actual results
D. The planning and control of future activities
Performance
measures
Return on Investment
48. Return on investment (ROI) is calculated as
A. divisional operating income/divisional investment
B. divisional investment – divisional income
C. divisional investment/divisional operating income
D. divisional income – (divisional investment x required rate of
return)
43. The return on investment calculation only
considers 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 C. (S/I) x (NI/S) = NI/I
B. (I/S) x (NI/S) = (Ix NI) x (S x S) D. (S/I) x (S/NI) = (S x S)/(I x NI)
46. To properly motivate divisional management,
the divisional ROIs should be
A. Equal
B. Greater in the less profitable divisions to motivate those
divisions to achieve higher ROIs
C. Lower in more profitable divisions in which motivation is
necessary
D. Different based upon strategic goals of the firm
51. Evaluating performance using ROI encourages
managers to focus on
A. income and investment
B. cost efficiency and operating asset efficiency
C. both a and b
D. neither a nor b
58. A measure frequently used to evaluate the
performance of the manager of an investment center is
A. the amount of profit generated.
B. the rate of return on funds invested in the
center.
C. the percentage increase in profit over the
previous year.
D. departmental gross profit.
61. In the formula for ROI, idle plant assets are
A. included in the calculation of controllable
margin.
B. included in the calculation of operating
assets.
C. excluded in the calculation of operating
assets.
D. excluded from total assets.
DuPont Model
44. C company’s return on investment is affected
by a change in
A.
|
B.
|
C.
|
D.
|
|
Capital turnover
|
Yes
|
Yes
|
No
|
No
|
Profit margin on sales
|
Yes
|
No
|
No
|
Yes
|
55. Return on investment for divisions and other
company segments is a function of
A. assets employed and expected future cash flows.
B. contribution margin and invested capital.
C. investment turnover and profit margin on sales.
D. physical sales volume, prices, variable costs, and fixed costs.
Residual Income
50. Using residual income for evaluating
performance
A. penalizes managers whose segments have low ROIs
B. penalizes managers of relatively large segment
C. encourages managers to maximize pesos of profit after a required
ROI has been achieved
D. encourage managers to maximize ROI for the company
53. Residual income
A. is always the best measure of divisional performance
B. is not as good a measure of performance as ROI
C. overcomes some of the problems associated with ROI
D. cannot be used by divisions that deal with others in the same
company
59. When a firm uses residual income to make
decisions, the firm should favor those projects whose residual income
A. is closest to the firm’s minimum capital rate
B. is lowest
C. is highest
D. exceeds a specific target amount
62. A division's investment in conjunction with
the residual income may be
A. operating assets
B. operating and non-operating assets
C. assets minus current liabilities
D. any of the above
65. In order to promote goal congruence a manager
of an investment center is best evaluated using
A. standard variable costing income statements
B. return on investment
C. budgets and standard costs
D. residual income
64. An advantage of residual income is that it
encourages managers to
A. accept projects which provide returns in excess of the company's
required rate of return
B. to increase asset turnover
C. attempt to increase the margin
D. all of the above
Economic value added
60. In contrast to residual income (RI), economic
value added (EVA) uses:
A. the firm's minimum rate of return instead of its cost of capital.
B. the firm's cost of capital instead of its minimum rate of return
C. a required rate of return.
D. values determined by using conventional accounting policies
68. Which
of the following would promote goal congruence?
A. return on
investment C. single measures of performance
B. income based
compensation D. economic
value added
Sensitivity Analysis
Return on investment
45. Assuming that sales and net income remain the
same, a company’s return on investment will
A, Increase if invested capital increases
B. Decrease if invested capital decreases
C. Decrease if the invested capital-employed turnover rate decreases
D. Decrease if the invested capital-employed turnover rate increases
52. The other things remaining constant, if a
division doubles its investment turnover, its ROI will
A. decrease C. remain constant
B. increase D. double
54. Other factors remaining unchanged, the rate of
return on investment may be improved by
A. increasing investment in assets.
B. increasing expenses.
C. reducing sales
D. decreasing investment in assets.
56. Which of the following will not improve return on investment if
other factors remain constant?
A. Increasing sales volume while holding fixed expenses constant.
B. Decreasing assets.
C. Increasing selling prices.
D. None of the above.
57. Assuming that sales and net income remain the
same, a company’s return on investment (ROI) would
A. increase if the invested capital-employed turnover rate
decreases.
B. Increase if the invested capital-employed turnover rate
increases.
C. Increase if invested capital increases.
D. Decrease if invested capital decreases.
63. To improve asset turnover in conjunction with
ROI computations,
A. sales may be increased C. assets may be decreased
B. assets may be increased D. a and c
66. How
can an investment center improve its return on investment (ROI)?
A. increase margin, increase investments
B. decrease margin, decrease turnover
C. increase margin, increase turnover
D. decrease margin, increase investments
Economic value added
67. Economic
value added would decrease if:
A. operating income increases
B. the division invests in a project wherein
the after-tax operating income is more than the cost of capital
C. operating expenses increase
D. cost of capital decreases
Estimating Current
Market Value of Assets
47. Which of the following is NOT a method for
developing or estimating the current market value of assets?
A. Gross Book Value. C. Liquidation Value.
B. Replacement Cost. D. Economic Value Added.
Comprehensive
18. Which of the following is not a true statement?
A. Many costs are controllable at some level
with a company.
B. Responsibility accounting applies to both
profit and not-for-profit entities.
C. Fewer
costs are controllable
as one moves
up to each
higher level of
managerial responsibility.
D. The term segment is sometimes used to
identify areas of responsibility in decentralized operations.
PROBLEMS:
DuPont Model
Return on sales
[i]. The Dela Merced
Company’s Household Products Division reported in 2007 sales of P15,000,000, an
asset turnover ratio of 3.0, and a rate of return on average assets of 18
percent. The percentage of net income to
sales is
A. 6 percent. C. 3 percent
B. 12 percent. D. 5 percent.
Return
on assets
Required unit sales
[ii]. The
Valve Division of Industrial Company produces a small valve that is used by various companies as a component part
in their products. Industrial Company
operates its divisions as autonomous units, giving its divisional manager great
discretion in pricing and other decisions.
Each division is expected to generate a rate of return of at least 14
percent on its operating assets. The
Valve Division has average operating assets of P700,000. The valves are sold for P5 each. Variable costs are P3 per valve, and fixed
costs total P462,000 per year. The
Division has a capacity of 300,000 units.
How many valves must the Valve Division sell
each year to generate the desired rate of return on its assets?
A. 280,000 C. 355,385
B. 350,000 D. 265,000
Divisional
ROI
[iii]. Marsh Company that had
current operating assets of one million and net income of P200,000 had an
opportunity to invest in a project that requires an additional investment of
P250,000 and increased net income by P40,000. After the investment, the
company's ROI will be
A. 16.0% C. 19.2%
B. 18.0% D. 20.2%
[iv]. The following
data relate to the Motor Division of Eurosun Company:
Sales P10,000,000
Variable costs 3,000,000
Direct fixed costs 5,000,000
Invested capital 8,000,000
Allocated actual interest costs 800,000
Capital charge 12%
The
divisional return on investment is:
A. 15 percent C. 13 percent
B. 25 percent D. 20 percent
Required sales
[v]. The
manager of the Mac Division of Power Company expects the following results in
2006 (pesos in millions):
Sales P49.60
Variable costs (60%) 29.76
Contribution margin P19.84
Fixed costs 12.00
Profit P 7.84
Investment:
Plant equipment
P19.51
Working capital
14.88 P34.39
ROI P7.84/P34.39 22.80%
The division has a target ROI of 30 percent,
and the manager has asked you to determine how much sales volume the division
would need to reach that. He states that the sales mix is relatively constant
so variable costs and equipment should be close to 60 percent of sales, fixed cost
and plant and equipment should remain constant, and working capital (cash,
receivables, and inventories) should vary closely with sales in the percentage
reflected above.
The peso
sales that the division needs in order to reach the 30 percent ROI target is
A. P19,829,032 C. P57,590,322
B. P44,373,871 D. P59,510,000
Residual income
[vi]. The
current income for a subunit is P36,000. Its current invested capital is
P200,000. The subunit is considering purchasing for P20,000 equipment that will
increase annual income by an estimated P2,800. The firm's cost of capital is
12%. If the equipment is purchased, the residual income of the subunit will
A. increase by
P2,800 C. increase
by P400
B. increase by
P16,000 D. increase by 4%
Minimum selling price
[vii]. Matipid
Division of Expenditures Company expects the following results for 2007:
Unit sales
70,000
Unit selling price P
10
Unit variable cost P
4
Total fixed costs P300,000
Total investment P500,000
The minimum required ROI is 15 percent, and
divisions are evaluated on residual income. A foreign customer has approached
Matipid’s manager with an offer to buy 10,000 units at P7 each. If Matipid
accepts the order, it would not lose any of the 70,000 units at the regular
price. Accepting the order would increase fixed costs by P10,000 and investment
by P40,000.
What is the minimum price that Matipid could
accept for the order and still maintain its expected residual income?
A. P5.00 C. P5.60
B. P4.75 D. P9.00
Maximum lost unit sales
[viii]. Magastos
Division of Expenditures Company expects the following results for 2006:
Unit sales 70,000
Unit selling price P 10
Unit variable cost P 4
Total fixed cost
Total fixed costs P
300,000
Total investment P
500,000
The minimum required ROI is 15 percent, and
divisions are evaluated on residual income. A foreign customer has approached
Magastos’ manager with an offer to buy 10,000 units at P7 each. Magastos
Division has capacity of 75,000 units and the foreign customer will not accept
fewer than 10,000 units. Accepting the
order would increase fixed costs by P10,000 and investment by P40,000.
At the price of P7 offered by foreign
customer, what is the maximum number of units in regular sales that Magastos
Division could sacrifice and still maintain its expected residual income?
A. 2,333 C. 3,333
B. 2,667 D. 3,667
Economic
Value Added
[ix]. Consider
the following:
Investment center’s after-tax operating profit P
50,000
Investment center’s total assets 800,000
Investment center’s current liabilities 80,000
Weighted-average cost of capital 6.5%
What is
the economic value added (EVA)?
A. P60,000 C. P
6,000
B. P 3,200 D. P50,000
Segmented
Income Statement
Controllable segment profit margin
[x]. Segment
A generated sales revenues of P400,000 and variable operating expenses of
P180,000. Its controllable fixed expenses were P40,000. It was assigned 20% of
P200,000 of fixed costs controlled by others. The common fixed costs were
P25,000. What was Segment A's controllable segment profit margin?
A. P220,000 C. P140,000
B. P180,000 D. P160,000
Sensitivity
Analysis
[xi]. If the investment
turnover increased by 30% and ROS decreased by 20%, the ROI would
A. increase by 30% C. increase by 6%
B. increase by 4% D. none of these
[xii]. If the investment
turnover decreased by 10% and ROS decreased by 30%, the ROI would
A. increase by 30% C. decrease by 10%
B. decrease by 37% D. none of the above
Comprehensive
Use the following information to answer questions 2 thru 6:
Carlyle Company had the following information pertaining to 2005:
Profit P100,000
Sales P1,000,000
Asset Turnover ratio 2
times
The desired minimum rate of return is 15 percent.
[xiii]. What is the ROI?
A. 10 percent C. 20 percent
B. 5
percent D. 15 percent
[xiv]. What is the return on
sales?
A. 10 percent C. 20 percent
B. 5 percent D. 15 percent
[xv]. What is the amount of
assets?
A. P250,000 C. P1,000,000
B. P500,000 D. P2,000,000
[xvi]. The manager of Carlyle
is paid a bonus based on ROI. Would the manager invest in a project that will
pay a return on investment of 18 percent?
A. Yes, because the project's ROI exceeds the desired minimum rate
of return.
B. Yes, because the project's ROI is greater than the company's
current ROI.
C. Yes, because the project's ROI is equal than the company's
current ROI.
D. No, because the project's ROI is less than the company's current
ROI.
[xvii]. What is Carlyle's
residual income?
A. P
25,000 C. P(200,000)
B. P(
50,000) D. P 150,000
[ii]. Answer: A
Operating profit:
(0.14 x P700,000) P98,000
Units sold = (Fixed costs + Profit) ÷ UCM (P462,000 + P98,000) ÷ P2 280,000
[vi]. Answer: C
Increase in annual income P2,800
Additional required
returns (P20,000 x 0.12) 2,400
Increase in residual value P 400
[vii]. Answer: C
Unit variable cost P4.00
Incremental unit fixed
cost (P10,000/10) 1.00
Minimum return per P1 of
additional asset requirement 40,000 x 0.15 /10,000 0.60
Minimum selling price P5.60
[viii]. Answer: A
Contribution provided by 10,000
units
10,000 x (7.00 – 5.60) 14,000
Divided by regular contribution margin per
unit ÷ 6
Maximum decrease in regular
sales
2,333
[ix]. Answer: B
EVA = Investment center's
after-tax operating income - (Investment center's total assets - Investment
center's current liabilities) x Weighted-average cost of capital].
Net operating profit P50,000
Cost of investment (P800,000 –
P80,000) x 0.075 46,800
Economic Value Added P 3,200
[x]. Answer: B
Controllable segment profit
margin = Revenue - (Segment's variable operating costs + Controllable fixed
costs).
(P400,000 – P180,000 – P40,000) P180,000
[xiii]. Answer: C
ROI = Operating Profit ÷ Average investment
Average Operating
assets: (P1,000,000 ÷ 2) = P500,000
ROI: (P100,000 ÷ P500,000) = 20%
[xvi]. Answer: D
No, because the manager's bonus would go down
because the company's ROI is 20 percent only.
[xvii]. Answer: A
Operating profit P100,000
Less Required return on average assets: (P500,000 x
15%) 75,000
Residual income P 25,000
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