RESPONSIBILITY ACCOUNTING / PERFORMANCE EVALUATION

Multiple Choice
1. Goal congruence exists when
a. the goals of the company harmonize with each other.
b. the company's managers are pursuing their own goals effectively.
c. the company's managers are pursuing the goals of the company.
d. all of the above are true.

2. 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
performances.
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.

3. In responsibility accounting the most relevant classification of costs is

a. fixed and variable.
b. incremental and nonincremental.
c. discretionary and committed.
d. controllable and noncontrollable.

4. 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.

5. Which of the following items is LEAST likely to appear on the performance

report of the manager of a product line?
a. Variable manufacturing costs for products in the line.
b. Selling expenses for the line.
c. A share of company-wide advertising.
d. Revenues from the line.

6. 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.

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7. 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 interests.

8. A balanced scorecard approach to performance measurement

a. can only be used in profit or investment centers.
b. balances financial measures with nonfinancial measures.
c. uses only qualitative data to evaluate performance.
d. uses budgeted data rather than historical data.

9. If a company has a favorable sales volume variance, its

a. sales price variance is also favorable.
b. total contribution margin might be less than planned.
c. total contribution margin will be more than planned.
d. income will be positive.

10. Transfer prices

a. reduce employee turnover.
b. are necessary for investment centers.
c. should encourage the kinds of behavior that upper-level management
wants.
d. are not used for departments with high amounts of fixed costs.

11. A transfer price is

a. an accounting device to turn profit centers into investment centers.
b. the price charged by one segment of the company for goods or
services provided to another segment.
c. only useful in a segment that deals with outsiders as well as with
other segments of the same company.
d. the amount charged by a cost center for a service performed for a
profit center.

12. The cost allocation policy most likely to encourage use of a service is
based on
a. budgeted total costs of the service department.
b. actual total costs of the service department.
c. budgeted variable costs for the service department.
d. actual variable costs for the service department.

13. Which of the following statements is true?

a. A company changes its total income when it changes the bases used to
allocate indirect costs.
b. A company should select an allocation basis so as to raise or lower
reported income on given products.
c. A company's total income will remain unchanged no matter how
indirect costs are allocated.
d. Costs should be allocated on an "ability-to-bear" basis.

14. If a company allocates costs of a service department to other

departments, it should
a. consider the likely effects of the allocations on the use of the
services.
b. use the method that best reflects the relative sizes of the
departments.
c. turn the service department into an investment center.

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d. allocate only the fixed costs of the service department.

15. If a computer department does work for other departments, charging a flat
price per hour, the computer department is
a. an artificial profit center.
b. a cost center.
c. an investment center.
d. none of the above.

16. The WORST method of allocating service department costs is

a. to allocate total actual costs based on actual use of the service.
b. to allocate total budgeted costs based on long-term expected use of
the service.
c. to allocate total budgeted costs based on actual use of the service.
d. none of the above, because all the above are equally undesirable.

17. As a general rule, the best transfer price to use to transfer the costs
of a service center to an operating department is
a. the price charged by an outside company for the same service.
b. the price that encourages goal congruence.
c. one that is based on budgeted variable cost.
d. one that is based on budgeted total cost.

18. Which of the following costs is LEAST likely to appear on the performance
report for the foreman of a production department?
a. Wages of direct laborers.
b. Rent on machinery used in department.
c. Repairs to machinery used in department.
d. Cost of materials used.

19. ABC Company operates a factory that makes components for other ABC
factories to assemble. The factory could be treated as
a. a cost center.
b. an artificial profit center.
c. an investment center.
d. any of the above.

20. For reports to follow the principles of responsibility accounting, which

of the following must be true?
a. Each segment of the entity is an artificial profit center.
b. The company is decentralized.
c. The company uses transfer prices.
d. The reports show controllable costs separately from noncontrollable
costs.

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21. The worst transfer-pricing method is to base the prices on

a. market prices.
b. budgeted variable costs.
c. budgeted total costs.
d. actual total costs.

22. All other things remaining constant, if a division doubles its investment
turnover, its ROI will
a. decrease.
b. remain constant.
c. increase.
d. double.

23. 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.

24. If two divisions earn the same ROI and RI, which of the following is
true?
a. Their managers must be about equally skillful.
b. Their incomes and investments must be the same.
c. Both divisions are doing as well as they should be.
d. All of the above.

25. Which of the following is most likely to be included in calculating

divisional profit?
a. Interest on corporate debt.
b. Income taxes.
c. Sales to other divisions within the company.
d. A share of corporate administration expenses.

26. If sales increase, while income and investment remain constant, which of
the following is true?
a. Investment turnover decreases.
b. ROS decreases.
c. ROI increases.
d. ROI could increase or decrease.

27. Compared to a jewelry store, a supermarket has

a. higher margin and higher turnover.
b. higher margin and lower turnover.
c. lower margin and higher turnover.
d. lower margin and lower turnover.

28. If income increases while sales and investment remain constant, which of
the following is true?
a. Investment turnover increases.
b. ROS decreases.
c. ROI increases.
d. ROI could increase or decrease.

29. Which transfer price is ideal for the company when the selling division
is at capacity?
a. Market price.

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b. Incremental cost.
c. Budgeted full cost.
d. Actual variable cost plus a percentage profit.

30. From the standpoint of the company, the important question in transfer
pricing is
a. what is fair to the divisions.
b. how to determine the profit of the divisions.
c. whether or not the transfer should take place.
d. when the transfer should be made.

31. The ROI of Division A relative to that of Division B can be influenced by

a. the industry in which each division operates.
b. the transfer price used for sales to Division B.
c. the tax structures of the countries in which the divisions operate.
d. all of the above.

32. Considering liabilities in computing divisional investment

a. encourages managers of divisions to pay their bills faster.
b. discourages managers of divisions from acquiring long-term
financing.
c. raises divisional ROI above what it would otherwise be.
d. is a bad managerial practice.

33. Interdivisional sales

a. lower the company's public image.
b. minimize income taxes.
c. are ignored when computing divisional ROI.
d. do none of the above.

34. Which of the following is true about transfer prices for sales between
divisions located in different countries?
a. They should consider the tax structures in the two countries.
b. They are usually set by the governments of the two countries.
c. They cannot affect the total income of the company.
d. All of the above.

35. Multinational companies face special problems in which of the following

areas of managerial practice?
a. Performance evaluation.
b. Transfer prices.
c. Allocating common costs.
d. All of the above.

36. Which of the following describes the computation of ROI?

a. Return on Sales x Investment
b. Investment Turnover x Return on Sales
c. Income - (Investment x Minimum RI)
d. Sales x Investment Turnover

37. If the investment turnover increased by 20% and ROS decreased by 30%, the
ROI would
a. increase by 20%.
b. decrease by 16%.
c. increase by 4%.
d. none of the above.

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38. Scottso Division has the following results for the year:

Revenues $1,080,000
Variable expenses 440,000
Fixed expenses 400,000

Total divisional assets are $1,600,000. The company's minimum required

rate of return is 14 percent. Residual income for Scottso is
a. $(64,000).
b. $16,000.
c. $151,200.
d. $224,000.

39. Scottso Division has the following results for the year:

Revenues $1,080,000
Variable expenses 440,000
Fixed expenses 400,000

Total divisional assets are $1,600,000. The company's minimum required

rate of return is 14 percent. Return on investment for Scottso is
a. 54%.
b. 18%.
c. 15%.
d. 10%.

40. Monrovia Division has net income of $240,000 on sales of $3,200,000. If

the investment is $1,600,000 what is ROS?
a. 15.0%
b. 7.5%
c. 10.0
d. 2.0

True-False

41. All responsibility centers are either natural or artificial.

42. The sales volume variance is the difference between actual and planned
unit sales multiplied by the actual contribution margin per unit.

43. The principle of controllability is less important to the internal

reporting for a centralized company than for a decentralized one.

44. Allocated costs are less important to the internal reporting for a
centralized company than for a decentralized company.

45. Achieving goal congruence is less important in a centralized organization

than in a decentralized one.

46. It is not always possible to separate the variable and fixed components
of actual costs.

47. A profit center will always have sales to outside customers.

48. The sales price variance is the difference between the actual selling
price and the planned selling price multiplied by actual units sold.

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49. The direct method of allocating service department costs ignores all of
the interactions between service departments.

50. The reciprocal method of allocating service department costs considers

only the usage by the producing departments in determining the
allocations.

51. Multinational companies cannot use transfer prices.

52. Long-term debt is seldom considered in determining divisional ROI.

53. The measure most commonly used for evaluating divisional performance is
investment turnover.

54. Allocating all common assets, liabilities, and costs to divisions does
not affect the ROI of the company as a whole.

55. Using residual income as a criterion for evaluating divisional

performance requires that the company establish a minimum desired rate
of return on investment.

56. Return on investment is the product of return on sales and inventory

turnover.
57. Return on investment for a multidivision company will be lower than the
ROI for the division with the lowest ROI.

58. Transfer prices equal to market prices are least appropriate when the
selling division has excess productive capacity.

59. Multinational companies must use transfer prices based on actual costs.

60. Return on investment is defined as net income divided by stockholders'

equity.

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Problems

61-62.The following data are for Billings Stores, which has two stores and
one service center.
Helena Butte
------- -----
Percentage of services used in current year 20% 80%
Expected long-term use of services 30% 70%

Budgeted central purchasing costs were $225,000 fixed and $125,000

variable. Actual fixed costs were $240,000 and actual variable costs were
$115,000. The managers wish to allocate the actual central purchasing
costs to the stores based on actual use of the central purchasing service.

a. Compute the allocation to the Helena store.

b. Compute the allocation to the Butte store.

63-64.Following are data about Alphabet Co.'s two service departments and two
operating departments.
Service Depts. Operating Depts.
-------------- ---------------
A B X Y
------- ------ ------ ------
Direct costs $200 $500 $1,500 $2,000
Services performed by Dept. A 20% 40% 40%
Services performed by Dept. B. 10% 90% -

a. Alphabet allocates costs of its service departments using the direct

method of allocation. Find the total cost that will be allocated to
Dept. X.

b. Alphabet allocates the costs of its service departments using the step-
down method, beginning with Dept. A. Find the total amount of cost that
will be allocated to Dept. X.

65-66. The following information relates to Bradley Division of Allen

Company. Allen's minimum cost of capital for its segments is 15%.

Sales $4,000,000 Variable costs 1,400,000

Direct fixed costs 1,800,000 Investment 4,800,000

a. Find Bradley's ROI.

b. Find Bradley's economic value added.

67-70. Young Division has the following information for the most recent
period:

Divisional income $ 11,000,000

Divisional investment $ 85,000,000
Divisional sales $100,000,000

Young has a minimum required return of 15%

a. Compute Young's return on investment.

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b. Compute Young's investment turnover.

c. Compute Young's residual income.

d. Compute Young's return on sales.

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