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Exam 23: Performance Evaluation for Decentralized Operations

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Question 61

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By using the rate of return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals which will increase the overall rate of return for the company.

A) True
B) False

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Question 62

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ABC Corporation has three service departments with the following costs and activity base: ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information are as follows: What will the income of the Micro Division be after all service department allocations?

A) $305,000
B) $650,000
C) $345,000
D) $610,000

E) B) and C)
F) B) and D)

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Question 63

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Using the data from the Terrace Industries, determine the divisional income from operations for Districts 1 & 2. Allocate service department expenses proportional to the sales of each district.

A factor in determining the rate of return on investment--the ratio of income from operations to sales--is called:

The sales, income from operations, and invested assets for each division of Wren Company are as follows: Management has established a minimum rate of return for invested assets of 8%.

A responsibility center in which the department manager has responsibility for and authority over costs, revenues, and assets invested in the department is termed a cost center.

The process of measuring and reporting operating data by areas of responsibility is termed responsibility accounting.

Which of the following is not one of the common types of responsibility centers?

Income from operations for Division K is $220,000, and income from operations before service department charges is $975,000. Therefore:

ABC Corporation has three service departments with the following costs and activity base: ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information are as follows: What will the income of the Macro Division be after all service department allocations?

The major advantage of the rate of return on investment over income from operations as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated.

Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers.

A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable rate of return on assets set by upper management.

Office salaries expense for a department store is an indirect expense.

It is beneficial for divisions in a company to negotiate a transfer price when the supplying division has unused capacity in its plant.

If Division Q's income from operations was $30,000 on invested assets of $200,000, the rate of return on investment is 15%.

The DuPont formula uses financial and nonfinancial information to measure the performance of a business.

Two divisions of Central Company (Divisions X and Y) have the same profit margins. Division X's investment turnover is larger than that of Division Y (1.2 to 1.0) . Income from operations for Division X is $55,000, and income from operations for Division Y is $43,000. Division X has a higher return on investment than Division Y by:

A responsibility center in which the authority over and responsibility for costs and revenues is vested in the department manager is termed a profit center.

The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so.