Chapter 12—Performance Evaluation and Decentralization

MULTIPLE CHOICE

1. The practice of delegating decision-making authority to the lower levels of management in a company
is
a. centralization.
b. decentralization.
c. performance evaluation.
d. authorization.
e. hierarchy flattening.
ANS: B PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Performance Measurement | ACBSP: APC-26-
Management Functions KEY: Bloom's: Knowledge
NOT: 2 min.

2. Which of the following is a reason for decentralization?

a. Ease of gathering and using local information.
b. Focusing of central management.
c. Training and motivating segment managers.
d. Exposing segments to market forces.
e. All of these.
ANS: E PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Performance Measurement | ACBSP: APC-26-
Management Functions KEY: Bloom's: Comprehension
NOT: 2 min.

3. Divisions in a decentralized company can be created along which of the following lines?
a. geographical
b. types of goods or services produced
c. type of responsibility given to divisional manager
d. two or more of the other answers are correct
e. None of these.
ANS: D PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Performance Measurement | ACBSP: APC-26-
Management Functions KEY: Bloom's: Comprehension
NOT: 2 min.

4. A responsibility center in which a manager is responsible only for costs is a(n)

a. investment center.
b. revenue center.
c. profit center.
d. cost center.
e. center not presented here.
ANS: D PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-36-Budgeting and
Responsibility KEY: Bloom's: Knowledge NOT: 2 min.

5. A responsibility center in which a manager is responsible only for sales is a(n)

a. cost center.
b. revenue center.
c. profit center.
d. investment center.
e. None of these.
 ANS: B PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-36-Budgeting and
Responsibility KEY: Bloom's: Knowledge NOT: 2 min.

6. A responsibility center in which a manager is responsible for both revenues and costs is a(n)
a. cost center.
b. revenue center.
c. profit center.
d. investment center
e. None of these.
ANS: C PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-36-Budgeting and
Responsibility KEY: Bloom's: Knowledge NOT: 2 min.

7. A responsibility center in which a manager is responsible for revenues, cost, and investment is a(n)
a. cost center.
b. revenue center.
c. profit center.
d. investment center.
e. None of these.
ANS: D PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-36-Budgeting and
Responsibility KEY: Bloom's: Knowledge NOT: 2 min.

8. The decision-making approach that allows managers at lower levels to make and implement key
decisions pertaining to their areas of responsibility is
a. responsibility accounting.
b. controllable accounting.
c. decentralization.
d. optimal strategic accounting.
e. None of these.
ANS: C PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management
Functions KEY: Bloom's: Knowledge NOT: 2 min.

9. Decentralization is frequently chosen by companies because it

a. allows higher management to make all decisions.
b. allows higher management to gather local information to make better decisions.
c. protects segments of the company from competitive pressures.
d. allows for training and motivation of local managers.
e. allows the CEO to make all important decisions.
ANS: D PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Performance Measurement | ACBSP: APC-25-
Managerial Characteristics/Terminology KEY: Bloom's: Comprehension
NOT: 2 min.

10. A segment of Mega Inc., manufactures and sells blankets. The various models of blankets are produced
in a single factory using stable technology. They are sold by the sales department, also located in the
factory. The segment is most probably accounted for as a(n)
a. cost center.
b. revenue center.
c. profit center.
d. investment center.
e. None of these.
 ANS: C PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-36-Budgeting and
Responsibility KEY: Bloom's: Comprehension NOT: 3 min.

11. JetSky Airways has three divisions, the Western Division, the Eastern Division, and the Northern
Division. The manager of the Western Division had wanted to purchase replacement airplanes for the
division. However, he decided against it because, although revenues would increase and the new
planes would be less expensive to operate, the initial cost of the planes was quite large. The Western
Division is most probably accounted for as a(n)
a. cost center.
b. investment center.
c. profit center.
d. revenue center.
e. None of these.
ANS: B PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-36-Budgeting and
Responsibility KEY: Bloom's: Comprehension NOT: 3 min.

12. Return on investment (ROI) is calculated as

a. operating income/average operating assets.
b. average operating assets/operating income.
c. (beginning operating assets + ending operating assets)/2.
d. sales/average operating assets.
e. operating income/sales.
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

13. Margin is calculated as

a. operating income/sales.
b. average operating assets/operating income.
c. (beginning operating assets + ending operating assets)/2.
d. sales/average operating assets.
e. operating income/average operating assets operating income/sales.
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

14. Turnover is calculated as

a. operating income/average operating assets.
b. average operating assets/operating income.
c. (beginning operating assets + ending operating assets)/2.
d. sales/average operating assets.
e. operating income/sales.
ANS: D PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

15. A positive result that stems from the use of return on investment (ROI) is that it encourages managers
to focus on
a. the relationship among sales, expenses, and investment.
b. cost efficiency.
c. operating asset efficiency.
d. the efficient use of resources in generating income.
e. All of these.
 ANS: E PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Comprehension NOT: 2 min.

16. Division A had ROI of 15% last year. The manager of Division A is considering an additional
investment for the coming year. What step will the manager likely choose to take?
a. Accept the investment as long as it provides positive operating income.
b. Accept the investment as long as its ROI is positive.
c. Reject the investment if it returns more than 15% ROI.
d. Reject the investment if it returns less than 15% ROI.
e. Reject the investment if it returns an ROI equal to 15%.
ANS: D PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Comprehension NOT: 3 min.

17. The manager of a division is displeased with the ROI of the division. One step that would increase
ROI (holding everything else constant) is
a. increasing investment.
b. increasing sales.
c. increasing costs.
d. decreasing operating income.
e. None of these.
ANS: B PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Comprehension NOT: 3 min.

18. Which of the following is a disadvantage of a focus on return on investment?

a. It can encourage managers to focus on cost cutting efforts.
b. It can produce a narrow focus on divisional profitability at the expense of profitability for
the overall firm.
c. It can encourage managers to cut inventories and reduce overall investment.
d. It can encourage managers to focus on the long run at the expense of the short run.
e. It can accomplish all of these disadvantages.
ANS: B PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Comprehension NOT: 3 min.

19. Castor Company had income of $10,000, average assets of $100,000 and sales of $40,000. What is
Castor's ROI?
a. 10%
b. 20%
c. 25%
d. 0.4%
e. 40%
ANS: A
ROI = $10,000/$100,000 = 0.1 or 10%

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 2 min.

20. Shandling Company had operating income of $70,000, sales of $218,750, and turnover of 0.5. What is
Shandling's ROI?
a. 32%
 b. 50%
c. 16%
d. 64%
e. Cannot be determined from this information.
ANS: C
ROI = margin  turnover = ($70,000/$218,750)  0.5 = 0.16 or 16%

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 2 min.

21. Beta Division had the following information:

Asset base in Beta Division $400,000

Operating income in Beta Division $ 50,000
Cost of capital 12%
Target ROI 15%
Margin for Beta Division 20%

If the asset base is decreased by $100,000, with no other changes, the return on investment of Beta
Division will be
a. 100.0%.
b. 16.7%.
c. 600.0%.
d. 62.5%.
ANS: B
SUPPORTING CALCULATIONS:
$50,000/($400,000  $100,000) = 16.7%

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 3 min.

22. If the National Division of American Products Company had a turnover ratio of 4.2 and a margin of
0.10, the return on investment would be
a. 23.8%.
b. 420.0%.
c. 42.0%.
d. 238.0%.
ANS: C
SUPPORTING CALCULATIONS:
4.2  0.10 = .42 or 42%

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 3 min.

23. If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10%, the ROI would
a. increase by 10%.
b. decrease by 10%.
c. increase by 15%.
d. remain the same.
ANS: A
SUPPORTING CALCULATIONS:
[(0.30  5.5)  1.5]/1.5 = 10% increase
 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2
NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 3 min.

24. If the operating asset turnover ratio increased by 30% and the margin increased by 20%, the divisional
ROI
a. would increase by 56%.
b. would decrease by 60%.
c. would increase by 20%.
d. cannot be determined.
ANS: A
SUPPORTING CALCULATIONS:
1.30  1.20 = 1.56 or a 56% increase

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 3 min.

25. If the operating asset turnover increased by 50% and the margin increased by 50%, the ROI would
increase by
a. 50%.
b. 25%.
c. 100%.
d. 125%.
ANS: D
SUPPORTING CALCULATIONS:
1.50  1.50 = 2.25 or 125% increase

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 3 min.

26. Which of the following is not an advantage of ROI?

a. It encourages managers of departments with high ROIs to invest in average ROI projects.
b. It encourages managers to pay careful attention to the relationships among sales, expenses,
and investment.
c. It encourages cost efficiency.
d. It discourages excessive investment in operating assets.
ANS: A PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Comprehension NOT: 2 min.

27. Which of the following is not a disadvantage of the ROI performance measure?
a. It encourages managers to focus on the long run rather than the short run.
b. It discourages managers from investing in projects that would decrease divisional ROI but
increase the profitability of the company as a whole.
c. It encourages myopic behavior.
d. All of these are disadvantages of the ROI measure.
ANS: A PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-2 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Comprehension NOT: 2 min.

Figure 12-1.
Dempsey Company provided the following information for last year:
 Operating income $86,000
Sales $225,000
Beginning operating assets $390,000
Ending operating assets $420,000

28. Refer to Figure 12-1. Calculate Dempsey's margin for last year, rounding to two decimal places.
a. 2.0
b. 0.26
c. 0.38
d. 0.50
e. 0.35
ANS: C
Margin = $86,000/$225,000 = 0.38

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 2 min.

29. Refer to Figure 12-1. Dempsey's turnover ratio for last year was
a. 2.0.
b. 0.46.
c. 0.56.
d. 0.32.
e. 0.10.
ANS: C
Turnover = $225,000/(($420,000 + $390,000)/2) = 0.56

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 2 min.

30. Refer to Figure 12-1. Dempsey's return on investment for last year was
a. 2.0.
b. 0.21.
c. 0.32.
d. 0.50.
e. 0.15.
ANS: B
ROI = $86,000/(($420,000 + $390,000)/2) = 0.21

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 2 min.

Figure 12-5.
The following information pertains to the three divisions of Yang Company:

Division A Division B Division C

Sales ? ? $1,345,000
Net operating income $48,000 418,000 $82,000
Average operating assets $420,000 ? ?
Return on investment ? 15% 20%
Margin 0.2 0.015 ?
Turnover 2.1 ? ?
Target ROI 17% 14% 8%
31. Refer to Figure 12-5. What are the average operating assets for Division C?
a. $95,000
b. $410,000
c. $82,000
d. $420,000
ANS: B
$82,000/0.20 = $410,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Application NOT: 3 min.

32. Refer to Figure 12-5. What is the turnover for Division C?

a. 3.28
b. 0.20
c. 6.670
d. 1.500
ANS: A
Average operating assets $82,000/0.20 = $410,000
Turnover $1,345,000/$410,000 = 3.28 times

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Application NOT: 3 min.

33. Refer to Figure 12-5. What are the sales for Division B?
a. $18,000
b. $1,250,000
c. $1,200,000
d. $208,333
ANS: C
$18,000/0.015 = $1,200,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Application NOT: 3 min.

34. Refer to Figure 12-5. What are the average operating assets for Division B?
a. $125,000
b. $120,000
c. $18,000
d. $420,000
ANS: B
$18,000/0.15 = $120,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Application NOT: 2 min.

Figure 12-2.
The manager of Stock Division projects the following for next year:

Sales $185,000
Operating income $60,000
 Operating assets $375,000

The manager can invest in an additional project that would require $40,000 investment in additional
assets and would generate $6,000 of additional income. The company's minimum rate of return is
14%.

35. Refer to Figure 12-2. What is the residual income for Stock Division without the additional
investment?
a. $40,000
b. $6,000
c. $6,600
d. $6,200
e. $7,500
ANS: E
Residual income = $60,000 - (0.14)($375,000) = $7,500

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-3

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Application NOT: 2 min.

36. Refer to Figure 12-2. What is the residual income for Stock Division with the additional project?
a. $40,000
b. $6,000
c. $7,900
d. $4,200
e. $25,600
ANS: C
Residual income = ($60,000 + $6,000) - (0.14)($375,000 + $40,000) = $7,900

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-3

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Application NOT: 2 min.

37. Refer to Figure 12-2. Which of the following statements is true?

a. If the manager invests in the additional project, ROI of the division will decrease.
b. The residual income of the project is less than the residual income of the division without
the project; therefore the project will be rejected.
c. Average investment for Stock Division will decrease if the project is accepted for
investment.
d. If the manager invests in the additional project, residual income of the division will
increase.
e. None of these.
ANS: D PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-2 | LO: 12-3 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Comprehension NOT: 3 min.

38. Residual income is calculated as

a. operating income  (ROI  average operating assets).
b. operating income/(ROI  average operating assets).
c. operating income/(minimum rate of return  average operating assets).
d. operating income  (minimum rate of return  average operating assets).
e. (minimum rate of return  average operating assets)/operating income.

ANS: D PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 12-3 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.
39. The performance measure that uses after-tax operating income and the actual cost of capital employed
is
a. return on investment (ROI).
b. residual income.
c. economic value added (EVA).
d. margin.
e. turnover.
ANS: C PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-3 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

40. Which of the following is an absolute dollar measure rather than a percentage?
a. average operating assets.
b. operating income.
c. residual income.
d. economic value added (EVA).
e. All of these.
ANS: E PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-3 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

41. Economic Value Added is residual income with the cost of capital equal to the firm's
a. budgeted cost of capital.
b. average cost of capital.
c. standard cost of capital.
d. actual cost of capital.
ANS: D
Basically, EVA is residual income with the cost of capital equal to the actual cost of capital for the firm
(as opposed to some minimum rate of return desired by the company for other reasons).

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-3

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

42. In calculating residual income, the variable set by top management is called the
a. average operating assets.
b. operating income.
c. hurdle rate.
d. actual operating assets.
ANS: C
The minimum rate of return is set by the company and is the same as the hurdle rate mentioned in the
section on ROI.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-3

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

43. The calculation of Economic Value Added is

a. margin minus total annual cost of capital.
b. operating income minus average cost of capital.
c. operating income minus total annual cost of capital.
d. operating income minus taxes and the total annual cost of capital.
ANS: D
 Economic value added (EVA) is net income (operating income minus taxes) minus the total annual
cost of capital.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-3

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

44. Using Economic Value Added (EVA) to calculate residual income, the cost of capital employed is
a. the standard percentage cost of capital multiplied by the average capital employed.
b. the actual percentage cost of capital multiplied by the average capital employed.
c. the standard percentage cost of capital multiplied by the total capital employed.
d. the actual percentage cost of capital multiplied by the total capital employed.
ANS: D
EVA is after-tax operating income minus the dollar cost of capital employed. The dollar cost of capital
employed is the actual percentage cost of capital multiplied by the total capital employed.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-3

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 2 min.

45. The following information pertains to the three divisions of Marlow Company:

Division X Division Y Division Z

Sales ? ? $1,250,000
Net operating income $36,000 $25,000 $75,000
Average operating assets $300,000 ? ?
Return on investment ? 20% 15%
Margin 0.10 0.05 ?
Turnover 1.2 ? ?
Target ROI 15% 12% 10%

What is the residual income for Division X?

a. $36,000
b. $45,000
c. $(9,000)
d. $(36,000)
ANS: C
SUPPORTING CALCULATIONS:
$36,000  ($300,000  0.15) = $(9,000)

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-3

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 2 min.

46. The Auto Division of Big Department Store had a net operating income of $560,000, a net asset base
of $4,000,000, and a required rate of return of 12%. Sales for the period totaled $3,000,000. The
residual income for the period is
a. $480,000.
b. $360,000.
c. $120,000.
d. $80,000.
ANS: D
SUPPORTING CALCULATIONS:
$560,000  ($4,000,000  0.12) = $80,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-3

NAT: BUSPROG: Analytic
 STA: AICPA: FN-Decision Modeling | IMA: Strategic Planning | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 3 min.

47. A price charged for a component by the selling division to the buying division of the same company is
called a(n)
a. transfer price.
b. economic value added.
c. market price.
d. cost-based price.
e. None of these.
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-4 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

48. The level of the transfer price can affect the overall company because
a. the higher the transfer price, the higher the operating income.
b. it may impact on the taxes paid by the multinational company.
c. the lower the transfer price, the lower the total costs.
d. internal transfers are always costly to the firm.
e. the transfer price may be higher than the cost-based price.
ANS: B PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-4 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

49. If there is a competitive outside market for the transferred product, then the best transfer price is the
a. cost-based price.
b. negotiated price.
c. market price.
d. price set by central management.
e. None of these.
ANS: C PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-4 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

50. If the selling division is operating at less than full capacity, the floor of the bargaining range would
most probably set at
a. market price.
b. full manufacturing cost.
c. average price of all products sold by the selling division.
d. manufacturing cost plus some percentage for profit.
e. variable cost of manufacturing.
ANS: E PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-4 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Comprehension
NOT: 2 min.

51. The Engine Division provides engines for the Tractor Division of a company. The standard unit costs
for Engine Division are:

Direct materials $ 600

Direct labor 1,200
Variable overhead 300
Fixed overhead 150
 Market price per unit 2,730

What is the transfer price based on full cost plus a markup of 30%?
a. $2,925
b. $585
c. $2,760
d. $2,730
ANS: A
SUPPORTING CALCULATIONS:
($600 + $1,200 + $300 + $150)  1.30 = $2,925

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Application
NOT: 3 min.

52. Several transfer pricing policies are used in practice. These transfer pricing policies include
a. transfer at market price.
b. transfer at negotiated price.
c. transfer at cost.
d. All of these.
ANS: D
Several transfer pricing policies are used in practice. These transfer pricing policies include market
price, cost-based transfer prices, and negotiated transfer prices.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

53. Division A produces a component and wants to sell it to Division B. The transfer price is
a. revenue to Division 'A' and a cost to Division B.
b. revenue to Division 'B' and a cost to Division A.
c. revenue to Division 'A' and no effect on Division B.
d. a cost to Division 'B' and no effect on Division A.
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-4 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Application
NOT: 2 min.

54. The Engine Division provides engines for the Tractor Division of a company. The standard unit costs
for Engine Division are:

Direct materials $ 600

Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730

The engine department has excess capacity. What is the best transfer price to avoid transfer price
problems?
a. $1,350
b. $300
c. $900
d. $2,100
ANS: D
SUPPORTING CALCULATIONS:
 ($600 + $1,200 + $300) = $2,100

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Application
NOT: 3 min.

55. Pautner Company had the following historical accounting data per unit:

Direct materials $60

Direct labor 30
Variable overhead 15
Fixed overhead 24
Variable selling expenses 45
Fixed selling expenses 9

The units are normally transferred internally from Division A to Division B. The units also may be sold
externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30%.
There were no beginning or ending inventories.

What would be the transfer price if Division X uses full cost plus markup?
a. $167.70
b. $198.90
c. $136.50
d. $129.00
ANS: A
SUPPORTING CALCULATIONS:
($60 + $30 + $15 + $24)  1.30 = $167.70

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Application
NOT: 4 min.

Figure 12-3.
Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes
boxes. A second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs
the following costs for one box:

Direct materials $0.35

Direct labor $0.60
Variable overhead $0.40
Fixed overhead $0.13
Total $1.48

Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside
supplier for $1.80 each (the same price that Centra receives).

56. Refer to Figure 12-3. Assume that Grey Inc. mandates that any transfers take place at full
manufacturing cost. What would be the transfer price if Centra transferred boxes to Mantra?
a. $1.35
b. $1.48
c. $1.00
d. Cannot be determined from the information given.
e. $0.90
ANS: B
The cost-based transfer price is $1.48.
 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-4
NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 5 min.

57. Refer to Figure 12-3. Assume that Grey Inc. allows division managers to negotiate transfer price.
Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the ceiling of
the bargaining range and which division sets it?
a. $1.48; Centra
b. $1.35; Centra
c. $1.80; Mantra
d. $1.35; Mantra
e. $1.80; Centra
ANS: C
As the buyer, Mantra sets the ceiling of the bargaining range. It would be set at market price of $1.80.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Application NOT: 5 min.

58. Refer to Figure 12-3. Assume that Grey Inc. allows division managers to negotiate transfer price.
Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the floor of
the bargaining range and which division sets it?
a. $1.80; Centra
b. $1.48; Centra
c. $1.48; Mantra
d. $1.35; Mantra
e. $1.35; Centra
ANS: E
As the seller, Centra sets the floor of the bargaining range. Because Centra has excess capacity, it
would set the minimum transfer price at $1.35 ($0.35 + $0.60 + $0.40).

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 5 min.

59. Refer to Figure 12-3. Assume that Grey Inc. allows division managers to negotiate transfer price.
Centra is producing 700,000 boxes. If Centra and Mantra agree to transfer boxes, what is the floor of
the bargaining range and which division sets it?
a. $1.80; Centra
b. $1.35; Centra
c. $1.48; Mantra
d. $1.35; Mantra
e. $1.80; Mantra
ANS: A
As the seller, Centra sets the minimum (floor) transfer price. Since Centra is producing at capacity and
can sell all that it produces at the market price, the floor is $1.80.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 5 min.

Figure 12-4.
Quinn Inc. has a number of divisions. One division, Style, makes zippers that are used in the
manufacture of boots. Another division, LeatherStuff, makes boots that use the zippers and needs
90,000 zippers per year. Style incurs the following costs for one zipper:
 Direct materials $0.23
Direct labor $0.20
Variable overhead $0.95
Fixed overhead $1.32
Total $2.70

Quinn has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce
and sell 620,000 zippers next year. LeatherStuff currently buys zippers from an outside supplier for
$3.50 each (the same price that Style receives).

60. Refer to Figure 12-4. Assume that Quinn allows negotiated transfer pricing. What is the floor of the
bargaining range and which division sets it?
a. $3.50; Style
b. $2.70; LeatherStuff
c. $2.70; Style
d. $1.38; LeatherStuff
e. $1.38; Style
ANS: E
The floor is set by the selling division, in this case, Style. It is set at variable cost because Style has
excess capacity, $1.38.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 4 min.

61. Refer to Figure 12-4. Assume that Quinn allows negotiated transfer pricing. What is the ceiling of the
bargaining range and which division sets it?
a. $3.50; Style
b. $3.50; LeatherStuff
c. $2.70; Style
d. $2.70; LeatherStuff
e. $1.38; Style
ANS: B
LeatherStuff, as the buying division, sets the ceiling at market price, $3.50.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 4 min.

62. Refer to Figure 12-4. Assume that Style and LeatherStuff have agreed on a transfer price of $3.25.
What are the total cost savings for LeatherStuff?
a. $22,500
b. $315,000
c. $292,500
d. $69,000
e. $81,000
ANS: A
Previous cost to LeatherStuff = $3.50 x 90,000 = $315,000
Cost to LeatherStuff at $3.25 transfer price = $3.25 x 90,000 = $292,500
Savings to LeatherStuff = $315,000 - $292,500 = $22,500

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 5 min.
63. Refer to Figure 12-4. Assume that Style and LeatherStuff have agreed on a transfer price of $3.25.
What is the total benefit for Style?
a. $243,000
b. $292,500
c. $168,300
d. $69,000
e. $81,000
ANS: C
Revenue from components transferred = $3.25 x 90,000 = $292,500
Cost to Style = $1.38 x 90,000 = $124,200
Benefit to Style = $292,500 - $124,200 = $168,300

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 5 min.

64. Refer to Figure 12-4. Assume that Style and LeatherStuff have agreed on a transfer price of $3.25.
What is the total benefit for Quinn, Inc.?
a. $22,500
b. $292,500
c. $163,000
d. $169,000
e. $190,800
ANS: E
Total benefit = ($3.50 - $1.38) x 90,000 = $190,800

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-4

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 5 min.

65. The strategic management system that translates an organization's mission and strategy into
operational objectives and performance measures is
a. activity-based management.
b. responsibility accounting.
c. strategic accounting.
d. cost information management.
e. Balanced Scorecard.
ANS: E PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

66. The Balanced Scorecard perspective that describes the internal processes needed to provide value for
customers and owners is the ____ perspective.
a. customer
b. internal business process
c. learning and growth
d. financial
e. None of these.
ANS: B PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.
67. The Balanced Scorecard perspective that describes the economic consequences of actions taken in the
other three perspectives is the ____ perspective.
a. customer
b. internal business process
c. learning and growth
d. financial
e. None of these.
ANS: D PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

68. The Balanced Scorecard perspective that defines the customer and market segments in which the
business unit will compete is the ____ perspective.
a. customer
b. internal business process
c. learning and growth
d. financial
e. None of these.
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

69. The Balanced Scorecard perspective that defines the capabilities than an organization needs to create
long-term growth and improvement is the ____ perspective.
a. learning and growth
b. internal business process
c. customer
d. financial
e. None of these.
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

70. A testable strategy is defined as a

a. set of linked objectives aimed at an overall goal.
b. means of providing managers with information about the effectiveness of strategy
implementation and the validity of the assumption underlying the strategy.
c. means of specifying objectives, measures, targets, and initiatives for each perspective of
the Balanced Scorecard.
d. strategic management system that defines a strategic-based responsibility accounting
system.
e. None of these.
ANS: A PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

71. The difference between realization and sacrifice defines

a. target objectives.
b. reliability.
c. single-loop feedback.
d. customer value.
e. None of these.
 ANS: D PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

72. The process value chain consists of

a. value, operations, and objectives.
b. innovation, satisfaction, and value.
c. innovation, operations, and post-sales service.
d. design, production, and selling.
e. design, satisfaction, and post-sales service.
ANS: C PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

73. The number of units of output that can be produced in a given period of time is called
a. cycle time.
b. unit process time.
c. responsiveness.
d. cell conversion time.
e. velocity.
ANS: E PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

74. MCE (manufacturing cycle efficiency) is calculated using the following formula:
a. processing time/nonprocessing time.
b. nonprocessing time/processing time.
c. total time/processing time.
d. processing time/total time.
e. total time/nonprocessing time.
ANS: D PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 12-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 2 min.

75. Last night, Shirley worked on her accounting homework for one and one half hours. During that time,
she completed 6 problems. What is the cycle time for one problem?
a. 4 minutes
b. 90 minutes
c. 15 minutes
d. 10 minutes
e. 6 minutes
ANS: C
Cycle time = 1.5(60 minutes)/6 problems = 90/6 = 15 minutes per problem

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-5

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Application
NOT: 3 min.
76. Last night, Shirley worked on her accounting homework for one and one half hours. During that time,
she completed 6 problems. What is the velocity in problems per hour?
a. 4 per hour
b. 0.67 per hour
c. 6 per hour
d. 10 per hour
e. 15 per hour
ANS: A
Velocity = 6 problems/1.5 hours = 4 problems per hour

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-5

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Application
NOT: 3 min.

77. Porter Company makes children's board games. One popular game requires the following amounts of
time: processing  2 hours; waiting  6 hours; moving  4 hours. The Manufacturing Cycle Efficiency
(MCE) for Porter Company is
a. 16.67%.
b. 20.0%.
c. 100%.
d. 25%.
e. 33%.
ANS: A
MCE = Processing Time/(Processing time + Move time + Inspection Time + Waiting Time)

MCE = 2/(2 + 6 + 4) = 0.1667 = 16.67%

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 12-5

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Application
NOT: 3 min.

78. A Utah hospital decided to streamline its surgical suite operation. In order to speed things up, the
nurses in charge studied how much time patients actually spent in various activities. They found that
on average, a patient scheduled for an operation spent about 1 hours waiting, and 1.5 hours in moving
from lab to x-ray to the operating room. The average operation takes 90 minutes. What is the MCE?
a. 100%
b. 60%
c. 50%
d. 37.5%
e. 20%
ANS: D
MCE = Processing Time/(Processing time + Move time + Inspection Time + Waiting Time)

MCE = 1.5/(1.5 + 1 + 1.5) = .375 = 37.5%