Responsibility Accounting and Transfer Pricing in Decentralized Organizations

Decentralization is a transfer of authority from the top to the bottom of an organization.

Decentralization can result in a lack of goal congruence among departments.

Decentralization can lead to greater job enrichment and satisfaction.

A responsibility accounting system should include the revenues and costs under a
division manager’s control.

Responsibility reports reflect the flow of information from operational units to top
management.

A manager of a cost center is evaluated solely on the basis of how well costs are
controlled.

When management by exception is employed, both favorable and unfavorable

variances should be investigated.

A profit center is typically an independent organizational unit.

The manager of a profit center has the ability to set selling prices.

The manager of an investment center is responsible for generating revenue as well as

controlling expenses

Suboptimization occurs when a manager of a cost center focuses on the goals of the
cost center rather than on the goals of the organization as a whole.

An administrative department provides services that benefit the entire organization.

A service department provides services that benefit other internal units of an

organization.

The most theoretically correct method of allocating service department costs is the
algebraic method.

The most straight-forward method of assigning service department costs to revenue-

producing areas is the direct method.

Transfer prices can be used to promote goal congruence among operating segments of
an organization.

In computing a transfer price, the maximum price should be no higher than the lowest
market price at which the buying segment can obtain the good or service externally.
In computing a transfer price, the minimum price should be no lower than the
incremental costs associated with the goods plus the opportunity cost of the facilities
used.

One of the main factors to consider when using a cost-based transfer price is whether to
use actual or standard costs.

When using a market-based transfer price, a decision must be made which market price
to use.

When using a negotiated transfer price, a determination must be made if comparable

substitutes are available externally.

Market based transfer prices are most effective for common high-cost and high-volume
standardized services.

Negotiated transfer prices are most appropriate customized high-volume and high-cost
services.

Cost based transfer prices are most appropriate for low cost and low volume services.

An advance pricing agreement can eliminate the possibility of double taxation on

multinational exchanges of goods.

COMPLETION

1. The transfer of authority, responsibility, and decision-making rights from the top to
the bottom of an organization is referred to as ___________________________.

ANS: decentralization

2. In a decentralized organization, the cost objective is referred to as a

_____________________.

ANS: responsibility center

3. The accounting practices that are practiced by a decentralized organization are

referred to as ___________________________.

ANS: responsibility accounting

4. A responsibility center in which a manger has only the authority to control cost is
referred to as a(n) ________________________________.
ANS: cost center

5. An organizational unit whose manager is solely responsible for generating revenues

is referred to as a ________________________________.

ANS: revenue center

6. A responsibility center whose manager is responsible for generating revenues and

controlling expenses is referred to as a ________________________.

ANS: profit center

7. An organizational unit whose manager is responsible for acquiring, using, and

disposing of assets in order to maximize return on assets is referred to as a(n)
______________________.

ANS: investment center

8. A situation in which managers pursue goals and objectives that are in the best
interests of a particular segment rather than in the best interests of the organization as a
whole is referred to as ________________________________.

ANS: suboptimization

9. An organizational unit that provides specific tasks for other internal units is referred
to as a(n)________________________________.

ANS: service department

10. An organizational unit that performs management activities, such as personnel

services, that benefit the entire organization is referred to as a(n)
_____________________________.

ANS: administrative department

11. When one responsibility center uses a transfer price to transfer goods or services to
another responsibility center a ___________________________ is created.

ANS: pseudo-profit center

12. Three types of transfer prices are ________________________,

______________________, and ________________________.

ANS: cost based, market based, and negotiated

 13. A binding contract between a company and one or more national taxing authorities
that provides the details of how transfer prices will be set is referred to as a(n)
________________________________.

ANS: advance pricing agreement

MULTIPLE CHOICE

1. Which of the following is more characteristic of a decentralized than a centralized

business structure?
a. The firm's environment is stable.
b. There is little confidence in lower-level management to make decisions.
c. The firm grows very quickly.
d. The firm is relatively small.

2. Costs of decentralization include all of the following except

a. more elaborate accounting control systems.
b. potential costs of poor decisions.
c. additional training costs.
d. slow response time to changes in local conditions.

3. Transfer pricing is primarily incurred in

a. foreign corporations exporting their products.
b. decentralized organizations.
c. multinational corporations headquartered in the U.S.
d. closely held corporations.

4. In a decentralized company in which divisions may buy goods from one another, the
transfer pricing system should be designed primarily to
a. increase the consolidated value of inventory.
b. allow division managers to buy from outsiders.
c. minimize the degree of autonomy of division managers.
d. aid in the appraisal and motivation of managerial performance.

5. When the majority of authority is maintained by top management personnel, the

organization is said to be
a. centralized.
b. decentralized.
c. composed of cost centers.
d. engaged in transfer pricing activities.

6. What term identifies an accounting system in which the operations of the business
are broken down into reportable segments, and the control function of a foreperson,
sales manager, or supervisor is emphasized?
a. responsibility accounting
b. operations-research accounting
c. control accounting
d. budgetary accounting

7. In a responsibility accounting system, costs are classified into categories on the

basis of
a. fixed and variable costs.
b. prime and overhead costs.
c. administrative and nonadministrative costs.
d. controllable and noncontrollable costs.

8. 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.

9. A ___________ is a document that reflects the revenues and/or costs that are under
the control of a particular manager.
a. quality audit report
b. responsibility report
c. performance evaluation report
d. project report

10. The cost object under the control of a manager is called a(n) __________________
center.
a. cost
b. revenue
c. responsibility
d. investment

11. In evaluating the performance of a profit center manager, he/she should be

evaluated on
a. all revenues and costs that can be traced directly to the unit.
b. all revenues and costs under his/her control.
c. the variable costs and the revenues of the unit.
d. the same costs and revenues on which the unit is evaluated.

12. If a division is set up as an autonomous profit center, then goods should not be
transferred
a. in at a cost-based transfer price.
b. out at a cost-based transfer price.
c. in or out at cost-based transfer price.
d. to other divisions in the same company.

13. Performance evaluation measures in an organization

a. affect the motivation of subunit managers to transact with one another.
b. always promote goal congruence.
c. are less motivating to managers than overall organizational goals.
d. must be the same for all managers to eliminate suboptimization.

14. 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.
b. centralization.
c. suboptimization.
d. maximization.

15. A major benefit of cost-based transfers is that

a. it is easy to agree on a definition of cost.
b. costs can be measured accurately.
c. opportunity costs can be included.
d. they provide incentives to control costs.

16. An internal reconciliation account is not required for internal transfers based on
a. market value.
b. dual prices.
c. negotiated prices.
d. cost.

17. The most valid reason for using something other than a full-cost-based transfer
price between units of a company is because a full-cost price
a. is typically more costly to implement.
b. does not ensure the control of costs of a supplying unit.
c. is not available unless market-based prices are available.
d. does not reflect the excess capacity of the supplying unit.

18. To avoid waste and maximize efficiency when transferring products among
divisions in a competitive economy, a large diversified corporation should base transfer
prices on
a. variable cost.
b. market price.
c. full cost.
d. production cost.

19. A transfer pricing system is also known as

a. investment center accounting.
b. a revenue allocation system.
c. responsibility accounting.
d. a charge-back system.

20. The maximum of the transfer price negotiation range is

a. determined by the buying division.
b. set by the selling division.
c. influenced only by internal cost factors.
d. negotiated by the buying and selling division.

21. The presence of idle capacity in the selling division may increase
a. the incremental costs of production in the selling division.
b. the market price for the good.
c. the price that a buying division is willing to pay on an internal transfer.
d. a negotiated transfer price.

22. Which of the following is a consistently desirable characteristic in a transfer pricing

system?
a. system is very complex to be the most fair to the buying and selling units
b. effect on subunit performance measures is not easily determined
c. system should reflect organizational goals
d. transfer price remains constant for a period of at least two years

23. With two autonomous division managers, the price of goods transferred between
the divisions needs to be approved by
a. corporate management.
b. both divisional managers.
c. both divisional managers and corporate management.
d. corporate management and the manager of the buying division.

24. The minimum potential transfer price is determined by

a. incremental costs in the selling division.
b. the lowest outside price for the good.
c. the extent of idle capacity in the buying division.
d. negotiations between the buying and selling division.

25. As the internal transfer price is increased,

a. overall corporate profits increase.
b. profits in the buying division increase.
c. profits in the selling division increase.
d. profits in the selling division and the overall corporation increase.

26. In an internal transfer, the selling division records the event by crediting
a. accounts receivable and CGS.
b. CGS and finished goods.
c. finished goods and accounts receivable.
d. finished goods and intracompany sales.

27. In an internal transfer, the buying division records the transaction by

a. debiting accounts receivable.
b. crediting accounts payable.
c. debiting intracompany CGS.
d. crediting inventory.

28. Top management can preserve the autonomy of division managers and encourage
an optimal level of internal transactions by
a. selecting performance evaluation measures that are consistent with the
achievement of overall corporate goals.
b. selecting division managers who are most concerned about their individual
performance.
c. prescribing transfer prices between segments.
d. setting up all organizational units as revenue centers.

29. To evaluate the performance of individual departments, interdepartmental transfers

of a product should preferably be made at prices
a. equal to the market price of the product.
b. set by the receiving department.
c. equal to fully-allocated costs of the producing department.
d. equal to variable costs to the producing department.

30. Allocating service department costs to revenue-producing departments is an

alternative to
a. responsibility accounting.
b. the use of profit centers.
c. the use of cost centers.
d. a transfer pricing system.

31. External factors considered in setting transfer prices in multinational firms typically
do not include
a. the corporate income tax rates in host countries of foreign subsidiaries.
b. foreign monetary exchange risks.
c. environmental policies of the host countries of foreign subsidiaries.
d. actions of competitors of foreign subsidiaries.

32. Corporate taxes and tariffs are particular transfer-pricing concerns of

a. investment centers.
b. multinational corporations.
c. division managers.
d. domestic corporations involved in importing foreign goods.

Computer Solutions Corporation

Computer Solutions Corporation manufactures and sells various high-tech office

automation products. Two divisions of Office Products Inc. are the Computer Chip
Division and the Computer Division. The Computer Chip Division manufactures one
product, a "super chip," that can be used by both the Computer Division and other
external customers. The following information is available on this month's operations in
the Computer Chip Division:

Selling price per chip $50

Variable costs per chip $20
Fixed production costs $60,000
Fixed SG&A costs $90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division,
but instead pays $45 to an external supplier for the 4,000 chips it needs each month.

33. Refer to Computer Solutions Corporation. Assume that next month's costs and
levels of operations in the Computer and Computer Chip Divisions are similar to this
month. What is the minimum of the transfer price range for a possible transfer of the
super chip from one division to the other? a. $50 b. $45 c. $20 d. $35

ANS: C $20 is the incremental internal cost of the chip.

34. Refer to Computer Solutions Corporation. Assume that next month's costs and
levels of operations in the Computer and Computer Chip Divisions are similar to this
month. What is the maximum of the transfer price range for a possible transfer of the
chip from one division to the other? a. $50 b. $45 c. $35 d. $30

ANS: B $45 is the external price paid for the chip.

35. Refer to Computer Solutions Corporation. Two possible transfer prices (for 4,000
units) are under consideration by the two divisions: $35 and $40. Corporate profits
would be ___________ if $35 is selected as the transfer price rather than $40.
a. $20,000 larger b. $40,000 larger c. $20,000 smaller d. the same

ANS: D Transfer prices are for internal use only; external profits are not affected.

36. Refer to Computer Solutions Corporation. If a transfer between the two divisions is
arranged next period at a price (on 4,000 units of super chips) of $40, total profits in the
Computer Chip division will
a. rise by $20,000 compared to the prior period.
b. drop by $40,000 compared to the prior period.
c. drop by $20,000 compared to the prior period.
d. rise by $80,000 compared to the prior period.

ANS: D $(40 - 20)/unit * 4,000 units = $80,000

 37. Refer to Computer Solutions Corporation. Assume, for this question only, that the
Computer Chip Division is selling all that it can produce to external buyers for $50 per
unit. How would overall corporate profits be affected if it sells 4,000 units to the
Computer Division at $45? (Assume that the Computer Division can purchase the super
chip from an outside supplier for $45.)
a. no effect b. $20,000 increase c. $20,000 decrease d. $90,000 increase

ANS: C $5.00/unit * 4,000 units = $20,000 decrease in profit

Dynamic Engine Corporation

The Motor Division of Dynamic Engine Corporation uses 5,000 carburetors per month in
its production of automotive engines. It presently buys all of the carburetors it needs
from two outside suppliers at an average cost of $100. The Carburetor Division of
Dynamic Engine Corporation manufactures the exact type of carburetor that the Motor
Division requires. The Carburetor Division is presently operating at its capacity of
15,000 units per month and sells all of its output to a foreign car manufacturer at $106
per unit. Its cost structure (on 15,000 units) is:

Variable production costs $70

Variable selling costs 10
All fixed costs 10

Assume that the Carburetor Division would not incur any variable selling costs on units
that are transferred internally.

38. Refer to Dynamic Engine Corporation. What is the maximum of the transfer price
range for a transfer between the two divisions? a. $106 b. $100 c. $90 d. $70

ANS: B $100 represents the price at which the good could be obtained externally.

39. Refer to Dynamic Engine Corporation. What is the minimum of the transfer price
range for a transfer between the two divisions? a. $96 b. $90 c. $70 d. $106

ANS: A $96 represents the external sales price less the selling expenses that will not be
incurred.

40. Refer to Dynamic Engine Corporation. If the two divisions agree to transact with
one another, corporate profits will
a. drop by $30,000 per month.
b. rise by $20,000 per month.
c. rise by $50,000 per month.
d. rise or fall by an amount that depends on the level of the transfer price.

ANS: C Selling costs of $50,000 ($10/unit) will not be incurred.

Watts Corporation

Watts Corporation produces various products used in the construction industry. The
Plumbing Division produces and sells 100,000 copper fittings each month. Relevant
information for last month follows:

Total sales (all external) $250,000

Expenses (all on a unit base):
Variable manufacturing $0.50
Fixed manufacturing 0.25
Variable selling 0.30
Fixed selling 0.40
Variable G&A 0.15
Fixed G&A 0.50
Total $2.10

Top-level managers are trying to determine how a transfer price can be set on a transfer
of 10,000 of the copper fittings from the Plumbing Division to the Bathroom Products
Division.

41. Refer to Watts Corporation. A transfer price based on variable cost will be set at
___________ per unit. a. $0.50 b. $0.80 c. $0.95 d. $0.75

ANS: C Variable costs = $(0.50 + 0.30 + 0.15) = $0.95

42. Refer to Watts Corporation. A transfer price based on full production cost would be
set at ___________ per unit. a. $0.75 b. $2.10 c. $1.45 d. $1.60

ANS: A Total manufacturing costs = $(0.50 + 0.25) = $0.75

43. Refer to Watts Corporation. A transfer price based on market price would be set at
___________ per unit. a. $2.10 b. $2.50 c. $1.60 d. $2.25

ANS: B
Market Price $250,000
External Sales 100,000 units
Price per Unit $2.50/unit

44. Refer to Watts Corporation. If the Plumbing Division is operated as an autonomous

investment center and its capacity is 100,000 fittings per month, the per-unit transfer
price is not likely to be below a. $0.75. b. $1.60. c. $2.10. d. $2.50.

ANS: D $2.50 is the price that the fitting is sold to external parties.
 45. A company has two divisions, A and B; each are operated as a profit center. A
charges B $35 per unit for each unit transferred to B. Other data follow:

A's variable cost per unit $30

A's fixed costs $10,000
A's annual sales to B 5,000 units
A's annual sales to outsiders 50,000 units

A is planning to raise its transfer price to $50 per unit. Division B can purchase units at
$40 each from outsiders but doing so would idle A's facilities now committed to
producing units for B. Division A cannot increase its sales to outsiders. From the
perspective of the company as a whole, from whom should Division B acquire the units,
assuming B's market is unaffected?
a. outside vendors
b. Division A, but only at the variable cost per unit
c. Division A, but only until fixed costs are covered, then should purchase from outside
vendors
d. Division A, in spite of the increased transfer price

ANS: D Since Division A cannot increase its sales to outsiders, it would not be
producing the units sold to Division B. Additionally, Division B would be spending an
additional $10 per unit from an outside source; this would reduce external profits.

46. A service department includes which of the following?

Payroll Production

a. yes no
b. yes yes
c. no yes
d. no no

47. Indirect costs should be allocated for all of the following reasons except to
a. motivate managers.
b. determine the full cost of a product.
c. motivate general administration.
d. compare alternatives for decision making.

48. A service department provides specific functional tasks for other internal units.
Which of the following activities would not be engaged in by a service department?
a. purchasing
b. warehousing
c. distributing
d. manufacturing
 49. All of the following objectives are reasons to allocate service department costs to
compute full cost except to
a. provide information on cost recovery.
b. abide by regulations that may require full costing in some instances.
c. provide information on controllable costs.
d. reflect production's "fair share" of costs.

50. All of the following objectives are reasons that service department allocations can
motivate managers except to
a. instill a consideration of support costs in production managers.
b. encourage production managers to help service departments control costs.
c. encourage the usage of certain services.
d. determine divisional profitability.

51. Which of the following is a reason for allocating service department costs and
thereby motivating management?
a. provides for cost recovery
b. provides relevant information in determining corporate-wide profits generated by
alternative actions
c. meets regulations in some pricing instances
d. reflects usage of services on a fair and equitable basis

52. Service departments provide functional tasks for which of the following?

Internal units External units

a. no no
b. yes no
c. no yes
d. yes yes

53. After service department costs have been allocated, what is the final step in
determining full product cost?
a. determine direct material cost
b. determine overhead application rates for revenue-producing areas
c. determine direct labor cost
d. determine total service department costs

54. Which of the following is not an objective for computing full cost?
a. to reflect production's "fair share" of costs
b. to instill a consideration of support costs
c. to reflect usage of services on a fair and equitable basis
d. to provide for cost recovery

55. A rational and systematic allocation base for service department costs should
reflect the cost accountant's consideration of all of the following except
a. the ability of revenue-producing departments to bear the allocated costs.
b. the benefits received by the revenue-producing department from the service
department.
c. a causal relationship between factors in the revenue-producing department and costs
incurred in the service department.
d. all of the above are considerations.

56. Which of the following is not a method for allocating service department costs?
a. step method
b. indirect method
c. direct method
d. algebraic method

57. Which service department cost allocation method assigns costs directly to revenue-
producing areas with no other intermediate cost pools or allocations?
a. step method
b. indirect method
c. algebraic method
d. direct method

58. The overhead allocation method that allocates service department costs without
consideration of services rendered to other service departments is the
a. step method.
b. direct method.
c. reciprocal method.
d. none of the above.

59. Which service department cost allocation method assigns indirect costs to cost
objects after considering some of the interrelationships of the cost objects?
a. step method
b. indirect method
c. algebraic method
d. direct method

60. Which service department cost allocation method utilizes a "benefits-provided"

ranking?
a. algebraic method
b. indirect method
c. step method
d. direct method

61. Which service department cost allocation method assigns indirect costs to cost
objects after considering interrelationships of the cost objects?

Algebraic method Step method

a. no no
b. no yes
c. yes yes
d. yes no

62. Which of the following methods of assigning indirect service department costs
recognizes on a partial basis the reciprocal relationships among the departments?
a. step method
b. direct method
c. indirect method
d. algebraic method

63. The most accurate method for allocating service department costs is the
a. step method.
b. direct method.
c. algebraic method.
d. none of the above.

64. The criteria that are most often used to decide on allocation bases are?

Benefits received Fairness Causal relationships

a. yes yes no
b. yes yes yes
c. no yes yes
d. no no no

65. To identify costs that relate to a specific product, an allocation base should be
chosen that
a. does not have a cause-and-effect relationship.
b. has a cause-and-effect relationship.
c. considers variable costs but not fixed costs.
d. considers direct material and direct labor but not manufacturing overhead.

66. The fixed costs of service departments should be allocated to production

departments based on
a. actual short-run utilization based on predetermined rates.
b. actual short-run units based on actual rates.
c. the service department's expected costs based on expected long-run use of capacity.
d. the service department's actual costs based on actual utilization of services.

67. Which service department cost allocation method provides for reciprocal allocation
of service costs among the service department as well as to the revenue producing
departments?
a. algebraic method
b. indirect method
c. step method
d. direct method

68. The algebraic method

a. considers all interrelationships of the departments and reflects these
relationships in equations.
b. does not consider interrelationships of the departments nor reflect these relationships
in equations.
c. is also referred to as the "benefits-provided" ranking method.
d. is not a service department cost allocation method.

69. Which service department cost allocation method considers all interrelationships of
the departments and reflects these relationships in equations?
a. step method
b. indirect method
c. algebraic method
d. direct method

70. An automotive company has three divisions. One division manufactures new
replacements parts for automobiles, another rebuilds engines, and the third does repair
and overhaul work on a line of trucks. All three divisions use the services of a central
payroll department. The best method of allocating the cost of the payroll department to
the various operating divisions is
a. total labor hours incurred in the divisions.
b. value of production in the divisions.
c. direct labor costs incurred in the divisions.
d. machine hours used in the divisions.

71. The allocation of general overhead control costs to operating departments can be
least justified in determining
a. income of a product or functional unit.
b. costs for making management's decisions.
c. costs of products sold.
d. costs for government's "cost-plus" contracts.

Diller Corporation

Diller Corporation has three production departments A, B, and C. Diller Corporation also
has two service departments, Administration and Personnel. Administration costs are
allocated based on value of assets employed, and Personnel costs are allocated based
on number of employees. Assume that Administration provides more service to the
other departments than does the Personnel Department.

Dept. Direct Costs Employees Asset Value

Admin. $900,000 25 $450,000
Personnel 350,000 10 600,000
A 700,000 15 300,000
B 200,000 5 150,000
C 250,000 10 800,000

72. Refer to Diller Corporation. Using the direct method, what amount of Administration
costs is allocated to A (round to the nearest dollar)?
a. $216,000 b. $150,000 c. $288,000 d. $54,000

ANS: A $900,000 * (300,000/1,250,000) = $216,000

73. Refer to Diller Corporation. Using the direct method, what amount of Personnel
costs is allocated to B (round to the nearest dollar)?
a. $50,000 b. $43,750 c. $26,923 d. $58,333

ANS: D $350,000 * (5/30) = $58,333

74. Refer to Diller Corporation. Using the direct method, what amount of Administration
costs is allocated to C (round to the nearest dollar)?
a. $576,000 b. $ 54,000 c. $108,000 d. $150,000

ANS: A $900,000 * $(800,000/1,250,000) = $576,000

75. Refer to Diller Corporation. Using the step method, what amount of Administration
costs is allocated to Personnel (round to the nearest dollar)?
a. $72,973 b. $291,892 c. $145,946 d. $389,189

ANS: B $900,000 * $(600,000/1,850,000) = $291,892

76. Refer to Diller Corporation. Using the step method, what amount of Administration
costs is allocated to A (round to the nearest dollar)?
a. $72,973 b. $291,892 c. $145,946 d. $389,189

ANS: C $900,000 * $(300,000/1,850,000) = $145,946

77. Refer to Diller Corporation. Using the step method, what amount of Administration
costs is allocated to B (round to the nearest dollar)?
a. $72,973 b. $291,892 c. $145,946 d. $389,189

ANS: A $900,000 * $(150,000/1,850,000) = $72,973

78. Refer to Diller Corporation. Using the step method, what amount of Administration
costs is allocated to C (round to the nearest dollar)?
a. $389,189 b. $145,946 c. $291,892 d. $72,973

ANS: A $900,000 * $(800,000/1,850,000) = $389,189

 79. Refer to Diller Corporation. Assume that Administration costs have been allocated
and the balance in Personnel is $860,000. What amount is allocated to A (round to the
nearest dollar)? a. $213,964 b. $106,982 c. $430,000 d. $0

ANS: C $860,000 * (15/30) = $430,000

80. Refer to Diller Corporation. Assume that Administration costs have been allocated
and the balance in Personnel is $860,000. What amount is allocated to B (round to the
nearest dollar)? a. $213,964 b. $430,000 c. $106,982 d. $143,333

ANS: D $860,000 * (5/30) = $143,333

81. Refer to Diller Corporation. Assume that Administration costs have been allocated
and the balance in Personnel is $860,000. What amount is allocated to C (round to the
nearest dollar)? a. $213,964 b. $430,000 c. $286,667 d. $143,333

ANS: C $860,000 * (10/30) = $286,667

Albert Corporation

Albert Corporation has two service departments: Data Processing and

Administration/Personnel. The company also has three divisions: X, Y, and Z. Data
Processing costs are allocated based on hours of use and Administration/Personnel
costs are allocated based on number of employees.

Department Direct costs Employees Hours of use

Administration/Personnel $400,000 10 3,300
Data Processing 850,000 5 1,100
X 450,000 30 1,800
Y 300,000 15 2,200
Z 550,000 25 4,500

Assume that Data Processing provides more service than Administration/Personnel.

82. Refer to Albert Corporation. Using the direct method, what amount of Data
Processing costs is allocated to X (round to the nearest dollar)?
a. $180,000 b. $129,661 c. $0 d. $84,706

ANS: A $850,000 * (1,800/8,500) = $180,000

83. Refer to Albert Corporation. Using the direct method, what amount of Data
Processing costs is allocated to Y (round to the nearest dollar)?
a. $158,475 b. $0 c. $220,000 d. $103,529
ANS: C $850,000 * (2,200/8,500) = $220,000

84. Refer to Albert Corporation. Using the direct method, what amount of Data
Processing costs is allocated to Z (round to the nearest dollar)?
a. $211,765 b. $0 c. $152,542 d. $450,000

ANS: D $850,000 * (4,500/8,500) = $450,000

85. Refer to Albert Corporation. Assume that Data Processing costs have been
allocated and the balance in Administration is $600,000. Using the step method, what
amount is allocated to X? a. $257,143 b. $112,500 c. $200,000 d. $187,500

ANS: A $600,000 * 30/70 = $257,143

86. Refer to Albert Corporation. Assume that Data Processing costs have been
allocated and the balance in Administration is $600,000. Using the step method, what
amount is allocated to Y? a. $225,000 b. $128,571 c. $187,500 d. $200,000

ANS: B $600,000 * 15/70 = $128,571

87. Refer to Albert Corporation. Assume that Data Processing costs have been
allocated and the balance in Administration is $600,000. Using the step method, what
amount is allocated to Z? a. $200,000 b. $112,500 c. $214,286 d. $225,000

ANS: C $600,000 * 25/70 = $214,286

Baretta Corporation

Baretta Corporation has two service departments: Data Processing and Personnel.
Data Processing provides more service than does Personnel. Baretta Corporation also
has two production departments: A and B. Data Processing costs are allocated on the
basis of assets used while Personnel costs are allocated based on the number of
employees.

Department Direct costs Employees Assets used

Data Processing $1,000,000 15 $700,000
Personnel 300,000 8 230,000
A 500,000 12 125,000
B 330,000 20 220,000

88. Refer to Baretta Corporation. Using the direct method, what amount of Data
Processing costs is allocated to A (round to the nearest dollar)?
a. $362,319 b. $637,681 c. $253,623 d. $446,377

ANS: A $1,000,000 * $(125,000/345,000) = $362,319

 89. Refer to Baretta Corporation. Using the direct method, what amount of Personnel
costs is allocated to B (round to the nearest dollar)? a. $123,750 b. $206,250 c.
$112,500 d. $187,500

ANS: D $300,000 * 20/32 = $187,500

Grant Corporation

Grant Corporation distributes its service department overhead costs directly to

producing departments without allocation to the other service departments. Information
for January is presented here.

Maintenance Utilities
Overhead costs incurred $18,700 $9,000
Service provided to:
Maintenance Dept. 10%
Utilities Dept. 20%
Producing Dept. A 40% 30%
Producing Dept. B 40% 60%

90. Refer to Grant Corporation. The amount of Utilities Department costs distributed to
Dept. B for January should be (rounded to the nearest dollar)
a. $3,600. b. $4,500. c. $5,400. d. $6,000.

ANS: D
Departments A and B have a 2:1 ratio of overhead sharing. This translates to 2/3 of the
expenses being allocated to Department B, $9,000 * 2/3 = $6,000.

91. Refer to Grant Corporation. Assume instead Grant Corporation distributes the
service department's overhead costs based on the step method. Maintenance provides
more service than does Utilities. Which of the following is true?
a. Allocate maintenance expense to Departments A and B.
b. Allocate maintenance expense to Departments A and B and the Utilities
Department.
c. Allocate utilities expense to the Maintenance Department and Departments A and B.
d. None of the above.

92. Refer to Grant Corporation. Using the step method, how much of Grant
Corporation’s Utilities Department cost is allocated between Departments A and B?
a. $9,900 b. $10,800 c. $12,740 d. $27,700

ANS: C Maintenance is allocated first, and 20% is added to the original utilities cost.
$9,000 + ($18,700 * .20) = $(9,000 + 3,740) = $12,740.
 93. Refer to Grant Corporation. Assume that Grant Corporation distributes service
department overhead costs based on the algebraic method. What would be the formula
to determine the total maintenance costs?
a. M = $18,700 + .10U
b. M = $9,000 + .20U
c. M = $18,700 + .30U + .40A + .40B
d. M = $27,700 + .40A + .40B

Performance Measurement, Balanced Scorecards, and Performance Rewards

An organization’s values statement identifies fundamental beliefs about what is

important to the organization.

In order to assure achievement of an organizational goal, performance measures must

be established for that goal.

Internal performance measures focus on the efficiency and effectiveness of an

organization’s production process.

The most common external performance measure used for all organizations is financial
in nature.

Benchmarks for performance measures may be monetary or non-monetary.

The segment margin of a profit or investment center does not include allocated common
costs.

Manipulation of segment expenses may result in the segment margin not being an
accurate performance measure.

Profit margin indicates management’s efficiency with regard to sales and expenses.

Asset turnover measures the effective use of assets relative to revenue production.

Economic value added (EVA) applies the target rate of return to the market value of the
capital invested in a division.

Economic value added (EVA) is a more appropriate performance measure when there
is a large difference between the market value of invested capital and the book value of
assets.

Economic value added (EVA) is focused on short-term performance measurement.

Financial measures are lagging indicators.

Speed of delivery is an example of a leading indicator.

Non-financial measures are generally more indicative of productive activity than are
financial performance measures.

Non-financial measures are generally more appropriate for gauging teamwork than are
financial performance measures.

Total units produced during the period divided by the value-added processing time is
referred to as process productivity.

The balanced scorecard approach complements measures of past performance with

measures of the drivers of future performance.

Cultural differences between countries may make performance evaluation in

multinational settings more difficult.

In a pay-for-performance plan, defined performance measures must be highly

correlated with an organization’s operational targets.

Expatriate workers should receive a compensation package that reflects cost of living
factors and currency fluctuations.

COMPLETION

1. A statement that identifies fundamental beliefs about what is important to an

organization is referred to as a ________________________________.

ANS: values statement

2. Performance measures that provide a focus on the efficiency and effectiveness of

production processes are referred to as ________________ measures.

ANS: internal

3. Performance measures that reflect an organization’s ability to satisfy customers

better than rival firms do are referred to as ________________ measures.

ANS: external

4. The ratio of income to assets invested is referred to as

______________________________.

ANS: return on investment (ROI)

5. The ratio of income to sales is referred to as ______________________________.

ANS: profit margin

6. The ratio of sales to assets is referred to as ______________________________.

ANS: asset turnover

7. Profit margin x Asset Turnover is often referred to as the _____________________

ANS: DuPont Model

8. Profit earned in excess of an amount charged for funds committed to a profit center
is referred to as ______________________________________.

ANS: residual income

9. A measure of profit produced above the cost of capital is referred to as

_____________________________________.

ANS: economic value added (EVA)

10. An indicator that reflects the results of past decisions is referred to as a(n)
________________________________.

ANS: lagging indicator

11. Statistical data about the steps that will create the results desired as referred to as
__________________________________________.

ANS: leading indicators

12. The number of good units or quantity of services that are produced and sold by an
organization within a specified time is referred to as _________________________.

ANS: throughput

13. Total units produced during the period divided by the value-added processing time
is referred to as _________________________________________.

ANS: process productivity

14. The proportion of good units resulting from activities is referred to as

____________________________________.
ANS: process quality yield

15. The three components of throughput are

_____________________________________, _______________________________,
and ________________________________.

ANS: manufacturing cycle efficiency, process productivity, process quality yield

MULTIPLE CHOICE

1. Variance analysis would be appropriate to measure performance in

a. profit centers.
b. investment centers.
c. cost centers.
d. all of the above.

2. Which of the following responsibility centers may be evaluated on the basis of

residual income?
a. investment center
b. revenue center
c. profit center
d. cost center

3. Net cash flow could be used to measure performance in

a. cost centers and investment centers.
b. revenue centers and profit centers.
c. revenue centers and investment centers.
d. profit and investment centers.

4. Using a single performance evaluation criterion for an investment center

a. is most effective because a manager can concentrate on a single goal.
b. can result in manipulation of the performance measure.
c. allows multinational investment centers' performances to be equitably compared.
d. is only appropriate if the criterion is non-monetary.

5. A company has set a target rate of return of 16% for its investment center. An
investment center manager in this company would
a. acquire assets that would increase divisional income by more than 16%.
b. sell all assets that do not generate divisional income of more than 16%.
c. acquire assets that would increase sales by more than 16%.
d. acquire any technologically advanced assets that would cause costs to be reduced
by 16% or more.

6. In evaluating the performance of a profit center manager, the manager

a. and the sub-unit should be evaluated on the basis of the same costs and revenues.
b. should only be evaluated on the basis of variable costs and revenues of the sub-unit.
c. should be evaluated on all costs and revenues that are controllable by the
manager
d. should be evaluated on all costs and revenues that can be directly traced to the sub-
unit.

7. The Statement of Cash Flows may be superior to the cash budget as a performance
evaluation measure because
a. cash flows are shown on the accrual basis on the cash budget.
b. the cash budget does not include capital investments.
c. cash flows are arranged by activity.
d. of all the above reasons.

8. The Statement of Cash Flows indicates the cash inflows and outflows from
a. investing, financing, and borrowing activities.
b. operating, investing, and sending activities.
c. merchandising, financing, and investing activities.
d. operating, investing, and financing activities.

9. Division A's investment in a new project will raise the overall organization's return on
investment if
a. the return on investment on the new project exceeds the target return of the overall
organization.
b. the return on investment on the new project exceeds the return on investment of
Division A.
c. the return on investment on the new project exceeds the overall organization's
return on investment.
d. Division A's return on investment exceeds the return on investment of the overall
organization.

10. If sales and expenses both rise by $100,000

a. residual income will increase.
b. return on investment will increase.
c. return on investment will be unchanged.
d. asset turnover will decrease

11. ABC Corp. is composed of three operating divisions. Overall, the ABC Corp. has a
return on investment of 20%. A Division has a return on investment of 25%. If ABC
Corp. evaluates its managers on the basis of return on investment, how would the A
Division manager and the ABC Corp. president react to a new investment that has an
estimated return on investment of 23%?

A Division manager ABC Corp. president

a. accept accept
b. accept reject
c. reject accept
d. reject reject

12. A company's return on investment is affected by a change in

Asset Turnover Profit Margin on Sales

a. Yes Yes
b. Yes No
c. No No
d. No Yes

13. The return on investment (ROI) ratio measures

a. only asset turnover.
b. only earnings as a percent of sales.
c. both asset turnover and earnings as a percent of sales.
d. asset turnover and earnings as a percent of sales, correcting for the effects of
differing depreciation methods.

14. Return on investment (ROI) is a term most often used to express income earned on
assets invested in a business unit. A company's return on investment would increase if
sales
a. increased by the same dollar amount as expenses and total assets increased.
b. remained the same and expenses were reduced by the same dollar amount that
total assets increased.
c. decreased by the same dollar amount that expenses increased.
d. and expenses increased by the same percentage that total assets increased.

15. A sub-unit of an organization is evaluated on the basis of its ROI. If this sub-unit's
sales and expenses both increase by $30,000, how will the following measures be
affected?

ROI Assert turnover Profit margin

a. increase increase increase

b. indeterminate increase decrease
c. no change increase decrease
d. no change decrease no change

16. Which of the following would be an appropriate alternative to the use of ROI in
evaluating the performance of an investment center?

Residual Net cash Cost and revenue

income flow variance analysis

a. yes yes yes

b. no yes no
c. yes no no
d. yes no yes

17. Return on investment is computed by dividing income by

a. contribution margin.
b. inventory turnover.
c. assets invested.
d. average assets employed.

18. Presently, the Classic Book Division of Griffin Publishing Corporation has a profit
margin of 30%. If total sales rise by $100,000, the net result will be
a. an increase in the profit margin ratio to above 30%.
b. a decrease in the profit margin ratio to below 30%.
c. no change in the profit margin ratio.
d. a change in the profit margin ratio that cannot be determined from this information.

19. Profit margin indicates the portion of sales that

a. covers fixed expenses.
b. is not used to cover expenses.
c. equals contribution margin.
d. equals product contribution margin.

20. Profit margin equals

a. income divided by sales.
b. incomes divided by average inventory.
c. income divided by average assets.
d. income divided by average stockholder's equity.

21. The Du Pont model measures

a. residual income.
b. return on investment.
c. throughput.
d. profit.

22. In the Du Pont model, profit margin is a ratio of

a. income to sales.
b. income to assets.
c. sales to income.
d. sales to assets.

23. The Du Pont model measures ROI as it is affected by

a. contribution margin and asset turnover.
b. profit margin and asset turnover.
c. asset turnover.
d. profit margin.
 24. Residual income is used as a performance measure in
a. profit centers.
b. cost centers.
c. investment centers.
d. revenue centers.

25. If a new project generates a positive residual income, the

a. project's return on investment is less than the target rate.
b. project's return on investment is greater than the target rate.
c. project's return on investment is equal to the target rate.
d. relationship between the project's return on investment and the target rate cannot
necessarily be determined.

26. A prospective project under consideration by the Telephone Division of

Communications Corporation. has an estimated residual income of $(20,000). If the
project requires an investment of $400,000, the
a. project generates a negative return on investment.
b. project's return on investment is zero.
c. project's return on investment is 5% less than the company's target rate.
d. company's target rate is 15%

27. Residual income is the

a. contribution margin of an investment center, less the imputed interest on the invested
capital used by the center.
b. contribution margin of an
investment center, plus the imputed interest on the invested capital used by the center.
c. income of an investment center, less the imputed interest on the invested
capital used by the center.
d. income of an investment center, plus the imputed interest on the invested capital
used by the center.

28. Residual income is an example of a ____________ performance measurement.

a. long-term
b. short-term
c. qualitative
d. profit center

29. If a division generates a positive residual income then the division's

a. asset turnover was very high.
b. profitability was greater than that of other divisions in the company.
c. performance was above expectations.
d. actual return on investment exceeds the division's target return.

30. Residual income is determined as

a. income times the asset turnover rate.
b. income times the inventory turnover rate.
c. income minus (asset base times target rate of return).
d. sales minus (asset base times target rate of return).

31. Residual income is used as a performance measure in which of the following types
of centers?

Revenue Investment Profit

a. yes no yes
b. yes yes yes
c. no yes yes
d. no yes no

32. An increase in a corporation's target rate would result in a(n)

a. increase in residual income.
b. decrease in return on investment.
c. decrease in residual income.
d. decrease in both residual income and return on investment.

33. All other things being equal, an increase in sales price would increase
a. asset turnover.
b. profit margin.
c. residual income.
d. all of the above.

34. If sales and expenses both rise by $100,000, profit margin will
a. decrease and asset turnover will decrease.
b. increase and asset turnover will decrease.
c. decrease and asset turnover will increase.
d. increase and asset turnover will increase.

35. Asset turnover equals

a. income divided by average assets.
b. sales divided by assets.
c. sales divided by average assets.
d. assets divided by sales.

36. The information below relates to costs, revenues, and assets anticipated in the
Boot Division of BVD Footwear Corporation:

Sales $ 4,000,000
Variable costs 75% of sales
Average assets employed $12,000,000
Fixed costs 0
How would each of the following measures be affected if sales rise by $5,000 in the
Boot Division?

ROI Asset turnover Profit margin

a. increase increase increase

b. increase no change increase
c. increase increase no change
d. no change no change increase

37. A division of Lachman Corporation reported a return on investment of 20% for a

recent period. If the division's asset turnover was 5, its profit margin must have been
a. 100% b. 4% c. 25% d. 2%

ANS: B
ROI = Profit Margin x Asset Turnover
0.20 = PM x 5
PM = ROI/Asset Turnover
PM = 0.04 or 4%

38. Which measure is limited by the fact that it uses accounting income?
a. ROI b. RI c. EVA d. All of the above

39. The Cake Division of Bakery Corporation has the following segment information:

Assets available for use $1,800,000

Target rate of return 10%
Residual income $ 270,000

What was Cake Division's return on investment?

a. 15% b. 10% c. 25% d. 20%

ANS: C
Income
= Residual Income + (Target Rate * Assets)
= $270,000 + (.10 * $1,800,000)
= $450,000

ROI
= Income / Assets Invested
= $(450,000/1,800,000)
= 25%

United Toy Company

The Doll Division of United Toy Company had the following financial data for the year:

Assets available for use $1,000,000 Book Value

$1,500,000 Market Value
Residual income $100,000
Return on investment 15%

40. Refer to United Toy Company. What was the Doll Division’s segment income?
a. $150,000 b. $100,000 c. $250,000 d. $ 50,000

ANS: A
Segment Income
= ROI * BV of Total Assets
= 0.15 * $1,000,000
= $150,000

41. Refer to United Toy Company. What was the target rate of return for United Toy
Company? a. 10% b. 15% c. 25% d. 5%

ANS: D
Net Income - (Target Rate x Asset Base) = Residual Income
$150,000 - (Target Rate x $1,000,000) = $100,000
(Target Rate x $1,000,000) = $50,000
Target Rate = 5.0%

42. Refer to United Toy Company. If the manager of the Doll Division is evaluated
based on return on investment, how much would she be willing to pay for an investment
that promises to increase net segment income by $50,000?
a. $ 50,000 b. $ 333,333 c. $1,000,000 d. $ 500,000

ANS: B $50,000 / 0.15 = $333,333

43. Refer to United Toy Company. If expenses increased by $20,000 in Apple Division,
a. return on investment would decrease.
b. residual income would increase.
c. the target rate of return would decrease.
d. asset turnover would decrease.

Houston Company

Texas Division of the Houston Company has the following statistics for its most recent
operations:

Assets available for use (Market Value) $3,600,000

Assets available for use (Book Value) $2,000,000
Texas Division's return on investment 25%
Texas Division's residual income 200,000
Return on investment (entire Houston Company) 20%

44. Refer to Houston Company. Compute EVA assuming the cost of capital is 10% and
the tax rate is 40%. a. $ 90,000 b. $ 150,000 c. $0 d. $ (60,000)

ANS: D
EVA = After Tax Net Income - (Cost of Capital x Market Value of Assets)
EVA = (($2,000,000 * .25) x .60) - (.10 x $3,600,000)
EVA = $(300,000 - 360,000)
EVA = $(60,000)

45. Refer to Houston Company. What is the target rate of return in Houston Company?
a. 25% b. 20% c. 15% d. 10%

ANS: C
Net Income - (Target Rate of Return x Total assets) = Residual Income
$500,000 - (Target Rate of Return * $2,000,000) = $200,000
Target Rate of Return * $2,000,000 = $300,000
Target Rate of Return = 15%

46. Refer to Houston Company. If Houston Company evaluates its managers on the
basis of return on investment, the manager of Texas Division would invest in a project
costing $100,000 only if it increased net segment income by at least
a. $10,000. b. $15,000. c. $20,000. d. $25,000.

ANS: D $100,000 * .25 = $25,000

47. Andersen Corporation has a target return of 15%. If a prospective investment has
an estimated return on investment of 20%, and a residual income of $10,000, what is
the estimated cost of the investment?
a. $200,000 b. $ 66,667 c. $ 50,000 d. The answer can't be determined from this
information.

ANS: A
0.20 - 0.15 = 0.05 residual income
$10,000 / 0.05 = $200,000

48. The Steelrod Division of Metal Products Company is considering an investment in a

new project. The project has an estimated cost of $1,000,000. If Metal Products
Company has a target rate of return of 12%, how large does the return on investment
on this project need to be to generate $150,000 of residual income?
a. 15% b. 12% c. 25% d. 27%

ANS: D
(ROI x Total Assets) - (Target Rate x Total Assets) = Residual Income
(ROI x $1,000,000) - (0.12 x $1,000,000) = $150,000
(ROI x $1,000,000) = $270,000
ROI = 27%

49. In the South Division of Occident Company, segment income for the most recent
year exceeded residual income by $15,000. Also, return on investment exceeded the
target rate of return by 10%. What was the level of investment in the X Division for the
most recent year?
a. $ 15,000 b. $100,000 c. $150,000 d. An answer can't be determined from this
information.

ANS: C $15,000/0.10 = $150,000

RAD Company

RAD Co. has established a target rate of return of 16% for all divisions. For the most
recent year, Division D generated sales of $10,000,000 and expenses of $7,500,000.
Total assets at the beginning of the year were $5,000,000 and total assets at the end of
the year were $7,000,000.

50. Refer to RAD Company. In the most recent year, what was Division D's residual
income? a. $ 960,000 b. $1,380,000 c. $1.540,000 d. $1,700,000

ANS: C
Residual Income
= $(10,000,000 - 7,500,000) - ((.16) * $6,000,000)
= $(2,500,000 - 960,000)
= $1,540,000

51. Refer to RAD Company. For the most recent year, what was Division D's return on
investment? a. 20.83 % b. 35.71 % c. 41.67 % d. 50.00 %

ANS: C
ROI = Net Income/Average Total Assets
ROI = $(2,500,000/6,000,000)
ROI = 41.67%

52. The Card Division of Party Company reported the following results for a recent year

Sales $8,000,000
Expenses 6,250,000
Total assets (1/1) 5,000,000
Total assets (12/31) 5,400,000
What was the profit margin for the Card Division?
a. 68% b. 35% c. 32% d. 22%

ANS: D
Profit Margin
= Gross Margin/Sales
= $(1,750,000/8,000,000)
= 22%

53. The Card Division of Party Company reported the following results for a recent year

Sales $8,000,000
Expenses 6,250,000
Total assets (1/1) 5,000,000
Total assets (12/31) 5,400,000

What was the asset turnover ratio of the Card Division?

a. 1.538 b. 2.97 c. 0.650 d. 1.20

ANS: A $8,000,000/ ($((5,000,000 + 5,400,000)/2) = 1.538

54. Empire Division of New York Delights, is evaluated based on residual income
generated. In the most recent year, the Empire Division generated a residual income of
$2,000,000 and net income of $5,000,000. The target rate of return for all divisions of
New York Delights is 20%. What was the return on investment for the Empire Division?
a. 40% b. 13% c. 20% d. 33%

ANS: D
(Net Income) - (Target Rate x Total Assets) = Residual Income
($5,000,000) - (0.20 x Total Assets) = $2,000,000
(0.20 x Total Assets) = $3,000,000
Total Assets = $15,000,000
ROI = (5,000,000/15,000,000)
ROI = 33%

55. Qualitative non-financial performance measures

a. are usually the most well-received by managers.
b. often reflect long-term organizational goals better than financial performance
measures.
c. can only be developed in the production area of an organization.
d. is limited by the number of critical success factors defined by the organization.

56. Relative to qualitative performance measures, quantitative performance measures

are less
a. subject to manipulation.
b. dependent on accounting information.
c. effective in the pursuit of organizational goals.
d. subjective.

57. Improved effectiveness and efficiency of a product is considered a ______

performance measurement?
a. non-financial
b. financial
c. quantitative
d. qualitative

58. Non-financial performance measures (NFPMs) are better than financial measures
in that NFPMs
a. provide a better indication of customer satisfaction.
b. may better predict the direction of future cash flows.
c. directly measure how well an organization does those things that create shareholder
value.
d. all of the above

59. In selecting non-financial performance measures managers should choose

measures that reflect
a. qualitative characteristics that point out sub-optimization activities and throughput
bottlenecks.
b. both short-term and long-term measures related to critical success factors.
c. long-term supplier satisfaction levels.
d. short-term financial viability.

60. Which of the following would be considered a non-financial performance

measurement?
a. increase in market share
b. variances from standards
c. number of customer complaints
d. cost of engineering changes

61. Which type of financial measure better predicts the direction of future cash flows?

Non-financial Measures Financial Measures

a. yes yes
b. yes no
c. no no
d. no yes

62. Which of the following would be classified as a non-financial critical success factor?

Technical Manufacturing Manufacturing

Quality Excellence Efficiency Effectiveness
a. no no no yes
b. yes no no no
c. yes yes yes yes
d. yes yes no yes

63. Which of the following is necessary for any valid performance measurement?
a. It must be part of the financial accounting system in use.
b. It must be quantifiable.
c. Goal congruence must be promoted by its use.
d. It must be financial in nature.

64. Process quality yield is used in the measurement of

a. throughput.
b. cash flows.
c. asset turnover.
d. profit margin.

65. An increase in productive processing time will increase

a. throughput.
b. process yield.
c. return on investment.
d. productive capacity.

66. Which of the following is the throughput measure?

a. Processing time/Total time
b. Good units/Total time
c. Good units/Processing time
d. Total units/Total time

67. Productive capacity is a measure used in computing

a. residual income.
b. net cash flow.
c. return on investment.
d. throughput.

68. Process quality yield reflects the proportion of

a. good units to bad units.
b. time required to produce a good unit.
c. total units manufactured that are good.
d. total time spent to time available.

69. When inventory sits idle in a department, this would not affect the department's
a. processing time.
b. throughput.
c. process quality yield.
d. dollar days.

70. Process quality yield reflects the proportion of

a. time it takes to make a good unit.
b. good units to defective units.
c. total time spent to total time available.
d. total units produced that are good units.

71. Holding total production in units constant, as the proportion of defective units to
total units declines, all of the following measures will be affected, except
a. total unit sales.
b. throughput.
c. process quality yield.
d. process productivity.

72. Process productivity is calculated as

a. total units divided by non-value-added processing time.
b. total units divided by value-added processing time.
c. value-added processing time divided by total units.
d. value-added processing divided by total time.

73. Which of the following would not be an appropriate cost driver to measure internal
failure?
a. design error
b. product failure
c. machine reliability
d. operator error

74. When assessing performance, one way to compensate for differences among
divisions of a multinational organization would be for the parent company to
a. use different target rates of return to compute residual incomes.
b. modify the return on investment calculation so that foreign currency fluctuations are
removed from all financial statement figures.
c. classify all domestic divisions as investment centers and all foreign divisions as profit
centers.
d. use financial performance measures for units whose records are kept in the domestic
currency and non-financial measures for units whose records are kept in a foreign
currency.

75. If performance measures are perfect proxies for organizational goals,

a. sub-optimization will be enhanced.
b. sub-unit managers will strive to achieve organizational goals.
c. sub-units can all be decentralized.
d. residual income will rise.
Rio Hondo Company

Rio Hondo Company is a manufacturer of electronic components. The following

manufacturing information is available for the month of May:

Good units manufactured 40,000

Value-added hours of manufacturing time 20,000
Total units manufactured 50,000
Total hours of manufacturing time 30,000

76. Refer to Rio Hondo Company. What is the throughput per hour?
a. 1.3 units (rounded) b. 2.0 units c. 1.8 units d. .8 units

ANS: A (20,000/30,000) x (50,000/20,000) x (40,000/50,000) = 1.3 units

77. Refer to Rio Hondo Company. What is the process quality yield?
a. 50% b. 75% c. 80% d. 125%

ANS: C 40,000/50,000 = 80%

McAllen Company

One of the products manufactured by McAllen Company is a plastic disk. The

information below relates to the Disk Production Department:

Good units produced 200,000

Units started in production 250,000
Processing time (budgeted hours) 425
Processing time (total hours) 400
Value-added processing time 300

78. Refer to McAllen Company. What is the process quality yield in the Disk
Production Department? a. 75% b. 44% c. 80% d. 125%

ANS: C 200,000/250,000 = 80%

79. Refer to McAllen Company. What is the throughput per hour in the Disk Production
Department? a. 470 units b. 500 units c. 625 units d. 667 units

ANS: B (300/400) x (200,000/250,000) x (250,000/300) = 500 units

80. Refer to McAllen Company. What is the process productivity in the Disk Production
Department? a. 588 b. 625 c. 667 d. 833

ANS: D 250,000/300 = 833 units

 81. Which of the following is not a balanced scorecard category?
a. financial measures
b. environmental measures
c. business process measures
d. personnel measures

82. A primary purpose of a balanced scorecard is to give

a. managers a way to judge past performance.
b. stockholders a way to judge current performance.
c. managers a way to forecast future performance.
d. stockholders a way to tie strategy to profitability.

83. In a balanced scorecard, measurements should be directly linked to

a. organizational strategy and values.
b. the cost management system.
c. current organizational profitability.
d. activity-based management concepts.

84. Customer measures on the balanced scorecard should be

Internal External Monetary Non-monetary

a. yes no no yes
b. no yes yes no
c. no yes no yes
d. yes yes yes yes

85. A balanced scorecard

a. records the variances between budgeted and actual revenues and expenses.
b. can be used at multiple organizational levels by redefining the categories and
measurements.
c. is most concerned with organizational financial solvency and business processes.
d. all of the above.

86. On a balanced scorecard, which of the following would be most appropriate to

measure customer service?
a. Rapid time-to-market of new products
b. Corporate financial profits
c. On-time delivery
d. Decrease in reworked products

87. On a balanced scorecard, which of the following would be most appropriate to

measure production process integrity?
a. Rapid time-to-market of new products
b. Corporate financial profits
c. Low employee turnover
d. Decrease in reworked products

88. On a balanced scorecard, which of the following would be most appropriate to

measure innovation:
a. Rapid time-to-market of new products
b. Corporate financial profits
c. On-time delivery
d. Manufacturing cycle efficiency

89. On a balanced scorecard, which of the following would be most appropriate to

measure financial performance?
a. Market share
b. Customer retention
c. Percentage of sales from new products
d. Investment in intellectual capital

90. A primary characteristic of a performance management system is

a. consistency at all levels in the organization.
b. adaptability to differing situations in the organization.
c. efficiency of application to all individuals in the organization.
d. flexibility to delay rewards although performance objectives have been met.

91. Which of the following would not normally affect the compensation strategy of a
firm?
a. organizational goals
b. location of firm
c. competition
d. number of subsidiaries

92. Managers should be paid

a. on a periodic basis.
b. based on results achieved.
c. using ESOPs.
d. on a piece rate basis.

93. Financial incentives are

a. different from monetary rewards
b. the same thing as a salary element
c. provided to all employee groups.
d. available to top management whose performance exceeds targeted objectives

94. Which of the following steps in the performance reward plan model comes before
the others listed?
a. set performance rewards
b. identify performance measures
c. determine reward
d. identify critical success factors

95. Objectives for a pay plan

a. are not needed in a performance-based plan.
b. must be stated for a performance-based plan to work.
c. are essential for a periodic compensation plan to be successful.
d. are unnecessary for a merit pay plan.

96. Merit pay is

a. a contingent amount of pay that is earned by managers whose subunits meet a target
rate of return.
b. always for a limited period of time and must be re-earned each period.
c. any pay earned when the company is profitable.
d. a pay increment received when a specific performance level is achieved.

97. Contingent pay

a. is always paid in stock options.
b. is the sole source of pay an employee receives from his/her employer.
c. is received in addition to the basic wage and is dependent upon performance
exceeding some performance objective.
d. can only apply to individual performance.

98. Piece rate pay

a. is a suitable pay plan for low-IQ workers.
b. involves a salary plus pay for each unit produced or carried out.
c. encourages quality output.
d. does not encourage workers to look at the company's well being.

99. Which of the following pay plans encourages the improvement of the overall
company's well-being?
a. monthly salary
b. cafeteria plan
c. profit sharing
d. pensions

100. Which performance plan is most tied to company objectives?

a. profit sharing
b. pensions
c. piece rate
d. merit pay

101. Which performance plan best promotes quality of the product or service?
a. piece rate
b. health insurance
c. pensions
d. profit sharing

102. Employee stock ownership in the employees' firm

a. will encourage short term earnings growth patterns.
b. will encourage employees to take a longer term perspective regarding their
performance in the company.
c. is not suitable for hourly or salaried employees.
d. is common for management in American firms.

103. A pay plan that gives an employee cash or stock equal to the difference between
some specified stock price and the quoted market price at some future time period is
a. stock appreciation rights.
b. an ESOP.
c. profit sharing.
d. merit pay.

104. Which of the following types of employee compensation are tax-exempt?

a. contingent pay
b. profit sharing
c. cafeteria plans
d. stock appreciation rights

105. The traditional compensation package provides

a. fixed monthly or weekly salaries.
b. the same salary structure for all groups of employees.
c. no incentive for non-top management to improve performance.
d. no need to include incentive compensation.

106. Compensation packages for executives of American firms

a. are beginning to emphasize the long-term commitment executives should have
in the firm.
b. are considered comparable to packages earned by European and Asian executives.
c. are shifting towards lower percentages of annual incentives.
d. are shifting away from long-term awards.

107. A pay plan that does not encourage the overall company good is
a. profit sharing.
b. an employee stock option plan.
c. contingent pay.
d. monthly salary.

108. Which performance plan is most motivating?

a. health insurance
b. piece rate
c. hourly wages
d. pensions
 109. Expatriate employees
a. should be paid a base comparable to what he/she was earning domestically.
b. will be paid more than corresponding managers in their home country.
c. will always pay taxes in the country in which they are based.
d. should receive retirement benefits based on local currencies.

110. Which of the following statements is true about the values statement of an
organization?
a. It is used to formulate the mission statement.
b. It reflects the organization’s culture by identifying beliefs about what is
important to the organization.
c. It focuses on long-range plans for the organization.
d. The values contained in the statement must be quantifiable.

111. Which of the following statements about an organization’s mission statement is

true?
a. The mission statement should express an organization’s purpose.
b. The mission statement should identify how an organization will meet the needs of its
targeted customers.
c. The mission statement must be communicated throughout the organization.
d. All of the statements are true.