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Chapter 12
Fundamentals of Management Control Systems
True / False Questions
1. The design and use of management control systems affects how an individual makes and
implements decisions.
True False
2. In general, there is a direct relationship between the quality of the information provided to
managers and the quality of decisions made using that information.
True False
3. Rational managers will always make decisions that are in the best interest of the organization
employing them.
True False
4. Decentralization is the delegation of the authority to make decisions in the organization's name to
subordinates.
True False
5. In general, organizations are more centralized in the early stages of their existence and more
decentralized as they grow.
True False
6. One advantage of decentralization is faster response time to changes in the organization's

environment by local managers.
True False
12-1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7. One advantage of centralization is better use of top management's time on strategic decisions.
True False
8. Properly developed and implemented management control systems influence subordinates to act
in the organization's best interest.
True False
9. Delegated decision authority is the specification of what decisions a subordinate can make in the
organization.
True False
10. It is important to not consider an organization's compensation and reward system when designing
its performance evaluation system.
True False
11. Managers in a cost center are held responsible for both the costs and volumes of inputs used to
produce a product or provide a service.
True False
12. In general, profit centers are found at higher levels in an organization than investment centers.
True False
13. Properly designed management control systems can totally eliminate the inherent conflict between
individual behavior and organizational goals.
True False
14. There is no single accounting measure that can fully measure the performance of a profit or
investment center.
True False
15. Fixed compensation is generally not linked to measured performance; i.e., it is independent of
measured performance.
True False
16. Properly designed management control systems have both fixed compensation and contingent
compensation.
True False
17. Cost allocations based on dual rates assume that a common cost can be separated into a fixed
and variable component.
True False
12-2
18. The primary reason to use a dual rate allocation system is to focus a manager's performance
evaluation on factors under the manager's direct control.
True False
19. It is possible for performance evaluation systems and/or management control systems to
contribute to unethical or fraudulent behavior.
True False
20. Properly designed management control systems will eliminate fraudulent behavior by maximizing
goal congruence within the organization.
True False
Multiple Choice Questions
21. Which of the following statements is (are) true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and
(B) Rational managers will always make decisions that are in the best interest of the organization
employing them.
A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.
22. Decentralizationrefers to the delegation of decision-making authority to:
A. top management.
B. superiors.
C. board of directors.
D. subordinates.
23. Which of the following is not a characteristic of a decentralized organization?
A. Better use of local knowledge.

B. Better use of top management's time.
C. Reduced response time to environmental changes.
D. More decisions made by relatively few individuals.
12-3
24. Which of the following statements is false?
A. The U.S. military is a good example of an organization that is highly decentralized.

B. The degree of decentralization depends on how many decisions principals delegate to agents.
C. Management control systems are used to measure the performance of an agent's decisions.
D. Most organizations have some operating units that are centralized and some that are
decentralized.
25. Which of the following elements is not part of a management control system?
A. Delegated decision authority.

B. Performance evaluation system.
C. Knowledge of local conditions.
D. Compensation and reward system.
26. An operating unit of an organization is called a cost center if it is responsible:
A. only for costs.

B. only for revenues.
C. for costs and revenues.
D. for investments in assets.
27. An operating unit of an organization is called an investment center if it is responsible:
A. only for costs.

28. An operating unit of an organization is called a revenue center if it is responsible:
A. only for costs.

29. An operating unit of an organization is called a profit center if it is responsible:
A. only for costs.

12-4
30. An operating unit that is responsible for revenues and costs is commonly referred to as a(n):
A. expense center.
B. revenue center.
C. profit center.
D. asset center.
31. An operating unit that is responsible for revenues only is commonly referred to as a(n):
A. expense center.
B. revenue center.
C. profit center.
D. asset center.
32. An operating unit that is responsible for only costs is commonly referred to as a(n):
A. cost center.
B. revenue center.
C. profit center.
D. asset center.
33. When managers are held responsible for costs but the input-output relationship is not well
specified, a(n) ___________ is established.
A. standard cost center

B. revenue center
C. discretionary cost center
D. asset center
34. When managers are held responsible for costs and the input-output relationship is well specified,
a(n) ___________ is established.

B. revenue center
D. asset center
35. Decentralized organizations can delegate authority and still maintain control and monitor
managers' performance by designing appropriate management control systems. Which of the
following responsibility centers would be evaluated similar to an independent business?
A. Profit center.
B. Revenue center.
C. Investment center.
D. Discretionary cost center.
12-5
36. Controllable revenue is included in a performance report of a:
A. Option a
B. Option b
C. Option c
D. Option d
A. Option a
B. Option b
C. Option c
D. Option d
A. Option a
B. Option b
C. Option c
D. Option d
12-6
39. Assets invested in a responsibility center are included in a performance report of a:
A. Option a
B. Option b
C. Option c
D. Option d
A. Option a
B. Option b
C. Option c
D. Option d
41. A manager makes a decision that is beneficial for a specific investment center and for the entire
organization. From the organization's perspective, this decision results in:
A. goal congruence.
B. decentralization.
C. contingent compensation.
D. fixed compensation.
42. The controllability concept states that managers should be held responsible for:
A. all items over which they have decision-making authority.

B. costs and revenues, but not investments in assets used in their division.
C. only items that are allocated to their divisions on a per-unit basis.
D. fixed compensation items, but not contingent compensation items.
12-7
43. Relative performance evaluations (RPE) are not designed to:
A. compare managers to other comparable managers.

B. compare divisions with other comparable divisions.
C. remove the effect of environmental factors that are beyond a manager's control.
D. restate departmental goals so meaningful comparisons can be made.
44. Which of the following items would be classified as a fixed compensation item?
A. Administrative salaries.
B. Sales commissions.
C. Stock options.
D. Piece rates.
45. Which of the following items would not be classified as a contingent compensation item?
C. Stock options.
D. Piece rates.
46. Which of the following statements is (are) true regarding compensation?
(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of
(B) Properly designed management control systems have contingent compensation items but not
fixed compensation items.
A. Only A is true.
B. Only B is true.
47. The use of dual rates in a cost allocation system assumes that common costs can be:
A. separated into their fixed and variable components.

B. traced directly to a specific division or manager.
C. allocated based on a physical quantities measure.
D. assigned to an investment responsibility center.
12-8
48. Which of the following statements is (are) false regarding the effective use of management control
systems?
(A) In general, single rate cost allocations should not be used in management control systems
because clear control over the cost being allocated cannot be determined.
(B) The primary reason to use a dual rate allocation system is to focus a manager's performance
A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.
49. Examples of pressures that can lead to financial fraud do not include:
A. unrealistic budgets.
B. inappropriate bonus plans.
C. overemphasis on long-term results.
D. overemphasis on short-term results.
50. The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies:
A. use investment centers to evaluate top managers.

B. report on the adequacy of the company's internal controls over financial reporting.
C. compensate managers with fixed compensation plans only.
D. eliminate stock options for managerial compensation.
51. Which of the following is not an internal control?
A. Rotating personnel among tasks.

B. Separation of duties.
C. Setting limits on the amount of expenditures.
D. Using absolute performance standards.
52. Internal controls include all of the following except:
A. using contingent compensation plans.

B. requiring management authorization for the use of a company's assets.
C. reconciling various sets of books.
D. requiring employees to take vacations.
12-9
53. Boxes-2-Go has two divisions, large and small, that share the common costs of the company's
communications network. The annual common costs are $4,500,000. You have been provided
with the following information for the upcoming year:
What is the allocation rate for the upcoming year, assuming Boxes-2-Go uses the single-rate
method and allocates common costs based on the number of calls?
A. $10.00.
B. $15.00.
C. $20.00.
D. $25.00.
What is the allocation rate for the upcoming, year assuming Boxes-2-Go uses the single-rate
method and allocates common costs based on the time on the network?
A. $10.98
B. $10.00.
C. $8.00.
D. $7.14.
12-10
The cost accountant determined $2,700,000 of the communication network's costs were fixed and
should be allocated based on the number of calls. The remaining costs should be allocated based
on the time on the network. What is the total communication network costs allocated to the Large
Box Division, assuming the company uses dual-rates to allocate common costs?
A. $2,700,000.
B. $2,520,000.
C. $1,980,000.
D. $1,500,000.
The cost accountant determined $2,700,000 of the communication network's costs were fixed and
should be allocated based on the number of calls. The remaining costs should be allocated based
on the time on the network. What is total communication network costs allocated to the Small Box
Division, assuming the company uses dual-rates to allocate common costs?
A. $2,520,000.
B. $1,800,000.
C. $1,320,000.
D. $1,200,000.
12-11
57. The Copy Department in the College of Business at State University provides photocopying
service for both the Marketing and Economics Department. The following budget has been
prepared for the year.
If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost
will be allocated to the Marketing Department?
A. $85,000.
B. $90,000.
C. $150,000.
D. $170,000.
If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost
will be allocated to the Economics Department?
A. $85,000.
B. $90,000.
C. $105,000.
D. $120,000.
12-12
If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to
the Economics Department, assuming the Economics Department actually made 2,100,000
copies during the year?
A. $85,000.
B. $92,500.
C. $132,500.
D. $112,500.
the Marketing Department, assuming the Marketing Department actually made 3,000,000 copies
during the year?
A. $135,000.
B. $150,000.
C. $155,000.
D. $170,000.
12-13
the Economics Department, assuming the Economics Department actually made 1,500,000
A. $77,500.
B. $92,500.
C. $132,500.
D. $112,500.
the Marketing Department, assuming the Marketing Department actually made 3,800,000 copies
during the year?
A. $135,000.
B. $150,000.
C. $155,000.
D. $175,000.
12-14
63. Fenway Telcom has three divisions, commercial, retail, and consumer, that share the common
costs of the company's computer server network. The annual common costs are $2,400,000. You
have been provided with the following information for the upcoming year:
What is the allocation rate for the upcoming year, assuming Fenway Telcom uses the single-rate
method and allocates common costs based on the number of connections?
A. $10.00.
B. $15.00.
C. $20.00.
D. $40.00.
Fenway Telcom uses the single rate method and allocates common costs based on the number of
connections. What is the total computer server network cost allocated to the Commercial
Division?
A. $480,000.
B. $514,286.
C. $600,000.
D. $1,200,000.
12-15
What is the allocation rate for the upcoming year, assuming Fenway Telcom uses the single-rate
A. $20.00.
B. $16.00.
C. $4.00.
D. $2.86.
Fenway Telcom uses the single rate method and allocates common costs based on the time on
the network. What is the total computer server network cost allocated to the Retail Division?
A. $429,000.
B. $600,000.
C. $657,800.
D. $3,000,000.
12-16
The cost accountant determined $1,700,000 of the server network's costs were fixed and should
be allocated based on the number of connections. The remaining costs should be allocated based
on the time on the network. What is the total server network costs allocated to the Commercial
Division, assuming the company uses dual-rates to allocate common costs?
A. $514,286.
B. $480,000.
C. $600,000.
D. $565,000.
on the time on the network. What is total server network costs allocated to the Retail Division,
assuming the company uses dual-rates to allocate common costs?
A. $741,667.
B. $657,143.
C. $425,000.
D. $211,765.
12-17
on the time on the network. What is total server network costs allocated to the Consumer Division,
assuming the company uses dual-rates to allocate common costs?
A. $1,200,000.
B. $1,093,333.
C. $954,896.
D. $750,000.
70. The Document Creation Center (DCC) for Alegis Corp. provides photocopying and document
services for three departments in the St. Paul office. The following budget has been prepared for
the year.
If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to
the Software Development Department?
A. $98,000.
B. $104,000.
C. $112,000.
D. $118,857.
12-18
the year.
the Training Department?
A. $183,750.
B. $210,000.
C. $195,000.
D. $222,857.
the year.
the Management Department?
A. $168,000.
B. $156,000.
C. $178,286.
D. $147,000.
12-19
the year.
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the
Management Department, assuming the Management Department actually made 2,100,000
A. $147,000.
B. $136,500.
C. $159,000.
D. $150,761.
the year.
A. $184,500.
B. $191,750.
C. $211,783.
D. $206,500.
12-20
the year.
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training
Department, assuming the Training Department actually made 3,250,000 copies during the year?
A. $227,500.
B. $211,250.
C. $217,500.
D. $223,017.
the year.
Department, assuming the Training Department actually made 2,770,000 copies during the year?
A. $180,050.
B. $190,079.
C. $193,900.
D. $203,100.
12-21
the year.
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Software
Development Department, assuming the Software Development Department actually made
1,160,000 copies during the year?
A. $75,400.
B. $98,800.
C. $81,200.
D. $84,312.
the year.
A. $117,400.
B. $115,700.
C. $124,600.
D. $129,376.
12-22
79. In responsibility accounting, a center's performance is measured by those costs which are
controllable. Controllable costs are best described as including: (CMA adapted)
A. direct materials and direct labor only.

B. only those costs that the manager can influence in the current period.
C. only discretionary costs.
D. those costs about which the manager is knowledgeable and informed.
E. incremental and fixed costs.
80. Rockford Manufacturing Corporation uses a responsibility accounting system in its operations.
Which one of the following items is least likely to appear in a performance report for a manager of
one of Rockford's assembly lines? (CMA adapted)
A. Direct labor.
B. Materials.
C. Repairs and maintenance.
D. Depreciation on the manufacturing facility.
E. Supervisory salaries.
81. Responsibility accounting defines an operating center that is responsible for revenue and costs as
a(n): (CMA adapted)
A. profit center.
B. revenue center.
C. division.
D. operating unit.
E. investment center.
82. When comparing performance report information for top management with that of lower-level
management: (CMA adapted)
A. top management reports are more detailed.

B. lower-level management reports are typically for longer time periods.
C. top management reports show control over fewer costs.
D. lower-level management reports are likely to contain more quantitative data and less financial
data.
E. top management reports are usually not of the exception type but present a complete analysis
of all variances.
83. The least complex segment or area of responsibility for which costs are allocated is a(n): (CMA
adapted)
A. profit center.
B. investment center.
C. contribution center.
D. cost center.
E. hybrid center.
12-23
84. Which one of the following will not occur in an organization that gives managers throughout the
organization maximum freedom to make decisions? (CMA adapted)
A. More effective solutions to operational problems.

B. Individual managers regarding the managers of other segments as they do external parties.
C. Two divisions of the organization having competing models that aim for the same market
segments.
D. Delays in securing approval for the introduction of new products.
E. greater knowledge of the marketplace and improved service to customers.
85. Which one of the following firms is likely to experience dysfunctional motivation on the part of its
managers due to its allocation methods? (CMA adapted)
A. To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar

Electronics uses predetermined amounts calculated on the basis of the long term average use
of the services provided by the warehouse to the various segments.
B. Manhattan Electronics uses the sales revenue of its various divisions to allocate costs
connected with the upkeep of its headquarters building. It also uses ROI to evaluate the
divisional performance.
C. Rainier Industrial does not allow its service departments to pass on their cost overruns to
production departments.
D. Tashkent Auto's management information system (MIS) is operated out of headquarters and
serves its various divisions. Tashkent's allocation of MIS-related costs to its divisions is limited
to costs the divisions will incur if they were to outsource their MIS needs.
E. Golkonda Refineries separately allocates fixed and variable costs incurred by its service
departments to its production departments.
86. Which of the following three statements are correct?
I. A profit center has control over both cost and revenue.

II. An investment center has control over invested funds, but not over costs and revenue.
III. A cost center has no control over sales.
A. Only I
B. Only II
C. Only I and III
D. Only I and II
87. The purpose of the Data Processing Department of Falena Corporation is to assist the various
departments of the corporation with their information needs free of charge. The Data Processing
Department would best be evaluated as a:
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
12-24
88. Dunkle Corporation's Maintenance Department provides services to the company's two operating
divisions - the Paints Division and the Stains Division. The variable costs of the Maintenance
Department are budgeted based on the number of cases produced by the operating departments.
The fixed costs of the Maintenance Department are budgeted based on the number of cases
produced by the operating departments during the peak period. Data appear below:
For performance evaluation purposes, how much Maintenance Department cost should be
charged to the Paints Division at the end of the year?
A. $298,800.
B. $498,000.
C. $289,000.
D. $240,000.
89. The fixed costs of Baxter Company's personnel department are allocated to operating
departments on the basis of direct labor-hours. The following data have been provided:
The fixed costs of the personnel department are budgeted at $56,000 per year and are incurred in
order to support long-run average requirements. How much of this fixed cost should be charged to
Operating Department X at the end of the year for performance evaluation purposes?
A. $35,000.
B. $33,600.
C. $52,500.
D. $22,400.
12-25
90. Peake Corporation's Maintenance Department provides services to the company's two operating
The fixed costs of the Maintenance Department are budgeted based on the number of cases
charged to the Stains Division at the end of the year?
A. $669,623.
B. $637,339.
C. $625,500.
D. $657,584.
91. Wilson Company maintains a cafeteria for its employees. For June, variable food costs were
budgeted at $45 per employee based on a budgeted level of 200 employees in other departments.
During the month, an average of 190 employees worked in other departments and actual food
costs totaled $9,250. How much food cost should be charged to the other departments at the end
of the month for performance evaluation purposes?
A. $9,000.
B. $9,250.
C. $8,550.
D. $9,737.
92. ____________ is the delegation of decision-making authority to lower management levels within
the organization.
A. Transfer pricing
B. Centralization
C. Decentralization
D. Goal congruence
12-26
93. Which of the following is not a benefit of decentralization?
A. Allowing managers some autonomy in decision making provides managerial training for future
higher-level managers.
B. In a decentralized organization some tasks or services may be duplicated unnecessarily.
C. Managers with some decision-making authority usually exhibit greater motivation than those
who merely execute the decisions of others.
D. Managers of the organization's subunits are specialists, thereby enabling them to manage their
departments most effectively.
94. Which of the following is not a cost of decentralization?
A. Managers in a decentralized organization might have a narrow focus on their own unit's
performance rather than the attainment of their organization's overall goals.
B. Managers might have a tendency to ignore the consequences of their actions on the
organization's other subunits.
C. Delegating decision making to the lowest level possible enables an organization to respond in a
timely way to opportunities and problems.
D. Managers in a decentralized organization might have a narrow focus on their own unit's
performance rather than the attainment of their organization's overall goals AND managers
might have a tendency to ignore the consequences of their actions on the organization's other
subunits.
95. Which of the following is considered a responsibility center?
A. Investment center.
B. Profit center.
C. Revenue center.
D. All are responsibility centers.
96. Which of the following departments would not be a cost center?
A. County fire department

B. University book store
C. University power plant
D. City building and grounds department
97. Which of the following subunits would most likely be considered a only cost center?
A. Jewelry department.
B. Parts department.
C. Legal department.
D. Electronics department.
12-27
98. The following is a summarized income statement for Royal Manor Co.'s profit center 12608 for
April:
Which of the following amounts is most likely subject to the control of the profit center's manager?
A. Contribution Margin of $175,000.

B. Contribution Margin of $175,000 and Period Expenses of $11,000.
C. Contribution Margin of $175,000 and Period Expenses of $13,000.
D. Contribution Margin of $175,000 and Period Expenses of $21,000.
99. Revenue center and profit center managers are both responsible for meeting
A. Budgeted income.
B. Budgeted costs.
C. Budgeted revenues.
D. Minimum return on investment as established by the company as a whole.
100.Which of the following subunits is most likely to be considered an investment center?
A. Accounting department.
B. Assembly department.
C. Petrochemical division.
D. Research and development department.
101.Cost allocation of shared facilities cost is intended to remind managers of:
A. The cost of using a shared resource.

B. Both the cost and value of using shared resources.
C. How much capacity a firm has.
D. Why the firm invests in these facilities.
E. How dependent the managers are for these facilities.
12-28
102.Dual allocation is a cost allocation approach that separates direct and indirect costs, tracing the
direct costs directly to the department that:
A. can bear the cost.

B. relates best to the cost.
C. is first identified with the cost.
D. caused the cost.
E. is most impacted by the cost.
103.If a budgeted activity base is used as the base in cost allocation, each department's cost
allocation will be predictable, and not influenced by the:
A. actual total cost.

B. change in activity.
C. variations from budget.
D. errors in calculations.
E. actual usage in other departments.
104.The concepts of cost allocation that are used in manufacturing can also apply in:
A. service and not-for-profit industries.

B. service industries only.
C. not-for-profit industries only.
D. limited instances outside of manufacturing.
E. the concepts apply only in manufacturing.
105.Which of the following is not one of the objectives of cost allocation?
A. Motivate managers to exert a high-level of effort.

B. Provide useful departmental and product costs.
C. Identify production constraints.
D. Provide the right incentive for managers to make decisions.
E. Provide an appropriate basis for performance evaluation.
Essay Questions
12-29
106.Atlantic Hotels operates a centralized call center for the reservation needs of its time-share units.
Costs associated with use of the center are charged to the time-share group (Luxury, Resort,
Standard, and Budget) where a reservation is made on the basis of time on a call. Idle time of the
reservation agents, time spent on calls where no reservation is made, and the fixed cost of the
equipment are allocated on the number of reservations made in each group. Due to recent
increased competition in the time-share business, the company has decided that it is necessary to
more accurately allocate its costs to price its services competitively and profitably. During the
current period, the use of the call center for each group was as follows (in thousands of seconds
for time usage and in number of reservations):
During this period, the cost of the computer center amounted to $2,410,000 for personnel and
$1,240,000 for equipment and other costs.
Required:
Determine the allocation to each of the divisions using (you may round all decimals to three
places):
a. a single rate based on time used.

b. multiple rates based on time used (for personnel costs) and number of reservations (for
equipment and other cost).
12-30
107.Baltic Resorts operates a centralized call center for the reservation needs of its time-share units.
Costs associated with use of the center are charged to the time-share group (Luxury, Standard,
and Budget) where a reservation is made on the basis of time spent on a call. Due to recent
Required:
Determine the allocation to each of the divisions using (round all decimals to three places):

12-31
108.Caspian Resorts operates a centralized call center for the reservation needs of its time-share
units. Costs associated with use of the center are charged to the time-share group (Luxury and
Standard) where a reservation is made on the basis of time spent on a call. Due to recent
$960,000 for equipment and other costs.
Required:

12-32
109.The Document Creation Center (DCC) for Aelerion Corp. provides document services for three
departments in the Denver office. The following budget has been prepared for the month.
Required (use three decimal places in your calculations):
a. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated
to the three user departments?
110.The legal department for Buffet Corp. provides legal services for four departments in the Omaha
office. The following budget has been prepared for the month.
a. If Buffet uses a dual rate for allocating its costs based on usage, how much cost will be
allocated to the four user departments?
12-33
111.The human resources department for Hammond Corp. provides personnel services for two
departments in the Chicago office. The following budget has been prepared for the month.
a. If Hammond uses a dual rate for allocating its costs based on employees, how much cost will
be allocated to the two departments?
112.The Document Creation Center (DCC) for Aelerion Corp. provides document services for three
a. If DCC uses a dual rate for allocating its costs; allocating fixed costs based on number of
documents and variable costs based on number of pages, how much cost will be allocated to the
three user departments?
12-34
113.The legal department for Buffet Corp. provides legal services for four departments in the Omaha
office. The following budget has been prepared for the month.
a. If Buffet uses a dual rate for allocating its costs, allocating fixed costs based on number of
contracts and variable costs based on number of pages reviewed, how much cost will be
12-35
114.Wrigley Services has three divisions, commercial, retail, and consumer, that share the common
a. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method
and allocates common costs based on the number of connections? Calculate the allocated
amount for each division.
b. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method
and allocates common costs based on the time on network? Calculate the allocated amount for
each division.
c. The cost accountant determined $850,000 of the server network's costs were fixed and should
on the time on the network. What is the total server network costs allocated to each division?
12-36
115.Comiskey has four divisions, commercial, retail, research, and consumer, that share the common
a. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate
method and allocates common costs based on the number of connections? Calculate the
allocated amount for each division.
b. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate
method and allocates common costs based on the time on network? Calculate the allocated
c. The cost accountant determined $1,700,000 of the server network's costs were fixed and
should be allocated based on the number of connections. The remaining costs should be
allocated based on the time on the network. What is the total server network costs allocated to
each division?
12-37
116.Jacobs Corp. has three divisions, commercial, retail, and consumer, that share the common costs
of the company's computer server network. The annual common costs are $2,400,000. You have
been provided with the following information for the upcoming year:
a. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method
and allocates common costs based on the number of connections? Calculate the allocated
b. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method
each division.
12-38
117.Marlin has three divisions, commercial, retail, and consumer, that share the common costs of the
company's computer server network. The annual common costs are $2,400,000. You have been
provided with the following information for the upcoming year:
a. The cost accountant determined $1,800,000 of the server network's costs were fixed and
each division?
12-39
118.Sanper Corp. has four divisions, commercial, retail, research, and consumer, that share the
common costs of the company's computer server network. The annual common costs are
$3,500,000. You have been provided with the following information for the upcoming year:
a. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method
and allocates common costs based on the number of connections?
b. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method
each division.
12-40
119.Charleston has four divisions, commercial, retail, research, and consumer, that share the common
each division?
12-41
120.Redding has two divisions, Production and Support, that share the common costs of the
company's communications network. The annual common costs are $4,500,000. You have been
provided with the following information for the upcoming year:
a. What is the allocation rate for the upcoming year assuming Redding uses the single-rate
method and allocates common costs based on the number of calls? Calculate the costs allocated
to each division.
b. What is the allocation rate for the upcoming year assuming Redding uses the single-rate
method and allocates common costs based on the time on the network? Calculate the costs
allocated to each division.
c. The cost accountant determined $2,700,000 of the communication network's costs were fixed
and should be allocated based on the number of calls. The remaining costs should be allocated
based on the time on the network. What is the total communication network costs allocated to
each division?
12-42
121.Salinas has two divisions, Marketing and Finance, that share the common costs of the company's
a. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method
and allocates common costs based on the number of calls? Calculate the costs allocated to each
division.
b. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method
and allocates common costs based on the time on the network? Calculate the costs allocated to
each division.
122.Tofte has two divisions, Research and Sales, that share the common costs of the company's
a. The cost accountant determined $1,350,000 of the communication network's costs were fixed
each division?
12-43
123.The Black Swan Company has three client-contact departments: Market Research, Branding, and
Promotion. Each department requires the services of the Legal Department for the contracts that
each undertakes. The size of the Legal Department was based on long-run estimates of
contracts. Information on the Legal Department's budgeted and actual costs is as follows:
The budget for the Legal Dept is $300,000 + $10/contract. The budgeted volume of contracts is as
follows:
The actual number of contracts for Market Research was 315, for Branding was 450, and for
Promotion was 720.
a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal
Department would be allocated to each of the producing departments?
b. If a dual charging rate is used, how much of the cost of the Legal Department would be
allocated to each of the producing departments
12-44
The budget for the Legal Dept is $200,000 + $7.50/contract. The budgeted volume of contracts is
as follows:
Promotion was 675.
12-45
The budget for the Legal Dept is $400,000 + $15/contract. The budgeted volume of contracts is as
follows:
Promotion was 820.
12-46
126.Scuderi Corporation has two operating divisions - Inland Division and Coast Division. The
company's Customer Service Department provides services to both divisions. The variable costs
of the Customer Service Department are budgeted at $29 per order. The Customer Service
Department's fixed costs are budgeted at $381,600 for the year. The fixed costs of the Customer
Service Department are determined based on the peak period orders.
At the end of the year, actual Customer Service Department variable costs totaled $219,905 and
fixed costs totaled $383,860. The Inland Division had a total of 1,520 orders and the Coast
Division had a total of 5,690 orders for the year.
Required:
a. Prepare a report showing how much of the Customer Service Department's costs should be
charged to each of the operating divisions at the end of the year.
b. How much of the actual Customer Service Department costs should not be charged to the
operating divisions at the end of the year? Who should be held responsible for these uncharged
costs?
12-47
127.Warehouse Services is a service department in the Werner Company, providing storage service
to three operating departments. The company charges the costs of this department to operating
departments on the basis o cubic feet occupied.
Last year, Warehouse Services budgeted variable storage cost of $0.15 per cubic foot occupied.
The budgeted total fixed cost was $120,000, and was determined by the long-term storage needs
of the operating departments. Actual storage space occupied during the year, along with long-
term storage needs of operating departments, is given below:
Actual variable storage costs amounted to $0.16 per cubic foot occupied. Actual fixed storage
costs were $123,000.
Required:
a. Compute the amount of variable storage cost that should be charged to each operating
department at the end of the year for performance evaluation purposes.
b. Compute the amount of fixed storage cost that should be charged to each operating
12-48
128.Trenron, Inc. has a maintenance department that provides services to the company's two
operating departments. The variable costs of the maintenance department are charged on the
basis of the number of maintenance hours logged in each department. Last year, budgeted
variable maintenance costs were $8.60 per maintenance hour and actual variable maintenance
costs were $8.75 per maintenance hour.
The budgeted and actual maintenance hours for each operating department for last year appear
below:
Required:
a. Compute the amount of variable maintenance department cost that should have been charged
to each operating department at the end of the year for performance evaluation purposes.
b. Compute the amount of actual variable maintenance department cost that should not have
been charged to the operating departments at the end of the year for performance evaluation
purposes.
12-49
129.Leslie Company operates a cafeteria for the benefit of its employees. The company subsidizes
the cafeteria heavily by allowing employees to purchase meals at greatly reduced prices.
Budgeted and actual costs in the cafeteria for the year just ended are as follows:
*Unrecovered cost after deducting amounts received from employees.
Costs of the cafeteria are charged to producing departments on the basis of the number of
employees in these departments. Fixed costs are charged on the basis of the peak-period number
of employees. Data on employees in the company's producing departments follows:
Required:
a. Compute the dollar amount of variable and fixed costs that should be charged to each of the
producing departments at the end of the year for purposes of evaluating performance.
b. Identify the amount, if any, of actual costs that should not be charged to the operating
departments.
12-50
130.The Borders Corporation operates one central plant that has two divisions, the Flashlight Division
and the Night Light Division. The following data apply to the coming budget year.
Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year
by the Flashlight Division was 1,400 hours and by the Night Light Division was 600 hours.
Required:
1. If a single-rate cost-allocation method is used, what amount of operating costs will be
2. If a single-rate cost-allocation method is used, what amount of cost will be allocated to the
Flashlight Division? Assume actual usage is used to allocate operating costs.
3. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted
for the Night Light Division?
4. If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night
Light Division? Assume budgeted usage is used to allocate fixed operating costs and actual
usage is used to allocate variable operating costs.
12-51
131.Blaster Drive-In is a fast-food restaurant that sells burgers and hot dogs in a 1950s environment.
The fixed operating costs of the company are $5,000 per month. The controlling shareholder,
interested in product profitability and pricing, wants all costs allocated to either the burgers or the
hot dogs. The following information is provided for the operations of the company:
Required:
a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual
sales are used as the allocation base for January? For February?
b. Hot dog sales for January and February remained constant. Did the amount of fixed operating
costs allocated to hot dogs also remain constant for January and February? Explain why or why
not. Comment on any other observations.
12-52
132.Cost allocation bases are factors that cost management analysts use to assign indirect costs to
cost objects. Ideally, cost-allocation bases should reflect a cause-and-effect relationship between
resource spending and use. Ideally, an Activity-Based-Costing (ABC. approach will provide a
more accurate and useful accounting for an organization's resources. Recent studies have found
that, in spite of increasing costs and diminishing resources, very few Higher Education Institutions
use the tools and techniques of an ABC cost allocation system to assign costs to academic
departments. While direct costs, such as faculty salaries, are traceable to individual academic
departments or courses, many indirect costs, such as facility use, computer use, and student
support services, are more difficult to assign. In a traditional approach, many higher education
institutions assign such costs based on a single factor, such as the number of courses taught in
the university. (Source: Activity-Based Costing for Higher Education Institutions, Management
Accounting Quarterly, Winter, 2001)
Required:
(a) Explain why the use of a single-cost driver such as the number of courses may result in
inaccurate management information as to the cost of running courses in individual academic
departments.
(b) For each of the indirect costs listed below, identify an appropriate cost-driver that might be
used to allocate costs to determine the cost of offering a single course in an academic department
if an Activity-Based-Costing model were used.
• Computer use
• Facility use
• Student services
• Course design
• Lecturing/class meeting time
• Assignment grading
12-53
133.Quick Credit Checks produces two styles of credit reports: personal and corporate. The difference
between the two is the amount of background information and data collection required. The
corporate report uses more skilled personnel because additional checking and data are required.
The relevant figures for the year just completed follow: Total support service costs to be allocated
are $3,200,000.
Required:
(a) Which method would be preferred by each manager? Which method would be least preferred?
(b) Provide arguments that each manager would make for his/her preferred method. How would
each manager argue against his/her least preferred method?
134.Redder Company has a purchasing department that provides services to two factories located in
Fargo and the other in Custer. Budgeted costs for the purchasing department consist of $55,000
per year of fixed costs and $8 per purchase order for variable costs. The level of budgeted fixed
costs is determined by the peak-period requirements. The Fargo factory requires 40% of the
peak-period capacity and the Custer factory requires 60%.
During the coming year, 1,800 purchase orders were processed for the Fargo factory and 2,700
purchase orders for the Custer factory.
Required:
Compute the amount of purchasing department cost that should be charged to each factory for
the year.
12-54
135.Kosek Corporation's Maintenance Department provides services to the company's two operating
The fixed costs of the Maintenance Department are determined based on the number of cases
Required:
a. Prepare a report showing how much of the Maintenance Department's costs should be charged
to each of the operating divisions at the end of the year.
b. How much of the actual Maintenance Department costs should not be charged to the operating
divisions at the end of the year? Who should be held responsible for these uncharged costs?
136.Describe five advantages of decentralization.
12-55
137.Describe two disadvantages of decentralization.
138.Describe the three main elements of a management control system.
139.Describe the five basic types of decentralized units in responsibility accounting.
140.Explain the difference between fixed compensation and contingent compensation. Give an
example of each.
12-56
141.Traffic Services Company has recently expanded by acquiring two smaller companies in the
transportation industry. Prior to these acquisitions, Traffic Services used a centralized style of
organization because it was small enough that the top management team was heavily involved in
the day-to-day activities of the firm. Ms. Causeway, the CEO, feels that this style is no longer
suitable for the larger, more diverse organization.
She has hired a consultant to help her and her management team create a new structure which,
when developed on paper, will be described to the affected employees and their inputs will be
sought. Since no one in the company knows much about management styles, Ms. Causeway felt
this would be an efficient way to get the ball rolling, but realized the consultants would not have
the specialized knowledge about her company and the two acquisitions.
One of the first things she feels she will need to do is to explain the benefits of decentralization
that will accrue to both the company and the affected employees.
Required:
Ms. Causeway has asked you, as the consultant, to provide her with a general list of advantages
of decentralization that she will tailor to her company before presenting it to the executives and
other affected employees.
142.Ladue, Inc. has used a decentralized form of organizational structure for the past five years. The
controller, Ms. Trevino, has noticed that some of the divisions are still using fixed assets that are
fully depreciated and that there has been little acquisition activity in these divisions. Coupled with
this are very high ROIs, especially when compared to the other divisions that seem to have a
regular program of disposition and replacement of fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will review
her findings and look into the problem.
Required:
1) What are the potential negative effects of decentralization?

2) Specifically discuss the issues involved in suboptimization.
12-57
143.Ricardo, Inc. is just starting up. The management team has decided from the beginning that
decentralization was the preferred organizational style and has made this clear in all interviews
and discussions with potential employees. Mr. Pangea, the CEO, is unsure about the best way to
evaluate his division managers. He has heard the terms return on investment, residual income,
economic value added, and flexible budgets but wants to know the pros and cons of each.
Required:
Briefly describe ROI, residual income, EVA, and other approaches to performance evaluation.
Discuss, where appropriate, how to calculate the measure and problem areas in the development
of some of the numbers.
144.The manager of a business unit of a large corporation made some projections regarding sales
and profits for the upcoming final quarter of the year. The managers' performance evaluation and
compensation depended significantly on his ability to meet budget goals. The manager
discovered that the final quarter would have to be a particularly good quarter in order to meet
these goals. He decided to implement a sales program offering liberal payment terms in order to
pull some sales that would normally occur next year into the current year. Customers accepting
delivery in the fourth quarter would not have to pay the invoice for 140 days. Also, he sold some
equipment that was not being used and realized a significant profit on the sale.
Required:
Are these actions ethical? Why or why not?
12-58
145.The controller of one division of a large diversified firm is compensated by salary plus bonus. The
bonus is a significant part of total compensation, and is based directly on the profits of the
division. Thus, the controller has an incentive to find ways to increase profits, including the delay
of discretionary expenses such as research and development, delay of maintenance and repair of
manufacturing equipment, and delay of sales promotions.
Required:
Is finding ways to increase profits as described above unethical? Why or why not? Who is to
blame, if anyone?
146.The executive vice president of Wicker Pen Company wants to establish an accounting-based
performance measurement system for the company's new plant. The company has an accounting
information system sufficient to support a fairly sophisticated performance measurement system.
The new plant is going to be considered an investment center since its products will be markedly
different from others the company currently sells. The new plant will have no internal dealings with
other plants within the company.
Required:
What are some of the key steps that should be undertaken in the establishment of an accounting-
based performance measurement system?
12-59
147.The fixed costs of operating the maintenance facility of General Hospital are $4,500,000 annually.
Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000
maintenance-hours a year. Budgeted and actual hours per user for 20X3 are as follows:
Assume that budgeted maintenance-hours are used to calculate the allocation rates.
Required:
a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be

budgeted for each department?
b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be
allocated to each department based on actual usage? Based on budgeted usage?
c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be
d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated
to each department based on actual usage? Based on budgeted usage for fixed operating costs
and actual usage for variable operating costs?
12-60
148.The Alex Miller Corporation operates one central plant that has two divisions, the Lamp Division
and the Flashlight Division. The following data apply to the coming budget year:
Budgeted costs of the operating the plant for 10,000 to 20,000 hours:
Budgeted long-run usage per year:
Assume that practical capacity is used to calculate the allocation rates. Further assume that
actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for
the month of June.
Required:
a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted
for the Lamp Division each month? For the Flashlight Division each month?
b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will
be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to
allocate operating costs.
c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted
for the Lamp Division each month? For the Flashlight Division each month?
d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to
allocate fixed operating costs and actual usage is used to allocate variable operating costs.
12-61
149.There are five common types of responsibility centers listed below.
Required:
Briefly describe each of the following terms and provide an example of each term.
(a) Cost Center

(b) Discretionary Cost Center
(c) Revenue Center
(d) Profit Center
(e) Investment Center
12-62
150.The order entry department of Ahura Associated Industries is considering improvements in the
order entry process, which includes preparing quotations based on customers' requests (via the
sales representative) and processing orders received from customers.
A typical sequence of events might begin with a sales representative meeting with a customer to
discuss the type of system desired. The sales representative then fills out a paper form and faxes
it or phones it in to an order entry associate, who might make several subsequent phone calls to
the sales representative, the potential customer, or the manufacturing department to prepare the
quote properly. These phone calls deal with such questions as exchangeability of parts, part
numbers, current prices for parts, or allowable sales discounts. Order entry staff then keys in the
configuration of the desired system, including part numbers, and informs the sales representative
of the quoted price. Each quote is assigned a quotation number. To smooth production,
manufacturing often produces systems with standard configurations in anticipation of obtaining
orders from recent quotes for systems. The systems usually involve adding on special features to
the standard configuration. Production in advance of orders sometimes results in duplication in
manufacturing, however, because customers often fail to put the assigned quotation numbers on
their orders. When order entry receives an order, the information on the order is reentered into the
computer to produce an order acknowledgement. This order acknowledgement is sent to the
manufacturing department, which produces the system ordered by customer. When the order
acknowledgement is sent to the invoicing department, the information is reviewed again to
generate an invoice to send to the customer.
Domingo Perez, the order entry manager, has received many complaints from the order entry
department's internal customers regarding quality and timeliness problems, and is considering
ways to improve the efficiency and quality of the order entry process.
Required:
(a) Develop some indicators that Perez could use to assess the performance of the order entry
process.
(b) List four possible errors that might be found in the quote and/or the order acknowledgement
(i.e., the outputs of the order entry process).
(c) What do you think are the likely causes of delays and quality problems?
12-63
Chapter 12 Fundamentals of Management Control Systems Answer Key
True / False Questions
1. The design and use of management control systems affects how an individual makes and
TRUE
Control systems influence behavior.
AACSB: Analytic
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 12-01 Explain the role of a management control system.
Topic Area: Alignment of Managerial and Organizational Interests
2. In general, there is a direct relationship between the quality of the information provided to
managers and the quality of decisions made using that information.
TRUE
Normally, the better the information, the higher the quality of the decision.
AACSB: Analytic
Blooms: Remember
Topic Area: Why a Management Control System?
3. Rational managers will always make decisions that are in the best interest of the organization
employing them.
FALSE
Rational managers will often make decisions that are in their best personal interest.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic Area: Why a Management Control System?
12-64
4. Decentralization is the delegation of the authority to make decisions in the organization's name
to subordinates.
TRUE
This is the definition of decentralization.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-02 Identify the advantages and disadvantages of decentralization.
Topic Area: Decentralized organizations
5. In general, organizations are more centralized in the early stages of their existence and more
decentralized as they grow.
TRUE
Decentralization normally is the result of growth.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
6. One advantage of decentralization is faster response time to changes in the organization's

environment by local managers.
TRUE
Local managers have the authority to make decisions, so the response time is faster.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic Area: Advantages of Decentralization
7. One advantage of centralization is better use of top management's time on strategic decisions.
FALSE
In a centralized system, top management is required to make many operating decisions, so

there is less time for strategic decision making.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic Area: Disadvantages of Decentralization
12-65
8. Properly developed and implemented management control systems influence subordinates to
act in the organization's best interest.
TRUE
A properly designed system will promote goal congruence.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 12-03 Describe and explain the basic framework for management control systems.
Topic Area: Elements of a Management Control System
9. Delegated decision authority is the specification of what decisions a subordinate can make in
the organization.
TRUE
Authority defines what a person can and cannot do.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10. It is important to not consider an organization's compensation and reward system when
designing its performance evaluation system.
FALSE
It is important to consider the system.
AACSB: Analytic
Blooms: Remember
11. Managers in a cost center are held responsible for both the costs and volumes of inputs used
to produce a product or provide a service.
TRUE
The manager does not have control over the price of the output, or authority over it.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Explain the relation between organization structure and responsibility centers.
Topic Area: Cost Centers
12-66
12. In general, profit centers are found at higher levels in an organization than investment centers.
FALSE
Investment centers are found at higher levels.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Topic Area: Investment Centers
13. Properly designed management control systems can totally eliminate the inherent conflict
between individual behavior and organizational goals.
FALSE
Conflict cannot be totally eliminated.
AACSB: Analytic
Blooms: Remember
Difficulty: 3 Hard
Topic Area: Responsibility Centers and Organization Structure
14. There is no single accounting measure that can fully measure the performance of a profit or
investment center.
TRUE
There is no one single perfect measure.
AACSB: Analytic
Blooms: Remember
Topic Area: Measuring Performance
15. Fixed compensation is generally not linked to measured performance; i.e., it is independent of
TRUE
Contingent compensation is linked with performance.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-05 Understand how managers evaluate performance.
Topic Area: Compensation Systems
12-67
16. Properly designed management control systems have both fixed compensation and contingent
compensation.
TRUE
If contingent is too small there is not enough incentive, if the proportion of contingent is too high
there is too much risk.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
17. Cost allocations based on dual rates assume that a common cost can be separated into a fixed
and variable component.
TRUE
The dual refers to fixed and variable.
AACSB: Analytic
Blooms: Remember
Learning Objective: 12-06 Analyze the effect of dual- versus single-rate allocation systems.
Topic Area: Effective Corporate Cost Allocation System
18. The primary reason to use a dual rate allocation system is to focus a manager's performance
TRUE
The allocation reflects the cost behavior.
AACSB: Analytic
Blooms: Remember
Difficulty: 3 Hard
19. It is possible for performance evaluation systems and/or management control systems to
contribute to unethical or fraudulent behavior.
TRUE
Systems do not guarantee ethical behavior.
AACSB: Analytic
Blooms: Remember
Learning Objective: 12-07 Understand the potential link between incentives and illegal or unethical behavior.
Topic Area: Do Performance Evaluation Systems Create Incentives to Commit Fraud?
12-68
20. Properly designed management control systems will eliminate fraudulent behavior by
maximizing goal congruence within the organization.
FALSE
Fraud cannot be eliminated by control systems, it can only be reduced.
AACSB: Analytic
Blooms: Remember
Multiple Choice Questions
21. Which of the following statements is (are) true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and
(B) Rational managers will always make decisions that are in the best interest of the
organization employing them.
A. Only A is true.
B. Only B is true.
Rational managers will not always make the best decisions for the organization.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic Area: Alignment of Managerial and Organizational Interests
22. Decentralizationrefers to the delegation of decision-making authority to:
A. top management.
B. superiors.
C. board of directors.
D. subordinates.
Delegation is to the subordinates; delegation is from the superiors/top management.
AACSB: Analytic
12-69
Blooms: Remember
Difficulty: 1 Easy
23. Which of the following is not a characteristic of a decentralized organization?
A. Better use of local knowledge.

B. Better use of top management's time.
C. Reduced response time to environmental changes.
D. More decisions made by relatively few individuals.
Decisions are made by more individuals, not fewer, under decentralization.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
24. Which of the following statements is false?
A. The U.S. military is a good example of an organization that is highly decentralized.

B. The degree of decentralization depends on how many decisions principals delegate to
agents.
C. Management control systems are used to measure the performance of an agent's
decisions.
D. Most organizations have some operating units that are centralized and some that are
decentralized.
The U.S. military is a centralized organization.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
25. Which of the following elements is not part of a management control system?
A. Delegated decision authority.

B. Performance evaluation system.
C. Knowledge of local conditions.
D. Compensation and reward system.
Knowledge of local conditions is an advantage of a decentralized organization, not an element

of management control.
AACSB: Analytic
12-70
Blooms: Remember
Difficulty: 1 Easy
26. An operating unit of an organization is called a cost center if it is responsible:
A. only for costs.

This is the definition of a cost center.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic Area: Delegated Decision Authority: Responsibility Accounting
27. An operating unit of an organization is called an investment center if it is responsible:
A. only for costs.

This is the definition of an investment center.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
28. An operating unit of an organization is called a revenue center if it is responsible:
A. only for costs.

This is the definition of a revenue center.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12-71
29. An operating unit of an organization is called a profit center if it is responsible:
A. only for costs.

This is the definition of a profit center.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
30. An operating unit that is responsible for revenues and costs is commonly referred to as a(n):
A. expense center.
B. revenue center.
C. profit center.
D. asset center.
Revenues - costs = profit.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
31. An operating unit that is responsible for revenues only is commonly referred to as a(n):
A. expense center.
B. revenue center.
C. profit center.
D. asset center.
This is the definition of a revenue center.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12-72
32. An operating unit that is responsible for only costs is commonly referred to as a(n):
A. cost center.
B. revenue center.
C. profit center.
D. asset center.
This is the definition of a cost center.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
33. When managers are held responsible for costs but the input-output relationship is not well

B. revenue center
D. asset center
Key is input-output not well established.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
34. When managers are held responsible for costs and the input-output relationship is well

B. revenue center
D. asset center
Key is the well specified input-output.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12-73
35. Decentralized organizations can delegate authority and still maintain control and monitor
managers' performance by designing appropriate management control systems. Which of the
following responsibility centers would be evaluated similar to an independent business?
A. Profit center.
B. Revenue center.
C. Investment center.
D. Discretionary cost center.
An investment center has authority over profits and can make asset decisions, just like an
independent business. The key is "asset decisions."
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
A. Option a
B. Option b
C. Option c
D. Option d
Both are responsible for revenues and costs.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12-74
A. Option a
B. Option b
C. Option c
D. Option d
Cost centers do not have authority over revenues.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
A. Option a
B. Option b
C. Option c
D. Option d
Profit centers have revenue authority, cost centers do not.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12-75
A. Option a
B. Option b
C. Option c
D. Option d
Only investment centers have asset authority.
AACSB: Analytic
Blooms: Remember
A. Option a
B. Option b
C. Option c
D. Option d
Neither have asset authority.
AACSB: Analytic
Blooms: Remember
12-76
41. A manager makes a decision that is beneficial for a specific investment center and for the
entire organization. From the organization's perspective, this decision results in:
A. goal congruence.
B. decentralization.
C. contingent compensation.
D. fixed compensation.
This is a definition of goal congruence.
AACSB: Analytic
Blooms: Remember
42. The controllability concept states that managers should be held responsible for:
A. all items over which they have decision-making authority.

B. costs and revenues, but not investments in assets used in their division.
C. only items that are allocated to their divisions on a per-unit basis.
D. fixed compensation items, but not contingent compensation items.
This is the definition of controllability.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic Area: Evaluating Performance
43. Relative performance evaluations (RPE) are not designed to:
A. compare managers to other comparable managers.

B. compare divisions with other comparable divisions.
C. remove the effect of environmental factors that are beyond a manager's control.
D. restate departmental goals so meaningful comparisons can be made.
Goals are not restated. RPE defines what is being compared against.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12-77
44. Which of the following items would be classified as a fixed compensation item?
C. Stock options.
D. Piece rates.
Salaries are fixed amounts, the other three vary.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
45. Which of the following items would not be classified as a contingent compensation item?
C. Stock options.
D. Piece rates.
Salaries are fixed amounts, the other three vary.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
46. Which of the following statements is (are) true regarding compensation?
(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent
of measured performance.
(B) Properly designed management control systems have contingent compensation items but
not fixed compensation items.
A. Only A is true.
B. Only B is true.
Both fixed and contingent compensation should be included.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12-78
47. The use of dual rates in a cost allocation system assumes that common costs can be:
A. separated into their fixed and variable components.

B. traced directly to a specific division or manager.
C. allocated based on a physical quantities measure.
D. assigned to an investment responsibility center.
Dual allocation needs the fixed/variable breakdown.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
48. Which of the following statements is (are) false regarding the effective use of management
control systems?
(A) In general, single rate cost allocations should not be used in management control systems
because clear control over the cost being allocated cannot be determined.
(B) The primary reason to use a dual rate allocation system is to focus a manager's
performance evaluation on factors under the manager's direct control.
A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.
Both are true.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
49. Examples of pressures that can lead to financial fraud do not include:
A. unrealistic budgets.
B. inappropriate bonus plans.
C. overemphasis on long-term results.
D. overemphasis on short-term results.
Both are true.
AACSB: Analytic
12-79
Blooms: Remember
Difficulty: 1 Easy
50. The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies:
A. use investment centers to evaluate top managers.

B. report on the adequacy of the company's internal controls over financial reporting.
C. compensate managers with fixed compensation plans only.
D. eliminate stock options for managerial compensation.
Sarbanes-Oxley does not reference stock options.
AACSB: Analytic
AICPA FN: Risk Analysis
Blooms: Remember
Learning Objective: 12-08 Understand how internal controls can help protect assets.
Topic Area: Internal Controls to Protect Assets and Provide Quality Information
51. Which of the following is not an internal control?
A. Rotating personnel among tasks.

B. Separation of duties.
C. Setting limits on the amount of expenditures.
D. Using absolute performance standards.
Absolute performance standards are not part of internal control.
AACSB: Analytic
Blooms: Remember
52. Internal controls include all of the following except:
A. using contingent compensation plans.

B. requiring management authorization for the use of a company's assets.
C. reconciling various sets of books.
D. requiring employees to take vacations.
Internal controls do not address contingent or fixed compensation.
AACSB: Analytic
Blooms: Remember
12-80
What is the allocation rate for the upcoming year, assuming Boxes-2-Go uses the single-rate
method and allocates common costs based on the number of calls?
A. $10.00.
B. $15.00.
C. $20.00.
D. $25.00.
[$4,500,000/(100,000 + 80,000)] = $25.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Topic Area: Incentive Problems with Allocated Costs
What is the allocation rate for the upcoming, year assuming Boxes-2-Go uses the single-rate
A. $10.98
B. $10.00.
C. $8.00.
D. $7.14.
[$4,500,000/(120,000 + 330,000)] = $10.00
AACSB: Analytic
Blooms: Apply
12-81
Difficulty: 1 Easy
The cost accountant determined $2,700,000 of the communication network's costs were fixed
the Large Box Division, assuming the company uses dual-rates to allocate common costs?
A. $2,700,000.
B. $2,520,000.
C. $1,980,000.
D. $1,500,000.
(100,000/180,000 × $2,700,000) + (120,000/450,000 × $1,800,000) = $1,980,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-82
The cost accountant determined $2,700,000 of the communication network's costs were fixed
based on the time on the network. What is total communication network costs allocated to the
Small Box Division, assuming the company uses dual-rates to allocate common costs?
A. $2,520,000.
B. $1,800,000.
C. $1,320,000.
D. $1,200,000.
(80,000/180,000 × $2,700,000) + (330,000/450,000 × $1,800,000) = $2,520,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-83
If the Copy Department uses a dual rate for allocating its costs based on usage, how much
cost will be allocated to the Marketing Department?
A. $85,000.
B. $90,000.
C. $150,000.
D. $170,000.
(3,600,000/5,400,000 × $120,000) + [$.025 × 3,600,000] = $170,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-84
If the Copy Department uses a dual rate for allocating its costs based on usage, how much
cost will be allocated to the Economics Department?
A. $85,000.
B. $90,000.
C. $105,000.
D. $120,000.
(1,800,000/5,400,000 × $120,000) + [$.025 × 1,800,000] = $85,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-85
If the Copy Department uses a dual-rate for allocating its costs, how much cost will be
allocated to the Economics Department, assuming the Economics Department actually made
A. $85,000.
B. $92,500.
C. $132,500.
D. $112,500.
(1,800,000/5,400,000 × $120,000) + [$.025 × 2,100,000] = $92,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-86
allocated to the Marketing Department, assuming the Marketing Department actually made
A. $135,000.
B. $150,000.
C. $155,000.
D. $170,000.
(3,600,000/5,400,000 × $120,000) + [$.025 × 3,000,000] = $155,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-87
allocated to the Economics Department, assuming the Economics Department actually made
A. $77,500.
B. $92,500.
C. $132,500.
D. $112,500.
(1,800,000/5,400,000 × $120,000) + [$.025 × 1,500,000] = $77,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-88
allocated to the Marketing Department, assuming the Marketing Department actually made
A. $135,000.
B. $150,000.
C. $155,000.
D. $175,000.
(3,600,000/5,400,000 × $120,000) + [$.025 × 3,800,000] = $175,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-89
costs of the company's computer server network. The annual common costs are $2,400,000.
You have been provided with the following information for the upcoming year:
What is the allocation rate for the upcoming year, assuming Fenway Telcom uses the single-
rate method and allocates common costs based on the number of connections?
A. $10.00.
B. $15.00.
C. $20.00.
D. $40.00.
[$2,400,000/(60,000 + 80,000 + 100,000)] = $10.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-90
Fenway Telcom uses the single rate method and allocates common costs based on the
number of connections. What is the total computer server network cost allocated to the
Commercial Division?
A. $480,000.
B. $514,286.
C. $600,000.
D. $1,200,000.
Correct! $10.00 × 60,000 = $600,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-91
What is the allocation rate for the upcoming year, assuming Fenway Telcom uses the single-
rate method and allocates common costs based on the time on the network?
A. $20.00.
B. $16.00.
C. $4.00.
D. $2.86.
[$2,400,000/(120,000 + 150,000 + 330,000)] = $4.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-92
Fenway Telcom uses the single rate method and allocates common costs based on the time on
the network. What is the total computer server network cost allocated to the Retail Division?
A. $429,000.
B. $600,000.
C. $657,800.
D. $3,000,000.
$4.00 × 150,000 = $600,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-93
The cost accountant determined $1,700,000 of the server network's costs were fixed and
the Commercial Division, assuming the company uses dual-rates to allocate common costs?
A. $514,286.
B. $480,000.
C. $600,000.
D. $565,000.
(60,000/240,000 × $1,700,000) + (120,000 × ($700,000/600,000) = $565,000
AACSB: Analytic
Blooms: Apply
12-94
allocated based on the time on the network. What is total server network costs allocated to the
Retail Division, assuming the company uses dual-rates to allocate common costs?
A. $741,667.
B. $657,143.
C. $425,000.
D. $211,765.
(80,000/240,000 × $1,700,000) + (150,000 × ($700,000/600,000)) = $741,667
AACSB: Analytic
Blooms: Apply
12-95
allocated based on the time on the network. What is total server network costs allocated to the
Consumer Division, assuming the company uses dual-rates to allocate common costs?
A. $1,200,000.
B. $1,093,333.
C. $954,896.
D. $750,000.
(100,000/240,000 × $1,700,000) + (330,000 × ($700,000/600,000)) = $1,093,333
AACSB: Analytic
Blooms: Apply
12-96
services for three departments in the St. Paul office. The following budget has been prepared
for the year.
If DCC uses a dual rate for allocating its costs based on usage, how much cost will be
allocated to the Software Development Department?
A. $98,000.
B. $104,000.
C. $112,000.
D. $118,857.
(1,600,000/7,000,000 × $280,000) + [$0.03 × 1,600,000] = $112,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-97
for the year.
allocated to the Training Department?
A. $183,750.
B. $210,000.
C. $195,000.
D. $222,857.
(3,000,000/7,000,000 × $280,000) + [$0.03 × 3,000,000] = $210,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-98
for the year.
allocated to the Management Department?
A. $168,000.
B. $156,000.
C. $178,286.
D. $147,000.
(2,400,000/7,000,000 × $280,000) + [$0.03 × 2,400,000] = $168,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-99
for the year.
A. $147,000.
B. $136,500.
C. $159,000.
D. $150,761.
(2,400,000/7,000,000 × $280,000) + [$0.03 × 2,100,000] = $159,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-100
for the year.
A. $184,500.
B. $191,750.
C. $211,783.
D. $206,500.
(2,400,000/7,000,000 × $280,000) + [$0.03 × 2,950,000] = $184,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-101
for the year.
Department, assuming the Training Department actually made 3,250,000 copies during the
year?
A. $227,500.
B. $211,250.
C. $217,500.
D. $223,017.
(3,000,000/7,000,000 × $280,000) + [$0.03 × 3,250,000] = $217,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-102
for the year.
Department, assuming the Training Department actually made 2,770,000 copies during the
year?
A. $180,050.
B. $190,079.
C. $193,900.
D. $203,100.
(3,000,000/7,000,000 × $280,000) + [$0.03 × 2,770,000] = $203,100
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-103
for the year.
A. $75,400.
B. $98,800.
C. $81,200.
D. $84,312.
(1,600,000/7,000,000 × $280,000) + [$0.03 × 1,160,000] = $98,800
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
12-104
for the year.
A. $117,400.
B. $115,700.
C. $124,600.
D. $129,376.
(1,600,000/7,000,000 × $280,000) + [$0.03 × 1,780,000] = $117,400
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
79. In responsibility accounting, a center's performance is measured by those costs which are
controllable. Controllable costs are best described as including: (CMA adapted)
A. direct materials and direct labor only.

B. only those costs that the manager can influence in the current period.
C. only discretionary costs.
D. those costs about which the manager is knowledgeable and informed.
E. incremental and fixed costs.
A controllable cost is one that can be influenced.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12-105
80. Rockford Manufacturing Corporation uses a responsibility accounting system in its operations.
Which one of the following items is least likely to appear in a performance report for a manager
of one of Rockford's assembly lines? (CMA adapted)
A. Direct labor.
B. Materials.
C. Repairs and maintenance.
D. Depreciation on the manufacturing facility.
E. Supervisory salaries.
An assembly line would be a cost center with no control over assets.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
81. Responsibility accounting defines an operating center that is responsible for revenue and costs
as a(n): (CMA adapted)
A. profit center.
B. revenue center.
C. division.
D. operating unit.
E. investment center.
Revenues and costs = profit center.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic Area: Profit Centers
12-106
82. When comparing performance report information for top management with that of lower-level
management: (CMA adapted)
A. top management reports are more detailed.

B. lower-level management reports are typically for longer time periods.
C. top management reports show control over fewer costs.
D. lower-level management reports are likely to contain more quantitative data and less
financial data.
E. top management reports are usually not of the exception type but present a complete
analysis of all variances.
Top management reports are less detailed, long time period, and more financial oriented.
Lower management is more detailed, shorter time, and more operational.
AACSB: Analytic
Blooms: Apply
83. The least complex segment or area of responsibility for which costs are allocated is a(n): (CMA
adapted)
A. profit center.
B. investment center.
C. contribution center.
D. cost center.
E. hybrid center.
Less complex implies less responsibility. Cost centers have the least responsibility.
AACSB: Analytic
Blooms: Apply
12-107
84. Which one of the following will not occur in an organization that gives managers throughout the
organization maximum freedom to make decisions? (CMA adapted)
A. More effective solutions to operational problems.

B. Individual managers regarding the managers of other segments as they do external parties.
C. Two divisions of the organization having competing models that aim for the same market
segments.
D. Delays in securing approval for the introduction of new products.
E. greater knowledge of the marketplace and improved service to customers.
Decentralization implies fewer approvals.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
85. Which one of the following firms is likely to experience dysfunctional motivation on the part of
its managers due to its allocation methods? (CMA adapted)
A. To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar

Electronics uses predetermined amounts calculated on the basis of the long term average
use of the services provided by the warehouse to the various segments.
B. Manhattan Electronics uses the sales revenue of its various divisions to allocate costs
connected with the upkeep of its headquarters building. It also uses ROI to evaluate the
divisional performance.
C. Rainier Industrial does not allow its service departments to pass on their cost overruns to
production departments.
D. Tashkent Auto's management information system (MIS) is operated out of headquarters
and serves its various divisions. Tashkent's allocation of MIS-related costs to its divisions is
limited to costs the divisions will incur if they were to outsource their MIS needs.
E. Golkonda Refineries separately allocates fixed and variable costs incurred by its service
departments to its production departments.
Allocating on the basis of sales revenue often creates dysfunctional behavior.
AACSB: Analytic
Blooms: Analyze
12-108
86. Which of the following three statements are correct?
I. A profit center has control over both cost and revenue.

II. An investment center has control over invested funds, but not over costs and revenue.
III. A cost center has no control over sales.
A. Only I
B. Only II
C. Only I and III
D. Only I and II
Investment centers combine both a measure of profit and a measure of asset usage.
AACSB: Reflective Thinking

AICPA FN: Measurement
Blooms: Analyze
87. The purpose of the Data Processing Department of Falena Corporation is to assist the various
departments of the corporation with their information needs free of charge. The Data
Processing Department would best be evaluated as a:
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
A data center creates expenses, not revenues.

Blooms: Remember
Difficulty: 1 Easy
12-109
88. Dunkle Corporation's Maintenance Department provides services to the company's two
operating divisions - the Paints Division and the Stains Division. The variable costs of the
Maintenance Department are budgeted based on the number of cases produced by the
operating departments. The fixed costs of the Maintenance Department are budgeted based on
the number of cases produced by the operating departments during the peak period. Data
appear below:
charged to the Paints Division at the end of the year?
A. $298,800.
B. $498,000.
C. $289,000.
D. $240,000.
See calculations below.
Solution:
AACSB: Analytic
Blooms: Apply
12-110
89. The fixed costs of Baxter Company's personnel department are allocated to operating
departments on the basis of direct labor-hours. The following data have been provided:
The fixed costs of the personnel department are budgeted at $56,000 per year and are
incurred in order to support long-run average requirements. How much of this fixed cost should
be charged to Operating Department X at the end of the year for performance evaluation
purposes?
A. $35,000.
B. $33,600.
C. $52,500.
D. $22,400.
Solution:
$56,000 ÷ 25,000 = $2.24

$2.24 × 15,000 = $33,600
AACSB: Analytic
Blooms: Apply
12-111
90. Peake Corporation's Maintenance Department provides services to the company's two
operating departments. The fixed costs of the Maintenance Department are budgeted based on
the number of cases produced by the operating departments during the peak period. Data
appear below:
charged to the Stains Division at the end of the year?
A. $669,623.
B. $637,339.
C. $625,500.
D. $657,584.
Solution:
AACSB: Analytic
Blooms: Apply
12-112
91. Wilson Company maintains a cafeteria for its employees. For June, variable food costs were
budgeted at $45 per employee based on a budgeted level of 200 employees in other
departments. During the month, an average of 190 employees worked in other departments
and actual food costs totaled $9,250. How much food cost should be charged to the other
departments at the end of the month for performance evaluation purposes?
A. $9,000.
B. $9,250.
C. $8,550.
D. $9,737.
Solution:
190 employees × $45 per employee = $8,550
AACSB: Analytic
Blooms: Apply
92. ____________ is the delegation of decision-making authority to lower management levels

within the organization.
A. Transfer pricing
B. Centralization
C. Decentralization
D. Goal congruence
Delegation of decision-making is a basic tenant of decentralization.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
12-113
93. Which of the following is not a benefit of decentralization?
A. Allowing managers some autonomy in decision making provides managerial training for
future higher-level managers.
B. In a decentralized organization some tasks or services may be duplicated unnecessarily.
C. Managers with some decision-making authority usually exhibit greater motivation than those
D. Managers of the organization's subunits are specialists, thereby enabling them to manage
their departments most effectively.
Some duplication is a basic disadvantage of decentralization.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 3 Hard
94. Which of the following is not a cost of decentralization?
A. Managers in a decentralized organization might have a narrow focus on their own unit's
performance rather than the attainment of their organization's overall goals.
B. Managers might have a tendency to ignore the consequences of their actions on the
organization's other subunits.
C. Delegating decision making to the lowest level possible enables an organization to respond
in a timely way to opportunities and problems.
D. Managers in a decentralized organization might have a narrow focus on their own unit's
performance rather than the attainment of their organization's overall goals AND managers
might have a tendency to ignore the consequences of their actions on the organization's
other subunits.
Local managers can react to a changing environment more quickly than top management can.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 3 Hard
12-114
95. Which of the following is considered a responsibility center?
A. Investment center.
B. Profit center.
C. Revenue center.
D. All are responsibility centers.
All three entities undergo performance evaluation by responsible managers.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic Area: Performance of the Responsibility Center
96. Which of the following departments would not be a cost center?
A. County fire department

B. University book store
C. University power plant
D. City building and grounds department
This is a profit center.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
97. Which of the following subunits would most likely be considered a only cost center?
A. Jewelry department.
B. Parts department.
C. Legal department.
D. Electronics department.
This is a cost center, generating only expense.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
12-115
98. The following is a summarized income statement for Royal Manor Co.'s profit center 12608 for
April:
Which of the following amounts is most likely subject to the control of the profit center's
manager?
A. Contribution Margin of $175,000.

B. Contribution Margin of $175,000 and Period Expenses of $11,000.
C. Contribution Margin of $175,000 and Period Expenses of $13,000.
D. Contribution Margin of $175,000 and Period Expenses of $21,000.
A profit center manager is responsible for revenue and expense of the product or service, but
not for all the period costs.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
Topic Area: Profit Centers
99. Revenue center and profit center managers are both responsible for meeting
A. Budgeted income.
B. Budgeted costs.
C. Budgeted revenues.
D. Minimum return on investment as established by the company as a whole.
A revenue center, by definition, would only be responsible for revenue.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
12-116
100. Which of the following subunits is most likely to be considered an investment center?
A. Accounting department.
B. Assembly department.
C. Petrochemical division.
D. Research and development department.
Managers of investment centers have responsibility for profits and investment in assets. These
managers have relatively large amounts of money with which to make capital budgeting and
other decisions affecting the use of assets.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
101. Cost allocation of shared facilities cost is intended to remind managers of:
A. The cost of using a shared resource.

B. Both the cost and value of using shared resources.
C. How much capacity a firm has.
D. Why the firm invests in these facilities.
E. How dependent the managers are for these facilities.
There is an accompanying cost to shared resources that must be utilized near capacity to
maximize value received.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Topic Area: Illustration: Corporate Cost Allocation
12-117
102. Dual allocation is a cost allocation approach that separates direct and indirect costs, tracing the
direct costs directly to the department that:
A. can bear the cost.

B. relates best to the cost.
C. is first identified with the cost.
D. caused the cost.
E. is most impacted by the cost.
This is a basic advantage to the dual-rate allocation method.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
103. If a budgeted activity base is used as the base in cost allocation, each department's cost
allocation will be predictable, and not influenced by the:
A. actual total cost.

B. change in activity.
C. variations from budget.
D. errors in calculations.
E. actual usage in other departments.
Then costs applicable are determined by cause and effect based on activities related only to
the department in question.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
12-118
104. The concepts of cost allocation that are used in manufacturing can also apply in:
A. service and not-for-profit industries.

B. service industries only.
C. not-for-profit industries only.
D. limited instances outside of manufacturing.
E. the concepts apply only in manufacturing.
Cost allocation techniques are applicable to the gamut of organizations alike.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
105. Which of the following is not one of the objectives of cost allocation?
A. Motivate managers to exert a high-level of effort.

B. Provide useful departmental and product costs.
C. Identify production constraints.
D. Provide the right incentive for managers to make decisions.
E. Provide an appropriate basis for performance evaluation.
Identifying production constraints is not an objective of cost allocation.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Essay Questions
12-119
106. Atlantic Hotels operates a centralized call center for the reservation needs of its time-share
units. Costs associated with use of the center are charged to the time-share group (Luxury,
Resort, Standard, and Budget) where a reservation is made on the basis of time on a call. Idle
time of the reservation agents, time spent on calls where no reservation is made, and the fixed
cost of the equipment are allocated on the number of reservations made in each group. Due to
recent increased competition in the time-share business, the company has decided that it is
necessary to more accurately allocate its costs to price its services competitively and profitably.
During the current period, the use of the call center for each group was as follows (in
thousands of seconds for time usage and in number of reservations):
Required:
Determine the allocation to each of the divisions using (you may round all decimals to three
places):

a. Luxury: $496,400; Resort: $828,550; Standard: $1,328,600; Budget: $996,450

b. Luxury: $415,800; Resort: $724,390; Standard: $1,409,200; Budget: $1,100,610
Feedback:
12-120
Totals:
Luxury: $327,760 + 88,040 = $415,800
Resort: $547,070 + 177,320 = $724,390
Standard: $877,240 + 531,960 = $1,409,200
Budget: $657,930 + 442,680 = $1,100,610
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
12-121
107. Baltic Resorts operates a centralized call center for the reservation needs of its time-share
units. Costs associated with use of the center are charged to the time-share group (Luxury,
Standard, and Budget) where a reservation is made on the basis of time spent on a call. Due to
recent increased competition in the time-share business, the company has decided that it is
Required:

a. Luxury: $375,000; Standard: $1,500,000; Budget: $1,125,000

b. Luxury: $322,920; Standard: $1,500,000; Budget: $1,177,080
Feedback:
12-122
Totals:
Luxury: $220,000 + 102,920 = $322,920
Standard: $880,000 + 620,000 = $1,500,000
Budget: $660,000 + 517,080 = $1,177,080
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
12-123
108. Caspian Resorts operates a centralized call center for the reservation needs of its time-share
units. Costs associated with use of the center are charged to the time-share group (Luxury and
Standard) where a reservation is made on the basis of time spent on a call. Due to recent
increased competition in the time-share business, the company has decided that it is
$960,000 for equipment and other costs.
Required:

a. Luxury: $436,000; Standard: $1,744,000

b. Luxury: $381,280; Standard: $1,798,720
Feedback:
Totals:
Luxury: $244,000 + 137,280 = $381,280
12-124
Standard: $976,000 + 822,720 = $1,798,720
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
109. The Document Creation Center (DCC) for Aelerion Corp. provides document services for three
a. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be
allocated to the three user departments?
Software Development: $11,000; Training: $20,625; Management: $23,375
Feedback:
AACSB: Analytic
Blooms: Analyze
12-125
110. The legal department for Buffet Corp. provides legal services for four departments in the
Omaha office. The following budget has been prepared for the month.
a. If Buffet uses a dual rate for allocating its costs based on usage, how much cost will be
Purchasing: $34,800; Marketing: $43,500; Training: $65,250; Management: $73,950
Feedback:
AACSB: Analytic
Blooms: Analyze
12-126
111. The human resources department for Hammond Corp. provides personnel services for two
departments in the Chicago office. The following budget has been prepared for the month.
a. If Hammond uses a dual rate for allocating its costs based on employees, how much cost
will be allocated to the two departments?
Production: $57,190; Management: $9,310
Feedback:
AACSB: Analytic
Blooms: Analyze
12-127
112. The Document Creation Center (DCC) for Aelerion Corp. provides document services for three
a. If DCC uses a dual rate for allocating its costs; allocating fixed costs based on number of
documents and variable costs based on number of pages, how much cost will be allocated to
the three user departments?
Software Development: $19,277; Training: $39,759; Management: $39,027
Feedback:
AACSB: Analytic
Blooms: Analyze
12-128
113. The legal department for Buffet Corp. provides legal services for four departments in the
Omaha office. The following budget has been prepared for the month.
a. If Buffet uses a dual rate for allocating its costs, allocating fixed costs based on number of
contracts and variable costs based on number of pages reviewed, how much cost will be
Purchasing: $62,940; Marketing: $93,956; Training: $132,264; Management: $82,850
Feedback:
AACSB: Analytic
Blooms: Analyze
12-129
114. Wrigley Services has three divisions, commercial, retail, and consumer, that share the common
a. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate
b. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate
c. The cost accountant determined $850,000 of the server network's costs were fixed and
each division?
a. Rate: $10/connection; Commercial: $300,000; Retail: $400,000; Consumer: $500,000

b. Rate: $2/hour; Commercial: $240,000; Retail: $300,000; Consumer: $660,000
c. Commercial: $282,460; Retail: $370,500; Consumer: $546,840
Feedback: a. Rate: $1,200,000/(30,000 + 40,000 + 50,000) = $10/connection

Commercial: 30,000 × $10 = $300,000; Retail: 40,000 × $10 = $400,000; Consumer: 50,000 ×
$10 = $500,000
b. Rate: $1,200,000/(120,000 + 150,000 + 330,000) = $2/hour
$2 = $660,000
AACSB: Analytic
Blooms: Analyze
12-130
12-131
115. Comiskey has four divisions, commercial, retail, research, and consumer, that share the
a. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate
b. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate
c. The cost accountant determined $1,700,000 of the server network's costs were fixed and
each division?
a. Rate: $8.571/connection; Commercial: $514,260; Retail: $685,680; Research: $342,840;

Consumer: $857,100
b. Rate: $3.429/hour; Commercial: $411,480; Retail: $514,350; Research: $342,900;
Consumer: $1,131,570
c. Commercial: $483,800; Retail: $636,200; Research: $343,100; Consumer: $936,900
Feedback: a. Rate: $2,400,000/(60,000 + 80,000 + 40,000 + 100,000) = $8.571/connection

Commercial: 60,000 × $8.571 = $514,260; Retail: 80,000 × $8.571 = $685,680; Research:
40,000 × $8.571 = $342,840; Consumer: 100,000 × $8.571 = $857,100
b. Rate: $2,400,000/(120,000 + 150,000 + 100,000 + 330,000) = $3.429/hour
Commercial: 120,000 × $3.429 = $411,480; Retail: 150,000 × $3.429 = $514,350; Research:
100,000 × $3.429 = $342,900; Consumer: 330,000 × $3.429 = $1,131,570
12-132
AACSB: Analytic
Blooms: Analyze
12-133
116. Jacobs Corp. has three divisions, commercial, retail, and consumer, that share the common
a. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate
b. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate
a. Rate: $10/connection; Commercial: $600,000; Retail: $800,000; Consumer: $1,000,000

b. Rate: $4/hour; Commercial: $480,000; Retail: $600,000; Consumer: $1,320,000
Feedback: (need to show rate in answer for a & b because asked for it in problem)
a. Rate: $2,400,000/(60,000 + 80,000 + 100,000) = $10/connection
$10 = $1,000,000
b. Rate: $2,400,000/(120,000 + 150,000 + 330,000) = $4/hour
$4 = $1,320,000
AACSB: Analytic
Blooms: Analyze
12-134
117. Marlin has three divisions, commercial, retail, and consumer, that share the common costs of
the company's computer server network. The annual common costs are $2,400,000. You have
each division?
Commercial: $570,000; Retail: $749,600; Consumer: $1,080,600
Feedback:
AACSB: Analytic
Blooms: Analyze
12-135
118. Sanper Corp. has four divisions, commercial, retail, research, and consumer, that share the
a. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate
method and allocates common costs based on the number of connections?
b. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate
a. Allocation rate = $12.50 per connection; Commercial: $875,000; Retail: $1,125,000;

Research: $250,000; Consumer: $1,250,000
b. Allocation rate = $5 per hour; Commercial: $600,000; Retail: $750,000; Research: $500,000;
Consumer: $1,650,000
Feedback: a. Rate: $3,500,000/(70,000 + 90,000 + 20,000 + 100,000) = $12.50/connection

Commercial: 70,000 × $12.50 = $875,000; Retail: 90,000 × $12.50 = $1,125,000; Research:
20,000 × $12.50 = $250,000; Consumer: 100,000 × $12.50 = $1,250,000
b. Rate: $3,500,000/(120,000 + 150,000 + 100,000 + 330,000) = $5/hour
Commercial: 120,000 × $5 = $600,000; Retail: 150,000 × $5 = $750,000; Research: 100,000 ×
$5 = $500,000; Consumer: 330,000 × $5 = $1,650,000
AACSB: Analytic
Blooms: Analyze
12-136
119. Charleston has four divisions, commercial, retail, research, and consumer, that share the
each division?
Commercial: $752,000; Retail: $944,000; Research: $324,000; Consumer: $1,580,000
Feedback:
AACSB: Analytic
Blooms: Analyze
12-137
120. Redding has two divisions, Production and Support, that share the common costs of the
company's communications network. The annual common costs are $4,500,000. You have
a. What is the allocation rate for the upcoming year assuming Redding uses the single-rate
method and allocates common costs based on the number of calls? Calculate the costs
b. What is the allocation rate for the upcoming year assuming Redding uses the single-rate
c. The cost accountant determined $2,700,000 of the communication network's costs were
fixed and should be allocated based on the number of calls. The remaining costs should be
allocated based on the time on the network. What is the total communication network costs
allocated to each division?
a. Rate: $12.50/call; Production: $2,500,000; Support: $2,000,000

b. Rate: $5/hour; Production: $1,200,000; Support: $3,300,000
c. Production: $1,981,200; Support: $2,518,800
Feedback: a. Rate: $4,500,000/(200,000 + 160,000) = $12.50/call

Production: 200,000 × $12.50 = $2,500,000; Support: 160,000 × $12.50 = $2,000,000
b. Rate: $4,500,000/(240,000 + 660,000) = $5/hour
Production: 240,000 × $5 = $1,200,000; Support: 660,000 × $5 = $3,300,000
AACSB: Analytic
Blooms: Analyze
12-138
121. Salinas has two divisions, Marketing and Finance, that share the common costs of the
company's communications network. The annual common costs are $2,250,000. You have
a. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate
method and allocates common costs based on the number of calls? Calculate the costs
b. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate
a. Rate: $25/call; Marketing: $1,250,000; Finance: $1,000,000

b. Rate: $5/hour; Marketing: $600,000; Finance: $1,650,000
Feedback: a. Rate: $2,250,000/(50,000 + 40,000) = $25/call

Marketing: 50,000 × $25 = $1,250,000; Finance: 40,000 × $25 = $1,000,000
b. Rate: $2,250,000/(120,000 + 330,000) = $5/hour
Marketing: 120,000 × $5 = $600,000; Finance: 330,000 × $5 = $1,650,000
AACSB: Analytic
Blooms: Analyze
12-139
122. Tofte has two divisions, Research and Sales, that share the common costs of the company's
a. The cost accountant determined $1,350,000 of the communication network's costs were
fixed and should be allocated based on the number of calls. The remaining costs should be
allocated based on the time on the network. What is the total communication network costs
allocated to each division?
a. Research: $990,600; Sales: $1,259,400
Feedback:
AACSB: Analytic
Blooms: Analyze
12-140
123. The Black Swan Company has three client-contact departments: Market Research, Branding,
and Promotion. Each department requires the services of the Legal Department for the
contracts that each undertakes. The size of the Legal Department was based on long-run
estimates of contracts. Information on the Legal Department's budgeted and actual costs is as
follows:
The budget for the Legal Dept is $300,000 + $10/contract. The budgeted volume of contracts is
as follows:
Promotion was 720.
a. If a single charging rate based on budgeted usage is used, how much of the cost of the
Legal Department would be allocated to each of the producing departments?
a. Market Research: $66,150; Branding: $94,500; Promotion: $151,200

b. Market Research: $63,150; Branding: $104,400; Promotion: $147,300
Feedback: a. Rate = [$300,000 + $10 × (300 + 500 + 700)]/(300 + 500 + 700) = $210/contract
Market Research: 315 × $210 = $66,150; Branding: 450 × $210 = $94,500; Promotion: 720 ×
$210 = $151,200
AACSB: Analytic
Blooms: Analyze
12-141
follows:
The budget for the Legal Dept is $200,000 + $7.50/contract. The budgeted volume of contracts
is as follows:
Promotion was 675.

Feedback: a. Rate = [$200,000 + $7.50 × (300 + 500 + 700)]/(300 + 500 + 700) =

$140.833/contract
Market Research: 286 × $140.833 = $40,278; Branding: 450 × $140.833 = $63,375; Promotion:
675 × $140.833 = $95,062
AACSB: Analytic
Blooms: Analyze
12-142
follows:
The budget for the Legal Dept is $400,000 + $15/contract. The budgeted volume of contracts is
as follows:
Promotion was 820.

Feedback: a. Rate = [$400,000 + $15 × (200 + 500 + 800)]/(200 + 500 + 800) =

$281.667/contract
Market Research: 207 × $281.667 = $58,305; Branding: 512 × $281.667 = $144,214;
Promotion: 820 × $281.667 = $230,967
AACSB: Analytic
Blooms: Analyze
12-143
126. Scuderi Corporation has two operating divisions - Inland Division and Coast Division. The
company's Customer Service Department provides services to both divisions. The variable
costs of the Customer Service Department are budgeted at $29 per order. The Customer
Service Department's fixed costs are budgeted at $381,600 for the year. The fixed costs of the
Customer Service Department are determined based on the peak period orders.
At the end of the year, actual Customer Service Department variable costs totaled $219,905
and fixed costs totaled $383,860. The Inland Division had a total of 1,520 orders and the Coast
Division had a total of 5,690 orders for the year.
Required:
a. Prepare a report showing how much of the Customer Service Department's costs should be
b. How much of the actual Customer Service Department costs should not be charged to the
operating divisions at the end of the year? Who should be held responsible for these
uncharged costs?
a. The operating divisions would be charged the following amounts at the end of the year:
b. The uncharged costs are:
Feedback: The spending variance represents the difference between the Customer Service
Department's actual costs and what those costs should have been, given the actual level of
activity. This difference is properly the responsibility of the Customer Service Department and
should not be charged to the operating divisions.
AACSB: Analytic
Blooms: Apply
12-144
Topic Area: Effective Corporate Allocation System
127. Warehouse Services is a service department in the Werner Company, providing storage
service to three operating departments. The company charges the costs of this department to
operating departments on the basis o cubic feet occupied.
Last year, Warehouse Services budgeted variable storage cost of $0.15 per cubic foot
occupied. The budgeted total fixed cost was $120,000, and was determined by the long-term
storage needs of the operating departments. Actual storage space occupied during the year,
along with long-term storage needs of operating departments, is given below:
Actual variable storage costs amounted to $0.16 per cubic foot occupied. Actual fixed storage
costs were $123,000.
Required:
a. Compute the amount of variable storage cost that should be charged to each operating
b. Compute the amount of fixed storage cost that should be charged to each operating
a. Dept X: 160,000 cubic feet × $0.15 per cubic foot = $24,000

Dept Y: 590,000 cubic feet × $0.15 per cubic foot = $88,500
Dept Z: 750,000 cubic feet × $0.15 per cubic foot = $112,500
b. Dept X: 200/1600 × $120,000 = $15,000

Dept Y: 600/1600 × $120,000 = $45,000
Dept Z: 800/1600 × $120,000 = $60,000
AACSB: Analytic
Blooms: Apply
12-145
128. Trenron, Inc. has a maintenance department that provides services to the company's two
operating departments. The variable costs of the maintenance department are charged on the
basis of the number of maintenance hours logged in each department. Last year, budgeted
variable maintenance costs were $8.60 per maintenance hour and actual variable maintenance
costs were $8.75 per maintenance hour.
The budgeted and actual maintenance hours for each operating department for last year
appear below:
Required:
a. Compute the amount of variable maintenance department cost that should have been
charged to each operating department at the end of the year for performance evaluation
purposes.
b. Compute the amount of actual variable maintenance department cost that should not have
been charged to the operating departments at the end of the year for performance evaluation
purposes.
AACSB: Analytic
Blooms: Apply
12-146
129. Leslie Company operates a cafeteria for the benefit of its employees. The company subsidizes
the cafeteria heavily by allowing employees to purchase meals at greatly reduced prices.
Budgeted and actual costs in the cafeteria for the year just ended are as follows:
*Unrecovered cost after deducting amounts received from employees.
Costs of the cafeteria are charged to producing departments on the basis of the number of
employees in these departments. Fixed costs are charged on the basis of the peak-period
number of employees. Data on employees in the company's producing departments follows:
Required:
a. Compute the dollar amount of variable and fixed costs that should be charged to each of the
producing departments at the end of the year for purposes of evaluating performance.
b. Identify the amount, if any, of actual costs that should not be charged to the operating
departments.
a. Variable costs are charged at the budgeted rate of $625 per employee. Fixed costs are
charged in predetermined lump-sum amounts.
b. The remaining amounts of variable and fixed costs are variances that should not be charged:
AACSB: Analytic
12-147
Blooms: Apply
130. The Borders Corporation operates one central plant that has two divisions, the Flashlight
Division and the Night Light Division. The following data apply to the coming budget year.
Assume that practical capacity is used to calculate the allocation rates. Actual usage for the
year by the Flashlight Division was 1,400 hours and by the Night Light Division was 600 hours.
Required:
1. If a single-rate cost-allocation method is used, what amount of operating costs will be
2. If a single-rate cost-allocation method is used, what amount of cost will be allocated to the
Flashlight Division? Assume actual usage is used to allocate operating costs.
3. If a dual-rate cost-allocation method is used, what amount of operating costs will be

budgeted for the Night Light Division?
4. If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the
Night Light Division? Assume budgeted usage is used to allocate fixed operating costs and
actual usage is used to allocate variable operating costs.
1. [(2,000/3,000) x $900,000] + (2,000 x $1,200) = $3,000,000
2. $3,000,000/2,000 x 1,400 = $2,100,000
3. [(500/3,000) x $900,000] + (500 x $1,200) = $750,000
4. [(500/3,000) x $900,000] + (600 x $1,200) = $870,000
AACSB: Analytic
Blooms: Apply
12-148
131. Blaster Drive-In is a fast-food restaurant that sells burgers and hot dogs in a 1950s
environment. The fixed operating costs of the company are $5,000 per month. The controlling
shareholder, interested in product profitability and pricing, wants all costs allocated to either the
burgers or the hot dogs. The following information is provided for the operations of the
company:
Required:
a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual
sales are used as the allocation base for January? For February?
b. Hot dog sales for January and February remained constant. Did the amount of fixed
operating costs allocated to hot dogs also remain constant for January and February? Explain
why or why not. Comment on any other observations.
b. Even though hot dog sales remained constant for both months, the allocation of fixed
operating costs decreased by more than $500. The reason is that fixed overhead costs are
allocated based on actual sales. The dollar amount is fixed, and since burger sales increased,
more of the fixed costs were allocated to the burgers.
Another observation is that burger sales increased by more than 50% from January to
February, while the fixed operating costs assigned to burgers increased by only 16%.
AACSB: Analytic
Blooms: Apply
12-149
132. Cost allocation bases are factors that cost management analysts use to assign indirect costs to
cost objects. Ideally, cost-allocation bases should reflect a cause-and-effect relationship
between resource spending and use. Ideally, an Activity-Based-Costing (ABC. approach will
provide a more accurate and useful accounting for an organization's resources. Recent studies
have found that, in spite of increasing costs and diminishing resources, very few Higher
Education Institutions use the tools and techniques of an ABC cost allocation system to assign
costs to academic departments. While direct costs, such as faculty salaries, are traceable to
individual academic departments or courses, many indirect costs, such as facility use,
computer use, and student support services, are more difficult to assign. In a traditional
approach, many higher education institutions assign such costs based on a single factor, such
as the number of courses taught in the university. (Source: Activity-Based Costing for Higher
Education Institutions, Management Accounting Quarterly, Winter, 2001)
Required:
(a) Explain why the use of a single-cost driver such as the number of courses may result in
inaccurate management information as to the cost of running courses in individual academic
departments.
(b) For each of the indirect costs listed below, identify an appropriate cost-driver that might be
used to allocate costs to determine the cost of offering a single course in an academic
department if an Activity-Based-Costing model were used.
• Computer use
• Facility use
• Student services
• Course design
• Lecturing/class meeting time
• Assignment grading
(a) Using a single cost allocation base to assign costs does not take into account the level of
resources consumed by the cost objects. Some courses may require the use of more
resources, such as computer and lab time. No distinction is made between fixed costs and
variable costs. This method assumes that all courses consume the same activities in the same
proportions; in reality, some programs may be subsidizing others.
(b) Computer use - number of computer hours
Facility use - square footage
Student services - number of students
Course design - number of courses
Class meeting time - number of classroom hours
Grading assignments - number of assignments

AICPA BB: Critical Thinking
Blooms: Apply
12-150
133. Quick Credit Checks produces two styles of credit reports: personal and corporate. The
difference between the two is the amount of background information and data collection
required. The corporate report uses more skilled personnel because additional checking and
data are required. The relevant figures for the year just completed follow: Total support service
costs to be allocated are $3,200,000.
Required:
(a) Which method would be preferred by each manager? Which method would be least
preferred?
(b) Provide arguments that each manager would make for his/her preferred method. How
would each manager argue against his/her least preferred method?
(a) This case points out the arbitrary nature of cost allocation and underscores the fact that no
method will please all of the recipients of allocated costs. In this case the manager of the
individual department would most favor interview hours, where his/her total percentage of the
allocation is only 9%. This manager would least favor number of reports, where the department
would receive a total of 84% of the allocation. The manager of the corporate department would
most favor number of reports, with a 16% total allocation and least favor interview hours, where
over 90% of the cost would be allocated to the corporate department.
(b) Arguments for:
Number of reports: The corporate manager would argue that the final output represents the
cost effort of each department. Since corporate provided far fewer total reports, that
department would receive a relatively small allocation.
Interview hours: The individual manager would argue that interview hours are the most
valuable source of information and that they reflect an appropriate use of his/her department
resources.
Arguments Against:
Number of reports: The individual manager would argue that just because there are more
individual customers generating the reports, the number of reports does not reflect the work
done and cost incurred by each department. The number of reports reflects great productivity
and the department should not be penalized for being productive.
Interview hours: The corporate manager would argue that while his/her department does more
interviewing, that is not a fair reflection of the resources consumed, since the number of
interviews is relatively small, but the hours put into them are extensive. The manager would
argue that other methods of gathering information more appropriately reflect the resource use
of the Department.

AICPA BB: Resource Management
Blooms: Apply
12-151
134. Redder Company has a purchasing department that provides services to two factories located
in Fargo and the other in Custer. Budgeted costs for the purchasing department consist of
$55,000 per year of fixed costs and $8 per purchase order for variable costs. The level of
budgeted fixed costs is determined by the peak-period requirements. The Fargo factory
requires 40% of the peak-period capacity and the Custer factory requires 60%.
During the coming year, 1,800 purchase orders were processed for the Fargo factory and
2,700 purchase orders for the Custer factory.
Required:
Compute the amount of purchasing department cost that should be charged to each factory for
the year.
AACSB: Analytic
Blooms: Apply
12-152
135. Kosek Corporation's Maintenance Department provides services to the company's two
operating departments. The fixed costs of the Maintenance Department are determined based
on the number of cases produced by the operating departments during the peak period. Data
appear below:
Required:
a. Prepare a report showing how much of the Maintenance Department's costs should be
b. How much of the actual Maintenance Department costs should not be charged to the
operating divisions at the end of the year? Who should be held responsible for these
uncharged costs?
a. The operating divisions would be charge the following amounts at the end of the year:
b. The uncharged costs are:
The spending variance represents the difference between the Maintenance Department's
12-153
actual costs and what those costs should have been, given the actual level of activity. This
difference is the responsibility of the Maintenance Department and should not be charged to
the operating divisions.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
136. Describe five advantages of decentralization.
1. Better use of local knowledge; 2. faster response; 3. wiser use of top management's time; 4.
reduction of problems to manageable size, and 5. training, evaluation, and motivation of local
managers.
AACSB: Analytic
Blooms: Remember
137. Describe two disadvantages of decentralization.
One disadvantage is that local managers can make decisions that are not in the best interests
of the organization as a whole. Second, decentralization will create administrative duplication.
AACSB: Analytic
Blooms: Remember
138. Describe the three main elements of a management control system.
1) Delegated decision authority is what decisions a subordinate manager can make in the
name of the organization. 2) Performance evaluation and measurement system: how the
performance of the subordinate manager is to be measured and how the results of the
measurement will be used in evaluation. 3) Compensation and reward systems: how will the
subordinate manager be paid for his/her performance.
AACSB: Analytic
Blooms: Apply
12-154
139. Describe the five basic types of decentralized units in responsibility accounting.
1) Cost Center: responsible for the cost of the activity of a center with a well defined input-
output relationship. 2) Discretionary Cost Center: responsible for the cost of the activity of a
center where the input-output relationship is not well specified. 3) Revenue Center: responsible
for selling a product. 4) Profit Center: has responsibility for both costs and revenues. 5)
Investment Center: has responsibility for costs and revenues (profits) and also the investment
in assets.
AACSB: Analytic
Blooms: Remember
140. Explain the difference between fixed compensation and contingent compensation. Give an
example of each.
Fixed compensation is paid to the manager independent of measured performance. A

manager's salary is an example. Contingent compensation is the amount of compensation that
is paid based on measured performance. Sales commissions would be an example of this.
AACSB: Analytic
Blooms: Remember
12-155
141. Traffic Services Company has recently expanded by acquiring two smaller companies in the
transportation industry. Prior to these acquisitions, Traffic Services used a centralized style of
organization because it was small enough that the top management team was heavily involved
in the day-to-day activities of the firm. Ms. Causeway, the CEO, feels that this style is no longer
suitable for the larger, more diverse organization.
She has hired a consultant to help her and her management team create a new structure
which, when developed on paper, will be described to the affected employees and their inputs
will be sought. Since no one in the company knows much about management styles, Ms.
Causeway felt this would be an efficient way to get the ball rolling, but realized the consultants
would not have the specialized knowledge about her company and the two acquisitions.
One of the first things she feels she will need to do is to explain the benefits of decentralization
that will accrue to both the company and the affected employees.
Required:
Ms. Causeway has asked you, as the consultant, to provide her with a general list of
advantages of decentralization that she will tailor to her company before presenting it to the
executives and other affected employees.
(a) Managers of the organization's subunits are specialists. They have specialized information
that enables them to manage their departments most effectively.
(b) Allowing managers some autonomy in decision making provides managerial training for
future higher-level managers.
(c) Managers with some decision-making authority usually exhibit greater motivation than those
(d) Delegating some decisions to lower-level managers provides time-relief to upper-level
managers, enabling them to devote time to strategic planning.
(e) Empowering employees to make decisions draws on the knowledge and expertise of those
closest to day-to-day operations.
(f) Delegating decision-making to the lowest level possible enables an organization to give a
timely response to opportunities and problems as they arise.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
Difficulty: 3 Hard
12-156
142. Ladue, Inc. has used a decentralized form of organizational structure for the past five years.
The controller, Ms. Trevino, has noticed that some of the divisions are still using fixed assets
that are fully depreciated and that there has been little acquisition activity in these divisions.
Coupled with this are very high ROIs, especially when compared to the other divisions that
seem to have a regular program of disposition and replacement of fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will
review her findings and look into the problem.
Required:
1) What are the potential negative effects of decentralization?

2) Specifically discuss the issues involved in suboptimization.
(1) (a) Managers in a decentralized organization sometimes have a narrow focus on their unit's
performance, rather than the attainment of their organization's overall goals.
(b) As a result of this narrow focus, managers may tend to ignore the consequences of their
actions on the organization's other subunits.
(c) In a decentralized organization, some tasks or services may be duplicated unnecessarily.
(2) The divisions with the high ROI and low replacements of fixed assets are comparing the
returns on potential replacements to their own high ROI and rejecting the replacements
because they do not meet this number. Their fear is that these replacements would reduce
their ROI, a valid concern because the invested capital component of the ROI formula would
increase.
The suboptimization occurs if these replacements meet the company's minimum desired rate of
return on invested capital; it would have been to the overall benefit of the company to acquire
the assets. This is the type of issue addressed by residual income.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
Difficulty: 3 Hard
12-157
143. Ricardo, Inc. is just starting up. The management team has decided from the beginning that
decentralization was the preferred organizational style and has made this clear in all interviews
and discussions with potential employees. Mr. Pangea, the CEO, is unsure about the best way
to evaluate his division managers. He has heard the terms return on investment, residual
income, economic value added, and flexible budgets but wants to know the pros and cons of
each.
Required:
Briefly describe ROI, residual income, EVA, and other approaches to performance evaluation.
Discuss, where appropriate, how to calculate the measure and problem areas in the
development of some of the numbers.
Formulas: ROI = divisional income/divisional invested capital = (divisional income/divisional

sales revenue) times (divisional sales revenue/divisional invested capital).
Residual income = divisional income - (divisional invested capital x imputed interest rate) where
the imputed interest rate is the minimum desired rate of return on invested capital.
EVA = divisional after-tax operating income - (divisional total assets - divisional current
liabilities)(WACC).
All three approaches use invested capital and divisional profit. Invested capital may be
calculated using total assets or total productive assets (which are total assets less current
liabilities) A second issue relates to the method of measuring the invested capital: gross book
value or net book value. One might say that net book value has some advantages because it is
the approach used on the balance sheet and the income statement, but it uses depreciation
methods that are somewhat arbitrary and as time passes the ROI can increase just because
the net book value of the assets declines. Common centrally controlled assets need to be
allocated to the investment centers, e.g. cash, accounts receivable.
Divisional income is measured using the concept of controllability; deciding which items are
controlled by the division manager may not be clear cut.
Alternative approaches include flexible budgets, variance analysis and postaudits of major
investment decisions. While these are more complicated approaches, they help avoid the
myopic problems of the single-period measures such as ROI, RI, and EVA
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
Difficulty: 3 Hard
12-158
144. The manager of a business unit of a large corporation made some projections regarding sales
and profits for the upcoming final quarter of the year. The managers' performance evaluation
and compensation depended significantly on his ability to meet budget goals. The manager
discovered that the final quarter would have to be a particularly good quarter in order to meet
these goals. He decided to implement a sales program offering liberal payment terms in order
to pull some sales that would normally occur next year into the current year. Customers
accepting delivery in the fourth quarter would not have to pay the invoice for 140 days. Also, he
sold some equipment that was not being used and realized a significant profit on the sale.
Required:
Are these actions ethical? Why or why not?
Each of the manager's actions needs to be considered separately:
• Liberal credit terms - OK, a business strategy that should be judged on how it affects the
firm's operations and profits.
• Attempt to pull sales from one period to another - may not be OK. If the purpose of the
change in credit terms is simply to move sales from one period to another, then the result is
misleading financial reports and fraudulent; if the objective is to increase sales through
management of credit policies, then OK.
• Sale of equipment - may be OK, a business decision that should be judged on how it affects
the firm's operations and profits; may not be OK if done just to show a short term gain that
would improve current period profit.
AACSB: Analytic
Blooms: Remember
12-159
145. The controller of one division of a large diversified firm is compensated by salary plus bonus.
The bonus is a significant part of total compensation, and is based directly on the profits of the
division. Thus, the controller has an incentive to find ways to increase profits, including the
delay of discretionary expenses such as research and development, delay of maintenance and
repair of manufacturing equipment, and delay of sales promotions.
Required:
Is finding ways to increase profits as described above unethical? Why or why not? Who is to
blame, if anyone?
Since the actions contemplated by the controller are not in the best interests of the company,
these actions are probably not ethical, and are in conflict with the ethical standard of integrity.
The situation displays both conflict of interests and an attempt to subvert the firm's
performance incentive system.
Both the incentive system and the controller are to blame in this case. While it is not
reasonable to expect that the firm can design a bias-free incentive system, it appears that the
firm has not done an acceptable job of developing a system that will reward performance
based upon the firm's critical success factors, instead of short-term profits only. Improvements
in the incentive scheme are possible and necessary. On the other hand, the controller cannot
be excused for taking advantage of the opportunity to manipulate profits. The standards are
clear on the required professional behavior in this case, and the controller has ignored them for
self-serving purposes.
AACSB: Analytic
Blooms: Remember
12-160
146. The executive vice president of Wicker Pen Company wants to establish an accounting-based
performance measurement system for the company's new plant. The company has an
accounting information system sufficient to support a fairly sophisticated performance
measurement system. The new plant is going to be considered an investment center since its
products will be markedly different from others the company currently sells. The new plant will
have no internal dealings with other plants within the company.
Required:
What are some of the key steps that should be undertaken in the establishment of an
accounting-based performance measurement system?
Key steps include:
1. Choose performance measures that align with top management's financial goals for the
plant.
They would include those that relate to the plant as an investment center.
2. Choose the time horizon of each performance measure in step 1.
3. Choose a definition of the components in each performance measure in step 1. For
example, how should investment be defined?
4. Choose a measurement alternative for each performance measure in step 1. For example,
should historical cost or current cost be used to measure investment?
5. Choose a target level of performance.
6. Choose the timing of feedback.

Blooms: Remember
12-161
147. The fixed costs of operating the maintenance facility of General Hospital are $4,500,000
annually. Variable costs are incurred at the rate of $30 per maintenance-hour. The facility
averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for 20X3 are
as follows:
Assume that budgeted maintenance-hours are used to calculate the allocation rates.
Required:
a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be

b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be
allocated to each department based on actual usage? Based on budgeted usage?
c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be
d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be
allocated to each department based on actual usage? Based on budgeted usage for fixed
operating costs and actual usage for variable operating costs?
a.
Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000
Single rate = $5,700,000/40,000 mh = $142.50 per maintenance-hour
Single-rate budgeted amounts:
b.
Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000
Single rate = $5,700,000/40,000 mh = $142.50 per maintenance-hour
Single-rate allocated amounts:
c. Dual-rate budgeted amounts:
12-162
d. Dual-rate allocated amounts:
12-163
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
12-164
148. The Alex Miller Corporation operates one central plant that has two divisions, the Lamp
Division and the Flashlight Division. The following data apply to the coming budget year:
Budgeted costs of the operating the plant for 10,000 to 20,000 hours:
Budgeted long-run usage per year:
Assume that practical capacity is used to calculate the allocation rates. Further assume that
actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for
the month of June.
Required:
a. If a single-rate cost-allocation method is used, what amount of operating costs will be

budgeted for the Lamp Division each month? For the Flashlight Division each month?
b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost
will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is
used to allocate operating costs.
c. If a dual-rate cost-allocation method is used, what amount of operating costs will be

budgeted for the Lamp Division each month? For the Flashlight Division each month?
d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will
be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used
to allocate fixed operating costs and actual usage is used to allocate variable operating costs.
12-165
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
149. There are five common types of responsibility centers listed below.
Required:
Briefly describe each of the following terms and provide an example of each term.
(a) Cost Center

(b) Discretionary Cost Center
(c) Revenue Center
(d) Profit Center
(e) Investment Center
(a) Cost center: an organizational subunit whose manager is responsible for the cost of an
activity for which a well-defined relationship exists between inputs and outputs. Production
department in a manufacturing firm; check processing department in a bank; laundry,
laboratory, food service department in a hospital.
(b) Discretionary cost center: an organizational subunit whose manager is held accountable for
costs, but the subunit's input-output relationship is not well specified. Administrative and
marketing departments such as legal, accounting, research and development, advertising.
(c) Revenue center: an organizational subunit whose manager is held accountable for the
revenue attributed to the subunit. Reservations department of an airline; sales department of a
manufacturer.
(d) Profit center: an organizational subunit whose manager is held accountable for profit—both
revenues and expenses attributed to the subunit. Company-owned restaurant in a fast-food
chain.
(e) Investment center: an organizational subunit whose manager is held accountable for the
subunit's profit and the invested capital used by the subunit to generate its profit. Divisions of a
large corporation.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
12-166
150. The order entry department of Ahura Associated Industries is considering improvements in the
order entry process, which includes preparing quotations based on customers' requests (via
the sales representative) and processing orders received from customers.
A typical sequence of events might begin with a sales representative meeting with a customer
to discuss the type of system desired. The sales representative then fills out a paper form and
faxes it or phones it in to an order entry associate, who might make several subsequent phone
calls to the sales representative, the potential customer, or the manufacturing department to
prepare the quote properly. These phone calls deal with such questions as exchangeability of
parts, part numbers, current prices for parts, or allowable sales discounts. Order entry staff
then keys in the configuration of the desired system, including part numbers, and informs the
sales representative of the quoted price. Each quote is assigned a quotation number. To
smooth production, manufacturing often produces systems with standard configurations in
anticipation of obtaining orders from recent quotes for systems. The systems usually involve
adding on special features to the standard configuration. Production in advance of orders
sometimes results in duplication in manufacturing, however, because customers often fail to
put the assigned quotation numbers on their orders. When order entry receives an order, the
information on the order is reentered into the computer to produce an order acknowledgement.
This order acknowledgement is sent to the manufacturing department, which produces the
system ordered by customer. When the order acknowledgement is sent to the invoicing
department, the information is reviewed again to generate an invoice to send to the customer.
Domingo Perez, the order entry manager, has received many complaints from the order entry
department's internal customers regarding quality and timeliness problems, and is considering
ways to improve the efficiency and quality of the order entry process.
Required:
(a) Develop some indicators that Perez could use to assess the performance of the order entry
process.
(b) List four possible errors that might be found in the quote and/or the order acknowledgement
(i.e., the outputs of the order entry process).
(c) What do you think are the likely causes of delays and quality problems?
(a) Perez could use several indicators to assess the quality of the order entry process in this
company. Examples include: number of errors, percentage of errors (number of order
acknowledgements with errors divided by total number of order acknowledgements), number of
change orders, change order costs, total quality costs.
(b) Errors that can be found on either of the two output documents:
• Incorrect part number(s)

• More than one part number when only one is required
• Missing part number(s)
• Incorrect sales tax calculation
• Errors that can be found on the order acknowledgement:
• Incorrect business unit code
• Freight terms missing
• Incorrect shipping or billing address
• Credit approval missing
• There are several possible causes of the errors:
• Incomplete/incorrect information provided by the sales representative
• Order entry staff not having updated information from marketing regarding prices, discounts,
etc.
• Incorrect entry of order by staff
12-167
(c) Causes of delays and quality problems include:
• Lack of proper communication between sales and production regarding special orders
• The primary cause is poor communication.

Blooms: Apply
Difficulty: 3 Hard
12-168

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True / False Questions

6. One advantage of decentralization is faster response time to changes in the organization's

Multiple Choice Questions

22. Decentralizationrefers to the delegation of decision-making authority to:

23. Which of the following is not a characteristic of a decentralized organization?

A. Better use of local knowledge.

A. The U.S. military is a good example of an organization that is highly decentralized.

A. Delegated decision authority.

26. An operating unit of an organization is called a cost center if it is responsible:

A. only for costs.

27. An operating unit of an organization is called an investment center if it is responsible:

A. only for costs.

28. An operating unit of an organization is called a revenue center if it is responsible:

A. only for costs.

29. An operating unit of an organization is called a profit center if it is responsible:

A. only for costs.

A. standard cost center

A. standard cost center

37. Controllable revenue is included in a performance report of a:

38. Controllable revenue is included in a performance report of a:

40. Assets invested in a responsibility center are included in a performance report of a:

A. all items over which they have decision-making authority.

A. compare managers to other comparable managers.

46. Which of the following statements is (are) true regarding compensation?

A. separated into their fixed and variable components.

A. use investment centers to evaluate top managers.

51. Which of the following is not an internal control?

A. Rotating personnel among tasks.

52. Internal controls include all of the following except:

A. using contingent compensation plans.

A. direct materials and direct labor only.

A. top management reports are more detailed.

A. More effective solutions to operational problems.

A. To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar

86. Which of the following three statements are correct?

I. A profit center has control over both cost and revenue.

94. Which of the following is not a cost of decentralization?

95. Which of the following is considered a responsibility center?

96. Which of the following departments would not be a cost center?

A. County fire department

A. Contribution Margin of $175,000.

100.Which of the following subunits is most likely to be considered an investment center?

101.Cost allocation of shared facilities cost is intended to remind managers of:

A. The cost of using a shared resource.

A. can bear the cost.

A. actual total cost.

A. service and not-for-profit industries.

105.Which of the following is not one of the objectives of cost allocation?

A. Motivate managers to exert a high-level of effort.

a. a single rate based on time used.

a. a single rate based on time used.

a. a single rate based on time used.

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):

Required (use three decimal places in your calculations):