Deck 10: Management Control in Decentralized Organizations

Question 1

In designing accounting control systems, top managers must consider the system's impact on behavior desired by the organization.

Answer 1

True

Question 2

Decentralization is more popular in nonprofit organizations than it is in profit-seeking organizations.

Answer 2

False

Question 3

Performance-based rewards can be informal.

Answer 3

True

Question 4

Managers tend to focus their efforts in areas where performance is measured and where their performance affects rewards.

Question 5

The more subjective the measures of performance, the more likely managers will exert effort.

Question 6

The increasing sophistication of telecommunications aids decentralization.

Question 7

Some level of decentralization creates benefits for most organizations.

Question 8

There are really no advantages to a centralized company.

Question 9

Profit centers can exist only in a decentralized organization.

Question 10

If segments do much buying from the same outside suppliers, they are candidates for heavier decentralization.

Question 11

According to agency theory, employment contracts will trade off the following three factors: risk, incentive, and the cost of measuring performance.

Question 12

The lower in the organization that the freedom to make decisions exists, the greater the centralization.

Question 13

Decentralization is the delegation of freedom to make decisions.

Question 14

Managers in decentralized units may waste time negotiating with other units about goods or services one unit provides to the other.

Question 15

Incentives do not enhance managerial effort toward goal congruence.

Question 16

Accounting measures provide relatively subjective evaluations of performance.

Question 17

The costs of accumulating and processing information frequently decline under centralization.

Question 18

Higher-level managers have the best information concerning local conditions.

Question 19

Decentralization is most successful when an organization's segments are relatively independent of one another.

Question 20

All control systems are imperfect.

Question 21

Usually, perfect measurement of a manager's performance is worth its cost.

Question 22

ROI = return on sales / capital turnover.

Question 23

The income percentage of revenue is determined by multiplying return on investment by the capital turnover.

Question 24

Capital turnover = revenue / invested capital

Question 25

The amount of income generated by the investment is a better test of profitability than the return on investment.

Question 26

In all ROI calculations, invested capital should be measured as an average for the period under review.

Question 27

EVA = adjusted after-tax operating income - cost of invested capital - a percentage x adjusted average invested capital).

Question 28

The greater the influence of noncontrollable factors on responsibility center results, the more problems there are in using the results to represent a manager's performance.

Question 29

ROI tells us how much a company's after-tax operating income exceeds what it is paying for capital.

Question 30

ROI = income or profit) / investment.

Question 31

Capital turnover can be increased by decreasing investment.

Question 32

Rewards may be nonmonetary.

Question 33

Increasing capital turnover is one of the advantages of implementing the JIT philosophy.

Question 34

Return on sales can be increased by increasing expenses.

Question 35

Cost of capital is the company's cost of capital multiplied by the amount of the investment.

Question 36

Companies must pay managers more if the managers bear more risk, assuming the managers are risk averse.

Question 37

Return on sales = revenue / income.

Question 38

EVA usually uses after-tax numbers.

Question 39

EVA companies look upon R&D as a capital investment, and not immediately expensed.

Question 40

A larger bonus portion compared with the guaranteed portion of a contract creates more incentive.

Question 41

In general, use of economic profit or EVA will promote goal congruence and lead to better decisions than use of ROI.

Question 42

In measuring the performance of a division manager, stockholders' equity should not be used as the amount of invested capital.

Question 43

Most companies use economic profit in evaluating projects, not ROI.

Question 44

The transfer price is revenue to the acquiring segment, and it is a cost to the segment producing the product or service.

Question 45

A major reason for transfer pricing is to communicate data that will lead to goal-congruent decisions.

Question 46

The historical-cost system may be superior for the nonroutine evaluation of performance.

Question 47

Net asset value promotes a more conservative approach to asset replacement as compared with gross book value.

Question 48

The rate of return on net book value decreases as the equipment ages.

Question 49

Possible definitions of invested capital include total assets employed and stockholders' equity.

Question 50

The rate of return on gross book value will not change if operating income remains constant.

Question 51

Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and tariffs.

Question 52

In measuring income, either the net book value or the gross book value can be used.

Question 53

In general, for companies using ROI, the most profitable divisions have more incentive to invest in new projects than do the least profitable divisions.

Question 54

Transfer prices are the amounts charged by one segment of an organization for a product or service that it supplies to an outside firm.

Question 55

The proponents of gross book value maintain that it facilitates comparisons between years and between plants or divisions.

Question 56

When a company measures performance using economic profit, managers tend to invest in any project earning more than the cost of capital and, thus, raise the firm's total profits.

Question 57

There is no perfect transfer pricing system.

Question 58

Historical costs may be subjective.

Question 59

When companies maximize economic profit, they are maximizing their rate of return a percentage.

Question 60

Managers evaluated using net book value will tend to replace assets sooner than will those managers in firms using gross book value.

Question 61

Generally, the transfer price = outlay cost + opportunity cost.

Question 62

Dysfunctional behavior is action taken in conflict with organizational goals.

Question 63

Income taxes rarely influence the setting of transfer prices.

Question 64

It is recommended that budgeted or standard costs be used instead of actual costs for cost-based transfer prices.

Question 65

The time and effort spent negotiating a transfer price between a company's divisions add nothing directly to the profits of the company.

Question 66

United States' multinational companies must use a transfer price that one division would pay another if they were independent companies.

Question 67

If using actual costs for cost-based transfer pricing, the supplying division lacks incentive to control its costs.

Question 68

Companies will not be harmed if they overemphasize meeting a budget when evaluating managers.

Question 69

A full-cost or full-cost plus profit transfer price would potentially create dysfunctional behavior.

Question 70

When a division has idle production capacity, variable cost is the transfer price that leads to optimal decision making.

Question 71

A management by objectives approach stresses budgeted results.

Question 72

Outlay cost is often the variable cost for producing the item transferred.

Question 73

In cases of constrained capacity, the opportunity cost is zero.

Question 74

A drawback to market-based prices is that in an imperfectly competitive market, the price of one division has to pay to buy an item may be less than the amount another division gets for selling the same item.

Question 75

Opportunity cost is the minimum contribution to profit that the selling segment forgoes by transferring the item internally.

Question 76

When the selling division cannot sell an item on the external market, using either a market-based or cost-based transfer for the item can lead to dysfunctional decisions.

Question 77

Low transfer prices generally lead to low import duties.

Question 78

If there is a competitive market for the product or service being transferred internally, using the cost-based price as a transfer price will generally lead to the desired goal congruence and managerial effort.

Question 79

With no opportunity cost, using the market price as a transfer price will not create dysfunctional decisions.

Question 80

Top managers who wish to encourage decentralization will often make sure that both production and purchasing division managers understand all the facts and then allow the managers to negotiate a transfer price.