Deck 10: Capital Budgeting

Question 1

If a cost is a traceable fixed cost at one level, it will remain a traceable cost at a lower level.

Answer 1

False
Costs that were traceable fixed costs at one level may become a common fixed cost at a lower level,

Question 2

An investment center manager's performance is typically measured based on the unit's overall profit compared to the flexible budget.

Answer 2

False
An investment center manager's performance is typically measured based on measures such as return on investment or residual income,

Question 3

A cost center manager's performance is measured largely by comparing the actual costs incurred to the flexible budget.

Answer 3

True

Question 4

A profit center manager's performance is measured using methods such as return on investment or residual income.

Question 5

A segment of an organization is any part of the organization that management wishes to evaluate.

Question 6

In preparing a segment margin income statement, instead of looking for a certain phrase that describes the cost, look for the reason the cost was incurred.

Question 7

A segment margin income statement includes all allocated costs in the calculation of the segment margin.

Question 8

Generally accepted accounting principles require companies to report selected information about operating segments in the annual report.

Question 9

Although a profit center is expected to generate profits, not just revenues or costs, the manager cannot commit funds to invest in assets.

Question 10

After an organization implements a certain level of decentralization, it is committed to maintaining that level for the life of the organization.

Question 11

The goal of the cost center manager is to minimize total costs and to maximize profit.

Question 12

Net income after interest and taxes is a common income measurement choice used to calculate ROI for an entire organization, because all expenses are under the CEO's control at the corporate level.

Question 13

Return on investment measures the rate of return generated by an investment in assets.

Question 14

An organizational structure in which decision-making authority for the entire organization rests in the hands of one person or a small group of people in a single location is called centralization.

Question 15

An organizational structure in which decision-making authority for the entire organization rests in the hands of one person or a small group of people in a single location is called decentralization.

Question 16

You cannot classify a unit as a cost, profit, or investment center by looking at its name or its location on the organizational chart.

Question 17

A disadvantage of decentralized decision-making is that two or more operational managers may evaluate and make the same decision, duplicating their efforts.

Question 18

If a cost was incurred to support the company as a whole, then it is a common cost.

Question 19

A manager who is responsible for both the revenue and the costs incurred in generating a product is managing an investment center.

Question 20

A disadvantage of decentralization is that the process does not give lower-level managers practice in developing their decision-making skills.

Question 21

The organizational structure in which decision-making authority for the entire organization rests in the hands of one person or a small group of people in a single location is called

A)responsibility centered.
B)centralization.
C)decentralization.
D)segmentation.

Question 22

ABC Corporation has three divisions, a service division with two locations, a retail division with four locations, and a home office, each of which is evaluated individually.This is an example of which type of organization?

A)Segmented decision-making
B)Decentralization
C)Centralization
D)Investment center

Question 23

Which of the following is an advantage of decentralization?

A)Duplication of effort is minimized.
B)The potential for sharing ideas throughout the organization is enhanced.
C)Lower-level managers understand the company's strategies and goals, and thus make decisions that are in the best interest of the organization as a whole.
D)Top management is free to focus on the long-term strategies of the organization.

Question 24

Return on investment is based on the fair market value of operating assets.

Question 25

Finance theory says that the rate of return required by creditors is the same as the return required by investors.

Question 26

ROI is a relative measure of return, in other words, the result is a dollar amount of return.

Question 27

Which of the following would not be a focus of top managers in a decentralized organizational structure?

A)Long-range projections
B)Corporate goals
C)Day-to-day operational issues
D)All of these answer choices would be focuses of top management.

Question 28

If you think of an organization's structure as a continuum, on the centralized end of the continuum, operational managers

A)are never evaluated.
B)are evaluated on costs, revenue, and profit.
C)have complete control over operational decisions.
D)have no authority to make decisions.

Question 29

In calculating EVA, invested capital is the company's total assets minus its total liabilities.

Question 30

If you think of an organization's structure as a continuum, on the decentralized end of the continuum, operational managers

A)are never evaluated.
B)are evaluated on costs and revenue.
C)have complete control over operational decisions.
D)have limited authority to make decisions.

Question 31

For a small business producing a single product, having one location and few employees, the organizational structure that is most appropriate is

A)centralized.
B)decentralized.
C)divisional stability.
D)segmented decision-making.

Question 32

Which of the following is an advantage of decentralization?

A)Managers at the upper level of the organization have the best knowledge of the actual day-to-day operations.
B)Companies can develop their own managers internally by giving lower-level managers practice in developing their decision-making skills.
C)Lower management focus on the long-term strategies of the organization.
D)The is little or no duplication of efforts.

Question 33

As long as EVA is positive, the firm's managers have used the invested capital to create additional value for shareholders.

Question 34

The organizational structure in which decision-making authority is dispersed throughout the organization is called

A)Centralized.
B)Decentralized.
C)Divisional stability.
D)Segmented decision-making.

Question 35

Although managers' actions may improve ROI in the short run, they may do so at the expense of the company's long-term financial health.

Question 36

The most common measure used as the denominator in the ROI calculation is a simple average of the assets used during the year.

Question 37

The ROI formula decomposed into two components, margin and asset turnover, is referred to as the Deaumon Model.

Question 38

Which of the following would not be an advantage of decentralization?

A)Duplication of effort is minimized.
B)Companies can develop their own managers internally by giving lower-level managers practice in developing their decision-making skills.
C)Top management is free to focus on the long-term strategies of the organization.
D)All of these answer choices are advantages of decentralization.

Question 39

Just because a project's residual income is positive, does not mean that it is earning a return in excess of the corporate minimum.

Question 40

The DuPont Model decomposes the original ROI formula into two components: margin and asset turnover.

Question 41

A disadvantage of decentralization is that

A)if lower-level managers do not understand the company's strategies and goals, they may make decisions that are not in the best interest of the organization as a whole.
B)two or more operational managers may evaluate and make the same decision, duplicating their efforts.
C)managers tend to focus on their own units and often lose contact with others in the organization.
D)All of these answer choices are correct.

Question 42

The accounting department of a large corporation is classified as a

A)cost center.
B)profit center.
C)investment center.
D)segment.

Question 43

A manager of a profit center cannot

A)incur cost to operate the center.
B)set the selling price of the center's product.
C)commit funds to invest in assets.
D)control the center for which he or she is responsible.

Question 44

In a responsibility accounting environment, which of the following managers is considered to have the broadest responsibility?

A)Cost center manager
B)Profit center manager
C)Investment center manager
D)Revenue center manager

Question 45

The manager of which of the following responsibility centers is expected to invest in assets that generate profit?

A)Cost center
B)Revenue center
C)Profit center
D)Investment center

Question 46

In a responsibility accounting environment, which of the following is not a classification of organizational units?

A)Cost centers
B)Revenue centers
C)Profit centers
D)Investment centers

Question 47

An investment center manager's performance can be based on

A)the same methods as managers of cost centers.
B)the same methods as managers of profit centers.
C)residual income.
D)All of these answer choices are correct.

Question 48

A manager who is responsible for both the revenue and the costs incurred in generating a product or service is managing

A)a cost center.
B)a product center.
C)a profit center.
D)an investment center.

Question 49

A cost center manager's performance might be measured by

A)the center's ROI.
B)direct material variances.
C)segment profit.
D)its return on invested assets.

Question 50

An investment center manager's performance is more thoroughly based on

A)the same methods as managers of cost centers.
B)a comparison with the flexible budget.
C)an evaluation of the return on invested assets.
D)profitability.

Question 51

In a responsibility accounting environment, upper managers evaluate the performance of the unit managers based

A)on those items over which the unit managers have control.
B)not only on costs, but also on revenues.
C)on the overall profit of the organization.
D)on their units' operations and an allocated share of common costs.

Question 52

Which of the following is a reason why top managers would decide to increase the level of decentralized decision-making authority in their company?

A)Managers at the operational level can respond to issues more quickly than top management.
B)Top managers want to have input into day-to-day operations.
C)Managers at the operational level need constant supervision.
D)Top managers have too many tasks to complete so they prefer to allocate some to operational level managers.

Question 53

On an organizational chart, from bottom to top, which of the following is the order of responsibility centers?

A)Cost, profit, investment
B)Cost, investment, profit
C)Profit, cost, investment
D)Profit, investment, cost

Question 54

At Devoe Manufacturing, the Southern Division is responsible for the production and selling of products in fifteen states.This division is an example of which of the following responsibility centers?

A)Cost center
B)Revenue center
C)Profit center
D)Investment center

Question 55

The packaging department in a large manufacturing company is classified as a

A)cost center.
B)profit center.
C)investment center.
D)segment.

Question 56

At Devoe Manufacturing, the vice-president of the Southern Division is responsible for the production and selling of products in fifteen states as well as securing the productive assets needed to create the product.This division is an example of which of the following responsibility centers?

A)Cost center
B)Revenue center
C)Profit center
D)Investment center

Question 57

A disadvantage of decentralization is that decision-making is spread throughout the organization.This is a disadvantage because

A)managers tend to focus on interacting with others in the organization.
B)the potential for sharing ideas throughout the organization is increased.
C)lower-level managers may not fully understand the ramifications of their localized decisions on the organization as a whole.
D)lower-level managers are often not trained well enough to run operations.

Question 58

A profit center manager's performance is typically measured based on the unit's

A)direct material and direct labor variances only.
B)overall profit compared to the flexible budget.
C)ROI.
D)costs incurred.

Question 59

An organizational unit whose manager is responsible only for the expenses incurred in the unit is referred to as a

A)expense center.
B)cost center.
C)product center.
D)manufacturing center.

Question 60

In a responsibility accounting environment, which of the following managers has his or her performance typically measured based on the unit's overall profit compared to the flexible budget?

A)Cost center manager
B)Profit center manager
C)Investment center manager
D)Revenue center manager

Question 61

Traceable fixed costs are the responsibility of

A)top management only.
B)managers who control them.
C)investment center managers only.
D)all centers within a company.

Question 62

City Retail sells two products: Standard and Deluxe.The company had sales of $800,000 during the current year.The company's contribution margin ratio was 40% and total fixed costs totaled $300,000.Sales were $600,000 for Standard and $200,000 for Deluxe.Traceable fixed costs were $150,000 for Standard and $90,000 for Deluxe.Variable costs were $360,000 for Standard and $120,000 for Deluxe.What is the segment margin for the Deluxe product?

A)($10,000)
B)$10,000
C)$20,000
D)$80,000

Question 63

City Retail sells two products: Standard and Deluxe.The company had sales of $800,000 during the current year.The company's contribution margin ratio was 40% and total fixed costs totaled $300,000.Sales were $600,000 for Standard and $200,000 for Deluxe.Traceable fixed costs were $150,000 for Standard and $90,000 for Deluxe.Variable costs were $360,000 for Standard and $120,000 for Deluxe.What is the segment margin for the Standard product?

A)$20,000
B)$80,000
C)$90,000
D)$240,000

Question 64

Which of the following items would not appear on a segment margin income statement?

A)Direct material
B)Traceable fixed costs
C)Selling expense
D)Common fixed costs

Question 65

When does a traceable fixed cost become a common cost?

A)When it is at a lower level than where it is incurred
B)When it is at a higher level than where it is incurred
C)A traceable fixed cost is always a common cost at another level
D)A traceable fixed cost is never a common cost at another level

Question 66

Segment margin income statements are most useful to managers when they are prepared

A)on a cash basis.
B)using a segment contribution margin basis.
C)on a GAAP basis.
D)based on function.

Question 67

Kimble Industries' production division reported a net operating loss of $500,000 in 2021.Included in that amount were common fixed corporate expenses of $720,000 that were allocated to divisions based on segment gross profit.The division's segment margin was

A)$220,000.
B)$500,000.
C)($220,000).
D)($500,000).

Question 68

Common fixed costs are most likely the responsibility of

A)top management only.
B)managers who have no control of them.
C)investment center managers only.
D)cost center managers only.

Question 69

Any part of an organization that management wishes to evaluate is referred to as a

A)department.
B)segment.
C)factory.
D)center.

Question 70

Which of the following terms is not used in referring to costs for which managers cannot control in calculating segment margin?

A)Allocated cost
B)Unavoidable cost
C)Traceable cost
D)Common costs

Question 71

The segment margin income statement excludes

A)all allocated costs in the calculation of the segment margin.
B)all fixed costs.
C)all period costs.
D)non-cash expenses.

Question 72

What a company really need to best measure a segment's performance is an income statement that highlights

A)variable versus fixed costs.
B)product versus period costs.
C)all elements under the segment manager's control.
D)all revenues and expenses.

Question 73

Which of the following terms are used in referring to common costs?

A)Allocated cost
B)Avoidable costs
C)Fixed costs
D)Discretionary

Question 74

An income statement presented in a functional format is not very helpful in managerial decision-making because it does not show which expenses are

A)fixed and which are variable.
B)direct and which are indirect.
C)product costs and which are period costs.
D)common and which are allocated.

Question 75

Generally Accepted Accounting Principles (GAAP) require companies to report

A)selected information about operating segments in the annual report.
B)financial statements using a cash basis.
C)information based on responsibility centers.
D)information in a segment margin format.

Question 76

If a cost is incurred to support the company as a whole, it is referred to as a

A)a common cost.
B)a traceable cost.
C)a direct cost.
D)an allowable cost.

Question 77

If a cost is incurred specifically for a segment of an organization, it is referred to as

A)a common cost.
B)a traceable cost.
C)an allocated cost.
D)an unavoidable cost.

Question 78

In a centralized organization, decision-making authority

A)is spread throughout the organization.
B)always rests with profit center managers.
C)rests with a small group of managers in a single location.
D)is broader at the bottom of the organizational chart.

Question 79

A segment margin income statement excludes all ________ costs in the calculation of the segment margin.

A)selling
B)traceable
C)fixed
D)allocated

Question 80

One thing that is missing from GAAP-based segment reporting is a breakdown of

A)product and period costs.
B)cost of goods sold and operating costs.
C)variable and fixed costs.
D)gross margin and net income.