Deck 24: Performance Measurement and Responsibility Accounting

Question 1

Direct expenses require allocation across departments because they cannot be readily traced to one department.

Answer 1

False

Question 2

Investment center is another name for profit center.

Answer 2

False

Question 3

Indirect expenses are allocated to departments based upon the benefits received by each department.

Answer 3

True

Question 4

Product lines are often evaluated as profit centers.

Question 5

A selling department is usually evaluated as a profit center.

Question 6

Direct expenses are incurred for the joint benefit of more than one department; they cannot be readily traced to only one department.

Question 7

The concepts of direct expenses and uncontrollable costs are essentially the same; also, indirect expenses and controllable costs are essentially the same.

Question 8

Direct expenses are costs readily traced to a department because they are incurred for that department's sole benefit.

Question 9

Indirect expenses are incurred for the joint benefit of more than one department; they cannot be readily traced to only one department.

Question 10

Advertising expense can be reasonably allocated to departments on the basis of each department's proportion of sales.

Question 11

Profit center managers are evaluated on their ability to generate revenues in excess of costs.

Question 12

A department can never be considered to be a profit center.

Question 13

Departmental information is usually distributed to the public as part of the company's annual report and footnotes.

Question 14

A cost center does not directly generate revenues.

Question 15

Departmental salary expenses are direct expenses of that department.

Question 16

A profit center generates revenue, incurs costs, and has the authority to make significant investing decisions.

Question 17

The number of hours that a department uses equipment and machinery is a reasonable basis for allocating depreciation.

Question 18

Evaluation of the performance of an investment center involves only financial measures.

Question 19

Cost center managers are evaluated on their success in controlling costs compared to budgeted costs.

Question 20

Investment center managers are evaluated on their use of investment center assets to generate income.

Question 21

Departmental income statements are prepared for operating departments (profit centers) but not service departments (cost centers).

Question 22

A useful measure used to evaluate the performance of an investment center is investment center residual income.

Question 23

No standard rule identifies the best basis of allocating expenses across departments, so it is impossible to allocate costs in a manner that will be perceived as fair.

Question 24

Joint costs can be allocated either using a physical basis or a value basis.

Question 25

Departmental contribution to overhead is the amount of sales for that department, less its direct expenses.

Question 26

Investment center managers are typically evaluated using performance measures that combine income and assets.

Question 27

A department's direct expenses are usually considered uncontrollable costs.

Question 28

A joint cost of producing two products can be allocated between those products on the basis of the relative physical quantities of each product produced.

Question 29

Return on investment is a useful measure to evaluate the performance of a cost center manager.

Question 30

The process of preparing departmental income statements begins with allocating service department expenses.

Question 31

No standard rule identifies the best basis of allocating expenses across departments.

Question 32

Allocating costs to service departments involves accumulating revenues and direct expenses, allocating indirect expenses, and preparing the department income statement.

Question 33

An example of a controllable cost is equipment depreciation expense.

Question 34

An example of a service department is the human resources department.

Question 35

Departmental income statements are prepared for service departments but not operating departments.

Question 36

Joint costs are costs incurred in producing or purchasing a single product.

Question 37

Since service departments do not generate revenues, it is unnecessary to accumulate and allocate their costs.

Question 38

In producing oat bran, the joint cost of milling the oats into bran, oatmeal, and animal feed is considered a direct cost to the oat bran, because the oat bran cannot be produced without incurring the joint cost.

Question 39

A responsibility accounting performance report usually compares actual costs to budgeted costs amounts by management level.

Question 40

Measures used to evaluate the manager of an investment center include investment turnover and profit margin.

Question 41

Expenses that are easily traced and assigned to a specific department because they are incurred for the sole benefit of that department are called:

A) Uncontrollable expenses.
B) Direct expenses.
C) Fixed expenses.
D) Indirect expenses.
E) Controllable expenses.

Question 42

A company has two departments, Y and Z that incur delivery expenses. An analysis of the total delivery expense of $9,000 indicates that Dept. Y had a direct expense of $1,000 for deliveries and Dept. Z had no direct expense. The indirect expenses are $8,000. The analysis also indicates that 40% of regular delivery requests originate in Dept. Y and 60% originate in Dept. Z. Departmental delivery expenses for Dept. Y and Dept. Z, respectively, are:

A) $5,500; $3,500.
B) $4,500; $4,500.
C) $4,200; $4,800.
D) $5,400; $3,600.
E) $4,800; $4,200.

Question 43

Departmental contribution to overhead is the same as gross profit generated by that department.

Question 44

Costs that the manager has the power to determine or at least significantly affect are called:

A) Direct costs.
B) Joint costs.
C) Controllable costs.
D) Uncontrollable costs.
E) Indirect costs.

Question 45

Decentralization refers to companies that have multiple locations.

Question 46

The most useful allocation basis for the departmental costs of an advertising campaign for a storewide sale is likely to be:

A) An equal amount of cost for each department.
B) Relative number of items each department had on sale.
C) Proportion of sales of each department.
D) Floor space of each department.
E) Number of customers to enter each department.

Question 47

An expense that is readily traced to a department because it is incurred for that department's sole benefit is a(n):

A) Administrative expense.
B) Common expense.
C) Recurring expense.
D) Indirect expense.
E) Direct expense.

Question 48

A unit of a business that generates revenues and incurs costs is called a:

A) Expense center.
B) Responsibility center.
C) Profit center.
D) Performance center.
E) Cost center.

Question 49

Which of the following is not a step in creating operating department income statements?

A) Allocate indirect expenses across departments.
B) Allocate service department expenses to operating departments.
C) Prepare the departmental income statements.
D) Accumulate revenues and direct expenses by department.
E) Eliminate the uncontrollable costs for each department.

Question 50

A department that incurs costs without directly generating revenues is a:

A) Profit center.
B) Production center.
C) Cost center.
D) Service center.
E) Performance center.

Question 51

The type of department that generates revenues and incurs costs, and its manager is responsible for the investments made in operating assets is called a(n):

A) Cost center
B) Service department
C) Responsibility center
D) Investment center
E) Profit center

Question 52

Regardless of the system used in departmental cost analysis:

A) Direct costs are allocated, indirect costs are not.
B) Indirect costs are allocated, direct costs are not.
C) Neither direct nor indirect costs are allocated.
D) Total departmental costs will always be the same.
E) Both direct and indirect costs are allocated.

Question 53

The difference between a profit center and an investment center is

A) An investment center is responsible for investments made in operating assets.
B) An investment center provides services to profit centers.
C) An investment center incurs costs, but does not directly generate revenues.
D) An investment center incurs no costs but does generate revenues.
E) There is no difference; investment center and profit center are synonymous.

Question 54

A company has two departments, Y and Z that incur wage expenses. An analysis of the total wage expense of $19,000 indicates that Dept. Y had a direct wage expense of $2,000 and Dept. Z had a direct wage expense of $3,500. The remaining expenses are indirect and analysis indicates they should be allocated evenly between the two departments. Departmental wage expenses for Dept. Y and Dept. Z, respectively, are:

A) $9,500; $9,500.
B) $6,750; $6,750.
C) $8,750; $10,250.
D) $10,250; $8,750.
E) $2,000; $3,500.

Question 55

The salaries of employees who spend all their time working in one department are:

A) Indirect expenses.
B) Unavoidable expenses.
C) Direct expenses.
D) Variable expenses.
E) Responsibility expenses.

Question 56

A challenge in calculating the total costs and expenses of a department is:

A) Assigning direct costs to the department.
B) Allocating indirect expenses to the department.
C) Determining the direct expenses of the department.
D) Determining the amount of sales of the department.
E) Determining the gross profit ratio.

Question 57

Expenses that are not easily associated with a specific department, and which are incurred for the joint benefit of more than one department, are:

A) Fixed expenses.
B) Direct expenses.
C) Variable expenses.
D) Indirect expenses.
E) Uncontrollable expenses.

Question 58

An accounting system that accumulates and reports costs incurred by each service department for management to evaluate the performance of a department is a:

A) Standard accounting system.
B) Cost accounting system.
C) Departmental accounting system.
D) Service accounting system.
E) Revenue accounting system.

Question 59

In a decentralized organization, decisions are made by managers throughout the company rather than by a few top executives.

Question 60

A cost center is a unit of a business that incurs costs without directly generating revenues. All of the following are considered cost centers except:

A) Advertising department at Hertz.
B) Accounting department at Warner Bros.
C) Research department at Microsoft.
D) Juice division at Coca Cola.
E) Purchasing department at Best Buy.

Question 61

In regard to joint cost allocation, the "split-off point" is:

A) Not acceptable when using the value basis for allocating joint costs.
B) The point at which some products are sold and some remain in inventory.
C) The point at which separate products can be identified.
D) A physical basis method to allocate costs based on ratio of some physical characteristic.
E) The difference between the actual and market value of joint costs.

Question 62

A cost incurred to produce or purchase two or more products at the same time is a(n):

A) Differential cost.
B) Fixed cost.
C) Joint cost.
D) Product cost.
E) Incremental cost.

Question 63

In a responsibility accounting system:

A) Outputs of the departments are not part of the evaluation process.
B) All managers at a given level have equal authority and responsibility.
C) Each accounting report contains all items allocated to a responsibility center.
D) Managers are responsible for their departments' controllable costs.
E) Organized and clear lines of authority and responsibility are only incidental.

Question 64

Allocating joint costs to products using a value basis method is based on their relative:

A) Direct costs.
B) Variable costs.
C) Total costs.
D) Sales values.
E) Gross margins.

Question 65

A lumber mill bought a shipment of logs for $40,000. When cut, the logs produced a million board feet of lumber in the following grades. Compute the cost to be allocated to Type 1 and Type 2 lumber, respectively, if the value basis is used. Type 1-400,000 bd. ft. priced to sell at $0.12 per bd. ft. Type 2- 400,000 bd. ft. priced to sell at $0.06 per bd. ft. Type 3- 200,000 bd. ft. priced to sell at $0.04 per bd. ft.

A) $40,000; $24,000.
B) $24,000; $8,000.
C) $13,333; $4,444.
D) $24,000; $12,000.
E) $16,000; $16,000.

Question 66

Plans that identify costs and expenses under each manager's control prior to the reporting period, typically based on the flexible budget approach, are called:

A) Managerial accounting systems.
B) Responsibility accounting systems.
C) Cost accounting systems.
D) Activity-based accounting systems.
E) Responsibility accounting budgets.

Question 67

An accounting system that is set up to control costs and evaluate managers' performance by assigning costs to the managers responsible for controlling them is called a(n):

A) Responsibility accounting system.
B) Cost accounting system.
C) Activity-based accounting system.
D) Financial accounting system.
E) Managerial accounting system.

Question 68

A granary allocates the cost of unprocessed wheat to the production of feed, flour, and starch. For the current period, unprocessed wheat was purchased for $120,000, and the following quantities of product and sales revenues were produced. $$\begin{array} { l c c } \text { Product } & \text { Pounds } & \text { Price per Pound } \\\text { Feed } & 100,000 & \$ 0.70 \\\text { Flour } & 50,000 & 2.20 \\\text { Starch } & 20,000 & 1.00\end{array}$$ How much of the $120,000 cost should be allocated to feed if the value basis is used?

A) $ 70,000.
B) $ 45,000.
C) $ 100,000.
D) $ 42,000.
E) $ 12,250.

Question 69

Data pertaining to a company's joint production for the current period follows: $\begin{array}{llr}& \text { L } & \text { M }\\ \text { Quantities produced } &200 Ibs&150Ibs\\ \text { Market value at split-off point } &\$8/Ib&\$16/Ib\end{array}$
Compute the cost to be allocated to Product M for this period's $660 of joint costs if the value basis is used.

A) $330.
B) $396.
C) $1,364.
D) $264.
E) $796.

Question 70

Responsibility accounting performance reports:

A) Are equally detailed at all levels of management.
B) Are useful in any format.
C) Are usually summarized at higher levels of management.
D) Become more detailed at higher levels of management.
E) Are irrelevant at the highest level of management.

Question 71

Which of the following is not true regarding a responsibility accounting system?

A) It can be applied at any level of an organization.
B) It should not hold a manager responsible for costs over which the manager has no influence.
C) It is designed to measure the performance of managers in terms of controllable costs.
D) It is only relevant in manufacturing companies.
E) It assigns responsibility for costs to the appropriate managerial level that controls those costs.

Question 72

Data pertaining to a company's joint production for the current period follows: $\begin{array}{llr}& \text { L } & \text { M }\\ \text { Quantities produced } &200 Ibs&150Ibs\\ \text { Market value at split-off point } &\$8/Ib&\$16/Ib\end{array}$
Compute the cost to be allocated to Product L for this period's $660 of joint costs if the value basis is used. (Do not round your intermediate calculations.)

A) $796.
B) $1,364.
C) $264.
D) $396.
E) $330.

Question 73

A report that accumulates the actual expenses that a manager is responsible for and their budgeted amounts is a:

A) Departmental accounting report.
B) Managerial cost report.
C) Controllable expense report.
D) Responsibility accounting performance report.
E) Segmental accounting report.

Question 74

Differential Chemical produced 10,000 gallons of Preon and 20,000 gallons of Paron. Joint costs incurred in producing the two products totaled $7,500. At the split-off point, Preon has a market value of $6.00 per gallon and Paron $2.00 per gallon. Compute the portion of the joint costs to be allocated to Preon if the value basis is used.

A) $1,500.
B) $3,000.
C) $2,500
D) $4,500.
E) $5,625.

Question 75

A responsibility accounting performance report displays:

A) Only indirect costs.
B) Only direct costs.
C) Both actual costs and budgeted costs.
D) Only actual costs.
E) Only budgeted costs.

Question 76

Costs that the manager does not have the power to determine or at least significantly affect are:

A) Uncontrollable costs.
B) Direct costs.
C) Joint costs.
D) Variable costs.
E) Indirect costs.

Question 77

A lumber mill paid $70,000 for logs that produced 200,000 board feet of lumber in 3 different grades and amounts as follows: $$\begin{array} { l r r r } { \text { Grade } } & \text { Production } & \text { Market Price } \\\text { Structural } & 25,000 \text { board feet } & \mathbf { \$ } 1,350 / 1,000 \text { bd. ft. } \\\text { No. 1 Common } & 75,000 \text { board feet } & \$ \$ 750 / 1,000 \text { bd. ft. } \\\text { No. 2 Common } & 100,000 \text { board feet } & \mathbf { \$ } 300 / 1,000 \text { bd. ft. }\end{array}$$ Compute the portion of the $70,000 joint cost to be allocated to No. 2 Common if the value basis is used.

A) $35,000.
B) $70,000.
C) $17,500.
D) $23,333.
E) $0.

Question 78

The most useful data for evaluation of a manager's cost performance is based on:

A) Controllable costs.
B) Contribution percentages.
C) Uncontrollable expenses.
D) Direct costs.
E) Departmental contributions to overhead.

Question 79

Within an organizational structure, the person most likely to be evaluated in terms of controllable costs would be:

A) A sales representative.
B) A maintenance worker.
C) A production line worker.
D) A cost center manager.
E) A payroll clerk.

Question 80

Wren Pork Company uses the value basis of allocating joint costs in its production of pork products. Relevant information for the current period follows: $$\begin{array} { l r r } \text { Product } & \text { Pounds } & \text { Price/Ib. } \\\text { Loin chops } & 3,000 & \$ 5.00 \\\text { Ground } & 10,000 & 2.00 \\\text { Ribs } & 4,000 & 4.75 \\\text { Bacon } & 6,000 & 3.50\end{array}$$ The total joint cost for the current period was $43,000. How much of this cost should Wren Pork allocate to Loin chops?

A) $10,750.
B) $0.
C) $8,600.
D) $43,000.
E) $5,909.