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Chapter 9 Multiple Choice: It is a subdivision of managerial accounting which relates reporting or performance directly with the person who has the responsibility for its control. It is useful in assessing the performance of persons responsible for controlling costs, revenues, or invested capital an...

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Chapter 9 Multiple Choice: 1. It is a subdivision of managerial accounting which relates reporting or performance directly with the person who has the responsibility for its control. It is useful in assessing the performance of persons responsible for controlling costs, revenues, or invested capital and analyzing deviations from planned and prior performance. a. Accounting systems design and installation b. Cost accounting c. Standard cost accounting d. Responsibility accounting 2. It relates accounting to the budgetary system, thus acting as a control device. Management reports give details of budgeted and actual performances and show responsibilities at all levels of management. a. Programming c. Responsibility accounting b. Accounting system d. Budgeting 3. Which of the following statements is correct? a. The direct cost of a particular department is always a controllable cost. b. Responsibility accounting identifies cost, revenues and even capital investments with individuals, e.g., managers, and thus provides for more control and evaluation of performance. c. All managers within an organization have equal authority and responsibility d. Internal reports prepared under the responsibility accounting system should be limited to only variable manufacturing costs. 4. B Company uses an accounting system that charges costs to the manager who has been given the authority to make the decisions regarding the incurrence of such costs. For example, if the Production manager was not able to monitor the efficiency of the workers in his department, so that he was forced to ask them to work overtime to finish a specific job on time, the additional cost of working overtime is charged to such Manager or his department. This type of accounting system is known as a. Transfer price accounting c. functional accounting d. cost accounting b. Responsibility accounting 5. In a responsibility accounting system, costs are classified as controllable and noncontrollable costs, which imply that some revenues and costs can be changed through effective management. Controllable costs can be described as including a. Discretionary costs only b. Prime costs only c. Only those costs that the manager can influence in the current time period d. All the costs that are directly traceable to the responsibility center 6. The basic purpose of responsibility accounting is c. authority a. Motivation b. Variance analysis d. budgeting

7. The cost center is a. The least complex type of segment or area of responsibility that is accountable only for costs b. An area of responsibility where the manager has the authority to make decisions concerning markets and sources of supply c. A responsibility center that is accountable for revenues (markets) costs (sources of supply), and invested capital d. An organizational unit that is responsible for revenues and variable costs, but not invested capital 8. A service center is a segment of an organization which has the a. Responsibility of rendering services to outside customers b. Authority to provide specialized support or service to other units within the organization c. Responsibility to incur manufacturing costs to produce the company’s products d. Authority to make decision concerning revenues and costs 9. Management by objectives (MBO) is a concept related to responsibility accounting. MBO can be described as a. A behavioral, communications-oriented responsibility approach to employee selfdirection b. The process of preparing a series of multiple budgets for varying levels of production and sales c. The process of managing personnel d. A means of evaluating long term-investments 10. Responsibility accounting works best in decentralized firms where the organization is structured into responsibility centers. A responsibility center that is most like an independent business is called a a. Profit center c. cost center b. Revenue center d. investment center 11. The format for internal reports in a responsibility accounting system is prescribed by a. Management b. The Philippine Institute of Certified Public Accountants c. Generally Accepted Accounting Principles d. The Board of Accountancy

12. Which of the following statements is incorrect?

a. A successful responsibility accounting reporting system is dependent upon the proper delegation of responsibility and authority b. Fixed cost can also be controllable, and some costs not controllable may need to be assigned to a responsibility center c. Controllability is the only appropriate basis for delegation of responsibility d. The salary of the department manager is a direct cost of his department, but not controllable by such manager 13. In responsibility accounting system, managerial performance should be evaluated on the basis of those factors controllable or capable of being significantly influenced by the manager. In a manufacturing firm, which of the following items is least likely to appear in a performance report from a manager of one of the firm’s production departments? a. Materials b. Labor c. Depreciation of the administration building d. Repairs and maintenance 14. Vernie Company uses a responsibility accounting system for a planning, control, and performance evaluation. Just recently, the company’s personnel department set the conditions for working and paying overtime. During the month, the sales department accepted a rush order from an important customer, and forwarded the production request to the production department which processed the order and finished the same on time, although its staff worked overtime. The overtime cost generated by the rush order should be charged to a. The personnel department b. The sales department c. The production department staff d. The accounting department 15. When used for performance evaluation, periodic internal reports based on a responsibility accounting system should not a. Be related to the organizational chart b. Include variances between actual and budgeted controllable costs c. Include allocated fixed cost d. Distinguish between controllable and non-controllable costs 16. The following costs may be controllable at certain levels of management within a manufacturing concern except: a. Insurance costs of plant and equipment b. Power rates imposed by the electric cooperative or the power supplier in the area c. Basic salary of factory workers d. Monthly maintenance cost of factory equipment covered by an annual contract 17. The criteria for evaluating the performance of responsibility centers should be carefully selected because

a. b. c. d.

The responsibility centers’ managers may found out what they are They must be approved by the BIR Stockholders require an explanation about such criteria The manager’s behavior can be affected by such criteria that are used to judge their (manager’s) performance

18. When a responsibility center manager takes an action that benefits his/her responsibility center, but not the organization as a whole, a. The manager should be demoted b. The responsibility center must be an artificial profit center c. There is lack of goal congruence d. Such action is a non-controllable action 19. To be effective, the criteria used to evaluate the performance of Boss, a manager of a responsibility center should a. Be known and understood by the boss b. Include only those factors that are controllable by the boss c. Not be influenced by actions taken by the other managers in the firm d. All of the above 20. When using a contribution margin format for internal reporting purposes, the major distinction between the department manager performance and department performance is the a. Direct variable manufacturing cost of the product being produced by the department b. Direct or unallocated fixed cost of the department controllable by the department manager c. Direct fixed cost are controllable by others d. Prime cost of the product being manufactured by the department 21. The segment of the Foot Spray Division of the Foot Care Inc. should not include a. Fixed selling cost of the division b. Central administration cost allocated to the division c. Net sales of the division d. Variable selling cost of the division 22. The performance of an investment center should be evaluated based on a. Amount of investment b. Return on investment c. Residual value of investment d. Average investment

23. Which of the following formulas best describes the return on investment calculation? A. return on sales x Assets turn over B. Net income ÷ Sales C. Sales ÷ Total assets D. Sales x Profit Ratio 24. The ROI can be calculated using the Du Pont formula. A variant of this formula is return on Equity (ROE) which can be calculated as a. ROE = Profit/Sales b. ROE = ROI x (Assets/equity) c. ROE = Assets/Equity d. ROE = ROI

Items 25 to 29 are based on the following information: The following information pertains to the product produced by the Men’s Belt division of Leather Goods Company: Per Unit Selling price

P150

Manufacturing costs Prime costs

75

Variable factory overhead

15

Fixed Factory overhead (total is P80,000)

8

Selling and administrative costs Variable Fixed (total is P60,000)

18 6

During the period, the division produced 10,000 units and sold 9000 units, both as budgeted. There was no beginning and ending work-in-process inventories, and there was no beginning finished goods inventory during the period. There was no difference between the total budgeted and actual fixed costs. Variable manufacturing costs vary with production while variable selling costs vary with sales. Central administration costs are allocated to the different departments of the company. For this period, central administration cost allocated to Men’s belt Division amounted to P150,000

25. How much is the Men’s Belt division’s manufacturing margin? a. P378,000 b. P465,000 c. P322,000 d. P540,000 26. Men’s Belt Division contribution margin was a. P378,000 b. P465,000 c. P322,000 d. P540,000 27. Assume that 40% of the division’s total fixed costs is controllable by the division manager. How much was the division’s short-run performance margin? a. P238,000 b. P322,000 c. P294,000 d. P540,000 28. Assume that 40% of the division’s total fixed costs is controllable by the division manager. How much was the division’s segment margin? a. P238,000 b. P322,000 c. P294,000 d. P540,000 29. How much was the division’s operating income during the period? a. P238,000 b. P88,000 c. P322,000 d. P378,000 30. A profitable responsibility center classified as an investment center can increase iys return on investment by a. Increasing peso sales and operating expenses by the same percentage b. Increasing peso sales and operating expenses by the same peso amount c. Increasing peso sales and operating expenses by the same percentage d. Increasing investment and operating expenses by the same peso amount 31. Return on Investment is a performance measure used for investment centers. Which of the following statements about ROI is incorrect? a. ROI is computed by dividing a segment’s income by the investment capital b. ROI is subject to numerous possible manipulations of the income and investment amounts, so that the manager may decide not to invest in a project that will yield less than the desired rate of return, or he/she may defer necessary expenses just to improve his/her center’s ROI c. ROI is superior to the residual income control d. The use of ROI may not be appropriate when the average age of assets differs substantially across segments of a business Items 32 and 33 are based on the following information

The ladies’ belt division of Leather Goods Corp. is classified as an investment center. For the month of November, it had the following operating statistics Sales

675,000

Cost of Goods Sold

400,000

Operating Expenses

237,500

Total Assets

750,000

Weighted Average cost of capital

4%

Leather goods Corp’s average stockholders’ equity is P300.000. It is subject to an income tax rate of 40% 32. What is the Ladies’ Belt Division return on investment? a. 4% b. 5% c. 7.5% d. 3% 33. The Ladies’ Belt Division’s residual income amounts to a. P30,000 b. 7,500 c. 25,000 d. (7,500) Items 34 and 35 are based on the following information The Quezon City division of Luzonian Company is treated as an investment center for performance measurement purposes. Selected financial information for such division for last year is given below Net sales

200,000

Cost of goods sold

176,250

General and admin. Expenses

3,750

Average working capital

31,250

Average plant and equipment

68,750

Desired rate of return

15%

34. What was the Quezon City division’s return on investment for last year?

a. 29.09% b. 15% c. 53.33% d. 20% 35. What was the Quezon City Division’s residual income for last year? a. P5,000 b. P9,687.5 c. P8,750 d. P14,375 36. Residual income as used in evaluating the performance of investment centers is the excess of the return on an investment over targeted amount equal to an imputed interest charge on invested capital. The imputed interest rate used is ordinarily the a. Target return on investment set by the company’s management, but is often equal to the weighted average cost of capital b. Average lending rate during the period under consideration c. Average ROI for the investment center over the last several accounting periods. d. Internal rate of return on the invested capital in the investment center. Items 37 and 38 are based on the following information Princess is the manager of the Home Care Product Division of Care Corporation. As a manager of an investment center, Princess’ performance is measured using the residual income method For the coming year, Princess wants to achieve a residual income target of P100,000 using an imputed interest charge of 20%. Other forecasted figures for the coming year as follows Working capital

90,000

Plant and equipment

860,000

Costs and expenses

1.210,000

37. How much should revenues be next year to achieve the residual income target? a. P1.482,000 b. 1,300,000 c. 1,500,000 d. 1,464,000 38. By what percent should the division’s ROI next year exceed the desired rate of return? a. 10.5% b. 30.5% c. 20% d. 9.5% 39. Rizaldy Corp. is a decentralized firm segmented into different divisions and departments. The divisions are treated as investment centers whose performance is evaluated using the ROI method. Mr. L. Presidente, the president of Rizaldy Corp., requires a minimum

ROI of 10% for any project to be undertaken by the divisions in his company. He leaves investment decisions to the managers as long as the 10% RO is expected to be realized. Mr. D. Vision, a manager of one of the divisions of Rizaldy Corp. which has had a return on investment of 15% for the past several years, expects to have the same ROI in the coming year. MR. D. Vision has the opportunity to invest in a new project which is expected to have ROI of 13% Which of the ff. statements is incorrect? a. If Mr. L. Presidente were to decide, he would invest in the new project regardless of whether the division managers are evaluated based om ROI or residual income b. If the division managers were evaluated based on the ROI method, MR. D. Vision would not invest in the new project. c. If the division managers were evaluated based on the residual income method, Mr. D. Vision would invest in the new project d. None of the above. 40. Man Edyer is the manager of the Manila Division of Perry Corporation. The Manila Division is treated as an investment center whose performance is evaluated using the residual income method For the coming period, Man Edyer expects to incur total costs and expenses of P1,210,000. The expected investment in the division for the same period is P950,000, composed of working capital of P90,000 and plant and equipment of P860,000 To establish a standard of performance for the performance of Man Edyer in the coming period, four scenarios are being considered Desired rate of return Target residual income Scenario 1 10% 125,000 2 12% 75,000 3 15% 100,000 4 18% 62,500 Which scenario assumes the highest revenue? a. Scenario1 b. Scenario2 c. Scenario3 d. Scenario4 41. The ff. year-end data pertain to Adan Corporation Earning before interest and taxes Current Assets Non-current Assets Current Liabilities Non-current liabilities

800,000 800,000 3,200,000 400,000 1,000,000

Adan Corporation pays an income tax rate of 32%. Its weighted average cost of capital is 10%. What is Adan Corporation’s Economic Value Added (EVA)? a. 184,000 b. 144,000 c. 440,000 d. 400,000 42. The ff. year-end data pertain to Adan Corporation Book Value Current assets 800,000 Noncurrent Assets 3,200,000 Current liabilities 400,000 Non-current liabilities (8% interest rate) 1,000,000 Stockholders’ Equity 2,600,000

Fair value

1,000,000 3,000,000

During the year, the company earned income before interest and taxes of P800,000. It pays income tax at the rate of 25%. Its cost of equity capital is 12% What is the company’s Economic Value Added? a. 240,000 b. 222,000 c. 180,000 d. 422,000 43. Blescilyn Corp.’s net income for the year 200A was P126,000. Other pertinent data for the corporation are as follows Jan.1 Feb.1 Stockholder’s equity (80,000 shares outstanding) 840,000 896,000 Price per share 25 30 The company’s cost of equity capital is 10%. For purposes of measuring its performance, Blescilyn Corp. computes its Economic Value Added. It also compute the following 1. Equity Value Creation by multiplying the beginning equity capital by the difference between the return on equity (Net income ÷ Beginning equity) and the percentage cost of equity 2. Market Value Added which is the difference between the market value of equity (outstanding shares x market price) and the equity supplied by stockholders 3. Total Shareholders’ Return which is equal to the change in stock price plus dividends per share, dic=vided by the initial stock price. Considering the given data Blescilyn Corp.’s equity value creation, market value added, and total shareholders’ return are

Equity Value

a. b. c. d.

Creation 42,000 126,000 89,000 84,000

Market Value Added 344,000 400,000 80,000 56,000

Total Shareholder’s Equity 28% 24% 20% 8%

44. The price charged by one segment of an organization for a product or service supplied to another segment of the same organization is called the a. Selling price b. Exchange rate c. Transfer price d. Outlay price 45. Transfer pricing works best in a decentralized organization. It should encourage goal congruence and managerial effort. Goal congruence is a. the extent of an attempt to accomplish a specific goal b. The desire and the commitment to achieve a specific goal c. The agreement on the goals of the organization and/or the segment by both the superiors and subordinates d. The extent to which managers have the authority to make decisions. 46. It is the extent to which a manager attempts to accomplish a specific goal. It may include psychological, as well as physical commitment to a goal a. Goal Congruence b. Managerial Effort c. Motivation d. Autonomy 47. It is the desire to attain a specific goal and the commitment to accomplish the goal a. Goal Congruence b. Managerial Effort c. Motivation d. Autonomy 48. It is the extent which managers have the authority to make decisions A. Goal Congruence B. Managerial Effort C. Motivation D. Autonomy 49. An artificial profit center

a. b. c. d.

Is not responsible for the costs that it occurs Has no investment Does not provide its goods or services outside the entity Could not be operated as a cost center

50. Given no idle capacity and a competitive market exists, that is, all goods transferred internally ca...