MIDTERM QUIZ 1

Strategic Business Analysis (ACC 118)

PART I: TRUE or FALSE. Read the statements and write T if the statement is true and F if the statement is false.
T 1. Separation of businesses into more manageable operating units is termed decentralization.
T 2. The process of measuring and reporting operating data by areas of responsibility is termed responsibility
accounting.
3. A decentralized business organization is one in which all major planning and operating decisions are made by
F
top management.
4. A centralized business organization is one in which all major planning and operating decisions are made by top
T
management.
5. The primary disadvantage of decentralized operations is that decisions made by one manager may affect other
T
managers in such a way that the profitability of the entire company may suffer.
6. The three common types of responsibility centers are referred to as cost centers, profit centers, and investment
T
centers.
F 7. One of the advantages of decentralization is that delegating authority to managers closest to the operation
always results in better decisions.
T 8. Developing and retaining quality managers is an advantage of decentralization.
F 9. A responsibility center in which the department manager has responsibility for and authority over costs,
revenues, and assets invested in the department is termed a cost center.
10. Budget performance reports prepared for the vice-president of production would generally contain less detail
T
than
T 11. The amount of detail presented in a budget performance report for a cost center depends upon the level of
management to which the report is directed.
T 12. The primary accounting tool for controlling and reporting for cost centers is a budget.
13. Responsibility accounting reports that are given to lower level managers are usually very detailed, in turn,
T
higher level managers will be given a summary report.
F
14. A manager in a cost center also has responsibility and authority over the revenues and the costs.
T 15. The plant managers in a cost center can be held responsible for major differences between budgeted and actual
costs in their plants.
16. A responsibility center in which the authority over and responsibility for costs and revenues is vested in the
T
department manager is termed a profit center.
17. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually
T subject to the control of the department manager are termed direct expenses.
T 18. Sales commissions expense for a department store is an example of a direct expense.
T
19. Operating expenses incurred for the entire business as a unit that are not subject to the control of individual
department managers are called indirect expenses.
T
20. Office salaries expense for a department store is an indirect expense.
F 21. Investment turnover (as used in determining the rate of return on investment) focuses on the rate of profit
earned on each sales dollar.
F
22. The ratio of sales to investment is termed the rate of return on investment.
23. The major advantage of the rate of return on investment over income from operations as a divisional
T
performance measure is that divisional investment is directly considered and thus comparability of divisions is
facilitated.
F 24. By using the rate of return on investment as a divisional performance measure, divisional managers will always
be motivated to invest in proposals which will increase the overall rate of return for the company.
25. The excess of divisional income from operations over a minimum amount of desired income from operations is
T
termed the residual income.
26. The minimum amount of desired divisional income from operations is set by top management by establishing a
F maximum rate of return considered acceptable for invested assets.
T 27. The major advantage of residual income as a performance measure is that it gives consideration to not only a
minimum rate of return on investment but also the total magnitude of income from operations earned by each
division.
T
28. The ratio of income from operations to sales is termed the profit margin component of the rate of return on
investment.
T 29. The ratio of sales to invested assets is termed the investment turnover component of the rate of return on
T
investment.
30. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit
margin is 20%.
 F 31. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit
margin is 24%.
32. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the
T
investment turnover is 1.2.
F
33. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the
investment turnover is 5.
T 34. If income from operations for a division is $30,000, sales are $243,750, and invested assets are $187,500, the
investment turnover is 1.3.
F
35. If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the
investment turnover is 6.3.
T 36. If divisional income from operations is $75,000, invested assets are $637,500, and the minimum rate of return
on invested assets is 6%, the residual income is $36,750.
F
37. If divisional income from operations is $100,000, invested assets are $850,000, and the minimum rate of return
on invested assets is 8%, the residual income is $68,000.
38. The profit margin component of rate of return on investment analysis focuses on profitability by indicating the
T rate of profit earned on each sales dollar.
T 39. In rate of return on investment analysis, the investment turnover component focuses on efficiency in the use of
T
assets and indicates the rate at which sales are being generated for each dollar of invested assets.
40. The minimum amount of desired divisional income from operations is set by top management by establishing a
minimum rate of return considered acceptable for invested assets.

PART II: Encircle the letter of your answer.

1. Which of the following could be considered a segment?

a. division c. product line
b. sales territory d. all of these
2. The guideline(s) used in assigning costs to a segment include(s) whether
a. costs are fixed c. costs are directly traceable
b. costs are variable d. all of the above
3. Segment margin is equal to
a. sales less variable costs
b. sales less variable costs and direct fixed costs
c. sales less variable costs and indirect fixed costs
d. sales less cost of goods sold
4. Revenue less variable costs and direct fixed costs equals
a. contribution margin c. income before taxes
b. segment margin d. income after taxes
5. Indicate which of the following costs would be avoided if a segment is eliminated.
1. variable manufacturing costs
2. direct fixed costs
3. common fixed costs
4. variable selling costs
5. direct fixed selling costs
6. common fixed selling costs
a. 2, 3, 5, 6 c. 2, 3, 4, 5
b. 1, 2, 4, 5 d. 1, 4, 5, 6
6. Which of the following costs would continue to be incurred even if a segment is eliminated?
a. direct fixed expenses
b. common fixed costs
c. variable cost of goods sold
d. variable selling and administrative expenses
7. Belle, Inc. uses an accounting system that charges costs to the manager who has been delegated the authority to
make decisions incurring the costs. For example, if the sales manager accepts a rush order that will result in higher-
than-normal manufacturing costs, these additional costs are charged to the sales manager because the authority to
accept or decline the rush order was given to the sales manager. This type of accounting system is known as
a. responsibility accounting. c. reciprocal allocation.
b. functional accounting. d. transfer price accounting.
8. In responsibility accounting, a center’s performance is measured by controllable costs. Controllable costs are best
described as including
a. direct material and direct labor only.
b. only those costs that the manager can influence in the current time period.
c. only discretionary costs.
d. those costs about which the manager is knowledgeable and informed.
9. The maintenance department of a manufacturing company is a(n)
a. segment.
b. profit center.
c. cost center.
d. investment center.
10. Which of the following is not a correct match?
1. Incurs costs
2. Generates revenue
3. Controls investment funds
a. Investment Center 1, 2, 3
b. Cost Center 1
c. Profit Center 1, 2, 3
d. All are correct matches.
11. A cost center
a. only incurs costs and does not directly generate revenues.
b. incurs costs and generates revenues.
c. is a responsibility center of a company which incurs losses.
d. is a responsibility center which generates profits and evaluates the investment cost of earning the profit.

12. A manager of a cost center is evaluated mainly on

a. the profit that the center generates.
b. his or her ability to control costs.
c. the amount of investment it takes to support the cost center.
d. the amount of revenue that can be generated.
13. Controllable margin is defined as
a. sales minus variable costs.
b. sales minus contribution margin.
c. contribution margin less controllable fixed costs.
d. contribution margin less noncontrollable fixed costs.
14. Timex Corporation recorded operating data for its Cheap division for the year. Timex requires its return to be 10%.
Sales $ 700,000
Controllable margin 80,000
Total average assets 2,000,000
Fixed costs 50,000
What is the ROI for the year?
a. 4%
b. 35%
c. –6%
d. 1.5%

15. Costs that relate specifically to one center and are incurred for the sole benefit of that center are
a. common fixed costs.
b. direct fixed costs.
c. indirect fixed costs.
d.noncontrollable fixed costs.

END