UST - ALFREDO M.

VELAYO COLLEGE OF ACCOUNTANCY

Management Advisory Services
Responsibility Accounting

QUIZZER
Decentralization and Decentralized Organizations
1. This occurs when there has been a delegation of decision-making authority to lower segments
of the organization:
A. Decentralization
B. Total quality management
C. Activity-Based management
D. Implementing the balanced scorecard

2. There is decentralization when

A. Operations are spread over a large geographic area
B. Important decisions are made at the upper levels of management
C. Authority for important decisions are withheld from lower segment managers
D. None of the above

3. Why would a company adopt a decentralized organization?

A. To train and motivate division managers
B. To let top management focus on strategic planning
C. To allow division managers to make important operating decisions
D. All of the above

Responsibility Accounting; Concepts

4. It is a system of accounting that is implemented to an organization so that performance are
recorded, reported and evaluated by levels of responsibility within an organization
A. Cost accounting
B. Financial accounting
C. Standard cost accounting
D. Responsibility accounting

5. In a responsibility accounting system, a feedback report that focuses on the difference between
budgeted amounts and actual amounts is an example of
A. Assessing blame.
B. Management by exception.
C. Getting rewards to successful managers.
D. Ignoring other variables for which the budgeted goals were met.

6. The basic purpose of a responsibility accounting system is

A. Authority.
B. Budgeting.
C. Motivation.
D. Variance analysis.

7. Motivation is the basic purpose of responsibility accounting because

A. Customers will be motivated to transact with the company
B. Potential shareholders will be motivated to invest in the business
C. The mangers will be motivated to do better than other managers in the same
organization
D. The manager’s behaviour will be affected by the criteria for evaluating the performance
of their responsibility centers
 8. In responsibility accounting, a center’s performance is measured by controllable costs.
Controllable costs are best described as including
A. Only discretionary costs.
B. Direct material and direct labor only.
C. Those costs about which the manager is knowledgeable and informed.
D. Only those costs that the manager can influence in the current time period.

9. ABC, Inc., uses an accounting system that charges costs to the manager who has been
delegated the authority to make the 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. Reciprocal accounting.
B. Functional accounting.
C. Responsibility accounting.
D. Transfer price accounting.

10. A successful responsibility accounting reporting system is dependent upon

A. The correct allocation of controllable variable costs.
B. The proper delegation of responsibility and authority.
C. Identification of the management level at which all costs are controllable.
D. A reasonable separation of costs into their fixed and variable components since fixed
costs are not controllable and must be eliminated from the responsibility report.

11. Which of the following is not true of responsibility accounting?

A. Managers should only be held accountable for factors over which they have significant
influence.
B. The focus of cost center managers will normally be more narrow than that of profit center
managers.
C. When a responsibility account system exists, operations of the business are organized into
separate areas controlled by individual managers.
D. Every factor that affects a firm’s financial performance ultimately is controllable by
someone, even if that someone is the person at the top of the firm.

12. Characteristics of a responsibility accounting system include all of the following except that
A. Cost centers are responsible for revenues as well as common costs.
B. The system should encourage employee involvement and participation.
C. Each level of management is responsible for its department’s operations and employees.
D. Responsibility for performance according to budget must be linked to the appropriate
authority.

Goal Congruence
13. It is the consistency between the goals of the firm and the goals of the employees.
A. Goal congruence
B. Goal optimization
C. Sub-optimization
D. Profit sharing plans

14. There is lack of goal congruence when

A. A profit center manager reports a segment loss
B. A cost center manager reported actual costs higher than the budgeted costs
C. A revenue center manager failed to meet the sales quota for the particular period
D. What a manager takes an action that benefits his responsibility center, but not the
organization as a whole
Controllable vs. Non-controllable Costs; Common Costs
15. As to classification of costs, responsibility accounting prioritizes on the classification of whether
the costs are
A. Fixed or variable
B. Discretionary or committed
C. Controllable or non-controllable
D. Manufacturing or non-manufacturing

16. A cost incurred for the benefit of more than one cost objective is
A. A prime cost.
B. A variable cost.
C. A common cost.
D. A conversion cost.

17. In a responsibility accounting system, managers are accountable for

A. Incremental costs.
B. Variable costs but not for fixed costs.
C. Product costs but not for period costs.
D. Costs over which they have significant influence.

18. Costs may be classified as either controllable or non-controllable. This implies that some
revenues and costs can be changed through effective management. Controllable costs can
be described as including
A. Prime costs
B. Traceable costs
C. Discretionary costs only
D. Costs that can be influenced by the manager in the current time period

Performance Evaluation; Performance Reports

19. The criteria used to evaluate the performance of a manager should
A. Be known and understood by the manager
B. Include only factors within the control of the manager
C. Not be influenced by actions taken by other managers in the organization
D. All of the above

20. The criteria used for evaluating performance

A. Should be designed to help achieve goal congruence
B. Motivate people to work in the company’s best interest
C. Can only be used with profit centers and investment centers
D. Should be used to compare past performance with current performance

21. ABC Corporation uses a responsibility accounting system in its operations. Which one of the
following items is least likely to appear in a performance report for a manager of one of ABC’s
assembly lines?
A. Materials.
B. Direct labor.
C. Repairs and maintenance.
D. Depreciation on the manufacturing facility.

22. The segment margin of Division A of ABC Corporation should not include
A. Net sales of Division A.
B. Fixed selling expenses of Division A.
C. Variable selling expenses of Division A.
D. Division A’s fair share of the salary of ABC Corporation’s president.
Responsibility Centers
23. The responsibility center where managers have the authority to incur costs to support their areas
of responsibility
A. Cost center
B. Profit center
C. Revenue center
D. Investment center

24. A responsibility center where managers are held responsible for both revenues and costs of the
segment.
A. Cost center
B. Profit center
C. Revenue center
D. Investment center

25. A segment of an organization is referred to as a profit center if it has

A. Authority to provide specialized support to other units within the organization.
B. Authority to make decisions over the most significant costs of operations including the
power to choose the sources of supply.
C. Authority to make decisions affecting the major determinants of profit including the
power to choose its markets and sources of supply.
D. Authority to make decisions affecting the major determinants of profit including the
power to choose its markets and sources of supply and significant control over the
amount of invested capital.

26. The responsibility center where a manager is responsible for generating revenue for their
segment of the business.
A. Cost center
B. Profit center
C. Revenue center
D. Investment center

27. Which one of the following organizational segments is most like an independent business?
A. Cost center
B. Profit center
C. Revenue center
D. Investment center

28. The least complex segment or area of responsibility for which costs are allocated is a(n)
A. Cost center.
B. Profit center
C. Investment center.
D. Contribution center.

29. In a highly decentralized organization, the best option for measuring the performance of
subunits is the establishment of
A. Cost centers.
B. Product centers.
C. Revenue centers.
D. Marketing centers.
 30. Juan Dela Cruz is the marketing manager for a local recreational sports complex. Juan’s role in
the marketing department is to advertise events, meet potential clients, and plan future events.
Juan is responsible for revenues and costs for each event and reports to the sports complex
manager. Juan’s marketing department is an example of which type of responsibility center?
A. Cost center.
B. Profit center.
C. Revenue center.
D. Investment center.

31. A manager who is accountable for both income statement and balance sheet items is
responsible for a(n)
A. Cost center.
B. Profit center.
C. Revenue center.
D. Investment center.

32. A cosmetics company is expanding its marketing presence by placing stores within a national
department store chain. The cosmetics company hires its own store managers who are
responsible for generating sales. The company pays rent per square foor to the department
store. For the purpose of assessing the manager’s performance, each cosmetics store would
most appropriately be considered as a(n)
A. Cost center.
B. Profit center.
C. Revenue center.
D. Investment center.

Profit Center
33. Which one of the following best identifies a profit center?
A. A large toy company.
B. A new car sales division for a large local auto agency.
C. The Information Technology Department of a large consumer products company.
D. The Production Operations Department of a small job-order machine shop company.

34. In evaluating the performance of a profit center, which of the following would be used?
A. Segment margin
B. Residual income
C. Return on investment
D. Economic value-added

35. The best measure of the performance of the manager of a profit center would be
A. The return on investment
B. Whether it met the budgeted goals for controllable costs
C. The amount of controllable margin generated by the profit center
D. The amount of contribution margin generated by the profit center

36. The controllability principle states that managers should be held responsible only for what they
can control. We can therefore conclude that
A. Directs costs are not controllable by managers
B. Controllability is the only appropriate basis for delegation of responsibility
C. Depreciation of the administrative building should be allocated to a production
manager
D. None of the above
37. In evaluating the performance of a segment, which of the following should not be included
A. Net sales
B. Repairs and maintenance expense
C. Depreciation of the administrative building allocated to the segment
D. Variable manufacturing costs and variable selling and administrative expenses

38. In evaluating the performance of a segment, which of the following is true regarding the
periodic internal reports?
A. It should include allocated fixed costs
B. It should be related to the organizational chart
C. It should not include variances between actual and budgeted controllable costs
D. It should not distinguish between controllable and non-controllable costs

39. There are instances where a management decision would be beneficial for a given profit
center, but not for the company as a whole. From the overall company viewpoint, this
decision would lead to
A. Goal congruence
B. Decentralization
C. Sub-optimization
D. Profit maximization

40. Ordinarily, the most appropriate basis on which to evaluate the performance of a division
manager is the division’s
A. Gross profit.
B. Contribution margin.
C. Net income minus the division’s fixed costs.
D. Net revenue minus controllable division costs.

41. The major distinction between the department manager performance and department
performance is the
A. Direct fixed costs controllable by others
B. Controllable direct fixed costs of the segment
C. Prime costs of the product being manufactured by the segment
D. Variable manufacturing costs of the product produced by the segment

42. ABC Co.’s income statement for profit center A for August includes

Contribution margin Php84,000

Manager’s salary 24,000
Depreciation on accommodations 9,600
Allocated corporate expenses 6,000
The profit center’s manager is most likely able to control which of the following?
A. Php44,400
B. Php60,000
C. Php68,400
D. Php84,000

43. Segment X generated sales revenue of Php250,000 and variable operating expenses of
Php112,500. Its controllable fixed expenses were Php25,000. It was assigned 40% of Php125,000
of fixed costs controlled by others. The common fixed cots were Php16,000. What was Segment
X’s controllable segment profit margin?
A. Php46,500
B. Php63,500
C. Php112,500
D. Php137,500
Items 44 to 48 are based on the following information
TISS Company provides you with the following information pertaining to the product produced
by one of its major divisions:
Selling price Php125/unit
Manufacturing costs
Direct material 25/unit
Direct labor 35/unit
Variable factory overhead 12/unit
Fixed factory overhead Php64,000
Selling and administrative costs
Variable selling and administrative expenses 15/unit
Fixed selling and administrative expenses Php50,000

During the period, the division produced 8,000 units and sold 7,500 units, both as budgeted.
There were no inventory balances for work-in-process inventories and there were no beginning
finished goods inventory during the period. 80% of the division’s total fixed costs is controllable
by the division.

There was no difference between the total budgeted and actual fixed cost. Variable
manufacturing costs vary with production while variable selling costs vary with sales. Central
administration costs are allocated to the different divisions of the company. For this period,
central administration costs allocated to the division amounted to Php100,000.

44. How much is the division’s manufacturing margin? (Note: Manufacturing margin = Net sales –
Variable manufacturing costs)
A. Php171,000
B. Php228,000
C. Php285,000
D. Php397,500

45. How much is the division’s contribution margin?

A. Php171,000
B. Php228,000
C. Php285,000
D. Php397,500

46. If the manager is to be evaluated, what amount of profit must be the basis?
A. Php71,000
B. Php171,000
C. Php193,800
D. Php285,000

47. How much is the division’s segment margin?

A. Php71,000
B. Php171,000
C. Php193,800
D. Php285,000

48. How much is the division’s operating income?

A. Php71,000
B. Php171,000
C. Php193,800
D. Php285,000
Investment Center
49. A measure frequently used to evaluate the performance of the manager of an investment
center is
A. Amount of profit generated
B. Department contribution margin
C. Rate of return on funds invested in the center
D. Percentage increase in profit over the previous year

50. In evaluating an investment center, top management should concentrate on

A. Net income.
B. Dollar sales.
C. Profit percentages.
D. Return on investment.

51. The segment margin of an investment center after deducting the imputed interest on the assets
used by the investment ceter is known as
A. Return on assets.
B. Residual income.
C. Operating income.
D. Return on investment.

52. A corporation has set a goal ot increase its return on investment (ROI). To facilitate his goal, the
corporation has set up an incentive program that rewards each division for increasing its ROI.
One possible downfall of this incentive program is that it will
A. Result in managers rejecting profitable projects.
B. Cause the corporation to select high-risk investments.
C. Cause the corporation to pay out incentives if goals are achieved.
D. Cause division managers to compete for the corporation’s investment funds.

Investment Center; Residual Income

53. The basic objective of the residual income approach to performance measurement and
evaluation is to have a division maximize its
A. Cash flows.
B. Return on investment rate.
C. Imputed interest rate charge.
D. Income in excess of a desired minimum return.

54. Which of the following statements is correct?

A. Residual income is a better comparative measure than return on investment
B. Residual income is more useful as a performance measure of a single investment center
C. Return on investment is more useful as a performance measure for a single investment
center
D. Return on investment and residual income are equally good performance measures for
a single investment center

55. The imputed interest rate used in the residual income approach to performance evaluation can
best be described as the
A. Average lending rate for the year being evaluated.
B. Historical weighted-average cost of capital for the company.
C. Target return on investment set by the company’s management.
D. Average return on investments for the company over the last several years.
 56. Which one of the following items would most likely not be incorporated into the calculation of
a division’s investment base when using the residual income approach for performance
measurement and evaluation?
A. Fixed assets employed in division operations.
B. Land being held by the division as a site for a new plant.
C. Division inventories when division management exercises control over the inventory
levels.
D. Division accounts payable when division manager exercises control over the amount of
short-term credit used.

57. Managerial performance can be measured in many different ways, including return on
investment (ROI) and residual income. A good reason for using residual income instead of ROI
is that
A. Goal congruence is more likely to be promoted by using residual income.
B. Residual income is well understood and often used in the financial press.
C. Residual income can be computed without regard to identifying an investment base.
D. ROI does not take into consideration both the investment turnover ratio and return-on-
sale percentage.

58. ABC Company, a merchandising company, is considering a Php1,000,000 upgrade to its retail
and warehousing facilities that will allow the company to handle more products and attract
more customers. ABC anticipates that sales will increase by Php500,000 and operating income
will increase by Php200,000 per year. If ABC has a minimum required return on investment of
15%, what would be the residual income resulting from the upgrade?
A. Php50,000
B. Php75,000
C. Php500,00
D. Php800,000

Investment Center; Return on Investment

59. Which of the following would increase the return on investment?
A. Increasing the peso sales and operating expenses by the same percentage
B. Decreasing the peso sales and operating expenses by the same percentage
C. Increasing the peso sales and operating expenses by the same peso amount
D. Decreasing the peso sales and operating expenses by the same peso amount

60. When sales and net income remain constant, the company’s return on investment will
A. Increase if invested capital increases
B. Decrease if invested capital decreases
C. Increase if the invested capital employed turnover rate decreases
D. Decrease if the invested capital employed turnover rate decreases

61. Everything else remaining constant, if the investment turnover is doubled, the return on
investment will
A. Double
B. Increase by half
C. Remain constant
D. Decrease by half

62. Which of the following will not improve return on investment if other factors are constant?
A. Increasing selling prices.
B. Decreasing expenses or assets.
C. Increasing sales volume while holding fixed expenses constant.
D. None of the above.
 63. Which one of the following statements pertaining to the return on investment (ROI) as a
performance measure is false?
A. When the average age of assets differs substantially across segments of a business, the
use of ROI may not be appropriate.
B. The use of ROI may lead managers to reject capital investment projects that can be
justified using discounted cash flow models.
C. ROI relies on financial measures that are capable of being independently verified, while
other forms of performance measures are subject to manipulation.
D. The use of ROI can make it undesirable for a skilful manager to take on troubleshooting
assignments such as those involving turning around unprofitable divisions.

Comprehensive; Residual Income and Return on Investment

Items 64 and 65 are based on the following information:
The Davao Division of CEL Company is treated as an investment center for performance
measurement purposes. Selected financial information of such division for last year is given
below:
Net sales Php460,000
Cost of goods sold 305,000
Selling and administrative expenses 105,000
Average working capital 70,000
Average non-current assets 130,000

The desired rate of return from investments of this division was set at 12%

64. What was the division’s return of investment last year?

A. 15%
B. 20%
C. 25%
D. 29%

65. What was the division’s residual income last year?

A. Php5,000
B. Php24,000
C. Php26,000
D. Php35,000

Items 66 and 67 are based on the following information:

TAZO Company had the following information pertaining to 2023:
Sales Php2,000,000
Profit 240,000
Asset turnover ratio 2.5 times

The desired minimum rate of return is 20%.

66. What is the return on investment?

A. 20%
B. 25%
C. 30%
D. 35%

67. What is the residual income?

A. Php80,000
B. (Php80,000)
C. Php100,000
D. (Php100,000)
 68. For the current year, XYZ Inc. reported sales of Php1,320,000 and an asset turnover of 4. The rate
of return on average assets was 25%. The company’s operating income for the year was
A. Php80,000
B. Php82,500
C. Php85,000
D. Php90,000

69. An investment center is considering to purchase a new equipment costing Php25,000 which
would increase income by Php4,000 annually. Currently, it as an income of Php43,000 and an
invested capital in the amount of Php240,000. The firm’s cost of capital is 12% and it required the
different segments to have a minimum of 14% return on investment. If the equipment is
purchased, the residual income of the subunit will
A. Increase by Php500
B. Decrease by Php500
C. Increase by Php1,000
D. Decrease by Php1,000

70. Abby is the manager of the Quezon City Division of ABC Corporation. The Division is treated as
an investment center whose performance is evaluated using its residual income.

For the coming period, Abby presents the following expectations:

Investment:
Working capital Php50,000
Plant and equipment 140,000
Estimated expenses 100,000

To establish a standard of performance for the performance of Abby in the coming period,
three alternatives are being considered:

Alternative Target residual income Desired rate of return

One Php110,000 10%
Two 70,000 15%
Three 10,000 18%

Which alternative would require the greatest amount of revenue to satisfy?

A. Alternative One
B. Alternative Two
C. Alternative Three
D. Each alternative would require the same amount of revenue

Economic Value-Added
71. The following data are presented to you for the performance evaluation of one of the
investment centers
Investment center’s total assets Php640,000
Investment center’s current liabilities 60,000
Investment center’s after-tax operating profit 90,000
Weighted-average cost of capital 12%
Minimum required ROI 14%

What is the economic value-added?

A. Php20,400
B. Php60,000
C. Php69,600
D. Php90,000
72. BAM Corporation had current assets in the amount of Php320,000 and non-current assets of
Php1,280,000. It had current liabilities in the amount of Php200,000 and non-current liabilities of
Php400,000. The non-current liabilities are subject to an interest rate of 12%. Shareholders’ equity
had a fair value of Php1,200,000. Assets and liabilities provided represent their fair values.

During the year, the company earned income before interest and taxes of Php250,000. The
company is subject to an income tax rate of 30%. The cost of equity capital is 9%.

What is the Economic Value-Added (EVA)?

A. Php51,100
B. Php123,900
C. Php175,000
D. Php200,000

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