ch12

ch12Student: ___________________________________________________________________________

1. The design and use of management control systems affects how an individual makes and implements decisions. True False

2. In general, there is a direct relationship between the quality of the information provided to managers and

the quality of decisions made using that information. True False

3. Rational managers will always make decisions that are in the best interest of the organization employing

them. True False

4. Decentralization is the delegation of the authority to make decisions in the organization's name to

subordinates. True False

5. In general, organizations are more centralized in the early stages of their existence and more decentralized

as they grow. True False

6. One advantage of decentralization is faster response time to changes in the organization's environment by

local managers. True False

7. One advantage of centralization is better use of top management's time on strategic decisions.

True False

8. Properly developed and implemented management control systems influence subordinates to act in the

organization's best interest. True False

9. Delegated decision authority is the specification of what decisions a subordinate can make in the

organization. True False

10. It is important to not consider an organization's compensation and reward system when designing its

performance evaluation system. True False

11. Managers in a cost center are held responsible for both the costs and volumes of inputs used to produce a product or provide a service. True False

12. In general, profit centers are found at higher levels in an organization than investment centers.

True False

13. Properly designed management control systems can totally eliminate the inherent conflict between

individual behavior and organizational goals. True False

14. There is no single accounting measure that can fully measure the performance of a profit or investment

center. True False

15. Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured

performance. True False

16. Properly designed management control systems have both fixed compensation and contingent

compensation. True False

17. Cost allocations based on dual rates assume that a common cost can be separated into a fixed and variable

component. True False

18. The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on

factors under the manager's direct control. True False

19. It is possible for performance evaluation systems and/or management control systems to contribute to

unethical or fraudulent behavior. True False

20. Properly designed management control systems will eliminate fraudulent behavior by maximizing goal

congruence within the organization. True False

21. Which of the following statements is (are) true regarding managerial decisions?(A) The design and use of management control systems affects how an individual makes and implements decisions.(B) Rational managers will always make decisions that are in the best interest of the organization employing them. A. Only A is true.B. Only B is true.C. Both A and B are true.D. Neither A nor B is true.

22. Decentralization refers to the delegation of decision-making authority to

A. top management.B. superiors.C. board of directors.D. subordinates.

23. Which of the following is not a characteristic of a decentralized organization?

A. better use of local knowledgeB. better use of top management's timeC. reduced response time to environmental changesD. more decisions made by relatively few individuals

24. Which of the following statements is false?

A. The U.S. military is a good example of an organization that is highly decentralized.B. The degree of decentralization depends on how many decisions principals delegate to agents.C. Management control systems are used to measure the performance of an agent's decisions.D. Most organizations have some operating units that are centralized and some that are decentralized.

25. Which of the following elements is not part of a management control system?

A. delegated decision authorityB. performance evaluation systemC. knowledge of local conditionsD. compensation and reward system

26. An operating unit of an organization is called a cost center if it is responsible

A. only for costs.B. only for revenues.C. for costs and revenues.D. for investments in assets.

27. An operating unit of an organization is called an investment center if it is responsible


28. An operating unit of an organization is called a revenue center if it is responsible A. only for costs.B. only for revenues.C. for costs and revenues.D. for investments in assets.

29. An operating unit of an organization is called a profit center if it is responsible


30. An operating unit that is responsible for revenues and costs is commonly referred to as a(n)

A. expense center.B. revenue center.C. profit center.D. asset center.

31. An operating unit that is responsible for revenues only is commonly referred to as a(n)

A. expense center.B. revenue center.C. profit center.D. asset center.

32. An operating unit that is responsible for only costs is commonly referred to as a(n)

A. cost center.B. revenue center.C. profit center.D. asset center.

33. When managers are held responsible for costs but the input-output relationship is not well specified, a(n)

________________________ is established. A. standard cost centerB. revenue centerC. discretionary cost centerD. asset center

34. When managers are held responsible for costs and the input-output relationship is well specified, a(n)

________________________ is established. A. standard cost centerB. revenue centerC. discretionary cost centerD. asset center

35. Decentralized organizations can delegate authority and still maintain control and monitor managers' performance by designing appropriate management control systems. Which of the following responsibility centers would be evaluated similar to an independent business? A. profit centerB. revenue centerC. investment centerD. discretionary cost center

36. Controllable revenue is included in a performance report of a

A. aB. bC. cD. d


A. aB. bC. cD. d


A. aB. bC. cD. d

39. Assets invested in a responsibility center are included in a performance report of

A. aB. bC. cD. d


A. aB. bC. cD. d

41. A manager makes a decision that is beneficial for a specific investment center but not for the entire

organization. From the organization's perspective, this decision results in A. goal congruence.B. decentralization.C. contingent compensation.D. fixed compensation.

42. The controllability concept states that managers should be held responsible for

A. all items over which they have decision-making authority.B. costs and revenues, but not investments in assets used in their division.C. only items that are allocated to their divisions on a per-unit basis.D. fixed compensation items, but not contingent compensation items.

43. Relative performance evaluations (RPE) are not designed to

A. compare managers to other comparable managers.B. compare divisions with other comparable divisions.C. remove the effect of environmental factors that are beyond a manager's control.D. restate departmental goals so meaningful comparisons can be made.

44. Which of the following items would be classified as a fixed compensation item?

A. Administrative salariesB. Sales commissionsC. Stock optionsD. Piece rates

45. Which of the following items would not be classified as a contingent compensation item? A. Administrative salariesB. Sales commissionsC. Stock optionsD. Piece rates

46. Which of the following statements is (are) true regarding compensation?

(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured performance.(B) Properly designed management control systems have contingent compensation items but not fixed compensation items. A. Only A is true.B. Only B is true.C. Both A and B are true.D. Neither A nor B is true.

47. The use of dual rates in a cost allocation system assumes that common costs can be

A. separated into their fixed and variable components.B. traced directly to a specific division or manager.C. allocated based on a physical quantities measure.D. assigned to an investment responsibility center.

48. Which of the following statements is (are) false regarding the effective use of management control

systems?(A) In general, single rate cost allocations should not be used in management control systems because clear control over the cost being allocated cannot be determined.(B) The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control. A. Only A is false.B. Only B is false.C. Both A and B are false.D. Neither A nor B is false.

49. Examples of pressures that can lead to financial fraud do not include

A. unrealistic budgets.B. inappropriate bonus plans.C. overemphasis on long-term results.D. overemphasis on short-term results.

50. The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies

A. use investment centers to evaluate top managers.B. report on the adequacy of the company's internal controls over financial reporting.C. compensate managers with fixed compensation plans only.D. eliminate stock options for managerial compensation.

51. Which of the following is not an internal control? A. rotating personnel among tasks.B. separation of duties.C. setting limits on the amount of expenditures.D. using absolute performance standards.

52. Internal controls include all of the following except:

A. using contingent compensation plans.B. requiring management authorization for the use of a company's assets.C. reconciling various sets of books.D. requiring employees to take vacations.

Boxes-2-Go has two divisions, large and small, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year:

53. What is the allocation rate for the upcoming year assuming Boxes-2-Go uses the single-rate method and

allocates common costs based on the number of calls? A. $10.00B. $15.00C. $20.00D. $25.00

54. What is the allocation rate for the upcoming year assuming Boxes-2-Go uses the single-rate method and

allocates common costs based on the time on the network? A. $10.98B. $10.00C. $8.00D. $7.14

55. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should

be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is the total communication network costs allocated to the Large Box Division assuming the company uses dual-rates to allocate common costs? A. $2,700,000B. $2,520,000C. $1,980,000D. $1,500,000

56. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is total communication network costs allocated to the Small Box Division assuming the company uses dual-rates to allocate common costs? A. $2,520,000B. $1,800,000C. $1,320,000D. $1,200,000

The Copy Department in the College of Business at State University provides photocopying service for both the Marketing and Economics Department. The following budget has been prepared for the year.

57. If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be

allocated to the Marketing Department? A. $85,000B. $90,000C. $150,000D. $170,000

58. If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be

allocated to the Economics Department? A. $85,000B. $90,000C. $105,000D. $120,000

59. If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the

Economics Department, assuming the Economics Department actually made 2,100,000 copies during the year? A. $85,000B. $92,500C. $132,500D. $112,500


Marketing Department, assuming the Marketing Department actually made 3,000,000 copies during the year? A. $135,000B. $150,000C. $155,000D. $170,000

61. If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the Economics Department, assuming the Economics Department actually made 1,500,000 copies during the year? A. $77,500B. $92,500C. $132,500D. $112,500


Marketing Department, assuming the Marketing Department actually made 3,800,000 copies during the year? A. $135,000B. $150,000C. $155,000D. $175,000

Fenway Telcom has three divisions, commercial, retail and consumer, that share the common costs of the company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year:

63. What is the allocation rate for the upcoming year assuming Fenway Telcom uses the single-rate method

and allocates common costs based on the number of connections? A. $10.00B. $15.00C. $20.00D. $40.00

64. Fenway Telcom uses the single rate method and allocates common costs based on the number of

connections. What is the total computer server network cost allocated to the Commercial Division? A. $480,000B. $514,286C. $600,000D. $1,200,000

65. What is the allocation rate for the upcoming year assuming Fenway Telcom uses the single-rate method

and allocates common costs based on the time on the network? A. $20.00B. $16.00C. $4.00D. $2.86

66. Fenway Telcom uses the single rate method and allocates common costs based on the time on the network. What is the total computer server network cost allocated to the Retail Division? A. $429,000B. $600,000C. $657,800D. $3,000,000

67. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be

allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to the Commercial Division assuming the company uses dual-rates to allocate common costs? A. $514,286B. $480,000C. $600,000D. $565,000


allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is total server network costs allocated to the Retail Division assuming the company uses dual-rates to allocate common costs? A. $741,667B. $657,143C. $425,000D. $211,765


allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is total server network costs allocated to the Consumer Division assuming the company uses dual-rates to allocate common costs? A. $1,200,000B. $1,093,333C. $954,896D. $750,000

The Document Creation Center (DCC) for Alegis Corp. provides photocopying and document services for three departments in the St. Paul office. The following budget has been prepared for the year.

70. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the

Software Development Department? A. $98,000B. $104,000C. $112,000D. $118,857

71. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Training Department? A. $183,750B. $210,000C. $195,000D. $222,857

72. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the

Management Department? A. $168,000B. $156,000C. $178,286D. $147,000

73. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management

Department, assuming the Management Department actually made 2,100,000 copies during the year? A. $147,000B. $136,500C. $159,000D. $150,761

74. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management

Department, assuming the Management Department actually made 2,950,000 copies during the year? A. $184,500B. $191,750C. $211,783D. $206,500

75. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training

Department, assuming the Training Department actually made 3,250,000 copies during the year? A. $227,500B. $211,250C. $217,500D. $223,017

76. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training

Department, assuming the Training Department actually made 2,770,000 copies during the year? A. $180,050B. $190,079C. $193,900D. $203,100

77. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Software Development Department, assuming the Software Development Department actually made 1,160,000 copies during the year? A. $75,400B. $98,800C. $81,200D. $84,312

78. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Software

Development Department, assuming the Software Development Department actually made 1,780,000 copies during the year? A. $117,400B. $115,700C. $124,600D. $129,376

79. In responsibility accounting, a center's performance is measured by those costs which are controllable.

Controllable costs are best described as including (CMA adapted) A. direct materials and direct labor only.B. only those costs that the manager can influence in the current period.C. only discretionary costs.D. those costs about which the manager is knowledgeable and informed.E. incremental and fixed costs.

80. Rockford Manufacturing 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 Rockford's assembly lines? (CMA adapted) A. direct laborB. materialsC. repairs and maintenanceD. depreciation on the manufacturing facilityE. supervisory salaries

81. Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n)

(CMA adapted) A. profit center.B. revenue center.C. division.D. operating unit.E. investment center.

82. When comparing performance report information for top management with that of lower-level management, (CMA adapted) A. top management reports are more detailed.B. lower-level management reports are typically for longer time periods.C. top management reports show control over fewer costs.D. lower-level management reports are likely to contain more quantitative data and less financial data.E. top management reports are usually not of the exception type but present a complete analysis of all

variances. 83. The least complex segment or area of responsibility for which costs are allocated is a(n) (CMA adapted)

A. profit center.B. investment center.C. contribution center.D. cost center.E. hybrid center.

84. Which one of the following will not occur in an organization that gives managers throughout the

organization maximum freedom to make decisions? (CMA adapted) A. more effective solutions to operational problemsB. individual managers regarding the managers of other segments as they do external partiesC. two divisions of the organization having competing models that aim for the same market segmentsD. delays in securing approval for the introduction of new productsE. greater knowledge of the marketplace and improved service to customers

85. Which one of the following firms is likely to experience dysfunctional motivation on the part of its

managers due to its allocation methods? (CMA adapted) A.

To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar Electronics uses predetermined amounts calculated on the basis of the long term average use of the services provided by the warehouse to the various segments.

B.

Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building. It also uses ROI to evaluate the divisional performance.

C. Rainier Industrial does not allow its service departments to pass on their cost overruns to production departments.

D. Tashkent Auto's management information system (MIS) is operated out of headquarters and serves its various divisions. Tashkent's allocation of MIS-related costs to its divisions is limited to costs the divisions will incur if they were to outsource their MIS needs.

E. Golkonda Refineries separately allocates fixed and variable costs incurred by its service departments to its production departments.

86. Atlantic Hotels operates a centralized call center for the reservation needs of its time-share units. Costs associated with use of the center are charged to the time-share group (Luxury, Resort, Standard, and Budget) where a reservation is made on the basis of time on a call. Idle time of the reservation agents, time spent on calls where no reservation is made, and the fixed cost of the equipment are allocated on the number of reservations made in each group. Due to recent increased competition in the time-share, the company has decided that it is necessary to more accurately allocate its costs to price its services competitively and profitably. During the current period, the use of the call center for each group was as follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $2,410,000 for personnel and $1,240,000 for equipment and other costs.Required Determine the allocation to each of the divisions using (you may round all decimals to three places):a. A single rate based on time used. b. Multiple rates based on time used (for personnel costs) and number of reservations (for equipment and other cost).

87. Baltic Resorts operates a centralized call center for the reservation needs of its time-share units. Costs associated with use of the center are charged to the time-share group (Luxury, Standard, and Budget) where a reservation is made on the basis of time spent on a call. Due to recent increased competition in the time-share, the company has decided that it is necessary to more accurately allocate its costs to price its services competitively and profitably. During the current period, the use of the call center for each group was as follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $1,760,000 for personnel and $1,240,000 for equipment and other costs.Required Determine the allocation to each of the divisions using (round all decimals to three places):a. A single rate based on time used. b. Multiple rates based on time used (for personnel costs) and number of reservations (for equipment and other cost).

88. Caspian Resorts operates a centralized call center for the reservation needs of its time-share units. Costs

associated with use of the center are charged to the time-share group (Luxury and Standard) where a reservation is made on the basis of time spent on a call. Due to recent increased competition in the time-share, the company has decided that it is necessary to more accurately allocate its costs to price its services competitively and profitably. During the current period, the use of the call center for each group was as follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $1,220,000 for personnel and $960,000 for equipment and other costs.Required Determine the allocation to each of the divisions using (round all decimals to three places):a. A single rate based on time used. b. Multiple rates based on time used (for personnel costs) and number of reservations (for equipment and other cost).

89. The Document Creation Center (DCC) for Aelerion Corp. provides document services for three departments in the Denver office. The following budget has been prepared for the month.

Required (use three decimal places in your calculations):a. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the three user departments?

90. The legal department for Buffet Corp. provides legal services for four departments in the Omaha office.

The following budget has been prepared for the month.

Required (use three decimal places in your calculations):a. If Buffet uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the four user departments?

91. The human resources department for Hammond Corp. provides personnel services for two departments in the Chicago office. The following budget has been prepared for the month.

Required (use three decimal places in your calculations):a. If Hammond uses a dual rate for allocating its costs based on employees, how much cost will be allocated to the two departments?

92. The Document Creation Center (DCC) for Aelerion Corp. provides document services for three departments

in the Denver office. The following budget has been prepared for the month.

Required (use three decimal places in your calculations):a. If DCC uses a dual rate for allocating its costs; allocating fixed costs based on number of documents and variable costs based on number of pages, how much cost will be allocated to the three user departments?

93. The legal department for Buffet Corp. provides legal services for four departments in the Omaha office. The following budget has been prepared for the month.

Required (use three decimal places in your calculations):a. If Buffet uses a dual rate for allocating its costs, allocating fixed costs based on number of contracts and variable costs based on number of pages reviewed, how much cost will be allocated to the four user departments?

94. Wrigley Services has three divisions, commercial, retail and consumer, that share the common costs of the

company's computer server network. The annual common costs are $1,200,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method and allocates common costs based on the number of connections? Calculate the allocated amount for each division. b. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division.c. The cost accountant determined $850,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division?

95. Comiskey has four divisions, commercial, retail, research and consumer, that share the common costs of the company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate method and allocates common costs based on the number of connections? Calculate the allocated amount for each division. b. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division.c. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division?

96. Jacobs Corp. has three divisions, commercial, retail and consumer, that share the common costs of the

company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method and allocates common costs based on the number of connections? Calculate the allocated amount for each division. b. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division.

97. Marlin has three divisions, commercial, retail and consumer, that share the common costs of the company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. The cost accountant determined $1,800,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division?

98. Sanper Corp. has four divisions, commercial, retail, research, and consumer, that share the common costs

of the company's computer server network. The annual common costs are $3,500,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method and allocates common costs based on the number of connections? b. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division.

99. Charleston has four divisions, commercial, retail, research, and consumer, that share the common costs of the company's computer server network. The annual common costs are $3,600,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. The cost accountant determined $2,300,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division?

100.Redding has two divisions, Production and Support, that share the common costs of the company's

communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Redding uses the single-rate method and allocates common costs based on the number of calls? Calculate the costs allocated to each division. b. What is the allocation rate for the upcoming year assuming Redding uses the single-rate method and allocates common costs based on the time on the network? Calculate the costs allocated to each division.c. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is the total communication network costs allocated to each division?

101.Salinas has two divisions, Marketing and Finance, that share the common costs of the company's communications network. The annual common costs are $2,250,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method and allocates common costs based on the number of calls? Calculate the costs allocated to each division. b. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method and allocates common costs based on the time on the network? Calculate the costs allocated to each division.

102.Tofte has two divisions, Research and Sales, that share the common costs of the company's

communications network. The annual common costs are $2,250,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. The cost accountant determined $1,350,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is the total communication network costs allocated to each division?

103.The Black Swan Company has three client-contact departments: Market Research, Branding, and Promotion. Each department requires the services of the Legal Department for the contracts that each undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on the Legal Department's budgeted and actual costs is as follows:The budget for the Legal Dept is $300,000 + $10/contract. The budgeted volume of contracts is as follows:

The actual number of contracts for Market Research was 315, for Branding was 450, and for Promotion was 720.Required (use three decimal places in your calculations):a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal Department would be allocated to each of the producing departments? b. If a dual charging rate is used, how much of the cost of the Legal Department would be allocated to each of the producing departments

104.The Black Swan Company has three client-contact departments: Market Research, Branding, and

Promotion. Each department requires the services of the Legal Department for the contracts that each undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on the Legal Department's budgeted and actual costs is as follows:The budget for the Legal Dept is $200,000 + $7.50/contract. The budgeted volume of contracts is as follows:


105.The Black Swan Company has three client-contact departments: Market Research, Branding, and Promotion. Each department requires the services of the Legal Department for the contracts that each undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on the Legal Department's budgeted and actual costs is as follows:The budget for the Legal Dept is $400,000 + $15/contract. The budgeted volume of contracts is as follows:


106.Describe five advantages of decentralization.

107.Describe two disadvantages of decentralization.

108.Describe the three main elements of a management control system.

109.Describe the five basic types of decentralized units in responsibility accounting.

110.Explain the difference between fixed compensation and contingent compensation. Give an example of

each.

ch12 Key

1. The design and use of management control systems affects how an individual makes and implements decisions. TRUEControl systems affect behavior.

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Comprehension

Difficulty: MediumLanen - Chapter 12 #1Learning Objective: 1

Topic Area: Alignment of Managerial and Organizational Interests

2. In general, there is a direct relationship between the quality of the information provided to managers and the quality of decisions made using that information. TRUENormally, the better the information, the higher the quality of the decision.

AACSB: Analytic


Difficulty: MediumLanen - Chapter 12 #2Learning Objective: 1

Topic Area: Why a Management Control System?

3. Rational managers will always make decisions that are in the best interest of the organization employing them. FALSERational managers will often make decisions that are in their best personal interest.

AACSB: Analytic


Difficulty: EasyLanen - Chapter 12 #3Learning Objective: 1

Topic Area: Why a Management Control System?

4. Decentralization is the delegation of the authority to make decisions in the organization's name to subordinates. TRUEThis is the definition of decentralization.

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Knowledge


Topic Area: Decentralized organizations

5. In general, organizations are more centralized in the early stages of their existence and more decentralized as they grow. TRUEDecentralization normally is the result of growth.

AACSB: Analytic



Topic Area: Decentralized organizations

6. One advantage of decentralization is faster response time to changes in the organization's environment by local managers. TRUELocal managers have the authority to make decisions, so the response time is faster.

AACSB: Analytic



Topic Area: Advantages of Decentralization

7. One advantage of centralization is better use of top management's time on strategic decisions. FALSEIn a centralized system top management is required to make many operating decisions, so there is less time for strategic decision making.

AACSB: Analytic



Topic Area: Disadvantages of Decentralization

8. Properly developed and implemented management control systems influence subordinates to act in the organization's best interest. TRUEA properly designed system will promote goal congruence.

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Application


Topic Area: Elements of a Management Control System

9. Delegated decision authority is the specification of what decisions a subordinate can make in the organization. TRUEAuthority defines what a person can and cannot do.

AACSB: Analytic



Topic Area: Elements of a Management Control System

10. It is important to not consider an organization's compensation and reward system when designing its performance evaluation system. FALSEIt is important to consider the system.

AACSB: Analytic


Difficulty: MediumLanen - Chapter 12 #10

Learning Objective: 3Topic Area: Elements of a Management Control System

11. Managers in a cost center are held responsible for both the costs and volumes of inputs used to produce a product or provide a service. TRUEThe manager does not have control over the price of the output, nor authority over it.

AACSB: Analytic


Difficulty: EasyLanen - Chapter 12 #11

Learning Objective: 4Topic Area: Cost Centers

12. In general, profit centers are found at higher levels in an organization than investment centers. FALSEInvestment centers are found at higher levels.

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Knowledge


Learning Objective: 4Topic Area: Investment Centers

13. Properly designed management control systems can totally eliminate the inherent conflict between individual behavior and organizational goals. FALSEConflict cannot be totally eliminated.

AACSB: Analytic


Difficulty: HardLanen - Chapter 12 #13

Learning Objective: 4Topic Area: Responsibility Centers and Organization Structure

14. There is no single accounting measure that can fully measure the performance of a profit or investment center. TRUEThere is no one single perfect measure.

AACSB: Analytic



Learning Objective: 4Topic Area: Measuring Performance

15. Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured performance. TRUEContingent compensation is linked with performance.

AACSB: Analytic



Learning Objective: 5Topic Area: Compensation Systems

16. Properly designed management control systems have both fixed compensation and contingent compensation. TRUEIf contingent is too small there is not enough incentive, if the proportion of contingent is too high there is too much risk.

AACSB: Analytic




17. Cost allocations based on dual rates assume that a common cost can be separated into a fixed and variable component. TRUEThe dual refers to fixed and variable.

AACSB: Analytic



Learning Objective: 6Topic Area: Effective Corporate Cost Allocation System

18. The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control. TRUEThe allocation reflects the cost behavior.

AACSB: Analytic


Difficulty: HardLanen - Chapter 12 #18


19. It is possible for performance evaluation systems and/or management control systems to contribute to unethical or fraudulent behavior. TRUESystems do not guarantee ethical behavior.

AACSB: Analytic



Learning Objective: 7Topic Area: Do Performance Evaluation Systems Create Incentives to Commit Fraud?

20. Properly designed management control systems will eliminate fraudulent behavior by maximizing goal congruence within the organization. FALSEFraud cannot be eliminated by control systems, it can only be reduced.

AACSB: Analytic




21. Which of the following statements is (are) true regarding managerial decisions?(A) The design and use of management control systems affects how an individual makes and implements decisions.(B) Rational managers will always make decisions that are in the best interest of the organization employing them. A. Only A is true.B. Only B is true.C. Both A and B are true.D. Neither A nor B is true.

Rational managers will not always make the best decisions for the organization.

AACSB: Analytic



Learning Objective: 1Topic Area: Alignment of Managerial and Organizational Interests

22. Decentralization refers to the delegation of decision-making authority to A. top management.B. superiors.C. board of directors.D. subordinates.

Delegation is to the subordinates; delegation is from the superiors/top management.

AACSB: Analytic



Learning Objective: 2Topic Area: Decentralized organizations

23. Which of the following is not a characteristic of a decentralized organization? A. better use of local knowledgeB. better use of top management's timeC. reduced response time to environmental changesD. more decisions made by relatively few individuals

Decisions are made by more individuals, not fewer, under decentralization.

AACSB: Analytic



Learning Objective: 2Topic Area: Advantages of Decentralization

24. Which of the following statements is false? A. The U.S. military is a good example of an organization that is highly decentralized.B. The degree of decentralization depends on how many decisions principals delegate to agents.C. Management control systems are used to measure the performance of an agent's decisions.D. Most organizations have some operating units that are centralized and some that are decentralized.

The U.S. military is a centralized organization.

AACSB: Analytic




25. Which of the following elements is not part of a management control system? A. delegated decision authorityB. performance evaluation systemC. knowledge of local conditionsD. compensation and reward system

Knowledge of local conditions is an advantage of a decentralized organization, not an element of management control.

AACSB: Analytic




26. An operating unit of an organization is called a cost center if it is responsible A. only for costs.B. only for revenues.C. for costs and revenues.D. for investments in assets.

This is the definition of a cost center.

AACSB: Analytic



Learning Objective: 4Topic Area: Delegated Decision Authority: Responsibility Accounting

27. An operating unit of an organization is called an investment center if it is responsible A. only for costs.B. only for revenues.C. for costs and revenues.D. for investments in assets.

This is the definition of an investment center.

AACSB: Analytic




28. An operating unit of an organization is called a revenue center if it is responsible A. only for costs.B. only for revenues.C. for costs and revenues.D. for investments in assets.

This is the definition of a revenue center.

AACSB: Analytic




29. An operating unit of an organization is called a profit center if it is responsible A. only for costs.B. only for revenues.C. for costs and revenues.D. for investments in assets.

This is the definition of a profit center.

AACSB: Analytic




30. An operating unit that is responsible for revenues and costs is commonly referred to as a(n) A. expense center.B. revenue center.C. profit center.D. asset center.

Revenues - costs = profit.

AACSB: Analytic




31. An operating unit that is responsible for revenues only is commonly referred to as a(n) A. expense center.B. revenue center.C. profit center.D. asset center.

This is the definition of a revenue center.

AACSB: Analytic




32. An operating unit that is responsible for only costs is commonly referred to as a(n) A. cost center.B. revenue center.C. profit center.D. asset center.

This is the definition of a cost center.

AACSB: Analytic




33. When managers are held responsible for costs but the input-output relationship is not well specified, a(n) ________________________ is established. A. standard cost centerB. revenue centerC. discretionary cost centerD. asset center

Key is input-output not well established.

AACSB: Analytic




34. When managers are held responsible for costs and the input-output relationship is well specified, a(n) ________________________ is established. A. standard cost centerB. revenue centerC. discretionary cost centerD. asset center

Key is the well specified input-output.

AACSB: Analytic




35. Decentralized organizations can delegate authority and still maintain control and monitor managers' performance by designing appropriate management control systems. Which of the following responsibility centers would be evaluated similar to an independent business? A. profit centerB. revenue centerC. investment centerD. discretionary cost center

An investment center has authority over profits and can make asset decisions, just like an independent business. The key is "asset decisions."

AACSB: Analytic





A. aB. bC. cD. d

Both are responsible for revenues and costs.

AACSB: Analytic





A. aB. bC. cD. d

Cost centers do not have authority over revenues.

AACSB: Analytic





A. aB. bC. cD. d

Profit centers have revenue authority, cost centers do not.

AACSB: Analytic





A. aB. bC. cD. d

Only investment centers have asset authority.

AACSB: Analytic





A. aB. bC. cD. d

Neither have asset authority.

AACSB: Analytic




41. A manager makes a decision that is beneficial for a specific investment center but not for the entire organization. From the organization's perspective, this decision results in A. goal congruence.B. decentralization.C. contingent compensation.D. fixed compensation.

This is a definition of goal congruence.

AACSB: Analytic



Learning Objective: 4Topic Area: Measuring Performance

42. The controllability concept states that managers should be held responsible for A. all items over which they have decision-making authority.B. costs and revenues, but not investments in assets used in their division.C. only items that are allocated to their divisions on a per-unit basis.D. fixed compensation items, but not contingent compensation items.

This is the definition of controllability.

AACSB: Analytic



Learning Objective: 5Topic Area: Evaluating Performance

43. Relative performance evaluations (RPE) are not designed to A. compare managers to other comparable managers.B. compare divisions with other comparable divisions.C. remove the effect of environmental factors that are beyond a manager's control.D. restate departmental goals so meaningful comparisons can be made.

Goals are not restated. RPE defines what is being compared against.

AACSB: Analytic




44. Which of the following items would be classified as a fixed compensation item? A. Administrative salariesB. Sales commissionsC. Stock optionsD. Piece rates

Salaries are fixed amounts, the other three vary.

AACSB: Analytic




45. Which of the following items would not be classified as a contingent compensation item? A. Administrative salariesB. Sales commissionsC. Stock optionsD. Piece rates

Salaries are fixed amounts, the other three vary.

AACSB: Analytic




46. Which of the following statements is (are) true regarding compensation?(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured performance.(B) Properly designed management control systems have contingent compensation items but not fixed compensation items. A. Only A is true.B. Only B is true.C. Both A and B are true.D. Neither A nor B is true.

Both fixed and contingent compensation should be included.

AACSB: Analytic




47. The use of dual rates in a cost allocation system assumes that common costs can be A. separated into their fixed and variable components.B. traced directly to a specific division or manager.C. allocated based on a physical quantities measure.D. assigned to an investment responsibility center.

Dual allocation needs the fixed/variable breakdown.

AACSB: Analytic




48. Which of the following statements is (are) false regarding the effective use of management control systems?(A) In general, single rate cost allocations should not be used in management control systems because clear control over the cost being allocated cannot be determined.(B) The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control. A. Only A is false.B. Only B is false.C. Both A and B are false.D. Neither A nor B is false.

Both are true.

AACSB: Analytic




49. Examples of pressures that can lead to financial fraud do not include A. unrealistic budgets.B. inappropriate bonus plans.C. overemphasis on long-term results.D. overemphasis on short-term results.

Fraud is almost always short-term.

AACSB: Analytic




50. The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies A. use investment centers to evaluate top managers.B. report on the adequacy of the company's internal controls over financial reporting.C. compensate managers with fixed compensation plans only.D. eliminate stock options for managerial compensation.

Sarbanes-Oxley does not reference stock options.

AACSB: Analytic

AICPA: FN-Risk AnalysisBlooms: Comprehension


Learning Objective: 8Topic Area: Internal Controls to Protect Assets and Provide Quality Information

51. Which of the following is not an internal control? A. rotating personnel among tasks.B. separation of duties.C. setting limits on the amount of expenditures.D. using absolute performance standards.

Absolute performance standards are not part of internal control.

AACSB: Analytic




52. Internal controls include all of the following except: A. using contingent compensation plans.B. requiring management authorization for the use of a company's assets.C. reconciling various sets of books.D. requiring employees to take vacations.

Internal controls do not address contingent or fixed compensation.

AACSB: Analytic




Boxes-2-Go has two divisions, large and small, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year:

Lanen - Chapter 12

53. What is the allocation rate for the upcoming year assuming Boxes-2-Go uses the single-rate method and allocates common costs based on the number of calls? A. $10.00B. $15.00C. $20.00D. $25.00

[$4,500,000/(100,000 + 80,000)] = $25.00

AACSB: Analytic



Learning Objective: 6Topic Area: Incentive Problems with Allocated Costs

54. What is the allocation rate for the upcoming year assuming Boxes-2-Go uses the single-rate method and allocates common costs based on the time on the network? A. $10.98B. $10.00C. $8.00D. $7.14

[$4,500,000/(120,000 + 330,000)] = $10.00

AACSB: Analytic




55. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is the total communication network costs allocated to the Large Box Division assuming the company uses dual-rates to allocate common costs? A. $2,700,000B. $2,520,000C. $1,980,000D. $1,500,000

(100,000/180,000 × $2,700,000) + (120,000/450,000 × $1,800,000) = $1,980,000

AACSB: Analytic




56. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is total communication network costs allocated to the Small Box Division assuming the company uses dual-rates to allocate common costs? A. $2,520,000B. $1,800,000C. $1,320,000D. $1,200,000

(80,000/180,000 × $2,700,000) + (330,000/450,000 × $1,800,000) = $2,520,000

AACSB: Analytic




The Copy Department in the College of Business at State University provides photocopying service for both the Marketing and Economics Department. The following budget has been prepared for the year.

Lanen - Chapter 12

57. If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Marketing Department? A. $85,000B. $90,000C. $150,000D. $170,000

(3,600,000/5,400,000 × $120,000) + [$.025 × 3,600,000] = $170,000

AACSB: Analytic




58. If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Economics Department? A. $85,000B. $90,000C. $105,000D. $120,000

(1,800,000/5,400,000 × $120,000) + [$.025 × 1,800,000] = $85,000

AACSB: Analytic





(1,800,000/5,400,000 × $120,000) + [$.025 × 2,100,000] = $92,500

AACSB: Analytic




60. If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the Marketing Department, assuming the Marketing Department actually made 3,000,000 copies during the year? A. $135,000B. $150,000C. $155,000D. $170,000

(3,600,000/5,400,000 × $120,000) + [$.025 × 3,000,000] = $155,000

AACSB: Analytic





(1,800,000/5,400,000 × $120,000) + [$.025 × 1,500,000] = $77,500

AACSB: Analytic




62. If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the Marketing Department, assuming the Marketing Department actually made 3,800,000 copies during the year? A. $135,000B. $150,000C. $155,000D. $175,000

(3,600,000/5,400,000 × $120,000) + [$.025 × 3,800,000] = $175,000

AACSB: Analytic




Fenway Telcom has three divisions, commercial, retail and consumer, that share the common costs of the company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year:

Lanen - Chapter 12

63. What is the allocation rate for the upcoming year assuming Fenway Telcom uses the single-rate method and allocates common costs based on the number of connections? A. $10.00B. $15.00C. $20.00D. $40.00

[$2,400,000/(60,000 + 80,000 + 100,000)] = $10.00

AACSB: Analytic




64. Fenway Telcom uses the single rate method and allocates common costs based on the number of connections. What is the total computer server network cost allocated to the Commercial Division? A. $480,000B. $514,286C. $600,000D. $1,200,000

$10.00 × 60,000 = $600,000

AACSB: Analytic




65. What is the allocation rate for the upcoming year assuming Fenway Telcom uses the single-rate method and allocates common costs based on the time on the network? A. $20.00B. $16.00C. $4.00D. $2.86

[$2,400,000/(120,000 + 150,000 + 330,000)] = $4.00

AACSB: Analytic




66. Fenway Telcom uses the single rate method and allocates common costs based on the time on the network. What is the total computer server network cost allocated to the Retail Division? A. $429,000B. $600,000C. $657,800D. $3,000,000

$4.00 × 150,000 = $600,000

AACSB: Analytic




67. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to the Commercial Division assuming the company uses dual-rates to allocate common costs? A. $514,286B. $480,000C. $600,000D. $565,000

(60,000/240,000 × $1,700,000) + (120,000 × ($700,000/600,000) = $565,000

AACSB: Analytic




68. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is total server network costs allocated to the Retail Division assuming the company uses dual-rates to allocate common costs? A. $741,667B. $657,143C. $425,000D. $211,765

(80,000/240,000 × $1,700,000) + (150,000 × ($700,000/600,000)) = $741,667

AACSB: Analytic




69. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is total server network costs allocated to the Consumer Division assuming the company uses dual-rates to allocate common costs? A. $1,200,000B. $1,093,333C. $954,896D. $750,000

(100,000/240,000 × $1,700,000) + (330,000 × ($700,000/600,000))= $1,093,333

AACSB: Analytic




The Document Creation Center (DCC) for Alegis Corp. provides photocopying and document services for three departments in the St. Paul office. The following budget has been prepared for the year.

Lanen - Chapter 12

70. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Software Development Department? A. $98,000B. $104,000C. $112,000D. $118,857

(1,600,000/7,000,000 × $280,000) + [$.03 × 1,600,000] = $112,000

AACSB: Analytic




71. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Training Department? A. $183,750B. $210,000C. $195,000D. $222,857

(3,000,000/7,000,000 × $280,000) + [$.03 × 3,000,000] = $210,000

AACSB: Analytic




72. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the Management Department? A. $168,000B. $156,000C. $178,286D. $147,000

(2,400,000/7,000,000 × $280,000) + [$.03 × 2,400,000] = $168,000

AACSB: Analytic




73. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management Department, assuming the Management Department actually made 2,100,000 copies during the year? A. $147,000B. $136,500C. $159,000D. $150,761

(2,400,000/7,000,000 × $280,000) + [$.03 × 2,100,000] = $159,000

AACSB: Analytic




74. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management Department, assuming the Management Department actually made 2,950,000 copies during the year? A. $184,500B. $191,750C. $211,783D. $206,500

(2,400,000/7,000,000 × $280,000) + [$.03 × 2,950,000] = $184,500

AACSB: Analytic




75. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training Department, assuming the Training Department actually made 3,250,000 copies during the year? A. $227,500B. $211,250C. $217,500D. $223,017

(3,000,000/7,000,000 × $280,000) + [$.03 × 3,250,000] = $217,500

AACSB: Analytic




76. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training Department, assuming the Training Department actually made 2,770,000 copies during the year? A. $180,050B. $190,079C. $193,900D. $203,100

(3,000,000/7,000,000 × $280,000) + [$.03 × 2,770,000] = $203,100

AACSB: Analytic





(1,600,000/7,000,000 × $280,000) + [$.03 × 1,160,000] = $98,800

AACSB: Analytic





(1,600,000/7,000,000 × $280,000) + [$.03 × 1,780,000] = $117,400

AACSB: Analytic




79. In responsibility accounting, a center's performance is measured by those costs which are controllable. Controllable costs are best described as including (CMA adapted) A. direct materials and direct labor only.B. only those costs that the manager can influence in the current period.C. only discretionary costs.D. those costs about which the manager is knowledgeable and informed.E. incremental and fixed costs.

A controllable cost is one that can be influenced.

AACSB: Analytic




80. Rockford Manufacturing 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 Rockford's assembly lines? (CMA adapted) A. direct laborB. materialsC. repairs and maintenanceD. depreciation on the manufacturing facilityE. supervisory salaries

An assembly line would be a cost center with no control over assets.

AACSB: Analytic




81. Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n) (CMA adapted) A. profit center.B. revenue center.C. division.D. operating unit.E. investment center.

Revenues and costs = profit center.

AACSB: Analytic



Learning Objective: 4Topic Area: Profit Centers

82. When comparing performance report information for top management with that of lower-level management, (CMA adapted) A. top management reports are more detailed.B. lower-level management reports are typically for longer time periods.C. top management reports show control over fewer costs.D. lower-level management reports are likely to contain more quantitative data and less financial data.E. top management reports are usually not of the exception type but present a complete analysis of all

variances.

Top management reports are less detailed, long time period, and more financial oriented. Lower management is more detailed, shorter time, and more operational.

AACSB: Analytic




83. The least complex segment or area of responsibility for which costs are allocated is a(n) (CMA adapted) A. profit center.B. investment center.C. contribution center.D. cost center.E. hybrid center.

Less complex implies less responsibility. Cost centers have the least responsibility

AACSB: Analytic



Learning Objective: 4Topic Area: Cost Centers

84. Which one of the following will not occur in an organization that gives managers throughout the organization maximum freedom to make decisions? (CMA adapted) A. more effective solutions to operational problemsB. individual managers regarding the managers of other segments as they do external partiesC. two divisions of the organization having competing models that aim for the same market segmentsD. delays in securing approval for the introduction of new productsE. greater knowledge of the marketplace and improved service to customers

Decentralization implies less approvals.

AACSB: Analytic




85. Which one of the following firms is likely to experience dysfunctional motivation on the part of its managers due to its allocation methods? (CMA adapted) A.

To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar Electronics uses predetermined amounts calculated on the basis of the long term average use of the services provided by the warehouse to the various segments.

B.

Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building. It also uses ROI to evaluate the divisional performance.

C. Rainier Industrial does not allow its service departments to pass on their cost overruns to production departments.

D.

Tashkent Auto's management information system (MIS) is operated out of headquarters and serves its various divisions. Tashkent's allocation of MIS-related costs to its divisions is limited to costs the divisions will incur if they were to outsource their MIS needs.

E. Golkonda Refineries separately allocates fixed and variable costs incurred by its service departments to its production departments.

Allocating on the basis of sales revenue often creates dysfunctional behavior.

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Analysis



86. Atlantic Hotels operates a centralized call center for the reservation needs of its time-share units. Costs associated with use of the center are charged to the time-share group (Luxury, Resort, Standard, and Budget) where a reservation is made on the basis of time on a call. Idle time of the reservation agents, time spent on calls where no reservation is made, and the fixed cost of the equipment are allocated on the number of reservations made in each group. Due to recent increased competition in the time-share, the company has decided that it is necessary to more accurately allocate its costs to price its services competitively and profitably. During the current period, the use of the call center for each group was as follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $2,410,000 for personnel and $1,240,000 for equipment and other costs.Required Determine the allocation to each of the divisions using (you may round all decimals to three places):a. A single rate based on time used. b. Multiple rates based on time used (for personnel costs) and number of reservations (for equipment and other cost). a. Luxury: $496,400; Resort: $828,550; Standard: $1,328,600; Budget: $996,450b. Luxury: $415,800; Resort: $724,390; Standard: $1,409,200; Budget: $1,100,610

Feedback: Totals:Luxury: $327,760 + 88,040 = $415,800Resort: $547,070 + 177,320 = $724,390Standard: $877,240 + 531,960 = $1,409,200Budget: $657,930 + 442,680 = $1,100,610

AACSB: Analytic

AICPA: FN-MeasurementBlooms: AnalysisDifficulty: Hard

Lanen - Chapter 12 #86Learning Objective: 6

Topic Area: Effective Corporate Cost Allocation System

87. Baltic Resorts operates a centralized call center for the reservation needs of its time-share units. Costs associated with use of the center are charged to the time-share group (Luxury, Standard, and Budget) where a reservation is made on the basis of time spent on a call. Due to recent increased competition in the time-share, the company has decided that it is necessary to more accurately allocate its costs to price its services competitively and profitably. During the current period, the use of the call center for each group was as follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $1,760,000 for personnel and $1,240,000 for equipment and other costs.Required Determine the allocation to each of the divisions using (round all decimals to three places):a. A single rate based on time used. b. Multiple rates based on time used (for personnel costs) and number of reservations (for equipment and other cost). a. Luxury: $375,000; Standard: $1,500,000; Budget: $1,125,000b. Luxury: $322,920; Standard: $1,500,000; Budget: $1,177,080

Feedback: Totals:Luxury: $220,000 + 102,920 = $322,920Standard: $880,000 + 620,000 = $1,500,000Budget: $660,000 + 517,080 = $1,177,080

AACSB: Analytic




88. Caspian Resorts operates a centralized call center for the reservation needs of its time-share units. Costs associated with use of the center are charged to the time-share group (Luxury and Standard) where a reservation is made on the basis of time spent on a call. Due to recent increased competition in the time-share, the company has decided that it is necessary to more accurately allocate its costs to price its services competitively and profitably. During the current period, the use of the call center for each group was as follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $1,220,000 for personnel and $960,000 for equipment and other costs.Required Determine the allocation to each of the divisions using (round all decimals to three places):a. A single rate based on time used. b. Multiple rates based on time used (for personnel costs) and number of reservations (for equipment and other cost). a. Luxury: $436,000; Standard: $1,744,000b. Luxury: $381,280; Standard: $1,798,720

Feedback: Totals:Luxury: $244,000 + 137,280 = $381,280Standard: $976,000 + 822,720 = $1,798,720

AACSB: Analytic





Required (use three decimal places in your calculations):a. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the three user departments? Software Development: $11,000; Training: $20,625; Management: $23,375

Feedback:

AACSB: Analytic

AICPA: FN-MeasurementBlooms: Analysis




Required (use three decimal places in your calculations):a. If Buffet uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the four user departments? Purchasing: $34,800; Marketing: $43,500; Training: $65,250; Management: $73,950

Feedback:

AACSB: Analytic




91. The human resources department for Hammond Corp. provides personnel services for two departments in the Chicago office. The following budget has been prepared for the month.

Required (use three decimal places in your calculations):a. If Hammond uses a dual rate for allocating its costs based on employees, how much cost will be allocated to the two departments? Production: $57,190; Management: $9,310

Feedback:

AACSB: Analytic





Required (use three decimal places in your calculations):a. If DCC uses a dual rate for allocating its costs; allocating fixed costs based on number of documents and variable costs based on number of pages, how much cost will be allocated to the three user departments? Software Development: $19,277; Training: $39,759; Management: $39,027

Feedback:

AACSB: Analytic





Required (use three decimal places in your calculations):a. If Buffet uses a dual rate for allocating its costs, allocating fixed costs based on number of contracts and variable costs based on number of pages reviewed, how much cost will be allocated to the four user departments? Purchasing: $62,940; Marketing: $93,956; Training: $132,264; Management: $82,850

Feedback:

AACSB: Analytic




94. Wrigley Services has three divisions, commercial, retail and consumer, that share the common costs of the company's computer server network. The annual common costs are $1,200,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method and allocates common costs based on the number of connections? Calculate the allocated amount for each division. b. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division.c. The cost accountant determined $850,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division? a. Rate: $10/connection; Commercial: $300,000; Retail: $400,000; Consumer: $500,000b. Rate: $2/hour; Commercial: $240,00; Retail: $300,000; Consumer: $660,000c. Commercial: $282,460; Retail: $370,500; Consumer: $546,840Feedback: a. rate: $1,200,000/(30,000 + 40,000 + 50,000) = $10/connectionCommercial: 30,000 × $10 = $300,00; Retail: 40,000 × $10 = $400,000; Consumer: 50,000 × $10 = $500,000b. rate: $1,200,000/(120,000 + 150,000 + 330,000) = $2/hourCommercial: 120,000 × $2 = $240,000; Retail: 150,000 × $2 = $300,000; Consumer: 330,000 × $2 = $660,000

AACSB: Analytic




95. Comiskey has four divisions, commercial, retail, research and consumer, that share the common costs of the company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate method and allocates common costs based on the number of connections? Calculate the allocated amount for each division. b. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division.c. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division? a. Rate: $8.571/connection; Commercial: $514,260; Retail: $685,680; Research: $342,840; Consumer: $857,100b. Rate: $3.429/hour; Commercial: $411,480; Retail: $514,350; Research: $342,900; Consumer: $1,131,570c. Commercial: $483,800; Retail: $636,200; Research: $343,100; Consumer: $936,900Feedback: a. rate: $2,400,000/(60,000 + 80,000 + 40,000 + 100,000) = $8.571/connectionCommercial: 60,000 × $8.571 = $514,260; Retail: 80,000 × $8.571 = $685,680; Research: 40,000 × $8.571 = $342,840; Consumer: 100,000 × $8.571 = $857,100b. rate: $2,400,000/(120,000 + 150,000 + 100,000 + 330,000) = $3.429/hourCommercial: 120,000 × $3.429 = $411,480; Retail: 150,000 × $3.429 = $514,350; Research: 100,000 × $3.429 = $342,900; Consumer: 330,000 × $3.429 = $1,131,570

AACSB: Analytic




96. Jacobs Corp. has three divisions, commercial, retail and consumer, that share the common costs of the company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method and allocates common costs based on the number of connections? Calculate the allocated amount for each division. b. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division. a. Rate: $10/connection; Commercial: $600,000; Retail: $800,000; Consumer: $1,000,000b. Rate: $4/hour; Commercial: $480,000; Retail: $600,000; Consumer: $1,320,000Feedback: (need to show rate in answer for a & b because asked for it in problem)a. rate: $2,400,000/(60,000 + 80,000 + 100,000) = $10/connectionCommercial: 60,000 × $10 = $600,000; Retail: 80,000 × $10 = $800,000; Consumer: 100,000 × $10 = $1,000,000b. rate: $2,400,000/(120,000 + 150,000 + 330,000) = $4/hourCommercial: 120,000 × $4 = $480,000; Retail: 150,000 × $4 = $600,000; Consumer: 330,000 × $4 = $1,320,000

AACSB: Analytic




97. Marlin has three divisions, commercial, retail and consumer, that share the common costs of the company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. The cost accountant determined $1,800,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division? Commercial: $570,000; Retail: $749,600; Consumer: $1,080,600

Feedback:

AACSB: Analytic




98. Sanper Corp. has four divisions, commercial, retail, research, and consumer, that share the common costs of the company's computer server network. The annual common costs are $3,500,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method and allocates common costs based on the number of connections? b. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division. a. Commercial: $875,000; Retail: $1,125,000; Research: $250,000; Consumer: $1,250,000b. Commercial: $600,000; Retail: $750,000; Research: $500,000; Consumer: $1,650,000Feedback: a. rate: $3,500,000/(70,000 + 90,000 + 20 000 + 100,000) = $12.50/connectionCommercial: 70,000 × $12.50 = $875,000; Retail: 90,000 × $12.50 = $1,125,000; Research: 20,000 × $12.50 = $250,000; Consumer: 100,000 × $12.50 = $1,250,000b. rate: $3,500,000/(120,000 + 150,000 + 100,000 + 330,000) = $5/hourCommercial: 120,000 × $5 = $600,000; Retail: 150,000 × $5 = $750,000; Research: 100,000 × $5 = $500,000; Consumer: 330,000 × $5 = $1,650,000

AACSB: Analytic




99. Charleston has four divisions, commercial, retail, research, and consumer, that share the common costs of the company's computer server network. The annual common costs are $3,600,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. The cost accountant determined $2,300,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division? Commercial: $752,000; Retail: $944,000; Research: $324,000; Consumer: $1,580,000

Feedback:

AACSB: Analytic




100. Redding has two divisions, Production and Support, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Redding uses the single-rate method and allocates common costs based on the number of calls? Calculate the costs allocated to each division. b. What is the allocation rate for the upcoming year assuming Redding uses the single-rate method and allocates common costs based on the time on the network? Calculate the costs allocated to each division.c. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is the total communication network costs allocated to each division? a. Rate: $12.50/call; Production: $2,500,000; Support: $2,000,000b. Rate: $5/hour; Production: $1,200,000; Support: $3,300,000c. Production: $1,981,200; Support: $2,518,800Feedback: a. rate: $4,500,000/(200,000 + 160,000) = $12.50/callProduction: 200,000 × $12.50 = $2,500,000; Support: 160,000 × $12.50 = $2,000,000b. rate: $4,500,000/(240,000 + 660,000) = $5/hourProduction: 240,000 × $5 = $1,200,000; Support: 660,000 × $5 = $3,300,000

AACSB: Analytic




101. Salinas has two divisions, Marketing and Finance, that share the common costs of the company's communications network. The annual common costs are $2,250,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method and allocates common costs based on the number of calls? Calculate the costs allocated to each division. b. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method and allocates common costs based on the time on the network? Calculate the costs allocated to each division. a. Rate: $25/call; Marketing: $1,250,000; Finance: $1,000,000b. Rate: $5/hour; Marketing: $600,000; Finance: $1,650,000Feedback: a. rate: $2,250,000/(50,000 + 40,000) = $25/callMarketing: 50,000 × $25 = $1,250,000; Finance: 40,000 × $25 = $1,000,000b. rate: $2,250,000/(120,000 + 330,000) = $5/hourMarketing: 120,000 × $5 = $600,000; Finance: 330,000 × $5 = $1,650,000

AACSB: Analytic




102. Tofte has two divisions, Research and Sales, that share the common costs of the company's communications network. The annual common costs are $2,250,000. You have been provided with the following information for the upcoming year:

Required (use three decimal places in your calculations):a. The cost accountant determined $1,350,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is the total communication network costs allocated to each division? a. Research: $990,600; Sales: $1,259,400

Feedback:

AACSB: Analytic




103. The Black Swan Company has three client-contact departments: Market Research, Branding, and Promotion. Each department requires the services of the Legal Department for the contracts that each undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on the Legal Department's budgeted and actual costs is as follows:The budget for the Legal Dept is $300,000 + $10/contract. The budgeted volume of contracts is as follows:

The actual number of contracts for Market Research was 315, for Branding was 450, and for Promotion was 720.Required (use three decimal places in your calculations):a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal Department would be allocated to each of the producing departments? b. If a dual charging rate is used, how much of the cost of the Legal Department would be allocated to each of the producing departments a. Market Research: $66,150; Branding: $94,500; Promotion: $151,200b. Market Research: $63,150; Branding: $104,400; Promotion: $147,300Feedback: a. rate = [$300,000 + $10 × (300 + 500 + 700)]/(300 + 500 + 700) = $210/contractMarket Research: 315 × $210 = $66,150; Branding: 450 × $210 = $94,500; Promotion: 720 × $210 = $151,200

AACSB: Analytic




104. The Black Swan Company has three client-contact departments: Market Research, Branding, and Promotion. Each department requires the services of the Legal Department for the contracts that each undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on the Legal Department's budgeted and actual costs is as follows:The budget for the Legal Dept is $200,000 + $7.50/contract. The budgeted volume of contracts is as follows:

The actual number of contracts for Market Research was 286, for Branding was 450, and for Promotion was 675.Required (use three decimal places in your calculations):a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal Department would be allocated to each of the producing departments? b. If a dual charging rate is used, how much of the cost of the Legal Department would be allocated to each of the producing departments a. Market Research: $40,278; Branding: $63,375; Promotion: $95,062b. Market Research: $42,145; Branding: $69,975; Promotion: $98,463Feedback: a. rate = [$200,000 + $7.50 × (300 + 500 + 700)]/(300 + 500 + 700) = $140.833/contractMarket Research: 286 × $140.833 = $40,278; Branding: 450 × $140.833 = $63,375; Promotion: 675 × $140.833 = $95,062

AACSB: Analytic




105. The Black Swan Company has three client-contact departments: Market Research, Branding, and Promotion. Each department requires the services of the Legal Department for the contracts that each undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on the Legal Department's budgeted and actual costs is as follows:The budget for the Legal Dept is $400,000 + $15/contract. The budgeted volume of contracts is as follows:

The actual number of contracts for Market Research was 207, for Branding was 512, and for Promotion was 820.Required (use three decimal places in your calculations):a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal Department would be allocated to each of the producing departments? b. If a dual charging rate is used, how much of the cost of the Legal Department would be allocated to each of the producing departments a. Market Research: $58,305; Branding: $144,214; Promotion: $230,967b. Market Research: $56,305; Branding: $140,880; Promotion: $225,500Feedback: a. rate = [$400,000 + $15 × (200 + 500 + 800)]/(200 + 500 + 800) = $281.667/contractMarket Research: 207 × $281.667 = $58,305; Branding: 512 × $281.667 = $144,214; Promotion: 820 × $281.667 = $230,967

AACSB: Analytic




106. Describe five advantages of decentralization. 1. Better use of local knowledge; 2. faster response; 3. wiser use of top management's time; 4. reduction of problems to manageable size, and 5) training, evaluation, and motivation of local managers.

AACSB: Analytic



Learning Objective: 2Topic Area: Advantages of Decentralization

107. Describe two disadvantages of decentralization. One disadvantage is that local managers can make decisions that are not in the best interests of the organization as a whole. Second, decentralization will create administrative duplication.

AACSB: Analytic



Learning Objective: 2Topic Area: Disadvantages of Decentralization

108. Describe the three main elements of a management control system. 1) Delegated decision authority is what decisions a subordinate manager can make in the name of the organization. 2) Performance evaluation and measurement system: how the performance of the subordinate manager is to be measured and how the results of the measurement will be used in evaluation. 3) Compensation and reward systems: how will the subordinate manager be paid for his/her performance.

AACSB: Analytic




109. Describe the five basic types of decentralized units in responsibility accounting. 1) Cost Center: responsible for the cost of the activity of a center with a well defined input-output relationship. 2) Discretionary Cost Center: responsible for the cost of the activity of a center where the input-output relationship is not well specified. 3) Revenue Center: responsible for selling a product. 4) Profit Center: has responsibility for both costs and revenues. 5) Investment Center: has responsibility for costs and revenues (profits) and also the investment in assets.

AACSB: Analytic




110. Explain the difference between fixed compensation and contingent compensation. Give an example of each. Fixed compensation is paid to the manager independent of measured performance. A manager's salary is an example. Contingent compensation is the amount of compensation that is paid based on measured performance. Sales commissions would be an example of this.

AACSB: Analytic




ch12 Summary

Category # of Questions

AACSB: Analytic 110

AICPA: FN-Decision Making 87

AICPA: FN-Measurement 20

AICPA: FN-Risk Analysis 3

Blooms: Analysis 21

Blooms: Application 33

Blooms: Comprehension 54

Blooms: Knowledge 2

Difficulty: Easy 64

Difficulty: Hard 5

Difficulty: Medium 41

Lanen - Chapter 12 114

Learning Objective: 1 4








Topic Area: Advantages of Decentralization 3

Topic Area: Alignment of Managerial and Organizational Interests 2

Topic Area: Compensation Systems 6

Topic Area: Cost Centers 2

Topic Area: Decentralized organizations 5

Topic Area: Delegated Decision Authority: Responsibility Accounting 16

Topic Area: Disadvantages of Decentralization 2

Topic Area: Do Performance Evaluation Systems Create Incentives to Commit Fraud? 4

Topic Area: Effective Corporate Cost Allocation System 44

Topic Area: Elements of a Management Control System 5

Topic Area: Evaluating Performance 5

Topic Area: Incentive Problems with Allocated Costs 6

Topic Area: Internal Controls to Protect Assets and Provide Quality Information 3

Topic Area: Investment Centers 1

Topic Area: Measuring Performance 2

Topic Area: Profit Centers 1

Topic Area: Responsibility Centers and Organization Structure 1

Topic Area: Why a Management Control System? 2

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