21decentralized Operations and Segment Reporting

CHAPTER 21 DECENTRALIZED OPERATIONS AND SEGMENT REPORTING
 Decentralization
A decentralized organization is one in which decision making is not confined to a few top executives but
rather is spread throughout the organization with managers at various levels making key operating
decisions relating to their sphere of responsibility. Decentralization is a matter of degree, since all
organizations are decentralized to some extent out of necessity.
 Advantages of Decentralization
A decentralized organization does not confine decision-making authority to a few top executives; rather,
decision-making authority is spread throughout the organization. The advantages of decentralization are
as follows:
1. Top management freed to concentrate on strategy.
2. Decision-making authority leads to job satisfaction.
3. Lower level managers can respond quickly to customers.
4. Lower-level managers gain experience in decision-making.
5. Lower-level decision often based on better information.
 Disadvantages of Decentralization
1. May be a lack of coordination among autonomous managers.

2. Lower-level managers may make decisions without seeing the “big picture.”
3. Lower-level manager’s objectives may not be those of the organization.
4. May be difficult to spread innovative ideas in the organization.
 Segment
A segment is a part or activity of an organization about which managers would like cost, revenue, or
profit data. Examples of segments include divisions of a company, sales territories, individual stores,
service centers, manufacturing plants, marketing departments, individual customers, and product lines. A
company’s operations can be segmented in many ways. For example, segment the business by geographic
region, by individual store, by the nature of the merchandise, by brand name and so on.
Responsibility Center
Responsibility accounting systems link lower-level managers’ decision-making authority with
accountability for the outcomes of those decisions. Responsibility center is broadly defined as any part of
an organization whose manager has control over, and is accountable for cost, profit, or investment funds.
The three primary types of responsibility centers are cost centers, profit centers, and investment
centers. Superior Foods Corporation provides an example of the various kinds of responsibility centers
that exist in an organization.
 Cost Center
A cost center is a business segment whose manager has control over costs, but not over revenue or
investment funds. Service departments such as accounting, general administration, legal and personnel are
usually considered to be cost centers. In addition, manufacturing facilities are often considered to be cost
center. The manager of the cost center are expected to minimize cost while providing the level of services
or the amount of products demanded by the other parts of the organization. Standard cost variances and
flexible budget variances are often used to evaluate cost center performance.
 Profit Center
In contrast to a cost center, a profit center is any business segment whose manager has control over both
costs and revenue. Like a cost center, however, a profit center generally does not nave control over
investment funds. Profit center managers are often evaluated by comparing actual profit to targeted or
budgeted profit. An example of a profit center is a company’s cafeteria.
 Investment Center
An investment center is any segment of an organization whose manager has control over cost, revenue,
and investments in operating assets. Investment center managers are usually evaluated using return on
investment (ROI) or residual income. An example of an investment center would be the corporate
headquarters.
 Segment Margin
To prepare an income statement for a particular segment, variable expenses are deducted from sales to
yield the contribution margin for the segment. The segment margin, which is computed by subtracting
the traceable fixed costs of a segment from its contribution margin. It represents the margin available
after a segment has covered all of its own costs. The segment margin is the best gauge of the long-run
profitability of a segment. There are two keys to building segmented income statements:
1. A contribution format should be used because it separates fixed from variable costs and it enables the
calculation of a contribution margin.
2. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a
segment margin.
Income Statement
Contribution Margin Format
Television Division
Sales $300,000
Variable COGS 120,000
Other variable costs 30,000
Total variable costs 150,000
Contribution margin 150,000
Traceable fixed costs 90,000
Division margin $ 60,000
 Traceable Fixed Cost
A Traceable costs or a segment is a fixed cost that is incurred because of the existence of a particular
segment and would disappear over time if the segment itself disappeared. Only the traceable fixed costs
are charged to a segment in the segmented income statements in the report. It is important to realize that
the traceable fixed costs of one segment may be a common fixed cost of another segment. For example,
the landing fee paid to land an airplane at an airport is traceable to the particular flight, but it is not
traceable to first-class, business-class, and economy-class passengers.
 Common Fixed Cost
A common cost is a fixed cost that supports the operations of more than one segment, but is not traceable
in whole or in part to any one segment. Common costs arise because of the overall operation of the
company and would not disappear if any particular segment were eliminated. Common costs are not
allocated to segments.
Income Statement
Company Television Computer

Sales $ 500,000 $ 300,000 $ 200,000
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 $ 60,000 $ 40,000
Common costs 25,000

Net operating income $ 75,000
 Return on Investment (ROI)
Rate of return is an approach for measuring managerial performance of a segment. The return on
investment (ROI) is defined as net operating income divided by average operating assets. The higher the
ROI of a business segment, the greater the profit generated in a segment operating assets. ROI measures
net operating income earned relative to the investment in average operating assets.
Return on Investment (ROI) Net Operating Income

= Average Operating Assets
Net operating income, rather than net income, is used in the ROI formula. Net operating income is
income before interest and taxes and is sometimes referred to as earnings before interest and taxes
(EBIT). Operating assets include cash, account receivable, inventory, plant and equipment, and all other
assets held for productive use in the organization. Most companies use the net book value of depreciable
assets to calculate average operating assets.
We can modify this formula slightly by introducing sales as follows
Net Operating Income X Sales
Return on Investment (ROI) =
Sales Average Operating Assets
The first term on the right-hand side of the equation is the margin. Margin is a measure of management’s
ability to control operating expenses in relation to sales. The lower the operating expenses per taka of
sales, the higher the margin earned.
Net Operating Income
Margin =
Sales
The second term of the right-hand side of the equation is turnover. Turnover is a measure of the sales that
are generated for each taka invested in operating assets.
Turnover = Sales
Average Operating Assets

The following alternative form of the ROI formula, which will be used most frequently, combines margin
and turnover:
Return on Investment (ROI) = Margin X Turnover
 Improve or Increase the ROI
There are three ways to increase ROI;

1. Increase Sales: With the help of increase in sales we can be able to increase ROI
2. Reduce Expenses: If we can be able to reduce expense, operating income will be increased. Due to
the increase in operating income ROI will be increase
3. Reduce Assets: If we can be able to reduce average operating assets, ROI will be increased. By using
JIT inventory as an operating asset can be reduced.
Criticisms of ROI
1. In the absence of the balanced scorecard, management may not know how to increase ROI. They may
increase ROI in a way that is inconsistent with the company’s strategy or they may take actions that
increase ROI in the short run but harm the company in the long run. Example, cutting back on
research and development cost.
2. Managers often inherit many committed costs over which they have no control. These committed
costs may be relevant in assessing the performance of the business segment.
3. A manager who is evaluated based on ROI may reject investment opportunities that are profitable for
the whole company but that would have negative impact on the manager’s performance evaluation.
 Residual Income
Another approach to measuring an investment center’s performance is residual income. Residual income
is the net operating income that an investment center earns above the minimum required return on its
operating assets. That means, Residual income measures net operating income earned less the minimum
required return on average operating assets. Residual income encourages managers to make profitable
investments that would be rejected by managers using ROI.
Operating assets $ 100,000 Actual income $ 30,000

Required rate of return × 20% Minimum required return (20,000)
Minimum required return $ 20,000 Residual income $ 10,000
 Transfer Pricing
A transfer price is the price charged when one segment of a company provides goods or services to
another segment of the company. The fundamental objective in setting transfer prices is to motivate
managers to act in the best interests of the overall company. There are three primary approaches to setting
transfer prices:
1. Negotiated Transfer Prices
2. Transfer at Cost Prices at the selling division

a. Variable Cost
b. Full (Absorption Cost) Cost
3. Transfer at Market Prices
 Negotiated Transfer Prices
A negotiated transfer price results from discussions between the selling and buying divisions. Advantages
of negotiated transfer prices:
a) They preserve the autonomy of the divisions, which is consistent with the spirit of
decentralization.
b) The managers negotiating the transfer price are likely to have much better information about
the potential costs and benefits of the transfer than others in the company.
 Transfer at Cost Prices
Many companies set transfer prices at either the variable cost or full (absorption) cost incurred by the
selling division. The drawbacks of this approach include:
1. Using full cost as a transfer price can lead to suboptimization because it does not distinguish between
variable costs, which may be relevant to the transfer pricing decision, and fixed costs, which may be
irrelevant.
2. If cost is used as the transfer price, the selling division will never show a profit on any internal
transfer. The only division that shows a profit is the division that makes the final sale to an outside
party.
3. Cost-based transfer prices do not provide incentives to control costs. If the actual costs of one
division are passed on to the next, there is little incentive for anyone to work on reducing costs.
 Transfer at Market Prices
A market price (i.e., the price charged for an item on the open market) is often regarded as the best
approach to the transfer pricing problem. It works best when the product or service is sold in its present
form to outside customers and the selling division has no idle capacity. With no idle capacity the real cost
of the transfer from the company’s perspective is the opportunity cost of the lost revenue on the outside
sale.
It does not work well when the selling division has idle capacity. In this case, market-based transfer prices
are likely to be higher than the variable cost per unit of the selling division. Consequently, the buying
division may make pricing and other decisions based on incorrect, market-based cost information rather
than the true variable cost incurred by the company as a whole.
ESSAY QUESTIONS:
1. What is meant by the term decentralization?
Decentralization means that decision making in an organization isn’t confined to a few top
executives, but rather is spread throughout the organization with managers at various levels
making key operating decisions relating to their sphere of responsibility.
2. What benefits are felt to result from decentralization in an organization?

The benefits include: (1) a spreading of decision-making responsibility among managers, thereby
relieving top management from day-to-day problem solving and allowing them to focus their time
on long-range planning; (2) training in decision making for lower-level managers, thereby
preparing them to assume greater responsibility; (3) greater job satisfaction and greater incentive
for lower-level managers; (4) better decisions, since decisions are made at the level where the
problem is best understood; and (5) a more effective basis for measuring managerial performance
through the creation of profit and investment centers.
3. Identify three business practices that hinder proper cost assignment to segments of a company.
The three business practices are (a) omission of some costs in the assignment process, (b) the use
of inappropriate allocation methods, and (c) allocation of common costs to segments.
4. Explain how the segment margin differs from the contribution margin. Which concept is most
useful to manager? Why?
The contribution margin represents the portion of sales revenue remaining after deducting
variable expenses. The segment margin represents the margin still remaining after deducting
traceable fixed expenses from the contribution margin. Generally speaking, the contribution
margin is most useful as a planning tool in the short run, when fixed costs don’t change. The
segment margin is most useful as a planning tool in the long run, when fixed costs will be
changing, and as a tool for evaluating long-run segment performance. One concept is no more
useful to management than the other; the two concepts simply relate to different planning
horizons.
5. What is segment of an organization? Give several examples of segments.

A segment is any part or activity of an organization about which a manager seeks cost, revenue,
or profit data. Examples of segments include departments, operations, sales territories, divisions,
product lines, and so forth.
6. What costs are assigned to a segment under the contribution approach?

Under the contribution approach, costs are assigned to a segment if and only if the costs are
traceable to the segment (i.e., could be avoided if the segment were eliminated). Common costs
are not allocated to segments under the contribution approach.
7. Distinguish between traceable cost and a common cost. Give several examples of each.
A traceable cost of a segment is a cost that arises specifically because of the existence of that
segment. If the segment were eliminated, the cost would disappear. A common cost, by contrast,
is a cost that supports more than one segment, but is not traceable in whole or in part to any one
of the segments. If the departments of a company are treated as segments, then examples of the
traceable costs of a department would include the salary of the department’s supervisor,
depreciation of machines used exclusively by the department, and the costs of supplies used by
the department. Examples of common costs would include the salary of the general counsel of the
entire company, the lease cost of the headquarters building, corporate image advertising, and
periodic depreciation of machines shared by several departments.
8. What are the benefits and costs of decentralization?

Benefits of decentralization include:
1. better decisions made by lower-level managers due to their having the best
information regarding local conditions,
2. the acquisition of decision-making ability and other management skills that help
lower-level managers move up in an organization, and
3. better motivation and higher status of lower-level managers.
Costs include:
1. making decisions that are not in the organization's best interests,
2. duplication of services,
3. higher costs of accumulating and processing information, and
4. the waste of time due to dickering with other organizational units about goods or
services one unit provides to another.
9. Differentiate Centralization and Decentralization.

Centralization happens when decision rests exclusively to top management.
Decentralization is in place when the power to make decision is entrusted to operating managers; this
is the model used in designing and managing autonomous responsibility centers.
10. What are the advantages of Decentralization? Give at least three.

(1) Responsibility center managers are authorized to decide on operational matters within their
technical expertise and control.
(2) Decisions are made quicker
(3) Employees are more involved leading to more commitment in their work.
11. What are the dis-advantages of Decentralization? Give at least two.

(1) Lower managers who lack the necessary skills in making excellent decisions are tapped.
(2) Operating managers are inclined to decide in favor of presenting a favorable results of their
responsibility center’s performance over that of the organizational performance; this leads to sub
optimization.
12. How does the organizational segments are classified within a decentralized operations?
In decentralized operations, organizational segments are classified into responsibility centers headed
by a manager who is assigned a corresponding authority, responsibility and accountability in
business operations.
13. Describe the lowest internal transfer price that an autonomous division manager of an investment
center would consider accepting for a product that his/her division produces.
The lowest price that an investment center manager should ever consider is the one that would
leave his/her performance evaluation measures unaffected. Typically, this would be the price that
maintains divisional profits at the level that existed prior to acceptance of the internal transfer.
This price should be no lower than the total of the selling segment’s incremental costs associated
with the services/goods plus the opportunity cost of the facilities used.
14. Can the performance evaluation measures (for autonomous subunit managers) create goal
congruence problems in transfer pricing situations? Explain.
Yes, at times, performance-based incentives can conflict with overall organizational goals. The
situation is the worst when upper level managers look at the performance of subunit managers in
a comparative fashion. In this case, before transacting with another internal segment, each
manager needs to determine how the transaction would affect his/her performance evaluation
measure relative to the performance evaluation measure of the other transacting party.
15. The allocation of costs gives rise to several unique terms. Briefly discuss the following: cost
object, cost allocation base, and cost allocation.
Cost object—the responsibility centers, products, or services to which costs are to be assigned.
Cost allocation base—a measure of activity, physical characteristic, or economic characteristic

that is used as the basis for cost allocation. Commonly known as cost drivers, examples may
include machine hours, labor cost, number of setups, and a host of other items.
Cost allocation—the process of assigning costs to the cost object by using the cost allocation
base.
16. Why don’t upper-level managers simply dictate transfer prices to divisional managers, and
thereby avoid all the hassles and expense of the negotiations between them (divisional
managers)?
Once upper-level managers impose their wills on lower-level managers, the autonomy of the
lower-level managers is reduced. This situation is significant because managers should only be
evaluated on the controllable aspects of operations. If upper management sets transfer prices,
various divisional income measures (ROI, RI, etc.) are no longer fair bases on which to evaluate
lower-level managers. Thus, intervention reduces both the authority to act and the subsequent
responsibility of lower managers.
17. Explain the relevance of sub optimization.

Sub optimization is a condition whereby individual managers work to achieve results that are in
their own best interests and that of their segments to the detriment of the overall company. Top
managers must guard against such behavior of subordinates when authority is delegated to them
in a decentralized setting. Sub optimization results from segment managers’ motivation to appear
successful and gain rewards and recognition. Sometimes, this motivation overrides the best
interests of the company.
18. The two basic functions of responsibility reports are to:

(1) Provide operational managers with information needed for planning, controlling, and decision
making for their areas of responsibility.
(2) Assist top managers in evaluating how well operational managers fulfilled their
responsibilities to the organization.
19. The performance reports generated by a responsibility accounting system often form a "hierarchy
of performance reports." Explain what is meant by this term.
The performance evaluations are tied to the organizational chart. The performance report at each
level reflects results of the units that report to the manager at that particular level, with the results
being combined and "delivered" to the next higher level in the firm. Thus, each manager receives
feedback that reflects his or her areas of responsibility, and the whole process parallels a
pyramiding of accountability throughout the organization.
20. Explain why managers needs to measure performance.

The goal of measuring performance is to objectively capture achievement of the organization's
goals. To achieve goals, firms identify critical success factors. Some critical success factors are
more easily measured in nonmonetary units rather than monetary units. Examples of such factors
include: customer satisfaction, throughput, and product quality.
MULTIPLE CHOICE: THEORIES

1. Why would a company decentralized?
a. To train and motivate division managers
b. To focus top management’s attention to operating decisions
c. To allow division managers to concentrate on strategic planning
d. All of the above
2. Decentralization occurs when

a. The firm’s operations are located over a large geographic area to reduce risk.
b. Authority for important decisions is delegated to lower segments of the organization
c. Important decisions are made at the upper levels and the lower levels of the organization are
responsible for implementing the decisions
d. None of the above.
3. In a company with a centralized approach to responsibility accounting, upper-level managers

typically
a. Make key decisions only
b. Implement key decisions only
c. Both make and implement decisions
d. Review the outcomes of key decision only
4. Responsibility accounting is a system whose attributes include

a. Culpability, liability and accountability
b. Responsibility, liability and culpability
c. Performance evaluation, accountability, and responsibility
d. Liability, accountability, and performance evaluation
5. The Atwood Company uses a performance reporting system that reflects the company’s
decentralization of decision making. The departmental performance report shows one line of data
for each subordinate who reports to the group vice-president. The data presented shows the actual
costs incurred during the period, the budgeted costs, and all variances from budget for that
subordinate’s department. The Atwood Company is using a type of system called
a. Cost-benefit accounting
b. Flexible accounting
c. Responsibility accounting
d. Contribution budgeting
6. What term identifies an accounting system in which the operations of the business are broken
down into reportable segments and the control functions of a foreperson, sales managers or
supervisor is emphasized?
a. Responsibility accounting
b. Operations-research accounting
c. Control accounting
d. Budgetary accounting
7. Segmented income statements are most meaningful to managers when they are prepared
a. In a multi-step format
b. On an absorption cost basis
c. On a cost behavior basis
d. On a cash basis
8. When used for performance evaluation, periodic internal reports based on a responsibility
accounting system should not
a. Distinguish between controllable and noncontrollable costs
b. Include allocated fixed overhead
c. Be related to the organization chart
d. Include variances between actual and budgeted controllable costs
9. Consistency between goals of the firm and the goals of its employee is:
a. Goal compensation
b. Goal optimization
c. Goal congruence
d. Goal conformance
10. Goal congruence is most likely to result when

a. A managers knows the criteria used to judge his or her performance
b. Reports’ behavior is affected by the criteria used to judge their performance
c. Performance evaluation criteria encourage behavior in the company’s best interests as well as
in the manager’s best interests
d. Managers’ behavior is affected by the criteria used to judge their performance
11. An emphasis on obtaining goal congruence is consistent with a broad managerial approach called
a. Just-in-time philosophy
b. Management by objectives
c. Management by crisis
d. Management through goal congruence
12. A segment is any part of an organization about which manager seeks

a. Cost data
b. Revenue data
c. Quantitative data
d. Any of the above
13. Indicate which of the following costs would be avoided if a segment is eliminated
1. Variable manufacturing costs
2. Direct fixed costs
3. Common fixed costs
4. Variable selling costs
5. Direct fixed selling costs
6. Common fixed selling costs
a. 2,3,5,6 c. 2,3,4,5
b. 1,2,4,5 d. 1,4,5,6
14. Advantages of decentralization include all of the following except

a. Divisional management is able to react to changing market conditions more rapidly than top
management
b. Divisional management is a source of personnel for promotion to top management positions
c. Decentralization can motivate divisional managers
d. Decentralization permits divisional management to concentrate on company-wide problems
and long-range planning
15. In a company with decentralized approach to responsibility accounting, upper-level managers
typically
a. Make key decisions only
b. Implement key decisions only
c. Both make and implement key decisions
d. Review the outcomes of key decisions only

a. The firm’s operations are located over a large geographic area to reduce risk
b. Authority for important decisions is delegated to lower segments of the organization
c. Important decisions are made at the upper levels and the lower levels of the organization are
responsible for implementing the decisions
d. None of the above
17. A good example of a common cost which normally could not be assigned to products on a
segmented income statement except on an arbitrary basis would be:
a. Product advertising outlays
b. Salary of a corporation president
c. Direct materials
d. The product manager’s salary
18. All other things being equal, if a division’s traceable fixed expenses increase:
a. The division’s contribution margin ratio will decrease
b. The division’s segment margin ratio will remain the same
c. The division’s segment margin will decrease
d. The overall company profit will remain the same.
19. It is the process of delegating the decision-making authority throughout an organization.

a. Staffing
b. Segmentation
c. Decentralization
EXPLANATION:
The process of delegating the decision making authority throughout an organization is called
decentralization. It is the dispersion or distribution of powers and functions from the central
authority within the organization.
Obviously Choices A and B are incorrect. Staffing is merely assigning capable workers to
their appropriate kind of work. And Segmentation is the process of dividing the costs or
activities of the organization.
20. The following are the advantages of decentralization, except one:
a. Sharpens the focus of subunit managers
b. Increases motivation of subunit managers
c. Management is relieved of much day-to-day problem solving
d. Manager’s attention may be focused only on the subunit rather than the organization as a
whole
EXPLANATION:
Accordingly, there are 10 advantages of the decentralization.
Choices A, B and C are correct.
In a decentralized setting, the manager of a small subunit has a concentrated focus. Top
management are relieved of the burden of day-to-day operating decisions, and they can spend
more time and energy on strategic planning for the entire organization.
Also, subunit managers are usually more highly motivated when they can exercise greater
individual enterprise.
So, Choice D is incorrect, because individual subunit managers may regard themselves as
competing with managers of other subunits in the same organization as if they were external
rivals. Consequently, they may be unwilling to share information to other subunits.
21. There are costs that are charged directly to the segments in the report, choose the exception.
a. Insurance and maintenance of the division building
b. Salary of the division manager
c. Common fixed expenses not traceable
d. Direct fixed costs
EXPLANATION:
Only the traceable or direct fixed costs are charged to the segments in the report. Deducting
traceable fixed costs from the segment contribution margin would yield the segment margin
or contribution to indirect or common costs.
Therefore, deducting common fixed expenses not traceable to individual segment from the
segment margin would result to the net operating income or loss of the segment. So thus, it
is inappropriate to deduct or charged common fixed expenses that are not traceable.
Choices A and B are example of traceable fixed costs, which are easily identified or traced
to a particular segment.
22. An organization’s managerial decision-making model for capital budgeting is based on the net
present value of discounted cash flows. The same organization’s managerial performance
evaluation model is based on annual divisional return on investment. Which of the following is
true?
a. Divisional managers are likely to maximize the measures in the decision-making model.
b. Divisional managers are likely to maximize the measures in the performance evaluation
model.
c. The manager has an incentive to accept a project with a positive net present value that
initially has a negative effect on net income.
d. The use of models with different criteria promotes goal congruence.
23. A large corporation allocates the costs of its headquarters staff to decentralized divisions. The
best reason for this allocation is to
a. More accurately measure divisional operating results
b. Improve divisional management’s morale
c. Remind divisional managers that common costs exist
d. Discourage any use of central support services
24. Disadvantages of decentralization include all of the following except:

a. lack of communication among segments.
b. services duplication.
c. lower manager motivation.
d. time taken to negotiate between units.
25. Advantages of decentralization include all of the following except:

a. divisional management is able to react to changing market conditions more rapidly than top
management
b. divisional management is a source of personnel for promotion to top management positions
c. decentralization can motivate divisional managers
d. decentralization permits divisional management to concentrate on firm-wide problems and
long-range planning
26. Separation of businesses into more manageable operating units is termed decentralization.
a. True
b. False
27. The process of measuring and reporting operating data by areas of responsibility is termed
responsibility accounting.
a. False
b. True
28. A decentralized business organization is one in which all major planning and operating decisions
are made by top management.
a. False
b. True
29. A centralized business organization is one in which all major planning and operating decisions
a. True
b. False
30. The primary disadvantage of decentralized operations is that decisions made by one manager may
affect other managers in such a way that the profitability of the entire company may suffer.
a. True
b. False
31. The three common types of responsibility centers are referred to as cost centers, profit centers,
and investment centers.
a. True
b. False
32. One of the advantages of decentralization is that delegating authority to managers closest to the
operation always results in better decisions.
a. False
b. True
33. Developing and retaining quality managers is an advantage of decentralization.

a. True
b. False
34. A responsibility center in which the department manager has responsibility for and authority over
costs, revenues, and assets invested in the department is termed a cost center.
a. True
b. False
35. Budget performance reports prepared for the vice-president of production would generally
contain less detail than reports prepared for the various plant managers
a. True
b. False
36. The amount of detail presented in a budget performance report for a cost center depends upon the
level of management to which the report is directed.
a. True
b. False
37. The primary accounting tool for controlling and reporting for cost centers is a budget.
a. False
b. True
38. Responsibility accounting reports that are given to lower level managers are usually very
detailed, in turn, higher level managers will be given a summary report
a. True
b. False
39. A manager in a cost center also has responsibility and authority over the revenues and the costs.
a. True
b. False
40. The plant managers in a cost center can be held responsible for major differences between
budgeted and actual costs in their plants.
a. True
b. False
41. A responsibility center in which the authority over and responsibility for costs and revenues is
vested in the department manager is termed a profit center.
a. True
b. False
42. Operating expenses directly traceable to or incurred for the sole benefit of a specific department
and usually subject to the control of the department manager are termed direct expenses
a. True
b. False
43. Sales commission’s expense for a department store is an example of a direct expense.
a. False
b. True
44. Operating expenses incurred for the entire business as a unit that are not subject to the control of
individual department managers are called indirect expenses.
a. False
b. True
45. Office salaries expense for a department store is an indirect expense.

a. True
b. False
The next 6 questions are based on the following data & choices: (Matching Type)
Depending on the type of responsibility center, managers have different responsibilities. Match the
responsibilities with the responsibility center.
a. Cost center
b. Profit center
c. Investment center
d. Cost and Profit centers

e. Cost and Investment centers
f. Profit and Investment centers
g. Cost, Profit, and Investment centers
46. Factory wages

Cost, Profit, and Investment centers
47. Purchase of equipment

Investment center
48. Property taxes

Investment center
49. Repairs and maintenance expense

Cost, Profit, and Investment centers
50. Sales
Profit and Investment centers
51. Indirect expenses

Cost and Profit centers
52. The underlying principle of allocating operating expenses to departments is to assign to each
department an amount of expense proportional to the revenues of that department.
a. True
b. False
53. Property tax expense for a department store's store equipment is an example of a direct expense.
a. True
b. False
54. Depreciation expense on store equipment for a department store is an indirect expense.
a. True
b. False
55. Responsibility accounting reports for profit centers are normally in the form of income
statements.
a. True
b. False
56. The manager of a profit center does not make decisions concerning the fixed assets invested in
the center.
a. True
b. False
57. The profit center income statement should include only revenues and expenses that are controlled
by the manager.
a. False
b. True
58. The manager of the furniture department of a leading retailer does not control the salaries of
departmental personnel.
a. False
b. True
59. Service department charges are similar to the expenses of a profit center that purchased services
from a source outside the company.
a. True
b. False
60. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are
examples of activity bases.
a. False
b. True
61. The rates at which services are charged to each division are called service department charge
rates.
a. False
b. True
62. The service department will determine its service department charge rate and charge the
company’s divisions or departments according to their use of that particular service department.
a. True
b. False
63. The profit center income statement should include only controllable revenues and expenses.
a. False
b. True
64. Controllable expenses are those that can be influenced by the decisions of the profit center
management.
a. False
b. True
The next 6 questions are based on the following:

An activity base is used to charge service department expenses. Match each of the following questions
with an activity base.
a. Purchasing
b. Payroll Accounting
c. Human Resources
d. Maintenance
e. Information systems
f. Marketing
g. President’s office
h. Transportation
65. Number of work orders

Maintenance
66. Number of employees

Human Resources
67. Number of payroll checks

Payroll Accounting
68. Number of purchase requisitions

Purchasing
69. Equally amongst divisions

President’s Office
70. Number of advertising campaigns

Marketing
71. Number of miles

Transportation
72. Number of computers in department

Information Systems
73. Which of the following would be most effective in a small owner/manager-operated business?
a. Profit centers
b. Centralization
c. Investment centers
d. Cost centers
74. Businesses that are separated into two or more manageable units in which managers have
authority and responsibility for operations are said to be:
a. Decentralized
b. Consolidated
c. Diversified
d. Centralized
75. Which of the following is NOT a disadvantage of decentralized operation?

a. Competition among managers decreases profits
b. Duplication of operations
c. Price cutting by departments that are competing in the same product market
d. Top management freed from everyday tasks to do strategic planning
76. Which is the best example of a decentralized operation?

a. One owner who prepares plans and makes decisions for the entire company.
b. Each unit is responsible for their own operations and decision making.
c. In a major company, operating decisions are made by top management.
d. None of the above. All are examples of a centralized management.
77. The following are advantages of decentralization except:

a. Managers make better decisions when closer to the operation of the company.
b. Expertise in all areas of the business is difficult, decentralization makes it better to
delegate certain responsibilities.
c. Each decentralized operation purchases their own assets and pays for operating costs.
d. Decentralized managers can respond quickly to customer satisfaction and quality service.
78. Which of the following is not one of the common types of responsibility centers?
a. Cost Center
b. Profit Center
c. Investment Center
d. Revenue Center
79. Which of the following is a disadvantage of decentralization?

a. Decisions made by one manager may negatively affect the profitability of the entire
company.
b. Helps retain quality managers.
c. Decision making by managers closest to the operations.
d. Managers are able to acquire expertise in their areas of responsibility.
80. A manager is responsible for costs only in a(n):

a. profit center
b. investment center
c. volume center
d. cost center
81. In a cost center, the manager has responsibility and authority for making decisions that affect:
a. Revenues
b. Assets
c. both costs and revenues
d. costs
82. For higher levels of management, responsibility accounting reports:

a. are more detailed than for lower levels of management
b. are more summarized than for lower levels of management
c. contain about the same level of detail as reports for lower levels of management
d. are rarely provided or reviewed
83. Most manufacturing plants are considered cost centers because the have control over
a. sales and costs.
b. fixed assets and costs.
c. costs only.
d. fixed assets and sales.
84. The following is a measure of a manager’s performance working in a cost center.

a. budget performance report
b. rate of return and residual income measures
c. divisional income statements
d. balance sheet
85. A responsibility center in which the department manager has responsibility for and authority over
costs and revenues is called a(n):
a. profit center
b. investment center
c. volume center
d. cost center
86. In a profit center, the department manager has responsibility for and the authority to make
decisions that affect:
a. not only costs and revenues, but also assets invested in the center
b. the assets invested in the center, but not costs and revenues
c. both costs and revenues for the department or division
d. costs and assets invested in the center, but not revenues
87. Which of the following expenses incurred by the sporting goods department of a department store
is a direct expense?
a. Depreciation expense--office equipment
b. Insurance on inventory of sporting goods
c. Uncollectible accounts expense
d. Office salaries
88. Which of the following expenses incurred by a department store is an indirect expense?
a. Insurance on merchandise inventory
b. Sales salaries
c. Depreciation on store equipment
d. Salary of vice-president of finance
89. In a profit center, the manager has responsibility and authority for making decisions that affect:
a. liabilities
b. assets
c. equity
d. costs
90. Operating expenses directly traceable to or incurred for the sole benefit of a specific department
and usually subject to the control of the department manager are termed:
a. miscellaneous administrative expenses
b. direct expenses
c. indirect expenses
d. operating expenses
91. In evaluating the profit center manager, the income from operations should be compared:
a. across profit centers
b. to historical performance or budget
c. to the competition's net income
d. to the total company earnings per share
92. The minimum amount of desired divisional income from operations is set by top management by
establishing a maximum rate of return considered acceptable for invested assets.
a. True
b. False
93. The major advantage of residual income as a performance measure is that it gives consideration
to not only a minimum rate of return on investment but also the total magnitude of income from
operations earned by each division.
a. True
b. False
94. The ratio of income from operations to sales is termed the profit margin component of the rate of
return on investment.
a. True
b. False
95. The ratio of sales to invested assets is termed the investment turnover component of the rate of
return on investment.
a. True
b. False
96. If income from operations for a division is $6,000, invested assets are $25,000, and sales are
$30,000, the profit margin is 20%.
a. True
b. False
$30,000, the profit margin is 24%.
a. False
b. True
$30,000, the investment turnover is 1.2.
a. False
b. True
$30,000, the investment turnover is 5.
a. False
b. True
100. If income from operations for a division is $30,000, sales are $243,750, and invested assets are
$187,500, the investment turnover is 1.3.
a. True
b. False
101. If income from operations for a division is $120,000, sales are $975,000, and invested assets
are $750,000, the investment turnover is 6.3.
a. True
b. False
102. If divisional income from operations is $75,000, invested assets are $637,500, and the
minimum rate of return on invested assets is 6%, the residual income is $36,750.
a. True
b. False
103. If divisional income from operations is $100,000, invested assets are $850,000, and the
minimum rate of return on invested assets is 8%, the residual income is $68,000.
a. True
b. False
104. The profit margin component of rate of return on investment analysis focuses on profitability by
indicating the rate of profit earned on each sales dollar.
a. True
b. False
105. In rate of return on investment analysis, the investment turnover component focuses on
efficiency in the use of assets and indicates the rate at which sales are being generated for each
dollar of invested assets.
a. True
b. False
106. The minimum amount of desired divisional income from operations is set by top management by
establishing a minimum rate of return considered acceptable for invested assets.
a. True
b. False
107. A disadvantage to using the Residual Income performance measure is that it encourages
managers to spend only the minimum acceptable rate of return on assets set by upper
management.
a. True
b. False
108. The costs of services charged to a profit center on the basis of its use of those services are called:
a. operating expenses
b. noncontrollable charges
c. service department charges
d. activity charges
109. Division T reported income from operations of $875,000 and total service department charges
of $575,000. Therefore:
a. net income was $300,000
b. the gross profit margin was $300,000
c. income from operations before service department charges was $1,450,000
d. consolidated net income was $300,000
110. To calculate income from operations, total service department charges are:
a. added to income from operations before service department charges
b. subtracted from operating expenses
c. subtracted from income from operations before service department charges
d. subtracted from gross profit margin
111. What is the term used to describe expenses that are incurred for the benefit of a specific
department?
a. Indirect expenses
b. Margin expenses
c. Departmental expenses
d. Direct expenses
112. The DuPont formula uses financial information to measure the performance of a business.
a. True
b. False
113. The DuPont formula uses financial and nonfinancial information to measure the performance of
a business.
a. True
b. False
114. The balanced scorecard is a set of financial and nonfinancial measures that reflect the
performance of the business.
a. True
b. False
115. The objective of transfer pricing is to encourage each division manager to transfer goods and
services between divisions if overall company income can be increased by doing so.
a. True
b. False
116. Transfer prices may be used when decentralized units are organized as cost, profit, or investment
centers.
a. True
b. False
117. Under the cost price approach, the transfer price is the price at which the product or service
transferred could be sold to outside buyers.
a. True
b. False
118. Under the negotiated price approach, the transfer price is the price at which the product or
service transferred could be sold to outside buyers.
a. True
b. False
119. The negotiated price approach allows the managers of decentralized units to agree among
themselves as to the transfer price.
a. True
b. False
120. It is beneficial for related companies to negotiate a transfer price when the supplying company
has unused capacity in its plant.
a. True
b. False
121. It is beneficial for two related companies to use the cost price approach for transfer pricing
when both of the companies operate as cost centers and are not concerned with the revenue.
a. True
b. False
122. Responsibility accounting reports for profit centers will include

a. costs.
b. revenues.
c. expenses and fixed assets.
d. revenues, expenses, net income or loss from operations.
123. Some organizations use internal service departments to provide like services to several divisions
or departments within an organization. Which of the following would probably not lend itself as a
service department?
a. Inventory Control
b. Payroll Accounting
c. Information Systems
d. Human Resources
124. The following is a measure of a manager’s performance working in a profit center.

a. balance sheet
c. budget performance report
d. divisional income statements
125. Which of the following would not be considered an internal centralized service department?
a. Payroll accounting department
b. Manufacturing department
c. Information systems department
d. Purchasing department
126. Managers of what type of decentralized units have authority and responsibility for revenues,
costs, and assets invested in the unit?
a. Profit center
b. Investment center
c. Production center
d. Cost center
127. A responsibility center in which the department manager is responsible for costs, revenues, and
assets for a department is called:
a. a cost center
b. a profit center
c. an operating center
d. an investment center
128. In an investment center, the manager has the responsibility for and the authority to make
decisions that affect:
a. the assets invested in the center, but not costs and revenues
b. costs and assets invested in the center, but not revenues
c. both costs and revenues for the department or division
d. not only costs and revenues, but also assets invested in the center
129. In an investment center, the manager has responsibility and authority for making decisions that
affect:
a. Costs
b. Revenues
c. Assets
d. costs, revenues, and assets
130. The profit margin is the:

a. ratio of income from operations to sales
b. ratio of income from operations to invested assets
c. ratio of assets to liabilities
d. ratio of sales to invested assets
131. The investment turnover is the:

a. ratio of income from operations to sales
b. ratio of income from operations to invested assets
c. ratio of assets to liabilities
d. ratio of sales to invested assets
132. Identify the formula for the rate of return on investment.

a. Invested Assets/Income From Operations
b. Sales/Invested Assets
c. Income From Operations/Sales
d. Income From Operations/Invested Assets
133. Which of the following expressions is termed the profit margin factor as used in determining
the rate of return on investment?
a. Sales/Income From Operations
b. Income From Operations/Sales
c. Invested Assets/Sales
d. Sales/Invested Assets
134. Which of the following expressions is termed the investment turnover factor as used in
determining the rate of return on investment?
a. Invested Assets/Sales
b. Income From Operations/Invested Assets
d. Sales/Invested Assets
135. Toxic Company manufactures five flavors of salsa. Last year, Toxic generated net operating
income of $40,000. The following information was taken from last year's income statement
segmented by flavor (brackets indicate a negative amount):
Wi Mi Me We Mo
Contribution margin..... $(2,000) $45,000 $35,000 $50,000 $162,000
Segment margin........... $(16,000) $(5,000) $7,000 $10,000 $94,000
Segment margin less
allocated common
fixed expenses.......... $(26,000) $(15,000) $(3,000) $0 $84,000
Toxemia expects similar operating results for the upcoming year. If Toxic wants to maximize its
profitability in the upcoming year, which flavor or flavors should Toxic discontinue?
a. no flavors should be discontinued
b. Wi
c. Wi and Mi
d. Wi, Mi, and Me
EXPLANATION:
The segment margin is a better indication of profitability of individual products than the
segment margin less allocated common fixed expenses. The products with negative segment
margins should be discontinued to maximize profit: Wi and Mi.
136. Consider the following three conditions:

I. An increase in sales
II. An increase in operating assets
III. A reduction in expenses
Which of the above conditions provide a way in which a manager can improve return on
investment?
a. Only I
b. Only I and II
c. Only I and III
d. Only II and III
137. When calculating a segment's return on investment (ROI), which of the following assets of that
segment would be considered a part of average operating assets?
a. Cash
b. accounts receivable
c. plant and equipment
d. all of the above
138. Which of the following measures of performance encourages continued expansion by an

investment center so long as it is able to earn a return in excess of the minimum required return
on average operating assets?
a. return on investment
b. transfer pricing
c. the contribution approach
d. residual income
139. Residual income is:
a. Net operating income plus the minimum required return on average operating assets.
b. Net operating income less the minimum required return on average operating assets.
c. Contribution margin plus the minimum required return on average operating assets.
d. Contribution margin less the minimum required return on average operating assets.
140. What additional information is needed to find the rate of return on investment if income from
operations is known?
a. Invested assets
b. Residual income
c. Direct expenses
d. Sales
141. The best measure of managerial efficiency in the use of investments in assets is:
a. rate of return on stockholders' equity
b. investment turnover
c. income from operations
d. inventory turnover
142. Two divisions of Halloway Company (Divisions X and Y) have the same profit margins.
Division X's investment turnover is larger than that of Division Y (1.2 to 1.0). Income from
operations for Division X is $50,000, and income from operations for Division Y is $38,000.
Division X has a higher return on investment than Division Y by:
a. using income from operations as a performance measure
b. comparing income from operations
c. applying a negotiated price measure
d. using its assets more efficiently in generating sales
143. The excess of divisional income from operations over a minimum amount of divisional income
from operations is termed:
a. profit margin
b. residual income
c. rate of return on investment
d. gross profit
144. Which one of the following is NOT a measure that management can use in evaluating and
controlling investment center performance?
a. Rate of return on investment
b. Negotiated price
c. Residual income
d. Income from operations
145. A factor in determining the rate of return on investment--the ratio of income from operations to
sales--is called:
a. profit margin
b. indirect expense
c. investment turnover
d. cost
146. A factor in determining the rate of return on investment--the ratio of sales to invested assets--is
called:
a. profit margin
b. indirect margin
c. investment turnover
d. cost ratio
147. Investment centers differ from profit centers in that they

a. are responsible for net income only.
b. are able to invest in assets.
c. have less responsibilities than cost centers and profit centers
d. are only responsible for revenues.
148. The balanced scorecard measures financial and nonfinancial performance of a business. The
balanced scorecard measures four areas. Identify one of the following that is not included as a
performance measurement
a. Internal Process
b. Financial
c. Innovation and Learning
d. Employees
149. The following is a measure of a manager’s performance working in an investment center.

d. all of the responses
150. Which of the following is not a commonly used approach to setting transfer prices?
a. Market price approach
b. Revenue price approach

c. Negotiated price approach
d. Cost price approach
151. Which of the following is NOT a common approach used to set transfer prices?
a. market price
b. variable cost
c. negotiation
d. suboptimization
152. For performance evaluation purposes, the variable costs of a service department should be
charged to operating departments using:
a. the actual variable rate and the budgeted level of activity for the period.
b. the budgeted variable rate and the actual level of activity for the period.
c. the budgeted variable rate and the budgeted level of activity for the period.
d. the actual variable rate and the peak-period or long-run average servicing capacity.
153. Which of the following companies is following a policy with respect to the costs of service
departments that is not recommended?
a. To charge operating departments with the depreciation of forklifts used at its central
warehouse, Shalimar Electronics charges predetermined lump-sum 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.
c. Rainier Industrial does not allow its service departments to pass on the costs of their
inefficiencies to the operating departments.
d. Golkonda Refinery separately allocates fixed and variable costs incurred by its service
departments to its operating departments.
154. A segment of a business responsible for both revenues and expenses would be called:
a. a cost center.
b. an investment center.
c. a profit center.
d. residual income.
155. The impact on net operating income of short-run changes in sales for a segment can be most
clearly predicted by analyzing:
a. the contribution margin ratio.
b. the segment margin.
c. the ratio of the segment margin to sales.
d. net sales less segment fixed costs.
156. Determining the transfer price as the price at which the product or service transferred could be
sold to outside buyers is known as the:
a. Cost price approach

b. Negotiated price approach
c. Revenue price approach
d. Market price approach
157. When is it appropriate to use the market price approach when two related companies are
providing services or products to each other?
a. The production for the selling company is falling under full capacity and it needs to
increase its sales.
b. The purchasing company is currently purchasing a product at a price from an outside
supplier as it would from its related company that is operating at full capacity.
c. The purchasing company is considered a cost center and is not concerned with
maximizing profits for the company.
d. The policy of the parent company is that when a product is sold by an outside supplier
and by a related party, purchases must be made within the company.
158. Which transfer price approach is used when the transfer price is set at the amount sold to outside
buyers?
a. Market Price
b. Cost Price
c. Negotiated Price
d. Variable Price
159. In a segmented contribution format income statement, what is the best measure of the long-run
profitability of a segment?
a. its gross margin
b. its contribution margin
c. its segment margin
d. its segment margin minus an allocated portion of common fixed expenses
160. In order to properly report segment margin as a guide to long-run segment profitability and
performance, fixed costs must be separated into two broad categories. One category is common
fixed costs. What is the other category?
a. discretionary fixed costs
b. committed fixed costs
c. traceable fixed costs
d. specialized fixed costs
161. The transfer price that must be less than the market price but greater than the supplying
division’s variable costs per unit is called
a. the cost price approach
b. the negotiated cost approach
c. the standard cost approach
d. the market price approach
162. Which of the following segment performance measures will decrease if there is an increase in
the interest expense for that segment?
Return on Investment Residual Income

a. a. Yes Yes
b. b. No Yes
c. c. Yes No
d. d. No No
163. Which of the following segment performance measures will increase if there is a decrease in
the selling expenses for that segment?

a. Yes Yes
b. No Yes
c. Yes No
d. No No
164. Some investment opportunities that should be accepted from the viewpoint of the entire
company may be rejected by a manager who is evaluated on the basis of:
a. return on investment.
b. residual income.
c. contribution margin.
d. segment margin.
165. These statements are presented to you:

I: Allocating common fixed costs to segments on segmented income statements reduces the
usefulness of such statements.
II: A responsibility center is a business segment whose manager has control over costs,
revenues, or investments in operating assets.
In your evaluation of the foregoing statements:
a. Both statements are true
b. Both statements are false
c. Only statement I is true
d. Only statement II is true

I: A segment is any part or activity of an organization about which a manager seeks cost,
revenue, or profit data
II: Residual income is used in the numerator to compute turnover in an ROI analysis.
a. Only Statement I is true
b. Only statement II true
c. Statement I is true and Statement II is false
d. Statement I is false and Statement II is false

I: Net operating income is earnings before interest and taxes.
II: Land held for possible plant expansion would be included as an operating asset in the ROI
calculation.
d. Statement I is false and Statement II is false

I: Margin equals Stockholders' Equity divided by Sales.
II: The use of return on investment (ROI) as a performance measure may lead managers to reject
a project that would be favorable for the company as a whole.
d. Statement I is false and Statement II is true
169. The transfer price which is uses a variety of cost concepts is the
a. Negotiated price approach
b. Standard cost approach
c. Cost price approach
d. Market price approach

I: Residual income is equal to the difference between total revenues and operating expenses.
II: When using residual income as a measure of performance, it is not meaningful to compare
the residual incomes of divisions of different sizes.
d. Statement I is false and Statement II is true
171. The biggest challenge in making a decentralized organization function effectively is:
a. earning maximum profits through fair practices.
b. minimizing losses.
c. taking advantage of the specialized knowledge and skills of highly talented managers.
d. obtaining goal congruence among division managers.
e. developing an adequate budgetary control system.
172. What practice is present when divisional managers throughout an organization work together in
an effort to achieve the organization's goals?

a. Participatory management.
b. Goal attainment.
c. Goal congruence.
d. Centralization of objectives.
e. Negotiation by subordinates.
173. Consider the following statements about goal congruence:
I. Goal congruence is obtained when managers of subunits throughout an organization

strive to achieve the goals set by top management.
II. Managers are often more concerned about the performance of their own subunits rather
than the performance of the entire organization.
III. Achieving goal congruence in most organizations is relatively straightforward and easy to
accomplish.
Which of the above statements is (are) true?

a. I only.
b. II only.
c. I and II.
d. II and III.
e. I, II, and III.
174. Only those fixed costs labeled “common” are charged to the individual segments when
preparing a segmented income statement.
a. False
b. True
175. A company has two divisions, each selling several product lines. If segment reports
are prepared at the product line level, the division managers' salaries would be considered as
common fixed costs of the product lines.
a. False
b. True
176. A segment margin is computed by deducting variable and traceable fixed expenses
from the sales of a segment.
a. True
b. False
177. Those fixed costs that arise because of the existence of the segment and that would
disappear if the segment were eliminated are called traceable fixed costs of the
segment.
a. True
b. False
178. Suppose a company evaluates divisional performance using both ROI and residual
income. The company's minimum required rate of return for the purposes of residual
income calculations is 12%. If a division has a residual income of $6,000, then its ROI is less
than 12%.
a. True
b. False
179. Return on investment (ROI) encourages managers to accept all investment decisions
that will benefit the company as a whole when it is used as a measure of performance.
a. True
b. False
180. Just-in-time practices improve return on investment (ROI) by decreasing turnover.

a. True
b. False
181. Whenever the selling division must give up outside sales in order to sell internally, it has an
opportunity cost that should be considered in setting the transfer price.
a. True
b. False
182. If transfer prices are to be based on cost, then the costs should be actual costs rather
than standard costs.
a. True
b. False
183. Setting transfer prices at full cost can lead to bad decisions since, among other reasons, full cost
does not take into account opportunity costs.
a. True
b. False
184. The selling division in a transfer pricing situation would want the transfer price to be set to cover
at least the full cost per unit plus the lost contribution margin per unit on outside sales.
a. True
b. False
185. Under a responsibility accounting system, fewer expenses are charged against managers the
higher one moves upward in an organization.
a. True
b. False
186. Responsibility accounting functions most effectively in decentralized organizations.

a. True
b. False
187. In a strongly centralized organization there is a large amount of freedom to make

decisions at all levels of management.
a. True
b. False
188. All profit centers are responsibility centers, but not all responsibility centers are profit centers.
a. True
b. False
189. If a cost is a common cost of the segments on a segmented income statement, the cost should:
a. be allocated to the segments on the basis of segment sales.
b. not be allocated to the segments.
c. excluded from the income statement.
d. treated as a product cost rather than as a period cost.
190. Spiedino Company sells its products to both residential and commercial customers in eight sales
territories. In which of the following ways could Spiedino be segmented?
a. by product and then further segmented by type of customer.
b. by type of customer and then further segmented by sales territory.
c. by sales territory and then further segmented by product line.
d. all of the above.
191. Which of the following is generally considered to be part of the value chain of a manufacturing
company?
a. marketing activities
b. customer service activities
c. research and development activities
d. both A and C above
e. all of the above
192. A national retail company has segmented its income statement by sales territories. If each sales
territory statement is further segmented by individual stores, which of the following will most
likely occur?
a. some common fixed expenses in the sales territory segmented statement will become
traceable fixed expenses in the individual store segmented statement.
b. some traceable fixed expenses in the sales territory segmented statement will become
common fixed expenses in the individual store segmented statement.
c. the sum total of the individual stores' segment margins in each sales territory will be
equal to the segment margin for the sales territory.
d. both A and C above.
193. Hayworth Company has just segmented last year's income statements into its ten product lines.
The chief executive officer (CEO) is curious as to what effect dropping one of the product lines at
the beginning of last year would have had on overall company profit. What is the best number for
the CEO to look at to determine the effect of this elimination on the net operating income of the
company as a whole?
a. the product line's sales dollars.
b. the product line's contribution margin.
c. the product line's segment margin.
d. the product line's segment margin minus an allocated portion of common fixed expenses.
194. In an income statement segmented by product line, a fixed expense that cannot be allocated
among product lines on a cause-and-effect basis should be:
a. classified as a variable expense.

b. allocated to the product lines on the basis of sales dollars.
c. allocated to the product lines on the basis of segment margin.
d. classified as a common fixed expense and not allocated.
e. classified as a traceable fixed expense and not allocated.
195. 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:
a. Residual income can be computed without having to measure operating assets.
b. Managers are more likely to accept projects that are beneficial to the company.
c. ROI does not take into account both turnover and margin.
d. A minimum rate of return does not have to be specified when the residual income
approach is used.
196. Which of the following performance measures will decrease if the minimum required rate of
return increases?
a. Yes
b. Yes
b. Yes No
c. No No
197. Which of the following performance measures will increase if inventory decreases and all else
remains the same?
a. Yes
b. Yes
c. Yes No
d. No No
198. Some investment opportunities which should be accepted from the viewpoint of the entire
company may be rejected by a manager who is evaluated on the basis of:
a. return on investment.
b. residual income.
c. contribution margin.
d. segment margin.
199. Which of the following would be an argument for using the gross cost of plant and equipment as
part of operating assets in return on investment computations?
a. It is consistent with the computation of net operating income, which includes
depreciation as an operating expense.
b. It is consistent with the balance sheet presentation of plant and equipment.
c. It eliminates the age of equipment as a factor in ROI computations.
d. It discourages the replacement of old, worn-out equipment because of the dramatic,

adverse effect on ROI.
200. Which of the following would not be included in operating assets in return on investment
calculations?
a. Cash.
b. Accounts Receivable.
c. Equipment
d. Factory building rented to (and occupied by) another company.
201. Which of the following statements is correct concerning return on investment calculations?
a. Margin equals stockholders' equity divided by sales.
b. Return on investment equals margin divided by turnover.
c. Turnover equals return on investment divided by margin.
d. Sales equals turnover divided by margin.
202. All other things equal, which of the following would increase a division's residual income?
a. Increase in expenses.
b. Decrease in average operating assets.
c. Increase in minimum required return.
d. Decrease in net operating income.
203. The basic objective of the residual income approach to performance measurement and
evaluation is to have a division maximize its:
a. return on investment (ROI).
b. cash flows.
c. cash flows in excess of a desired minimum amount.
d. net operating income in excess of a minimum return.
204. Residual income:

a. is the return on investment (ROI) percentage multiplied by average operating assets.
b. is the net operating income earned above a certain minimum required return on sales.
c. is the net operating income earned above a certain minimum required return on average
operating assets.
d. will always be greater than zero.
205. A company is analyzing the performance of responsibility centers. Controllable costs would be
included in the performance reports of which of the following types of responsibility centers?
Investment Centers Profit Centers
a. No No
b. No Yes
c. Yes Yes
d. Yes No
206. Controllable revenue would be included in a performance report for a:

Investment Centers Profit Centers
a. No No
b. No Yes
c. Yes Yes
d. Yes No
207. Which of the following is necessary for any valid performance measurement?
a. It must be part of the financial accounting system in use.
b. It must be quantifiable.
c. Goal congruence must be promoted by its use.
d. It must be financial in nature.
208. Productivity is measured by the

a. total quantity of output generated from a limited amount of input during a time period.
b. quantity of good output generated from a specific amount of input during a time period.
c. quantity of good output generated from the quantity of good input used during a time
period.
d. total quantity of input used to generate total quantity of output for a time period.
209. A small manufacturing company recently stated its sales goal for a period was P100,000. At
this level of activity, its budgeted expenses were P80,000. Its actual sales were P100,000, but its
actual expenses were P85,000. This company operated
a. effectively and efficiently. c. effectively but not efficiently.
b. neither effectively nor efficiently. d. efficiently but not effectively.
210. Why would a company decentralize?

a. to train and motivate division managers
b. to focus top management’s attention to operating decisions
c. to allow division managers to concentrate on strategic planning
d. all of the above
211. When a manager takes an action that benefits his or her responsibility center, but not the
company as a whole,
a. it is a non-controllable action
b. there is a lack of goal congruence
c. the center must be an artificial profit center
d. the manager should be fired
212. The accumulation of accounting data on the basis of the individual manager who has the
authority to make day-to-day decisions about activities in an area is called
a. static reporting.
b. responsibility accounting.
c. flexible accounting.
d. master budgeting.
213. Cost centers in a responsibility accounting system

a. will organize the company into the smallest units of activity – the individual worker
b. will have a specific manager in charge of every cost center
c. should have the same code number for similar units wherever they appear in an
organization
d. should show the contribution margin in its control report
214. Which one of the following would NOT usually be considered a controllable cost for the
product or division manager?
a. factory wages C. maintenance
b. plant salaries D. plant rent expense
215. Of little or no relevance in evaluating the performance of an activity would be

a. Flexible budgets for mixed costs
b. Fixed budgets for mixed costs
c. The difference between planned and actual results
d. The planning and control of future activities
216. Residual income

a. is always the best measure of divisional performance
b. is not as good a measure of performance as ROI
c. overcomes some of the problems associated with ROI
d. cannot be used by divisions that deal with others in the same company
217. Which of the following will not improve return on investment if other factors remain constant?
a. Increasing sales volume while holding fixed expenses constant.
b. Decreasing assets.
c. Increasing selling prices.
218. A decentralized business organization is one in which all major planning and operating decisions
a. TRUE
b. FALSE
219. Responsibility accounting reports that are given to lower level managers are usually very
detailed, in turn, higher level managers will be given a summary report.
a. TRUE
b. FALSE
220. Depreciation expense on store equipment for a department store is an indirect expense
a. TRUE
b. FALSE
221. Controllable expenses are those that can be influenced by the decisions of the profit center
management.
a. TRUE
b. FALSE
223. The major advantage of the rate of return on investment over income from operations as a
divisional performance measure is that divisional investment is directly considered and thus
comparability of divisions is facilitated.
a. TRUE
b. FALSE
$30,000, the investment turnover is 5.
a. TRUE
b. FALSE
225. The DuPont formula uses financial and nonfinancial information to measure the performance of
a business.
a. TRUE
b. FALSE
226. Businesses that are separated into two or more manageable units in which managers have
authority and responsibility for operations are said to be:
a. decentralized
b. consolidated
c. diversified
d. centralized
227. The following is a measure of a manager’s performance working in a cost center.

d. balance sheet
228. Division T reported income from operations of P875,000 and total service department charges of
P575,000. Therefore:
a. net income was P300,000
b. the gross profit margin was P300,000
c. income from operations before service department charges was P1,450,000
d. consolidated net income was P300,000
229. Identify the formula for the rate of return on investment.

a. Invested Assets/Income From Operations
b. Sales/Invested Assets
d. Income From Operations/Invested Assets
230. Which of the following is not a commonly used approach to setting transfer prices?
a. Market price approach
b. Revenue price approach
c. Negotiated price approach
d. Cost price approach
231. When the majority of authority is maintained by top management personnel, the organization is
said to be
a. centralized.
b. decentralized.
c. composed of cost centers.
d. engaged in transfer pricing activities.
232. An internal reconciliation account is not required for internal transfers based on
a. market value.
b. dual prices.
c. negotiated prices.
d. cost.
233. In an internal transfer, the selling division records the event by crediting
a. accounts receivable and CGS.
b. CGS and finished goods.
c. finished goods and accounts receivable.
d. finished goods and intracompany sales.
234. Indirect costs should be allocated for all of the following reasons except to
a. motivate managers.
b. determine the full cost of a product.
c. motivate general administration.
d. compare alternatives for decision making.
235. Which service department cost allocation method assigns costs directly to revenue-producing
areas with no other intermediate cost pools or allocations?
a. step method
b. indirect method
c. algebraic method
d. direct method
236. To identify costs that relate to a specific product, an allocation base should be chosen that
a. does not have a cause-and-effect relationship.
b. has a cause-and-effect relationship.
c. considers variable costs but not fixed costs.
d. considers direct material and direct labor but not manufacturing overhead.
237. S1 Decentralization can lead to greater job enrichment and satisfaction.

S2 Negotiated transfer prices are most appropriate customized high-volume and high-cost
services
A. S1-TRUE S2-TRUE
B. S1-FALSE S2-FALSE
C. SI-TRUE S2-FALSE
D. S1-FALSE S2-TRUE
238. Segment margin is equal to segment sales revenue minus:

A. Variable cost of goods sold, variable selling and administrative expenses and
traceable fixed costs
B. Variable cost of goods sold, variable selling expense and common fixed costs
C. Variable cost of goods sold, total selling expense and traceable fixed costs
D. Variable cost of goods sold, variable selling expense, common administrative
expense and traceable fixed costs
239. If a cost is a common cost of the segments on a segmented income statement, the cost should:
a. be allocated to the segments on the basis of segment sales.
b. not be allocated to the segments.
c. excluded from the income statement.
d. treated as a product cost rather than as a period cost.
240. If a segment’s common costs decrease, then:

a. Net operating income remains the same.
b. Segment margins remain the same.
c. Sales have increased.
d. Sales have decreased
241. A report that measures financial and non financial performance measures for various organization
units in a single report is called
a. Balanced scorecard
b. Financial report scorecard
c. Imbalanced scorecard
d. Unbalanced scorecard
242. Customer satisfaction measures are an example of:

a. Goal congruence approach
b. Balanced scorecard approach
c. Financial report scorecard approach
d. Investment success approach
243. An example of a performance measure with a long-run time horizon

a. Is direct materials efficiency variances
b. Is overhead spending variances
c. Is number of new patents developed
d. Include all of the above measure
244. Should asset be defined as total assets or net assets? This question is considered part of which
step in designing an accounting-based performance measure
a. Choose performance measures that align with top management’s financial goals
b. Choose the time horizon of each measure
c. Choose a definition for each performance measure
d. Choose a measurement alternative for each performance measure
245. Should asset be measured art historical cost or current cost? This question is considered part of
which step in designing an accounting based performance measure?
a. Choose performance measures that align with top management’s financial goals
b. Choose the time horizon of each measure
c. Choose a definition for each performance measure
d. Choose a measurement alternative for each performance measure
246. Which of the following statements about designing an accounting based performance measure is
false?
a. The steps may be followed in a random order
b. The issue considered in each step are independent
c. Management’s beliefs are present during the analysis

d. Behavioral criteria are important when evaluating the steps
247. The biggest challenge in making a decentralized organization function effectively is:
a. earning maximum profits through fair practices.
b. minimizing losses.
c. taking advantage of the specialized knowledge and skills of highly talented managers.
d. obtaining goal congruence among division managers.
e. developing an adequate budgetary control system.
248. What practice is present when divisional managers throughout an organization work together in
an effort to achieve the organization's goals?
a. Participatory management.
b. Goal attainment.
c. Goal congruence.
d. Centralization of objectives.
e. Negotiation by subordinates.
249. Consider the following statements about goal congruence:

I. Goal congruence is obtained when managers of subunits throughout an organization strive
to achieve the goals set by top management.
II. Managers are often more concerned about the performance of their own subunits rather
than the performance of the entire organization.
III. Achieving goal congruence in most organizations is relatively straightforward and easy
to accomplish.

a. I only.
b. II only.
c. I and II.
d. II and III.
e. I, II, and III.
250. Most scorecards includes the following, except:

a. Time
b. profitability measures
c. customer- satisfaction measures
d. innovation measures
251. What is the first step in designing accounting-based performance, measures?

a. choose performance measures that align with top management’s financial goal
b. determine the time horizon of each performance measure
c. define the components of each performance measure
d. choose a measurement alternative
e. decide on a target level of performance
252. What is the second step in designing accounting-based performance, measures?

a. choose performance measures that align with top management’s financial goal
253. What is the third step in designing accounting-based performance, measures?

a. choose performance measures that align with top management’s financial goa
254. A company's sales margin:

a. must, by definition, be greater than the firm's net sales.
b. has basically the same meaning as the term "contribution margin."
c. is computed by dividing sales revenue into income.
d. is computed by dividing income into sales revenue.
e. shows the sales dollars generated from each dollar of income.
255. Which of the following elements is not used when calculating the weighted-average cost
of capital?
a. Before-tax cost of debt capital.
b. After-tax cost of debt capital.
c. Cost of equity capital.
d. Market value of debt capital.
e. Market value of equity capital.
256. Transfer prices can be based on:

a. variable cost.
b. full cost.
c. an external market price.
d. a negotiated settlement between the buying and selling divisions.
e. all of the above.
257. Which of the following transfer-pricing methods can lead to dysfunctional decision-
making behavior by managers?
a. Variable cost.
b. Full cost.
c. External market price.
d. A professionally negotiated, amicable settlement between the buying and selling
divisions.
e. None of the above.
258. The Pro Division of Custom Industries is in need of a particular service. The service can
be obtained from another division of Custom at "cost," with cost defined as the
summation of variable cost ($9) and fixed cost ($3). Alternatively, Pro can secure the
service from a source external to Custom for $10. Which of the following statements is
true?
a. Pro should compare $10 vs. $3 in deciding where to acquire the service.
b. Pro should compare $10 vs. $9 in deciding where to acquire the service.
c. Pro should compare $10 vs. $12 in deciding where to acquire the service.
d. From Custom's perspective, the proper decision is reached by comparing $10 vs. $9.
e. Both "C" and "D" are true.
259. It includes all assets is equals to ____________.

a. total assets available
b. total assets employed
c. total assets employed less liabilities
d. shareholder’s equity
260. A report that measures financial and non financial performance measures for various
organization units in a single report is called
a. Balanced scorecard
b. Financial report scorecard
c. Imbalanced scorecard
d. Unbalanced scorecard
261. Division A transfers item no. 78 to Division B. Consider the following situations:
1—A is located in Texas and B is located in California.
2—A is located in Texas and B is located in Mexico.
Assuming that item no. 78 is unavailable in the open market, which of the following
choices correctly depicts the probable importance of federal income taxes when
determining the transfer price that is established for item no. 78?
Situation 1 Situation 2
A. Important Important
B. Important Not important
C. Not important Important
D. Not important Not important
E. It is not possible to judge based on the information presented.
262. Division A transfers a profitable subassembly to Division B, where it is assembled into a

final product. A is located in a European country that has a high tax rate; B is located in
an Asian country that has a low tax rate. Ideally, (1) what type of before-tax income
should each division report from the transfer and (2) what type of transfer price should
be set for the subassembly?
Division A Division B Transfer
Income Income Price
A. Low Low Low
B. Low High Low
C. Low High High
D. High Low High
E. High High Low
263. Consider the following statements about transfer pricing:

I. Income taxes and import duties are an important consideration when setting a transfer
price for companies that pursue international commerce.
II. Transfer prices cannot be used by organizations in the service industry.
III. Transfer prices are totally cost-based in nature, not market-based.

a. I only.
b. II only.
c. I and II.
d. II and III.
e. I, II, and III.
264. Given that ROI measures performance over a period of time, invested capital would most
appropriately be figured by using:
a. beginning-of-year assets.
b. average assets.
c. end-of-year assets.
d. total assets.
e. only current assets.
265. Hayes Division has been stagnant over the past five years, neither growing nor contracting
in size and profitability. Investments in new property, plant, and equipment have been
minimal. Would the division's use of total assets (valued at net book value) when
measuring ROI result in (1) using numbers that are consistent with those on the balance
sheet and (2) a rising ROI over time?
Consistent with Numbers Produce a Rising Return on
on the Balance Sheet? Investment Over Time?
A. Yes Yes
B. Yes No
C. No Yes
D. No No
E. Yes Need more information to judge
266. The income calculation for a division manager's ROI should be based on:
a. divisional contribution margin.
b. profit margin controllable by the division manager.
c. profit margin traceable to the division.
d. divisional income before interest and taxes.
e. divisional net income.
267. To partially eliminate the problems that are associated with the short-term focus of return
on investment, residual income, and EVA, the performance of a division's major
investments is commonly evaluated through:
a. post- audits.
b. sensitivity analysis.
c. performance operating plans.
d. horizontal analysis.
e. segmented reporting.
268. The amounts charged for goods and services exchanged between two divisions are known
as:
a. opportunity costs.
b. transfer prices.
c. standard variable costs.
d. residual prices.
e. target prices.
269. Nevada, Inc., has two divisions, one located in Las Vegas and the other located in Reno.
Las Vegas sells selected goods to Reno for use in various end-products. Assuming that
the transfer prices set by Las Vegas do not influence the decisions made by the two
divisions, which of the following correctly describes the impact of the transfer prices on
divisional profits and overall company profit?
Las Vegas Profit Reno Profit Nevada Profit
A. Affected Affected Affected
B. Affected Affected Not affected
C. Affected Not affected Affected
D. Not affected Not affected Affected
E. Not affected Not affected Not affected
270. Thurmond, Inc., has two divisions, one located in New York and the other located in
Arizona. New York sells a specialized circuit to Arizona and just recently raised the
circuit’s transfer price. This price hike had no effect on the volume of circuits transferred
nor on Arizona’s option of acquiring the circuit from either New York or from an
external supplier. On the basis of this information, which of the following statements is
most correct?
a. The profit reported by New York will increase and the profit reported by Arizona will
decrease.
b. The profit reported by New York will increase, the profit reported by Arizona will
decrease, and Thurmond’s profit will be unaffected.
c. The profit reported by New York will decrease, the profit reported by Arizona will
increase, and Thurmond’s profit will be unaffected.
d. The profit reported by New York will increase and the profit reported by Arizona will
increase.
e. The profit reported by New York and the profit reported by Arizona will be unaffected.
271. In a company with a centralized approach to responsibility accounting, upper-level managers

typically
A. make key decisions only
B. implement key decisions only
C. both make and implement key decisions
D. review the outcomes of key decisions only
272. Why would a company decentralize?

A. to train and motivate division managers
B. to focus top management’s attention to operating decisions
C. to allow division managers to concentrate on strategic planning
D. all of the above
273. Advantages of decentralization include all of the following except

A. divisional management is able to react to changing market conditions more rapidly than
top management
B. divisional management is a source of personnel for promotion to top management
positions
C. decentralization can motivate divisional managers
D. decentralization permits divisional management to concentrate on company-wide
problems and long-range planning
274. In a company with a decentralized approach to responsibility accounting, lower-level

managers typically
A. make key decisions only
B. implement key decisions only
C. both make and implement key decisions
D. review the outcomes of key decisions only

A. the firm’s operations are located over a large geographic area to reduce risk
B. authority for important decisions is delegated to lower segments of the organization
C. important decisions are made at the upper levels and the lower levels of the organization
are responsible for implementing the decisions
D. none of the above
276. Consistency between goals of the firm and the goals of its employees is:
A. goal optimization C. goal congruence
B. goal conformance D. goal compensation
277. Goal congruence is most likely to result when

A. reports to managers include all costs
B. managers’ behavior is affected by the criteria used to judge their performance
C. performance evaluation criteria encourage behavior in the company’s best interests as well
as in the manager’s best interests
D. a manager knows the criteria used to judge his or her performance
278. When a manager takes an action that benefits his or her responsibility center, but not the
company as a whole,
A. it is a non-controllable action
B. there is a lack of goal congruence
C. the center must be an artificial profit center
D. the manager should be fired
279. A management decision may be beneficial for a given profit center, but not for the entire
company. From the overall company viewpoint, this decision would lead to
A. goal congruence C. centralization
B. suboptimization D. maximization
280. An emphasis on obtaining goal congruence is consistent with a broad managerial approach
called
A. management by crisis
B. management by objectives
C. management through goal congruence
D. just-in-time philosophy
281. In a responsibility accounting system, the process in which a supervisor and a subordinate
jointly determine the subordinate’s goals and plans for achieving these goals is
A. Top-down budgeting C. Bottom-up budgeting
B. Imposed budgeting D. Management by objectives
282. Responsibility accounting is a system whose attributes include

A. responsibility, liability, and culpability
B. liability, accountability, and performance evaluation
C. performance evaluation, accountability, and responsibility
D. culpability, liability, and accountability
283. Some basic elements of responsibility accounting are

A. chart of accounts classification C. control-based reports
B. budgeting system D. all of the above
284. What term identifies an accounting system in which the operations of the business are broken
down into reportable segments and the control functions of a foreperson, sales managers, or
supervisor is emphasized?
A. Responsibility accounting C. Operations-research accounting
B. Control accounting D. Budgetary accounting
285. The Atwood Company uses a performance reporting system that reflects the company’s
decentralization of decision making. The departmental performance report shows one line of
data for each subordinate who reports to the group vice-president. The data presented shows
the actual costs incurred during the period, the budgeted costs, and all variances from budget
for that subordinate’s department. The Atwood Company is using a type of system called
A. Flexible budgeting C. Responsibility accounting
B. Contribution budgeting D. Cost-benefit accounting
286. The accumulation of accounting data on the basis of the individual manager who has the
authority to make day-to-day decisions about activities in an area is called
A. static reporting. C. responsibility accounting.
B. flexible accounting. D. master budgeting.
287. Which of the following is critically important for a responsibility accounting system to be
effective?
A. Each employee should receive a separate performance report.
B. Service department costs should be allocated to the operating departments that use the
service.
C. Each manager should know the criteria used for evaluating his or her performance.
D. The details on the performance reports for individual managers should add up to the
totals on the report to their supervisor.
288. The report to a territorial sales manager which shows the contribution to profit by each
salesperson in the territory is called
A. a profit report C. an absorption profit report
B. a responsibility report D. a distribution report
289. A responsibility center

A. is an organization unit where management control exists over incurring costs or
generating revenue
B. is responsible for all other departments

C. has a responsible manager in charge of it
D. all of the above
290. A segment of an organization for which management wants to report the cost of the activities
performed separately is called a(n)
A. cost center C. activity-based costing center
B. activity center D. batch activity center
291. The sequence that reflects increasing breadth of responsibility is

A. cost center, investment center, profit center
B. cost center, profit center, investment center
C. profit center, cost center, investment center
D. investment center, cost center, profit center
292. A cost center is used to

A. show responsibility for scheduling materials, labor, and overhead
B. collect costs incurred performing a set of homogeneous activities
C. show authority for choosing product markets and sources of supply
D. assign responsibility for setting the chart of accounts
293. Cost centers in a responsibility accounting system

A. will organize the company into the smallest units of activity – the individual worker
B. will have a specific manager in charge of every cost center
C. should have the same code number for similar units wherever they appear in an
organization
D. should show the contribution margin in its control report
294. A profit center is

A. a responsibility center that always reports a profit.
B. a responsibility center that incurs costs and generates revenues.
C. evaluated by the rate of return earned on the investment allocated to the center.
D. referred to as a loss center when operations do not meet the company's objectives.
295. A responsibility center having control over generating revenue is

A. a cost center C. a profit center
B. an investment center D. an operation center
296. A distinguishing characteristic of an investment center is that

A. revenues are generated by selling and buying stocks and bonds.
B. interest revenue is the major source of revenues.
C. the profitability of the center is related to the funds invested in the center.
D. it is a responsibility center which only generates revenues.
297. In which type of responsibility center is the manager held accountable for its profits?
A. Cost center C. Investment center
B. Profit center D. Profit centers or Investment centers
298. Which of the following responsibility centers have managers who are held accountable for
costs?
A. Cost centers and Investment centers
B. Revenue centers and Profit centers

C. Revenue centers and Investment centers
D. Cost centers and Profit centers
299. In responsibility accounting the most relevant classification of costs is

A. fixed and variable C. discretionary and committed
B. incremental and not incremental D. controllable and no controllable
300. Controllable costs are costs that

A. fluctuate in total in response to small changes in the rate of capacity utilization.
B. will be unaffected by current managerial decisions.
C. management decides to incur in the current period to enable the company to achieve
objectives other than filling customers’ orders.
D. are likely to respond to the amount of attention devoted to them by a specified
manager.
301. Overtime conditions and pay were recently set by the personnel department. The production
department has just received a request for a rush order from the sales department. The
production department protests that additional overtime costs would be incurred as a result of the
order. The sales department argues the order is from an important customer. The production
department processes the order. In order to control costs, which department should be charged
with the overtime costs generated as a result of the rush order?
A. Personnel department
B. Production department
C. Sales department
D. Shared by production department and sales department
302. Which one of the following would NOT usually be considered a controllable cost for the
product or division manager?
A. factory wages C. maintenance
B. plant salaries D. plant rent expense
303. Micro Manufacturing 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 requires the incurrence of additional 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. Functional accounting C. Contribution accounting
B. Reciprocal allocation D. Profitability accounting
304. A basic budgeting system includes

A. a planning schedule C. involvement of all managers
B. follow-up plan steps D. all of these
305. Segmented income statements are most meaningful to managers when they are prepared
A. on an absorption cost basis C. on a cost behavior basis
B. on a cash basis D. in a multi-step format
306. Transfer prices are charges for

A. transportation of goods outside units of an organization.
B. goods sold by subunits to outside customers.
C. goods exchanged among subunits.

D. goods stored within a subunit.
307. A transfer price is a price charged

A. to outside customers
B. when one division sells its goods or services to another division
C. by the selling division to the buying division when outside market does not exist
D. a and b
308. Transfer prices are

A. necessary to calculate costs in a cost, profit, or investment center
B. preferred by buying divisions are the lowest possible
C. do not make any difference for the company's bottom-line no matter what number is used
D. all of the above
309. Which of the following is a key factor to consider in deciding whether to make internal
transfers, and, if so, in setting the transfer price?
A. Is there an outside supplier?
B. Is the seller's variable cost less than the market price/
C. Is the selling unit operating at full capacity?
D. All of the above are key factors.
310. From the standpoint of the company, the important question in transfer pricing is
A. what is fair to the divisions
B. how to determine the profit of the divisions
C. whether or not the transfer should take place
D. when the transfer should be made
311. The objective of a transfer pricing system should be to

A. maximize the transfer price
B. minimize the transfer price
C. maintain goal congruence between the divisions and the entire firm
D. none of the above
312. The objective(s) of transfer pricing are

A. to motivate managers
B. to provide an incentive for managers to make decisions consistent with the firm's goals (i.e., goal
congruence)
C. to provide a basis for fairly rewarding the managers
D. all of the above
313. A transfer pricing system should satisfy which of the following objectives?
A. accurate performance evaluation C. goal congruence
B. preservation of divisional autonomy D. all of the above
314. The market price method satisfy a key objective of transfer pricing, namely:
A. objectivity C. consistency
B. usability D. reliability
315. Which item is usually not relevant to a decision by a divisional manager to reduce a transfer
price to meet a price offered to another division by an outside supplier?
A. opportunity cost
B. variable manufacturing costs
C. fixed divisional overhead
D. the price offered by the outside supplier
316. The general rule in establishing transfer prices consistent with economic decision making is the
A. differential cost plus opportunity cost if goods are transferred internally.
B. actual cost plus opportunity cost if goods are transferred internally.
C. standard cost plus opportunity cost if goods are transferred internally.
D. all of the above.
317. The minimum transfer price should be:

A. opportunity cost for selling division
B. opportunity cost for buying division
C. opportunity cost for the company as a whole
D. only variable cost for the selling division
318. A selling division produces components for a buying division that is considering accepting a
special order for the products it produces. The selling division has excess capacity. The
minimum price the selling division would be willing to accept is the
A. selling division’s variable costs
B. buying division’s outside purchase price
C. price that would allow the buying division to cover its incremental cost of the special order
D. price that would allow the selling division to maintain its current ROI
319. The minimum transfer price from the seller's standpoint is

A. market price when excess capacity exists
B. market price when excess capacity does not exist
C. incremental costs when excess capacity exists
D. b and c
320. Generally, the outside market price would be

A. a floor for internal transfer price.
B. a ceiling for internal transfer price.
C. both a and b
D. none of the above.
321. The basic methods used in transfer pricing are

A. variable or full costs C. market price or negotiated price
B. dual prices D. all of the above
322. An example of a transfer price policy is

A. market price.
B. actual cost plus markup.
C. standard cost plus markup.
323. Transfer prices are set by:

A. cost or cost plus C. negotiation
B. market prices D. all of the above
324. Which of the following are transfer pricing models?

A. Variable cost method C. Market cost method
B. Average price method D. All of the above
325. If a firm operates at capacity, the transfer price should be the:

A. external market price. C. actual cost.
B. differential cost. D. standard cost.
326. To avoid waste and maximize efficiency when transferring products among divisions in a
competitive economy, a large diversified corporation should base transfer prices on:
A. full cost C. replacement cost
B. variable cost D. market price
327. If an intermediate market exists, the optimal transfer price is the:

A. outlay cost for producing the goods.
B. opportunity cost of not selling to the outside market.
C. market price.
D. variable costs associated with producing the product.
328. If there is no excess capacity, the transfer price is often

A. market price
B. opportunity cost plus incremental cost
C. variable cost or variable cost plus profit
D. a or b
329. Market pricing approach in transfer pricing

A. helps to preserve unit autonomy
B. provides incentive for the selling unit to be competitive with outside suppliers
C. may be the most practical approach when there is significant conflict
D. both a and b
330. The best transfer price is usually

A. actual cost plus a percentage markup
B. a reliable market price
C. budgeted full cost plus a percentage markup
D. budgeted variable cost plus a percentage markup
331. Market-based transfer prices are best for the

A. company when the selling division is operating below capacity.
B. company when the selling division is operating at capacity.
C. buying division if it is operating at capacity.
D. buying division.
332. Which transfer price is ideal for the company when the selling division is at capacity?
A. Market price
B. Incremental cost
C. Budgeted full cost
D. Actual variable cost plus a percentage profit
333. Disadvantages of transfer prices based on actual cost include:

A. reducing the incentive of managers of supplying divisions to control their costs.
B. passing on efficiencies or inefficiencies of supplying divisions to receiving divisions.

C. both a and b.
D. none of the above.
334. Which of the following types of transfer prices do not encourage the selling division to be
efficient?
A. transfer prices based upon market prices
B. transfer prices based upon actual costs
C. transfer prices based upon standard costs
D. transfer prices based upon standard costs plus a markup for profit
335. The worst transfer-pricing method is to base the prices on

A. market prices C. budgeted variable costs
B. budgeted total costs D. actual total costs
336. Variable costing method of transfer pricing is

A. easy to implement
B. intuitive and easily understood
C. more logical when there is excess capacity
D. all of the above
337. A company may consider using variable costs in transfer pricing when there is
A. excess capacity because variable costs would stay the same
B. no excess capacity because variable costs would not stay the same
C. excess capacity because fixed costs would stay the same
D. no excess capacity because fixed costs would stay the same
338. If full cost is used in transfer pricing, it is preferable to use

A. standard full cost because the buyer does not wish to be stuck with unknowns
B. standard full cost because the seller does not wish to pass along the variations in cost
C. actual full cost because the buyer is well-advised to deal with the real rather than anticipated costs
D. actual full costs because the seller is well-advised to deal with the real rather than anticipated
costs
339. Negotiated transfer prices are appropriate when:

A. there are cost savings to the selling division.
B. there is no external market price.
C. the internal market price reflects a bargain price.
340. A negotiated transfer pricing system is set up where

A. the two sides cannot agree on a price and the difference between the two sides is absorbed by the
home office
B. a ready market price is not available and the two sides must come up with an agreeable price
C. the buyer buys at variable cost and the seller only sells at full cost
D. the two sides agree to use a cost basis for transfer pricing
341. To minimize taxes, some multinational companies set low transfer prices when goods are
shipped from
A. low tax countries to other low tax countries
B. low tax countries to high tax countries
C. high tax countries to low tax countries

D. c or b
MULTIPLE CHOICE: PROBLEMS

Use the following information for questions 1 through 5:
Wing, Inc.’s income statement for the most recent month is given below.
__ Total Store P ___Store Q _
Sales P600,000 P200,000 P400,000
Variable Expenses 384,000 144,000 240,000
Contribution Margin 216,000 56,000 160,000
Traceable Fixed Costs 152,000 42,000 110,000
Segment Margin 64,000 P14,000 P50,000
Common Fixed Costs 34,000
Net Income P30,000
For each of the following questions, refer back to the original data.
1. If Store Q sales increase by P30,000 with no change in fixed costs, the overall company net
income will
a. Increase by P3,750
b. Increase by P7,500
c. Increase by P12,000
d. Increase by P18,000
SUPPORTING ANALYSIS/COMPUTATION
Percentage of Increase in = 30,000

contribution margin 400,000
= 7.5%
Thus:
Increase in net income = 160,000 x 7.5%
= P12,000
2. The marketing department believes that a promotional campaign at Store P costing P5,000 will
increase sales by P15,000. If the campaign is adopted, overall company net income will
a. Decrease by P800
b. Decrease by P5,800
SUPPORTING ANALYSIS/COMPUTATION:
Increase in promotional campaign 5,000

Increase in contribution margin (56,000x7.5%) (4,200)
Decrease in Income 800
Percentage of increase in sales (15,000/200,000) 7.5%
3. A proposal has been made that will lower variable costs in Store P to 65% of sales. However, this
reduction can only be accomplished by a P16,000 increase in Store P’s traceable fixed costs. If
this proposal is implemented and sales remain constant, overall company net income will
a. Remain in same
b. Decrease by P2,000
Decrease in variable cost

[(200,000x0.65) – 44,000)] 14,000
Increase in fixed cost (16,000)
Decrease in Net Income (2,000)
4. If sales in Store Q increase by P30,000 as a result of a P7,000 increase in traceable fixed costs
a. Store Q’s contribution margin will increase by P18,000
b. Store Q’s segment margin will increase by P12,000
c. Store Q’s contribution margin will increase by P11,000
d. Store Q’s segment margin will increase by P5,000
Increase in contribution margin

(160,000x.075) 12,000
Increase in traceable fixed cost (7,000)
Increase in Segment Margin 5,000
5. Currently the sales clerks receive a salary of P17,000 per month in Store Q. A proposal has been
made to change from a fixed salary to a sales commission of 5%. Assume that this is adopted, and
that as a result sale in Store Q increase by P40,000. The new segment margin for Store Q will be
a. P47,000
b. P61,000
c. P85,000
d. P44,000
Increase in contribution margin

(160,000x0.10) 16,000
Increase in traceable cost
[(440,000x0.05) – 17,000] (5,000)
Net increase in contribution margin 11,000
Previous segment margin 50,000
New contribution margin 61,000
6. Win company has two divisions, S and T. The company’s overall contribution margin ratio is
30% when sales in the two divisions total P750,000. If variable costs are P450,000 in Division S,
and if Division S’s contribution margin ratio is 25%, then sales in Division T must be
a. P75,000
b. P150,000
c. P225,000
d. P300,000
Total Sales 750,000

Sales in Division S (450,000/0.75) (600,000)
Sales in Division T 150,000
7. Sigma Retail Company consists of two stores, A and B. Store A had sales of P80,000 during
March, a contribution margin ratio of 30% and a segment margin of P11,000. The Company as a
whole had sales of P200,000, a contribution margin of 36% and segment’s margin for two stores
totaling P31,000. If net income for the company was P15,000 for the month, the traceable fixed
costs in Store B most have been
a. P16,000
b. P20,000
c. P31,000
d. P28,000
Total Contribution Margin

(200,000x0.36) 72,000
Total segment margin (31,000)
Total traceable fixed cost 41,000
Traceable Fixed Cost- Store A
CM (80,000 x .3) 24,000
Segment Margin (11,000) (13,000)
Traceable Fixed- Store B 28,000
8. Gamma Retail Company has two Stores, M and N. The Store N had sales of P180,000 during
March, a segment margin of 30% and traceable fixed costs of P26,000. The company as a whole
had a contribution margin ratio of 25% and P120,000 in total contribution margin. Based on this
information, total variable cost in Store M for the month must have been
a. P140,000
b. P260,000
c. P300,000
d. P360,000
Total Variable Cost [(120,000/.25) x .75] 360,000

Variable Cost of Store N (180,000-80,000) (100,000)

Variable Cost of Store M 260,000
9. Aldrin Market has three stores: P, Q and R. During 2017, Store P had a contribution margin of
P24,000 and a contribution margin ratio of 30%. Store Q had variable cost of P48,000 and a
contribution margin ratio of 40%. Store R had variable cost of P84,000, which represent 70% of
sale in the store. For 2017 Aldrin Markets total sales were
a. P320,000
b. P360,000
c. P440,000
d. P280,000
Total variable cost(120,000/.25)x.75 P360,000

Variable cost of store N (180,000 – 80,000) (P100,00)
P260,000
10. Alpha Market has two stores, F and G. During 2017, store F had a segment margin of P10,000,
traceable fixed cost of P26,000, and a variable cost equal to 55% of sale. Alpha Market as a
whole had a segment margin of 15%, a contribution margin ratio of 40%, and total sales of
P180,000 for the year. Based on this information, traceable fixed cost in Store G for the year were
a. 19,000
b. 17,000
c. 30,000
d. 36,000
Total contribution margin (180,000x.40) P72,000

Total segment margin (180,000x.15) (27,000)
Total traceable fixed cost P45,000
Traceable fixed cost – store F (26,000)
Traceable fixed cost – store G P19,000
11. Khi Company has two divisions, J and K. During 2017, the contribution margin in J was
P30,000. The contribution margin ratio in K during 2017 was 40%, its sales were P125,000, and
its segment margin was P32,000. The common fixed expense in the company were P40,000, and
the company’s net income for the year was P18,000. The segment margin for division J for 217
was
a. 26,000
b. 32,000
c. 8,000
d. 58,000
Total segment margin (40,000-18,000) P58,000

Segment margin of store K (32,000)

Segment margin of store J 26,000
12. Division X makes and sells a single product. Presently is sells 12,000 units per year to outside
customers at P24 per unit. The annual capacity is 20,000 units and the variable cost to make each
unit is P16. All selling expenses are fixed. Division Y would like to buy 10,000 units a year from
Division X. The unit price that Division X should charge Division Y, according to the transfer
pricing formula, is
a. P24.00
b. P21.40
c. P17.60
d. P16.00
Differential cost P16

Opportunity cost (2,000/10,000)x8 1.6
Minimum transfer price 17.6
13. A company has only two divisioln- P and Q. Division P has a capacity for making 75,000 wheel
sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is
P100 per wheel set and the unit variable production cost is P65. Division Q currently buys 30,000
wheel sets (of the kind made by P) yearly from an outside supplier at a price of P90 per wheel set.
If Q were to buy the 30,000 wheel sets it needs annually from P at P87 per wheel set, the change
in annual net operating income for the company as a whole, compared for what it is currently,
would be
a. P600,000
b. P225,000
c. P750,000
d. P135,000
Selling price 87.00

Minimum transfer price
Variable cost 65.00
Opportunity cost 17.5 (82.5)
Savings per unit (90-87) 3.00
Incremental advantage 7.50
X 30,000
Increase in net income 225,000
14. Income from operations for Division B is $150,000, total service department charges are
$400,000 and operating expenses are $2,266,000. What are the revenues for Division B?
a. $550,000
b. $3,216,000
c. $2,816,000
d. $2,666,000
15. Income from operations for Division M is $120,000, and income from operations before service
department charges is $975,000. Therefore:
a. total operating expenses are $855,000
b. total manufacturing expenses are $855,000
c. direct materials, direct labor, and factory overhead total $855,000
d. total service department charges are $855,000
16. The following data are taken from the management accounting reports of Dancer Co.:
Div. A Div. B Div. C
Income from operations $1,800,000 $1,350,000 $1,350,000
Total service
department charges 1,700,000 1,050,000 1,100,000
If an incentive bonus is paid to the manager who achieved the highest income from operations
before service department charges, it follows that:
a. Division A's manager is given the bonus
b. Division B's manager is given the bonus
c. Division C's manager is given the bonus
d. The managers of Divisions B and C divide the bonus
Use the following information for questions 17-21:
The following financial information was summarized from the accounting records of Block Corporation
for the current year ended December 31:
Software Hardware Corporate

Division Division Total
Cost of goods sold $47,200 $30,720
Direct operating expenses 27,200 20,040
Net sales 95,000 64,000
Interest expense $ 2,040
General overhead 18,160
Income tax 4,700
17. The gross profit for the Software Division is:

a. $47,800
b. $20,600
c. $13,240
d. $33,280
18. The income from operations for the Software Division is:
a. $47,800
b. $20,600
c. $13,240
d. $33,280
19. The gross profit for the Hardware Division is:

a. $47,800
b. $20,600
c. $13,240
d. $33,280
20. The income from operations for the Hardware Division is:
a. $47,800
b. $20,600
c. $13,240
d. $33,280
21. The net income for Block Corporation is:

a. $13,640
b. $ 8,940
c. $15,680
d. $10,980
22. Stevenson Corporation had $275,000 in invested assets, sales of $330,000, income from
operations amounting to $49,500 and a desired minimum rate of return of 7.5%. The rate of
return on investment for Stevenson is:
a. 8%
b. 10%
c. 18%
d. 7.5%
Use the following information for questions 23 to 25:
Steven Corporation had $550,000 in invested assets, sales of $660,000, income from operations
amounting to $99,000, and a desired minimum rate of return of 15%.
23. The profit margin for Stevenson is:
a. 16%
b. 20%
c. 18%
d. 15%
24. The investment turnover for Stevenson is:

a. 1.2
b. 1.0
c. 1.1
d. 1.3
25. The residual income for Stevenson is:

a. $0
b. $17,820
c. $14,850
d. $16,500
26. Espinosa Corporation had $220,000 in invested assets, sales of $242,000, income from operations
amounting to $48,400, and a desired minimum rate of return of 3%. The rate of return on
investment for Espinosa is:
a. 4%
b. 22%
c. 3%
d. 6.4%

SP Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations
amounting to $242,000, and a desired minimum rate of return of 15%.
27. The profit margin for Espinosa is:
a. 20%
b. 22%
c. 15%
d. 32%
28. The investment turnover for Espinosa is:

a. 1.3
b. 1.2
c. 1.0
d. 1.1
29. The residual income for Espinosa is:

a. $60,500
b. $22,000
c. $77,000
d. $24,200

The Anderson Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating
expenses of $3,600,000. The company has established a minimum rate of return of 7%.
30. What is Anderson Company's profit margin?
a. 20%
b. 80%
c. 44.4%
d. 18%
31. What is Anderson Company's investment turnover?

a. 1.80
b. 2.25
c. 1.25
d. 1.4
32. What is Anderson Company's rate of return on investment?

a. 56%
b. 20%
c. 45%
d. 25%
33. What is Anderson Company's residual income?

a. $252,000
b. $900,000
c. $1,400,000
d. $760,000
34. The profit margin for Division E is 28% and the investment turnover is 2.8. What is the rate of
return on investment for Division E?
a. 20%
b. 28%
c. 14%
d. 78.4%
35. Division Q for Mott Company has a rate of return on investment of 28% and an investment
turnover of 1.4. What is the profit margin?
a. 28%
b. 20%
c. 14%
d. 39.2%
36. Division I of Norris Company has a rate of return on investment of 28% and a profit margin of
20%. What is the investment turnover?
a. 3.6
b. 1.4
c. 5.0
d. .7
37. Division A of Purvis Company has a rate of return on investment of 15% and an investment
turnover of 1.2. What is the profit margin?
a. 10%
b. 12.5%
c. 9%
d. 6%
38. The profit margin for Division K is 8% and the investment turnover is 1.20. What is the rate of
return on investment for Division K?
a. 8%
b. 6.7%
c. 7.3%
d. 9.6%
39. Assume that divisional income from operations amounts to $187,000 and top management has
established 15% as the minimum rate of return on divisional assets totaling $1,000,000. The
residual income for the division is:
a. $37,000
b. $28,050
c. $67,000
d. $0
40. Assume that Division P has achieved income from operations of $165,000 using $900,000 of
invested assets. If management desires a minimum rate of return of 8%, the residual income is:
a. $72,000
b. $13,200
c. $185,000
d. $93,000

Division W of Comer Company has sales of $140,000, cost of goods sold of $83,000, operating expenses
of $43,000, and invested assets of $100,000.
41. What is the rate of return on investment for Division W?
a. 14%
b. 2.8%
c. 10%
d. 5.47%
42. What is the profit margin for Division W?

a. 14%
b. 2.8%
c. 10%
d. 5.47%
43. What is the investment turnover for Division W?

a. 1.4
b. 1.2
c. 1.7
d. 0.7

Division R of O'Murray Company has sales of $200,000, cost of goods sold of $120,000, operating
expenses of $58,000, and invested assets of $125,000.
44. What is the rate of return on investment for Division R?
a. 9.15%
b. 17.6%
c. 20%
d. 5.5%
45. What is the profit margin for Division R?

a. 8.8%
b. 9.15%
c. 11%
d. 20%
46. Starrs Shoe Factory is an investment center and is responsible for all of their net income and the
use of their assets. In 2008, the invested assets totaled $460,000 and net income was $115,000.
What is to rate of return on assets?
a. 25%
b. 25%
c. 4%
d. 400%

The Koko Company has income from operations of $80,000, invested assets of $400,000, and sales of
$930,000.
47. What is the profit margin?
a. 43%
b. 8.6%
c. 20%
d. 4.3%
48. What is the investment turnover?

a. 5.000
b. 2.325
c. 20
d. 4.30

Materials used by Aro-Products Inc. in producing Division 3's product are currently purchased from
outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6.
Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of
$3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred,
with no reduction in Division 6's current sales.
49. How much would Division 3's income from operations increase?
a. $150,000
b. $50,000
c. $32,000
d. $72,000
50. How much would Division 6's income from operations increase?
a. $8,000
b. $15,000
c. $80,000
d. $150,000
51. How much would Aro-Products total income from operations increase?
a. $32,000
b. $112,000
c. $80,000
d. $150,000

Materials used by Bristol Company in producing Division C's product are currently purchased from
outside suppliers at a cost of $10 per unit. However, the same materials are available from Division A.
Division A has unused capacity and can produce the materials needed by Division C at a variable cost of
$8.50 per unit. A transfer price of $9.50 per unit is negotiated and 30,000 units of material are transferred,
with no reduction in Division A's current sales.
52. How much would Division C's income from operations increase?
a. $0
b. $90,000
c. $15,000
d. $60,000
53. How much would Division A's income from operations increase?
a. $0
b. $90,000
c. $30,000
d. $60,000
54. How much would Bristol's total income from operations increase?
a. $45,000
b. $120,000
c. $60,000
d. $150,000

The Hua Company's radio division currently is purchasing transistors from the Xiang Co. for $3.50 each.
The total number of transistors needed is 8,000 per month. Hua Company's electronics division can
produce the transistors for a cost of $4.00 each. The $4 is made up of $3 in variable costs, and $1 in
allocated fixed costs.
55. What should be the range of a possible transfer price?
a. No transfer should take place.
b. $3.51 to $3.99
c. $3.01 to $3.99
d. $3.01 to $3.49
56. What would be the total savings (or additional costs) if the transfer were to take place?
a. $4,000 Savings
b. $4,000 in additional costs
c. $8,000 Savings
d. $8,000 in additional costs
57. Koko Company has two divisions. Division A is interested in purchasing 10,000 units from
Division B. Capacity is available for Division B to produce these units. The per unit market price
is $30 per unit, with a variable cost of $17. The manager of Division A has offered to purchase
the units at $15 per unit. In an effort to make this transfer price beneficial for the company as a
whole, what is the range of prices that should be used during negotiations between the two
divisions?
a. $15 to $30
b. $15 to $17
c. over $30
d. $17 to $30
58. Income from operations of the Commercial Aviation Division is $2,225,000. If income from
operations before service department charges is $3,250,000:
a. operating expenses are $1,025,000
b. total service department charges are $1,025,000
c. non-controllable charges are $1,025,000
d. direct manufacturing charges are $1,025,000
59. Walsh Company has three Stores: X, Y, and Z. During August, the variable expenses in Store X
were $90,000 and the contribution margin ratio was 25%. Store Y had a contribution margin of
$27,000 and a contribution margin ratio of 20%. Store Z had variable expenses of $120,000 and a
variable expense ratio of 60% of sales. For August, Walsh Company's sales were:
a. $318,000
b. $455,000
c. $485,000
d. $555,000
60. Channing Company has two divisions, S and T. The company's overall contribution margin ratio
is 30% when sales in the two divisions total $750,000. If variable expenses are $450,000 in
Division S, and if Division S's contribution margin ratio is 25%, then sales in Division T must be:
a. $75,000
b. $150,000
c. $225,000
d. $300,000
61. Insider Company has two divisions, J and K. During March, the contribution margin in J was
$30,000. The contribution margin ratio in K was 40%, its sales were $125,000, and its segment
margin was $32,000. The common fixed expenses in the company were $40,000, and the
company's net operating income was $18,000. The segment margin for Division J was:
a. $26,000
b. $32,000
c. $8,000
d. $58,000
62. Davison Inc. consists of two districts, A and B. The company as a whole had sales of $400,000, a
contribution margin ratio of 25% and a combined segment margin totaling $35,000. District A
had sales of $90,000 during May, a contribution margin ratio of 45%, and a segment margin of
$16,000. If the net operating income of Davison Inc. for May is $12,000, the traceable fixed
expenses in District B must have been:
a. $23,000
b. $24,500
c. $49,000
d. $40,500
63. Domingos Company has two product lines, C and J. Line C has sales of $100,000 during March,
a segment margin ratio of 19%, and traceable fixed expenses of $20,000. The company as a
whole had a contribution margin ratio of 25% and $105,000 in total contribution margin. Based
on this information, total variable expenses for product J must have been:
a. $61,000
b. $176,000
c. $315,000
d. $254,000
64. Bennett Company has two stores, P and Q. During April, Store P had a segment margin of $8,000
and variable expenses equal to 65% of sales. Traceable fixed expenses for Store Q were $18,000.
Bennett Company as a whole had a contribution margin ratio of 40%, a combined segment
margin of $20,000, and sales of $180,000. Given this data, the sales for store Q were:
a. $157,143
b. $60,000
c. $30,000
d. $120,000
65. Brummitt Corporation has two divisions: the BAJ Division and the CBB Division. The
corporation's net operating income is $10,700. The BAJ Division's divisional segment margin is
$76,100 and the CBB Division's divisional segment margin is $42,300. What is the amount of the
common fixed expense not traceable to the individual divisions?
a. $86,800
b. $107,700
c. $53,000
d. $118,400
66. Sorto Corporation has two divisions: the East Division and the West Division. The corporation's
net operating income is $93,200. The East Division's divisional segment margin is $223,200 and
the West Division's divisional segment margin is $15,900. What is the amount of the common
fixed expense not traceable to the individual divisions?
a. $316,400
b. $145,900
c. $109,100
d. $239,100
67. Quinnett Corporation has two divisions: the Export Products Division and the Business Products
Division. The Export Products Division's divisional segment margin is $34,300 and the Business
Products Division's divisional segment margin is $86,700. The total amount of common fixed
expenses not traceable to the individual divisions is $95,600. What is the company's net operating
income?
a. $216,600
b. $121,000
c. $25,400
d. ($121,000)
68. Gunderman Corporation has two divisions: the Alpha Division and the Charlie Division. The
Alpha Division has sales of $230,000, variable expenses of $131,100, and traceable fixed
expenses of $63,300. The Charlie Division has sales of $540,000, variable expenses of $307,800,
and traceable fixed expenses of $120,700. The total amount of common fixed expenses not
traceable to the individual divisions is $119,200. What is the company's net operating income?
a. $147,100
b. $331,100
c. $27,900
d. $211,900
69. Given the following data:

Return on investment ................................. 25%
Sales ............................................................. $100,000
Average operating assets ............................ $40,000
Turnover ....................................................... 2.5
Minimum required rate of return ............... 18%
Margin on sales ............................................ 10%
The residual income would be:
a. $2,800
b. $0
c. $6,000
d. $8,000
70. Given the following data:

Average operating assets ............... $250,000
Total liabilities ............................... $100,000
Sales ................................................ $600,000
Contribution margin ...................... $150,000
Net operating income ..................... $30,000

Return on investment (ROI) would be:
a. 5%
b. 12%
c. 25%
d. 60%
71. Last year a company had sales of $400,000, a turnover of 2.4, and a return on investment of 36%.
The company's net operating income for the year was:
a. $144,000
b. $120,000
c. $80,000
d. $60,000
72. Cabot Company had the following results during June: net operating income, $2,500;
turnover, 4; and ROI, 20%. Cabot Company's average operating assets were:
a. $50,000
b. $200,000
c. $12,500
d. $10,000
73. The following information pertains to Quest Company's Gold Division for last year:
Sales ................................................ $311,000
Variable expenses ........................... $250,000
Traceable fixed expenses ................ $50,000
Average operating assets ................ $40,000
The Gold Division's return on investment is:
a. 10.00%
b. 13.33%
c. 27.50%
d. 30.00%
74. The following information relates to last year's operations at the Paper Division of Germane
Corporation:
Return on investment (ROI) ........................ 18%
Sales ............................................................ $810,000
Turnover (on operating assets) ................... 5 times
What was the Paper Division's net operating income last year?
a. $24,300
b. $29,160
c. $145,800
d. $162,000
75. The following information is available on Company X:

Sales ............................................................ $90,000

Net operating income.................................. $3,600
Average operating assets ........................... $30,000
Stockholders’ equity .................................. $25,000
Company X's residual income would be:
a. $1,100
b. $5,400
c. $360
d. $600
76. The following information relates to last year's operations at the Bread Division of Rison
Bakery, Inc.:
Residual income ............................ $12,000
Net operating income..................... $60,000
Sales ................................................ $300,000
Average operating assets ............... $400,000
What was the Bread Division's minimum required rate of return last year?
a. 12%
b. 4%
c. 15%
d. 20%
77. Division X makes a part that it sells to customers outside of the company. Data concerning
this part appear below:
Selling price to outside customers ............. $75
Variable cost per unit ….............................. $50
Total fixed costs ........................................ $400,000
Capacity in units ........................................ 25,000
Division Y of the same company would like to use the part manufactured by Division X in
one of its products. Division Y currently purchases a similar part made by an outside
company for $70 per unit and would substitute the part made by Division X. Division Y
requires 5,000 units of the part each period. Division X has ample excess capacity to handle
all of Division Y's needs without any increase in fixed costs and without cutting into outside
sales of the part. What is the lowest acceptable transfer price from the standpoint of the
selling division?
a. $75
b. $66
c. $16
d. $50
78. The Blade Division of Dana Company produces hardened steel blades. One-third of the
Blade Division's output is sold to the Lawn Products Division of Dana; the remainder is sold
to outside customers. The Blade Division's estimated sales and standard cost data for the
next year are as follows:
Sales To Lawn Products Outsiders
Unit sales 10,000 20,000
Sales $15,000 $40,000

Variable costs $10,000 $20,000
Fixed costs $3,000 $6,000
The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades
from an outside supplier at a cost of $1.25 per unit on a continuing basis. The Blade
Division cannot sell any additional products to outside customers because the market is
saturated. This decision would have no effect on the company's total fixed costs. If the Blade
Division refuses to meet the $1.25 price internally and the Lawn Products Division starts
buying from the outside supplier, the company as a whole will be:
a. better off by $500 each period.
b. worse off by $1,500 each period.
c. better off by $2,500 each period.
d. worse off by $2,500 each period.
79. Using the formula in the text, if the lowest acceptable transfer price for the viewpoint of the
selling division is $80 and the lost contribution margin per unit on outside sales is $30, then
the variable cost per unit must be:
a. $50
b. $30
c. $110
d. $80
80. Mar Company has two decentralized divisions, X and Y. Division X has always purchased
certain units from Division Y at $75 per unit. Because Division Y plans to raise the price to
$100 per unit, Division X is seeking an outside supplier of the part for the old price of $75
per unit. Division Y's costs follow:
Y’s variable costs per unit ..................................... $70
Y’s annual fixed costs ............................................ $15,000
Y’s annual production of these units for X …......... 1,000 units
If Division X buys from an outside supplier, the facilities Division Y uses to manufacture
these units would be idle. What would be the result if the top management of Mar Company
insists that Division X purchase from Division Y at a transfer price of $100 per unit?
a. it would reduce the company's overall profit because Division X should buy from
outside suppliers at $75 per unit if possible.
b. it would provide lower overall company net operating income than the old transfer price
of $75 per unit.
c. it would provide higher overall company net operating income than the old transfer price
of $75 per unit.
d. it would be more profitable for the company than allowing X to buy from outside
suppliers at $75 per unit.
Use the following to answer questions 81 to 83:

Meyer Company has two sales areas: North and South. During April, the contribution margin in the
North was $90,000, or 30% of sales. The segment margin in the South was $25,000, or 10% of
sales. Traceable fixed expenses were $30,000 in the North and $15,000 in the South. Meyer
Company reported a total net operating income of $52,000.
81. The total sales for Meyer Company were:

a. $983,333
b. $430,000
c. $550,000
d. $480,000
82. The total fixed expenses for Meyer Company were:

a. $45,000
b. $33,000
c. $85,000
d. $78,000
83. The variable costs for the South area were:

a. $180,000
b. $210,000
c. $225,000
d. $120,000

The Rialto Company's income statement for May is given below:
Total Division L Division M
Sales $300,000 $165,000 $135,000

Variable expenses 153,000 99,000 54,000
Contribution margin 147,000 66,000 81,000
Traceable fixed expenses 97,000 45,000 52,000
Segment margin 50,000 $ 21,000 $ 29,000
Common fixed expenses 25,000
84. If sales for Division L increase $30,000 with a $9,000 increase in the Division's traceable
fixed expenses, the overall company net operating income should:
a. decrease by $4,000
b. increase by $21,000
c. increase by $3,000
d. increase by $5,700
85. During May, the sales clerks in Division L received salaries totaling $25,000. Assume that
during June the salaries of these sales clerks are discontinued and instead they are paid a
commission of 18% of sales. If sales in Division L increase by $35,000 as a result of this
change, the June segment margin for Division L should be:
a. $30,300
b. $24,000
c. $5,300
d. $60,000
86. If the sales in Division M increase by 25% while traceable fixed expenses decrease by
$7,000, the segment margin for Division M should:
a. increase by $13,250
c. decrease by $17,750
d. increase by $27,250
87. A proposal has been made that will lower variable costs in Division M to 37% of sales. The
reduction can be accomplished only if Division M's traceable fixed costs are allowed to
increase $12,000. If this proposal is implemented, and if sales remain constant, overall
company net operating income should:
a. increase by $12,000
c. decrease by $7,950
d. decrease by $12,000
Use the following to answer questions 88 & 89:

Miller Company has two sales areas: North and South. In June, the contribution margin in the North
was $50,000, or 20% of sales. The segment margin in the South was $15,000, or 8% of sales.
Traceable fixed expenses are $15,000 in the North and $10,000 in the South. During June, Miller
Company reported total net operating income of $26,000.
88. The total fixed expenses (traceable and common) for Miller Company in June were:
a. $49,000
b. $25,000
c. $24,000
d. $50,000
89. The variable costs for the South in June were:

a. $230,000
b. $185,000
c. $162,500
d. $65,000

Nantua Sunglasses Corporation has two divisions, Southern and Northern. The following
information was taken from last year's income statement segmented by division:
Total Southern Northern
Sales $4,000,000 $2,500,000 $1,500,000

Contribution margin $1,650,000 $1,050,000 $600,000
Divisional segment margin $850,000 $700,000 $150,000
Net operating income last year for Nantua Company was $400,000.
90. In last year's income statement segmented by division, what were Nantua's total common
fixed expenses?
a. $450,000
b. $800,000
c. $1,250,000
d. $1,300,000
91. If the Northern Division's sales last year were $300,000 higher, how would this have
changed Nantua's net operating income? (Assume no change in the revenue or cost
structure.)
a. $30,000 increase
b. $80,000 increase
c. $120,000 increase
d. $300,000 increase

Brandon, Inc. has provided the following data for last year's operations:
Sales .......................................................... $100,000
Net operating income ................................. $6,000
92. Brandon's residual income is:

a. $2,000
b. $4,000
c. $3,500
d. $2,500
93. Brandon's return on investment (ROI) is:

a. 6%
b. 10%
c. 15%
d. 24%

The following selected data pertain to the belt division of Allen Corp. for last year:
Sales .......................................................... $1,000,000
Net operating income ................................ $100,000
Turnover .................................................... 2.5
Minimum required return .......................... 20%
94. How much is the return on investment?

a. 25%
b. 10%
c. 20%
d. 15%
95. How much is the residual income?

a. $100,000
b. $20,000
c. $80,000
d. $900,000

Yola Co.'s East Division had the following results last year:
Sales .......................................................... $620,000
Variable expenses ...................................... $500,000
Traceable fixed expenses .......................... $100,000
96. The return on investment was:

a. 40.00%
b. 29.00%
c. 18.00%
d. 8.33%
97. The residual income was:

a. $3,600
b. $9,000
c. $11,000
d. $20,000

Data pertaining to Mar Co.'s Alo Division for last year follows:
Sales ............................................................ $100,000
Variables expenses ....................................... $60,000
Traceable fixed expenses ............................ $10,000
Average operating assets .............................. $20,000
Minimum required rate of return .................. 12%
98. Alo's return on investment was:

a. 60%
b. 75%
c. 138%
d. 150%
99. Alo's residual income was:

a. $27,600
b. $30,000
c. $32,400
d. $40,000

The following selected data pertain to the Maple Division of Beyer Corp. for last year:
Sales .......................................................... $300,000
Net operating income ................................. $20,000

Turnover .................................................... 3.0
100. The return on investment was:

a. 6.67%
b. 8.00%
c. 20.00%
d. 33.33%
101. The residual income was:

a. $2,400
b. $5,600
c. $6,667
d. $8,000

The Northern Division of the Kimball Company reported the following data for last year:
Sales .......................................................... $800,000
Operating expenses ................................... $690,000
102. The return on investment last year for the Northern Division was:
a. 50%
b. 80%
c. 27.5%
d. 44%
103. The residual income for the Northern Division last year was:
a. $112,000
b. $144,000
c. $110,000
d. $54,000

The following data are for the Akron Division of Consolidated Rubber, Inc.:
Sales .......................................................... $750,000
Net operating income ................................ $45,000
Residual income ........................................ $15,000
104. The margin used in calculating the return on investment for the past year was:
a. 6.00%
b. 8.67%
c. 10.00%
d. 8.00%
105. The return on investment for the past year was:

a. 6%
b. 30%
c. 18%
d. 26%
106. The turnover used in calculating the return on investment for the past year was:
a. 1.4
b. 3.3
c. 10.0
d. 3.0
107. The minimum required rate of return used in calculating the residual income for the past
year was:
a. 30%
b. 12%
c. 15%
d. 6%

Cebe Products is a division of a major corporation. Last year the division had total sales of
$26,800,000, net operating income of $1,768,800, and average operating assets of $8,000,000. The
company's minimum required rate of return is 12%.
108. The division's margin is closest to:

a. 22.1%
b. 6.6%
c. 29.9%
d. 36.5%
109. The division's turnover is closest to:

a. 0.22
b. 2.74
c. 15.15
d. 3.35
110. The division's return on investment (ROI) is closest to:

a. 74.0%
b. 5.1%
c. 22.1%
d. 1.5%
111. The division's residual income is closest to:

a. $808,800
b. $1,768,800
c. $(1,447,200)
d. $2,728,800

Dealey Products is a division of a major corporation. The following data are for the last year of
operations:
Sales ................................................................................. $12,700,000
Net operating income ...................................................... $1,549,400
Average operating assets ................................................. $5,000,000
The company’s minimum required rate of return ............ 10%

a. 12.2%
b.39.4%
c. 31.0%
d.51.6%

a. 0.31
b.2.54
c. 8.20
d.1.94

a. 31.0%
b.3.8%
c. 78.7%
d. 8.8%
115. The division's residual income is closest to:

a. $279,400
b. $1,549,400
c. $1,049,400
d. $2,049,400

The Portland Division's operating data for the past two years is as follows:
Year 1 Year 2
Return on investment 12% 24%
Stockholders’ equity $500,000 $200,000
Net operating income ? $288,000
Turnover ? 2
Sales $1,600,000 ?
The Portland Division's margin in Year 2 was 150% of the margin for Year 1.
116. The turnover for Year 1 was:

a. 10.00
b.2.00
c. 1.50
d.3.20
117. The net operating income for Year 1 was:

a. $192,000
b.$128,000
c. $266,667
d.$208,000
118. The sales for Year 2 were:

a. $750,000
b.$2,000,000
c. $3,846,154
d.$2,400,000
119. The average operating assets for Year 2 were:

a. $750,000
b. $400,000
c. $1,200,000
d. $800,000

Data from the Trendall Company for last year follow:
Sales .......................................................... $750,000
Return on investment ................................ 12%
Turnover .................................................... 1.5
120. The average operating assets were:

a. $300,000
b.$400,000
c. $500,000
d. $600,000
121. The margin used in calculating return on investment was:

a. 6.67%
b. 16.67%
c. 20.00%
d. 8.00%

Ahalt Industries is a division of a major corporation. Data concerning the most recent year appears
below:
Sales .............................................. $17,340,000
Net operating income .................... $1,248,480
Average operating assets ............... $6,000,000

a. 41.8%
b. 7.2%
c. 20.8%
d. 34.6%

a. 2.39
b. 13.89
c. 0.21
d. 2.89

a. 1.5%
b. 20.8%
c. 5.3%
d. 17.2%

Beach Industries is a division of a major corporation. Last year the division had total sales of
$11,360,000, net operating income of $624,800, and average operating assets of $4,000,000.

a. 15.6%
b.35.2%
c. 5.5%
d.40.7%

a. 2.84
b.18.18
c. 2.46
d.0.16

a. 0.9%
b.15.6%
c. 4.1%
d.13.5%

Division A makes a part with the following characteristics:
Production capacity in units ...................... 15,000 units
Selling price to outside customers ............. $30
Variable cost per unit ................................ $20
Fixed cost per unit ..................................... $4

Total fixed costs ........................................ $60,000
Division B, another division of the same company, would like to purchase 5,000 units of the part
each period from Division A. Division B is now purchasing these parts from an outside supplier at a
price of $28 each.
128. Suppose that Division A has ample idle capacity to handle all of Division B's needs
without any increase in fixed costs and without cutting into sales to outside customers. If
Division A refuses to accept the $28 price internally, the company as a whole will be:
a. worse off by $40,000 each period.
b.worse off by $20,000 each period.
d.worse off by $30,000 each period.
129. Suppose that Division A is operating at capacity and can sell all of its output to outside
customers at its usual selling price. If Division A sells the parts to Division B at $28 per unit
(Division B's outside price), the company as a whole will be:
a. better off by $20,000 each period.
b.worse off by $10,000 each period.
c. worse off by $40,000 each period.
d.There will be no change in the status of the company as a whole.

Division T of Clocker Company makes a timer which it sells for $30 to outside customers.
The division has supplied the following data concerning the timer:
Monthly capacity ........................... 12,000 timers
Variable cost per unit .................... $15
Fixed cost per unit ......................... $10
Presently, Division S of Clocker Company is currently buying 5,000 similar timers each month from
an overseas supplier at $27 each. Division S would like to acquire its timers from Division T if the
price is right.
130. Suppose Division T is operating at capacity and can sell all of the timers it produces to
outside customers at its usual selling price. According to the formula in the text, what is the
lowest acceptable transfer price from the viewpoint of the selling division?
a. $30
b. $27
c. $25
d. $15
131. Suppose Division T is operating at capacity and can sell all of the timers it produces to
outside customers at its usual selling price. If Division T meets the price of the overseas
supplier and sells 5,000 timers to Division S each month, the effect on the monthly net
operating income of the company as a whole will be:
a. increase of $15,000
b. decrease of $15,000
c. decrease of $60,000
d. increase of $10,000
132. Suppose that Division T can sell only 10,000 timers to outside customers. According to the
formula in the text, what is the lowest acceptable transfer price from the viewpoint of the
selling division?
a. $24
b. $27
c. $30
d. $15

Division A of Tripper Company produces a part that it sells to other companies. Sales and cost data
for the part follow:
Capacity in units ........................................ 60,000
Selling price per unit ................................. $40
Variable costs per unit ............................... $28
Fixed costs per unit at capacity ................. $9
Division B, another division of Tripper Company, would like to buy this part from Division A.
Division B is presently purchasing the part from an outside source at $38 per unit. If Division A
sells to Division B, $1 in variable costs can be avoided.
133. Assume that Division A is presently operating at capacity. According to the formula in the
text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
a. $37
b. $39
c. $36
d. $38
134. Assume that Division A has ample idle capacity to handle all of Division B's needs without
any increase in fixed costs and without cutting into outside sales. According to the formula
in the text, what is the lowest acceptable transfer price from the viewpoint of the selling
division?
a. $40
b. $39
c. $28
d. $27

Division S of Kracker Company makes a part that it sells to other companies. Data on that part
appear below:
Selling price on the intermediate market .............. $30
Variable costs per unit ........................................... $22
Fixed costs per unit (based on capacity) ............... $7
Capacity in units .................................................... 50,000
Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar
product each period from an outside supplier for $28 per unit, but would like to begin purchasing
from Division S.
135. Suppose that Division S has ample idle capacity to handle all of Division B's needs without
any increase in fixed costs or cutting into sales to outside customers. If Division S refuses to
accept a transfer price of $28 or less and Division B continues to buy from the outside
supplier, the company as a whole will:
a. gain $20,000 in potential profit.
b. lose $60,000 in potential profit.
c. lose $70,000 in potential profit.
d. lose $20,000 in potential profit.
136. Suppose that Division S can sell all that it can produce to outside customers. If Division S
sells to Division B at a price of $28 per unit, the company as a whole will be:
a. worse off by $80,000 each period.
b. worse off by $70,000 each period.
d. worse off by $20,000 each period.

Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or
transferred to Division 2. The following data are available from last month:
Division 1:
Selling price per wheel to outside customers ............................. $50
Variable cost per wheel when sold to outside customers ........... $35
Capacity in wheels ..................................................................... 15,000
Division 2:
Number of wheels needed per month ......................................... 5,000
Price per wheel paid to an outside supplier ................................ $47
If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per wheel in sales
commissions.
137. Suppose that Division 1 sells 7,500 units per month to outside customers. According to the
formula in the text, what is the lowest acceptable transfer price from the viewpoint of the
selling division if Division 2 requires 5,000 units per month from Division 1?
a. $33
b. $35
c. $47
d. $50
138. What is the maximum price per wheel that Division 2 should be willing to pay Division 1 if
a transfer were to take place?
a. $33
b. $35
c. $47
d. $50
139. Suppose that Division 1 sells 11,500 units each month to outside customers. According to
the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the
selling division?
a. $47.00
b. $43.50
c. $37.50
d. $34.73
140. Failure Corporation is a manufacturer of a versatile statistical calculator. The following

information is a summary of defective and returned units for the previous year.
Total defective units 1,000
Number of units reworked 750
Number of customer units returned 150
Profit for a good unit P40
Profit for a defective unit P25
Cost to rework a defective unit P10
Cost of a returned unit P15
Total prevention cost P10,000
Total appraisal cost P5,000
The total quality cost is

a. P15,000. c. P28,500.
b.P15,750. d. P11,250.
Failure costs:
Rework cost (750 units x P10) P7,500
Returned units (150 x P15) 2,250
Not reworked (250 units x P15) 3,750
P13,500
Prevention costs 10,000
Appraisal cost 5,000
Total quality costs P28,500
141. Computer Solutions Corporation manufactures and sells various high-tech office automation
products. Two divisions of Computer Solutions Corporation are the Computer Chip Division and
the Computer Division. The Computer Chip Division manufactures one product, a "super chip,"
that can be used by both the Computer Division and other external customers. The following
information is available on this month's operations in the Computer Chip Division:
Selling price per chip P50
Variable costs per chip P20
Fixed production costs P60,000
Fixed SG&A costs P90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips
Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead
pays P45 to an external supplier for the 4,000 chips it needs each month.
Assume, for this question only, that the Computer Chip Division is selling all that it can produce to
external buyers for P50 per unit. How would overall corporate profits be affected if it sells 4,000 units
to the Computer Division at P45? (Assume that the Computer Division can purchase the super chip
from an outside supplier for P45.)
a. no effect c. P20,000 decrease
b. P20,000 increase d. P90,000 increase
Purchase price P45
Cost if purchased from within:
Variable cost P20
Opportunity cost 30 50
Loss per unit P 5
x number of units 4,000
Decrease in profit P20,000
142. Sadaku Corporation operates two stores: J and K. The following information relates to store J:
Sales revenue $1,300,000

Variable operating expenses 600,000
Fixed expenses:
Traceable to J and controllable by J 275,000
Traceable to J and controllable by others 80,000
J's segment contribution margin is:

A. $345,000.
B. $425,000.
C. $620,000.
D. $700,000.
E. $745,000.
143. Scotty Corporation operates two stores: A and B. The following information relates to store A:
Sales revenue $900,000

Variable operating expenses 400,000
Fixed expenses:
Traceable to A and controllable by A 275,000
Traceable to A and controllable by others 120,000
A's segment profit margin is:

A. $105,000.
B. $225,000.
C. $380,000.
D. $500,000.
E. $505,000.
144. BDC Corp. has two departments, the ALC Department and the SCR Department. Net
operating income of the corporation was $200,000 during this past reporting period. The
ALC segment margin was $180,000 and the SCR segment margin was $60,000. What is the
common fixed cost for the corporation?
a. $20,000
b. $40,000
c. $30,000
d. $60,000
SUPPORTING ANALYSIS AND COMPUTATION:
ALC + SCR = Total Segment - Income = Common
$180,000 + $60,000 = $240,000 - $200,000 = $40,000
145. ABC, Inc. has two divisions: AAA and BBB. For the current year, the AAA division has
sales of $3,000, variable expenses of $1,000, and traceable fixed expenses of $500. The
BBB division has sales of $12,000, variable expenses of $5,000, and traceable fixed
expenses of $3,200. Common fixed costs are $750. What is the company’s net operating
income?
a. $5,550
b.$3,500
c. $4,550
d.$2,000

Total AAA BBB
Company
Sales $15,000 $3,000 $12,000
Less: Variable $(6,000) $(1,000) $(5,000)

Costs
CM $9,000 $2,000 $7,000
Less: Traceable $(3,700) ($500) $(3,200)

Fixed Costs
Segment Margin $5,300 $1,500 $3,800
Less Common $ (750)

Costs
Net Operating $4,550

Income
146. 8. Koen Corporation has two divisions: Division A and Division B. Last month, the
company reported a contribution margin of $50,000 for Division A. Division B had a
contribution margin ratio of 30% and its sales were $250,000. Net operating income for the
company was $30,000 and traceable fixed expenses were $50,000. Koen Corporation's
common fixed expenses were:
a. $95,000
b.$75,000
c. $45,000
d.$50,000

Total Company Division A Division B B%
Sales $250,000
Variable expenses
CM $125,000 (2) $50,000 $75,000 (1) 30%

Traceable fixed
expense $50,000
Segment margin $75,000 (3)
Common fixed $45,000 (answer)

expenses
Net operating income $30,000
147. Segment A generated sales revenues of P400,000 and variable operating expenses of
P180,000. Its controllable fixed expenses were P40,000. It was assigned 20% of P200,000 of
fixed costs controlled by others. The common fixed costs were P25,000. What was Segment A's
controllable segment profit margin?
a. P220,000
b. P180,000
c. P140,000
d. P160,000
SUPPORTING ANALYSIS:
Controllable segment profit margin = Revenue - (Segment's variable operating costs +
Controllable fixed costs).
(P400,000 – P180,000 – P40,000) P180,000
148. If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would
a. increase by 30%
b. increase by 4%
c. increase by 6%
d. none of these
(1.3 x 0.8) – 100% = 4.0%
149. If the investment turnover decreased by 10% and ROS decreased by 30%, the ROI would
a. increase by 30%
b. decrease by 37%
c. decrease by 10%
d. none of the above
Decrease in ROI: (0.90 x 0.70) – 1.00 = 37.0%
150. Marsh Company that had current operating assets of one million and net income of P200,000
had an opportunity to invest in a project that requires an additional investment of P250,000 and
increased net income by P40,000. The company's required rate of return is 12%. After the
investment, the company's residual income will amount to
A. 80,000 C. 90,000
B. 85,000 D. 95,000
New Operating Profit (P200,000 + P40,000) P240,000
Less Required Returns (P1,250,000 x 0.12) 150,000
New Residual Income P 90,000
151. An appropriate transfer price between two divisions of the Reno Corporation can be
determined from the following data:
Fabrication Division
Market price of subassembly P50
Variable cost of subassembly P20
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900
What is the natural bargaining range for the two divisions?
A. Between P20 and P50 C. Between P50 and P70
B. Any amount less than P50 D. P50 is the only acceptable price
The Fabrication division has excess capacity, therefore the division can transfer the
units at a minimum transfer price of P50
152. Family Enterprises has two divisions: Davy and Johnny. Davy Division has a capacity to
produce 2,000 units and is expecting to sell 1,500 units. Johnny Division wants to purchase 100
units of a product Davy produces. Davy sells the product at a selling price of P100 per unit, the
variable cost per unit is P25 and the fixed costs total P30,000. The minimum transfer price that
Davy will accept is?
A. P100 C. P43.75
B. P45 D. P25
The minimum Davy would accept is the opportunity cost to make the product, which
would be the variable cost of P25.
153. Assume that Division X has a product that can be sold either to outside customers on an
intermediate market or to Division Y of the same company for use in its production process.
The managers of the division are evaluated based on their divisional profits.
Division X:
Capacity in units 200,000
Number of units being sold on the intermediate market 160,000

Selling price per unit on the intermediate market P75
Variables costs per unit 60
Fixed costs per unit (based on capacity) 8
Division Y:
Number of units needed for production 40,000
Purchase price per unit now being paid to an outside supplier P74
The minimum transfer price to be charged by the Division X should be:
A. P60 C. P68
B. P75 D. P74
The minimum transfer price is P60 because the Division X has excess capacity
154. Bearing Division of Phantom Corp. sells 80,000 units of Part X to the outside market. Part X
sells for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of P2.50. Bearing has a
capacity to produce 100,000 units per period. Motor Division currently purchases 10,000 units of
Part X from Bearing for P10.00. Motor has been approached by an outside supplier willing to
supply the parts for P9.00. What is the effect on XYZ’s overall profit if Bearing refuses the
outside price and Motor decides to buy outside?
A. no change
B. P20,000 decrease in Phantom profits
C. P35,000 decrease in Phantom profits
D. P10,000 increase in Phantom profits
The profit of the company will decrease by P35,000 which is the difference between the
variable (relevant) cost and the purchase price.
(P9.00 – P5.5) x 10,000 units = P35,000
155. Bearing Division of XYZ Corp. sells 80,000 units of Part X to the outside market. Part X sells
for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of P2.50. Bearing has a
capacity to produce 100,000 units per period. Motor Division currently purchases 10,000 units of
Part X from Bearing for P10.00. Motor has been approached by an outside supplier willing to
supply the parts for P9.00. What is the effect on XYZ’s overall profit if Bearing refuses the
outside price and Motor decides to buy inside?
A. no change C. P35,000 decrease in XYZ profits
B. P20,000 decrease in XYZ profits D. P10,000 increase in XYZ profits
There is no change in the profit because the Motor Division did not buy from the outside
supplier
156. Company Y is highly decentralized. Division X, which is operating at capacity, produces a

component that it currently sells in a perfectly competitive market for P13 per unit. At the
current level of production, the fixed cost of producing this component is P4 per unit and the
variable cost is P7 per unit. Division Z would like to purchase this component from Division
X. What would be the price that Division X should charge Division Z?
A. P 7 C. P 11
B. P 13 D. P 9
The division is operating at capacity (zero excess capacity). Any quantity of production
to be transferred to the Division Z must be at P13; Any price below P13, as transfer
price, would decrease its profit.
157. The Black Division of Pluma Company produces a high quality marker. Unit production
costs (based on capacity production of 100,000 units per year) follow:
Direct materials P 60
Direct labor 25
Overhead (20% variable) 15
Other information
Sales price 120
The Black Division is producing and selling at capacity.
What is the minimum selling price that the division would consider as a “transfer price” to the Red
Division on which no variable period costs would be incurred?
A. P120 C. P 88
B. P 91 D. P117
Selling price (market price) P120
Less avoidable selling expense 15 x 20% 3
Minimum transfer price P117
158. Harem Corporation consists of two divisions, Mining and Builders. The Mining makes black
steel, a product that can be used in the product that the Builders division makes. Both divisions
are considered profit centers. The following data are available concerning black steel and the
two divisions:
Mining Builders
Average units produced 150,000
Average units sold 150,000
Variable mfg cost per unit P2
Variable finishing cost per unit P5
Fixed divisional costs P75,000 P125,000
The Mining Division can sell all of its output outside the company for P4 per unit. The Builders
Division can buy the black steel from other firms for P4. The Builders Division sells its product for
P12.
What is the optimal transfer price in this case?
A. P2 per unit C. P7 per unit
B. P4 per unit D. P9 per unit
The optimal transfer price is P4 per unit, which represents the value of using the black
steel in the Builders Division because the black steel will cost P2 to manufacture and
each unit used internally is a unit that cannot be sold to external buyers. If an
intermediate market exists, the optimal transfer price is the market price
159. Assume that Steel Division has a product that can be sold either to outside customers on an
intermediate market or to Fabrication Division of the same company for use in its production
process. The managers of the division are evaluated based on their divisional profits.
Steel Division:
Capacity in units 200,000
Number of units being sold on the intermediate market 200,000
Selling price per unit on the intermediate market P90
Variables costs per unit (including P3 of avoidable selling expense) 70
Fixed costs per unit (based on capacity) 13
Fabrication Division:
Number of units needed for production 40,000
Purchase price per unit now being paid to an outside supplier P86
The appropriate transfer price should be:
A. P90 C. P70
B. P87 D. P86
The division is operating at capacity, therefore, the minimum transfer price must be the
amount of selling price, less avoidable selling expense.
Selling price P90
Avoidable selling expense 3
Net Price 87
160. Chips Division manufacturers electronic circuit boards. The boards can be sold either to
Compo Division of the same company or to outside customers. Last year, the following activity
occurred in division A:
Selling price per circuit board P125

Production cost per circuit board 90
Numbers of circuit boards:
Produced during the year 20,000
Sold to outside customers 16,000
Sold to Compo Division 4,000
Sales to Compo Division were at the same price as sales to outside customers. The circuit boards
purchased by Compo Division were used in an electronic instrument manufactured by that division
(one board per instrument). Compo Division incurred P100 in additional cost per instrument and
then sold the instrument for P300 each.
Assume that Chips Division’s manufacturing capacity is 20,000 circuit boards. Next year Compo
Division wants to purchase 5,000 circuits board from Chips Division rather than 4,000. (Circuit
boards of this type are not available from outside sources.)
Should Chips Division sell 1,000 additional circuit boards to Compo Division or continue to sell
them outside customers?
A. No, because the overall profit will decrease by P35,000.
B. Yes, because the overall profit will decrease by P35,000.
C. No, because there is no change in the overall profit.
D. Yes, because the overall profit will increase by P75,000.
Selling price charged by Compo Division P300
Selling price charge by Chips Division 125

Additional selling price P175
Less additional processing cost by Compo 100
Additional profit per unit P 75
Additional profit: 1,000 x P75 P75,000
161. Chips Division manufacturers electronic circuit boards. The boards can be sold either to
Compo Division of the same company or to outside customers. Last year, the following activity
occurred in division A:
Chips Division proposed that a transfer for additional 1,000 units be produced by requiring its
workers to work overtime. Chips Division indicated that the transfer price may be unreasonably
high because of the overtime premium.
What is the maximum transfer that Compo Division will accept for the additional 1,000 units?
A. P 90 C. P200
B. P125 D. P300
Final selling price by Compo P300
Less additional processing cost 100
Maximum material cost (transfer price) P200
At a transfer price of P200, Compo will not realize any profit on the additional 1,000
units
Use the following data to answer questions 162 through 164.

N & R Company transfers a product from division N to division R. Variable cost of this product is
anticipated to be P40 a unit and total fixed costs amount to P8,000. A total of 100 units are anticipated to
be produced. Actual cost, however, amounts to P50 for variable costs. Fixed costs were same as budget.
However, actual output was twice as many.
162. Actual cost per unit amounts to

A. P90 C. P115
B. P92 D. P120
The actual cost is the sum of unit variable cost plus fixed cost divided by actual units
produced.
50 + (8000 ÷ 200) = P90
163. The transfer price based on actual variable costs plus 130% markup amounts to
A. P90 C. P115
B. P92 D. P120
Variable cost P 50
Markup (P50 x 1.3) 65
Transfer price P115
164. The transfer price based on budgeted full cost plus 30% markup amounts to
A. P117 C. P150
B. P140 D. P156
Budgeted full costP40 + (P8,000 ÷ 100) P120
Markup (P120 x 0.3) 36
Transfer price P156
SHORT PROBLEMS:
PROBLEM 1
Geary Industries is a division of a major corporation. Last year the division had total sales of $7,920,000,
net operating income of $190,080, and average operating assets of $3,000,000. The company's minimum
required rate of return is 16%.
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
a. Margin = Net operating income ÷ Sales = $190,080 ÷ $7,920,000 = 2.4%
b. Turnover = Sales ÷ Average operating assets = $7,920,000 ÷ $3,000,000 = 2.6
c. ROI = Net operating income ÷ Average operating assets = $190,080 ÷ $3,000,000 =
6.3%
PROBLEM 2
Sterling Company, a wholesale distributor of DVDs, has been experiencing losses for some time, as
shown by its most recent monthly income statement below:
Sales ……………………………................... P1,500,000
Less Variable expenses……………………. 588,000
Contribution Margin………………………. 912,000
Less Fixed expenses……………………….. 945,000

Net Operating Loss………………………... P (33,000)
In an effort to isolate the problem, the president has asked for an income statement segmented by
geographic market. Accordingly, the Accounting Department has developed the following data:
Geographic Market
East Central West
Sales……………………................. P400,000 P600,000 P500,000
Variable expenses as a
percentage of sales…………….. 52% 30% 40%
Traceable fixed expenses……….. P240,000 P330,000 P200,000
Required:
1. Prepare an income statement by geographic market, as desired by the president. Show both
Amount and Percent columns for the company as a whole and for each geographic market. Carry
percentage computations to one decimal place.
2. The company’s sales manager believes that sales in Central geographic market could be increased
by 15% if advertising were increased by P25,000 each month. Would you recommend the
increased in advertising? Show computations to support your answer.
Requirement 1
Geographic Market
Eas Cent
Total Company t ral West
Amount % Amount % Amount % Amount %
Sales P1,500,000 100.0 P400,000 100 P600,000 100 P500,000 100

Less variable expenses 588,000 39.2 208,000 52 180,000 30 200,000 40
Contribution margin 912,000 60.8 192,000 48 420,000 70 300,000 60
Less traceable fixed
expenses 770,000 51.3 240,000 60 330,000 55 200,000 40
Geographic market
segment margin 142,000 9.5 P(48,000) (12) P 90,000 15 P100,000 20
Less common fixed
expenses not traceable to
geographic markets* 175,000 11.7
Net operating income
(loss) P (33,000) (2.2)
* P945,000 – P770,000 = P175,000.
Requirement 2
Incremental sales (P600,000 × 15%)....................................................................... P90,000
Contribution margin ratio........................................................................................
× 70%
Incremental contribution margin............................................................................. 63,000
Less incremental advertising expense..................................................................... 25,000
Incremental net operating income...........................................................................P38,000
Yes, the advertising program should be initiated.
PROBLEM 3
SCG, Inc., produces and sells recordable CD and DVD packs. Revenue and cost information relating to
the products follow:
Product
CD DVD
Selling price per pack P8.00 P25.00
Variable expense per pack P3.20 P17.50
Traceable fixed expenses per year P138,000 P45,000
Common fixed expenses in the company total P105,000 annually. Last year the company produced and
sold 37,500 CD packs and 18,000 DVD packs.
Required:
Prepare a contribution format income statement for the year segmented by product lines.
Total CD DVD
Sales*............................................................................ P750,000 P300,000 P450,000
Variable expenses**...................................................... 435,000 120,000 315,000
Contribution margin...................................................... 315,000 180,000 135,000
Traceable fixed expenses............................................... 183,000 138,000 45,000
Product line segment margin......................................... 132,000 P 42,000 P 90,000
Common fixed expenses not traceable to products........ 105,000
Net operating income.................................................... P 27,000
* CD: 37,500 packs × P8.00 per pack = P300,000;

DVD: 18,000 packs × P25.00 per pack= P450,000.
** CD: 37,500 packs × P3.20 per pack = P120,000;
DVD: 18,000 packs × P17.50 per pack= P315,000.
PROBLEM 4: Koko Company’s costs were over budget by $48,000. The Koko Company is divided in
two regions. The first region’s costs were over budget by $5,000. Determine the amount that the second
region’s cost was over or under budget.
$43,000 over budget
PROBLEM 5: Using the data from the Koko Company, determine the divisional income from operations
for the A and B regions.
A Region B Region
Sales $600,000 $900,000

Cost of goods sold 200,000 350,000
Selling expenses 150,000 275,000
Service department
expenses
Purchasing $80,000
Payroll 40,000
accounting
Allocate service department expenses proportional to the sales of each region.
A Region = $600,000 - ($200,000 + $150,000) - ($600,000/$1,500,000 * $120,000)
Income A region = $202,000
B Region = $900,000 - ($350,000 + $275,000) - ($900,000/$1,500,000 * $120,000)

Income A region = $203,000
PROBLEM 6: The Kuroko Company has income from operations of $60,000, invested assets of
$345,000, and sales of $786,000. Use the DuPont formula to calculate the rate of return on investment,
and show (a) the profit margin, (b) the investment turnover, and (c) rate of return on investment.
(a) Profit Margin = $60,000 / $786,000 = 7.63%
(b) Investment turnover = $786,000 / $345,000 = 2.278
(c) Rate of return on investment = 7.63% x 2.278 = 17.38%
PROBLEM 7: The Peace Company, Division A has income from operations of $80,000 and assets of
$400,000. The minimum acceptable rate of return on assets is 14%. What is the residual income for the
division?
Income from operations $80,000

Minimum acceptable income from operations as a 56,000

percent of assets:
$400,000 * 14%
Residual income $24,000
PROBLEM 8: The materials used by the Koko Company Division A are currently purchased from
outside supplier at $55 per unit. Division B is able to supply Division A with 20,000 units at a variable
cost of $42 per unit. The two divisions have recently negotiated a transfer price of $48 per unit for the
20,000 units. By how much will each division’s income increase as a result of this transfer?
Division A
Change in sales $0
Decrease in variable costs (20,000 * ($55 - $48)) 140,000
Increase in income $140,000
Division B
Increase in sales (20,000 * $48) $960,000
Increase in variable cost (20,000 * $42) 840,000
Increase in income $120,000
Total Increase in income for Koko Company $260,000
PROBLEM 9: The materials used by the Koko Company Division A are currently purchased from
outside supplier. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per
unit. The normal price that Division B normally sells its units is $53 per unit. What is the range of transfer
prices that the two division managers should negotiate?
$53 to $42 per unit.
PROBLEM 10: The budget for Department 10 of Plant M for the current month ending March 31 is as
follows:
Materials $208,000
Factory wages 265,000
Supervisory salaries 67,800
Depreciation of plant and equipment 35,000
Power and light 22,500

Insurance and property taxes 15,500
Maintenance 9,700
During March, the costs incurred in Department 10 of Plant M were materials, $204,000; factory wages,
$285,000; supervisory salaries, $63,600; depreciation of plant and equipment, $35,000; power and light,
$21,360; insurance and property taxes, $14,400; maintenance, $9,456.
(a) Prepare a budget performance report for the supervisor of Department 10 of

Plant M for the month of March.
(b) Are there any significant variances (greater than 5%) of the budgeted amounts
that should be examined by the supervisor?
(a)
BUDGET PERFORMANCE REPORT
Supervisor, Department 10--Plant M
For Month Ended March 31, 20--
Budget Actual Over Under
Materials $208,000 $204,000 $ 4,000
Factory wages 265,000 285,000 $20,000
Supervisory salaries 67,800 63,600 $ 4,200
Depreciation of plant
and equipment 35,000 35,000 -- --
Power and light 22,500 21,360 1,140
Insurance and property
15,500 14,400 1,100
taxes
Maintenance 9,700 9,456 244
$623,500 $632,816 $20,000 $10,684
(b) The factory wages and supervisory salaries expenses should be examined by the
supervisor.
PROBLEM 11: A department store apportions payroll costs on the basis of the number of payroll checks
issued. Accounting costs are apportioned on the basis of the number of reports. The payroll costs for the
year were $231,000 and the accounting costs for the year totaled $75,500. The departments and the
average cost of store equipment and average cost of inventory for each are as follows:
Number of Number
Payroll Checks of Reports
Department R 483 70
Department S 1,470 85
Department T 147 345
Determine the amount of (a) payroll cost and (b) accounting cost to be apportioned to each
department.
(a)
Department
Total R S T
Number of payroll 2,100 483 1,470 147
checks
Percent 100% 23% 70% 7%
Payroll cost $231,000 $53,130 $161,700 $16,170
(b)
Number of reports 500 70 85 345
Percent 100% 14% 17% 69%
Accounting cost $75,500 $10,570 $12,835 $52,095
PROBLEM 12: A portion of the divisional income statement for the year just ended is presented below
in condensed form.
Department F
Net sales $ 250,000
Cost of goods sold 180,000
Gross profit $ 70,000
Operating expenses 90,000
Loss from operations $ (20,000)
The operating expenses of Department F include $45,000 for direct expenses.

It is estimated that the discontinuance of Department F would not have affected the sales of the
other departments nor have reduced the indirect expenses of the business. Assuming the accuracy
of these estimates, determine the effect (increase or decrease and amount) on the income from
operations of the business if Department F had been discontinued.
$25,000 decrease, which is the income from operations for Department F ($250,000 net sales
- $180,000 cost of goods sold - $45,000 direct expenses).
Division L Division M Division N

Sales $ (1) $320,000 $580,000
Cost of goods sold 480,000 120,000 $ (5)
Gross profit $220,000 $ (3) $180,000
Operating expenses 95,000 160,000 $ (6)
Income from operations $ (2) $ (4) $ 75,000
PROBLEM 13: Some items are omitted from each of the following condensed divisional income
statements of Willis Inc.
(a) Determine the amount of the missing items, identifying them by number.
(b) Based on income from operations, which division is the most profitable?
(a) (1) $700,000
(2) $125,000
(3) $200,000
(4) $40,000
(5) $400,000
(6) $105,000
(b) Division L
PROBLEM 14: Casey Co. has two divisions, F and G. Invested assets and condensed income statement
data for each division for the past year ended December 31 are as follows:
Division F Division G
Revenues $175,000 $112,500
Operating expenses 112,500 92,750
Service department charges 27,500 12,625
Invested assets 225,000 97,500
(a) Prepare condensed income statements for the past year for each division.
(b) Using the expanded expression, determine the profit margin, investment
turnover, and rate of return on investment for each division.
(a)
Casey Co.
Divisional Income Statements
For the Year Ended December 31, 20--
Division Division
F G
Revenues $175,000 $112,500
Income from operations before
service department charges $ 62,500 $ 19,750
Income from operations $ 35,000 $ 7,125
(b) Rate of return on investment (ROI) = Profit margin  investment turnover
ROI = Income From Operations  Sales

Sales Invested Assets
Division F = $35,000  $175,000

$175,000 $225,000
ROI = 20.0%  .778

ROI = 15.6%
Division G = $7,125  $112,500

$112,500 $97,500
ROI = 6.3%  1.15

ROI = 7.2%
PROBLEM 15: Data for Divisions R, S, T, U, and V are as follows:

Div. Sales Income from Inv. Assets Rate of Profit Invest.
Operations Return Margin Turnover
on Inv.
R (1) $35,000 $200,000 (2) (3) 1.6
S $455,000 (4) $284,375 16% (5) (6)
T $525,000 $73,500 (7) (8) (9) 1.2
U $800,000 (10) (11) (12) 13.0% 2.5
V (13) (14) $250,000 (15) 16.0% 2.0
(a) Determine the missing items, identifying each by number.

(b) Which division is most profitable in terms of income from operations?
(c) Which division is most profitable in terms of rate of return on investment?
(a) (1) $320,000 ($200,000 x 1.6)
(2) 17.5% ($35,000/$200,000)
(3) 10.9% ($35,000/$320,000)
(4) $45,500 ($284,375 x 16%)
(5) 10% ($45,500/$455,000)
(6) 1.6 ($455,000/$284,375)
(7) $437,500 ($525,000/1.2)
(8) 16.8% ($73,500/$437,500)
(9) 14% ($73,500/$525,000)
(10) $104,000 ($800,000  13.0%)
(11) $320,000 ($800,000/2.5)
(12) 32.5% ($104,000/$320,000)
(13) $500,000 ($250,000  2.0)
(14) $80,000 ($500,000  16%)
(15) 32% (16%  2.0)
(b) Division U
(c) Division U
PROBLEM 16: Several items are missing from the following table of rate of return on investment and
residual income. Determine the missing items, identifying each item by the appropriate letter.
Invested Income from Rate of Return Min.Rate of Min. Amt. of Residual

Assets Oper. on Inv. Return Income from Income
Oper.
(a) (b) (c) 16% $128,000 $10,000
$850,000 $153,000 (d) 12% (e) (f)
$825,000 (g) 20% (h) (i) $24,000
(j) $129,000 24% (k) $ 60,000 (l)
(a) $800,000 ($128,000/16%)
(b) $138,000 ($128,000 + $10,000)
(c) 17.3% ($138,000/$800,000)
(d) 18% ($153,000/$850,000)
(e) $102,000 ($850,000  12%)
(f) $51,000 ($153,000 - $102,000)
(g) $165,000 ($825,000  20%)
(h) 17.1% ($141,000/$825,000)
(i) $141,000 ($165,000 - $24,000)
(j) $537,500 ($129,000/24%)
(k) 11.2% ($60,000/$537,500)
(l) $69,000 ($129,000 - $60,000)
PROBLEM 17: The sales, income from operations, and invested assets for each division of Jamieson
Company are as follows:
Income Invested
Sales from Assets
(a) Using the expanded expression, Operations
determine the profit margin, investment
Division E $4,000,000
turnover, and rate of return on $550,000 $2,400,000
investment for each division. Round to one
Division F 4,800,000
decimal place. 760,000 2,500,000
Division
(b) G 7,000,000
Which is (are) 860,000
the most profitable 2,800,000
per dollar invested?
(a) Rate of Return on Investment:
ROI = Profit Margin x Investment Turnover
ROI = Income from Operations x Sales

Division E: ROI = $550,000 x $4,000,000

$4,000,000 $2,400,000
ROI = 13.8% x 1.67
ROI = 23.0%
Division F: ROI = $760,000 x $4,800,000

$4,800,000 $2,500,000
ROI = 15.8% x 1.92
ROI = 30.3%
Division G: ROI = $860,000 x $7,000,000

$7,000,000 $2,800,000
ROI = 12.3% x 2.5
ROI = 30.8%
(b) Divisions F and G are almost equally profitable.
PROBLEM 18: The sales, income from operations, and invested assets for each division of Winston
Company are as follows:
Income Invested
Sales from Assets
Operations
Division C $5,000,000 $630,000 $3,900,000
Division D 6,800,000 760,000 4,300,000
Division E 3,750,000 750,000 7,250,000
Management has established a minimum rate of return for invested assets of 8%.
(a) Determine the residual income for each division.
(b) Based on residual income, which of the divisions is the most profitable?
(a) Division C: $318,000 ($630,000 - $312,000)
Division D: $416,000 ($760,000 - $344,000)
Division E: $170,000 ($750,000 - $580,000)
(b) Division D
PROBLEM 19: Materials used by Nead Company in producing Division A's product are currently
purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available
from Division B. Division B has unused capacity and can produce the materials needed by Division A at a
variable cost of $20 per unit.
(a) If a transfer price of $25 per unit is established and 60,000 units of material are
transferred, with no reductions in Division B's current sales, how much would
Nead Company's total income from operations increase?
(b) Assuming transfer price of $25, how much would the income from operations of
Division A increase?
(c) Assuming transfer price of $25, how much would the income from operations of
Division B increase?
(d) If the negotiated price approach is used, what would be the range of acceptable
transfer prices?
(a) $600,000
(b) Division A would save $5 per unit on 60,000 units or $300,000.
(c) Division B would earn an additional $300,000 by selling 60,000 units at $5 above
the variable cost.
(d) $20.01 to $29.99
PROBLEM 20: Eban Wares is a division of a major corporation. The following data are for the latest
year of operations:
Sales ................................................................................. $10,890,000
Net operating income ...................................................... $609,840
Average operating assets ................................................. $3,000,000
The company’s minimum required rate of return ........... 16%
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
d. What is the division's residual income?
SUPPORTING ANALYSIS/COMPUTATION
a. Margin = Net operating income ÷ Sales = $609,840 ÷ $10,890,000 = 5.6%
b. Turnover = Sales ÷ Average operating assets = $10,890,000 ÷ $3,000,000 = 3.6
c. ROI = Net operating income ÷ Average operating assets = $609,840 ÷ $3,000,000
= 20.3%
d. Residual income = Net operating income - Minimum required rate of return × Average operating
assets = $609,840 - 16% × $3,000,000 = $129,840
COMPREHENSIVE PROBLEMS:
PROBLEM 1
Omen Company produces and sells only two products that are referred to as RIPS and PITS. Production
is “for order” only, and no finished goods inventories are maintained; work in process inventories are
negligible. The following data have been extracted relating to last month:
RIPS PITS
Sales $180,000 $180,000
Manufacturing costs:
Materials $18,000 $24,000
Labor $54,000 $48,000
Overhead $72,000 $84,000
Selling expenses $14,400 $10,080
Administrative expenses $12,000 $18,000
An analysis has been made of the manufacturing overhead. Although the items listed above are
traceable to the products, $36,000 of the overhead assigned to RIPS and $72,000 of that assigned
to PITS is fixed. The balance of the overhead is variable. Selling expenses consist entirely of
commissions paid as a percentage of sales. Direct labor is completely variable. Administrative
expenses in the data above are fixed and cannot be traced to the products but have been arbitrarily
allocated to the products.
Required:
Prepare a segmented income statement, in total and for the two products. Use the contribution
approach.
TOTAL RIPS PITS
Sales $360,000 $180,000 $180,000
Less: Variable Expenses
Materials 42,000 18,000 24,000
Labor 102,000 54,000 48,000
Manufacturing Overhead 48,000 36,000 12,000
Selling expenses 24,480 14,400 10,080
Total Variable Expenses 216,480 122,400 94,080
Contribution margin 143,520 57,600 85,920
Less fixed expenses:
Manufacturing overhead 108,000 36,000 72,000
Segment margin 35,520 $ 21,600 $ 13,920
Less common expense:
Administrative expenses 30,000
PROBLEM 2
Financial data for Redstone Company for last year appear below:
Redstone Company
Statements of Financial Position
Beginning Ending Balance
Balance
Assets:
Cash $120,000 $160,000

Accounts Receivable 110,000 100,000
Inventory 50,000 60,000
Plant and equipment (net) 180,000 160,000
Investment in Balsam Company 50,000 60,000
Land (undeveloped) 120,000 120,000
Total assets $630,000 $660,000
Liabilities and owners’ equity:

Accounts payable $ 70,000 $ 90,000
Long-term debt 500,000 500,000
Owners’ equity 60,000 70,000
Total liabilities and owners’ equity $630,000 $660,000
Redstone Company
Income Statement
Sales $1,222,000
Less operating expenses 1,099,800
Net operating income 122,200
Less interest and taxes:
Interest expense $60,000
Tax expense 20,000
Net income $ 42,200
The company paid dividends of $32,200 last year. The “Investment in Balsam
Company” on the statement of financial position represents an investment in the stock of another
company.
Required:
a. Compute the company's margin, turnover, and return on investment for last year.
b. The Board of Directors of Redstone has set a minimum required return of 25%. What was the
company's residual income last year?
a. Operating assets do not include investments in other companies or in undeveloped land.
Beginning Ending Balance
Balance
Cash $120,000 $160,000
Accounts Receivable 110,000 100,000
Inventory 50,000 60,000
Plant and equipment (net) 180,000 160,000
Total Operating Assets $460,000 $480,000
Average operating assets = ($460,000 + $480,000) ÷ 2

= $470,000
Margin = Net operating income ÷ Sales
= $122,200 ÷ $1,222,000 = 10%
Turnover = Sales ÷ Average operating assets
= $1,222,000 ÷ $470,000 = 2.6

ROI = Margin × Turnover
= 10% × 2.6 = 26%
b. Net operating income ................................................ $122,200
Minimum required return (25% × $470,000) ........... 117,500
Residual income ........................................................ $ 4,700
PROBLEM 3
Purple Associates is a consulting firm that specializes in information systems for construction and
landscaping companies. The firm has two offices – one in Manila and one in Cebu. The firm classifies the
direct costs of consulting jobs as variable costs. A segmented income statement for the company’s most
recent year is given below:
Segment
Total Company Manila Cebu
Sales P750,000 100.0% P150,000 100% P600,000 100%
Less Variable Expenses 405,000 54.0 45,000 30 360,000 60
Contribution Margin 345,000 46.0 105,000 70 240,000 40
Less Traceable Fixed
Expenses 168,000 22.4 78,000 52 90,000 15
Office Segment Margin 177,000 23.6 P27,000 18% P150,000 25%
Less Common Fixed
Expenses not traceable
to segments 120,000 16.0
Net Operating Income P57,000 7.6%
Required:
1. By how much would the company’s net operating income increase if Cebu increased it sales by
P75,000 per year? Assume no change in cost behavior patterns.
2. Refer to the original data. Assume that sales in Manila increase by P50,000 next year and that
sales in Cebu remain unchanged. Assume no change in fixed costs.
a. Prepare a new segmented income statement for the company using the format above. Show
both amounts and percentages.
b. Observe from the income statement you have prepared that the CM ratio for Manila has
remained unchanged at 70% (the same as in the data above) but that the segment margin ratio
has changed. How do you explain the change in the segment margin ratio?
Requirement 1
P75,000 × 40% CM ratio = P30,000 increased contribution margin in Cebu. Since the fixed
costs in the office and in the company as a whole will not change, the entire P30,000 would
result in increased net operating income for the company.
It is incorrect to multiply the P75,000 increase in sales by Cebu’s 25% segment margin ratio.
This approach assumes that the segment’s traceable fixed expenses increase in proportion to
sales, but if they did, they would not be fixed.
Requirement 2
a. The segmented income statement follows:

Segments
Total Company Manila Cebu

Amount % Amount % Amount %
Sales....................................... P800,000 100.0% P200,000 100% P600,000 100%
Less variable expenses............ 420,000 52.5 60,000 30 360,000 60
Contribution margin................ 380,000 47.5 140,000 70 240,000 40
Less traceable fixed expenses.
168,000 21.0 78,000 39 90,000 15
Office segment margin........... 212,000 26.5 P 62,000 31% P150,000 25%
Less common fixed expenses not
traceable to segments...........
120,000 15.0
Net operating income.............. P 92,000 11.5%
b. The segment margin ratio rises and falls as sales rise and fall due to the presence of fixed
costs. The fixed expenses are spread over a larger base as sales increase.
In contrast to the segment ratio, the contribution margin ratio is a stable figure so long as there
is no change in either the variable expenses or the selling price of a unit of service.
PROBLEM 4
Laban lang Corporation's Maintenance Department provides services to the company's two operating
divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department
are budgeted based on the number of cases produced by the operating departments. The fixed costs of the
Maintenance Department are budgeted based on the number of cases produced by the operating
departments during the peak period. Data appear below:
Maintenance Department
Budgeted variable cost.............................................. $2 per case
Budgeted total fixed cost........................................... $1,140,000
Actual total variable cost........................................... $239,400
Actual total fixed cost............................................... $1,157,980
Paints Division
Percentage of peak period capacity required............. 30%
Budgeted cases.......................................................... 29,000
Actual cases.............................................................. 29,040
Stains Division
Percentage of peak period capacity required............. 70%
Budgeted cases.......................................................... 85,000
Actual cases.............................................................. 84,960
Requirements
1. For performance evaluation purposes, how much Maintenance Department cost should
be charged to the Stains Division at the END of the year?
2. If Store B sales increase by $20,000 with no change in traceable fixed expenses, the
overall company net operating income should:
3. The marketing department believes that a promotional campaign at Store A costing
$5,000 will increase sales by $15,000. If its plan is adopted, overall company net
operating income should:
4. A proposal has been made that will lower variable expenses in Store A to 62% of sales.
However, this reduction can only be accomplished by an increase in fixed expenses of
$8,000. If this proposal is implemented and sales remain constant, overall company net
operating income should:
5. If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed
expenses:
6. Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal has
been made to change from a fixed salary to a sales commission of 5%. Assume that this
proposal is adopted, and that as a result sales increase by $20,000. The new segment
margin for Store B should be:

1) Maintenance Department cost charged to Stains Division
= ($2 per case × 84,960 cases) + ($1,140,000 × 70%)
= $169,920 + $798,000 = $967,920
O'Neill, Incorporated's income statement for the most recent month is given below.
Total Store A Store B

Sales.......................................... $300,000 $100,000 $200,000
Variable expenses..................... 192,000 72,000 120,000
Contribution margin.................. 108,000 28,000 80,000
Traceable fixed expenses.......... 76,000 21,000 55,000
Segment margin........................ 32,000 $ 7,000 $ 25,000
Common fixed expenses........... 27,000
Net operating income................ $ 5,000
2) Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%

Additional net operating income = $20,000 × 40% = $8,000
3) Store A contribution margin ratio = $28,000 ÷ $100,000 = 28%

Change in net operating income = ($15,000 × 28%) − $5,000
= $4,200 − $5,000 = $800 decrease
4) New amount for Store A variable expenses = $100,000 × 62% = $62,000

Change in net operating income = ($72,000 − $62,000) − $8,000
= $10,000 − $8,000 = $2,000 increase
5) Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%

Change in segment margin = ($30,000 × 40%) − $7,000
= $12,000 − $7,000 = $5,000 increase
The segment margin should increase by $5,000
6) Sales.......................................... $220,000 ($200,000 + $20,000)

Sales commissions.................... 11,000 ($220,000 × 5%)
Other variable expenses............ 132,000 ($220,000 × 60%*)
Contribution margin.................. 77,000
Traceable fixed expenses.......... 48,000 ($55,000 − $7,000)
Segment margin...................... $ 29,000
*Variable expenses ÷ Sales = $120,000 ÷ $200,000 = 60%
PROBLEM 5
Suside Corporation has two operating divisions-an Inland Division and a Coast Division. The company's
Customer Service Department provides services to both divisions. The variable costs of the Customer
Service Department are budgeted at $38 per order. The Customer Service Department's fixed costs are
budgeted at $433,200 for the year. The fixed costs of the Customer Service Department are determined
based on the peak period orders.
Percentage of Peak Period Budgeted

Capacity Required Orders
Inland Division......... 40% 2,400
Coast Division.......... 60% 5,200
At the end of the year, actual Customer Service Department variable costs totaled $303,240 and
fixed costs totaled $450,280. The Inland Division had a total of 2,430 orders and the Coast
Division had a total of 5,170 orders for the year.
Required:
1) Prepare a report showing how much of the Customer Service Department's costs should be
charged to each of the operating divisions at the end of the year.
2) How much of the actual Customer Service Department costs should not be charged to the
operating divisions at the end of the year? Who should be held responsible for these
uncharged costs?

1) The amount of cost that would be charged to each of the operating divisions at the end of the
year would be as follows:
Inland Division Coast Division

Variable cost allocation:
$38 × 2,430 orders.............. $92,340
$38 × 5,170 orders.............. $196,460
Fixed cost allocation:
40% × $433,200................. 173,280
60% × $433,200................. 259,920
Total cost charged.................. $265,620 $456,380
2) The uncharged costs are:

Variable Fixed
Total actual costs incurred........ $303,240 $450,280
Costs charged............................ 288,800 433,200
Spending variance..................... $14,440 $17,080
The spending variance represents the difference between the Customer Service Department’s
actual costs and what those costs should have been, given the actual level of activity. This
difference is properly the responsibility of the Customer Service Department and should not be
charged to the operating divisions.
PROBLEM 6
Diva has asked Dina of the same company to supply it with 5,000 units of part WD26 this year to use in
one of its products. Diva has received a bid from an outside supplier for the parts at a price of $19.00 per
unit. Dina has the capacity to produce 25,000 units of part WD26 per year. Dina expects to sell 21,000
units of part WD26 to outside customers this year at a price of $18.00 per unit. To fill the order from
Diva, Dina would have to cut back its sales to outside customers. Dina produces part WD26 at a variable
cost of $12.00 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit.
These packing and shipping costs would not have to be incurred on sales of the parts to Diva.
Required:
1) What is the range of transfer prices within which both the Divisions' profits would increase as
a result of agreeing to the transfer of 5,000 parts this year from Diva to Dina?
2) Is it in the best interests of the overall company for this transfer to take place? Explain.

1) From the perspective of Diva, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost + Opportunity cost

The opportunity cost is the contribution margin on the lost sales, divided by the number of
units transferred:
Opportunity cost = [($18.00 - $12.00 - $2.00)×1,000*]/5,000 = $0.80
* Demand from outside customers....................................... 21,000

Units required by Diva...................................................... 5,000
Total requirements............................................................ 26,000
Capacity............................................................................ 25,000
Required reduction in sales to outside customers.............. 1,000
Therefore, Transfer price > $12.00 + $0.80 = $12.80.
From the viewpoint of Dina, the transfer price must be less than the cost of buying the units
from the outside supplier. Therefore,
Transfer price < $19.00.
Combining the two requirements, we get the following range of transfer prices:
$12.80 < Transfer price < $19.00.
2) Yes, the transfer should take place. From the viewpoint of the entire company, the cost of
transferring the units within the company is $12.80, but the cost of purchasing them from the
outside supplier is $19.00. Therefore, the company’s profits increase on average by $6.20 for
each of the special parts that is transferred within the company.
PROBLEM 7
Kantana Corporation has two operating divisions-a North Division and a South Division. The company's
Logistics Department services both divisions. The variable costs of the Logistics Department are
budgeted at $32 per shipment. The Logistics Department's fixed costs are budgeted at $372,300 for the
year. The fixed costs of the Logistics Department are determined based on peak-period demand.
Capacity Required Shipments
North Division.......... 25% 1,700
South Division.......... 75% 5,600
At the end of the year, actual Logistics Department variable costs totaled $335,000 and fixed
costs totaled $382,850. The North Division had a total of 4,700 shipments and the South Division
had a total of 5,300 shipments for the year.
Required:
1) Prepare a report showing how much of the Logistics Department's costs should be charged to
each of the operating divisions at the end of the year.
2) How much of the actual Logistics Department costs should not be charged to the operating
divisions at the end of the year? Who should be held responsible for these uncharged costs?

1) The amount of cost that would be charged to each of the operating divisions at the end of the
year would be as follows:
North Division South Division
Variable cost allocation:
$32 × 4,700 shipments.............. $150,400
$32 × 5,300 shipments.............. $169,600

Fixed cost allocation:
25% × $372,300........................ 93,075
75% × $372,300........................ 279,225
Total cost charged........................ $243,475 $448,825
2) The uncharged costs are:

Variable Fixed
Total actual costs incurred............ $335,000 $382,850
Costs charged............................... 320,000 372,300
Spending variance........................ $15,000 $10,550
The spending variance represents the difference between the Logistics Department’s actual costs
and what those costs should have been, given the actual level of activity. This difference is
properly the responsibility of the Logistics Department and should not be charged to the
operating divisions.
PROBLEM 8
Annyeong Corporation has two operating divisions-a Consumer Division and a Commercial Division.
The company's Order Fulfillment Department provides services to both divisions. The variable costs of
the Order Fulfillment Department are budgeted at $56 per order. The Order Fulfillment Department's
fixed costs are budgeted at $233,700 for the year. The fixed costs of the Order Fulfillment Department are
budgeted based on the peak period orders.
Capacity Required Orders
Consumer Division................ 40% 1,200
Commercial Division............. 60% 2,900
At the end of the year, actual Order Fulfillment Department variable costs totaled $237,390 and
fixed costs totaled $239,140. The Consumer Division had a total of 1,240 orders and the
Commercial Division had a total of 2,860 orders for the year.
Requirements:
1)How much Order Fulfillment Department cost should be allocated to the Commercial Division at
the end of the year?
2)How much actual Order Fulfillment Department cost should not be allocated to the operating
divisions at the end of the year?
1) Order Fulfillment Department cost allocated to Commercial Division

= ($56 per order × 2,860 orders) + ($233,700 × 60%)
= $160,160 + $140,220 = $300,380
2) Actual cost = $237,390 + $239,140 = $476,530

Cost allocated to operating divisions
= [$56 per order × (1,240 + 2,860 orders)] + $233,700
= [$56 per order × 4,100 orders] + $233,700
= $229,600 + $233,700 = $463,300
Actual Order Fulfillment cost not allocated to operating divisions
= $476,530 − $463,300 = $13,230
PROBLEM 9
Division Co of the Coku Company makes a part that can either be sold to outside customers or transferred
internally to Division Ku for further processing. Annual data relating to this part are as follows:
Annual production capacity.......................................... 80,000 units
Selling price of the item to outside customers.............. $35
Variable cost per unit................................................... $23
Fixed cost per unit........................................................ $5
Division Ku of the Coku Company requires 15,000 units per year and is currently paying an
outside supplier $33 per unit. Consider each part below independently.
Requirements:
1)If outside customers demand only 50,000 units per year, then according to the formula in the text,
what is the lowest acceptable transfer price from the viewpoint of the selling division?
2)If outside customers demand 80,000 units, then according to the formula in the text, what is the
3) If outside customers demand 80,000 units and if, by selling to Division Ku, Division Co could
avoid $4 per unit in variable selling expense, then according to the formula in the text, what is the
4)If outside customers demand 70,000 units, then according to the formula in the text, what is the
lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000
units needed by Co?

1) Transfer price ³ Variable cost per unit + (Total contribution margin on lost sales ÷ Number of
units transferred) = $23 + ($0 ÷ 15,000) = $23
2) Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ Number of
units transferred) = $23 + [($35 − $23) × 15,000] ÷ 15,000 = $23 + $12 = $35
units transferred) = $23 + [($35 − $23 − $4) × 15,000] ÷ 15,000 = $23 + $8 = $31
units transferred)
= $23 + [($35 − $23) × 5,000*] ÷ 15,000 = $23 + ($12 ÷ 3)
= $23 + $4 = $27
*Lost sales units = 15,000 − (80,000 − 70,000) = 15,000 − 10,000 = 5,000

PROBLEM 10
Ferrar Corporation has two major business segments-Consumer and Commercial. Data for the segment
and for the company for March appear below:
Sales revenues, Consumer............................... $680,000
Sales revenues, Commercial............................ $280,000
Variable expenses, Consumer.......................... $394,000
Variable expenses, Commercial...................... $143,000
Traceable fixed expenses, Consumer............... $102,000
Traceable fixed expenses, Commercial........... $45,000
In addition, common fixed expenses totaled $210,000 and were allocated as follows: $122,000 to
the Consumer business segment and $88,000 to the Commercial business segment.
Requirements:
1.The contribution margin of the Commercial business segment is:
2.A properly constructed segmented income statement in a contribution format would show that the
segment margin of the Consumer business segment is:
3. . A properly constructed segmented income statement in a contribution format would show that the
net operating income of the company as a whole is:

1)
Sales...................................... $280,000
Variable expenses.................. 143,000
Contribution margin............... $137,000
2)
Consumer
Sales...................................... $680,000
Variable expenses.................. 394,000
Contribution margin............... 286,000
Traceable fixed expenses....... 102,000
Segment margin..................... $184,000
3)
Segments
Total
Company Consumer Commercial
Sales...................................... $960,000 $680,000 $280,000
Variable expenses.................. 537,000 394,000 143,000
Contribution margin............... 423,000 286,000 137,000
Traceable fixed expenses....... 147,000 102,000 45,000
Segment margin..................... 276,000 $184,000 $92,000
Common fixed expenses........ 210,000
Net operating income............. $66,000
PROBLEM 11: Casey Co. has two divisions, F and G. Invested assets and condensed income statement
data for each division for the past year ended December 31 are as follows:
Division F Division G
Revenues $175,000 $112,500
Invested assets 225,000 97,500
(a) Prepare condensed income statements for the past year for each division.
(b) Using the expanded expression, determine the profit margin, investment
turnover, and rate of return on investment for each division.
(a)
Casey Co.
Divisional Income Statements
For the Year Ended December 31, 20--
Division Division
F G
Revenues $175,000 $112,500
Income from operations before
service department charges $ 62,500 $ 19,750
Income from operations $ 35,000 $ 7,125
(b) Rate of return on investment (ROI) = Profit margin  investment turnover
ROI = Income From Operations  Sales

Division F = $35,000  $175,000

$175,000 $225,000
ROI = 20.0%  .778

ROI = 15.6%
Division G = $7,125  $112,500

$112,500 $97,500
ROI = 6.3%  1.15

ROI = 7.2%
PROBLEM 12:
Chips Division manufacturers electronic circuit boards. The boards can be sold either to Compo
Division of the same company or to outside customers. Last year, the following activity occurred in
division A:
Chips Division proposed that a transfer for additional 1,000 units be produced by requiring its
workers to work overtime. Chips Division indicated that the transfer price may be unreasonably
high because of the overtime premium.
What is the maximum transfer that Compo Division will accept for the additional 1,000 units?
Final selling price by Compo P300
Less additional processing cost 100
Maximum material cost (transfer price) P200
At a transfer price of P200, Compo will not realize any profit on the additional 1,000
units
PROBLEM 13:
PROBLEM 14:
PROBLEM 15:
PROBLEM 16:
PROBLEM 17:
PROBLEM 18:
PROBLEM 19:
PROBLEM 20:
CASE STUDY:
I. Jensen Co. makes three products: Tulips, Asters, and Roses. Last year’s net operating
income/(loss) was $(145,000). The following segment information was taken from last year’s
segmented income statement:
Tulips Asters Roses
Contribution Margin $25,000 $(50,000) $70,000
Segment Margin $(5,000) $(80,000) $50,000
Segment Margin less $(15,000 ) $(120,000 ) $(10,000 )
common fixed costs
Jensen expects that this pattern of segment information will be similar next year. If Jensen wants
to maximize profit in the coming year, which product or products should he discontinue?
Tulips Asters Roses

Contribution Margin $25,000 $(50,000) $70,000
Segment Margin $(5,000) $(80,000) $50,000
Segment Margin less $(15,000 ) $(120,000 ) $(10,000 )
common fixed costs
Based on the Segmented income Statement, Tulips and Asters should be discontinue,
because they have a negative segment margin.
II. Nantua Sunglasses Corporation has two divisions: Southern and Northern. The following
information was taken from last year’s income statement segmented by division:
Total Southern Northern
Sales $4,000,00 0 $2,500,00 0 $1,500,00 0
Contribution Margin $1,650,00 0 $1,050,00 0 $ 600,000
Segment Margin $850,000 $700,000 $150,000
If the Northern Division’s sales last year were $300,000 higher, how would this have changed
Nantua’s net operating income (assuming no change in cost structure)?
Before Increase in Sales After Increase in Sales
Northern % of Sales Northern % of Sales

Sales $1,500,00 0 100% $1,800,000 100%
Variable costs $(900,000 ) 60% $(1,080,000 ) 60%
Contribution Margin $600,000 40% $720,000 40%
Increase in income = $720,000 - $600,000 = $120,000
III. Segmented income statements are used to show revenues, expenses, and income for major parts
of an organization.
Required:
A. Consider a regional chain of department stores that has two or three stores in each of several
cities. One way to segment this business is geographically. Describe another way of
segmenting the firm.
B. Segmented income statements often distinguish between "fixed expenses controllable by the
segment manager" and "fixed expenses traceable to the segment, but controllable by others."
Assume that the Cleveland district has three retail stores. Give two examples of each type of
fixed cost.
C. Common costs create difficulties when preparing segmented income statements. Define
"common costs," give an example for the regional chain of department stores, and explain in
general terms why such costs create a problem.
A. Other possible segments:
 product lines (women's clothing, men's clothing, housewares, etc.)
 demographic characteristics of customer (gender, use of cash or credit card, approximate
age, etc.)
B. Fixed expenses controllable by the Cleveland regional manager include:

 regional advertising
 contracts for maintenance of local facilities such as snowplowing, landscaping,
routine building maintenance
 utilities (controllable to some extent at the individual store level)
 salaries (within limits set by upper management)
Fixed expenses traceable to the segment, but controllable by others include:

 salary of the regional manager
 building depreciation (assuming the regional manager does not have authority
to close or open stores)
 Corporate charges for services such as legal and accounting, MIS, central
purchasing, etc.
 debt-service costs on funds used to acquire (build) the stores
C. Common costs are costs incurred to benefit more than one segment. Frequently, there is no
cause/effect relationship regarding the size of these costs and the segments nor are such costs
easily traceable to the segments. Examples include salaries of top corporate officials and
costs of the corporate headquarters.
IV. Brando Corporation manufactures decorative, sculpted accessories that are sold by interior
decorators and home furnishing stores. The following situation concerns two Brando employees:
Pitbull, head of the company's Billing Department, and Caty, the firm's general manager.
Pitbul's Billing Department makes heavy use of hourly employees and is evaluated as a cost
center. Understanding the need for prompt collection of receivables, Pitbul strives to run a first-
class operation. Pitbul also understands the need to contribute in a big way to Branson's financial
performance so she continually strives to minimize Billing Department expenses.
Unfortunately, Pitbul experienced a heated discussion with Caty several weeks ago, the subject
being the shoddy operation that she is running. Caty complained loudly about the lack of timely
billings to customers and the general lack of attention to detail, as many complaints have surfaced
about erroneous invoices and customer statements.
Required:
A. What is meant by the term "responsibility accounting?"
B. What measure(s) of performance would companies normally use to evaluate a cost-center
manager?
C. Does Caty have a valid reason to be upset with Pitbul ? Given the nature of the Billing
Department, did Deborah err in her quest to minimize expenses? Explain.
D. Is it likely that the Billing Department could be evaluated as a profit center? Why?
A. Responsibility accounting refers to the various concepts and tools that are used within an
organization to evaluate the performance of people and various sub-units (such as divisions
and departments). Managers are appointed to oversee these sub-units and held accountable
for items under their control.
B. The manager of a cost center is typically evaluated on the amount of cost incurred. The costs
should be under the manager's control, and the service provided by the center should be high.
C. Yes. Although Pitbul understands the need to run a first-class operation and contribute to
Branson's overall financial performance, she may have taken things a bit too far. A cost-
center manager should strive to run an operation that provides high-quality service at the
lowest possible cost. This does not necessarily mean cost minimization, which often results
in the elimination of key tasks (i.e., the "fine points") needed to achieve quality. It is possible
that the department's late billings and errors in invoices and customer statements may have
been caused by such eliminations.
D. No. A profit-center manager is evaluated on the basis of revenues generated and costs
incurred. The Billing Department does not produce any revenues for Branson—it merely
handles customer invoices and statements. Sales of company products are likely the
responsibility of a separate Sales Department.
V. Chunsa, Inc., provides a variety of telecommunications services to residential and commercial

customers from its massive campus-like headquarters in suburban Orlando. For a number of
years the firm's maintenance group has been organized as a cost center, rendering services free of
charge to the company's user departments (sales, billing, accounting, marketing, research, and so
forth).
Requests for maintenance have grown considerably, and demand is approaching the point where
quality and timeliness of services provided is becoming an issue. As a result, management is
studying whether the maintenance operation should be converted from a cost center to a profit
center, with users to be billed for services performed.
Required:
A. Differentiate between a cost center and a profit center. How is each of these centers
evaluated?
B. What will likely happen to the number of user service requests if the company makes the
switch to a profit-center form of organization? Why?
C. Assume that a user department has requested a particular service, one that is time consuming
and costly to perform. The maintenance group's actual cost incurred in providing this service
is $17,800, and the user has agreed to pay $20,800 if the switch to a profit center is made. If
this case is fairly typical within the firm, which of the two forms of organization (cost center
or profit center) will result in a more responsive, service-oriented maintenance group for
Chunsa? Why?
A. Cost centers and profit centers are different types of responsibility units within an
organization. With a cost center, a manager is held accountable for the amount of cost
incurred; in contrast, with a profit center, managers are evaluated on the amount of profit
generated, namely, revenues minus expenses.
B. The number of service requests is likely to drop because users will now be charged for
services provided. In cases where services are free, users sometimes use and abuse the
privilege.
C. The profit center form of organization will probably result in a more service-oriented
maintenance group. The profit-center manager would be willing to perform services as long
as capacity is available and revenues exceed expenses. Naturally, the added profit is viewed
favorably, and the quality of services may actually increase. On the other hand, if organized
as a cost center, providing additional service will likely result in higher costs, which could be
viewed unfavorably in performance evaluations.
VI. Consider the following situation:
The marketing manager of Gilroy, Inc., accepted a rush order for a nonstock item from a valued
customer. The manager filed the necessary paperwork with the production department, and a
production manager did the same with purchasing for needed raw materials. Unfortunately, a
purchasing clerk temporarily lost the paperwork; by the time it was found, it was too late to order
from Gilroy's regular supplier. A new supplier was located that quoted a very attractive price.
The materials soon arrived and were found to be of poor quality, thus giving rise to a favorable
materials price variance, an unfavorable materials quantity variance, and an unfavorable labor
efficiency variance. These latter two variances, as was the usual case, appeared on the production
manager's performance report for the period just ended.
Required:
A. Given that the company uses a responsibility accounting system, should the production
manager be penalized for poor performance? Briefly discuss, keeping in mind that a
production manager is generally in a very good position to control material usage and labor
efficiency.
B. Should anything be done to correct the situation? If "yes," briefly explain.
A. No. Although the variances appear on the production manager's performance report and are
often under his or her control, an adjustment is needed in this case. The problem appears to
be the fault of the purchasing clerk who misplaced the paperwork. Another explanation may
be that the fault lies with the marketing department for accepting a rush order and possibly
putting a strain on the entire manufacturing system.
B. Yes. These variances should be discussed to determine who's to blame and then cross-
charged against that individual's department.
VII. Lanie Corporation manufactures plastic water bottles. It plans to grow by producing high-quality
water bottles at a low cost that are delivered in a timely manner. There are a number of other
manufacturers who produce similar water bottles. Leonard believes that continuously improving its
manufacturing processes and having satisfied employees are critical to implementing its strategy.
Required:
a. Is Lanie strategy one of product innovation and leadership, best total cost, or complete
customer solutions? Briefly explain.
Identify at least one key element that you would expect to see included in the Balanced
Scorecard:
b. for the financial perspective;

c. for the customer perspective;
d. for the internal perspective; and
e. for the learning and growth perspective.
a. Maloney’s strategy is one of best total cost because there are a number of other
manufacturers who produce similar water bottles. To succeed, Maloney will have to achieve
lower costs relative to competitors through productivity and efficiency improvements,
elimination of waste, and tight cost controls.
The company’s Balanced Scorecard should describe the best total cost strategy. Key elements
should include:
b.operating income growth from productivity gains and growth for the financial perspective;
c. growth in market share, new customers, customer responsiveness, and customer
satisfaction for the customer perspective;
d. yield, time to complete customer jobs, and order delivery time for the internal business
perspective; and
e. number of process improvements, hours of employee training, and employee satisfaction
for the learning and growth perspective
VIII. Saxex) is listed on the London Stock Exchange and is the largest jewelry retailer in the UK.
COMPANY PROFILE Saxex operates some 600 jewellery outlets in the UK. Products include:
traditional jewelry of gold and gem stones, costume jewelry, watches, clocks, and silverware.
Saxex’s turnover makes up about 17 per cent of the UK jewelry market which is valued at around
£2.7 billion per year. Its brand name, used in all outlets, is ‘Jewel in the Crown’ and is well
recognized as a sign of good value and reasonable quality. The company currently manufactures
some jewelry from gold and rough gem stones, but it also buys in jewelry ready for sale. Given
the volume of its purchases it obtains significant discounts from all types of supplier. While the
company is profitable, its rate of growth has slowed significantly in recent years. The major
reasons for this are:
1. There is an outlet in every city and most major towns in the UK and Saxex has thus reached the
point of market saturation.
2. The ‘Jewel in the Crown’ stores are essentially mid-market and this has not been a growth area
for the industry in recent years. It is particularly susceptible to a downturn in the economy.
AN INDUSTRY PROFILE: Jewelry in the UK is retailed through a variety of outlets including
shops, mail order, jewelry counters in department stores, market stalls, and catalogue showrooms.
Retailers include large listed companies with many branches, smaller private companies
(normally with a limited number of branches in a particular region) and independent single
outlets. There is also a very wide range of quality and prices in the industry.
STRATEGIES FOR GROWTH: The board of Saxex is considering two strategies to return the
business to higher growth. The company does not have significant liquid resources and thus
intends to use debt to finance strategic development.
Strategy A – Open a new, up-market jewelry division. The board is considering opening shops
under a new name to sell up-market jewelry at a higher price and at a much greater profit margin
than the existing business. As yet it is unsure whether to buy retailing space and create a new
brand or to buy an existing up-market jewelry chain.
Strategy B – Expand Overseas Saxex is considering opening up further outlets in Europe under its
existing brand name and selling its existing product range. It is unsure whether to buy existing
overseas companies and re-brand them with the ‘Jewel in the Crown’ label or merely to buy
retailing space.
REQUIREMENTS:
a. Assume the following with respect to an existing outlet and a new outlet under Strategy A.
Existing Up-
Market
Annual Fixed Costs £240,000 £360,000
Expected sales volume 37,500 24,000
Average variable cost per £24 £36
item
Assume that existing outlets generate a contribution margin (i.e. contribution divided by sales) of
25 per cent.
Calculate the average price that the new up-market outlet must charge per item in order to earn
the same overall profit as the existing outlet.
b. Evaluate each of the proposed development strategies under the following headings:
• Marketing strategy
• Risk
•Growth by acquisition or by internal development; and conclusions.
Where appropriate, refer to relevant strategic models.
REFERENCES:
 Management Advisory Services CPA Reviewer by Cabrera

 Management Advisory Services CPA Reviewer by Agamata
 Management Advisory Services CPA Reviewer by Roque
 Management Advisory Services CPA Reviewer by Bobadilla
 www.coursehero.com/325301316-Chapter-6-Segmented-Income-Statement-Practice-
Problems.pdf
 www.scribd.com
 www.quizlet.com
 https://www.scribd.com/doc/110605859/Chapter13-Investment-Centers-and-Transfer-Pricing


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CHAPTER 21 DECENTRALIZED OPERATIONS AND SEGMENT REPORTING

1. May be a lack of coordination among autonomous managers.

 Traceable Fixed Cost

 Common Fixed Cost

Company Television Computer

Common costs 25,000

 Return on Investment (ROI)

Return on Investment (ROI) Net Operating Income

Average Operating Assets

 Improve or Increase the ROI

There are three ways to increase ROI;

Operating assets $ 100,000 Actual income $ 30,000

2. Transfer at Cost Prices at the selling division

 Negotiated Transfer Prices

 Transfer at Cost Prices

 Transfer at Market Prices

2. What benefits are felt to result from decentralization in an organization?

5. What is segment of an organization? Give several examples of segments.

6. What costs are assigned to a segment under the contribution approach?

8. What are the benefits and costs of decentralization?

9. Differentiate Centralization and Decentralization.

10. What are the advantages of Decentralization? Give at least three.

11. What are the dis-advantages of Decentralization? Give at least two.

Cost allocation base—a measure of activity, physical characteristic, or economic characteristic

17. Explain the relevance of sub optimization.

18. The two basic functions of responsibility reports are to:

20. Explain why managers needs to measure performance.

MULTIPLE CHOICE: THEORIES

2. Decentralization occurs when

3. In a company with a centralized approach to responsibility accounting, upper-level managers

4. Responsibility accounting is a system whose attributes include

10. Goal congruence is most likely to result when

12. A segment is any part of an organization about which manager seeks

14. Advantages of decentralization include all of the following except

16. Decentralization occurs when

19. It is the process of delegating the decision-making authority throughout an organization.

24. Disadvantages of decentralization include all of the following except:

25. Advantages of decentralization include all of the following except:

33. Developing and retaining quality managers is an advantage of decentralization.

45. Office salaries expense for a department store is an indirect expense.

d. Cost and Profit centers

46. Factory wages

47. Purchase of equipment

48. Property taxes

49. Repairs and maintenance expense

51. Indirect expenses

The next 6 questions are based on the following:

65. Number of work orders

66. Number of employees

67. Number of payroll checks

68. Number of purchase requisitions

69. Equally amongst divisions

70. Number of advertising campaigns

71. Number of miles

72. Number of computers in department

75. Which of the following is NOT a disadvantage of decentralized operation?

76. Which is the best example of a decentralized operation?

77. The following are advantages of decentralization except:

79. Which of the following is a disadvantage of decentralization?

80. A manager is responsible for costs only in a(n):

82. For higher levels of management, responsibility accounting reports:

84. The following is a measure of a manager’s performance working in a cost center.

122. Responsibility accounting reports for profit centers will include