Chapter 12 Segment Reporting and Decentralization True/False Questions



Download 0.52 Mb.
Page1/6
Date conversion01.02.2018
Size0.52 Mb.
  1   2   3   4   5   6

Chapter 12 Segment Reporting and Decentralization



True/False Questions
1. Allocating common fixed costs to segments on segmented income statements reduces the usefulness of such statements.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Easy


2. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Easy


3. A responsibility center is a business segment whose manager has control over costs, revenues, or investments in operating assets.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Easy


4. Residual income is used in the numerator to compute turnover in an ROI analysis.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy


5. Net operating income is earnings before interest and taxes.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  2 Level:  Easy


6. Land held for possible plant expansion would be included as an operating asset in the ROI calculation.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Medium


7. Margin equals Stockholders' Equity divided by Sales.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy


8. 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.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Medium


9. Residual income is equal to the difference between total revenues and operating expenses.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium


10. When using residual income as a measure of performance, it is not meaningful to compare the residual incomes of divisions of different sizes.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy


11. The transfer price used for internal transfers between divisions of the same company can increase or decrease each division's reported profits.

Ans:  True AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting Appendix:  12A LO:  4 Level:  Medium


12. For performance evaluation purposes, the lump-sum amount of fixed service department costs charged to an operating department should usually be based on either the operating department's peak-period or long-run average needs.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting Appendix:  12B LO:  5 Level:  Easy


13. In service department cost allocations, sales dollars should be used as an allocation base whenever possible.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting Appendix:  12B LO:  5 Level:  Easy


14. A cost center is also a responsibility center.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  6 Level:  Easy


15. The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he has control.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  6 Level:  Easy



Multiple Choice Questions
16. 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.

Ans:  A AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  1 Level:  Medium


17. 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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Medium


18. 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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Easy


19. 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)

Yes

Yes

B)

No

Yes

C)

Yes

No

D)

No

No

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2; 3 Level:  Hard


20. Which of the following segment performance measures will increase if there is a decrease in the selling expenses for that segment?






Return on Investment

Residual Income

A)

Yes

Yes

B)

No

Yes

C)

Yes

No

D)

No

No

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2; 3 Level:  Medium


21. 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.

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Medium


22. Consider the following three conditions:



  1. An increase in sales

  2. An increase in operating assets

  3. 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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Medium
23. 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

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Medium


24. 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

Ans:  D AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy


25. 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.

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy


26. Which of the following is NOT a common approach used to set transfer prices?

A) market price

B) variable cost

C) negotiation

D) suboptimization

Ans:  D AACSB:  Reflective Thinking AICPA BB:  Critical Thinking AICPA FN:  Reporting Appendix:  12A LO:  4 Level:  Easy


27. 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.

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting Appendix:  12B LO:  5 Level:  Medium


28. 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.

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting Appendix:  12B LO:  5 Level:  Medium Source:  CMA; adapted


29. 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.

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  6 Level:  Easy


30. Devlin Company has two divisions, C and D. The overall company contribution margin ratio is 30%, with sales in the two divisions totaling $500,000. If variable expenses are $300,000 in Division C, and if Division C's contribution margin ratio is 25%, then sales in Division D must be:

A) $50,000

B) $100,000

C) $150,000

D) $200,000

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  1 Level:  Hard


Solution:

Total company contribution margin = $500,000 × 30% = $150,000

Total company variable expenses = $500,000 − $150,000 = $350,000
Division C contribution margin ratio = (Sales − $300,000) ÷ Sales = 0.25

Sales − $300,000 = 0.25 × Sales

(0.75 × Sales) ÷ 0.75 = $300,000 ÷ 0.75

Sales = $400,000


Division D sales = Total company sales − Division C sales

= $500,000 − $400,000 = $100,000













Divisions







Total

Company


Division C

Division D




Sales

$500,000

$400,000

$100,000




Less variable expenses

 350,000

 300,000

   50,000




Contribution margin

$150,000

$100,000

$ 50,000




Contribution margin ratio

0.30

0.25

0.50

31. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia 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):











Wimpy

Mild

Medium

Hot

Atomic




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 Toxemia wants to maximize its profitability in the upcoming year, which flavor or flavors should Toxemia discontinue?

A) no flavors should be discontinued

B) Wimpy


C) Wimpy and Mild

D) Wimpy, Mild, and Medium

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Decision Making; LO:  1 Level:  Medium
Solution:
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: Wimpy and Mild.
32. Uchimura Corporation has two divisions: the AFE Division and the GBI Division. The corporation's net operating income is $42,000. The AFE Division's divisional segment margin is $15,700 and the GBI Division's divisional segment margin is $175,400. What is the amount of the common fixed expense not traceable to the individual divisions?

A) $149,100

B) $57,700

C) $217,400

D) $191,100

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  1 Level:  Medium


Solution:







Total Company







Divisional segment margin

$191,100

($15,700 + $175,400)




Less common fixed costs not traceable to the individual divisions

X







Net operating income

$ 42,000



Common fixed costs not traceable to the individual divisions

= $191,100 − $42,000 = $149,100

33. Younie Corporation has two divisions: the South Division and the West Division. The corporation's net operating income is $26,900. The South Division's divisional segment margin is $42,800 and the West Division's divisional segment margin is $29,900. What is the amount of the common fixed expense not traceable to the individual divisions?

A) $56,800

B) $69,700

C) $72,700

D) $45,800

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  1 Level:  Medium
Solution:








Total Company







Divisional segment margin

$72,700

($42,800 + $29,900)




Less common fixed costs not traceable to the individual divisions

X







Net operating income

$26,900



Common fixed costs not traceable to the individual divisions

= $72,700 − $26,900 = $45,800

34. Dukelow Corporation has two divisions: the Governmental Products Division and the Export Products Division. The Governmental Products Division's divisional segment margin is $255,000 and the Export Products Division's divisional segment margin is $59,800. The total amount of common fixed expenses not traceable to the individual divisions is $163,700. What is the company's net operating income?

A) $314,800

B) ($314,800)

C) $151,100

D) $478,500

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Easy
Solution:








Total Company







Divisional segment margin

$314,800

*




Less common fixed costs not traceable to the individual divisions

163,700







Net operating income

$151,100



  1   2   3   4   5   6


The database is protected by copyright ©ininet.org 2016
send message

    Main page