Chapter 12 Segment Reporting and Decentralization True/False Questions
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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?
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?
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: An increase in sales An increase in operating assets 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
A) cash
B) accounts receivable 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 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
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
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):
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
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:
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
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
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