RESPONSIBILTY ACCOUNTING PROF.

EG LINDO
REVIEWER-THEORY

MULTIPLE CHOICE

1. Which of the following is more characteristic of a decentralized than a centralized business

structure?

a. The firms environment is stable. Page | 1

b. There is little confidence in lower-level management to make decisions.
c. The firm grows very quickly.
d. The firm is relatively small.

ANSWER: c EASY

2. Costs of decentralization include all of the following except

a. more elaborate accounting control systems.

b. potential costs of poor decisions.
c. additional training costs.
d. slow response time to changes in local conditions.

ANSWER: d EASY

3. Transfer pricing is primarily incurred in

a. foreign corporations exporting their products.

b. decentralized organizations.
c. multinational corporations domiciled in the U.S.
d. closely held corporations.

ANSWER: b EASY

4. In a decentralized company in which divisions may buy goods from one another, the transfer
pricing system should be designed primarily to

a. increase the consolidated value of inventory.

b. allow division managers to buy from outsiders.
c. minimize the degree of autonomy of division managers.
d. aid in the appraisal and motivation of managerial performance.

ANSWER: d EASY
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

5. 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. Page | 2
d. engaged in transfer pricing activities.

ANSWER: a EASY

6. What term identifies an accounting system in which the operations of the business are broken
down into reportable segments, and the control function of a foreperson, sales manager, or
supervisor is emphasized?

a. responsibility accounting
b. operations-research accounting
c. control accounting
d. budgetary accounting

ANSWER: a EASY

7. In a responsibility accounting system, costs are classified into categories on the basis of

a. fixed and variable costs.

b. prime and overhead costs.
c. administrative and nonadministrative costs.
d. controllable and noncontrollable costs.

ANSWER: d EASY

8. When used for performance evaluation, periodic internal reports based on a responsibility
accounting system should not

a. be related to the organization chart.

b. include allocated fixed overhead.
c. include variances between actual and budgeted controllable costs.
d. distinguish between controllable and noncontrollable costs.

ANSWER: b EASY
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

9. A ___________ is a document that reflects the revenues and/or costs that are under the control of
a particular manager.

a. quality audit report

b. responsibility report
c. performance evaluation report Page | 3
d. project report

ANSWER: b EASY

10. The cost object under the control of a manager is called a(n) __________________ center.

a. cost
b. revenue
c. responsibility
d. investment

ANSWER: c EASY

11. In evaluating the performance of a profit center manager, he/she should be evaluated on

a. all revenues and costs that can be traced directly to the unit.
b. all revenues and costs under his/her control.
c. the variable costs and the revenues of the unit.
d. the same costs and revenues on which the unit is evaluated.

ANSWER: b EASY

12. If a division is set up as an autonomous profit center, then goods should not be transferred

a. in at a cost-based transfer price.

b. out at a cost-based transfer price.
c. in or out at cost-based transfer price.
d. to other divisions in the same company.

ANSWER: b MEDIUM
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

13. Performance evaluation measures in an organization

a. affect the motivation of subunit managers to transact with one another.

b. always promote goal congruence.
c. are less motivating to managers than overall organizational goals.
d. must be the same for all managers to eliminate suboptimization. Page | 4

ANSWER: a MEDIUM

14. 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.
b. centralization.
c. suboptimization.
d. maximization.

ANSWER: c EASY

15. A major benefit of cost-based transfers is that

a. it is easy to agree on a definition of cost.

b. costs can be measured accurately.
c. opportunity costs can be included.
d. they provide incentives to control costs.

ANSWER: c MEDIUM

16. An internal reconciliation account is not required for internal transfers based on

a. market value.
b. dual prices.
c. negotiated prices.
d. cost.

ANSWER: d MEDIUM
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

17. The most valid reason for using something other than a full-cost-based transfer price between
units of a company is because a full-cost price

a. is typically more costly to implement.

b. does not ensure the control of costs of a supplying unit.
c. is not available unless market-based prices are available. Page | 5
d. does not reflect the excess capacity of the supplying unit.

ANSWER: b MEDIUM

18. 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. variable cost.
b. market price.
c. full cost.
d. production cost.

ANSWER: b MEDIUM

19. A transfer pricing system is also known as

a. investment center accounting.

b. a revenue allocation system.
c. responsibility accounting.
d. a charge-back system.

ANSWER: d EASY

20. The maximum of the transfer price negotiation range is

a. determined by the buying division.

b. set by the selling division.
c. influenced only by internal cost factors.
d. negotiated by the buying and selling division.

ANSWER: a EASY
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

21. The presence of idle capacity in the selling division may increase

a. the incremental costs of production in the selling division.

b. the market price for the good.
c. the price that a buying division is willing to pay on an internal transfer.
d. a negotiated transfer price. Page | 6

ANSWER: a MEDIUM

22. Which of the following is a consistently desirable characteristic in a transfer pricing system?

a. system is very complex to be the most fair to the buying and selling units
b. effect on subunit performance measures is not easily determined
c. system should reflect organizational goals
d. transfer price remains constant for a period of at least two years

ANSWER: c MEDIUM

23. With two autonomous division managers, the price of goods transferred between the divisions
needs to be approved by

a. corporate management.
b. both divisional managers.
c. both divisional managers and corporate management.
d. corporate management and the manager of the buying division.

ANSWER: b EASY

24. The minimum potential transfer price is determined by

a. incremental costs in the selling division.

b. the lowest outside price for the good.
c. the extent of idle capacity in the buying division.
d. negotiations between the buying and selling division.

ANSWER: a EASY
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

25. As the internal transfer price is increased,

a. overall corporate profits increase.

b. profits in the buying division increase.
c. profits in the selling division increase.
d. profits in the selling division and the overall corporation increase. Page | 7

ANSWER: c EASY

26. 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.

ANSWER: d EASY

27. In an internal transfer, the buying division records the transaction by

a. debiting accounts receivable.

b. crediting accounts payable.
c. debiting intracompany CGS.
d. crediting inventory.

ANSWER: b EASY

28. Top management can preserve the autonomy of division managers and encourage an optimal
level of internal transactions by

a. selecting performance evaluation measures that are consistent with the achievement of
overall corporate goals.
b. selecting division managers who are most concerned about their individual performance.
c. prescribing transfer prices between segments.
d. setting up all organizational units as revenue centers.

ANSWER: a MEDIUM
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

29. To evaluate the performance of individual departments, interdepartmental transfers of a product

should preferably be made at prices

a. equal to the market price of the product.

b. set by the receiving department.
c. equal to fully-allocated costs of the producing department. Page | 8
d. equal to variable costs to the producing department.

ANSWER: a EASY

30. Allocating service department costs to revenue-producing departments is an alternative to

a. responsibility accounting.
b. the use of profit centers.
c. the use of cost centers.
d. a transfer pricing system.

ANSWER: d MEDIUM

31. External factors considered in setting transfer prices in multinational firms typically do not
include

a. the corporate income tax rates in host countries of foreign subsidiaries.

b. foreign monetary exchange risks.
c. environmental policies of the host countries of foreign subsidiaries.
d. actions of competitors of foreign subsidiaries.

ANSWER: c MEDIUM

32. Corporate taxes and tariffs are particular transfer-pricing concerns of

a. investment centers.
b. multinational corporations.
c. division managers.
d. domestic corporations involved in importing foreign goods.

ANSWER: b EASY
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

33. When managers attempt to cause actual results to conform to planned results, this is known as

a. efficiency.
b. effectiveness.
c. conformity.
d. goal congruence. Page | 9

ANSWER: b EASY

34. Which of the following would not be considered a critical success factor?

a. quality
b. cost control
c. customer service
d. all of the above are critical success factors

ANSWER: d EASY

35. The costs of service departments can be assigned to other divisions through the use of

a. cost centers.
b. transfer prices.
c. goal congruence.
d. operational auditing techniques.

ANSWER: d MEDIUM

c 1. Goal congruence exists when

a. the goals of the company harmonize with each other.
b. the company's managers are pursuing their own goals effectively.
c. the company's managers are pursuing the goals of the company.
d. all of the above are true.

c 2. 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 performances.
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.

d 3. In responsibility accounting the most relevant classification of costs is

a. fixed and variable.
b. incremental and nonincremental.
c. discretionary and committed.
d. controllable and noncontrollable.

c 4. 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.
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

d. The details on the performance reports for individual managers should add up to the totals on the
report to their supervisor.

c 5. Which of the following items is LEAST likely to appear on the performance report of the manager of
a product line?
a. Variable manufacturing costs for products in the line. Page | 10
b. Selling expenses for the line.
c. A share of company-wide advertising.
d. Revenues from the line.

b 6. 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.
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

a 7. The criteria used for evaluating performance

a. should be designed to help achieve goal congruence.
b. can be used only with profit centers and investment centers.
c. should be used to compare past performance with current performance.
d. motivate people to work in the company's best interests.
Page | 11
b 8. A balanced scorecard approach to performance measurement
a. can only be used in profit or investment centers.
b. balances financial measures with nonfinancial measures.
c. uses only qualitative data to evaluate performance.
d. uses budgeted data rather than historical data.

b 9. If a company has a favorable sales volume variance, its

a. sales price variance is also favorable.
b. total contribution margin might be less than planned.
c. total contribution margin will be more than planned.
d. income will be positive.

c 10. Transfer prices

a. reduce employee turnover.
b. are necessary for investment centers.
c. should encourage the kinds of behavior that upper-level management wants.
d. are not used for departments with high amounts of fixed costs.

b 11. A transfer price is

a. an accounting device to turn profit centers into investment centers.
b. the price charged by one segment of the company for goods or services provided to another
segment.
c. only useful in a segment that deals with outsiders as well as with other segments of the same
company.
d. the amount charged by a cost center for a service performed for a profit center.

c 12. The cost allocation policy most likely to encourage use of a service is based on
a. budgeted total costs of the service department.
b. actual total costs of the service department.
c. budgeted variable costs for the service department.
d. actual variable costs for the service department.

c 13. Which of the following statements is true?

a. A company changes its total income when it changes the bases used to allocate indirect costs.
b. A company should select an allocation basis so as to raise or lower reported income on given
products.
c. A company's total income will remain unchanged no matter how indirect costs are allocated.
d. Costs should be allocated on an "ability-to-bear" basis.
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

a 14. If a company allocates costs of a service department to other departments, it should

a. consider the likely effects of the allocations on the use of the services.
b. use the method that best reflects the relative sizes of the departments.
c. turn the service department into an investment center.
d. allocate only the fixed costs of the service department.
Page | 12
a 15. If a computer department does work for other departments, charging a flat price per hour, the
computer department is
a. an artificial profit center.
b. a cost center.
c. an investment center.
d. none of the above.

a 16. The WORST method of allocating service department costs is

a. to allocate total actual costs based on actual use of the service.
b. to allocate total budgeted costs based on long-term expected use of the service.
c. to allocate total budgeted costs based on actual use of the service.
d. none of the above, because all the above are equally undesirable.

b 17. As a general rule, the best transfer price to use to transfer the costs of a service center to an
operating department is
a. the price charged by an outside company for the same service.
b. the price that encourages goal congruence.
c. one that is based on budgeted variable cost.
d. one that is based on budgeted total cost.

b 18. Which of the following costs is LEAST likely to appear on the performance report for the foreman
of a production department?
a. Wages of direct laborers.
b. Rent on machinery used in department.
c. Repairs to machinery used in department.
d. Cost of materials used.

d 19. ABC Company operates a factory that makes components for other ABC factories to assemble. The
factory could be treated as
a. a cost center.
b. an artificial profit center.
c. an investment center.
d. any of the above.

d 20. For reports to follow the principles of responsibility accounting, which of the following must be
true?
a. Each segment of the entity is an artificial profit center.
b. The company is decentralized.
c. The company uses transfer prices.
d. The reports show controllable costs separately from noncontrollable costs.
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

c 21. The effective use of responsibility accounting requires that performance reports for cost centers
a. show only variable costs.
b. show a fair share of allocated costs.
c. distinguish between controllable and noncontrollable costs.
d. show a fair share of revenues attributable to the center.
Page | 13
b 22. Criteria for evaluating performance should be carefully selected because
a. they must be approved by the IRS.
b. a manager's behavior can be affected by the criteria used to judge his or her performance.
c. managers may find out what they are.
d. stockholders inquire about them at annual meetings.

d 23. Which of the following is NOT a good reason for allocating indirect costs to operating departments?
a. To remind managers of the need to cover indirect costs.
b. So that operating managers will encourage service department managers to keep costs down.
c. To encourage managers to use services wisely.
d. To determine the true costs of operating departments.

b 24. An artificial profit center

a. has no investment.
b. does not provide its goods or services outside the entity.
c. cannot control its costs.
d. could not be operated as a cost center.

c 25. A responsibility center is

a. any department.
b. any manager.
c. any area of activity for which a manager is responsible.
d. only large departments.

a 26. ABC's actual selling price was less than planned and actual unit volume more than planned.
Therefore,
a. ABC had a favorable sales volume variance.
b. ABC's total contribution margin was more than planned.
c. ABC had a favorable sales price variance.
d. ABC's actual total sales equaled planned total sales.

b 27. The term "dual rates" refers to

a. allocating costs to several operating departments.
b. allocating fixed costs based on capacity requirements and variable costs based on use.
c. allocating both actual costs and budgeted costs.
d. using the budgeted rate to allocate some costs, the actual rate to allocate others.

a 28. Which of the following methods of allocating the costs of service departments provides the broadest
recognition of departments served?
a. Reciprocal allocation.
b. Step-down allocation.
c. Direct allocation.
d. Arbitrary allocation.
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

d 29. Which of the following is a good reason for allocating indirect costs to operating departments?
a. The company could lose money if the operating departments do not pay for the services they use.
b. To remind managers of the need to cover indirect costs.
c. To encourage managers to use more services.
d. To determine the true costs of operating departments.
Page | 14
b 30. 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.

d 31. Which of the following is a good reason for NOT allocating indirect costs to operating departments?
a. The company saves money if the operating departments do not pay for the services they use.
b. To remind managers of the need to cover indirect costs.
c. To encourage managers to use more services.
d. The costs are not controllable by the operating departments.

d 32. Which of the following is a good reason for NOT allocating indirect costs to operating departments?
a. To remind managers that revenues must cover indirect costs.
b. To recognize that operating departments benefit from the services.
c. To encourage managers to use services wisely.
d. Because allocating them might prompt operating managers to use nonincremental costs in making
decisions.

b 33. A profit center is a responsibility center

a. that sells its output outside the company.
b. whose manager is responsible for both revenues and costs.
c. that provides a service to other responsibility centers.
d. within an investment center.

d 34. An investment center is

a. larger than a cost center.
b. larger than a profit center.
c. seldom the responsibility of a single manager.
d. not truthfully characterized in any of the above statements.

a 35. The managerial level at which a particular cost is controllable

a. varies from company to company.
b. depends on whether the cost is fixed or variable.
c. depends on whether the cost is direct or indirect.
d. is irrelevant to the preparation of performance reports.

d 36. If at all possible, a manager's performance report should

a. consider the results that the manager can control.
b. consider only the results that the manager can control.
c. not be influenced by the results of decisions made by other managers.
d. reflect all of the above characteristics.
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

d 37. Comparing budgeted and actual amounts is important in evaluating the performance of
a. the manager of a cost center.
b. the manager of a profit center.
c. the manager of an investment center.
d. any manager.
Page | 15
c 38. Direct, step-down, and reciprocal are names for
a. the allocation methods most likely to produce goal congruence.
b. transfer-pricing methods.
c. methods for allocating costs of service departments to operating departments.
d. alternative organizational structures.
RESPONSIBILTY ACCOUNTING PROF. EG LINDO
REVIEWER-THEORY

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