Responsibility Accounting and Decentralization Lecture Notes

These flashcards cover the key concepts of responsibility accounting, the differences between centralization and decentralization, types of responsibility centers, and performance evaluation techniques like ROI and Residual Income.

Centralization

A form of organization or management style where top management makes most decisions and controls most activities from the company’s central offices.

Decentralization

An organizational form where the firm is divided into smaller units such as divisions, segments, business units, and departments.

Responsibility accounting

A system that requires various decision centers throughout an organization and traces costs, revenues, assets, and liabilities by areas of responsibility.

Activity accounting / Profitability accounting

Alternative names for responsibility accounting.

Goal congruence

The alignment where managers set targets and formulate strategies to attain the firm’s overall objectives.

Management by objectives

A concept where managers promote a common set of goals and evaluate performance based on the attainment of those goals.

Management by exception

A technique used to maximize efficiency by concentrating on operational factors that show deviation from the plan.

Sub-optimization

A disadvantage of decentralization where managers focus all efforts on their specific unit's goals rather than the overall organizational goals.

Responsibility center

A unit within an organization which has control over costs, revenues, and/or investment funds.

Cost Center

A responsibility center where the manager has the authority only to incur costs and is evaluated on how well those costs are controlled.

Revenue center

A center where a manager is accountable only for the generation of revenues and has no control over setting selling prices or budgeting costs.

Profit center

A responsibility center in which the manager is responsible for generating revenues as well as planning and controlling expenses.

Investment Center

A unit in which the manager is responsible for revenues and expenses and has authority to acquire, utilize, and dispose of assets.

Controllable costs

Costs that may be influenced by unit managers in a given time period, such as Direct Materials (DM), Direct Labor (DL), and Variable Overhead (VOH).

Uncontrollable costs

Costs assigned to a responsibility center by upper management that the unit manager cannot influence, such as rental costs.

Direct costs

Costs directly incurred by a specific responsibility center, which can be either variable or fixed.

Indirect costs

Costs assigned or allocated to a center as its share of the total costs incurred by the entire organization.

Return on Investment (ROI)

A performance measure calculated as: $\text{ROI} = \frac{\text{Segment Net Income}}{\text{Invested Capital}}$ or $\text{ROI} = \frac{\text{Income}}{\text{Sales revenue}} \times \frac{\text{Sales revenue}}{\text{Invested capital}}$.

Residual Income (RI)

The difference between actual income and the required return on investment, calculated as: $\text{Residual Income} = \text{Investment center's actual income} - (\text{Invested capital} \times \text{Imputed interest rate})$.

Action reports

Performance reports that utilize specific techniques to facilitate taking corrective action.

Flash reports

Reports issued earlier than standard periodic reports when practical to provide timely information.

Span of control

A decentralization benefit allowing workload to be distributed among several managers, letting top management devote more time to strategic planning.

C. Cost Center

The manager of the maintenance department is evaluated based on how well repair costs are controlled.

A. Revenue Center

B. Profit Center

C. Cost Center

D. Investment Center

A. Cost Center

A production manager has authority over labor costs and materials costs but does not generate revenue.

A. Cost Center

B. Revenue Center

C. Profit Center

D. Investment Center

A. Revenue Center

A sales manager is evaluated based only on total sales generated.

A. Revenue Center

B. Cost Center

C. Profit Center

D. Investment Center

A. Revenue Center

A manager is responsible for increasing sales but has no authority over operating expenses.

A. Revenue Center

B. Profit Center

C. Cost Center

D. Investment Center

C. Profit Center

The manager controls sales revenues and operating expenses.

A. Cost Center

B. Revenue Center

C. Profit Center

D. Investment Center

C. Profit Center

The Loans and Discounts Department of a bank is usually classified as a:

A. Cost Center

B. Revenue Center

C. Profit Center

D. Investment Center

C. Profit Center

The manager is responsible for generating revenue and controlling costs but cannot purchase major assets.

A. Revenue Center

B. Cost Center

C. Profit Center

D. Investment Center

D. Investment Center

A branch manager can purchase equipment, generate revenues, and control expenses.

A. Revenue Center

B. Cost Center

C. Profit Center

D. Investment Center

D. Investment Center

A manager can acquire, utilize, and dispose of assets.

A. Cost Center

B. Revenue Center

C. Profit Center

D. Investment Center

D. Investment Center

A commercial bank branch office is classified as a:

A. Cost Center

B. Revenue Center

C. Profit Center

D. Investment Center

B. Centralization

A company requires every purchasing decision to be approved by the president.

A. Decentralization

B. Centralization

C. Goal Congruence

D. Management by Exception

A. Decentralization

Branch managers are allowed to create local marketing campaigns.

A. Decentralization

B. Centralization

C. Cost Control

D. Responsibility Accounting

A. Centralization

The CEO personally approves hiring decisions for every branch.

A. Centralization

B. Decentralization

C. Responsibility Center

D. Investment Center

B. Decentralization

Managers at lower levels are given authority to make decisions.

A. Centralization

B. Decentralization

C. Management by Exception

D. Goal Congruence

B. Decentralization

During a natural disaster, local officials immediately distribute relief goods without waiting for approval from the national government.

A. Centralization

B. Decentralization

C. Budgetary Control

D. Cost Allocation

A. Enhanced Specialization

A division becomes highly skilled in its own industry because managers focus only on their specialized area.

A. Enhanced Specialization

B. Goal Congruence

C. Management by Exception

D. Span of Control

C. Training Future Managers

A company allows managers to gain actual decision-making experience before promotion.

A. Faster Decision-Making

B. Enhanced Specialization

C. Training Future Managers

D. Goal Congruence

A. Motivated Managers

Managers become more enthusiastic because they have authority over decisions.

A. Motivated Managers

B. Goal Congruence

C. Responsibility Accounting

D. Cost Control

B. Defined Span of Control

Top executives focus more on long-term planning because lower managers handle daily operations.

A. Enhanced Specialization

B. Defined Span of Control

C. Management by Exception

D. Goal Congruence

A. Faster Decision-Making

A store manager quickly lowers prices to respond to local competition.

A. Faster Decision-Making

B. Goal Congruence

C. Enhanced Specialization

D. Cost Control

A. Need for Competent People

A newly promoted manager lacks the skills needed to run a division effectively.

A. Need for Competent People

B. Faster Decision-Making

C. Goal Congruence

D. Enhanced Specialization

A. Measurement System Problem

Different divisions use different accounting methods, making comparisons difficult.

A. Measurement System Problem

B. Motivated Managers

C. Cost Control

D. Responsibility Accounting

B. Sub-optimization

A division manager increases divisional profits but harms overall company performance.

A. Goal Congruence

B. Sub-optimization

C. ROI

D. Residual Income

A. Controllable

A production manager decides how much direct material to use.

This cost is:

A. Controllable

B. Uncontrollable

C. Indirect

D. Allocated

C. Uncontrollable

Head office allocates building rent to all departments.

This cost is:

A. Direct

B. Controllable

C. Uncontrollable

D. Variable

B. Controllable

A manager can influence labor efficiency and material usage.

These costs are:

A. Uncontrollable

B. Controllable

C. Indirect

D. Sunk

C. Uncontrollable

Corporate insurance expense is assigned to divisions by top management.

A. Controllable

B. Direct

C. Uncontrollable

D. Variable

A. Fit Report to Recipient

A report contains only information useful to the manager receiving it.

A. Fit Report to Recipient

B. Standardization

C. Timeliness

D. Action Report

C. Pinpoint Responsibility

A report identifies which manager is responsible for a variance.

A. Timeliness

B. Action Report

C. Pinpoint Responsibility

D. Standardization

B. Timeliness

A manager receives a report quickly enough to correct a problem immediately.

A. Standardization

B. Timeliness

C. Goal Congruence

D. Span of Control

B. Management by Exception

A manager ignores small variances but investigates major unfavorable variances.

A. Goal Congruence

B. Management by Exception

C. Cost Control

D. Decentralization

C. Management by Exception

Management focuses attention only on unusual results.

A. Flexible Budgeting

B. Responsibility Accounting

C. Management by Exception

D. Residual Income

B. ROI

A company wants to know how efficiently a division uses assets to generate income.

A. Residual Income

B. ROI

C. Flexible Budget

D. Gross Margin

B. Residual Income

A company wants to know whether a division earned more than the minimum required return.

A. ROI

B. Residual Income

C. Contribution Margin

D. Flexible Budget

B. ROI Limitation

A manager rejects a project because it lowers the division's ROI even though it benefits the company.

Which weakness is being illustrated?

A. Goal Congruence

B. ROI Limitation

C. Flexible Budgeting

D. Cost Control

B. Flexible Budget

Actual production was 5,800 units instead of 5,000 units. Management wants a budget adjusted for the actual level.

A. Static Budget

B. Flexible Budget

C. Cash Budget

D. Master Budget

A. Flexible Budget

A company compares actual costs with budgeted costs at actual activity.

A. Flexible Budget

B. Static Budget

C. Responsibility Report

D. Cost Report

B. Static Budget

A manager is evaluated using a budget based on 5,000 units even though actual production was 6,000 units.

Which budget is being used?

A. Flexible Budget

B. Static Budget

C. Capital Budget

D. Cash Budget

D. Sub-optimization

All of the following are advantages of decentralization EXCEPT:

A. Enhanced Specialization

B. Faster Decision-Making

C. Motivated Managers

D. Sub-optimization

D. Budget Center

All of the following are responsibility centers EXCEPT:

A. Cost Center

B. Revenue Center

C. Profit Center

D. Budget Center

D. Include All Available Data

All of the following are characteristics of a good performance report EXCEPT:

A. Timely

B. Pinpoint Responsibility

C. Include Essential Data

D. Include All Available Data

D. Allocated Rent

All of the following are controllable costs EXCEPT:

A. Direct Materials

B. Direct Labor

C. Variable Overhead

D. Allocated Rent

B. Direct Cost

A cost is directly incurred by a division and can be traced specifically to it.

A. Indirect Cost
B. Direct Cost
C. Controllable Cost
D. Allocated Cost

B. Indirect Cost

A cost is assigned to a division as its share of company-wide expenses.

A. Direct Cost
B. Indirect Cost
C. Variable Cost
D. Relevant Cost

C. Lower levels to higher levels

In a responsibility accounting system, information generally flows:

A. Top management to employees

B. Employees to customers

C. Lower levels to higher levels

D. Investors to management

B. More summarized

As managers move higher in the organization, reports become:

A. More detailed

B. More summarized

C. More frequent

D. More complex

A. True

Responsibility accounting can influence employee and manager behavior.

A. True

B. False

B. Goal Congruence

A manager's decisions help both the division and the entire company achieve objectives.

A. Sub-optimization

B. Goal Congruence

C. Decentralization

D. Management by Exception

C. Current and future oriented

A management accounting system provides information that is:

A. Historical only

B. Future only

C. Current and future oriented

D. Tax oriented

C. Human reactions to information

Management accountants should understand:

A. Tax law only

B. Financial statements only

C. Human reactions to information

D. Production schedules only

D. Indirect uncontrollable cost

Property tax allocated to a department is usually:

A. Direct controllable cost

B. Direct uncontrollable cost

C. Indirect controllable cost

D. Indirect uncontrollable cost

A. Operations Control

Performance measures about customer preferences are part of:

A. Operations Control

B. Tax Accounting

C. Auditing

D. Cost Allocation

c. At appropriate intervals depending on need and cost-benefit

Budget reports are most effective when they are prepared:
a. Annually only
b. Weekly regardless of situation
c. At appropriate intervals depending on need and cost-benefit
d. Only at year-end

c. Significant deviations from plan

Management by exception means managers focus on:
a. All transactions equally
b. Only favorable variances
c. Significant deviations from plan
d. Only fixed costs

b. Adjusts for actual level of activity

A flexible budget is better than a static budget because it:
a. Ignores activity changes
b. Adjusts for actual level of activity
c. Eliminates fixed costs
d. Replaces financial statements

b. Planning only at one level of activity

A static budget is mainly useful for:
a. Performance evaluation when activity changes
b. Planning only at one level of activity
c. Eliminating variances
d. Adjusting costs automatically

b. Variable costs per unit remain constant within relevant range

Flexible budgeting assumes that:
a. Fixed costs change with activity
b. Variable costs per unit remain constant within relevant range
c. Revenue is always fixed
d. No costs exist

b. Same as master budget

In a flexible budget, fixed costs are:
a. Always zero
b. Same as master budget
c. Variable depending on activity
d. Ignored

c. Can be influenced by a specific manager

A controllable cost is one that:
a. Cannot be influenced by any manager
b. Is influenced by external customers
c. Can be influenced by a specific manager
d. Is always fixed

b. Increase

As managers move to higher levels of responsibility, controllable costs usually:
a. Decrease
b. Increase
c. Disappear
d. Become irrelevant

b. Lower levels to higher levels

Responsibility reports generally flow:
a. Top management to lower levels
b. Lower levels to higher levels
c. External to internal users
d. Random direction

b. Managers evaluate performance

A responsibility report mainly helps:
a. Customers
b. Managers evaluate performance
c. Government taxation
d. External auditors only

b. Costs only

A cost center is responsible for:
a. Revenue only
b. Costs only
c. Profit and investment
d. Market share only

b. Revenue and costs

A profit center is responsible for:
a. Costs only
b. Revenue and costs
c. Only fixed assets
d. Taxes only

b. Capital investment

An investment center is a profit center that also controls:
a. Advertising only
b. Capital investment
c. Inventory only
d. Labor hours only

b. Net income / Investment

ROI is calculated as:
a. Sales / Costs
b. Net income / Investment
c. Costs / Revenue
d. Revenue – Expenses

b. Reject projects that benefit the company overall

A disadvantage of ROI is that it may:
a. Encourage too many investments
b. Reject projects that benefit the company overall
c. Ignore profits
d. Eliminate fixed costs

b. Income after subtracting imputed interest on investment

Residual income is:
a. Net income only
b. Income after subtracting imputed interest on investment
c. Revenue minus taxes
d. Fixed cost minus variable cost

b. Required return on invested capital

Imputed interest refers to:
a. Marketing cost
b. Required return on invested capital
c. Salary expense
d. Depreciation

b. Better aligns with company goals

Compared to ROI, residual income:
a. Encourages rejection of good projects
b. Better aligns with company goals
c. Ignores investment
d. Only measures revenue

b. Decision-making is spread across levels

A decentralized organization means:
a. Only top management decides
b. Decision-making is spread across levels
c. No managers exist
d. Only accountants decide

b. Operations control and decision-making

Management accounting information is mainly used for:
a. External auditing
b. Operations control and decision-making
c. Tax computation only
d. Legal reporting only

b. Provide information for planning and control

One key role of management accounting is to:
a. Predict stock prices
b. Provide information for planning and control
c. Replace financial accounting
d. Eliminate budgeting

b. Support performance evaluation and control

A well-designed responsibility accounting system should:
a. Punish employees automatically
b. Support performance evaluation and control
c. Ignore nonfinancial data
d. Focus only on revenue

b. Residual income considers cost of capital

A statement that is TRUE is:
a. ROI always increases investment decisions quality
b. Residual income considers cost of capital
c. All costs are controllable
d. Budget reports should always be weekly

b. Cannot be influenced by a specific manager

Noncontrollable costs are those that:
a. Can be influenced by managers
b. Cannot be influenced by a specific manager
c. Are always variable
d. Are always fixed

b. Evaluate performance by responsibility level

A key purpose of responsibility accounting is to:
a. Assign blame
b. Evaluate performance by responsibility level
c. Increase taxes
d. Replace budgeting