Management Control Systems MCQ

ch12
Student: ___________________________________________________________________________
1. The design and use of management control systems affects how an individual makes and implements
decisions.

True False

2. In general, there is a direct relationship between the quality of the information provided to managers and
the quality of decisions made using that information.

True False

3. Rational managers will always make decisions that are in the best interest of the organization employing
them.

True False

4. Decentralization is the delegation of the authority to make decisions in the organization's name to
subordinates.

True False

5. In general, organizations are more centralized in the early stages of their existence and more decentralized
as they grow.

True False

6. One advantage of decentralization is faster response time to changes in the organization's environment by
local managers.

True False

7. One advantage of centralization is better use of top management's time on strategic decisions.

True False

8. Properly developed and implemented management control systems influence subordinates to act in the
organization's best interest.

True False

9. Delegated decision authority is the specification of what decisions a subordinate can make in the
organization.

True False

10. It is important to not consider an organization's compensation and reward system when designing its
performance evaluation system.

True False

11. Managers in a cost center are held responsible for both the costs and volumes of inputs used to produce a
product or provide a service.

True False

12. In general, profit centers are found at higher levels in an organization than investment centers.

True False

13. Properly designed management control systems can totally eliminate the inherent conflict between
individual behavior and organizational goals.

True False

14. There is no single accounting measure that can fully measure the performance of a profit or investment
center.

True False

15. Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured
performance.

True False

16. Properly designed management control systems have both fixed compensation and contingent
compensation.

True False

17. Cost allocations based on dual rates assume that a common cost can be separated into a fixed and variable
component.

True False

18. The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on
factors under the manager's direct control.

True False

19. It is possible for performance evaluation systems and/or management control systems to contribute to
unethical or fraudulent behavior.

True False

20. Properly designed management control systems will eliminate fraudulent behavior by maximizing goal
congruence within the organization.

True False

21. Which of the following statements is (are) true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and implements
decisions.
(B) Rational managers will always make decisions that are in the best interest of the organization
employing them.

A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.

22. Decentralization refers to the delegation of decision-making authority to

A. top management.
B. superiors.
C. board of directors.
D. subordinates.

23. Which of the following is not a characteristic of a decentralized organization?

A. better use of local knowledge
B. better use of top management's time
C. reduced response time to environmental changes
D. more decisions made by relatively few individuals

24. Which of the following statements is false?

A. The U.S. military is a good example of an organization that is highly decentralized.
B. The degree of decentralization depends on how many decisions principals delegate to agents.
C. Management control systems are used to measure the performance of an agent's decisions.
D. Most organizations have some operating units that are centralized and some that are decentralized.

25. Which of the following elements is not part of a management control system?

A. delegated decision authority
B. performance evaluation system
C. knowledge of local conditions
D. compensation and reward system

26. An operating unit of an organization is called a cost center if it is responsible

A. only for costs.
B. only for revenues.
C. for costs and revenues.
D. for investments in assets.

27. An operating unit of an organization is called an investment center if it is responsible

A. only for costs.

28. An operating unit of an organization is called a revenue center if it is responsible

A. only for costs.

29. An operating unit of an organization is called a profit center if it is responsible

A. only for costs.

30. An operating unit that is responsible for revenues and costs is commonly referred to as a(n)

A. expense center.
B. revenue center.
C. profit center.
D. asset center.

31. An operating unit that is responsible for revenues only is commonly referred to as a(n)

A. expense center.
B. revenue center.
C. profit center.
D. asset center.

32. An operating unit that is responsible for only costs is commonly referred to as a(n)

A. cost center.
B. revenue center.
C. profit center.
D. asset center.

33. When managers are held responsible for costs but the input-output relationship is not well specified, a(n)
________________________ is established.

A. standard cost center
B. revenue center
C. discretionary cost center
D. asset center

34. When managers are held responsible for costs and the input-output relationship is well specified, a(n)
________________________ is established.

B. revenue center
D. asset center

35. Decentralized organizations can delegate authority and still maintain control and monitor managers'
performance by designing appropriate management control systems. Which of the following responsibility
centers would be evaluated similar to an independent business?

A. profit center
B. revenue center
C. investment center
D. discretionary cost center

36. Controllable revenue is included in a performance report of a

A. a
B. b
C. c
D. d


A. a
B. b
C. c
D. d


A. a
B. b
C. c
D. d

39. Assets invested in a responsibility center are included in a performance report of

A. a
B. b
C. c
D. d


A. a
B. b
C. c
D. d

41. A manager makes a decision that is beneficial for a specific investment center but not for the entire
organization. From the organization's perspective, this decision results in

A. goal congruence.
B. decentralization.
C. contingent compensation.
D. fixed compensation.

42. The controllability concept states that managers should be held responsible for

A. all items over which they have decision-making authority.
B. costs and revenues, but not investments in assets used in their division.
C. only items that are allocated to their divisions on a per-unit basis.
D. fixed compensation items, but not contingent compensation items.

43. Relative performance evaluations (RPE) are not designed to

A. compare managers to other comparable managers.
B. compare divisions with other comparable divisions.
C. remove the effect of environmental factors that are beyond a manager's control.
D. restate departmental goals so meaningful comparisons can be made.

44. Which of the following items would be classified as a fixed compensation item?

A. Administrative salaries
B. Sales commissions
C. Stock options
D. Piece rates

45. Which of the following items would not be classified as a contingent compensation item?

C. Stock options
D. Piece rates

46. Which of the following statements is (are) true regarding compensation?
(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of
measured performance.
(B) Properly designed management control systems have contingent compensation items but not fixed
compensation items.

A. Only A is true.
B. Only B is true.

47. The use of dual rates in a cost allocation system assumes that common costs can be

A. separated into their fixed and variable components.
B. traced directly to a specific division or manager.
C. allocated based on a physical quantities measure.
D. assigned to an investment responsibility center.

48. Which of the following statements is (are) false regarding the effective use of management control
systems?
(A) In general, single rate cost allocations should not be used in management control systems because clear
control over the cost being allocated cannot be determined.
(B) The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation
on factors under the manager's direct control.

A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.

49. Examples of pressures that can lead to financial fraud do not include

A. unrealistic budgets.
B. inappropriate bonus plans.
C. overemphasis on long-term results.
D. overemphasis on short-term results.

50. The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies

A. use investment centers to evaluate top managers.
B. report on the adequacy of the company's internal controls over financial reporting.
C. compensate managers with fixed compensation plans only.
D. eliminate stock options for managerial compensation.

51. Which of the following is not an internal control?

A. rotating personnel among tasks.
B. separation of duties.
C. setting limits on the amount of expenditures.
D. using absolute performance standards.

52. Internal controls include all of the following except:

A. using contingent compensation plans.
B. requiring management authorization for the use of a company's assets.
C. reconciling various sets of books.
D. requiring employees to take vacations.

Boxes-2-Go has two divisions, large and small, that share the common costs of the company's
communications network. The annual common costs are $4,500,000. You have been provided with the
following information for the upcoming year:

53. What is the allocation rate for the upcoming year assuming Boxes-2-Go uses the single-rate method and
allocates common costs based on the number of calls?

A. $10.00
B. $15.00
C. $20.00
D. $25.00

allocates common costs based on the time on the network?

A. $10.98
B. $10.00
C. $8.00
D. $7.14

55. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should
be allocated based on the number of calls. The remaining costs should be allocated based on the time on the
network. What is the total communication network costs allocated to the Large Box Division assuming the
company uses dual-rates to allocate common costs?

A. $2,700,000
B. $2,520,000
C. $1,980,000
D. $1,500,000

56. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should
be allocated based on the number of calls. The remaining costs should be allocated based on the time on
the network. What is total communication network costs allocated to the Small Box Division assuming the

A. $2,520,000
B. $1,800,000
C. $1,320,000
D. $1,200,000

The Copy Department in the College of Business at State University provides photocopying service for
both the Marketing and Economics Department. The following budget has been prepared for the year.

57. If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be
allocated to the Marketing Department?

A. $85,000
B. $90,000
C. $150,000
D. $170,000

allocated to the Economics Department?

A. $85,000
B. $90,000
C. $105,000
D. $120,000

59. If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the
Economics Department, assuming the Economics Department actually made 2,100,000 copies during the
year?

A. $85,000
B. $92,500
C. $132,500
D. $112,500

Marketing Department, assuming the Marketing Department actually made 3,000,000 copies during the
year?

A. $135,000
B. $150,000
C. $155,000
D. $170,000

Economics Department, assuming the Economics Department actually made 1,500,000 copies during the
year?

A. $77,500
B. $92,500
C. $132,500
D. $112,500

year?

A. $135,000
B. $150,000
C. $155,000
D. $175,000

Fenway Telcom has three divisions, commercial, retail and consumer, that share the common costs of the
company's computer server network. The annual common costs are $2,400,000. You have been provided
with the following information for the upcoming year:

63. What is the allocation rate for the upcoming year assuming Fenway Telcom uses the single-rate method
and allocates common costs based on the number of connections?

A. $10.00
B. $15.00
C. $20.00
D. $40.00

64. Fenway Telcom uses the single rate method and allocates common costs based on the number of
connections. What is the total computer server network cost allocated to the Commercial Division?

A. $480,000
B. $514,286
C. $600,000
D. $1,200,000

and allocates common costs based on the time on the network?

A. $20.00
B. $16.00
C. $4.00
D. $2.86

66. Fenway Telcom uses the single rate method and allocates common costs based on the time on the network.
What is the total computer server network cost allocated to the Retail Division?

A. $429,000
B. $600,000
C. $657,800
D. $3,000,000

67. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be
allocated based on the number of connections. The remaining costs should be allocated based on the time
on the network. What is the total server network costs allocated to the Commercial Division assuming the

A. $514,286
B. $480,000
C. $600,000
D. $565,000

on the network. What is total server network costs allocated to the Retail Division assuming the company
uses dual-rates to allocate common costs?

A. $741,667
B. $657,143
C. $425,000
D. $211,765

allocated based on the number of connections. The remaining costs should be allocated based on the
time on the network. What is total server network costs allocated to the Consumer Division assuming the

A. $1,200,000
B. $1,093,333
C. $954,896
D. $750,000

The Document Creation Center (DCC) for Alegis Corp. provides photocopying and document services for
three departments in the St. Paul office. The following budget has been prepared for the year.

70. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the
Software Development Department?

A. $98,000
B. $104,000
C. $112,000
D. $118,857

Training Department?

A. $183,750
B. $210,000
C. $195,000
D. $222,857

Management Department?

A. $168,000
B. $156,000
C. $178,286
D. $147,000

73. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management
Department, assuming the Management Department actually made 2,100,000 copies during the year?

A. $147,000
B. $136,500
C. $159,000
D. $150,761


A. $184,500
B. $191,750
C. $211,783
D. $206,500

75. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training
Department, assuming the Training Department actually made 3,250,000 copies during the year?

A. $227,500
B. $211,250
C. $217,500
D. $223,017


A. $180,050
B. $190,079
C. $193,900
D. $203,100

77. If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Software
Development Department, assuming the Software Development Department actually made 1,160,000
copies during the year?

A. $75,400
B. $98,800
C. $81,200
D. $84,312


A. $117,400
B. $115,700
C. $124,600
D. $129,376

79. In responsibility accounting, a center's performance is measured by those costs which are controllable.
Controllable costs are best described as including (CMA adapted)

A. direct materials and direct labor only.
B. only those costs that the manager can influence in the current period.
C. only discretionary costs.
D. those costs about which the manager is knowledgeable and informed.
E. incremental and fixed costs.

80. Rockford Manufacturing Corporation uses a responsibility accounting system in its operations. Which one
of the following items is least likely to appear in a performance report for a manager of one of Rockford's
assembly lines? (CMA adapted)

A. direct labor
B. materials
C. repairs and maintenance
D. depreciation on the manufacturing facility
E. supervisory salaries

81. Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n)
(CMA adapted)

A. profit center.
B. revenue center.
C. division.
D. operating unit.
E. investment center.

82. When comparing performance report information for top management with that of lower-level
management, (CMA adapted)

A. top management reports are more detailed.
B. lower-level management reports are typically for longer time periods.
C. top management reports show control over fewer costs.
D. lower-level management reports are likely to contain more quantitative data and less financial data.
E. top management reports are usually not of the exception type but present a complete analysis of all
variances.

83. The least complex segment or area of responsibility for which costs are allocated is a(n) (CMA adapted)

A. profit center.
B. investment center.
C. contribution center.
D. cost center.
E. hybrid center.

84. Which one of the following will not occur in an organization that gives managers throughout the
organization maximum freedom to make decisions? (CMA adapted)

A. more effective solutions to operational problems
B. individual managers regarding the managers of other segments as they do external parties
C. two divisions of the organization having competing models that aim for the same market segments
D. delays in securing approval for the introduction of new products
E. greater knowledge of the marketplace and improved service to customers

85. Which one of the following firms is likely to experience dysfunctional motivation on the part of its
managers due to its allocation methods? (CMA adapted)

A
.
To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar Electronics uses
predetermined 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. It also uses ROI to evaluate the divisional performance.
C. Rainier Industrial does not allow its service departments to pass on their cost overruns to production
departments.
D
.
Tashkent Auto's management information system (MIS) is operated out of headquarters and serves
its various divisions. Tashkent's allocation of MIS-related costs to its divisions is limited to costs the
divisions will incur if they were to outsource their MIS needs.
E. Golkonda Refineries separately allocates fixed and variable costs incurred by its service departments to
its production departments.

86. Atlantic Hotels operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury, Resort, Standard, and
Budget) where a reservation is made on the basis of time on a call. Idle time of the reservation agents, time
spent on calls where no reservation is made, and the fixed cost of the equipment are allocated on the
number of reservations made in each group. Due to recent increased competition in the time-share, the
company has decided that it is necessary to more accurately allocate its costs to price its services
competitively and profitably. During the current period, the use of the call center for each group was as
follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $2,410,000 for personnel and $1,240,000
for equipment and other costs.
Required Determine the allocation to each of the divisions using (you may round all decimals to three
places):
a. A single rate based on time used.
b. Multiple rates based on time used (for personnel costs) and number of reservations (for equipment and
other cost).

87. Baltic Resorts operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury, Standard, and Budget) where
a reservation is made on the basis of time spent on a call. Due to recent increased competition in the time-
share, the company has decided that it is necessary to more accurately allocate its costs to price its services

During this period, the cost of the computer center amounted to $1,760,000 for personnel and $1,240,000
Required Determine the allocation to each of the divisions using (round all decimals to three places):
other cost).

88. Caspian Resorts operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury and Standard) where a
reservation is made on the basis of time spent on a call. Due to recent increased competition in the time-
share, the company has decided that it is necessary to more accurately allocate its costs to price its services

During this period, the cost of the computer center amounted to $1,220,000 for personnel and $960,000 for
equipment and other costs.
other cost).

89. The Document Creation Center (DCC) for Aelerion Corp. provides document services for three departments
in the Denver office. The following budget has been prepared for the month.

Required (use three decimal places in your calculations):
a. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the
three user departments?

90. The legal department for Buffet Corp. provides legal services for four departments in the Omaha office.
The following budget has been prepared for the month.

a. If Buffet uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the
four user departments?

91. The human resources department for Hammond Corp. provides personnel services for two departments in
the Chicago office. The following budget has been prepared for the month.

a. If Hammond uses a dual rate for allocating its costs based on employees, how much cost will be
allocated to the two departments?

92. The Document Creation Center (DCC) for Aelerion Corp. provides document services for three departments
in the Denver office. The following budget has been prepared for the month.


a. If DCC uses a dual rate for allocating its costs; allocating fixed costs based on number of documents and
variable costs based on number of pages, how much cost will be allocated to the three user departments?



a. If Buffet uses a dual rate for allocating its costs, allocating fixed costs based on number of contracts
and variable costs based on number of pages reviewed, how much cost will be allocated to the four user
departments?

94. Wrigley Services has three divisions, commercial, retail and consumer, that share the common costs of the


a. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method and
allocates common costs based on the number of connections? Calculate the allocated amount for each
division.
b. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method and
allocates common costs based on the time on network? Calculate the allocated amount for each division.
c. The cost accountant determined $850,000 of the server network's costs were fixed and should be
on the network. What is the total server network costs allocated to each division?

95. Comiskey has four divisions, commercial, retail, research and consumer, that share the common costs
of the company's computer server network. The annual common costs are $2,400,000. You have been
provided with the following information for the upcoming year:


a. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate method and
c. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be

96. Jacobs Corp. has three divisions, commercial, retail and consumer, that share the common costs of the


a. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method and

97. Marlin has three divisions, commercial, retail and consumer, that share the common costs of the company's
computer server network. The annual common costs are $2,400,000. You have been provided with the


a. The cost accountant determined $1,800,000 of the server network's costs were fixed and should be

98. Sanper Corp. has four divisions, commercial, retail, research, and consumer, that share the common costs


a. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method and
allocates common costs based on the number of connections?
b. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method and

99. Charleston has four divisions, commercial, retail, research, and consumer, that share the common costs



100.Redding has two divisions, Production and Support, that share the common costs of the company's

a. What is the allocation rate for the upcoming year assuming Redding uses the single-rate method and
allocates common costs based on the number of calls? Calculate the costs allocated to each division.
b. What is the allocation rate for the upcoming year assuming Redding uses the single-rate method and
allocates common costs based on the time on the network? Calculate the costs allocated to each division.
c. The cost accountant determined $2,700,000 of the communication network's costs were fixed and should
network. What is the total communication network costs allocated to each division?

101.Salinas has two divisions, Marketing and Finance, that share the common costs of the company's


a. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method and
b. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method and

102.Tofte has two divisions, Research and Sales, that share the common costs of the company's


a. The cost accountant determined $1,350,000 of the communication network's costs were fixed and should
network. What is the total communication network costs allocated to each division?

103.The Black Swan Company has three client-contact departments: Market Research, Branding, and
Promotion. Each department requires the services of the Legal Department for the contracts that each
undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on
the Legal Department's budgeted and actual costs is as follows:
The budget for the Legal Dept is $300,000 + $10/contract. The budgeted volume of contracts is as follows:

The actual number of contracts for Market Research was 315, for Branding was 450, and for Promotion
was 720.

a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal Department
would be allocated to each of the producing departments?
b. If a dual charging rate is used, how much of the cost of the Legal Department would be allocated to each
of the producing departments

The budget for the Legal Dept is $200,000 + $7.50/contract. The budgeted volume of contracts is as
follows:

was 675.

The budget for the Legal Dept is $400,000 + $15/contract. The budgeted volume of contracts is as follows:

was 820.

106.Describe five advantages of decentralization.

107.Describe two disadvantages of decentralization.

108.Describe the three main elements of a management control system.

109.Describe the five basic types of decentralized units in responsibility accounting.

110.Explain the difference between fixed compensation and contingent compensation. Give an example of
each.

ch12 Key

1. The design and use of management control systems affects how an individual makes and implements
decisions.

TRUE
Control systems affect behavior.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 12 #1
Learning Objective: 1
Topic Area: Alignment of Managerial and Organizational Interests

2. In general, there is a direct relationship between the quality of the information provided to managers
and the quality of decisions made using that information.

TRUE
Normally, the better the information, the higher the quality of the decision.

AACSB: Analytic
Difficulty: Medium
Topic Area: Why a Management Control System?

3. Rational managers will always make decisions that are in the best interest of the organization employing
them.

FALSE
Rational managers will often make decisions that are in their best personal interest.

AACSB: Analytic
Difficulty: Easy
Topic Area: Why a Management Control System?

4. Decentralization is the delegation of the authority to make decisions in the organization's name to
subordinates.

TRUE
This is the definition of decentralization.

AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
Topic Area: Decentralized organizations

5. In general, organizations are more centralized in the early stages of their existence and more
decentralized as they grow.

TRUE
Decentralization normally is the result of growth.

AACSB: Analytic
Difficulty: Easy

6. One advantage of decentralization is faster response time to changes in the organization's environment
by local managers.

TRUE
Local managers have the authority to make decisions, so the response time is faster.

AACSB: Analytic
Difficulty: Easy
Topic Area: Advantages of Decentralization

7. One advantage of centralization is better use of top management's time on strategic decisions.

FALSE
In a centralized system top management is required to make many operating decisions, so there is less
time for strategic decision making.

AACSB: Analytic
Difficulty: Easy
Topic Area: Disadvantages of Decentralization

8. Properly developed and implemented management control systems influence subordinates to act in the
organization's best interest.

TRUE
A properly designed system will promote goal congruence.

AACSB: Analytic
Blooms: Application
Difficulty: Easy
Topic Area: Elements of a Management Control System

9. Delegated decision authority is the specification of what decisions a subordinate can make in the
organization.

TRUE
Authority defines what a person can and cannot do.

AACSB: Analytic
Difficulty: Easy

10. It is important to not consider an organization's compensation and reward system when designing its
performance evaluation system.

FALSE
It is important to consider the system.

AACSB: Analytic
Difficulty: Medium

11. Managers in a cost center are held responsible for both the costs and volumes of inputs used to produce
a product or provide a service.

TRUE
The manager does not have control over the price of the output, nor authority over it.

AACSB: Analytic
Difficulty: Easy
Topic Area: Cost Centers

12. In general, profit centers are found at higher levels in an organization than investment centers.

FALSE
Investment centers are found at higher levels.

AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
Topic Area: Investment Centers

13. Properly designed management control systems can totally eliminate the inherent conflict between
individual behavior and organizational goals.

FALSE
Conflict cannot be totally eliminated.

AACSB: Analytic
Difficulty: Hard
Topic Area: Responsibility Centers and Organization Structure

14. There is no single accounting measure that can fully measure the performance of a profit or investment
center.

TRUE
There is no one single perfect measure.

AACSB: Analytic
Difficulty: Medium
Topic Area: Measuring Performance

15. Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured
performance.

TRUE
Contingent compensation is linked with performance.

AACSB: Analytic
Difficulty: Easy
Topic Area: Compensation Systems

16. Properly designed management control systems have both fixed compensation and contingent
compensation.

TRUE
If contingent is too small there is not enough incentive, if the proportion of contingent is too high there
is too much risk.

AACSB: Analytic
Difficulty: Easy

17. Cost allocations based on dual rates assume that a common cost can be separated into a fixed and
variable component.

TRUE
The dual refers to fixed and variable.

AACSB: Analytic
Difficulty: Medium
Topic Area: Effective Corporate Cost Allocation System

18. The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation
on factors under the manager's direct control.

TRUE
The allocation reflects the cost behavior.

AACSB: Analytic
Difficulty: Hard

19. It is possible for performance evaluation systems and/or management control systems to contribute to
unethical or fraudulent behavior.

TRUE
Systems do not guarantee ethical behavior.

AACSB: Analytic
Difficulty: Medium
Topic Area: Do Performance Evaluation Systems Create Incentives to Commit Fraud?

20. Properly designed management control systems will eliminate fraudulent behavior by maximizing goal
congruence within the organization.

FALSE
Fraud cannot be eliminated by control systems, it can only be reduced.

AACSB: Analytic
Difficulty: Medium

21. Which of the following statements is (are) true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and
implements decisions.
(B) Rational managers will always make decisions that are in the best interest of the organization
employing them.

A. Only A is true.
B. Only B is true.
Rational managers will not always make the best decisions for the organization.

AACSB: Analytic
Difficulty: Easy
Topic Area: Alignment of Managerial and Organizational Interests

22. Decentralization refers to the delegation of decision-making authority to

A. top management.
B. superiors.
C. board of directors.
D. subordinates.
Delegation is to the subordinates; delegation is from the superiors/top management.

AACSB: Analytic
Difficulty: Easy

23. Which of the following is not a characteristic of a decentralized organization?

A. better use of local knowledge
B. better use of top management's time
C. reduced response time to environmental changes
D. more decisions made by relatively few individuals
Decisions are made by more individuals, not fewer, under decentralization.

AACSB: Analytic
Difficulty: Easy

24. Which of the following statements is false?

A. The U.S. military is a good example of an organization that is highly decentralized.
B. The degree of decentralization depends on how many decisions principals delegate to agents.
C. Management control systems are used to measure the performance of an agent's decisions.
D. Most organizations have some operating units that are centralized and some that are decentralized.
The U.S. military is a centralized organization.

AACSB: Analytic
Difficulty: Easy

25. Which of the following elements is not part of a management control system?

A. delegated decision authority
B. performance evaluation system
C. knowledge of local conditions
D. compensation and reward system
Knowledge of local conditions is an advantage of a decentralized organization, not an element of
management control.

AACSB: Analytic
Difficulty: Easy

26. An operating unit of an organization is called a cost center if it is responsible

A. only for costs.
This is the definition of a cost center.

AACSB: Analytic
Difficulty: Easy
Topic Area: Delegated Decision Authority: Responsibility Accounting

27. An operating unit of an organization is called an investment center if it is responsible

A. only for costs.
This is the definition of an investment center.

AACSB: Analytic
Difficulty: Easy

28. An operating unit of an organization is called a revenue center if it is responsible

A. only for costs.
This is the definition of a revenue center.

AACSB: Analytic
Difficulty: Easy

29. An operating unit of an organization is called a profit center if it is responsible

A. only for costs.
This is the definition of a profit center.

AACSB: Analytic
Difficulty: Easy

30. An operating unit that is responsible for revenues and costs is commonly referred to as a(n)

A. expense center.
B. revenue center.
C. profit center.
D. asset center.
Revenues - costs = profit.

AACSB: Analytic
Difficulty: Easy

31. An operating unit that is responsible for revenues only is commonly referred to as a(n)

A. expense center.
B. revenue center.
C. profit center.
D. asset center.
This is the definition of a revenue center.

AACSB: Analytic
Difficulty: Easy

32. An operating unit that is responsible for only costs is commonly referred to as a(n)

A. cost center.
B. revenue center.
C. profit center.
D. asset center.
This is the definition of a cost center.

AACSB: Analytic
Difficulty: Easy

33. When managers are held responsible for costs but the input-output relationship is not well specified,
a(n) ________________________ is established.

B. revenue center
D. asset center
Key is input-output not well established.

AACSB: Analytic
Difficulty: Easy

34. When managers are held responsible for costs and the input-output relationship is well specified, a(n)
________________________ is established.

B. revenue center
D. asset center
Key is the well specified input-output.

AACSB: Analytic
Difficulty: Easy

35. Decentralized organizations can delegate authority and still maintain control and monitor managers'
performance by designing appropriate management control systems. Which of the following
responsibility centers would be evaluated similar to an independent business?

A. profit center
B. revenue center
C. investment center
D. discretionary cost center
An investment center has authority over profits and can make asset decisions, just like an independent
business. The key is "asset decisions."

AACSB: Analytic
Blooms: Application
Difficulty: Easy


A. a
B. b
C. c
D. d
Both are responsible for revenues and costs.

AACSB: Analytic
Difficulty: Easy


A. a
B. b
C. c
D. d
Cost centers do not have authority over revenues.

AACSB: Analytic
Difficulty: Easy


A. a
B. b
C. c
D. d
Profit centers have revenue authority, cost centers do not.

AACSB: Analytic
Difficulty: Easy


A. a
B. b
C. c
D. d
Only investment centers have asset authority.

AACSB: Analytic
Difficulty: Medium


A. a
B. b
C. c
D. d
Neither have asset authority.

AACSB: Analytic
Difficulty: Medium

41. A manager makes a decision that is beneficial for a specific investment center but not for the entire
organization. From the organization's perspective, this decision results in

A. goal congruence.
B. decentralization.
C. contingent compensation.
D. fixed compensation.
This is a definition of goal congruence.

AACSB: Analytic
Difficulty: Medium
Topic Area: Measuring Performance

42. The controllability concept states that managers should be held responsible for

A. all items over which they have decision-making authority.
B. costs and revenues, but not investments in assets used in their division.
C. only items that are allocated to their divisions on a per-unit basis.
D. fixed compensation items, but not contingent compensation items.
This is the definition of controllability.

AACSB: Analytic
Difficulty: Easy
Topic Area: Evaluating Performance

43. Relative performance evaluations (RPE) are not designed to

A. compare managers to other comparable managers.
B. compare divisions with other comparable divisions.
C. remove the effect of environmental factors that are beyond a manager's control.
D. restate departmental goals so meaningful comparisons can be made.
Goals are not restated. RPE defines what is being compared against.

AACSB: Analytic
Difficulty: Easy

44. Which of the following items would be classified as a fixed compensation item?

C. Stock options
D. Piece rates
Salaries are fixed amounts, the other three vary.

AACSB: Analytic
Difficulty: Easy

45. Which of the following items would not be classified as a contingent compensation item?

C. Stock options
D. Piece rates
Salaries are fixed amounts, the other three vary.

AACSB: Analytic
Difficulty: Easy

46. Which of the following statements is (are) true regarding compensation?
(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of
measured performance.
(B) Properly designed management control systems have contingent compensation items but not fixed
compensation items.

A. Only A is true.
B. Only B is true.
Both fixed and contingent compensation should be included.

AACSB: Analytic
Difficulty: Easy

47. The use of dual rates in a cost allocation system assumes that common costs can be

A. separated into their fixed and variable components.
B. traced directly to a specific division or manager.
C. allocated based on a physical quantities measure.
D. assigned to an investment responsibility center.
Dual allocation needs the fixed/variable breakdown.

AACSB: Analytic
Difficulty: Easy

48. Which of the following statements is (are) false regarding the effective use of management control
systems?
(A) In general, single rate cost allocations should not be used in management control systems because
clear control over the cost being allocated cannot be determined.
(B) The primary reason to use a dual rate allocation system is to focus a manager's performance
evaluation on factors under the manager's direct control.

A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.
Both are true.

AACSB: Analytic
Difficulty: Easy

49. Examples of pressures that can lead to financial fraud do not include

A. unrealistic budgets.
B. inappropriate bonus plans.
C. overemphasis on long-term results.
D. overemphasis on short-term results.
Fraud is almost always short-term.

AACSB: Analytic
Difficulty: Easy

50. The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies

A. use investment centers to evaluate top managers.
B. report on the adequacy of the company's internal controls over financial reporting.
C. compensate managers with fixed compensation plans only.
D. eliminate stock options for managerial compensation.
Sarbanes-Oxley does not reference stock options.

AACSB: Analytic
AICPA: FN-Risk Analysis
Difficulty: Medium
Topic Area: Internal Controls to Protect Assets and Provide Quality Information

51. Which of the following is not an internal control?

A. rotating personnel among tasks.
B. separation of duties.
C. setting limits on the amount of expenditures.
D. using absolute performance standards.
Absolute performance standards are not part of internal control.

AACSB: Analytic
Difficulty: Medium

52. Internal controls include all of the following except:

A. using contingent compensation plans.
B. requiring management authorization for the use of a company's assets.
C. reconciling various sets of books.
D. requiring employees to take vacations.
Internal controls do not address contingent or fixed compensation.

AACSB: Analytic
Difficulty: Medium

Boxes-2-Go has two divisions, large and small, that share the common costs of the company's

Lanen - Chapter 12

allocates common costs based on the number of calls?

A. $10.00
B. $15.00
C. $20.00
D. $25.00
[$4,500,000/(100,000 + 80,000)] = $25.00

AACSB: Analytic
Blooms: Application
Difficulty: Easy
Topic Area: Incentive Problems with Allocated Costs

allocates common costs based on the time on the network?

A. $10.98
B. $10.00
C. $8.00
D. $7.14
[$4,500,000/(120,000 + 330,000)] = $10.00

AACSB: Analytic
Blooms: Application
Difficulty: Easy

55. The cost accountant determined $2,700,000 of the communication network's costs were fixed and
should be allocated based on the number of calls. The remaining costs should be allocated based on
the time on the network. What is the total communication network costs allocated to the Large Box
Division assuming the company uses dual-rates to allocate common costs?

A. $2,700,000
B. $2,520,000
C. $1,980,000
D. $1,500,000
(100,000/180,000 $2,700,000) + (120,000/450,000 $1,800,000) = $1,980,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

56. The cost accountant determined $2,700,000 of the communication network's costs were fixed and
should be allocated based on the number of calls. The remaining costs should be allocated based on the
time on the network. What is total communication network costs allocated to the Small Box Division
assuming the company uses dual-rates to allocate common costs?

A. $2,520,000
B. $1,800,000
C. $1,320,000
D. $1,200,000
(80,000/180,000 $2,700,000) + (330,000/450,000 $1,800,000) = $2,520,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

The Copy Department in the College of Business at State University provides photocopying service for
both the Marketing and Economics Department. The following budget has been prepared for the year.

Lanen - Chapter 12

allocated to the Marketing Department?

A. $85,000
B. $90,000
C. $150,000
D. $170,000
(3,600,000/5,400,000 $120,000) + [$.025 3,600,000] = $170,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

allocated to the Economics Department?

A. $85,000
B. $90,000
C. $105,000
D. $120,000
(1,800,000/5,400,000 $120,000) + [$.025 1,800,000] = $85,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

Economics Department, assuming the Economics Department actually made 2,100,000 copies during
the year?

A. $85,000
B. $92,500
C. $132,500
D. $112,500
(1,800,000/5,400,000 $120,000) + [$.025 2,100,000] = $92,500

AACSB: Analytic
Blooms: Application
Difficulty: Easy

year?

A. $135,000
B. $150,000
C. $155,000
D. $170,000
(3,600,000/5,400,000 $120,000) + [$.025 3,000,000] = $155,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

Economics Department, assuming the Economics Department actually made 1,500,000 copies during
the year?

A. $77,500
B. $92,500
C. $132,500
D. $112,500
(1,800,000/5,400,000 $120,000) + [$.025 1,500,000] = $77,500

AACSB: Analytic
Blooms: Application
Difficulty: Easy

year?

A. $135,000
B. $150,000
C. $155,000
D. $175,000
(3,600,000/5,400,000 $120,000) + [$.025 3,800,000] = $175,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

Fenway Telcom has three divisions, commercial, retail and consumer, that share the common costs of
the company's computer server network. The annual common costs are $2,400,000. You have been

Lanen - Chapter 12

and allocates common costs based on the number of connections?

A. $10.00
B. $15.00
C. $20.00
D. $40.00
[$2,400,000/(60,000 + 80,000 + 100,000)] = $10.00

AACSB: Analytic
Blooms: Application
Difficulty: Easy

64. Fenway Telcom uses the single rate method and allocates common costs based on the number of
connections. What is the total computer server network cost allocated to the Commercial Division?

A. $480,000
B. $514,286
C. $600,000
D. $1,200,000
$10.00 60,000 = $600,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

and allocates common costs based on the time on the network?

A. $20.00
B. $16.00
C. $4.00
D. $2.86
[$2,400,000/(120,000 + 150,000 + 330,000)] = $4.00

AACSB: Analytic
Blooms: Application
Difficulty: Easy

66. Fenway Telcom uses the single rate method and allocates common costs based on the time on the
network. What is the total computer server network cost allocated to the Retail Division?

A. $429,000
B. $600,000
C. $657,800
D. $3,000,000
$4.00 150,000 = $600,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

time on the network. What is the total server network costs allocated to the Commercial Division
assuming the company uses dual-rates to allocate common costs?

A. $514,286
B. $480,000
C. $600,000
D. $565,000
(60,000/240,000 $1,700,000) + (120,000 ($700,000/600,000) = $565,000

AACSB: Analytic
Blooms: Application
Difficulty: Medium

time on the network. What is total server network costs allocated to the Retail Division assuming the

A. $741,667
B. $657,143
C. $425,000
D. $211,765
(80,000/240,000 $1,700,000) + (150,000 ($700,000/600,000)) = $741,667

AACSB: Analytic
Blooms: Application
Difficulty: Medium

time on the network. What is total server network costs allocated to the Consumer Division assuming
the company uses dual-rates to allocate common costs?

A. $1,200,000
B. $1,093,333
C. $954,896
D. $750,000
(100,000/240,000 $1,700,000) + (330,000 ($700,000/600,000))= $1,093,333

AACSB: Analytic
Blooms: Application
Difficulty: Medium

The Document Creation Center (DCC) for Alegis Corp. provides photocopying and document services
for three departments in the St. Paul office. The following budget has been prepared for the year.

Lanen - Chapter 12

Software Development Department?

A. $98,000
B. $104,000
C. $112,000
D. $118,857
(1,600,000/7,000,000 $280,000) + [$.03 1,600,000] = $112,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

Training Department?

A. $183,750
B. $210,000
C. $195,000
D. $222,857
(3,000,000/7,000,000 $280,000) + [$.03 3,000,000] = $210,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy

Management Department?

A. $168,000
B. $156,000
C. $178,286
D. $147,000
(2,400,000/7,000,000 $280,000) + [$.03 2,400,000] = $168,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy


A. $147,000
B. $136,500
C. $159,000
D. $150,761
(2,400,000/7,000,000 $280,000) + [$.03 2,100,000] = $159,000

AACSB: Analytic
Blooms: Application
Difficulty: Easy


A. $184,500
B. $191,750
C. $211,783
D. $206,500
(2,400,000/7,000,000 $280,000) + [$.03 2,950,000] = $184,500

AACSB: Analytic
Blooms: Application
Difficulty: Easy


A. $227,500
B. $211,250
C. $217,500
D. $223,017
(3,000,000/7,000,000 $280,000) + [$.03 3,250,000] = $217,500

AACSB: Analytic
Blooms: Application
Difficulty: Easy


A. $180,050
B. $190,079
C. $193,900
D. $203,100
(3,000,000/7,000,000 $280,000) + [$.03 2,770,000] = $203,100

AACSB: Analytic
Blooms: Application
Difficulty: Easy


A. $75,400
B. $98,800
C. $81,200
D. $84,312
(1,600,000/7,000,000 $280,000) + [$.03 1,160,000] = $98,800

AACSB: Analytic
Blooms: Application
Difficulty: Easy


A. $117,400
B. $115,700
C. $124,600
D. $129,376
(1,600,000/7,000,000 $280,000) + [$.03 1,780,000] = $117,400

AACSB: Analytic
Blooms: Application
Difficulty: Easy

79. In responsibility accounting, a center's performance is measured by those costs which are controllable.
Controllable costs are best described as including (CMA adapted)

A. direct materials and direct labor only.
B. only those costs that the manager can influence in the current period.
C. only discretionary costs.
D. those costs about which the manager is knowledgeable and informed.
E. incremental and fixed costs.
A controllable cost is one that can be influenced.

AACSB: Analytic
Difficulty: Easy

80. Rockford Manufacturing Corporation uses a responsibility accounting system in its operations. Which
one of the following items is least likely to appear in a performance report for a manager of one of
Rockford's assembly lines? (CMA adapted)

A. direct labor
B. materials
C. repairs and maintenance
D. depreciation on the manufacturing facility
E. supervisory salaries
An assembly line would be a cost center with no control over assets.

AACSB: Analytic
Blooms: Application
Difficulty: Easy

81. Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n)
(CMA adapted)

A. profit center.
B. revenue center.
C. division.
D. operating unit.
E. investment center.
Revenues and costs = profit center.

AACSB: Analytic
Difficulty: Easy
Topic Area: Profit Centers

82. When comparing performance report information for top management with that of lower-level
management, (CMA adapted)

A. top management reports are more detailed.
B. lower-level management reports are typically for longer time periods.
C. top management reports show control over fewer costs.
D. lower-level management reports are likely to contain more quantitative data and less financial data.
E. top management reports are usually not of the exception type but present a complete analysis of all
variances.
Top management reports are less detailed, long time period, and more financial oriented. Lower
management is more detailed, shorter time, and more operational.

AACSB: Analytic
Blooms: Application
Difficulty: Medium

83. The least complex segment or area of responsibility for which costs are allocated is a(n) (CMA adapted)

A. profit center.
B. investment center.
C. contribution center.
D. cost center.
E. hybrid center.
Less complex implies less responsibility. Cost centers have the least responsibility

AACSB: Analytic
Blooms: Application
Difficulty: Medium
Topic Area: Cost Centers

84. Which one of the following will not occur in an organization that gives managers throughout the
organization maximum freedom to make decisions? (CMA adapted)

A. more effective solutions to operational problems
B. individual managers regarding the managers of other segments as they do external parties
C. two divisions of the organization having competing models that aim for the same market segments
D. delays in securing approval for the introduction of new products
E. greater knowledge of the marketplace and improved service to customers
Decentralization implies less approvals.

AACSB: Analytic
Blooms: Application
Difficulty: Easy

85. Which one of the following firms is likely to experience dysfunctional motivation on the part of its
managers due to its allocation methods? (CMA adapted)

A
.
To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar Electronics
uses predetermined 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. It also uses ROI to evaluate the divisional performance.
C. Rainier Industrial does not allow its service departments to pass on their cost overruns to production
departments.
D
.
Tashkent Auto's management information system (MIS) is operated out of headquarters and serves
its various divisions. Tashkent's allocation of MIS-related costs to its divisions is limited to costs the
divisions will incur if they were to outsource their MIS needs.
E. Golkonda Refineries separately allocates fixed and variable costs incurred by its service departments
to its production departments.
Allocating on the basis of sales revenue often creates dysfunctional behavior.

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

86. Atlantic Hotels operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury, Resort, Standard, and
Budget) where a reservation is made on the basis of time on a call. Idle time of the reservation agents,
time spent on calls where no reservation is made, and the fixed cost of the equipment are allocated on
the number of reservations made in each group. Due to recent increased competition in the time-share,
the company has decided that it is necessary to more accurately allocate its costs to price its services

During this period, the cost of the computer center amounted to $2,410,000 for personnel and
$1,240,000 for equipment and other costs.
Required Determine the allocation to each of the divisions using (you may round all decimals to three
places):
other cost).

a. Luxury: $496,400; Resort: $828,550; Standard: $1,328,600; Budget: $996,450
b. Luxury: $415,800; Resort: $724,390; Standard: $1,409,200; Budget: $1,100,610

Feedback:

Totals:
Luxury: $327,760 + 88,040 = $415,800
Resort: $547,070 + 177,320 = $724,390
Standard: $877,240 + 531,960 = $1,409,200
Budget: $657,930 + 442,680 = $1,100,610

AACSB: Analytic
AICPA: FN-Measurement
Blooms: Analysis
Difficulty: Hard

87. Baltic Resorts operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury, Standard, and Budget)
where a reservation is made on the basis of time spent on a call. Due to recent increased competition in
the time-share, the company has decided that it is necessary to more accurately allocate its costs to price
its services competitively and profitably. During the current period, the use of the call center for each
group was as follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $1,760,000 for personnel and
$1,240,000 for equipment and other costs.
other cost).

a. Luxury: $375,000; Standard: $1,500,000; Budget: $1,125,000
b. Luxury: $322,920; Standard: $1,500,000; Budget: $1,177,080

Feedback:

Totals:
Luxury: $220,000 + 102,920 = $322,920
Standard: $880,000 + 620,000 = $1,500,000
Budget: $660,000 + 517,080 = $1,177,080

AACSB: Analytic
Blooms: Analysis
Difficulty: Hard

88. Caspian Resorts operates a centralized call center for the reservation needs of its time-share units.
Costs associated with use of the center are charged to the time-share group (Luxury and Standard)
where a reservation is made on the basis of time spent on a call. Due to recent increased competition in
the time-share, the company has decided that it is necessary to more accurately allocate its costs to price
its services competitively and profitably. During the current period, the use of the call center for each
group was as follows (in thousands of seconds for time usage and in number of reservations):

During this period, the cost of the computer center amounted to $1,220,000 for personnel and $960,000
other cost).

a. Luxury: $436,000; Standard: $1,744,000
b. Luxury: $381,280; Standard: $1,798,720

Feedback:

Totals:
Luxury: $244,000 + 137,280 = $381,280
Standard: $976,000 + 822,720 = $1,798,720

AACSB: Analytic
Blooms: Analysis
Difficulty: Hard

89. The Document Creation Center (DCC) for Aelerion Corp. provides document services for three
departments in the Denver office. The following budget has been prepared for the month.

a. If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the
three user departments?

Software Development: $11,000; Training: $20,625; Management: $23,375

Feedback:

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium


a. If Buffet uses a dual rate for allocating its costs based on usage, how much cost will be allocated to
the four user departments?

Purchasing: $34,800; Marketing: $43,500; Training: $65,250; Management: $73,950

Feedback:

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

91. The human resources department for Hammond Corp. provides personnel services for two departments
in the Chicago office. The following budget has been prepared for the month.

a. If Hammond uses a dual rate for allocating its costs based on employees, how much cost will be
allocated to the two departments?

Production: $57,190; Management: $9,310

Feedback:

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

92. The Document Creation Center (DCC) for Aelerion Corp. provides document services for three
departments in the Denver office. The following budget has been prepared for the month.


a. If DCC uses a dual rate for allocating its costs; allocating fixed costs based on number of documents
and variable costs based on number of pages, how much cost will be allocated to the three user
departments?

Software Development: $19,277; Training: $39,759; Management: $39,027

Feedback:

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium



a. If Buffet uses a dual rate for allocating its costs, allocating fixed costs based on number of contracts
and variable costs based on number of pages reviewed, how much cost will be allocated to the four user
departments?

Purchasing: $62,940; Marketing: $93,956; Training: $132,264; Management: $82,850

Feedback:

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

94. Wrigley Services has three divisions, commercial, retail and consumer, that share the common costs


a. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Wrigley uses the single-rate method and
c. The cost accountant determined $850,000 of the server network's costs were fixed and should be
time on the network. What is the total server network costs allocated to each division?

a. Rate: $10/connection; Commercial: $300,000; Retail: $400,000; Consumer: $500,000
b. Rate: $2/hour; Commercial: $240,00; Retail: $300,000; Consumer: $660,000
c. Commercial: $282,460; Retail: $370,500; Consumer: $546,840

Feedback: a. rate: $1,200,000/(30,000 + 40,000 + 50,000) = $10/connection
Commercial: 30,000 $10 = $300,00; Retail: 40,000 $10 = $400,000; Consumer: 50,000 $10 =
$500,000
b. rate: $1,200,000/(120,000 + 150,000 + 330,000) = $2/hour
$660,000

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

95. Comiskey has four divisions, commercial, retail, research and consumer, that share the common costs


a. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Comiskey uses the single-rate method and
c. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be

a. Rate: $8.571/connection; Commercial: $514,260; Retail: $685,680; Research: $342,840; Consumer:
$857,100
b. Rate: $3.429/hour; Commercial: $411,480; Retail: $514,350; Research: $342,900; Consumer:
$1,131,570
c. Commercial: $483,800; Retail: $636,200; Research: $343,100; Consumer: $936,900

Feedback: a. rate: $2,400,000/(60,000 + 80,000 + 40,000 + 100,000) = $8.571/connection
Commercial: 60,000 $8.571 = $514,260; Retail: 80,000 $8.571 = $685,680; Research: 40,000
$8.571 = $342,840; Consumer: 100,000 $8.571 = $857,100
b. rate: $2,400,000/(120,000 + 150,000 + 100,000 + 330,000) = $3.429/hour
Commercial: 120,000 $3.429 = $411,480; Retail: 150,000 $3.429 = $514,350; Research: 100,000
$3.429 = $342,900; Consumer: 330,000 $3.429 = $1,131,570

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

96. Jacobs Corp. has three divisions, commercial, retail and consumer, that share the common costs of
the company's computer server network. The annual common costs are $2,400,000. You have been


a. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Jacobs uses the single-rate method and

a. Rate: $10/connection; Commercial: $600,000; Retail: $800,000; Consumer: $1,000,000
b. Rate: $4/hour; Commercial: $480,000; Retail: $600,000; Consumer: $1,320,000

Feedback: (need to show rate in answer for a & b because asked for it in problem)
a. rate: $2,400,000/(60,000 + 80,000 + 100,000) = $10/connection
$1,000,000
b. rate: $2,400,000/(120,000 + 150,000 + 330,000) = $4/hour
$1,320,000

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

97. Marlin has three divisions, commercial, retail and consumer, that share the common costs of the
company's computer server network. The annual common costs are $2,400,000. You have been



Commercial: $570,000; Retail: $749,600; Consumer: $1,080,600

Feedback:

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

98. Sanper Corp. has four divisions, commercial, retail, research, and consumer, that share the common
costs of the company's computer server network. The annual common costs are $3,500,000. You have
been provided with the following information for the upcoming year:


a. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method and
allocates common costs based on the number of connections?
b. What is the allocation rate for the upcoming year assuming Sanper uses the single-rate method and

a. Commercial: $875,000; Retail: $1,125,000; Research: $250,000; Consumer: $1,250,000
b. Commercial: $600,000; Retail: $750,000; Research: $500,000; Consumer: $1,650,000

Feedback: a. rate: $3,500,000/(70,000 + 90,000 + 20 000 + 100,000) = $12.50/connection
Commercial: 70,000 $12.50 = $875,000; Retail: 90,000 $12.50 = $1,125,000; Research: 20,000
$12.50 = $250,000; Consumer: 100,000 $12.50 = $1,250,000
b. rate: $3,500,000/(120,000 + 150,000 + 100,000 + 330,000) = $5/hour
Commercial: 120,000 $5 = $600,000; Retail: 150,000 $5 = $750,000; Research: 100,000 $5 =
$500,000; Consumer: 330,000 $5 = $1,650,000

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

99. Charleston has four divisions, commercial, retail, research, and consumer, that share the common costs



Commercial: $752,000; Retail: $944,000; Research: $324,000; Consumer: $1,580,000

Feedback:

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

100. Redding has two divisions, Production and Support, that share the common costs of the company's

a. What is the allocation rate for the upcoming year assuming Redding uses the single-rate method and
b. What is the allocation rate for the upcoming year assuming Redding uses the single-rate method and
c. The cost accountant determined $2,700,000 of the communication network's costs were fixed and
time on the network. What is the total communication network costs allocated to each division?

a. Rate: $12.50/call; Production: $2,500,000; Support: $2,000,000
b. Rate: $5/hour; Production: $1,200,000; Support: $3,300,000
c. Production: $1,981,200; Support: $2,518,800

Feedback: a. rate: $4,500,000/(200,000 + 160,000) = $12.50/call
Production: 200,000 $12.50 = $2,500,000; Support: 160,000 $12.50 = $2,000,000
b. rate: $4,500,000/(240,000 + 660,000) = $5/hour
Production: 240,000 $5 = $1,200,000; Support: 660,000 $5 = $3,300,000

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

101. Salinas has two divisions, Marketing and Finance, that share the common costs of the company's


a. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method and
b. What is the allocation rate for the upcoming year assuming Salinas uses the single-rate method
and allocates common costs based on the time on the network? Calculate the costs allocated to each
division.

a. Rate: $25/call; Marketing: $1,250,000; Finance: $1,000,000
b. Rate: $5/hour; Marketing: $600,000; Finance: $1,650,000

Feedback: a. rate: $2,250,000/(50,000 + 40,000) = $25/call
Marketing: 50,000 $25 = $1,250,000; Finance: 40,000 $25 = $1,000,000
b. rate: $2,250,000/(120,000 + 330,000) = $5/hour
Marketing: 120,000 $5 = $600,000; Finance: 330,000 $5 = $1,650,000

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

102. Tofte has two divisions, Research and Sales, that share the common costs of the company's


a. The cost accountant determined $1,350,000 of the communication network's costs were fixed and
time on the network. What is the total communication network costs allocated to each division?

a. Research: $990,600; Sales: $1,259,400

Feedback:

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

103. The Black Swan Company has three client-contact departments: Market Research, Branding, and
undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information
on the Legal Department's budgeted and actual costs is as follows:
The budget for the Legal Dept is $300,000 + $10/contract. The budgeted volume of contracts is as
follows:

was 720.

a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal
Department would be allocated to each of the producing departments?
b. If a dual charging rate is used, how much of the cost of the Legal Department would be allocated to
each of the producing departments

a. Market Research: $66,150; Branding: $94,500; Promotion: $151,200
b. Market Research: $63,150; Branding: $104,400; Promotion: $147,300

Feedback: a. rate = [$300,000 + $10 (300 + 500 + 700)]/(300 + 500 + 700) = $210/contract
Market Research: 315 $210 = $66,150; Branding: 450 $210 = $94,500; Promotion: 720 $210 =
$151,200

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

The budget for the Legal Dept is $200,000 + $7.50/contract. The budgeted volume of contracts is as
follows:

was 675.


Feedback: a. rate = [$200,000 + $7.50 (300 + 500 + 700)]/(300 + 500 + 700) = $140.833/contract
Market Research: 286 $140.833 = $40,278; Branding: 450 $140.833 = $63,375; Promotion: 675
$140.833 = $95,062

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

The budget for the Legal Dept is $400,000 + $15/contract. The budgeted volume of contracts is as
follows:

was 820.


Feedback: a. rate = [$400,000 + $15 (200 + 500 + 800)]/(200 + 500 + 800) = $281.667/contract
Market Research: 207 $281.667 = $58,305; Branding: 512 $281.667 = $144,214; Promotion: 820
$281.667 = $230,967

AACSB: Analytic
Blooms: Analysis
Difficulty: Medium

106. Describe five advantages of decentralization.

1. Better use of local knowledge; 2. faster response; 3. wiser use of top management's time; 4. reduction
of problems to manageable size, and 5) training, evaluation, and motivation of local managers.

AACSB: Analytic
Difficulty: Medium

107. Describe two disadvantages of decentralization.

One disadvantage is that local managers can make decisions that are not in the best interests of the
organization as a whole. Second, decentralization will create administrative duplication.

AACSB: Analytic
Difficulty: Medium
Topic Area: Disadvantages of Decentralization

108. Describe the three main elements of a management control system.

1) Delegated decision authority is what decisions a subordinate manager can make in the name of
the organization. 2) Performance evaluation and measurement system: how the performance of
the subordinate manager is to be measured and how the results of the measurement will be used in
evaluation. 3) Compensation and reward systems: how will the subordinate manager be paid for his/her
performance.

AACSB: Analytic
Blooms: Application
Difficulty: Medium

109. Describe the five basic types of decentralized units in responsibility accounting.

1) Cost Center: responsible for the cost of the activity of a center with a well defined input-output
relationship. 2) Discretionary Cost Center: responsible for the cost of the activity of a center where the
input-output relationship is not well specified. 3) Revenue Center: responsible for selling a product. 4)
Profit Center: has responsibility for both costs and revenues. 5) Investment Center: has responsibility
for costs and revenues (profits) and also the investment in assets.

AACSB: Analytic
Difficulty: Medium

110. Explain the difference between fixed compensation and contingent compensation. Give an example of
each.

Fixed compensation is paid to the manager independent of measured performance. A manager's salary
is an example. Contingent compensation is the amount of compensation that is paid based on measured
performance. Sales commissions would be an example of this.

AACSB: Analytic
Difficulty: Medium

ch12 Summary

Category # of Questions
AACSB: Analytic 110
AICPA: FN-Decision Making 87
AICPA: FN-Measurement 20
AICPA: FN-Risk Analysis 3
Blooms: Analysis 21
Blooms: Application 33
Blooms: Comprehension 54
Blooms: Knowledge 2
Difficulty: Easy 64
Difficulty: Hard 5
Difficulty: Medium 41
Lanen - Chapter 12 114
Learning Objective: 1 4
Topic Area: Advantages of Decentralization 3
Topic Area: Alignment of Managerial and Organizational Interests 2
Topic Area: Compensation Systems 6
Topic Area: Cost Centers 2
Topic Area: Decentralized organizations 5
Topic Area: Delegated Decision Authority: Responsibility Accounting 16
Topic Area: Disadvantages of Decentralization 2
Topic Area: Do Performance Evaluation Systems Create Incentives to Commit Fraud? 4
Topic Area: Effective Corporate Cost Allocation System 44
Topic Area: Elements of a Management Control System 5
Topic Area: Evaluating Performance 5
Topic Area: Incentive Problems with Allocated Costs 6
Topic Area: Internal Controls to Protect Assets and Provide Quality Information 3
Topic Area: Investment Centers 1
Topic Area: Measuring Performance 2
Topic Area: Profit Centers 1
Topic Area: Responsibility Centers and Organization Structure 1
Topic Area: Why a Management Control System? 2

Management Control Systems MCQ

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