Chapter 10
Decentralization
True/False
1. Suppose a company evaluates divisional performance using both ROI and residual income. The
company’s minimum required rate of return for the purposes of residual income calculations is 12%. If a
division has a residual income of $6,000, then its ROI is less than 12%.
Level: Medium LO: 1,2 Ans: F
2. Return on investment (ROI) encourages managers to accept all investment decisions that will benefit
the company as a whole when it is used as a measure of performance.
Level: Medium LO: 1 Ans: F
3. Just-in-time practices improve return on investment (ROI) by decreasing turnover.
Level: Hard LO: 1 Ans: F
4. Under a responsibility accounting system, fewer expenses are charged against managers the higher one
moves upward in an organization.
Level: Medium LO: 3 Ans: F
5. Responsibility accounting functions most effectively in decentralized organizations.
Level: Easy LO: 3 Ans: T
6. In a strongly centralized organization there is a large amount of freedom to make decisions at all levels
of management.
Level: Easy LO: 3 Ans: F
7. All profit centers are responsibility centers, but not all responsibility centers are profit centers.
Level: Medium LO: 3 Ans: T
Multiple Choice
8. Managerial performance can be measured in many different ways including return on investment (ROI)
and residual income. A good reason for using residual income instead of ROI is:
A) Residual income can be computed without having to measure operating assets.
B) Managers are more likely to accept projects that are beneficial to the company.
C) ROI does not take into account both turnover and margin.
D) A minimum rate of return does not have to be specified when the residual income approach is used.
Source: CMA, adapted Level: Medium LO: 1,2 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 513
,9. Which of the following performance measures will decrease if the minimum required rate of return
increases?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1,2 Ans: B
10. Which of the following performance measures will increase if inventory decreases and all else
remains the same?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1,2 Ans: A
11. Some investment opportunities which should be accepted from the viewpoint of the entire company
may be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.
Level: Medium LO: 1 Ans: A
514 Brewer, Introduction to Managerial Accounting, 3/e
, 12. Which of the following would be an argument for using the gross cost of plant and equipment as part
of operating assets in return on investment computations?
A) It is consistent with the computation of net operating income, which includes depreciation as an
operating expense.
B) It is consistent with the balance sheet presentation of plant and equipment.
C) It eliminates the age of equipment as a factor in ROI computations.
D) It discourages the replacement of old, worn-out equipment because of the dramatic, adverse effect on
ROI.
Level: Medium LO: 1 Ans: C
13. Which of the following would not be included in operating assets in return on investment
calculations?
A) Cash.
B) Accounts Receivable.
C) Equipment
D) Factory building rented to (and occupied by) another company.
Level: Easy LO: 1 Ans: D
14. Which of the following statements is correct concerning return on investment calculations?
A) Margin equals stockholders’ equity divided by sales.
B) Return on investment equals margin divided by turnover.
C) Turnover equals return on investment divided by margin.
D) Sales equals turnover divided by margin.
Level: Hard LO: 1 Ans: C
15. All other things equal, which of the following would increase a division’s residual income?
A) Increase in expenses.
B) Decrease in average operating assets.
C) Increase in minimum required return.
D) Decrease in net operating income.
Level: Medium LO: 2 Ans: B
16. The basic objective of the residual income approach to performance measurement and evaluation is to
have a division maximize its:
A) return on investment (ROI).
B) cash flows.
C) cash flows in excess of a desired minimum amount.
D) net operating income in excess of a minimum return.
Source: CMA, adapted
Level: Medium LO: 2 Ans: D
Brewer, Introduction to Managerial Accounting, 3/e 515
Decentralization
True/False
1. Suppose a company evaluates divisional performance using both ROI and residual income. The
company’s minimum required rate of return for the purposes of residual income calculations is 12%. If a
division has a residual income of $6,000, then its ROI is less than 12%.
Level: Medium LO: 1,2 Ans: F
2. Return on investment (ROI) encourages managers to accept all investment decisions that will benefit
the company as a whole when it is used as a measure of performance.
Level: Medium LO: 1 Ans: F
3. Just-in-time practices improve return on investment (ROI) by decreasing turnover.
Level: Hard LO: 1 Ans: F
4. Under a responsibility accounting system, fewer expenses are charged against managers the higher one
moves upward in an organization.
Level: Medium LO: 3 Ans: F
5. Responsibility accounting functions most effectively in decentralized organizations.
Level: Easy LO: 3 Ans: T
6. In a strongly centralized organization there is a large amount of freedom to make decisions at all levels
of management.
Level: Easy LO: 3 Ans: F
7. All profit centers are responsibility centers, but not all responsibility centers are profit centers.
Level: Medium LO: 3 Ans: T
Multiple Choice
8. Managerial performance can be measured in many different ways including return on investment (ROI)
and residual income. A good reason for using residual income instead of ROI is:
A) Residual income can be computed without having to measure operating assets.
B) Managers are more likely to accept projects that are beneficial to the company.
C) ROI does not take into account both turnover and margin.
D) A minimum rate of return does not have to be specified when the residual income approach is used.
Source: CMA, adapted Level: Medium LO: 1,2 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 513
,9. Which of the following performance measures will decrease if the minimum required rate of return
increases?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1,2 Ans: B
10. Which of the following performance measures will increase if inventory decreases and all else
remains the same?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1,2 Ans: A
11. Some investment opportunities which should be accepted from the viewpoint of the entire company
may be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.
Level: Medium LO: 1 Ans: A
514 Brewer, Introduction to Managerial Accounting, 3/e
, 12. Which of the following would be an argument for using the gross cost of plant and equipment as part
of operating assets in return on investment computations?
A) It is consistent with the computation of net operating income, which includes depreciation as an
operating expense.
B) It is consistent with the balance sheet presentation of plant and equipment.
C) It eliminates the age of equipment as a factor in ROI computations.
D) It discourages the replacement of old, worn-out equipment because of the dramatic, adverse effect on
ROI.
Level: Medium LO: 1 Ans: C
13. Which of the following would not be included in operating assets in return on investment
calculations?
A) Cash.
B) Accounts Receivable.
C) Equipment
D) Factory building rented to (and occupied by) another company.
Level: Easy LO: 1 Ans: D
14. Which of the following statements is correct concerning return on investment calculations?
A) Margin equals stockholders’ equity divided by sales.
B) Return on investment equals margin divided by turnover.
C) Turnover equals return on investment divided by margin.
D) Sales equals turnover divided by margin.
Level: Hard LO: 1 Ans: C
15. All other things equal, which of the following would increase a division’s residual income?
A) Increase in expenses.
B) Decrease in average operating assets.
C) Increase in minimum required return.
D) Decrease in net operating income.
Level: Medium LO: 2 Ans: B
16. The basic objective of the residual income approach to performance measurement and evaluation is to
have a division maximize its:
A) return on investment (ROI).
B) cash flows.
C) cash flows in excess of a desired minimum amount.
D) net operating income in excess of a minimum return.
Source: CMA, adapted
Level: Medium LO: 2 Ans: D
Brewer, Introduction to Managerial Accounting, 3/e 515
