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Exam 8: Performance Evaluation for Decentralized Operations

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Question 31

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The minimum amount of desired divisional income from operations is set by top management by establishing a maximum rate of return considered acceptable for invested assets.

A) True
B) False

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Question 32

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Which of the following would not be considered an internal centralized service department?

A) Payroll accounting department
B) Manufacturing department
C) Information systems department
D) Purchasing department

E) A) and B)
F) C) and D)

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Question 33

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The major advantage of the rate of return on investment over income from operations as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated.

The best measure of managerial efficiency in the use of investments in assets is:

Depreciation expense on store equipment for a department store is an indirect expense.

Service department charges are similar to the expenses of a profit center that purchased services from a source outside the company.

Assume that Division J has achieved income from operations of $165,000 using $900,000 of invested assets. If management desires a minimum rate of return of 11%, the residual income is:

The sales, income from operations, and invested assets for each division of Wren Company are as follows:

Identify the formula for the rate of return on investment.

The major shortcoming of income from operations as an investment center performance measure is that it ignores the amount of revenues earned by the center.

A responsibility center in which the department manager has responsibility for and authority over costs, revenues, and assets invested in the department is termed a cost center.

The profit margin component of rate of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar.

Match the following terms with the best definition given below.

Sales commissions expense for a department store is an example of a direct expense.

A portion of the divisional income statement for the year just ended is presented below in condensed form.

If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on investment is 9.6%.

The excess of divisional income from operations over a minimum amount of divisional income from operations is termed:

A manager in a cost center also has responsibility and authority over the revenues and the costs.

Investment centers differ from profit centers in that they

Property tax expense for a department store's store equipment is an example of a direct expense.