Question 1

An investment center is responsible for:

Accepted Answer

All of the options listed

Answer

Controlling costs

Answer

Investing in long term assets

Answer

Generating revenues

Question 2

Cost centers are often evaluated using:

Accepted Answer

Variance analysis

Answer

Return on investment

Answer

Operating margin

Answer

Residual income

Question 3

Profit centers are often evaluated using:

Accepted Answer

Income targets or profit budgets

Answer

Residual income

Answer

Return on investment

Answer

Investment turnover

Question 4

Which of the following are benefits of ROI? (Select ALL that applies)

Question 5

Problems with ROI (Select ALL that applies)

Question 6

Investment centers are often evaluated using:

Accepted Answer

Both return on investment and Residual income/EVA

Answer

Standard cost variances

Answer

Residual income/EVA

Answer

Return on investment

Question 7

Divisions and their managers are evaluated for all of the following reasons EXCEPT?

Accepted Answer

To determine the real managers of the firm

Answer

To identify successful operations and areas needing improvement

Answer

To decide if the division should expanded or contracted or change their operations

Answer

To influences the behavior of managers

Answer

To motivate them to take actions that maximize the value of the firm

Question 8

Which of the following measures do NOT serve a similar purpose as Economic Value Added (EVA)?

Accepted Answer

Return On Capital Employed (ROCE)

Answer

Shareholder Value Added (SVA)

Answer

Market Value Added (MVA)

Answer

Total Shareholders Return (TSR)

Question 9

What does it mean when the EVA is positive?

Accepted Answer

The management has created value for the shareholders

Answer

The management has destroyed shareholders value

Answer

The company is profitable

Answer

Nothing, it's an absolute number

Question 10

What does it mean when the EVA is negative?

Accepted Answer

The management has destroyed shareholders value

Answer

Nothing, it's an absolute number

Answer

The management has created value for the shareholders

Answer

The company is in a loss making position

Question 11

Which of the following is NOT an advantage of EVA?

Accepted Answer

Can suffer from focus on short term performance like many other measures.

Answer

Treatment of certain costs as investments thereby encouraging expenditure.

Answer

An absolute value thus easier to interpret by non-financial managers

Answer

Less distortion by accounting principles. The figures used are closer to cash flows than accounting profits

Answer

Maximization of EVA will create real wealth for shareholders.

Question 12

Which of the following is a NOT weakness of EVA?

Accepted Answer

Treatment of certain costs as investments thereby encouraging expenditure.

Answer

The number of adjustments needed to measure EVA

Answer

Difficulty in estimating WACC

Answer

Dependency on historical data which may be of limited use in determining the future

Answer

Comparison is difficult as EVA is an absolute number

Question 13

The criteria to be used in designing a good transfer pricing policy does NOT include?

Accepted Answer

ensure that the best performing division gets the highest price if selling or the lowest price if buying

Answer

ensure goal congruence between the divisions and the parent company

Answer

maintain a suitable level of managerial autonomy within each division

Answer

ensure that there is a fair performance measurement for all divisions

Question 14

A division that has an external market for its product should use

Accepted Answer

adjusted market-based price (market-based price less admin costs such as transportation and marketing)

Answer

total costs only

Answer

market-based price

Answer

cost price plus a markup

Question 15

A division that has no external market for its product (i.e. product can only be sold internally) should use (Choose the best option)

Accepted Answer

total standard costs

Answer

adjusted market-based price (market price less admin costs such as transportation and marketing)

Answer

total actual costs

Answer

market-based price

Question 16

Ideally transfers should be done using (Choose the best option)

Accepted Answer

variable/marginal costs

Answer

total standard costs

Answer

dual pricing

Answer

market-based price

Question 17

Where limitations exists on capacity, transfers should be done using

Accepted Answer

variable costs + loss contribution from sales of the product forgone.

Answer

total cost

Answer

actual costs

Answer

marginal cost

Question 18

Which one of the following is most suitable for evaluating the performance of a manager in charge of a division?

Accepted Answer

Controllable profit

Answer

Contribution

Answer

Divisional pre-tax profit

Answer

Profit before head office charges

Question 19

Which one of the following responsibility centres has independent control of its sales income and its fixed assets?

Accepted Answer

Investment centre

Answer

Cost centre

Answer

Profit centre

Answer

Revenue centre

Question 20

Which one of the following does NOT describe a type of transfer pricing?

Accepted Answer

target-based price

Answer

cost-based price

Answer

negotiation-based price

Answer

market-based price

Question 21

Controllable costs, as used in a responsibility accounting system, consist of:

Accepted Answer

those costs that a manager can influence in the time period under review.

Answer

only fixed costs

Answer

those costs about which a manager has some knowledge.

Answer

only direct materials and direct labor.

Question 22

Which of the following statements regarding transfer pricing is false?

Accepted Answer

the goal of transfer pricing is to provide segment managers with incentives to maximize the profits of their divisions.

Answer

No contribution margin is generated by the transferring division when variable cost-based transfer prices are used

Answer

When idle capacity exists, there is no opportunity cost to producing intermediate products for another division

Answer

Market-based transfer prices should be reduced by any costs avoided by selling internally rather than externally

Question 23

Which statement below is FALSE?

Accepted Answer

The net profit arrived at after items which are not under managers’ control are added back is known as the ‘traceable profit’.

Answer

Divisional performance should be evaluated on all the items which relate directly to the division which is its ‘traceable profit’.

Answer

A difficulty with calculating controllable and traceable profits may be that at times it is difficult to determine which items are controllable or traceable and which are not.

Answer

Allocated head office costs do not directly reflect the activity of the division and should be excluded when calculating the traceable profit.

Question 24

Division A produces a product used by Division B. Division A's product does not have an external market. How should Division A be treated and what should be the transfer pricing policy?

SELECT ALL that's appropriate

Question 25

Which statement below is NOT a disadvantage of market-based transfer prices

Accepted Answer

Best price may be market price if an external market exists

Answer

There may be no equivalent product on which to set a market value price

Answer

Market price may discourage divisions from utilizing spare capacity in the selling division

Answer

Setting a market-based transfer price may be difficult because the market price may be only temporary

Question 26

Factors to consider when setting international transfer prices include all the following EXCEPT

Accepted Answer

Size of the fixed costs

Answer

Exchange rates

Answer

The corporation tax rate (at home versus abroad)

Answer

Import tariffs and anti-dumping legislation

Question 27

Calculate the EVA from the figures below:

Accepted Answer

0

Answer

8050

Answer

45

Answer

245

Answer

200

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