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Unit 14: Responsibility Accounting - Practice Quiz

DEACC506 60 Questions
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1 Responsibility accounting is a system that collects and reports accounting information on the basis of:

Concept and Significance Easy
A. Market share of products
B. Areas of responsibility within an organization
C. Tax liability of the firm
D. Total company profit only

2 The main objective of responsibility accounting is to:

Concept and Significance Easy
A. Fix responsibility on managers for their controllable performance
B. Calculate income tax accurately
C. Determine dividend payments
D. Prepare the balance sheet

3 Responsibility accounting is most closely associated with which type of accounting?

Concept and Significance Easy
A. Management accounting
B. Financial accounting
C. Government accounting
D. Tax accounting

4 A key significance of responsibility accounting is that it helps in:

Concept and Significance Easy
A. Filing GST returns
B. Preparing statutory audit reports
C. Calculating goodwill
D. Performance evaluation and control

5 Under responsibility accounting, a manager should be held accountable for:

Concept and Significance Easy
A. Costs of unrelated departments
B. All costs of the entire organization
C. Costs incurred by top management alone
D. Only the costs and revenues within their control

6 Responsibility accounting is based on the principle of:

Concept and Significance Easy
A. Materiality
B. Going concern
C. Conservatism
D. Controllability

7 Which of the following is a benefit of responsibility accounting?

Concept and Significance Easy
A. It eliminates the need for budgets
B. It reduces the number of departments
C. It motivates managers by clearly assigning responsibility
D. It removes the need for financial statements

8 Which of the following is an essential element of responsibility accounting?

Elements Easy
A. A single unified profit account
B. Absence of budgets
C. Clearly defined responsibility centers
D. External audit only

9 Costs in responsibility accounting are classified into:

Elements Easy
A. Fixed and variable costs only
B. Controllable and uncontrollable costs
C. Product and period costs
D. Direct and indirect materials

10 The comparison of actual results with budgeted targets in responsibility accounting produces:

Elements Easy
A. Depreciation
B. Variances
C. Goodwill
D. Dividends

11 Which document sets the targets against which a responsibility center's performance is measured?

Elements Easy
A. Bank statement
B. Tax return
C. Audit certificate
D. Budget

12 Performance reports in responsibility accounting are prepared for:

Elements Easy
A. Only the whole company
B. Only tax authorities
C. Only external investors
D. Each responsibility center

13 For responsibility accounting to work effectively, the organizational structure should be:

Elements Easy
A. Completely informal
B. Without any managers
C. Free of any departments
D. Clearly defined with lines of authority

14 A segment of an organization whose manager is accountable for specific activities is called a:

Responsibility Centers Easy
A. Balance sheet
B. Trial balance
C. Ledger account
D. Responsibility center

15 In a cost center, the manager is primarily responsible for:

Responsibility Centers Easy
A. Dividend policy
B. Revenues earned
C. Investment decisions
D. Costs incurred

16 In a revenue center, the manager is mainly responsible for:

Responsibility Centers Easy
A. Managing capital investment
B. Generating revenues
C. Setting depreciation rates
D. Controlling manufacturing costs

17 A profit center is a responsibility center whose manager is accountable for both:

Responsibility Centers Easy
A. Dividends and reserves
B. Assets and liabilities
C. Cash and inventory only
D. Costs and revenues

18 In an investment center, the manager is responsible for costs, revenues, and:

Responsibility Centers Easy
A. Only office supplies
B. Only employee wages
C. Only advertising
D. Investment in assets

19 Which responsibility center has the broadest scope of managerial responsibility?

Responsibility Centers Easy
A. Cost center
B. Revenue center
C. Expense center
D. Investment center

20 A production department that controls manufacturing expenses but does not sell products is best classified as a:

Responsibility Centers Easy
A. Investment center
B. Revenue center
C. Cost center
D. Profit center

21 A production manager is held accountable only for the direct materials, direct labour, and variable overhead incurred within their department, but not for the allocated head-office rent. This treatment best reflects which principle of responsibility accounting?

Concept and Significance Medium
A. All costs must be charged to the lowest cost centre
B. Every department must absorb corporate overhead
C. Fixed costs should always be excluded from reports
D. Managers should be evaluated on costs they can control

22 The primary significance of responsibility accounting in a large decentralised organisation is that it:

Concept and Significance Medium
A. Guarantees higher profits every period
B. Removes the requirement for external audits
C. Links performance to the manager responsible for each segment
D. Eliminates the need for a master budget

23 A manager controls both the costs incurred and the revenues generated but has no authority over the level of investment in assets. This unit is best classified as a:

Responsibility Centers Medium
A. Profit centre
B. Investment centre
C. Cost centre
D. Revenue centre

24 The maintenance department of a factory generates no external revenue and its manager is judged on keeping expenses within budget. This is an example of a:

Responsibility Centers Medium
A. Revenue centre
B. Investment centre
C. Profit centre
D. Cost centre

25 A division reports operating profit of on average operating assets of . Its Return on Investment (ROI) is:

Responsibility Centers Medium
A.
B.
C.
D.

26 An investment centre earns operating profit of on operating assets of . If the minimum required rate of return is , the Residual Income (RI) is:

Responsibility Centers Medium
A.
B.
C.
D.

27 Which of the following is NOT a fundamental element required for an effective responsibility accounting system?

Elements Medium
A. A system to trace controllable costs to managers
B. Uniform product pricing across all divisions
C. A clear structure of responsibility centres
D. Performance reports comparing actual with budget

28 A regional sales office is responsible for achieving sales targets but has no control over the cost of goods it sells or the marketing budget set centrally. This office is best treated as a:

Responsibility Centers Medium
A. Profit centre
B. Cost centre
C. Revenue centre
D. Investment centre

29 In a responsibility report, a cost is labelled 'controllable' at a given level. The most appropriate basis for this classification is whether:

Elements Medium
A. The cost appears in the departmental ledger
B. The manager can significantly influence the cost through their decisions
C. The cost is variable in nature
D. The cost was budgeted at the start of the year

30 Two divisions report the following: Division X has ROI of ; Division Y has ROI of . If a new project offering a return is available, which division's manager is most likely to reject it under ROI-based evaluation?

Responsibility Centers Medium
A. Division X, because it lowers its existing ROI
B. Both divisions will reject it
C. Division Y, because it lowers its existing ROI
D. Both divisions will accept it

31 The practice of preparing a performance report only for the items a manager can influence, and highlighting significant deviations for action, primarily supports which management concept?

Concept and Significance Medium
A. Management by objectives only
B. Zero-based budgeting
C. Activity-based costing
D. Management by exception

32 Which sequence correctly describes the working of a responsibility accounting system?

Elements Medium
A. Set targets → report variances → define centres → measure actuals
B. Measure actuals → report variances → set targets → define centres
C. Report variances → define centres → set targets → measure actuals
D. Define centres → set targets → measure actuals → report variances

33 An investment centre differs from a profit centre mainly because the investment centre manager is additionally accountable for:

Responsibility Centers Medium
A. The advertising expenditure incurred
B. The number of employees hired
C. The selling price of each product
D. The capital invested in the division's assets

34 A division has a turnover (asset turnover) of times and a profit margin of . Using the DuPont approach, its ROI equals:

Responsibility Centers Medium
A.
B.
C.
D.

35 A key limitation of responsibility accounting arises when costs are jointly influenced by more than one manager. The most appropriate way to handle such costs is to:

Concept and Significance Medium
A. Ignore them in all performance reports
B. Charge them fully to the most senior manager
C. Split them equally regardless of influence
D. Report them separately as non-controllable at the individual level

36 For a responsibility accounting system to work, the organisation's budgeting structure should ideally be aligned so that:

Elements Medium
A. Budgets are set solely by external consultants
B. Budgets ignore departmental boundaries
C. Budgets are built around responsibility centres
D. Only a single company-wide budget is prepared

37 The Residual Income approach is often preferred over ROI for investment centre evaluation because it:

Responsibility Centers Medium
A. Removes the need to measure operating assets
B. Ignores the cost of capital entirely
C. Always produces a higher percentage figure
D. Encourages managers to accept all projects earning above the required return

38 Responsibility accounting is most effective in an organisation that is:

Concept and Significance Medium
A. Operating as a single undivided unit
B. Decentralised with clearly delegated authority
C. Highly centralised with all decisions at the top
D. Structured with no defined reporting lines

39 In a well-designed performance report, which comparison provides the most useful basis for evaluating a responsibility centre manager?

Elements Medium
A. Actual results against the flexible budget for controllable items
B. Budgeted costs against a competitor's costs
C. Actual costs against total non-controllable costs
D. Actual results against last year's total company profit

40 A company sets transfer prices between two profit centres. If the transfer price is set too high, the most likely effect is that the:

Responsibility Centers Medium
A. Buying division's profit is overstated
B. Selling division's profit is overstated while the buying division's is understated
C. Both divisions report identical profits
D. Total company profit increases

41 A manufacturing division manager is evaluated on divisional profit. Corporate allocates head-office administrative costs to the division based on total sales revenue. The division's controllable margin improved by , yet the reported divisional profit fell by . Which conclusion is most consistent with sound responsibility accounting principles?

Concept and Significance Hard
A. The controllable margin is irrelevant since only bottom-line profit reflects true performance
B. The manager should be penalized because reported divisional profit declined overall
C. The allocation basis of sales revenue is the fairest method and the result is therefore valid
D. The evaluation is distorted because allocated uncontrollable costs are included in the manager's performance measure

42 An investment center has operating assets of , operating income of , and a minimum required rate of return of . A new project offers a return of on an additional of assets. If the manager is evaluated solely on ROI, what is the likely decision and why?

Responsibility Centers Hard
A. Accept, because adding assets always improves the ROI denominator effect
B. Reject, because the project's return is below the center's current ROI of and would lower it
C. Accept, because the project's return exceeds the minimum required rate of
D. Reject, because residual income would decrease with the new project

43 Using the data of an investment center with operating income , assets , and required return , evaluate the same / project under a residual income measure. What happens to residual income?

Responsibility Centers Hard
A. It increases by , so a residual income manager accepts the project
B. It decreases by , so the project is rejected
C. It increases by , equal to the project's operating income
D. It stays unchanged because the return equals the hurdle rate

44 In designing a responsibility accounting system, the principle of controllability is often difficult to apply cleanly. Which situation represents the greatest violation of the controllability principle?

Elements Hard
A. Charging a department head with overtime costs approved at that department head's discretion
B. Charging a production supervisor with the full purchase-price variance on materials bought centrally by procurement
C. Charging a plant manager with depreciation on machinery the plant manager authorized and purchased
D. Charging a sales manager with a quantity variance arising from the sales team's own order errors

45 A profit center reports sales of , variable costs of , controllable fixed costs of , and traceable-but-uncontrollable fixed costs of . When assessing the manager's performance rather than the segment's, which figure is most appropriate?

Responsibility Centers Hard
A. Contribution margin of
B. Net operating income of
C. Controllable margin of
D. Segment margin of

46 Which statement best captures why responsibility accounting can, if poorly designed, encourage dysfunctional behavior despite its intent to improve control?

Concept and Significance Hard
A. It always eliminates information asymmetry between managers and top management
B. It guarantees that all costs are traced to exactly one responsibility center
C. It removes the need for any budgetary participation by lower-level managers
D. Narrow single-metric evaluation may lead managers to optimize their own measure at the expense of overall firm goals

47 Two divisions transact internally. The selling division has spare capacity, variable cost per unit of , and market price of . The buying division can source externally at . From a corporate goal-congruence perspective, the transfer should occur if and only if:

Responsibility Centers Hard
A. The buyer's external price of exceeds the seller's variable cost of , so internal transfer benefits the firm
B. The buyer's external price is below the seller's variable cost
C. The seller refuses because reduces its reported margin
D. The transfer price is set exactly at market price of

48 A key element of responsibility accounting is the classification of costs. A cost that is uncontrollable at a supervisor's level but controllable at a higher managerial level is best described as:

Elements Hard
A. A committed cost that no manager can ever influence
B. An imputed cost with no cash flow effect
C. Controllable in the long run and at a higher organizational level, though uncontrollable in the short run for the supervisor
D. Permanently uncontrollable throughout the organization

49 A cost center incurs actual costs of producing units against a static budget of for units. Standard variable cost is /unit and budgeted fixed cost is . What is the flexible-budget variance, and is it favorable?

Responsibility Centers Hard
A. unfavorable
B. favorable
C. favorable
D. unfavorable

50 Top management wants a responsibility accounting system to satisfy the 'principle of exception' (management by exception). Which reporting design best supports this principle?

Concept and Significance Hard
A. Reports issued only when top management specifically requests them
B. Reports that list every transaction in full detail regardless of size
C. Reports that highlight only significant variances requiring managerial attention rather than listing every routine item
D. Reports that show only annual totals with no variance breakdown

51 A revenue center manager is evaluated only on sales revenue. This creates a specific risk. Which outcome is the most likely dysfunctional consequence?

Responsibility Centers Hard
A. The manager will refuse all sales below full cost to protect margins
B. The manager will over-invest in fixed assets to improve ROI
C. The manager will minimize discretionary spending to boost reported profit
D. The manager may push high-volume, low-margin sales that raise revenue but reduce overall profitability

52 An investment center reports ROI of , computed as margin turnover. If margin is and the manager wants to raise ROI to purely by improving asset turnover, the required new turnover is:

Responsibility Centers Hard
A. times
B. times
C. times
D. times

53 A responsibility accounting system relies on a coding structure to trace costs. Which design flaw most directly undermines the traceability element?

Elements Hard
A. Producing reports in a timely manner after period close
B. Using account codes that fail to link each cost to a single accountable responsibility center
C. Distinguishing between controllable and uncontrollable costs
D. Comparing actual results against flexible budgets

54 A firm shifts from a purely functional structure to a decentralized divisional structure and introduces responsibility accounting. Which statement best explains the relationship between decentralization and responsibility accounting?

Concept and Significance Hard
A. Responsibility accounting provides the control mechanism that makes delegated decision-making accountable, complementing decentralization
B. Decentralization makes responsibility accounting unnecessary since managers act autonomously
C. Responsibility accounting is only relevant in fully centralized organizations
D. Responsibility accounting replaces the need for decentralization by centralizing all decisions

55 A division's segment margin is positive but its controllable margin (manager performance) is negative. What is the most defensible interpretation?

Responsibility Centers Hard
A. The manager is performing well since the segment margin is positive
B. The manager is performing poorly, but traceable fixed costs beyond the manager's control keep the segment overall contributory
C. The segment should be closed immediately regardless of margins
D. Controllable and segment margins cannot logically move in opposite directions

56 The selling division operates at full capacity, selling externally at with variable cost . The buying division requests an internal transfer. The minimum transfer price the selling division should accept is:

Responsibility Centers Hard
A. , equal to variable cost only
B. , equal to variable cost plus the opportunity cost of lost external sales
C. , the midpoint of variable cost and market price
D. , equal to the contribution margin

57 Goal congruence is considered an implicit element supporting responsibility accounting effectiveness. Which performance-measurement choice best promotes goal congruence for divisional managers?

Elements Hard
A. Absolute divisional profit ignoring the asset base employed
B. ROI used in isolation as the sole evaluation metric
C. Residual income or economic value added, which reward decisions that add value above the cost of capital
D. Sales revenue growth as the only bonus driver

58 A critic argues that responsibility accounting overemphasizes financial control and can demotivate managers. Which system feature is the strongest safeguard against this criticism?

Concept and Significance Hard
A. Reporting only annual results to reduce administrative burden
B. Participative budgeting combined with evaluation limited to controllable factors
C. Evaluating managers on total costs including allocated corporate overhead
D. Imposing tight top-down budgets with no manager input

59 An investment center manager can reduce reported operating assets at year-end by delaying necessary equipment purchases, temporarily inflating ROI. This behavior illustrates which limitation of ROI-based responsibility centers?

Responsibility Centers Hard
A. ROI cannot be decomposed into margin and turnover components
B. ROI can encourage short-term manipulation of the asset base at the expense of long-term competitiveness
C. ROI is unaffected by the timing of asset acquisitions
D. ROI always understates true economic performance

60 For a responsibility accounting system to function, several elements must operate together. Which sequence correctly orders the logical elements of the system?

Elements Hard
A. Measure actuals, define centers, ignore budgets, then report totals
B. Report variances, set budgets, define centers, then assign costs
C. Set budgets first, then abolish responsibility centers, then measure actuals
D. Define responsibility centers, assign controllable costs/revenues, set budgets, measure actuals, report variances by responsibility
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