A profit center generates revenue, incurs costs, and has the authority to make significant investing decisions

  1. A profit center generates revenue, incurs costs, and has the authority to make significant investing decisions. True / False.


  1. A department’s direct expenses are usually considered uncontrollable costs. True / False.


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  1. No standard rule identifies the best basis of allocating expenses across departments, so it is impossible to allocate costs in a manner that will be perceived as fair. True / False.


  1. A joint cost of producing two products can be allocated between those products on the basis of the relative physical quantities of each product produced. True False.


  1. If a company reports profit margin of 31.6% and investment turnover of 1.30 for one of its investment centers, the return on investment must be:

e). 24.3%.

ROI     = Profit margin / Investment Turnover

= 0.316/1.30

= 24.3%

  1. Kragle Corporation reported the following financial data for one of its divisions for the year; average invested assets of $470,000; sales of $930,000; and income of $105,000. The investment center profit margin is:

d). 11.3%.

Profit margin = operating income / sales

= ($105,000 / $930,000) * 100%

= 11.3%.

  1. The salaries of employees who spend all their time working in one department are:

c). Unavoidable expenses.

  1. Differential Chemical produced 10,000 gallons of Preon and 20,000 gallons of Paron. Joint costs incurred in producing the two products totaled $7,500. At the split-off point, Preon has a market value of $6.00 per gallon and Paron $2.00 per gallon. Compute the portion of the joint costs to be allocated to Preon if the value basis is used.

b). $4,500.

Preon allocation = Total joint cost for two products × (Preon cost ÷ Total cost)

= 10,000 gallons × $6 per gallon = $60,000


The total cost = 10,000 gallons × $6 per gallon + 20,000 gallons × $2 per gallon

= $60,000 + $40,000

= $100,000


Thus, the total cost to be allocated = $7,500 × ($60,000 ÷ $100,000)

= $4,500

  1. The amount by which a department’s sales exceed its direct expenses is:

d). Net sales.

  1. Advertising expense can be reasonably allocated to departments on the basis of each department’s proportion of sales. True False.


  1. Part 7B costs the Midwest Division of Frackle Corporation $30 to make, of which $21 is variable. Midwest Division sells Part 7B to other companies for $47. The Northern Division of Frackle Corporation can use Part 7B in one of its products. The Midwest Division has enough idle capacity to produce all of the units of Part 7B that the Northern Division would require. What is the lowest transfer price at which the Midwest Division should be willing to sell Part 7B to the Northern Division?

e). $21.

Unit variable cost = $21.

Fixed cost per unit = $9.

Selling price per unit = $47.

Transfer price = additional outlay cost incurred in each unit + opportunity cost in each      unit.

But Midwest Division has idle capacity, which is equivalent to zero opportunity cost, to produce all units of 7B for Northern Division.

Thus, transfer price = $21 + $0

= $21.

  1. The type of department that generates revenues and incurs costs, and its manager is responsible for the investments made in operating assets is called a:

d). Investment center.

  1. Indirect expenses are allocated to departments based upon the benefits received by each department. True False.


  1. Profit margin for an investment center measures:

a). How efficiently an investment center generates sales from its invested assets.

  1. Direct expenses require allocation across departments because they cannot be readily traced to one department. True False.


  1. A department can never be considered to be a profit center. True False.


  1. Part AR3 costs the Southwestern Division of Luxon Corporation $26 to make-direct materials are $10, direct labor is $4, variable manufacturing overhead is $9, and fixed manufacturing overhead is $3. Southwestern Division sells Part AR3 to other companies for $30. The Northeastern Division of Luxon Corporation can use Part AR3 in one of its products. The Southwestern Division has enough idle capacity to produce all of the units of Part AR3 that the Northeastern Division would require. What is the lowest transfer price at which the Southwestern Division should be willing to sell Part AR3 to the Northeastern Division?

e). $23.

In this case transfer price should be the same as variable cost of production

And variable production cost = direct materials + direct labor + variable manufacturing =             $10 + $4 + $9 = $23.

  1. A responsibility accounting performance report usually compares actual costs to budgeted costs amounts by management level. True False.


  1. Joint costs can be allocated either using a physical basis or a value basis. True False.


  1. Regardless of the system used in departmental cost analysis:

e). Direct costs are allocated, indirect costs are not.

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