Segment Reporting and Performance Evaluation
Easy Practice Test
Introduction to Accounting
Easy Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
Responsibility Accounting – Segment Reporting:
1. Which is the highest level within a company?
a. cost center
b. investment center
c. profit center
d. revenue center
Answer
B. An investment center is the highest level. The manager of an investment center is responsible for revenues, costs, and investments in assets.
2. Decentralization provides all of the following benefits except
a. timely decision making
b. evaluation of management
c. manager decisions are not always consistent with company goals
d. managers have an incentive to perform to company goals
Answer
C. When managers make decisions regarding their own departments they do not always make decisions that line up with the company’s overall goals. Sometimes decisions are made that benefit their department or division and do not benefit the total company. Evaluation of management can be done more easily in a decentralized organization because results are directly measurable. Management is typically evaluated based on company goals.
3. The center that can be evaluated using residual income is
a. cost center
b. investment center
c. revenue center
d. profit center
Answer
B. Operating assets must be used In order to calculate residual income. An investment center is the only center that is responsible for making decisions related to operating assets.
4. Which of the following could be considered a segment?
a. a division
b. a product line
c. a sales territory
d. all of the above
Answer
D. All of the above are considered segments. All have revenues and costs.
5. Sales less direct costs equal
a. contribution margin
b. operating income
c. segment margin
d. gross profit
Answer
C. Revenues less direct costs is equal to segment margin. Variable costs are always direct costs. Segment margin is profits from the segment after covering direct costs.
6. Traceable costs are
a. not included in segment profit margin
b. treated the same as allocated costs
c. allocated to each segment
d. included in segment profit margin
Answer
D. Traceable costs are direct costs that are incurred only related to a segment and are included in segment margin. Traceable costs and direct costs are included in a segment’s profit margin. Allocated costs are not included in segment profit margin.
7. Allocated and nontraceable costs are
a. are included in segment profit margin
b. are not included in segment profit margin
c. are allocated based on sales
d. are direct costs
Answer
B. Allocated costs are not included in segment profit margin. They are not direct costs. They can be allocated based on a variety of things and are not always allocated based on sales. Allocated costs are incurred in support of more than one segment.
8. A corporate accounting department is a
a. cost center
b. profit center
c. investment center
d. administrative center
Answer
A. A corporate accounting department has no means to earn revenues. The accounting department incurs only costs. A cost center incurs only costs.
Performance Evaluation:
1. Return on investment is analyzed by looking at
a. profit margin and asset turnover
b. profit turnover and asset margin
c. contribution margin and asset turnover
d. operating income and cost of goods sold
Answer
A. Return on investment consist of two calculations considered together; profit margin and asset turnover.
2. Both return on investment and residual income can be used to evaluate
a. cost centers
b. profit centers
c. investment centers
d. all of the above
Answer
C. Operating assets are required to compute return on investment and residual income. Investment centers are the only centers that are responsible for assets.
3. When two segments earn the same return on investment and the same residual income
a. management is equally talented
b. income and investment must be the same
c. both divisions are meeting all goals
d. all of the above
Answer
B. If return on investment and residual income is the same than income and investments must be the same. The formulas for computing both return on investment and residual income use operating income and investments. Divisions can have different goals and still give the same results. Return on investment and residual income are most likely not the only goals that management is trying to meet.
4. Residual income considers
a. operating income and required return on assets
b. sales and required return on assets
c. operating assets and expenses
d. all assets and net income
Answer
A. The formula for residual income uses operating income and a required return on assets. The two are compared to determine if actual operating income is higher and if there is residual income.
5. Residual income compares
a. required income to residual income
b. required income to actual income
c. required income to budgeted income
d. residual income to actual income
Answer
B. The formula for residual income uses operating income and residual income determined from a required return on assets. The two are compared to determine if actual operating income is higher.
6. A company with a return on sales of 10% and asset turnover of 2.0 will have return on investment of
a. 20%
b. 5%
c. 10%
d. not enough information to determine
Answer
A. Return on investment is equal to profit margin on sales times asset turnover. Return on sales is another term for profit margin on sales.
7. Return on investment will increase when
a. sales decrease
b. expenses increase
c. operating assets decrease
d. operating assets increase
Answer
C. Return on investment is equal to operating income over assets. When assets decrease the return on investment will increase. When sales decrease and expenses increase profits will decrease and decreased profit gives a decrease in return on investment.
1. A company has two sales divisions, North and South. Cost and revenue information related to the divisions follow:
| North | South | |
| Sale in units | 50,000 | 75,000 |
| Revenues | $600,000 | $900,000 |
| Direct fixed Costs | $300,000 | $400,000 |
| Corporate fixed costs | $150,000 | $200,000 |
| Variable cost per unit | $3 | $3 |
| Common advertising costs | $60,000 | $80,000 |
Prepare a segment income statement for the company.
Answer
| North | South | Total | |
| Sales | $ 600,000 | $900,000 | $1,500,000 |
| Variable Costs | $ 150,000 | $225,000 | $ 375,000 |
| Contribution Margin | $ 450,000 | $675,000 | $1,125,000 |
| Fixed Expense | $300,000 | $400,000 | $700,000 |
| Segment Income | $150,000 | $275,000 | $425,000 |
| Corporate Expenses | $350,000 | ||
| Common Advertising Expense | $140,000 | ||
| Operating Income | ($65,000) |
Direct and variable costs are reported in the segment column.
Costs that are common, corporate, non traceable, allocated do not get reported
in the segment column. Report the total in the total company column only.
2. A company produces two products. Information related to the products follows:
| Product A | Product B | |
| Units sold | 10,000 | 20,000 |
| Sales price per unit | $20 | $15 |
| Variable cost per unit | $6 | $5 |
Total fixed costs for the company were $260,000. Other information related to fixed costs: $28,000 can be avoided if product A is discontinued and $39,000 can be avoided if product B is discontinued. Common costs are allocated based on percentage of total sales.
Prepare a segment income statement for the company.
Answer
| Product A | Product B | Total | |
| Sales | $200,000 | $300,000 | $500,000 |
| Variable Costs | $60,000 | $100,000 | $160,000 |
| Contribution Margin | $140,000 | $200,000 | $340,000 |
| Fixed Expense | $28,000 | $39,000 | $67,000 |
| Segment Income | $112,000 | $161,000 | $273,000 |
| Common Fixed Costs | $193,000 | ||
| Operating Income | $ 80,000 |
Common fixed costs are $260,000 less $28,000 direct to A less $39,000 direct
to B leaves $193,000 as common. It does not matter how common costs are
allocated, you do not allocate common costs on the segment statement.
Avoidable to a specific segment is direct to the segment.
3. The following information has been determined for a retail company with a required rate of return of 11%:
| Operating Income | $200,000 |
| Operating Assets – this year | $1,250,000 |
| Operating Expenses | $500,000 |
| Operating Assets – last year | $1,500,000 |
| Sales | $950,000 |
A. Compute return on investment showing the two major components.
B. Determine residual income.
Answer
Compute average operating assets: Beginning + Ending / 2
$1,500,000 + $1,250,000 / 2 = $1,375,000
Write the formula you have memorized and plug in the amounts.
A. Return on Investment
Operating Income
Average Operating Assets
$200,000
$1,375,000 = 14.5%
$200,000 $950,000
$950,000 X $1,375,000
21% X .69 = 14.5%
Operating Income Sales
Sales X Average Operating Assets
“Profit Margin” “Asset Turnover”
B. Residual Income:
Actual Operating Income $200,000
- Required Operating Income (see below) $ 151,250
= Residual Income $ 48,750
Average Operating Assets $1,375,000
X Required Rate of Return % x .11
= Required Operating Income $ 151,250
4. The following information relates to a wholesale company:
| Sales | $1,000,000 |
| Average operating assets | $500,000 |
| Asset turnover | 2.0 |
| Minimum required return | 15% |
| Operating income | $150,000 |
A. Calculate return on investment. Show profit margin and asset turnover.
B. Calculate residual income
Answer
A. Write the formula and plug in what you are given.
Return on Investment
Operating Income
Average Operating Assets
$150,000
$500,000 = 30%
$ 150,000 $1,000,000
$1,000,000 X $ 500,000 =
15% X 2.0 = 30%
Operating Income Sales
Sales X Average Operating Assets
“Profit Margin” “Asset Turnover”
B. Residual Income:
Actual Operating Income $150,000
- Required Operating Income (see below) $ 75,000
= Residual Income $ 75,000
Average Operating Assets $500,000
X Required Rate of Return % x . 15
= Required Operating Income $ 75,000