Q.1 What is the primary purpose of responsibility accounting?
To measure company-wide profits
To assign accountability to managers
To prepare tax returns
To calculate cash flow
Explanation - Responsibility accounting focuses on assigning financial results to managers who are responsible for them, ensuring accountability.
Correct answer is: To assign accountability to managers
Q.2 Which type of responsibility center is primarily concerned with revenues?
Cost center
Revenue center
Profit center
Investment center
Explanation - Revenue centers are evaluated based on their ability to generate sales revenue without direct responsibility for costs.
Correct answer is: Revenue center
Q.3 A cost center manager is responsible for:
Only revenues
Only costs
Both revenues and costs
Investments and profits
Explanation - Cost centers focus on controlling and minimizing costs without responsibility for revenue generation.
Correct answer is: Only costs
Q.4 Which of the following evaluates both revenues and costs?
Cost center
Revenue center
Profit center
Investment center
Explanation - Profit centers are accountable for both revenues and costs, allowing evaluation of profitability.
Correct answer is: Profit center
Q.5 An investment center is unique because it is evaluated based on:
Only revenue generation
Costs control
Return on investments
Cash collection
Explanation - Investment centers are measured by their ability to generate profit relative to the invested capital.
Correct answer is: Return on investments
Q.6 Transfer pricing is most commonly applied in:
Small sole proprietorships
Partnership firms
Divisionalized companies
Government organizations
Explanation - Transfer pricing is relevant when divisions of a large company transact with each other.
Correct answer is: Divisionalized companies
Q.7 Which transfer pricing method is based on prevailing market rates?
Cost-based pricing
Market-based pricing
Negotiated pricing
Dual pricing
Explanation - Market-based transfer pricing uses external market prices as a benchmark for internal transactions.
Correct answer is: Market-based pricing
Q.8 A dual pricing system in transfer pricing means:
Using two different prices for external customers
Using market price and cost price simultaneously
Using one price across all divisions
Negotiating price at two different times
Explanation - Dual pricing combines both cost-based and market-based prices to satisfy buying and selling divisions.
Correct answer is: Using market price and cost price simultaneously
Q.9 Responsibility accounting reports are typically prepared for:
Shareholders
Tax authorities
Internal management
Creditors
Explanation - Responsibility accounting reports are internal documents to help managers monitor performance.
Correct answer is: Internal management
Q.10 In responsibility accounting, controllable costs are:
Costs not influenced by any manager
Costs that can be influenced by a manager’s decisions
Fixed overhead costs
Depreciation expenses
Explanation - Managers should only be held accountable for costs they can control.
Correct answer is: Costs that can be influenced by a manager’s decisions
Q.11 Which of the following is an example of a controllable cost for a production manager?
Factory rent
Raw materials cost
Depreciation
Corporate overhead allocation
Explanation - Production managers can control raw material usage but not rent or overhead allocations.
Correct answer is: Raw materials cost
Q.12 Responsibility centers are classified into how many types?
Two
Three
Four
Five
Explanation - The four main responsibility centers are cost, revenue, profit, and investment centers.
Correct answer is: Four
Q.13 Which of the following is NOT a goal of responsibility accounting?
Encouraging accountability
Evaluating manager performance
Maximizing shareholder wealth directly
Improving cost control
Explanation - Responsibility accounting focuses on accountability and performance, not directly on shareholder wealth maximization.
Correct answer is: Maximizing shareholder wealth directly
Q.14 Negotiated transfer pricing works best when:
There is no external market
Both divisions have equal bargaining power
Costs are unpredictable
Only one division has power
Explanation - Negotiated pricing requires a fair balance of power between divisions.
Correct answer is: Both divisions have equal bargaining power
Q.15 A key limitation of cost-based transfer pricing is:
It ignores costs
It may not motivate cost control
It is too complex
It requires market data
Explanation - When based on costs, selling divisions have less incentive to reduce costs.
Correct answer is: It may not motivate cost control
Q.16 ROI in investment centers is calculated as:
Net profit / Sales
Net profit / Total assets
Sales / Costs
Revenue – Costs
Explanation - Return on investment compares net profit with the total capital employed.
Correct answer is: Net profit / Total assets
Q.17 Residual income differs from ROI because it:
Uses only revenues
Considers a minimum required return
Ignores capital investment
Focuses only on costs
Explanation - Residual income subtracts a required return on assets, making it more comprehensive than ROI.
Correct answer is: Considers a minimum required return
Q.18 Which statement about responsibility accounting is TRUE?
Managers are accountable for uncontrollable costs
Reports vary depending on the level of responsibility
It is primarily for tax purposes
It is unrelated to performance evaluation
Explanation - Responsibility accounting adapts reports based on each manager’s scope of authority.
Correct answer is: Reports vary depending on the level of responsibility
Q.19 Transfer pricing affects:
Only external customers
Divisional performance evaluation
Shareholder dividends directly
Legal compliance only
Explanation - Transfer pricing determines divisional profitability and influences how managers are evaluated.
Correct answer is: Divisional performance evaluation
Q.20 A profit center manager is NOT responsible for:
Revenues
Costs
Profitability
Capital investment decisions
Explanation - Capital investment decisions are under investment centers, not profit centers.
Correct answer is: Capital investment decisions
Q.21 Which of the following encourages goal congruence in transfer pricing?
Ignoring market conditions
Market-based transfer pricing
Using arbitrary cost allocations
Allowing one division to dictate price
Explanation - Market-based prices align divisional decisions with company-wide goals.
Correct answer is: Market-based transfer pricing
Q.22 What is the main drawback of negotiated transfer pricing?
It uses external prices
It may cause conflicts between managers
It ignores costs
It lacks flexibility
Explanation - Negotiation can lead to disputes and consume managerial time.
Correct answer is: It may cause conflicts between managers
Q.23 Which factor is most important when evaluating a cost center?
Level of sales achieved
Control over expenses
ROI achieved
Residual income earned
Explanation - Cost centers are judged by how well managers control costs, not revenues or investments.
Correct answer is: Control over expenses
Q.24 Responsibility accounting is most useful in:
Centralized organizations
Decentralized organizations
Small sole proprietorships
Tax departments
Explanation - It helps evaluate performance when decision-making authority is spread across divisions.
Correct answer is: Decentralized organizations
Q.25 Which is NOT a transfer pricing method?
Market-based pricing
Negotiated pricing
Cost-based pricing
Dividend-based pricing
Explanation - Transfer pricing methods include market, cost, and negotiated, but not dividend-based.
Correct answer is: Dividend-based pricing