Chapter 19Performance Measurement, Balanced Scorecards, and Performance

Rewards
LEARNN! "B#EC$%ES
LO 1 Why is a mission statement important to an organization?
LO 2 What roles do performance measures serve in organizations?
LO 3 What guidelines or criteria apply to the design of performance measures?
LO 4 What are the common short-term financial performance measures, and ho are
they calculated and used?
LO ! Why should company management focus on long-run performance?
LO " What factors should managers consider hen selecting nonfinancial performance
measures?
LO # Why is it necessary to use multiple measures of performance?
LO $ %o can a &alanced scorecard &e used to measure performance?
LO ' What difficulties are encountered in trying to measure performance for multinational
firms?
LO 1( What is compensation strategy, and hat factors must &e considered in designing the
compensation plan?
&'ES$"N !R(
True/False
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13"
&o'(letion
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*)ort +ns,er
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-roble'
Difficulty Level Learning Objectives
Easy Mod Difficult LO 1 LO 2 LO 3 LO 4 LO LO ! LO " LO # LO $ LO 1%
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13'
$R'E)*ALSE
1) *n organization+s values statement identifies fundamental &eliefs a&out hat is important to the
organization)
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2) *n organization typically develops a values statement &efore developing a mission statement)
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3) /he o&6ectives identified in an organization+s values statement must &e o&6ective in nature)
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4) 1n order to assure achievement of an organizational goal, performance measures must &e esta&lished
for that goal)
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!) 1nternal performance measures focus on the efficiency and effectiveness of an organization+s
production process)
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") 37ternal performance measures focus on the efficiency and effectiveness of an organization+s
production process)
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#) /he most common e7ternal performance measure used for all organizations is financial in nature)
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$) 9erformance measures need not &e correlated ith the mission of a su&unit)
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') 4enchmar:s for performance measures may &e monetary or non-monetary)
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1() /he segment margin of a profit or investment center includes allocated common costs)
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11) /he segment margin of a profit or investment center does not include allocated common costs)
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14(
12) 8anipulation of segment e7penses may result in the segment margin not &eing an accurate
performance measure)
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13) 9rofit margin indicates management+s efficiency ith regard to sales and e7penses)
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14) *sset turnover measures the effective use of assets relative to revenue production)
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1!) 3conomic value added ;3<*= applies the target rate of return to the mar:et value of the capital
invested in a division)
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1") 3conomic value added ;3<*= applies the target rate of return to the &oo: value of the assets invested
in a division)
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1#) 3conomic value added ;3<*= is a more appropriate performance measure hen there is a large
difference &eteen the mar:et value of invested capital and the &oo: value of assets)
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1$) 3conomic value added ;3<*= is focused on short-term performance measurement)
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1') 2inancial measures are lagging indicators)
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2() -peed of delivery is an e7ample of a leading indicator)
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21) ,on-financial measures are generally more indicative of productive activity than are financial
performance measures)
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22) ,on-financial measures are generally less timely than are financial performance measures)
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141
23) ,on-financial measures are generally more appropriate for gauging teamor: than are financial
performance measures)
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24) /he num&er of good units or >uantity of services that are produced and sold &y an organization ithin
a specified time is referred to as process >uality yield)
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2!) /otal units produced during the period divided &y the value-added processing time is referred to as
process productivity)
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2") /he &alanced scorecard approach complements measures of past performance ith measures of the
drivers of future performance)
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2#) ?ultural differences &eteen countries may ma:e performance evaluation in multinational settings
more difficult)
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2$) %ourly compensation provides a definite lin: &eteen performance and reard)
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2') 1n a pay-for-performance plan, defined performance measures must &e highly correlated ith an
organization+s operational targets)
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3() /a7 deferral is the most desira&le form of ta7 treatment for employee compensation elements)
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31) 37patriate or:ers should receive a compensation pac:age that reflects cost of living factors and
currency fluctuations)
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C"MPLE$"N
1) * statement that identifies fundamental &eliefs a&out hat is important to an organization is referred to
as a @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. values statement
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142
2) 9erformance measures that provide a focus on the efficiency and effectiveness of production processes
are referred to as @@@@@@@@@@@@@@@@ measures)
*,-. internal
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3) 9erformance measures that reflect an organization+s a&ility to satisfy customers &etter than rival firms
do are referred to as @@@@@@@@@@@@@@@@ measures)
*,-. e7ternal
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4) /he ratio of income to assets invested is referred to as @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. return on investment ;AO1=
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!) /he ratio of income to sales is referred to as @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. profit margin
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") /he ratio of sales to assets is referred to as @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. asset turnover
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#) 9rofit margin 7 *sset /urnover is often referred to as the @@@@@@@@@@@@@@@@@@@@@
*,-. 0u9ont 8odel
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$) 9rofit earned in e7cess of an amount charged for funds committed to a profit center is referred to as
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. residual income
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') * measure of profit produced a&ove the cost of capital is referred to as
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. economic value added ;3<*=
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143
1() *n indicator that reflects the results of past decisions is referred to as a;n=
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. lagging indicator
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11) -tatistical data a&out the steps that ill create the results desired as referred to as
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. leading indicators
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12) /he num&er of good units or >uantity of services that are produced and sold &y an organization ithin
a specified time is referred to as @@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. throughput
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13) /otal units produced during the period divided &y the value-added processing time is referred to as
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. process productivity
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14) /he proportion of good units resulting from activities is referred to as
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. process >uality yield
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1!) /he three components of throughput are @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@,
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@, and @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@)
*,-. manufacturing cycle efficiency, process productivity, process >uality yield
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M'L$PLE C+"CE
1) <ariance analysis ould &e appropriate to measure performance in
a) profit centers)
&) investment centers)
c) cost centers)
d) all of the a&ove)
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144
2) Which of the folloing responsi&ility centers may &e evaluated on the &asis of residual income?
a) investment center
&) revenue center
c) profit center
d) cost center
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3) ,et cash flo could &e used to measure performance in
a) cost centers and investment centers)
&) revenue centers and profit centers)
c) revenue centers and investment centers)
d) profit and investment centers)
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4) Bsing a single performance evaluation criterion for an investment center
a) is most effective &ecause a manager can concentrate on a single goal)
&) can result in manipulation of the performance measure)
c) allos multinational investment centersC performances to &e e>uita&ly compared)
d) is only appropriate if the criterion is non-monetary)
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!) * company has set a target rate of return of 1"D for its investment center) *n investment center
manager in this company ould
a) ac>uire assets that ould increase divisional income &y more than 1"D)
&) sell all assets that do not generate divisional income of more than 1"D)
c) ac>uire assets that ould increase sales &y more than 1"D)
d) ac>uire any technologically advanced assets that ould cause costs to &e reduced &y 1"D
or more)
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") 1n evaluating the performance of a profit center manager, the manager
a) and the su&-unit should &e evaluated on the &asis of the same costs and revenues)
&) should only &e evaluated on the &asis of varia&le costs and revenues of the su&-unit)
c) should &e evaluated on all costs and revenues that are controlla&le &y the manager
d) should &e evaluated on all costs and revenues that can &e directly traced to the su&-unit)
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#) /he -tatement of ?ash 2los may &e superior to the cash &udget as a performance evaluation measure
&ecause
a) cash flos are shon on the accrual &asis on the cash &udget)
&) the cash &udget does not include capital investments)
c) cash flos are arranged &y activity)
d) of all the a&ove reasons)
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14!
$) /he -tatement of ?ash 2los indicates the cash inflos and outflos from
a) investing, financing, and &orroing activities)
&) operating, investing, and sending activities)
c) merchandising, financing, and investing activities)
d) operating, investing, and financing activities)
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') 0ivision *Cs investment in a ne pro6ect ill raise the overall organizationCs return on investment if
a) the return on investment on the ne pro6ect e7ceeds the target return of the overall
organization)
&) the return on investment on the ne pro6ect e7ceeds the return on investment of 0ivision
*)
c) the return on investment on the ne pro6ect e7ceeds the overall organizationCs return on
investment)
d) 0ivision *Cs return on investment e7ceeds the return on investment of the overall
organization)
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1() 1f sales and e7penses &oth rise &y E1((,(((
a) residual income ill increase)
&) return on investment ill increase)
c) return on investment ill &e unchanged)
d) asset turnover ill decrease
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11) *4? ?orp) is composed of three operating divisions) Overall, the *4? ?orp) has a return on
investment of 2(D) * 0ivision has a return on investment of 2!D) 1f *4? ?orp) evaluates its
managers on the &asis of return on investment, ho ould the * 0ivision manager and the *4? ?orp)
president react to a ne investment that has an estimated return on investment of 23D?
* 0ivision manager *4? ?orp) president
a) accept accept
&) accept re6ect
c) re6ect accept
d) re6ect re6ect
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12) * companyCs return on investment is affected &y a change in
9rofit 8argin
*sset /urnover on -ales
a)
Yes Yes
&)
Yes No
c)
No No
d)
No Yes
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14"
13) /he return on investment ;AO1= ratio measures
a) only asset turnover)
&) only earnings as a percent of sales)
c) &oth asset turnover and earnings as a percent of sales)
d) asset turnover and earnings as a percent of sales, correcting for the effects of differing
depreciation methods)
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14) Aeturn on investment ;AO1= is a term most often used to e7press income earned on assets
invested in a &usiness unit) * companyCs return on investment ould increase if sales
a) increased &y the same dollar amount as e7penses and total assets increased)
&) remained the same and e7penses ere reduced &y the same dollar amount that total assets
increased)
c) decreased &y the same dollar amount that e7penses increased)
d) and e7penses increased &y the same percentage that total assets increased)
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1!) * su&-unit of an organization is evaluated on the &asis of its AO1) 1f this su&-unitCs sales and e7penses
&oth increase &y E3(,(((, ho ill the folloing measures &e affected?
AO1 *ssert turnover 9rofit margin
a) increase increase increase
&) indeterminate increase decrease
c) no change increase decrease
d) no change decrease no change
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1") Which of the folloing ould &e an appropriate alternative to the use of AO1 in evaluating the
performance of an investment center?
Aesidual ,et cash ?ost and revenue
income flo variance analysis
a)
yes yes yes
&)
no yes no
c)
yes no no
d)
yes no yes
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1#) Aeturn on investment is computed &y dividing income &y
a) contri&ution margin)
&) inventory turnover)
c) assets invested)
d) average assets employed)
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14#
1$) 9resently, the ?lassic 4oo: 0ivision of Friffin 9u&lishing ?orporation has a profit margin of 3(D) 1f
total sales rise &y E1((,(((, the net result ill &e
a) an increase in the profit margin ratio to a&ove 3(D)
&) a decrease in the profit margin ratio to &elo 3(D)
c) no change in the profit margin ratio)
d) a change in the profit margin ratio that cannot &e determined from this information)
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1') 9rofit margin indicates the portion of sales that
a) covers fi7ed e7penses)
&) is not used to cover e7penses)
c) e>uals contri&ution margin)
d) e>uals product contri&ution margin)
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2() 9rofit margin e>uals
a) income divided &y sales)
&) incomes divided &y average inventory)
c) income divided &y average assets)
d) income divided &y average stoc:holderCs e>uity)
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21) /he 0u 9ont model measures
a) residual income)
&) return on investment)
c) throughput)
d) profit)
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22) 1n the 0u 9ont model, profit margin is a ratio of
a) income to sales)
&) income to assets)
c) sales to income)
d) sales to assets)
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23) /he 0u 9ont model measures AO1 as it is affected &y
a) contri&ution margin and asset turnover)
&) profit margin and asset turnover)
c) asset turnover)
d) profit margin)
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14$
24) Aesidual income is used as a performance measure in
a) profit centers)
&) cost centers)
c) investment centers)
d) revenue centers)
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2!) 1f a ne pro6ect generates a positive residual income, the
a) pro6ectCs return on investment is less than the target rate)
&) pro6ectCs return on investment is greater than the target rate)
c) pro6ectCs return on investment is e>ual to the target rate)
d) relationship &eteen the pro6ectCs return on investment and the target rate cannot
necessarily &e determined)
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2") * prospective pro6ect under consideration &y the /elephone 0ivision of ?ommunications ?orporation)
has an estimated residual income of E;2(,(((=) 1f the pro6ect re>uires an investment of E4((,(((, the
a) pro6ect generates a negative return on investment)
&) pro6ectCs return on investment is zero)
c) pro6ectCs return on investment is !D less than the companyCs target rate)
d) companyCs target rate is 1!D
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2#) Aesidual income is the
a) contri&ution margin of an investment center, less the imputed interest on the invested
capital used &y the center)
&) contri&ution margin of an investment center, plus the imputed interest on the invested
capital used &y the center)
c) income of an investment center, less the imputed interest on the invested capital used &y
the center)
d) income of an investment center, plus the imputed interest on the invested capital used &y
the center)
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2$) Aesidual income is an e7ample of a @@@@@@@@@@@@ performance measurement)
a) long-term
&) short-term
c) >ualitative
d) profit center
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2') 1f a division generates a positive residual income then the divisionCs
a) asset turnover as very high)
&) profita&ility as greater than that of other divisions in the company)
c) performance as a&ove e7pectations)
d) actual return on investment e7ceeds the divisionCs target return)
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14'
3() Aesidual income is determined as
a) income times the asset turnover rate)
&) income times the inventory turnover rate)
c) income minus ;asset &ase times target rate of return=)
d) sales minus ;asset &ase times target rate of return=)
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31) Aesidual income is used as a performance measure in hich of the folloing types of centers?
Aevenue 1nvestment 9rofit
a)
yes no yes
&)
yes yes yes
c)
no yes yes
d)
no yes no
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32) *n increase in a corporationCs target rate ould result in a;n=
a) increase in residual income)
&) decrease in return on investment)
c) decrease in residual income)
d) decrease in &oth residual income and return on investment)
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33) *ll other things &eing e>ual, an increase in sales price ould increase
a) asset turnover)
&) profit margin)
c) residual income)
d) all of the a&ove)
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34) 1f sales and e7penses &oth rise &y E1((,(((, profit margin ill
a) decrease and asset turnover ill decrease)
&) increase and asset turnover ill decrease)
c) decrease and asset turnover ill increase)
d) increase and asset turnover ill increase)
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3!) *sset turnover e>uals
a) income divided &y average assets)
&) sales divided &y assets)
c) sales divided &y average assets)
d) assets divided &y sales)
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1!(
3") /he information &elo relates to costs, revenues, and assets anticipated in the 4oot 0ivision of 4<0
2ootear ?orporation.
-ales
$ 4,000,000
<aria&le costs
75% of sales
*verage assets employed
$12,000,000
2i7ed costs
0
%o ould each of the folloing measures &e affected if sales rise &y E!,((( in the 4oot 0ivision?
AO1 *sset turnover 9rofit margin
a) increase increase increase
&) increase no change increase
c) increase increase no change
d) no change no change increase
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3#) * division of Lachman ?orporation reported a return on investment of 2(D for a recent period) 1f the
divisionCs asset turnover as !, its profit margin must have &een
a) 1((D
&) 4D
c) 2!D
d) 2D
*,-. 4
AO1 G 9rofit 8argin 7 *sset /urnover
)2( G 98 7 !
98 G AO1H*sset /urnover
98 G )(4 or 4D
012. 3asy O45. 1'-4
3$) Which measure is limited &y the fact that it uses accounting income?
a) AO1
&) A1
c) 3<*
d) *ll of the a&ove
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1!1
3') /he ?a:e 0ivision of 4a:ery ?orporation has the folloing segment information.
*ssets availa&le for use
$1,800,000
/arget rate of return
10%
Aesidual income
$ 270,000
What as ?a:e 0ivisionCs return on investment?
a) 1!D
&) 1(D
c) 2!D
d) 2(D
*,-. ?
AO1 G 1ncome H *ssets 1nvested
1ncome G Aesidual 1ncome I ;/arget Aate J *ssets=
G E2#(,((( I ;)1( J E1,$((,(((=
G E4!(,(((
AO1 G E;4!(,(((H1,$((,(((=
G ,-.
012. 8oderate O45. 1'-4
'n/ted $o0 Compan0
/he 0oll 0ivision of Bnited /oy ?ompany had the folloing financial data for the year.
*ssets availa&le for use E1,(((,((( 4oo: <alue
E1,!((,((( 8ar:et <alue
Aesidual income E1((,(((
Aeturn on investment 1!D
4() Aefer to Bnited /oy ?ompany) What as the 0oll 0ivision+s segment income?
a) E1!(,(((
&) E1((,(((
c) E2!(,(((
d) E !(,(((
*,-. *
-egment 1ncome G AO1 J 4< of /otal *ssets
G ()1! J E1,(((,(((
G 11-2,222
012. 8oderate O45. 1'-4
1!2
41) Aefer to Bnited /oy ?ompany) What as the target rate of return for Bnited /oy ?ompany?
a) 1(D
&) 1!D
c) 2!D
d) !D
*,-. 0
,et 1ncome - ;/arget Aate 7 *sset 4ase= G Aesidual 1ncome
E1!(,((( - ;/arget Aate 7 E1,(((,(((= G E1((,(((
;/arget Aate 7 E1,(((,(((= G E!(,(((
/arget Aate G -32.
012. 8oderate O45. 1'-4
42) Aefer to Bnited /oy ?ompany) 1f the manager of the 0oll 0ivision is evaluated &ased on return on
investment, ho much ould she &e illing to pay for an investment that promises to increase net
segment income &y E!(,(((?
a) E !(,(((
&) E 333,333
c) E1,(((,(((
d) E !((,(((
*,-. 4
E!(,((( H ()1! G E333,333
012. 8oderate O45. 1'-4
43) Aefer to Bnited /oy ?ompany) 1f e7penses increased &y E2(,((( in *pple 0ivision,
a) return on investment ould decrease)
&) residual income ould increase)
c) the target rate of return ould decrease)
d) asset turnover ould decrease)
*,-. * 012. 3asy O45. 1'-4
+ouston Compan0
/e7as 0ivision of the %ouston ?ompany has the folloing statistics for its most recent operations.
*ssets availa&le for use ;8ar:et <alue=
$3,600,000
*ssets availa&le for use ;4oo: <alue=
$2,000,000
/e7as 0ivisionCs return on investment
25%
/e7as 0ivisionCs residual income
200,000
Aeturn on investment ;entire %ouston ?ompany=
20%
1!3
44) Aefer to %ouston ?ompany) ?ompute 3<* assuming the cost of capital is 1(D and the ta7 rate is 4(D)
a) E '(,(((
&) E 1!(,(((
c) E(
d) E ;"(,(((=
*,-. 0
3<* G *fter /a7 ,et 1ncome - ;?ost of ?apital 7 8ar:et <alue of *ssets=
3<* G ;;E2,(((,((( J )2!= 7 )"(= - ;)1( 7 E3,"((,(((=
3<* G E;3((,((( - 3"(,(((=
3<* G E;"(,(((=
012. 8oderate O45. 1'-4
4!) Aefer to %ouston ?ompany) What is the target rate of return in %ouston ?ompany?
a) 2!D
&) 2(D
c) 1!D
d) 1(D
*,-. ?
,et 1ncome - ;/arget Aate of Aeturn 7 /otal assets= G Aesidual 1ncome
E!((,((( - ;/arget Aate of Aeturn J E2,(((,(((= G E2((,(((
/arget Aate of Aeturn J E2,(((,((( G E3((,(((
/arget Aate of Aeturn G 1-.
012. 8oderate O45. 1'-4
4") Aefer to %ouston ?ompany) 1f %ouston ?ompany evaluates its managers on the &asis of return on
investment, the manager of /e7as 0ivision ould invest in a pro6ect costing E1((,((( only if it
increased net segment income &y at least
a) E1(,((()
&) E1!,((()
c) E2(,((()
d) E2!,((()
*,-. 0
E1((,((( J )2! G E2!,(((
012. 8oderate O45. 1'-4
1!4
4#) *ndersen ?orporation has a target return of 1!D) 1f a prospective investment has an estimated return
on investment of 2(D, and a residual income of E1(,(((, hat is the estimated cost of the investment?
a) E2((,(((
&) E "",""#
c) E !(,(((
d) /he anser canCt &e determined from this information)
*,-. *
()2( - ()1! G ()(! residual income
E1(,((( H ()(! G 1,22,222
012. 8oderate O45. 1'-4
4$) /he -teelrod 0ivision of 8etal 9roducts ?ompany is considering an investment in a ne pro6ect) /he
pro6ect has an estimated cost of E1,(((,((() 1f 8etal 9roducts ?ompany has a target rate of return of
12D, ho large does the return on investment on this pro6ect need to &e to generate E1!(,((( of
residual income?
a) 1!D
&) 12D
c) 2!D
d) 2#D
*,-. 0
;AO1 7 /otal *ssets= - ;/arget Aate 7 /otal *ssets= G Aesidual 1ncome
;AO1 7 E1,(((,(((= - ;()12 7 E1,(((,(((= G E1!(,(((
;AO1 7 E1,(((,(((= G E2#(,(((
AO1 G ,4.
012. 8oderate O45. 1'-4
4') 1n the -outh 0ivision of Occident ?ompany, segment income for the most recent year e7ceeded
residual income &y E1!,((() *lso, return on investment e7ceeded the target rate of return &y 1(D)
What as the level of investment in the K 0ivision for the most recent year?
a) E 1!,(((
&) E1((,(((
c) E1!(,(((
d) *n anser canCt &e determined from this information)
*,-. ?
E1!,(((H()1( G 11-2,222
012. 0ifficult O45. 1'-4
1!!
RA( Compan0
A*0 ?o) has esta&lished a target rate of return of 1"D for all divisions) 2or the most recent year,
0ivision 0 generated sales of E1(,(((,((( and e7penses of E#,!((,((() /otal assets at the &eginning
of the year ere E!,(((,((( and total assets at the end of the year ere E#,(((,((()
!() Aefer to A*0 ?ompany) 1n the most recent year, hat as 0ivision 0Cs residual income?
a) E '"(,(((
&) E1,3$(,(((
c) E1)!4(,(((
d) E1,#((,(((
*,-. ?
Aesidual 1ncome G E;1(,(((,((( - #,!((,(((= - ;;)1"= J E",(((,(((=
G E;2,!((,((( - '"(,(((=
G11,-52,222
012. 8oderate O45. 1'-4
!1) Aefer to A*0 ?ompany) 2or the most recent year, hat as 0ivision 0Cs return on investment ?
a) 2()$3 D
&) 3!)#1 D
c) 41)"# D
d) !()(( D
*,-. ?
AO1 G ,et 1ncomeH*verage /otal *ssets
G E;2,!((,(((H",(((,(((=
G 51364.
012. 8oderate O45. 1'-4
!2) /he ?ard 0ivision of 9arty ?ompany reported the folloing results for a recent year
-ales
$8,000,000
37penses
6,250,000
/otal assets ;1H1=
5,000,000
/otal assets ;12H31=
5,400,000
What as the profit margin for the ?ard 0ivision?
a) "$D
&) 3!D
c) 32D
d) 22D
*,-. 0
9rofit 8argin G Fross 8arginH-ales
GE;1,#!(,(((H$,(((,(((=
G,,.
012. 8oderate O45. 1'-4
1!"
!3) /he ?ard 0ivision of 9arty ?ompany reported the folloing results for a recent year
-ales
$8,000,000
37penses
6,250,000
/otal assets ;1H1=
5,000,000
/otal assets ;12H31=
5,400,000
What as the asset turnover ratio of the ?ard 0ivision?
a) 1)!3$
&) 2)'#
c) ()"!(
d) 1)2(
*,-. *
E$,(((,(((H;E;;!,(((,((( I !,4((,(((=H2= G 13-78
012. 8oderate O45. 1'-4
!4) 3mpire 0ivision of ,e Lor: 0elights, is evaluated &ased on residual income generated) 1n the most
recent year, the 3mpire 0ivision generated a residual income of E2,(((,((( and net income of
E!,(((,((() /he target rate of return for all divisions of ,e Lor: 0elights is 2(D) What as the
return on investment for the 3mpire 0ivision?
a) 4(D
&) 13D
c) 2(D
d) 33D
*,-. 0
;,et 1ncome= - ;/arget Aate 7 /otal *ssets= G Aesidual 1ncome
;E!,(((,(((= - ;()2( 7 /otal *ssets= G E2,(((,(((
;()2( 7 /otal *ssets= G E3,(((,(((
/otal *ssets G E1!,(((,(((
AO1 G ;!,(((,(((H1!,(((,(((=
AO1 G 77.
012. 8oderate O45. 1'-4
!!) Mualitative non-financial performance measures
a) are usually the most ell-received &y managers)
&) often reflect long-term organizational goals &etter than financial performance measures)
c) can only &e developed in the production area of an organization)
d) is limited &y the num&er of critical success factors defined &y the organization)
*,-. 4 012. 3asy O45. 1'-"
!") Aelative to >ualitative performance measures, >uantitative performance measures are less
a) su&6ect to manipulation)
&) dependent on accounting information)
c) effective in the pursuit of organizational goals)
d) su&6ective)
*,-. 0 012. 3asy O45. 1'-"
1!#
!#) 1mproved effectiveness and efficiency of a product is considered a @@@@@@ performance measurement?
a) non-financial
&) financial
c) >uantitative
d) >ualitative
*,-. 0 012. 3asy O45. 1'-"
!$) ,on-financial performance measures ;,298s= are &etter than financial measures in that ,298s
a) provide a &etter indication of customer satisfaction)
&) may &etter predict the direction of future cash flos)
c) directly measure ho ell an organization does those things that create shareholder value)
d) all of the a&ove
*,-. 0 012. 3asy O45. 1'-"
!') 1n selecting non-financial performance measures managers should choose measures that reflect
a) >ualitative characteristics that point out su&-optimization activities and throughput
&ottlenec:s)
&) &oth short-term and long-term measures related to critical success factors)
c) long-term supplier satisfaction levels)
d) short-term financial via&ility)
*,-. 4 012. 3asy O45. 1'-"
"() Which of the folloing ould &e considered a non-financial performance measurement?
a) increase in mar:et share
&) variances from standards
c) num&er of customer complaints
d) cost of engineering changes
*,-. ? 012. 3asy O45. 1'-"
"1) Which type of financial measure &etter predicts the direction of future cash flos?
,on-financial 8easures 2inancial 8easures
a)
yes yes
&)
yes no
c)
no no
d)
no yes
*,-. 0 012. 3asy O45. 1'-"
"2) Which of the folloing ould &e classified as a non-financial critical success factor?
/echnical 8anufacturing 8anufacturing
Muality 37cellence 3fficiency 3ffectiveness
a)
no no no yes
&)
yes no no no
c)
yes yes yes yes
d)
yes yes no yes
*,-. ? 012. 3asy O45. 1'-!
1!$
"3) Which of the folloing is necessary for any valid performance measurement?
a) 1t must &e part of the financial accounting system in use)
&) 1t must &e >uantifia&le)
c) Foal congruence must &e promoted &y its use)
d) 1t must &e financial in nature)
*,-. ? 012. 3asy O45. 1'-3
"4) 9rocess >uality yield is used in the measurement of
a) throughput)
&) cash flos)
c) asset turnover)
d) profit margin)
*,-. * 012. 3asy O45. 1'-#
"!) *n increase in productive processing time ill increase
a) throughput)
&) process yield)
c) return on investment)
d) productive capacity)
*,-. * 012. 3asy O45. 1'-#
"") Which of the folloing is the throughput measure?
a) 9rocessing timeH/otal time
&) Food unitsH/otal time
c) Food unitsH9rocessing time
d) /otal unitsH/otal time
*,-. 4 012. 3asy O45. 1'-#
"#) 9roductive capacity is a measure used in computing
a) residual income)
&) net cash flo)
c) return on investment)
d) throughput)
*,-. 0 012. 3asy O45. 1'-#
"$) 9rocess >uality yield reflects the proportion of
a) good units to &ad units)
&) time re>uired to produce a good unit)
c) total units manufactured that are good)
d) total time spent to time availa&le)
*,-. ? 012. 3asy O45. 1'-#
"') When inventory sits idle in a department, this ould not affect the departmentCs
a) processing time)
&) throughput)
c) process >uality yield)
d) dollar days)
*,-. ? 012. 3asy O45. 1'-#
1!'
#() 9rocess >uality yield reflects the proportion of
a) time it ta:es to ma:e a good unit)
&) good units to defective units)
c) total time spent to total time availa&le)
d) total units produced that are good units)
*,-. 0 012. 3asy O45. 1'-#
#1) %olding total production in units constant, as the proportion of defective units to total units declines,
all of the folloing measures ill &e affected, e7cept
a) total unit sales)
&) throughput)
c) process >uality yield)
d) process productivity)
*,-. 0 012. 3asy O45. 1'-#
#2) 9rocess productivity is calculated as
a) total units divided &y non-value-added processing time)
&) total units divided &y value-added processing time)
c) value-added processing time divided &y total units)
d) value-added processing divided &y total time)
*,-. 4 012. 3asy O45. 1'-#
#3) Which of the folloing ould not &e an appropriate cost driver to measure internal failure?
a) design error
&) product failure
c) machine relia&ility
d) operator error
*,-. 4 012. 3asy O45. 1'-#
#4) When assessing performance, one ay to compensate for differences among divisions of a
multinational organization ould &e for the parent company to
a) use different target rates of return to compute residual incomes)
&) modify the return on investment calculation so that foreign currency fluctuations are
removed from all financial statement figures)
c) classify all domestic divisions as investment centers and all foreign divisions as profit
centers)
d) use financial performance measures for units hose records are :ept in the domestic
currency and non-financial measures for units hose records are :ept in a foreign
currency)
*,-. * 012. 8oderate O45. 1'-'
#!) 1f performance measures are perfect pro7ies for organizational goals,
a) su&-optimization ill &e enhanced)
&) su&-unit managers ill strive to achieve organizational goals)
c) su&-units can all &e decentralized)
d) residual income ill rise)
*,-. 4 012. 3asy O45. 1'-#
1"(
R/o +ondo Compan0
Aio %ondo ?ompany is a manufacturer of electronic components) /he folloing manufacturing
information is availa&le for the month of 8ay.
Food units manufactured
40,000
<alue-added hours of manufacturing time
20,000
/otal units manufactured
50,000
/otal hours of manufacturing time
30,000
#") Aefer to Aio %ondo ?ompany) What is the throughput per hour?
a) 1)3 units ;rounded=
&) 2)( units
c) 1)$ units
d) )$ units
*,-. *
7 7 G 13 un/ts
012. 3asy O45. 1'-#
##) Aefer to Aio %ondo ?ompany) What is the process >uality yield?
a) !(D
&) #!D
c) $(D
d) 12!D
*,-. ?
G 82.
012. 3asy O45. 1'-#
McAllen Compan0
One of the products manufactured &y 8c*llen ?ompany is a plastic dis:) /he information &elo
relates to the 0is: 9roduction 0epartment.
Food units produced
200,000
Bnits started in production
250,000
9rocessing time ;&udgeted hours=
425
9rocessing time ;total hours=
400
<alue-added processing time
300
1"1
#$) Aefer to 8c*llen ?ompany) What is the process >uality yield in the 0is: 9roduction 0epartment?
a) #!D
&) 44D
c) $(D
d) 12!D
*,-. ?
G 82.
012. 3asy O45. 1'-#
#') Aefer to 8c*llen ?ompany) What is the throughput per hour in the 0is: 9roduction 0epartment?
a) 4#( units
&) !(( units
c) "2! units
d) ""# units
*,-. 4
7 7 G -22 un/ts
012. 8oderate O45. 1'-#
$() Aefer to 8c*llen ?ompany) What is the process productivity in the 0is: 9roduction 0epartment?
a) !$$
&) "2!
c) ""#
d) $33
*,-. 0
G 877 un/ts
012. 8oderate O45. 1'-#
$1) Which of the folloing is not a &alanced scorecard category?
a) financial measures
&) environmental measures
c) &usiness process measures
d) personnel measures
*,-. 4 012. 3asy O45. 1'-$
1"2
$2) * primary purpose of a &alanced scorecard is to give
a) managers a ay to 6udge past performance)
&) stoc:holders a ay to 6udge current performance)
c) managers a ay to forecast future performance)
d) stoc:holders a ay to tie strategy to profita&ility)
*,-. ? 012. 8oderate O45. 1'-$
$3) 1n a &alanced scorecard, measurements should &e directly lin:ed to
a) organizational strategy and values)
&) the cost management system)
c) current organizational profita&ility)
d) activity-&ased management concepts)
*,-. * 012. 3asy O45. 1'-$
$4) ?ustomer measures on the &alanced scorecard should &e
1nternal 37ternal 8onetary ,on-monetary
a)
yes no no yes
&)
no yes yes no
c)
no yes no yes
d)
yes yes yes yes
*,-. 0 012. 8oderate O45. 1'-$
$!) * &alanced scorecard
a) records the variances &eteen &udgeted and actual revenues and e7penses)
&) can &e used at multiple organizational levels &y redefining the categories and
measurements)
c) is most concerned ith organizational financial solvency and &usiness processes)
d) all of the a&ove)
*,-. 4 012. 8oderate O45. 1'-$
$") On a &alanced scorecard, hich of the folloing ould &e most appropriate to measure customer
service?
a) Aapid time-to-mar:et of ne products
&) ?orporate financial profits
c) On-time delivery
d) 0ecrease in reor:ed products
*,-. ? 012. 3asy O45. 1'-$
$#) On a &alanced scorecard, hich of the folloing ould &e most appropriate to measure production
process integrity?
a) Aapid time-to-mar:et of ne products
&) ?orporate financial profits
c) Lo employee turnover
d) 0ecrease in reor:ed products
*,-. 0 012. 3asy O45. 1'-$
1"3
$$) On a &alanced scorecard, hich of the folloing ould &e most appropriate to measure innovation.
a) Aapid time-to-mar:et of ne products
&) ?orporate financial profits
c) On-time delivery
d) 8anufacturing cycle efficiency
*,-. * 012. 3asy O45. 1'-$
$') On a &alanced scorecard, hich of the folloing ould &e most appropriate to measure financial
performance?
a) 8ar:et share
&) ?ustomer retention
c) 9ercentage of sales from ne products
d) 1nvestment in intellectual capital
*,-. * 012. 3asy O45. 1'-$
'() * primary characteristic of a performance management system is
a) consistency at all levels in the organization)
&) adapta&ility to differing situations in the organization)
c) efficiency of application to all individuals in the organization)
d) fle7i&ility to delay reards although performance o&6ectives have &een met)
*,-. 4 012. 8oderate O45. 1'-1(
'1) Which of the folloing ould not normally affect the compensation strategy of a firm?
a) organizational goals
&) location of firm
c) competition
d) num&er of su&sidiaries
*,-. 0 012. 3asy O45. 1'-1(
'2) 8anagers should &e paid
a) on a periodic &asis)
&) &ased on results achieved)
c) using 3-O9s)
d) on a piece rate &asis)
*,-. 4 012. 3asy O45. 1'-1(
'3) 2inancial incentives are
a) different from monetary reards
&) the same thing as a salary element
c) provided to all employee groups)
d) availa&le to top management hose performance e7ceeds targeted o&6ectives
*,-. 0 012. 3asy O45. 1'-1(
1"4
'4) Which of the folloing steps in the performance reard plan model comes &efore the others listed?
a) set performance reards
&) identify performance measures
c) determine reard
d) identify critical success factors
*,-. 0 012. 3asy O45. 1'-1(
'!) O&6ectives for a pay plan
a) are not needed in a performance-&ased plan)
&) must &e stated for a performance-&ased plan to or:)
c) are essential for a periodic compensation plan to &e successful)
d) are unnecessary for a merit pay plan)
*,-. 4 012. 3asy O45. 1'-1(
'") 8erit pay is
a) a contingent amount of pay that is earned &y managers hose su&units meet a target rate
of return)
&) alays for a limited period of time and must &e re-earned each period)
c) any pay earned hen the company is profita&le)
d) a pay increment received hen a specific performance level is achieved)
*,-. 0 012. 3asy O45. 1'-1(
'#) ?ontingent pay
a) is alays paid in stoc: options)
&) is the sole source of pay an employee receives from hisHher employer)
c) is received in addition to the &asic age and is dependent upon performance e7ceeding
some performance o&6ective)
d) can only apply to individual performance)
*,-. ? 012. 3asy O45. 1'-1(
'$) 9iece rate pay
a) is a suita&le pay plan for lo-1M or:ers)
&) involves a salary plus pay for each unit produced or carried out)
c) encourages >uality output)
d) does not encourage or:ers to loo: at the companyCs ell &eing)
*,-. 0 012. 3asy O45. 1'-1(
'') Which of the folloing pay plans encourages the improvement of the overall companyCs ell-&eing?
a) monthly salary
&) cafeteria plan
c) profit sharing
d) pensions
*,-. ? 012. 3asy O45. 1'-1(
1"!
1(() Which performance plan is most tied to company o&6ectives?
a) profit sharing
&) pensions
c) piece rate
d) merit pay
*,-. * 012. 3asy O45. 1'-1(
1(1) Which performance plan &est promotes >uality of the product or service?
a) piece rate
&) health insurance
c) pensions
d) profit sharing
*,-. 0 012. 3asy O45. 1'-1(
1(2) 3mployee stoc: onership in the employeesC firm
a) ill encourage short term earnings groth patterns)
&) ill encourage employees to ta:e a longer term perspective regarding their performance in
the company)
c) is not suita&le for hourly or salaried employees)
d) is common for management in *merican firms)
*,-. 4 012. 8oderate O45. 1'-1(
1(3) * pay plan that gives an employee cash or stoc: e>ual to the difference &eteen some specified stoc:
price and the >uoted mar:et price at some future time period is
a) stoc: appreciation rights)
&) an 3-O9)
c) profit sharing)
d) merit pay)
*,-. * 012. 3asy O45. 1'-1(
1(4) Which of the folloing types of employee compensation are ta7-e7empt?
a) contingent pay
&) profit sharing
c) cafeteria plans
d) stoc: appreciation rights
*,-. 0 012. 8oderate O45. 1'-1(
1(!) /he traditional compensation pac:age provides
a) fi7ed monthly or ee:ly salaries)
&) the same salary structure for all groups of employees)
c) no incentive for non-top management to improve performance)
d) no need to include incentive compensation)
*,-. ? 012. 3asy O45. 1'-1(
1""
1(") ?ompensation pac:ages for e7ecutives of *merican firms
a) are &eginning to emphasize the long-term commitment e7ecutives should have in the firm)
&) are considered compara&le to pac:ages earned &y 3uropean and *sian e7ecutives)
c) are shifting toards loer percentages of annual incentives)
d) are shifting aay from long-term aards)
*,-. * 012. 3asy O45. 1'-1(
1(#) * pay plan that does not encourage the overall company good is
a) profit sharing)
&) an employee stoc: option plan)
c) contingent pay)
d) monthly salary)
*,-. 0 012. 3asy O45. 1'-1(
1($) Which performance plan is most motivating?
a) health insurance
&) piece rate
c) hourly ages
d) pensions
*,-. 0 012. 8oderate O45. 1'-1(
1(') 37patriate employees
a) should &e paid a &ase compara&le to hat heHshe as earning domestically)
&) ill &e paid more than corresponding managers in their home country)
c) ill alays pay ta7es in the country in hich they are &ased)
d) should receive retirement &enefits &ased on local currencies)
*,-. * 012. 8oderate O45. 1'-1(
11() Which of the folloing statements is true a&out the values statement of an organization?
a) 1t is used to formulate the mission statement)
&) 1t reflects the organization+s culture &y identifying &eliefs a&out hat is important to the
organization)
c) 1t focuses on long-range plans for the organization)
d) /he values contained in the statement must &e >uantifia&le)
*,-. 4 012. 3asy O45. 1'-1
111) Which of the folloing statements a&out an organization+s mission statement is true?
a) /he mission statement should e7press an organization+s purpose)
&) /he mission statement should identify ho an organization ill meet the needs of its
targeted customers)
c) /he mission statement must &e communicated throughout the organization)
d) *ll of the statements are true)
*,-. * 012. 3asy O45. 1'-1
1"#
S+"R$ ANS9ER
1) *nser the folloing >uestions regarding economic value added ;3<*=.
a) What is it intended to do?
&) %o is it measured?
c) %o is the measurement different than that of A1?
d) Why is 3<* a &etter performance measure of A1?
e) What is the ma6or pro&lem ith using 3<* as a long-term performance measure?
*,-.
a) /he purpose of 3<* is to more directly align the interests of common shareholders and
managers)
&) 3<* G *H/a7 profit - ;mar:et value of invested capital 7 cost of capital D=)
c) 3<* uses after-ta7 profit, cost of capital and mar:et value of assets invested) A1 uses segment
income, target rate of return and &oo: value of assets invested)
d) 4ecause it recognizes that there may &e a significant difference &eteen &oo: value and mar:et
value of assets) /he mar:et value of a company is reflected in stoc: prices hich are another
measure of performance evaluation)
e) 3<* includes the increased investment immediately even though significant income may not
occur until sometime in the future) 8ost investments ill sho decreased short-term
performance ;3<*= and may cause a company to refuse pro6ects that are profita&le in the long-
term ;similar to shortcomings of the pay&ac: method=)
012. 8oderate O45. 1'-4
2) What items affect compara&ility of different divisions ithin the same company on the &asis of 3<*,
AO1 and A1?
*,-.
a) 3ach measure is &ased on accounting income hich can &e manipulated in the short-term &y
accounting methods used, hich can differ &eteen investment centers)
&) /he measurement of the asset &ase is affected &y the choice of hat to include, and may
include items that relate to decisions made &y prior managers)
c) *ll measures focus primarily on ho ell the segments do in isolation ith results compared
to prior years for the same segment, rather than relative company-ide o&6ectives)
012. 8oderate O45. 1'-4
3) Why is it li:ely that a su&ordinate manager ould &e more attentive to certain performance measures
than overall corporate o&6ectives to guide his decision ma:ing?
*,-.
8anagers are evaluated &ased on ho their actual results compare to specific measures of
performance) /hese performance measures are intended to &e surrogates for the overall corporate goals
as they apply to specific managers) /hus performance measures are selected &y the e7tent to hich
they are good pro7ies for corporate goals ;that is the e7tent to hich they operationally define, and are
consistent ith, corporate goals= and are intended to &e ma6or focal points for managers)
012. 8oderate O45. 1'-!
1"$
4) What are some of the ma6or pro&lems associated ith accrual-&ased accounting performance
measures?
*,-.
/here are to ma6or pro&lems ith accrual-&ased accounting num&ers) /he first pro&lem is that they
can &e easily manipulated &y managers) 2or e7ample, the timing of end of period transactions can &e
accelerated or delayed to affect performance measures) -econdly, accounting measures cannot capture
all corporate goals) *ccounting measures are particularly inappropriate to measure >ualitative changes
in the or:force, >ualitative changes in products, and achievement of social and non-monetary
o&6ectives) *dditionally, accounting measures reflect only a short-term perspective of operations rather
than a long-range goal orientation)
012. 8oderate O45. 1'-!
!) What distinct advantage does a return on investment measure have over a residual income measure?
37plain)
*,-.
/he advantage of AO1 measure over A1 is that AO1 facilitates a comparison of organizational su&-units
of differing sizes) 4ecause AO1 is a performance measure that automatically scales for size, large and
small su&-units can &e compared to each other ;su&6ect to all the factors that should &e considered
hen to units in different industries, different geographical areas, etc) are compared=)
012. 8oderate O45. 1'-4
") %o can return on investment result in su&-optimization hen it is used as a performance measure?
*,-.
4ecause performance measures are used to reard performance, managers use them as decision
criteria hen they evaluate alternative courses of action) 2or e7ample, if AO1 is the performance
criterion, a division manager ill only invest in ne pro6ects that ill result in an increase in hisHher
divisionCs AO1) /his is su&-optimal if the overall organization ould &e &etter off &y the division
managerCs investment in availa&le pro6ects ith loer AO1s)
012. 8oderate O45. 1'-4
#) 0efine residual income) 3valuate residual income as a measure of performance)
*,-.
Aesidual income is the remainder of net profit once a target cost of capital has &een ta:en into
consideration) Aesidual income is determined &y deducting from net income a prescri&ed or imputed
interest charge on assets) /his method allos an organization to use different rates of interest for
various organizational assets) * main advantage of using A1 is that it overcomes some limitations of
AO1 ;su&-optimization=)
012. 8oderate O45. 1'-4
1"'
$) What are some common pro&lems encountered in determining AO1?
*,-.
,et income and investment involved can &oth &e calculated several ays) 8ultiple calculations are
often presented to sho the different factors that affect AO1, changes in sales, e7penses, and capital
investments)
012. 8oderate O45. 1'-4
') 0iscuss the ays in hich management uses fle7i&le &udgets)
*,-.
2le7i&le &udgets are important to managers in performing a variety of functions) 2ormulating &udgets
commits certain activities agreed to during the planning process to specific monetary amounts) /he
fle7i&le &udget provides the means to estimate costs at various levels of activity) /he control function
is underta:en to assure that actual operations meet planned operations) /hrough this function,
deviations are determined and variances can &e ascertained) 8anagers also use fle7i&le &udgets in
performance evaluation) 3valuation is more meaningful ith valid and accurate data to ma:e the
process of evaluation &eneficial to all involved)
012. 8oderate O45. 1'-4
1() 1dentify the steps to follo in esta&lishing the performance reard system for a company)
*,-.
/he steps are in the folloing order.
1) set strategic goals
2) identify the critical success factors
3) set the compensation strategy
4) identify performance measures
!) set performance reards
") measureHmonitor performance
#) determine reards
012. 8oderate O45. 1'-1(
11) 0iscuss pay-for-performance plans)
*,-.
3mployees should &e encouraged &y compensation plans to perform and &e loyal to the organization)
9erformance measures should &e related to a companyCs operational targets) /hese performance
measures do not have to &e evenly eighted) 8anagement can assign higher eights to more
important performance measures as they are related to the corporate goals)
012. 8oderate O45. 1'-1(
1#(
12) 0iscuss the rethin:ing ta:ing place regarding the time frame used in *merican &usiness performance
systems)
*,-.
%istorically, *merican time frames for performance has &een short term, often only one year)
9resuma&ly management tries to do hat is &est for the firm and its oners) /hus, shareholder ealth
ma7imization should &e the primary focus of management) -hort term profit ma7imization doesnCt
necessarily result in long-run shareholder ealth ma7imization)
/o encourage this different attitude, employees and management are &eing as:ed to ta:e a longer run
perspective) /his is enhanced ith employee stoc: onership in their firm)
012. 8oderate O45. 1'-1(
13) 0eferred compensation techni>ues are currently used in the *merican or: place) What are they and
ho do they &enefit the employer and the employee?
*,-.
0eferred compensation is pay that as earned on current performance &ut is paid later to the
employee) /he compensation may include profit sharing plans, pensions, and stoc:-&ased plans li:e
3-O9s) /he payment &y the employer can &e deducted currently for ta7 purposes &ut the employee
doesnCt recognize it as income until it is received) 1n stoc: option plans, earnings in the plan are not
ta7a&le to the employee until the plan is distri&uted) -ize of the plans are affected &y the firmCs stoc:
value and encourage employees to ta:e a more positive attitude a&out the companyCs future)
012. 8oderate O45. 1'-1(
14) List the five general criteria that should &e considered hen designing a performance measurement
system)
*,-.
1) /he measures should &e esta&lished to assess progress toard the organizational mission
and its related goals and o&6ectives)
2) /he persons &eing evaluated should &e aare of the measurements used and have some
input in developing them)
3) /he persons &eing evaluated should have the appropriate s:ills, e>uipment, information, and
authority to &e successful under the measurement system)
4) 2eed&ac: of accomplishment should &e provided in a timely and useful manner)
!) /he system should &e fle7i&le to adapt to ne conditions in the organizational environment)
012. 8oderate O45. 1'-3
1#1
1!) What are five advantages that nonfinancial performance measures have over financial performance
measures
*,-.
*nsers ill vary on this) /he ma6or advantages are listed &elo.
?ompared to financial measures, nonfinancial performance measures are more.
N rele:ant to nonmanagement employees ho are generally more familiar ith nonfinancial items
;such as times and >uantities= than financial items ;such as costs or profits=
N t/mel0 than historical financial data and, thus, more apt to indicate here pro&lems lie or here
&enefits can &e o&tained
N reflect/:e of the leading indicators of activities that create shareholder ealth, such as
manufacturing and delivering >uality goods and services and providing service for the customer
N causat/:e of goal-congruent &ehavior ;rather than su&optimization= &ecause they promote
long-term success rather than the short-term success promoted &y financial measures
N /nte;rated ith organizational effectiveness &ecause they can &e designed to focus on
processes rather than simply outputs
N /nd/cat/:e of productive activity and the direction of future cash flos
N appropr/ate for gauging teamor: &ecause they can focus on outputs that result from
organizational effort ;such as >uality= rather than inputs ;such as costs=
N cross funct/onal than financial measures, hich are generally related to one function
N compara<le for &enchmar:ing e7ternally than financial measures ;hich can &e dramatically
affected &y differences in accounting methods=
N al/;ned ith the reard system &ecause they are more li:ely to &e under the control of
loer-level employees than are financial measures
012. 8oderate O45. 1'-"
PR"BLEM
Enterta/nment (/:/s/on
/he 3ntertainment 0ivision is one of the operating units of -oftare -olutions, 1nc) /he folloing
operating data of the division is presented &elo.

-ales
$3,000,000
9rofit margin
10%
/arget return
15%
Aesidual income
$ 60,000
1) Aefer to the 3ntertainment 0ivision) What as the segment income of the 3ntertainment 0ivision for
the year?
*,-.
-egment income G 9rofit 8argin J -ales G )1( J E3,(((,((( G E3((,(((
012. 3asy O45. 1'-4
1#2
2) Aefer to 3ntertainment 0ivision) What as the return on investment for the 3ntertainment 0ivision?
*,-.
AO1 G -egment 1ncomeH*ssets
-egment 1ncome G E3,(((,((( J )1( G E3((,(((
*ssets G ;E3((,((( - E"(,(((=H)1! G E1,"((,(((
AO1 G E3((,(((HE1,"((,((( G 1$)#!D
012. 8oderate O45. 1'-4
Eastern (/:/s/on
/he 3astern 0ivision of /e7as ?hemical ?o) produced the folloing operating results for the previous
year.
-ales
$10,000,000
-egment income
1,500,000
*ssets
6,000,000
/he 3astern 0ivision is considering a E1,(((,((( investment in a ne pro6ect) /he 3astern 0ivision
estimates that its return on investment ;for all of its operations= ould &e at 22D ith the ne
investment)
3) Aefer to 3astern 0ivision) %o much net segment income is the ne pro6ect e7pected to produce?
*,-.
the total of the ne segment income G )22;E",(((,(((IE1,(((,(((= G
)22;E#,(((,(((= G E1,!4(,(((
the portion of the total segment income that is produced &y the ne pro6ect G
E1,!4(,((( - E1,!((,((( G E4(,(((
012. 8oderate O45. 1'-4
4) Aefer to 3astern 0ivision) 1f the manager of the 3astern 0ivision is evaluated on return on investment
alone, ill the manager invest in the ne pro6ect? 37plain)
*,-.
/he manager ould not invest in the ne pro6ect &ecause the ne pro6ect ould loer the 0ivisionCs
AO1 from the current 2!D ;E1,!((,(((HE",(((,(((= to 22D) /he ne pro6ect only generates an AO1 of
4D ;E4(,(((HE1,(((,(((=
012. 8oderate O45. 1'-4
1#3
!) /he manager of the Waco 0ivision of ,ational ?hurch /ours is preparing the &udget for the upcoming
year) *t this point, he has determined that average total assets for the upcoming year ill e>ual
E4,(((,((() /he manager is evaluated on the amount of residual income generated &y the division)
*ssume varia&le costs in the Waco 0ivision are e7pected to e>ual "(D of total sales and fi7ed costs
are e7pected to e>ual E4((,((()
a) ?ompute the sales level that ould generate a 2(D return on investment)
&) *ssuming the rate of return is 1!D, determine the level of sales that ould generate E2((,(((
of residual income)
*,-.
a) /he re>uired net income G 2(D 7 E4,(((,((( G E$((,((()
sales G net income I fi7ed costs I varia&le costs
sales G E$((,((( IO E4((,((( I ;)"( 7 sales=
sales 7 4(D G E1,2((,(((
sales G E3,(((,(((
&) sales G fi7ed costs I varia&le costs I re>uired return I residual income
sales G E4((,((( I ;)"( 7 sales= I ;)1! 7 sales= I E2((,(((
sales G E2,4((,(((
012. 8oderate O45. 1'-4
") /he folloing information is given for *lpha and 4eta 0ivisions of 2raternity ?orporation)
*lpha 4eta
-ales
$600,000 $300,000
<ar) cost of goods sold
200,000 150,000
2i7ed manufacturing costs
50,000 40,000
<aria&le selling
30,000 5,000
2i7ed admin) ;!(D allocated=
20,000 4,000
2i7ed selling ;2(D allocated=
50,000 30,000
*ssets at cost
800,000 600,000
*ccumulated depreciation
200,000 100,000
a) 1f 2raternity ?orporation uses income to evaluate division managers, compute net income that
should &e used for that purpose given the limited data a&ove)
&) 1f 2raternity ?orporation uses AO1 to evaluate division managers and uses historical cost as the
investment &ase, compute the AO1 for *lpha and 4eta)
1#4
*,-.
a) *lpha 4eta
-ales
$600,000 $300,000
?F-
(250,000) (190,000)
Fross 8argin
$350,000 $110,000
<aria&le selling
(30,000) (5,000)
2i7ed admin
(10,000) (2,000)
2i7ed selling
(40,000) (24,000)
?ontrolla&le income
$270,000 $ 79,000
&) *lpha 4eta
$270,000 x $800,000 $79,000 x $600,000
= 33.75% = 13.17%
012. 8oderate O45. 1'-4
#) 1nformation for to divisions of ?harming ?onfections ?ompany is given &elo.
9eanut 9lain
,et income
$ 60,000 $100,000
?apital investment
$400,000 $500,000
a) 1f ?harming ?onfections ?ompany charges each division 12D for capital employed, compute
residual income for the 9eanut and 9lain divisions)
&) ?ompute the AO1 for each division)
*,-.
a) 9eanut 9lain
,et income
$60,000 $100,000
1nterest charge
(48,000) (60,000)
Aesidual income
$12,000 $ 40,000
&) AO1 E"(,((( 7 E4((,((( E1((,((( 7 E!((,(((
G 1!D G 2(D
012. 8oderate O45. 1'-4
1#!
$) 1nnovative 2urnishing -olutions ;12-=, a division of -teelman ?orporation &uys and installs modular
office components) 2or the most recent year, the division had the folloing performance targets.
*sset turnover
2.5
9rofit margin
6%
/arget rate of return on investments for A1
13%
?ost of capital
10%
1ncome ta7 rate
40%
*ctual information concerning the companyCs performance for last year follos.
/otal assets at &eginning of year
$3,600,000
/otal assets at end of year
5,300,000
/otal invested capital ;annual average=
8,000,000
-ales
9,000,000
<aria&le operating costs
3,650,000
0irect fi7ed costs
4,770,000
*llocated fi7ed costs
675,000
Ae>uired.
a) 2or 12-, compute the segment margin and the average assets for the year)
&) 4ased on segment margin and average assets, compute the profit margin, asset turnover and
AO1)
c) 3valuate the AO1 performance of 12-)
d) Bsing your ansers from part &), compute the residual income of 12-)
e) ?ompute the 3<* of 12-) Why are the 3<* and A1 levels different?
f) 4ased on the data given in the pro&lem, discuss hy AO1, 3<* and A1 may &e inappropriate
measures of performance for 12-)
*,-.
a) -ales
$9,000,000
<aria&le costs
(3,650,000)
0irect fi7ed costs
(4,770,000)
-egment margin
$ 580,000
*verage assets G ;E3,"((,((( I E!,3((,(((= H 2 G E4,4!(,(((
&) 9rofit margin G E!$(,((( H E',(((,((( G ")44D
*sset turnover G E',(((,((( H E4,4!(,((( G 2)(2
AO1 G E!$(,((( H E4,4!(,((( G 13D
c) /he target AO1 for the division as 2)! 7 " G 1!D) /he division generated an AO1 of only
13D) /hus the division did not achieve its target rate of return) /he poor performance resulted
from the divisions failure to achieve its targeted asset turnover)
d) A1 G E!$(,((( - ;13D 7 E4,4!(,(((=
G E!$(,((( - E!#$,!(( G E1!((
1#"
e) *fter-ta7 profits G preta7 income - ta7es
G E!$(,((( - ;E!$(,((( 7 4(D= G E34$,(((
3<* G E34$,((( - ;E$,(((,((( 7 1(D= G E;4!2,(((=
3<* and A1 differ for three reasons) 2irst, A1 is &ased on pre-ta7 rather than after-ta7 income) -econd,
A1 is &ased on the &oo: value of investment, hereas 3<* is &ased on the mar:et value of investment)
/hird, the target rates of return differ &eteen the methods)
f) AO1, A1 and 3<* are measures of short-term performance) /hese measures may &e particularly
inappropriate for divisions that have long-term missions ;such as high groth=) 1n this case, the
relatively large groth and assets of 12- from the &eginning of the period to the end of the
period may indicate this division is oriented to groth) 1f so, the AO1, A1 and 3<* measures
ill provide an incentive contrary to the groth mission)
012. 0ifficult O45. 1'-4
') /he ?uddly ?reations ?ompany produces small plastic dolls in its Feorgia manufacturing plant) /he
company is currently evaluating ays to improve productivity) /he accountant of the firmCs parent
organization suggested that management implement a ne compensation plan &ased on throughput
performance measure as an incentive to increase productivity) /o demonstrate ho such a measure
might or:, the accountant gathered the folloing production data for a recent month.
/otal units attempted
6,000,000
Food units manufactured
4,800,000
9rocessing time ;total hours=
800
<alue-added processing time
600
a) %o many defective units ere produced?
&) ?ompute manufacturing cycle efficiency)
c) ?ompute process productivity)
d) ?ompute process >uality yield)
e) ?ompute hourly throughput)
*,-.
a) 0efective units G ",(((,((( - 4,$((,((( G 1,2((,(((
&) 8?3 G "(( ; $(( G #!D
c) 9rocess productivity G ",(((,((( ; "(( G 1(,((( units per hour
d) 9rocess >uality yield G 4,$((,((( ; ",(((,((( G $(D
e) /hroughput G 1(,((( 7 )#! 7 )$ G ",((( dolls per hour
012. 8oderate O45. 1'-#
1##