An organization that is using the cost leadership approach would: a. incur costs for innovative R&D b.

provide products at a higher cost than competitors c. focus on productivity through efficiency improvements d. bring products to market rapidly The purpose of the balanced scorecard is BEST described as helping an organization: a. b. c. d. develop customer relations mobilize employee skills for continuous improvements in processing capabilities, quality, and response times introduce innovative products and services desired by target customers translate an organizations mission and strategy into a set of performance measures that help to implement the strategy

Identify the BEST description of the balanced scorecards internal business processes perspective. To achieve our firms vision and strategy, a. b. c. d. how do we lower costs? how do we motivate employees? how can we obtain greater profits? what processes will increase value to customers?

Which component of strategy measures the change in operating income attributable solely to changes in a companys profit margins between Year 1 and Year 2? a. The growth component b. The price-recovery component c. The productivity component d. The cost leadership component

74. Successful implementation of a product differentiation strategy will result in a. a large favorable growth and price-recovery components. b. a large favorable price-recovery and productivity components. c. a large favorable productivity and growth components. d. only a large favorable growth component.

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 89 THROUGH 98: Following a strategy of product differentiation, Lucas Company makes a high-end Appliance, AP15. Lucas Company presents the following data for the years 20X3 and 20X4:

20X3 Units of AP15 produced and sold 20,000 Selling price $200 Direct materials (square feet) 60,000 Direct materials costs per square foot $20 Manufacturing capacity in units of AP15 25,000 Total conversion costs $1,000,000 Conversion costs per unit of capacity $40 Selling and customer-service capacity (customers) 60 Total selling and customer-service costs $360,000 Selling and customer-service capacity cost per customer $6,000

20X4 21,000 $220 61,500 $22 25,000 $1,110,000 $44 58 $362,500 $6,250

Lucas Company produces no defective units but it wants to reduce direct materials usage per unit of AP15 in 20X4. Manufacturing conversion costs in each year depend on production capacity defined in terms of AP15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Lucas Company has 46 customers in 20X3 and 50 customers in 20X4. The industry market size for high-end appliances increased 5% from 20X3 to 20X4. 89. What is operating income for 20X3? a. $364,500 b. $1,804,500 c. $1,440,000 d. $200,000 Answer: c Difficulty: 2 Objective: Terms to Learn: operating income ($200 x 20,000) [($20 x 60,000) + ($40 x 25,000) + ($6,000 x 60)] = $1,440,000 90. What is operating income in 20X4? a. $1,440,000 b. $1,804,500 c. $364,500 d. $200,000 Answer: b Difficulty: 2 Objective: Terms to Learn: operating income ($220 x 21,000) [($22 x 61,500) + ($44 x 25,000) + ($6,250 x 58)] = $1,804,500 4 4

91. What is the change in operating income from 20X3 to 20X4? a. $1,440,000 F b. $1,804,500 F c. $364,500 F d. $200,000 F Answer: c Difficulty: 2 Terms to Learn: operating income $1,440,000 $1,804,500 = $364,500 F (see calculations for answers to questions 89 and 90) Objective: 4

92. What is the revenue effect of the growth component? a. $220,000 F b. $420,000 F c. $400,000 F d. $200,000 F Answer: d Difficulty: Terms to Learn: growth component (21,000 20,000) x $200 = $200,000 F 2 Objective: 4

93. What is the cost effect of the growth component? a. $60,000 U b. $140,000 F c. $60,000 F d. $200,000 F Answer: a Difficulty: 3 Objective: 4 Terms to Learn: growth component [(63,000 - 60,000) x $20] + [(25,000 25,000) x $40] + [(60 60) x $6,000] = $60,000 U 94. What is the net effect on operating income as a result of the growth component? a. $60,000 U b. $140,000 F c. $60,000 F d. $200,000 F Answer: b Difficulty: 3 Terms to Learn: growth component $200,000 F + $60,000 U = $140,000 F (see calculations for answers to questions 92 and 93) 95. What is the revenue effect of the price-recovery component? a. $220,000 F b. $420,000 F c. $400,000 F d. $200,000 F Answer: b Difficulty: 2 Terms to Learn: price-recovery component ($220 $200) x 21,000 = $420,000 F Objective: 4 Objective: 4

96. What is the cost effect of the price-recovery component? a. $179,000 F b. $179,000 U c. $241,000 U d. $420,000 F Answer: c Difficulty: 3 Objective: 4 Terms to Learn: price-recovery component [($22 $20) x 63,000] + [($44 $40) x 25,000] + [($6,250 $6,000) x 60] = $241,000 U 97. What is the net effect on operating income as a result of the price-recovery component? a. $179,000 F b. $179,000 U c. $241,000 U d. $420,000 F Answer: a Difficulty: 3 Terms to Learn: price-recovery component $420,000 F + $241,000 U = $179,000 F (see calculations for answers to questions 95 and 96) Objective: 4

98. What is the net effect on operating income as a result of the productivity component? a. $179,000 F b. $45,500 F c. $241,000 U d. $420,000 F Answer: b Difficulty: 3 Objective: 4 Terms to Learn: productivity component [(61,500 63,000) x $22] + [(25,000 25,000) x $40] + [(58 60) x $6,250] = $45,500 F

141. Define engineered and discretionary costs and give two examples of each. Answer: An engineered cost results from a cause-and-effect relationship between the cost driver output and the resources used to produce that output. An example of an engineered cost would be direct materials in the production of products. Other examples of engineered costs might include shipping costs or electrical costs. A discretionary cost has two features. The first feature is that the cost arises from a periodic decision regarding the amount of cost to be incurred. The second feature is that no measurable cause-and-effect relationship exists between the output and the resources used. An example of a discretionary cost would be the cost of advertising for a product, the amount spent on researching new products, or employee training expenses.

7. Market vesting conditions vesting conditions A undertaking granted share options that become exercisable when the market price increases by at least 10% in each year over the next three years. At the end of year three, this target has not been met. 1. The undertaking should revise the grant date fair value and should reverse the staff benefits expense already recognised. 2. The undertaking should not revise the grant date fair value and should not reverse the staff benefits expense already recognised. 3. The undertaking should transfer the staff benefits expense to equity.

8. Non-market vesting conditions Example Non-market vesting condition

Management introduced a new equity-settled compensation plan with a non-market performance condition. During the following year, after a downturn in the undertakings fortunes, it considers that there is no chance that it will meet the target.

1. The cumulative expense at the end of the second year will be adjusted to nil, and the charge is reversed in the current year. 2. The undertaking should not revise the grant date fair value and should not reverse the staff benefits expense already recognised. 3. The undertaking should transfer the staff benefits expense to equity.

10. For cash-settled share-based payment transactions, IFRS 2 requires an undertaking to measure the goods or services acquired and:

1. Establish a liability which remains unchanged; 2. Establish a liability. Until the liability is settled, the undertaking is required to remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognised in the income statement for the period; 3. Hold the cost in equity; 4. The undertaking should use the reload option 11. IFRS 2 prescribes various disclosure requirements to enable users to understand: i. the nature and extent of share-based payment arrangements that existed during the period; ii. how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; iii. the effect of share-based payment transactions on the undertakings profit or loss for the period and on its financial position; iv. the impact on clients of these transactions. 1. i 2 i-ii 3. i-iii 1. i-iv