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Cost Accounting, 13e (Horngren et al.

) Chapter 23 Performance Measurement, Compensation, and Multinational Considerations


1) Many common performance measures, such as customer satisfaction, rely on internal financial accounting information. Answer: FALSE

Explanatio n:
Diff: 1 Terms :

ustomer satisfaction woul! "e o"taine! "y sur#eys that are not in the financial accounting recor!s.

Balanced Scorecard Objectiv e: 1 AACSB: Analytical skills

$) Some companies present financial an! nonfinancial performance measures for #arious organi%ation units in a single report calle! the &"alance! scorecar!.& Answer: '()E

Diff: 1 Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Analytical skills

*) 'he &"alance! scorecar!& in most organi%ations is "ro+en !own into the following categories: financial perspecti#e, customer perspecti#e, internal "usiness,process perspecit#e, an! pro!ucti#ity perspecti#e. Answer: FALSE 1

'he &"alance! scorecar!& in most organi%ations is "ro+en !own into the following categories: financial perspecti#e, customer perspecti#e, internal "usiness,process perspecit#e, an! learning,an!,growth perspecti#e.
Diff: 1 Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

-) 'he first step in !esigning accounting "ase! performance measures is to choose performance measures that align with top management.s financial goals. Answer: '()E

Diff: 1 Terms :

erformance meas!re Objectiv e: " AACSB: Reflective thinking

/) A ma0or wea+ness of comparing two companies using only operating incomes as the "asis of comparison is this metho! ignores !ifferences in the si%e of the in#estment re1uire! to earn the operating income. Answer: '()E

Diff: 1 Terms :

ret!rn on investment #RO$%& investment Objectiv e: ' AACSB: Analytical skills

2) (eturn on in#estment is also calle! the accrual accounting rate of return. 2

'()E

Diff: 1 Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Reflective thinking

3) 4n#estment turno#er is calculate! "y !i#i!ing in#estments "y re#enues. Answer: FALSE

Explanatio n:
Diff: 1 Terms :

4n#estment turno#er is calculate! "y !i#i!ing re#enues "y in#estments.

ret!rn on investment #RO$% Objectiv e: ' AACSB: Reflective thinking

5) (eturn on sales is calculate! "y !i#i!ing net income "y re#enues. Answer: '()E

Diff: 1 Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Reflective thinking

6) 'he three alternati#es for increasing return on in#estment inclu!e increasing assets such as recei#a"les, 3

increasing re#enues, an! !ecreasing costs. 74n all cases assume that all other items stay the same.) Answer: FALSE Explanatio n:
Diff: " Terms :

4ncreasing recei#a"les !oes not increase return on in#estment.

ret!rn on investment #RO$% Objectiv e: ' AACSB: Reflective thinking

18) (eturn on in#estment is the most popular performance measure when measuring performance in an in#estment center. Answer: '()E

Diff: 1 Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

11) 'o e#aluate o#erall aggregate performance, return on in#estment an! resi!ual income measures are more appropriate than return on sales. Answer: '()E

Diff: " Terms :

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: '&( AACSB:

Analytical skills

1$) (eturn on in#estment is also calle! the impute! cost of the in#estment. Answer: FALSE

Explanatio n:
Diff: 1 Terms :

(e1uire! rate of return multiplie! "y the in#estment is the impute! cost of the in#estment.

im !ted cost Objectiv e: ( AACSB: Reflective thinking

1*) 4mpute! costs are costs recogni%e! in particular situations that are not usually recogni%e! "y accrual accounting proce!ures. Answer: '()E

Diff: " Terms :

im !ted cost Objectiv e: ( AACSB: Reflective thinking

1-) 'he o"0ecti#e of maximi%ing return on in#estment may in!uce managers of highly profita"le !i#isions to re0ect pro0ects that from the #iewpoint of the o#erall organi%ation shoul! "e accepte!. Answer: '()E

Diff: " Terms :

ret!rn on investment #RO$% Objectiv e:

( AACSB: Analytical skills

1/) 9oal congruence is more li+ely to "e promote! "y using return on in#estment rather than resi!ual income as a measure of a su"unit.s managerial performance. Answer: FALSE

Explanatio n:
Diff: " Terms :

9oal congruence is more li+ely to "e promote! "y using resi!ual income rather than return on in#estment.

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: ( AACSB: Analytical skills

12) (esi!ual income calculations are similar to E:A; calculations "ecause in each calculation there is a charge for the !i#ision.s in#este! capital which is !e!ucte! from a measure of that !i#ision.s profit. Answer: '()E

Diff: " Terms :

resid!al income& economic val!e added #)*A+% Objectiv e: (&, AACSB: Analytical skills

13) Economic #alue a!!e!, unli+e resi!ual income, charges managers for the costs of their in#estments in long,term assets an! wor+ing capital. Answer: FALSE

Explanatio n: 6

<oth economic #alue a!!e! an! resi!ual income charge managers for the costs of their in#estments in long,term capital.
Diff: " Terms :

economic val!e added #)*A+%& resid!al income #R$% Objectiv e: , AACSB: Reflective thinking

15) ompanies that a!opt the Economic :alue A!!e! concept !efine in#estment as total assets employe! minus current lia"ilities. Answer: '()E

Diff: " Terms :

economic val!e added #)*A+% Objectiv e: , AACSB: Reflective thinking

16) 4n an Economic A!!e! :alue calculation, the corporate charge for a !i#ision.s in#estment is "ase! entirely on the after,tax interest rate on the firm.s !e"t. Answer: FALSE

Explanatio n:

4n an Economic A!!e! :alue calculation, the corporate charge for a !i#ision.s in#estment is "ase! on a weighte! a#erage of the after,tax interest rate on the firm.s !e"t an! the cost of the firm.s e1uity.
Diff: " Terms :

economic val!e added #)*A+% Objectiv e: , AACSB: Reflective thinking

$8) 4n an Economic :alue A!!e! calculation, the measure of the in#este! capital for a !i#ision woul! "e that !i#ision.s assets minus that !i#ision.s lia"ilities. Answer: FALSE

Explanatio n:

4n an Economic :alue A!!e! calculation, the measure of the in#este! capital for a !i#ision woul! "e that !i#ision.s assets minus that !i#ision.s current lia"ilities.
Diff: " Terms :

economic val!e added #)*A+% Objectiv e: , AACSB: Reflective thinking

$1) 4n an Economic :alue A!!e! calculation, the appropriate measure of a !i#ision.s profit woul! "e that !i#ision.s after tax operating income. Answer: '()E

Diff: " Terms :

economic val!e added #)*A+% Objectiv e: , AACSB: Reflective thinking

$$) urrent cost return on in#estment is a "etter measure of the current economic returns from an in#estment than historical cost return on in#estment. Answer: '()E

Diff: " Terms :

c!rrent cost& ret!rn on investment #RO$% Objectiv e:

AACSB: Reflective thinking

$*) A firm will see a !ifference in the return on in#estment amount !epen!ing if they use historical cost or current cost #aluation metho!s for the assets. Answer: '()E

Diff: " Terms :

ret!rn on investment Objectiv e: AACSB: Analytical skills

$-) )sing gross "oo+ #alue as an in#estment "ase is consistent with the amount of total assets shown in the con#entional "alance sheet. Answer: FALSE

Explanatio n:

)sing net "oo+ #alue as an in#estment "ase is consistent with the amount of total assets shown in the con#entional "alance sheet.
Diff: " Terms :

ret!rn on investment Objectiv e: AACSB: Analytical skills

$/) )sing gross "oo+ #alue as an in#estment "ase will result in a lower (=4 than using net "oo+ #alue as an in#estment "ase. Answer: '()E 9

Diff: " Terms : ret!rn on investment Objectiv e: AACSB: Reflective thinking

10

$2) omparing the performance of !i#isions of a multinational company operating in !ifferent countries is !ifficult !ue to the !ifferences in economic, legal, political, social, an! cultural en#ironments. Answer: '()E

Diff: 1 Terms :

Balanced Scorecard Objectiv e: . AACSB: /!ltic!lt!ralism and diversity

$3) =ne way to achie#e greater compara"ility of historical cost,"ase! (=4s for a company.s foreign !i#ision is to restate performance in !ollars. Answer: '()E

Diff: " Terms :

ret!rn on investment #RO$% Objectiv e: . AACSB: /!ltic!lt!ralism and diversity

$5) An important consi!eration in !esigning compensation arrangements is the tra!eoff "etween creating incenti#es an! imposing ris+s. Answer: '()E

Diff: 1 Terms :

moral ha0ard Objectiv e: 1 AACSB:

11

Analytical skills

$6) Moral ha%ar! !escri"es contexts in which an employee prefers to exert less effort than the effort that the owner wants "ecause the employee.s effort cannot "e accurately monitore! an! enforce!. Answer: '()E

Diff: 1 Terms :

moral ha0ard Objectiv e: 1 AACSB: )thical reasoning

*8) Another term for "enchmar+ing is a relati#e performance e#aluation. Answer: '()E

Diff: 1 Terms :

benchmarking Objectiv e: 1 AACSB: Reflective thinking

*1) E#aluating an executi#e.s performance using the annual return on in#estment woul! sharpen an executi#e.s long,run focus. Answer: FALSE

Explanatio n:
Diff: " Terms :

)sing return on in#estment is a short,run tool.

ret!rn on investment #RO$% Objectiv e:

12

1 AACSB: Analytical skills

13

*$) Managers only employ one tas+ as a part of their 0o", an! thus e#aluation of how well they !o is simple to accomplish. Answer: FALSE

Explanatio n:

Managers employ many tas+s as a part of their 0o", an! thus e#aluation of how well they !o is !ifficult to accomplish.
Diff: " Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Analytical skills

**) 'he only criticism of team,"ase! compensation is that the incenti#es for in!i#i!ual employees to excel are !iminishe!, harming o#erall performance. Answer: FALSE Explanatio n: An a!!itional critcism is that there can "e pro"lems managing team mem"ers who are not pro!ucti#e contri"utors to the team.s success "ut who, ne#ertheless, share in the team.s rewar!s.
Diff: " Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Analytical skills

*-) Examples of &coo+ing the "oo+s& are un!erstate! assets an! o#erstate! lia"ilities. Answer: FALSE Explanatio n: 14

oo+ing the "oo+s is overstating assets an! !nderstating lia"ilities.


Diff: 1 Terms :

moral ha0ard Objectiv e: 2 AACSB: Reflective thinking

*/) (esi!ual income is a "etter e#aluation metho! than return on in#estment "ecause it has a lower re1uire! rate of return for the company pro0ects than return on in#estment !oes. Answer: FALSE Explanatio n: A company can ma+e a !ecision using the same re1uire! rate of return with either return on in#estment or resi!ual income.
Diff: 1 Terms :

resid!al income& ret!rn on investment #RO$% Objectiv e: 2 AACSB: Reflective thinking

*2) An interacti#e control system is a formal information system that managers use to focus organi%ation attention an! learning on +ey strategic issues. Answer: '()E

Diff: " Terms :

interactive control system Objectiv e: 2 AACSB: Comm!nication

15

*3) <oun!ary systems !escri"e stan!ar!s of "eha#ior an! co!es of con!uct expecte! of all employees, especially actions that are off,limits. Answer: '()E

Diff: " Terms :

bo!ndary systems Objectiv e: 2 AACSB: )thical reasoning

16

*5) 'he &four le#ers& of control are operating profit "efore taxes, return on in#estment, resi!ual income, an! economic #alue a!!e!. Answer: FALSE

Explanatio n:

'he &four le#ers& of control are !iagnostic control systems, "oun!ary systems, "elief systems, an! interacti#e control systems.
Diff: " Terms :

levers of control Objectiv e: 2 AACSB: Reflective thinking

*6) Measures which monitor critical performance #aria"les that help managers trac+ progress towar! achie#ing a company.s strategic goals are collecti#ely calle! !iagnostic control systems. Answer: '()E

Diff: " Terms :

diagnostic control systems Objectiv e: 2 AACSB: Reflective thinking

-8) A report that measures financial an! nonfinancial performance measures for #arious organi%ation units in a single report is calle! a7n): A) "alance! scorecar! <) financial report scorecar! ) 17

im"alance! scorecar! >) un"alance! scorecar! Answer: A

Diff: 1 Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

-1) ustomer,satisfaction measures are an example of the: A) goal,congruence approach <) "alance! scorecar! approach ) financial report scorecar! approach >) in#estment success approach Answer: <

Diff: 1 Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

-$) An example of a performance measure with a long,run time hori%on is: 18

A) !irect materials efficiency #ariances <) o#erhea! spen!ing #ariances ) num"er of new patents !e#elope! >) All of these answers are correct. Answer:

Diff: " Terms : Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

19

-*) >oes operating income "est measure a su"unit.s financial performance? 'his 1uestion is consi!ere! part of which step in !esigning an accounting,"ase! performance measure? A) hoose performance measures that align with top management.s financial goals. <) hoose the time hori%on of each performance measure. ) hoose a !efinition for each performance measure. >) hoose a measurement alternati#e for each performance measure. Answer: A

Diff: " Terms :

Balanced Scorecard Objectiv e: " AACSB: Reflective thinking

--) Shoul! assets "e !efine! as total assets or net assets? 'his 1uestion is consi!ere! part of which step in !esigning an accounting,"ase! performance measure? A) hoose performance measures that align with top management.s financial goals. <) hoose the time hori%on of each performance measure. ) hoose a !efinition for each performance measure. >) hoose a measurement alternati#e for each performance measure. Answer:

20

Diff: " Terms : ret!rn on investment #RO$% Objectiv e: " AACSB: Reflective thinking

-/) Shoul! assets "e measure! at historical cost or current cost? 'his 1uestion is consi!ere! part of which step in !esigning an accounting,"ase! performance measure? A) hoose performance measures that align with top management.s financial goals. <) hoose the time hori%on of each performance measure. ) hoose a !efinition for each performance measure. >) hoose a measurement alternati#e for each performance measure. Answer: >

Diff: " Terms :

c!rrent cost& ret!rn on investment #RO$% Objectiv e: " AACSB: Reflective thinking

-2) @hich of the following statements a"out !esigning an accounting,"ase! performance measure is FALSE? A) 'he steps may "e followe! in a ran!om or!er. <) 'he issues consi!ere! in each step are in!epen!ent. 21

) Management.s "eliefs are present !uring the analyses. >) <eha#ioral criteria are important when e#aluating the steps. Answer: <

Diff: " Terms :

Balanced Scorecard Objectiv e: " AACSB: Reflective thinking

22

-3) Managers usually use the term return on in#estment to e#aluate: A) the performance of a su"!i#ision <) a potential pro0ect ) the performance of a su"unit >) <oth A an! are correct. Answer: >

Diff: " Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Reflective thinking

-5) 'he return on in#estment is usually consi!ere! the most popular approach to incorporating the in#estment "ase into a performance measure "ecause: A) it "len!s all the ingre!ients of profita"ility into a single percentage <) once !etermine!, there is no nee! to use it with other measures of performance ) it is similar to the company.s price earnings ratio "ecause a corporation.s return on in#estment appears e#ery !ay in The 3all Street 4o!rnal >) <oth A an! are correct. Answer: A 23

Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Reflective thinking

-6) (eturn on in#estment can "e increase! "y: A) increasing operating assets <) !ecreasing operating assets ) !ecreasing re#enues >) <oth < an! are correct. Answer: <

Diff: " Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Reflective thinking

/8) 'he AAAAAAAA metho! of profita"ility analysis recogni%es the two "asic ingre!ients in profit,ma+ing: increasing income per !ollar of re#enues an! using assets to generate more re#enues. A) <alance! Scorecar! <) (esi!ual,4ncome 24

) >upont

>)

Economic :alue A!!e! Answer:

Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Reflective thinking

25

/1) >uring the past twel#e months, the Aaron orporation ha! a net income of B/8,888. @hat is the amount of the in#estment if the return on in#estment is $8C? A) B188,888

<)

B$88,888

B$/8,888

>)

B/88,888 Answer:

Explanatio n: ) 8.$8 D B/8,888ExF x D B$/8,888


Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

/$) >uring the past twel#e months, the Genith orporation ha! a net income of B*6,$88. @hat is the return on in#estment if the amount of the in#estment is B$58,888? A) 18C <) 1$C ) 1-C >) 26

12C

Answer:

Explanatio n: ) B*6,$88EB$58,888 D 1-C


Diff: 1 Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

/*) 'he Alpha <eta orporation ha! the following information for $8H/: (e#enue B 688,888 =perating expenses 238,888 'otal assets 1,1/8,888 @hat is the return on in#estment? A) 18C <) $8C ) $/C >) 35.$C Answer: < Explanatio n: <) 7688,888 , B238,888)EB1,1/8,888 D $8C 27

Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

28

/-) @ac+er ompany has two regional offices. 'he !ata for each are as follows: Marylan! Iew Jor+ (e#enues B /58,888 B /62,888 =perating assets -,588,888 6,888,888 Iet operating income $,812,888 $,-88,888

@hat is the Marylan! >i#ision.s return on in#estment? A) 8.-$ <) 8./) 8.62 >) -.1$ Answer: A Explanatio n: A) B$,812,888EB-,588,888 D 8.-$
Diff: 1 Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

//) 'hac+er ompany has two regional offices. 'he !ata for each are as follows: Marylan! Iew Jor+ (e#enues B /58,888 B /62,888 =perating assets -,588,888 6,888,888 Iet operating income $,812,888 -,528,888

@hat is the return on in#estment for the Iew Jor+ >i#ision? A) 8.-$ 29

<) 8./-

8.62

>)

-.1$

Answer:

<

Explanatio n: <)

B-,528,888EB6,888,888 D 8./Diff: 1 Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

30

Answer the following 1uestions using the information "elow: 'he y"ertronics orporation reporte! the following information for its B1,888,888 288,888 $88,888 /88,888 yclotron >i#ision:

(e#enues =perating costs 'axa"le income =perating assets

4ncome is !efine! as operating income. /2) @hat is the yclotron >i#ision.s in#estment turno#er ratio? A) $.88

<)

*.**

$./8

>)

8.58

Answer:

Explanatio n: A)

B1,888,888EB/88,888 D $
Diff: " Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

/3) @hat is the yclotron >i#ision.s return on sales? A) 8.$8 <) 31

8.-8

8./8

>)

8.28

Answer:

<

Explanatio n: <)

B1,888,888 , B288,888 D B-88,888F B-88,888EB1,888,888 D 8.-8


Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

/5) @hat is the yclotron >i#ision.s return on in#estment? A) 8.$

<)

8.-

8./

>)

8.5

Answer:

>

Explanatio n: >) 32

B-88,888 E B/88,888 D 8.5


Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

33

Answer the following 1uestions using the information "elow: 'he top management at Munchie ompany, a manufacturer of computer games, is attempting to reco#er from a floo! that !estroye! some of their accounting recor!s. 'he main computer system was also se#erely !amage!. 'he following information was sal#age!: Alpha Di ision!eta Di ision"amma Di ision Sales B$,/88,888 7a) B1,1/8,888 Iet operating income B1,/88,888 B2/8,888 B /3/,888 =perating assets 7") 7c) B 322,223 (eturn on in#estment 8.$/ 8.1/ 7!) (eturn on sales 7e) 8.18 8./ 4n#estment turno#er 7f) 7g) 1./ /6) @hat were the sales for the <eta >i#ision? A) B-,***,*** <) B/,6/$,*58 ) B2,/88,888 >) B3,1/1,588 Answer:

Explanatio n: ) 8.18 D B2/8,888ExF x D B2,/88,888


Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

28) @hat is the #alue of the operating assets "elonging to the Alpha >i#ision? A) 34

B-,***,*** <) B2,888,888

B2,/88,888 >) B3,1/1,588 Answer: <

Explanatio n: <)

B1,/88,888E8.$/ D B2,888,888
Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

21) @hat is the #alue of the operating assets "elonging to the <eta >i#ision? A) B-,***,*** <) B/,6/$,*58

B2,/88,888 >) B3,1/1,588 Answer: A 35

A) .1/ D B2/8,888ExF x D B-,***,***


Diff: " Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

36

2$) @hat is the 9amma >i#ision.s return on in#estment? A) 8.$/ <) 8.-$ ) 8.28 >) 8.3/ Answer: > Explanatio n: >) 8./ K 1./ D 8.3/
Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

2*) @hat is the Alpha >i#ision.s return on sales? A) 8.$/ <) 8.-$ ) 8.28 >)

37

8.3/ Answer:

Explanatio n: ) B1,/88,888EB$,/88,888 D 8.28


Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

Answer the following 1uestions using the information "elow: 'he top management at 9roun!source ompany, a manufacturer of lawn an! gar!en e1uipment, is attempting to reco#er from a fire that !estroye! some of their accounting recor!s. 'he main computer system was also se#erely !amage!. 'he following information was sal#age!: #ractor Di ision#iller Di isionDigger Di ision Sales B/,888,888 7a) B1,$88,888 Iet operating income B /88,888 B3$8,888 B *88,888 =perating assets 7") 7c) B 1,888,888 (eturn on in#estment 8.$8 8.18 7!) (eturn on sales 7e) 8.1$ 8.$/ 4n#estment turno#er 7f) 7g) 1.$ 2-) @hat were the sales for the 'iller >i#ision? A) B-,588,888 <) B2,888,888 ) B3,/88,888 >) B3,3/8,888 Answer:

38

< Explanatio n: <) (eturn on Sales D Iet 4nc E Sales .1$ D B3$8,888 E S S D B3$8,888 E .1$ D B2,888,888
Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

2/) @hat is the #alue of the operating assets "elonging to the 'ractor >i#ision? A) B 1,3/8,888 <) B$,888,888 ) B $,$/8,888 >) B$,/88,888 Answer: > Explanatio n: >) (=4 D Iet 4ncome E Assets Assets D net 4ncome E (=4 Assets D B/88,888E8.$8 D B$,/88,888
Diff: " Terms : ret!rn on investment #RO$% Objectiv e:

39

' AACSB: Analytical skills

22) @hat is the #alue of the operating assets "elonging to the 'iller >i#ision? A) B/,888,888 <) B 2,888,888 ) B 3,$88,888 >) B 3,/88,888 Answer:

Explanatio n: A) . ) (=4 D Iet 4ncome E Assets Assets D Iet 4ncome E (=4 Assets D B3$8,888E8.18 D B3,$88,888
Diff: " Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

23) @hat is the >igger >i#ision.s return on in#estment? A) .$/ <) 40

.*8

.-/

>)

.28

Answer:

<

Explanatio n: <)

(=4 D Iet 4ncome E Iet Assets D (eturn on Sales x Asset 'urno#er 8.$/ K 1.$ D .*8 an :erify "y !i#i!ing Iet 4ncome E Assets D B*88,888 E B1,888,888 D .*8 >)

Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

41

25) @hat is the 'ractor >i#ision.s return on sales? A) 8.18 <) 8.1$ ) 8.1/ >) 8.$8 Answer: A Explanatio n: A) B/88,888EB/,888,888 D 8.18
Diff: " Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

26) @hat is the 'ractor >i#ision.s in#estment turno#er? A) ./8

<)

1.8

$.8

>)

$./ 42

Explanatio n: ) 4n#estment 'urno#er D Sales E Assets step 1 is to calculate the Assets (=4 D Iet 4ncome E Assets Assets D net 4ncome E (=4 Assets D B/88,888E8.$8 D B$,/88,888 'hen 4n#estment 'urno#er D B/,888,888 E B$,/88,888 D $.8
Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

38) @hat is the 'iller >i#ision.s in#estment turno#er? A) ./8

<)

.5**

1.$

>)

1./

Answer:

<

Explanatio n: <)

(eturn on 4n#estment D (eturn on Sales x 4n#estment 'urno#er 4n#estment 'urno#er D (eturn on 4n#estment E (eturn on Sales D .18E.1$ D .5**
Diff: " Terms :

43

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

31) osts recogni%e! in particular situations that are not recogni%e! "y accrual accounting proce!ures are: A) opportunity costs <) impute! costs ) cash accounting costs >) Ione of these answers is correct. Answer: <

Diff: 1 Terms :

im !ted cost Objectiv e: ( AACSB: Reflective thinking

3$) A pro"lem with using resi!ual income is that a corporation with a: A) high in#estment turno#er ratio always has a higher resi!ual income than a corporation with a smaller in#estment turno#er ratio <) high return on sales always has a higher resi!ual income than a corporation with a smaller return on sales )

44

larger !ollar amount of assets is li+ely to ha#e a higher resi!ual income than a corporation with a smaller !ollar amount of assets >) Ione of these answers is correct. Answer:

Diff: " Terms : resid!al income resid!al income #R$% Objectiv e: ( AACSB: Reflective thinking

3*) A company which fa#ors the resi!ual income approach wants managers to: A) concentrate on maximi%ing an a"solute amount of !ollars <) concentrate on maximi%ing a percentage return ) maximi%e the in#estment turno#er ratio >) maximi%e return on sales Answer: A

Diff: " Terms :

resid!al income resid!al income #R$% Objectiv e: ( AACSB: Reflective thinking

3-) 45

)sing resi!ual income as a measure of performance rather than return on in#estment promotes goal congruence "ecause resi!ual income: A) places importance on the re!uction of un!erperforming assets <) calculates a percentage return rather than an a"solute return ) concentrates on maximi%ing an a"solute amount of !ollars >) concentrates on maximi%ing the return on sales Answer:

Diff: " Terms : resid!al income resid!al income #R$% Objectiv e: ( AACSB: Reflective thinking

46

Answer the following 1uestions using the information "elow: 'he <an!age Me!ical Supply ompany has two !i#isions that operate in!epen!ently of one another. 'he financial !ata for the year $8H/ reporte! the following results: Sales =perating income 'axa"le income 4n#estment $orth B*,888,888 3/8,888 2/8,888 2,888,888 %outh B$,/88,888 //8,888 *3/,888 /,888,888

'he company.s !esire! rate of return is 18C. 4ncome is !efine! as operating income. 3/) @hat are the respecti#e return,on,in#estment ratios for the Iorth an! South >i#isions? A) 8.118 an! 8.1$/ <) 8.185 an! 8.83/ ) 8.1$/ an! 8.118 >) 8.8/8 an! 8.1/8 Answer:

Explanatio n: ) Iorth D B3/8,888EB2,888,888 D 8.1$/ South D B//8,888EB/,888,888 D 8.118


Diff: " Terms : ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

32) @hich of the following is the correct formula for return on sales? A) 47

4ncome E 4n#estment <) 4n#estment E 4ncome ) 4ncome E (e#enue >) (e#enue E 4n#estment Answer:

Diff: 1 Terms : ret!rn on investment Objectiv e: ' AACSB: Reflective thinking

33) Another name for return on in#estment is the: A) net present #alue <) accounting rate of return ) resi!ual income >) internal rate of return Answer: <

Diff: 1 Terms :

ret!rn on investment Objectiv e:

48

' AACSB: Reflective thinking

49

35) @hat are the respecti#e resi!ual incomes for the Iorth an! South >i#isions? A) B*8,888 an! B/8,888 <) B1/8,888 an! B*8,888 ) B1/8,888 an! B/8,888 >) B/8,888 an! a negati#e B1/8,888 Answer:

Explanatio n: ) Iorth D B3/8,888 , 78.1 K B2,888,888) D B1/8,888 South D B//8,888 , 78.1 K B/,888,888) D B/8,888
Diff: " Terms : resid!al income resid!al income #R$% Objectiv e: ( AACSB: Analytical skills

36) @hich !i#ision has the "est return on in#estment an! which !i#ision has the "est resi!ual income figure, respecti#ely? A) Iorth, Iorth <) South, South ) Iorth, South >) 50

South, Iorth Answer: A

Explanatio n: A)

Iorth D B3/8,888EB2,888,888 D 8.1$/ South D B//8,888EB/,888,888 D 8.118 Iorth D B3/8,888 , 78.1 K B2,888,888) D B1/8,888 South D B//8,888 , 78.1 K B/,888,888) D B/8,888
Diff: " Terms :

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: ( AACSB: Analytical skills

58) After,tax operating income minus the after,tax weighte!,a#erage cost of capital multiplie! "y total assets minus current lia"ilities e1uals: A) return on in#estment <) resi!ual income ) economic #alue a!!e! >) weighte!,a#erage cost of capital Answer:

Diff: 1 Terms : economic val!e added #)*A+% Objectiv e:

51

, AACSB: Reflective thinking

51) 'he after,tax a#erage cost of all the long,term fun!s use! "y a corporation e1uals: A) economic #alue a!!e! <) return on in#estment ) return on e1uity >) weighte!,a#erage cost of capital Answer: >

Diff: 1 Terms :

economic val!e added #)*A+% Objectiv e: , AACSB: Reflective thinking

5$) A negati#e feature of !efining in#estment "y exclu!ing the portion of total assets employe! that are finance! "y short,term cre!itors is that: A) current lia"ilities are sometimes !ifficult to !efine <) short,term !e"t is always more expensi#e to finance than long,term !e"t ) this metho! encourages managers to use an excessi#e amount of short,term !e"t >)

52

this metho! encourages managers to use an excessi#e amount of long,term !e"t Answer:

Diff: " Terms : economic val!e added #)*A+%& investment Objectiv e: , AACSB: Reflective thinking

5*) Springfiel! orporation, whose tax rate is -8C, has two sources of fun!s: long,term !e"t with a mar+et #alue of B5,888,888 an! an interest rate of 5C, an! e1uity capital with a mar+et #alue of B1$,888,888 an! a cost of e1uity of 1$C. @hat is Springfiel!.s weighte! a#erage cost of capital 7@A )? A) .8-58

<)

.8588

.861$

>)

.1888

Answer:

Explanatio n: ) L7B5,888,888 K 71 , .-) K 7.85)) M 7B1$,888,888 K .1$)N E 7B5,888,888 M B1$,888,888) D .861$


Diff: " Terms : economic val!e added #)*A+% Objectiv e: , AACSB:

53

Analytical skills

5-) Springfiel! orporation, whose tax rate is -8C, has two sources of fun!s: long,term !e"t with a mar+et #alue of B5,888,888 an! an interest rate of 5C, an! e1uity capital with a mar+et #alue of B1$,888,888 an! a cost of e1uity of 1$C. Springfiel! has two operating !i#isions, the <lue !i#ision an! the 9ol! !i#ision, with the following financial measures for the current year: <lue >i#. "old Di . #otal Assets Current &ia'ilities (perating )ncome B6,/88,888 B$,588,888 B1,8//,888 B11,888,888 B$,$88,888 B1,$88,888 ) for the <lue >i#ision?

@hat is Economic :alue A!!e! 7 A) ,B$**,-88

<)

B$1,628

B155,288

>)

B-**,628 Answer: <

Explanatio n: <)

@A D L7B5,888,888 K 71 , .-) K 7.85)) M 7B1$,888,888 K .1$)N E 7B5,888,888 M B1$,888,888) D .861$ E:A D 7B1,8//,888 K 71 , .-)) , 77B6,/88,888 , B$,588,888) K .861$) D B$1,628
Diff: ' Terms : economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

54

5/) Springfiel! orporation, whose tax rate is -8C, has two sources of fun!s: long,term !e"t with a mar+et #alue of B5,888,888 an! an interest rate of 5C, an! e1uity capital with a mar+et #alue of B1$,888,888 an! a cost of e1uity of 1$C. Springfiel!.s after,tax cost of !e"t is: A) .8*$8 <) .8-58 ) .8588 >) .861$ Answer: < Explanatio n: <) .85 K 71 , .-) D .8-5
Diff: " Terms : economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

52) Springfiel! orporation, whose tax rate is -8C, has two sources of fun!s: long,term !e"t with a mar+et #alue of B5,888,888 an! an interest rate of 5C, an! e1uity capital with a mar+et #alue of B1$,888,888 an! a cost of e1uity of 1$C. Springfiel! has two operating !i#isions, the <lue !i#ision an! the 9ol! !i#ision, with the following financial measures for the current year: <lue >i#. "old Di . #otal Assets Current &ia'ilities (perating )ncome B6,/88,888 B$,588,888 B1,8//,888 B11,888,888 B$,$88,888 B1,$88,888

alculate E:A; for the 9ol! >i#ision. A) ,B$5*,$88 55

<) ,B5$,/28

B162,588

>)

B*63,--8 Answer: <

Explanatio n: <)

@A D L7B5,888,888 K 71 , .-) K 7.85)) M 7B1$,888,888 K .1$)N E 7B5,888,888 M B1$,888,888) D .861$ E:A; D 7B1,$88,888 K 71 , .-)) , 77B11,888,888 , B$,$88,888) K .861$) D ,B5$,/28
Diff: ' Terms : economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

56

Answer the following 1uestions using the information "elow: @al!orf ompany has two sources of fun!s: long,term !e"t with a mar+et an! "oo+ #alue of B18 million issue! at an interest rate of 1$C, an! e1uity capital that has a mar+et #alue of B5 million 7"oo+ #alue of Bmillion). @al!orf ompany has profit centers in the following locations with the following operating incomes, total assets, an! current lia"ilities. 'he cost of e1uity capital is 1$C, while the tax rate is $/C. St. Louis e!ar (api!s @ichita 53) (perating )ncome Assets Current &ia'ilities B 628,888 B -,888,888 B $88,888 B1,$88,888 B 5,888,888 B 288,888 B$,8-8,888 B1$,888,888 B1,$88,888

@hat is the E:A;for St. Louis? A) B$//,3-8

<)

B*$3,-28

B*6$,/-8

>)

B3$8,888 Answer: <

Explanatio n: <)

@A D L7.1$ K 71 , .$/) K B18,888,888) M 78.1$ K B5,888,888)NEB15,888,888 D 8.18** St. Louis 7E:A;) D 7B628,888 K 71 , .$/)) , L8.18** K 7B-,888,888 , B$88,888)N D B3$8,888 , B*6$,/-8 D B*$3,-28
Diff: ' Terms : economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

55) @hat is the E:A; for A) e!ar (api!s? 57

B1*/,/58 B$$8,888

<) )

B$*-,888 >) B*8/,888 Answer: A Explanatio n: A) e!ar (api!s 7E:A;) D 7B1,$88,888 K 71 , .$/)) , L8.18** K 7B5,888,888 , B288,888)N D B688,888 , B32-,-$8D B1*/,/58
Diff: ' Terms :

economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

56) @hat is the E:A; for @ichita? A) B-/8,888 <) B1,/*8,888 ) B-1-,*28 >) B1,11/,2-8 Answer:

Explanatio

n: 58

) @ichita 7E:A;) D 7B$,8-8,888 K .3/) , L78.18** K 7B1$,888,888 , B1,$88,888)N D B1,/*8,888 , B1,11/,2-8 D B-1-,*28
Diff: ' Terms : economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

59

Answer the following 1uestions using the information "elow: ol!"roo+ ompany has two sources of fun!s: long,term !e"t with a mar+et an! "oo+ #alue of B1/ million issue! at an interest rate of 18C, an! e1uity capital that has a mar+et #alue of B6 million 7"oo+ #alue of B/ million). ol!"roo+ ompany has profit centers in the following locations with the following operating incomes, total assets, an! current lia"ilities. 'he cost of e1uity capital is 1/C, while the tax rate is *8C. (perating )ncome <ish <ash Falls <roo+s#ille Stony"roo+ 68) B 51/,888 B1,188,888 B$,-/8,888 Assets B *,3/8,888 B /,888,888 B6,$/8,888 Current &ia'ilities B 588,888 B 1,$88,888 B*,158,888

@hat is the E:A;for <ish <ash Falls? A) B**5,/2* <) B*8/,888 ) B$3/,/88 >) B$//,/88 Answer:

Explanatio n: ) @A D L7.18 K 71 , .*8) K B1/,888,888) M 78.1/ K B6,888,888)NEB$-,888,888 D 8.188 <ish <ash Falls 7E:A;) D 7B51/,888 K 71 , .*8)) , L8.188 K 7B*,3/8,888 , B588,888)N D B/38,/88 , B$6/,888 D B$3/,/88
Diff: ' Terms : economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

61) @hat is the E:A;for <roo+s#ille? 60

A) B-32,$/8 B-$5,888 ) B-1/,/$/ >) B*68,888 Answer: > Explanatio n: >) @A D L7.18 K 71 , .*8) K B1/,888,888) M 78.1/ K B6,888,888)NEB$-,888,888 D 8.188 <roo+s#ille 7E:A;) D 7B1,188,888 K 71 , .*8)) , L8.188 K 7B/,888,888 , B1,$88,888)N D B338,888 , B*58,888 DB*68,888
Diff: ' Terms : economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

<)

6$) @hat is the E:A;for Stony"roo+? A) B1,185,888 <) B 1,125,388 ) B 1,*1/,82* >) B1,-8*,82* Answer: 61

A Explanatio n: A) @A D L7.18 K 71 , .*8) K B1/,888,888) M 78.1/ K B6,888,888)NEB$-,888,888 D 8.188 Stony"roo+ 7E:A;) D 7B$,-/8,888 K 71 , .*8)) , L8.188 K 7B6,$/8,888 , B*,158,888)N D B1,31/,888 , B283,888 DB1,185,888
Diff: ' Terms :

economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

Answer the following 1uestions using the information "elow: (uth leaning Oro!ucts manufactures home cleaning pro!ucts. 'he company has two !i#isions, <leach an! leanser. <ecause of !ifferent accounting metho!s an! inflation rates, the company is consi!ering multiple e#aluation measures. 'he following information is pro#i!e! for $8H/: ASSE'S <oo+ #alue urrent #alue B$$/,888 B*88,888 B-/8,888 B$/8,888 4I =ME <oo+ #alue urrent #alue B1/8,888 B1//,888 B188,888 B18/,888

<leach leanser

'he company is currently using a 1/C re1uire! rate of return. 6*) @hat are <leach.s an! A) 8.$$F 8.23 <) 8.-$F 8./$ ) 8./$F 8.-$ >) 8.23F 8.$$ Answer: > Explanatio n: 62 leanser.s return on in#estment "ase! on "oo+ #alues, respecti#ely?

>) <oo+ #alue (=4: <leach: B1/8,888EB$$/,888 D 8.23 leanser: B188,888EB-/8,888 D 8.$$
Diff: " Terms : ret!rn on investment #RO$% Objectiv e: AACSB: Analytical skills

6-) @hat are <leach.s an! A) 8.$$F 8.23 <) 8.-$F 8./$ ) 8./$F 8.-$ >) 8.23F 8.$$ Answer: leanser.s return on in#estment "ase! on current #alues, respecti#ely?

Explanatio n: ) urrent (=4: <leach: B1//,888 E B*88,888 D 8./$ leanser: B18/,888 E B$/8,888 D 8.-$
Diff: " Terms : ret!rn on investment #RO$%& c!rrent cost Objectiv e: AACSB:

63

Analytical skills

64

6/) @hat are <leach.s an! A) B112,$/8F B*$,/88 <) B118,888F B23,/88 ) B23,/88F B118,888 >) B*3,/88F B112,$/8 Answer: A Explanatio n: A) <oo+ #alue (4: <leach: B1/8,888 , 7B$$/,888 K 8.1/) D B112,$/8 leanser: B188,888 , 7B-/8,888 K 8.1/) D B*$,/88
Diff: " Terms :

leanser.s resi!ual incomes "ase! on "oo+ #alues, respecti#ely?

resid!al income resid!al income #R$% Objectiv e: AACSB: Analytical skills

Answer the following 1uestions using the information "elow: arriage 4ncorporate! manufactures horse carriages. 'he company has two !i#isions, @heels an! Assem"ly. <ecause of !ifferent accounting metho!s an! inflation rates, the company is consi!ering multiple e#aluation measures. 'he following information is pro#i!e! for $886: ASSE'S <oo+ #alue urrent #alue B-5/,888 B//8,888 B3/8,888 B1,$88,888 4I =ME <oo+ #alue urrent #alue B1$8,888 B1-8,888 B128,888 B13$,/88

@heels Assem"ly

'he company is currently using a 1$C re1uire! rate of return. 62) @hat are @heels.s an! Assem"ly.s return on in#estment "ase! on "oo+ #alues, respecti#ely? 65

A) 8.$1F 8.$/

<)

8.$/F 8.$1

8.1-F 8.$/

>)

8.$/F 8.1Answer: <

Explanatio n: <)

<oo+ #alue (=4: @heels: B1$8,888EB-5/,888 D 8.$/ Assem"ly: B128,888EB3/8,888 D 8.$1


Diff: " Terms : ret!rn on investment #RO$% Objectiv e: AACSB: Analytical skills

66

63) @hat are @heels.s an! Assem"ly.s return on in#estment "ase! on current #alues, respecti#ely? A) 8.$1F 8.$/ <) 8.$/F 8.$1 ) 8.1-F 8.$/ >) 8.$/F 8.1Answer: > Explanatio n: >) <oo+ #alue (=4: @heels: B1-8,888EB//8,888 D 8.$/ Assem"ly: B13$,/88EB1,$88,888 D 8.1Diff: " Terms : ret!rn on investment #RO$%& c!rrent cost Objectiv e: AACSB: Analytical skills

65) @hat are @heels.s an! Assem"ly.s resi!ual incomes "ase! on "oo+ #alues, respecti#ely? A) B3-,888F B$5,/88 <) B21,588F B38,888 ) B2*,/88F B/6./88 >) 67

B$5,/88F B3-,888 Answer: <

Explanatio n: <)

<oo+ #alue (4: @heels: B1$8,888 , 7B-5/,888 K 8.1$) D B21,588 Assem"ly: B128,888 , 7B3/8,888 K 8.1$) D B38,888
Diff: " Terms : resid!al income resid!al income #R$% Objectiv e: AACSB: Analytical skills

66) 'he cost to!ay of purchasing an asset i!entical to the one currently hel! is calle! a7n): A) actual cost

<)

current cost

!ual cost

>)

fixe! cost Answer: <

Diff: " Terms :

c!rrent cost Objectiv e: AACSB:

68

Reflective thinking

188) 4f a company is a multinational company with operations in se#eral !ifferent countries, one way to achie#e compara"ility of historical,cost "ase! (=4s for facilities in !ifferent countries is to: A) restate the results of operations using the cash "asis metho! of accounting <) use 9AAO for all reporting an! calculations ) restate the results of all operations in !ollars >) All of these answers are correct. Answer:

Diff: " Terms : ret!rn on investment #RO$% Objectiv e: . AACSB: /!ltic!lt!ralism and diversity

69

181) @hich of the following statements is true? A) 'he economic, legal, political, social, an! cultural en#ironments !iffer across countries. <) 9o#ernments in some countries may impose controls an! limit selling prices of a company.s pro!ucts. ) <ecause of a!#ances in telecommunications an! transportation, the a#aila"ility of materials an! s+ille! la"or !oes not !iffer significantly across countries. >) <oth A an! < are correct. Answer: >

Diff: " Terms :

Balanced Scorecard Objectiv e: . AACSB: /!ltic!lt!ralism and diversity

18$) AAAAAAAA an! AAAAAAAA woul! "e uncontrolla"le factors that a firm woul! nee! to consi!er when e#aluating the return on in#estment of an international !i#ision. A) Manager.s experienceF currency sta"ility <) Manager.s compensationF political climate ) (e1uire! rate of returnF legal re1uirements >) ustom !utiesF cultural en#ironment Answer: 70

>

Diff: " Terms :

ret!rn on investment Objectiv e: . AACSB: /!ltic!lt!ralism and diversity

18*) 4n performance e#aluations: A) the performance of the !i#ision prior to the manager assuming control shoul! "e consi!ere! <) economic con!itions for the specific in!ustry shoul! not "e consi!ere! ) to ha#e an effecti#e an! fair e#aluation, a manager shoul! "e e#aluate! o#er se#eral time perio!s >) <oth A an! are correct. Answer: >

Diff: " Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

18-) A pro"lem with rewar!ing managers only on the "asis of resi!ual income is that: A) resi!ual income is !ifficult to measure <) 71

on occasion the items in the resi!ual income calculation are not 1uantifia"le ) resi!ual income can !epen! on items o#er which the manager has little control >) All of these answers are correct. Answer:

Diff: " Terms : resid!al income resid!al income #R$% Objectiv e: 1 AACSB: Reflective thinking

72

18/) AAAAAAAA !escri"es contexts in which an employee prefers to exert less effort than the effort that the owner wants "ecause the employee.s effort cannot "e accurately monitore! an! enforce!. A) 9oal congruence <) Moral ha%ar! ) Management compensation >) 4ncenti#e compensation Answer: <

Diff: 1 Terms :

moral ha0ard Objectiv e: 1 AACSB: Reflective thinking

182) 'ying performance measures more closely to a manager.s efforts: A) encourages the use of nonfinancial measures <) results in a strict use of financial ratios ) results in the salary component of compensation !ominating the total compensation pac+age >) <oth A an! are correct. Answer: 73

Diff: " Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

183) (elati#e performance e#aluation: A) is calle! "enchmar+ing <) filters out the effect of common noncontrolla"le factors ) results in managers ha#ing no incenti#e to help one another >) All of these answers are correct. Answer: >

Diff: " Terms :

benchmarking Objectiv e: 1 AACSB: Reflective thinking

185) 'eam incenti#es encourage cooperation "y: A) forcing people to wor+ together on !ifficult tas+s <) 74

impro#ing morale ) letting in!i#i!uals help one another as they stri#e towar! a common goal >) rewar!ing all teams the same amount Answer:

Diff: 1 Terms : Balanced Scorecard Objectiv e: 1 AACSB: Comm!nication

75

186) Many manufacturing, mar+eting, an! !esign pro"lems re1uire employees with multiple s+illsF therefore, teams are use! an! the mem"ers ha#e the a!!e! encouragement of: A) in!i#i!ual incenti#es <) management incenti#es ) morale incenti#es >) team incenti#es Answer: >

Diff: 1 Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

118) >esigners of executi#e compensation plans emphasi%e which of the following factors? A) achie#ement of organi%ational goals <) a!ministrati#e ease ) the pro"a"ility that the executi#es affecte! "y the plan will percei#e the plan as fair >) All of these answers are correct. Answer: 76

>

Diff: " Terms :

Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

111) 'he situation in which an employee prefers to exert less effort compare! with the effort !esire! "y the owner "ecause the employee.s effort cannot accurately "e monitore! an! enforce! is +nown as a7n): A) incenti#e

<)

moral ha%ar! ) o"0ecti#e

>)

impute! cost Answer: <

Diff: 1 Terms :

moral ha0ard Objectiv e: 1 AACSB: Reflective thinking

11$) @hich of the following is a !ifference "etween a !iagnostic control system an! an interacti#e control system? A) A !iagnostic control system focuses on meeting expectations, while an interacti#e control system focuses 77

on stan!ar!s of ethical "eha#ior. <) A !iagnostic control system focuses on stan!ar!s of ethical "eha#ior while an interacti#e control system focus on meeting expectations. ) A !iagnostic control system focuses on meeting expectations, while an interacti#e control system focuses on organi%ational attention an! learning on +ey strategic issues. >) A !iagnostic control system focuses on organi%ational attention an! learning on +ey strategic issues, while an interacti#e control system focuses on meeting expectations. Answer:

Diff: " Terms : diagnostic control systems& interactive control systems Objectiv e: 2 AACSB: Reflective thinking

78

11*) A part of a control system that focuses on meeting expectations is +nown as a7n): A) !iagnostic control system <) "oun!ary system ) "elief system >) interacti#e control system Answer: A

Diff: " Terms :

diagnostic control& bo!ndary& belief& and interactive control systems Objectiv e: 2 AACSB: Reflective thinking

11-) A part of a control system that !escri"es stan!ar!s of "eha#ior an! co!es of con!uct expecte! of all employees, especially actions that are off,limits, is +nown as a7n): A) !iagnostic control system <) "oun!ary system ) "elief system >) interacti#e control system Answer: 79

<

Diff: " Terms :

diagnostic control& bo!ndary& belief& and interactive control systems Objectiv e: 2 AACSB: )thical reasoning

11/) A part of a control system that articulates the mission, purpose, an! core #alues of a company is +nown as a7n): A) !iagnostic control system <) "oun!ary system ) "elief system >) interacti#e control system Answer:

Diff: " Terms : diagnostic control& bo!ndary& belief& and interactive control systems Objectiv e: 2 AACSB: Comm!nication

112) A part of a control system that attempts to focus an organi%ation.s attention an! learning on +ey strategic issues is +nown as a7n): A) !iagnostic control system 80

<) "oun!ary system ) "elief system >) interacti#e control system Answer: >

Diff: " Terms :

diagnostic control& bo!ndary& belief& and interactive control systems Objectiv e: 2 AACSB: Reflective thinking

81

113) Managers use AAAAAAAA to create an ongoing !ialog aroun! the organi%ation.s +ey strategic issues to personally in#ol#e themsel#es in su"or!inates. !ecision,ma+ing acti#ities. A) !iagnostic control systems <) "oun!ary systems ) "elief systems >) interacti#e control systems Answer: >

Diff: " Terms :

diagnostic control& bo!ndary& belief& and interactive control systems Objectiv e: 2 AACSB: Comm!nication

115) &Le#ers of control,& in a!!ition to a !iagnostic control system, are nee!e! in an organi%ation "ecause: A) !iagnostic controls ha#e "een foun! to lea! to poor financial performance <) !iagnostic controls ha#e no place in a <alance! Scorecar! system ) pressure to perform on !iagnostic controls may lea! to unethical "eha#ior >) they are man!ate! "y the Financial Accounting Stan!ar!s <oar! Answer: 82

Diff: ' Terms : diagnostic control& bo!ndary& belief& and interactive control systems Objectiv e: 2 AACSB: Reflective thinking

83

116) Assume you are e#aluating a manufacturing company. Match the #arious organi%ational acti#ities an! concepts with the performance measures liste!. Some items may ha#e more than one match. Acti ities* 1. hange in re#enues $. ycle time *. Economic or!er 1uantity -. Manufacturing !efects /. Mar+et share 2. Iew pro!ucts 3. =n,time !eli#ery 5. =perating income 6. Oro!uct relia"ility 18. 'ime,to,mar+et Performance measure* AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA a. Orofita"ility ". ustomer satisfaction

c. 4nno#ation !. Efficiency, 1uality, an! time Answer: a. Orofita"ility ". ustomer satisfaction

1, 5 /, 3, 6 2, 18

c. 4nno#ation
Diff: " Terms :

$, *, -, 3, 6, 18

!. Efficiency, 1uality, an! time

Balanced Scorecard Objectiv e: 1 AACSB: Analytical skills

84

1$8) >esigning an accounting "ase! performance measure re1uires six steps. List each step. For three of the steps, !escri"e a 1uestion that must "e resol#e! as part of the implementation process. Answer: 1. Choose erformance meas!res that align 5ith to management6s goals . >oes operating income, return on assets, or re#enues "est measure a su"unit.s financial goals? $. Choose the time hori0on of each erformance meas!re. Shoul! the performance measures "e calculate! for one year or a multiyear time hori%on? *. Choose a definition for each erformance meas!re . Shoul! assets "e !efine! as total assets or net assets? -. Choose a meas!rement alternative for each erformance meas!re. Shoul! assets "e measure! at historical cost or current cost? /. Choose a target level of erformance. Shoul! all su"units ha#e the same targets such as the same re1uire! rate of return on assets? 2. Choose the timing of the feedback. Pow often shoul! manufacturing performance reports "e sent to management?
Diff: " Terms :

Balanced Scorecard Objectiv e: " AACSB: Reflective thinking

1$1) Museum orporation uses the in#estment center concept for the museums that it manages. Select operating !ata for three of its museums for $8H/ are as follows: (e#enue =perating assets Iet operating income %t. &ouis B288,888 *88,888 /1,888 Dallas B3/8,888 $/8,888 /2,888 Miami B688,888 */8,888 /6,888

+e,uired* a. ompute the return on in#estment for each !i#ision. ". @hich museum manager is !oing "est "ase! only on (=4? @hy? c. @hat other factors shoul! "e inclu!e! when e#aluating the managers? Answer: a. St. Louis >allas Miami D B/1,888EB*88,888 D 8.138 D B/2,888EB$/8,888 D 8.$$D B/6,888EB*/8,888 D 8.126

". >allas was !oing the "est "ecause the (=4 was the highest, an! compare! to Miami, was !oing "etter with fewer assets. c. At a minimum, the company shoul! consi!er examining the >uOont metho!, resi!ual income, an! the 85

age of operating assets.


Diff: " Terms :

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: ' AACSB: Analytical skills

86

1$$) onsoli!ate! 9as Supply orporation uses the in#estment center concept for the gasoline stations that it manages in the city. onsoli!ate! has a 1/C re1uire! rate of return on in#estment in or!er for a "ranch station to "e #ia"le. Select operating !ata for three of its stations for $885 are as follows: Maple %treet (a- %treet B5,/88,888 B2,3/8,888 *,/88,888 *,/88,888 -58,888 /3/,888 Hic-or. %treet B3,/88,888 $,/88,888 -//,888

(e#enue =perating assets Iet operating income

+e,uired* a. ompute the return on in#estment for each station. ". @hich station manager is !oing "est "ase! only on (=4? @hy? c. Are any of the stations in !anger of "eing close! !ue to lac+ of performance? !. @hat other factors shoul! "e inclu!e! when e#aluating the managers? Answer: a. Maple =a+ Pic+ory D B-58,888EB*,/88,888 D B/3/,888EB*,/88,888 D B-//,888EB$,/88,888 D 8.1*3 D 8.12D 8.15$

". Pic+ory Street was !oing the "est "ecause the (=4 was the highest. c. Maple Street is in !anger of "eing shut !own "ecause it is only ma+ing a return on its in#estment "ase of 1*.3C. 'his is less than the re1uire! rate of return of 1/C. !. At a minimum, the company shoul! consi!er examining the >uOont metho!, resi!ual income, an! the age of operating assets.
Diff: " Terms :

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: ' AACSB: Analytical skills

87

1$*) Qase 'ractor follow: ompany allows its !i#isions to operate as autonomous units. 'he operating !ata for $8H/ Plo/s B$,$/8,888 588,888 1,888,888 $$8,888 12/,888 #ractors Com'ines B/88,888 B-,588,888 1/$,/88 1,-*/,888 -88,888 1,3/8,888 28,888 68,888 -58,888 *5/,888

(e#enues Accounts recei#a"le =perating assets Iet operating income 'axa"le income

+e,uired* a. ompute the in#estment turno#er for each !i#ision. ". ompute the return on sales for each !i#ision. c. ompute the return on in#estment for each !i#ision. !. @hich !i#ision manager is !oing "est? @hy? e. @hat other factors shoul! "e inclu!e! when e#aluating the managers? For parts 7") an! 7c) income is !efine! as operating income. Answer: a. $nvestment t!rnover: Olows D B$,$/8,888EB1,888,888 'ractors D B/88,888EB-88,888 om"ines D B-,588,888EB1,3/8,888 ". Ret!rn on Olows 'ractors om"ines

D $.$/ D 1.$/ D $.3-

Sales: D B$$8,888EB$,$/8,888 D 8.18 D B28,888EB/88,888 D 8.1$ D B-58,888EB-,588,888 D 8.18 D 8.$$/ D 8.1/8 D 8.$3-

c. RO$: Olows D $.$/ K 8.18 'ractors D 1.$/ K 8.1$ om"ines D $.3- K 8.18

!. om"ines. manager ha! the "est performance "ecause he ha! the highest in#estment turno#er, which offset his secon!,"est return on sales. e. (esi!ual income shoul! "e consi!ere! an! noncontrolla"le factors such as the age of the assets.
Diff: " Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

88

1$-) Oro#i!e the missing !ata for the following situations: +ed Di ision B? B$88,888 B? 8.12 8.8? 0hite Di ision B18,888,888 B-88,888 B? 8.18 ? ? !lue Di ision B? B$55,888 B1,288,888 ? 8.1$ 1./

Sales Iet operating income =perating assets (eturn on in#estment (eturn on sales 4n#estment turno#er Answer: Red Division: (=4 D (=S K 4' 8.12 D 8.8- K 4' 4' D -.8

(=S D 4ncomeESales 8.8- D B$88,888ESales SalesD B/,888,888 4' =A D SalesE=A D B/,888,888E=A D B1,$/8,888

3hite Division: (=S D B-88,888EB18,888,888 D 8.84' =A D (=4E(=SD 8.18E8.8D SE4' D $./ D B-,888,888 D B$,-88,888

D B18,888,888E$./

Bl!e Division: SalesD 4' K =A D 1./ K B1,288,888 (=4 D 8.1$ K 1./


Diff: ' Terms :

D 8.15

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

89

1$/) Pargra#e Oro!ucts has three !i#isions, which operate autonomously. 'heir results for $8H/ were as follows: )nternationa 1ast 0est l B*8,888,888 B-8,888,888 B/8,888,888 1/,888,888 $/,888,888 *3,888,888 -,/88,888 -,3/8,888 /,888,888 *8,888,888 *8,/88,888 *1,888,888

Sales ost of goo!s sol! =perating income 4n#estment "ase

'he company.s !esire! rate of return is 1/C. +e,uired* a. ompute each !i#ision.s (=4. (oun! to three !ecimal places. ". ompute each !i#ision.s resi!ual income. Answer: a. East (=4 D B-,/88,888EB*8,888,888 D 8.1/8 @est (=4 D B-,3/8,888EB*8,/88,888 D 8.1/2 4nternational D B/,888,888EB*1,888,888 D 8.121 ". 4n#estment "ase Minimum rate Minimum return =perating 4ncome Minimum return (esi!ual income
Diff: " Terms : ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: '& ( AACSB: Analytical skills

)nternationa 1ast 0est l B*8,888,888 B*8,/88,888 B*1,888,888 K 8.1/ K 8.1/ K 8.1/ B -,/88,888 B -,/3/,888 B -,2/8,888 B-,/88,888 -,/88,888 B8 B-,3/8,888 -,/3/,888 B 13/,888 B/,888,888 -,2/8,888 B */8,888

90

1$2) <atman A"stract follows: ompany has three !i#isions that operate autonomously. 'heir results for $8H/ are as +iddler B/,888,888 1,--8,888 1,888,888 6,888,888 2o-er Penguin B3,888,888 B18,888,888 1,388,888 *,/88,888 1,3/8,888 $,/$8,888 18,888,888 1-,888,888

Sales ontri"ution margin =perating income 4n#estment "ase

'he company.s !esire! rate of return is $8C. +e,uired* a. ompute each !i#ision.s (=4. ". ompute each !i#ision.s resi!ual income. c. (an+ each !i#ision "y "oth (=4 an! resi!ual income. !. @hich !i#ision ha! the "est performance in $8H/? @hy? Answer: a. (i!!ler (=4 D B1,888,888EB6,888,888 D 8.111 Ro+er (=4 D B1,3/8,888EB18,888,888 D 8.13/ Oenguin (=4 D B$,/$8,888EB1-,888,888 D 8.158 ". 4n#estment "ase Minimum rate Minimum return 4ncome Minimum return (esi!ual income c. RO$ Rank: Oenguin S 1 Ro+er S $ (i!!ler S * R$ Rank: Ro+er S1 Oenguin S$ (i!!ler S* !. As to which !i#ision was the "est, it is !ifficult to !etermine without +nowing what the results are "eing use! to e#aluate. 4f management is measuring only the return of capital, the Oenguin >i#ision has the highest ran+ing, although not much ahea! of Ro+er. Powe#er, Oenguin !oes ha#e a su"stantially higher income le#el. As to meeting management.s expectations of resi!ual income, all !i#isions fall short of the goal with Ro+er "eing slightly ahea! of Oenguin.
Diff: ' Terms :

+iddler 2o-er Penguin B6,888,888 B18,888,888 B1-,888,888 K 8.$8 K 8.$8 K 8.$8 B1,588,888 B$,888,888 B$,588,888 B1,888,888 1,588,888 B7588,888) B1,3/8,888 $,888,888 B7$/8,888) B$,/$8,888 $,588,888 B7$58,888)

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: '& ( AACSB:

91

Analytical skills

92

1$3) 'he offee >i#ision of American Oro!ucts is planning the $8H/ operating "u!get. A#erage operating assets of B1,/88,888 will "e use! !uring the year an! unit selling prices are expecte! to a#erage B188 each. :aria"le costs of the !i#ision are "u!gete! at B-88,888, while fixe! costs are set at B$/8,888. 'he company.s re1uire! rate of return is 15C. +e,uired* a. ompute the sales #olume necessary to achie#e a $8C (=4. ". 'he !i#ision manager recei#es a "onus of /8C of resi!ual income. @hat is his anticipate! "onus for $8H/, assuming he achie#es the $8C (=4 from part 7a)? Answer: a. 'arget operating income D 8.$8 K B1,/88,888 D B*88,888 B*88,888 -88,888 $/8,888 B6/8,888

=perating income :aria"le costs Fixe! costs 'arget re#enues

Sales #olume D B6/8,888EB188 D 6,/88 units ". Asset "ase Minimum rate (e1uire! return 'arget operating income (e1uire! return (esi!ual income
Diff: ' Terms :

B1,/88,888 K 8.15 B $38,888 B *88,888 $38,888 B *8,888

<onus D B*8,888 K 8./8 D B1/,888

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: '& 1 AACSB: Analytical skills

93

1$5) LaserLife Orinter artri!ge ompany is a !ecentrali%e! organi%ation with se#eral autonomous !i#isions. 'he !i#ision managers are e#aluate!, in part, on the "asis of the change in their return on in#este! assets. =perating results for the Oac+er >i#ision for $8H/ are "u!gete! as follows: Sales Less #aria"le costs ontri"ution margin Less fixe! expenses Iet operating income B/,888,888 $,/88,888 $,/88,888 1,588,888 B 388,888

=perating assets for the !i#ision are currently B*,288,888. For $8H/, the !i#ision can a!! a new pro!uct line for an in#estment of B288,888. 'he new pro!uct line will generate sales of B1,288,888 an! will incur fixe! expenses of B288,888 annually. :aria"le costs of the new pro!uct will a#erage 28C of the selling price. +e,uired* a. @hat is the effect on (=4 of accepting the new pro!uct line? ". 4f the company.s re1uire! rate of return is 2C an! resi!ual income is use! to e#aluate managers, woul! this encourage the !i#ision to accept the new pro!uct line? Explain an! show computations. Answer: a. 7e5 investment: Sales :aria"le costs Fixe! costs =perating income

B1,288,888 B628,888 288,888 1,/28,888 B -8,888

urrent (=4 D B388,888EB*,288,888 D 8.16Iew in#estment (=4 D B-8,888EB288,888 D 8.823 om"ine! (=4 D B3-8,888EB-,$88,888 D 8.132 Accepting the new pro!uct line will re!uce the !i#ision.s (=4. 'his woul! ma+e the manager reluctant to ma+e the in#estment. ". 4n#estment Minimum return (e1uire! amount 4ncome (e1uire! amount (esi!ual income
Diff: " Terms :

B288,888 K 8.82 B *2,888 B -8,888 *2,888 B -,888

'he manager woul! accept the in#estment "ecause income is increase! "y B-,888.

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: '& (& 1 AACSB:

94

Analytical skills

95

1$6) apital 4n#estments has three !i#isions. Each !i#ision.s re1uire! rate of return is 1/C. Olanne! operating results for $8H/ are as follows: Di ision A < (perating income B1/,888,888 B$/,888,888 B11,888,888 )n estment B188,888,888 B1$/,888,888 B /8,888,888

'he company is planning an expansion, which will re1uire each !i#ision to increase its in#estments "y B$/,888,888 an! its income "y B-,/88,888. +e,uired* a. ompute the current (=4 for each !i#ision. ". ompute the current resi!ual income for each !i#ision.

c. (an+ the !i#isions accor!ing to their current (=4s an! resi!ual incomes. !. >etermine the effects after a!!ing the new pro0ect to each !i#ision.s (=4 an! resi!ual income. e. Assuming the managers are e#aluate! on either (=4 or resi!ual income, which !i#isions are please! with the expansion an! which ones are unhappy?

96

Answer: a. A (=4 D B1/,888,888EB188,888,888 < (=4 D B$/,888,888EB1$/,888,888 (=4 D B11,888,888EB/8,888,888 ". A (4 < (4 (4 D 8.1/ D 8.$8 D 8.$$

D B1/,888,888 , 7B188,888,888 K 8.1/)D B 8 D B$/,888,888 , 7B1$/,888,888 K 8.1/)D B2,$/8,888 D B11,888,888 , 7B/8,888,888 K 8.1/)D B*,/88,888 R$ Rank: 1. < $. *. A D 8.1/2 D 8.163 D 8.$83

c. RO$ Rank: 1. $. < *. A

!. A (=4 D B16,/88,888EB1$/,888,888 < (=4 D B$6,/88,888EB1/8,888,888 (=4 D B1/,/88,888EB3/,888,888 A (4 < (4 (4

D B16,/88,888 , 7B1$/,888,888 x 8.1/)D B 3/8,888 D B$6,/88,888 , 7B1/8,888,888 x 8.1/)D B3,888,888 D B1/,/88,888 , 7B3/,888,888 x 8.1/)D B-,$/8,888

e. E#eryone woul! "e please! if resi!ual income was use! "ecause resi!ual incomes increase with the expansion. Powe#er, it woul! "e !ifficult to e#aluate each !i#ision on a comparati#e "asis "ecause each !i#ision.s in#estment "ase is !ifferent. =nly the manager of >i#ision A is please! with the new in#estment if (=4 is use! "ecause that is the only !i#ision with an increase! (=4. 4n the case of a!!itional in#estments that are re1uire! "y corporate management, resi!ual income may "e the "est to use for e#aluating each manager in!i#i!ually, "ut not collecti#ely.
Diff: ' Terms :

ret!rn on investment #RO$%& resid!al income resid!al income #R$% Objectiv e: '& (& 1 AACSB: Analytical skills

1*8) optermagic ompany supplies helicopters to corporate clients. optermagic has two sources of fun!s: long term !e"t with a mar+et an! "oo+ #alue of B*$ million issue! at an interest rate of 18C, an! e1uity capital that has a mar+et #alue of B15 million 7"oo+ #alue of B5 million). 'he cost of e1uity capital for optermagic is 1/C, an! its tax rate is *8C. optermagic has profit centers in four !i#isions that operate autonomously. 'he company.s results for $885 are as follows: (perating Current )ncome Assets &ia'ilities B1,3/8,888 B11,/88,888 B$,/88,888 $,-88,888 6,888,888 *,/88,888 -,23/,888 $3,/88,888 6,/88,888 -,$88,888 $/,888,888 5,888,888 97

Iew Jor+ hicago >alllas Los Angeles

+e,uired* a. ompute optermagic.s weighte! a#erage cost of capital. ". ompute each !i#ision.s Economic :alue A!!e!. c. (an+ the !i#isions "y E:A.

98

Answer: a. @A D L7.18 x 71 , .*8) x B*$,888,888) M 7.1/ x B15,888,888)N E B/8,888,888 D 6.55 C

". Iew Jor+ 7E:A) D L7B1,3/8,888 x 71 , .*8)N , L8.8655 x 7B11,/88,888 , B$,/88,888)N D B1,$$/,888 , B556,$88 D B**/,588 hicago 7E:A) D L7B$,-88,888 x 71 , .*8)N , L8.8655 x 7B6,888,888 , B*,/88,888)N D B1,258,888 , B/-*,-88 D B1,1*2,288 >allas 7E:A) D L7B-,23/,888 x 71 , .*8)N , L8.8655 x 7B$3,/88,888 , B6,/88,888)N D B*,$3$,/88 , B1,355,-88 D B1,-6-,188 Los Angeles 7E:A) D L7B-,$888,888 x 71 , .*8)N , L8.8655 x 7B$/,888,888 , B5,888,888)N D B$,6-8,88 , B1,236,288 D B1,$28,-88 c. Rank: >allas S 1 Los Angeles S $ hicago S * Iew Jor+ SDiff: ' Terms :

economic val!e added #)*A+% Objectiv e: , AACSB: Analytical skills

99

1*1) 'he executi#e #ice presi!ent of @ic+er Oen ompany wants to esta"lish an accounting,"ase! performance measurement system for the company.s new plant. 'he company has an accounting information system sufficient to support a fairly sophisticate! performance measurement system. 'he new plant is going to "e consi!ere! an in#estment center since its pro!ucts will "e mar+e!ly !ifferent from others the company currently sells. 'he new plant will ha#e no internal !ealings with other plants within the company. +e,uired* @hat are some of the +ey steps that shoul! "e un!erta+en in the esta"lishment of an accounting,"ase! performance measurement system? Answer: Qey steps inclu!e: 1. hoose performance measures that align with top management.s financial goals for the plant. 'hey woul! inclu!e those that relate to the plant as an in#estment center. $. hoose the time hori%on of each performance measure in step 1.

*. hoose a !efinition of the components in each performance measure in step 1. For example, how shoul! in#estment "e !efine!? -. hoose a measurement alternati#e for each performance measure in step 1. For example, shoul! historical cost or current cost "e use! to measure in#estment? /. 2. hoose a target le#el of performance. hoose the timing of fee!"ac+.
Diff: " Terms :

Balanced Scorecard Objectiv e: " AACSB: Reflective thinking

1*$) ompanies are increasingly using nonfinancial measures to e#aluate performance. @hy? Since these num"ers !o not come from the company.s financial recor!s, why are they use!? Answer: 'he correct answer will re#ol#e aroun! the o"0ecti#e of pro#i!ing 1uality goo!s to the corporation.s customers. Tuality goo!s "ring repeat "usiness an! satisfie! customers are a "usiness. "est a!#ertisement. 'he i!ea is that these nonfinancial measures concentrate on areas an! 1uestions that in!icate the 1uality of a particular corporation.s pro!ucts. @hile some of these items !o not come from a companies. financial recor!s, such as !efect rates, they are 1uantifia"le an! can "e #erifie!.
Diff: ' Terms :

100

Balanced Scorecard Objectiv e: 1 AACSB: Reflective thinking

101

1**) <o".s ellular Ohone ompany uses (=4 to measure !i#isional performance. Annual (=4 calculations for each !i#ision ha#e tra!itionally employe! the en!ing amount of in#este! capital along with annual operating income an! net re#enue. 'he >upont metho! is generally use!. 'he company.s Ohone Accessories >i#ision ha! the following results for the last two years: $8H/ (=4 D 7B$,888,888EB$8,888,888) K 7B$8,888,888EB18,888,888) D 8.$8 $8H2 (=4 D 7B$,-88,888EB$/,888,888) K 7B$/,888,888EB1/,888,888) D 8.12 orporate management was !isappointe! in the performance of the !i#ision for $8H2, since it ha! ma!e an a!!itional in#estment in the !i#ision that was "u!gete! for a $*C (=4. +e,uired* a. >iscuss some factors that may ha#e contri"ute! to the !ecrease in (=4 for $8H2. ". @oul! there ha#e "een any su"stantial !ifference if a#erage capital ha! "een use!? Answer: a. @hile sales increase! "y $/C, net income only increase! "y $8C. 'his may in!icate that expenses increase! more than they shoul! ha#e. Apparently, the expecte! marginal net income from the new in#estment was B1,1/8,888 7B/,888,888 K 8.$*), an! either sales were too low or expenses too high for the new pro!ucts. <ut this calculation is somewhat hypothetical since we !o not +now expecte! sales. Start,up costs may ha#e also contri"ute! to the increase! expenses of the first year.s operations. An increase in in#estment also contri"ute! to the !ecline in return on in#estment. ". )sing a#erage capital: D 7B18,888,888 M B1/,888,888)E$ D B1$,/88,888 (=4 D B$,-88,888EB1$,/88,888 D 8.16$ )sing a#erage capital woul! ha#e impro#e! the (=4 from 12C to o#er 16C. 'his woul! still ha#e "een a !isappointment to management "ecause the total (=4 fell "elow expectations. Oerhaps it is unreasona"le to expect a new in#estment to achie#e its target (=4 in the first year of operations.
Diff: ' Terms :

ret!rn on investment #RO$% Objectiv e: ' AACSB: Analytical skills

1*-) 'he economic #alue a!!e! concept has attracte! consi!era"le attention in recent years. Explain the attracti#eness of this num"er as a measure of performance. Answer: 'he attracti#eness of economic #alue a!!e! at the !i#isional le#el is primarily the fact that it allows managers to incorporate the cost of capital in !ecisions at the !i#isional le#el.
Diff: ' Terms :

102

economic val!e added #)*A+% Objectiv e: , AACSB: Reflective thinking

103

1*/) @hen using the historical cost of assets for calculation of return on in#estment, is it "etter to use the gross "oo+ #alue of the assets or the net "oo+ #alue of the assets ? >iscuss. Answer: Although the most fre1uently use! measure of assets "y companies is the net "oo+ #alue, there are a!#antages an! !isa!#antages of each option. 'hose who use the net "oo+ #alue will note that it is consistent with the assets shown in the con#entional "alance sheet, an! that it is consistent with the income computations that inclu!e !e!uctions for !epreciation expense. 'hose who fa#or using the gross "oo+ #alue calculation will note that it is more li+ely to "e a"le to compare (=4 across the su"units.
Diff: ' Terms :

ret!rn on investment #RO$% Objectiv e: AACSB: Reflective thinking

1*2) >iscuss the issues an! complications that may arise when multinational corporations con!uct performance measurement an! comparisons among !i#isions locate! in !ifferent countries. Answer: 'here are wi!e !ifferences in legal, political, social, an! cultural en#ironments among countries. Many go#ernments impose price an! importEexport controls on #arious pro!ucts. A#aila"lilty of materials an! s+ille! la"or as well as power, transportation, an! communication gri!s are li+ely to create significant issues. >i#isions operating in !ifferent countries account for their performance in !ifferent currencies. 'he exchange rates will fluctuate an! there will "e !ifferences an! effects as a result of le#els of inflation, which will nee! to "e reconcile! with a!0ustments to the measurement criteria esta"lishe!.
Diff: ' Terms :

erformance meas!re Objectiv e: . AACSB: /!ltic!lt!ralism and diversity

104

1*3) (U> Storage is a small, "ut !i#ersifie!, mo#ing an! storage company. 4n recent years, its corporate income has !ecline! to unaccepta"le le#els. 'o change the !irection of the company, the "oar! of !irectors hire! a new chief executi#e officer. She is currently consi!ering three alternati#e ways to rewar! !i#ision managers for performance. 'hey are: 1. 9i#e each manager a competiti#e salary with no "onus for performance. $. 9i#e each manager a "ase salary with the largest portion "eing a "onus "ase! on performance, (=4 "eing the yar!stic+. *. 9i#e each manager a "ase salary with a "onus "ase! on comparati#e performance with the other !i#isions. +e,uired: E#aluate each of the i!eas, gi#ing strengths an! wea+nesses. Answer: 1. =pportunities for salary increases might "e !eci!e! #ia other means such as impro#ements in employee moti#ation, cost sa#ings i!eas, or impro#e! management s+ills. 'his metho! will fit some types of situations an! managers "etter than the "onus metho!s, "ut shoul! not "e use! in situations where a high !egree of moti#ation is !esire!. $. 'he secon! i!ea is goo! for moti#ating a manager to impro#e the performance of each gi#en !i#ision. A wea+ness in this metho! occurs when managers ma+e !ecisions that maximi%e return on in#estment in the short run "ecause they ha#e no intent to stay with the company o#er a long perio! of time. *. 'he thir! metho! is great for moti#ating managers to compete with each other. Powe#er, some rewar! shoul! "e a#aila"le for the lowest rate! manager if that manager.s performance is, in fact, a"o#e the company.s stan!ar! for performance. Su"optimi%ation is a potential pro"lem with this approach if the winning manager.s "onus is su"stantially a"o#e e#eryone else.s "onus.
Diff: " Terms :

ret!rn on investment #RO$%& balanced scorecard Objectiv e: 1 AACSB: Analytical skills

105

1*5) <riefly explain each of the four le#els of control. @hy !oes a company nee! to implement more than a !iagnostic control system? Answer: 'he four le#ers of control are !iagnostic control systems, "oun!ary systems, "elief systems, an! interacti#e control systems. ompanies must stri#e for performance, "eha#e ethically, inspire employees, an! respon! to strategic threats an! opportunities in the en#ironment. >iagnostic control systems in#ol#e measures that help a company to !iagnose whether or not a company is performing accor!ing to expectations. <oun!ary systems !escri"e stan!ar!s of "eha#ior an! co!es of con!uct expecte! of all employees, especially actions that are off,limits. <elief systems articulate the mission, purpose, an! core #alues of a company. 4nteracti#e control systems are formal information systems that managers use to focus organi%ation attention an! learning on +ey strategic issues. 'he &le#ers of control,& in a!!ition to !iagnostic control systems, are nee!e! since the pressure to perform on !iagnostic goals can "e so strong that management might ta+e steps to cut corners an! ma+e their performance loo+ "etter than it really is. 4n a!!ition, !iagnostic systems might focus management too much on meeting short term goals that organi%ation learning an! attention to +ey strategic issues might "e ina!e1uate for the future.
Diff: " Terms :

diagnostic control& bo!ndary& belief& and interactive control systems Objectiv e: 2 AACSB:

(eflecti#e thin+ing

106