Chapter 14 Performance Mea

Chapter 14--Performance Measurement, Balanced Scorecards,
and Performance Rewards
Student: ___________________________________________________________________________
1. An organization’s values statement identifies fundamental beliefs about what is important to the
organization.
True False
2. An organization typically develops a values statement before developing a mission statement.
True False
3. The objectives identified in an organization’s values statement must be objective in nature.

True False
4. In order to assure achievement of an organizational goal, performance measures must be established for that
goal.
True False
5. Internal performance measures focus on the efficiency and effectiveness of an organization’s production
process.
True False
6. External performance measures focus on the efficiency and effectiveness of an organization’s production
process.
True False
7. The most common external performance measure used for all organizations is financial in nature.
True False

8. Performance measures need not be correlated with the mission of a subunit.
True False
9. Benchmarks for performance measures may be monetary or non-monetary.

True False
10. The segment margin of a profit or investment center includes allocated common costs.
True False
11. The segment margin of a profit or investment center does not include allocated common costs.
True False
12. Manipulation of segment expenses may result in the segment margin not being an accurate performance
measure.
True False
13. Profit margin indicates management’s efficiency with regard to sales and expenses.
True False
14. Asset turnover measures the effective use of assets relative to revenue production.
True False
15. Economic value added (EVA) applies the target rate of return to the market value of the capital invested in a
division.
True False
16. Economic value added (EVA) applies the target rate of return to the book value of the assets invested in a
division.
True False

17. Economic value added (EVA) is a more appropriate performance measure when there is a large difference
between the market value of invested capital and the book value of assets.
True False
18. Economic value added (EVA) is focused on short-term performance measurement.

True False
19. Financial measures are lagging indicators.

True False
20. Speed of delivery is an example of a leading indicator.

True False
21. Non-financial measures are generally more indicative of productive activity than are financial performance
measures.
True False
22. Non-financial measures are generally less timely than are financial performance measures.
True False
23. Non-financial measures are generally more appropriate for gauging teamwork than are financial
performance measures.
True False
24. The number of good units or quantity of services that are produced and sold by an organization within a
specified time is referred to as process quality yield.
True False
25. Total units produced during the period divided by the value-added processing time is referred to as process
productivity.
True False

26. The balanced scorecard approach complements measures of past performance with measures of the drivers
of future performance.
True False
27. Hourly compensation provides a definite link between performance and reward.

True False
28. In a pay-for-performance plan, defined performance measures must be highly correlated with an
organization’s operational targets.
True False
29. Tax deferral is the most desirable form of tax treatment for employee compensation elements.
True False
30. Expatriate workers should receive a compensation package that reflects cost of living factors and currency
fluctuations.
True False
31. Cultural differences between countries may make performance evaluation in multinational settings more
difficult.
True False
32. A statement that identifies fundamental beliefs about what is important to an organization is referred to as a
______________________________.
________________________________________
33. Performance measures that provide a focus on the efficiency and effectiveness of production processes are
referred to as ____________________ measures.
________________________________________
34. Performance measures that reflect an organization’s ability to satisfy customers better than rival firms do are
________________________________________

35. The ratio of income to assets invested is referred to as ___________________________________.
________________________________________
36. The ratio of income to sales is referred to as ______________________________.

________________________________________
37. The ratio of sales to assets is referred to as ______________________________.

________________________________________
38. Profit margin ´ Asset Turnover is often referred to as the _________________________.

________________________________________
39. Profit earned in excess of an amount charged for funds committed to a profit center is referred to as
______________________________.
________________________________________
40. A measure of profit produced above the cost of capital is referred to as

___________________________________.
________________________________________
41. An indicator that reflects the results of past decisions is referred to as a(n)
______________________________.
________________________________________
42. Statistical data about the steps that will create the results desired as referred to as
___________________________________.
________________________________________
specified time is referred to as ____________________.
________________________________________

44. Total units produced during the period divided by the value-added processing time is referred to as
______________________________.
________________________________________
45. The proportion of good units resulting from activities is referred to as

________________________________________.
________________________________________
46. The three components of throughput are _____________________________________________,

______________________________, and ___________________________________.
________________________________________
47. Which of the following statements is true about the values statement of an organization?
A. It is used to formulate the mission statement.
B. It reflects the organization’s culture by identifying beliefs about what is important to the organization.
C. It focuses on long-range plans for the organization.
D. The values contained in the statement must be quantifiable.
48. Which of the following statements about an organization’s mission statement is true?

A. The mission statement should express an organization’s purpose.
B. The mission statement should identify how an organization will meet the needs of its targeted customers.
C. The mission statement must be communicated throughout the organization.
D. All of the statements are true.
49. Variance analysis would be appropriate to measure performance in

A. profit centers.
B. investment centers.
C. cost centers.
D. all of the above.
50. Which of the following responsibility centers may be evaluated on the basis of residual income?
A. investment center
B. revenue center
C. profit center
D. cost center

51. Net cash flow could be used to measure performance in
A. cost centers and investment centers.
B. revenue centers and profit centers.
C. revenue centers and investment centers.
D. profit and investment centers.
52. Using a single performance evaluation criterion for an investment center

A. is most effective because a manager can concentrate on a single goal.
B. can result in manipulation of the performance measure.
C. allows multinational investment centers' performances to be equitably compared.
D. is only appropriate if the criterion is non-monetary.
53. A company has set a target rate of return of 16% for its investment center. An investment center manager in
this company would
A. acquire assets that would increase divisional income by more than 16%.
B. sell all assets that do not generate divisional income of more than 16%.
C. acquire assets that would increase sales by more than 16%.
D. acquire any technologically advanced assets that would cause costs to be reduced by 16% or more.
54. In evaluating the performance of a profit center manager, the manager

A. and the sub-unit should be evaluated on the basis of the same costs and revenues.
B. should only be evaluated on the basis of variable costs and revenues of the sub-unit.
C. should be evaluated on all costs and revenues that are controllable by the manager
D. should be evaluated on all costs and revenues that can be directly traced to the sub-unit.
55. The Statement of Cash Flows may be superior to the cash budget as a performance evaluation measure
because
A. cash flows are shown on the accrual basis on the cash budget.
B. the cash budget does not include capital investments.
C. cash flows are arranged by activity.
D. of all the above reasons.
56. The Statement of Cash Flows indicates the cash inflows and outflows from
A. investing, financing, and borrowing activities.
B. operating, investing, and sending activities.
C. merchandising, financing, and investing activities.
D. operating, investing, and financing activities.

57. Division A's investment in a new project will raise the overall organization's return on investment if
A. the return on investment on the new project exceeds the target return of the overall organization.
B. the return on investment on the new project exceeds the return on investment of Division A.
C. the return on investment on the new project exceeds the overall organization's return on investment.
D. Division A's return on investment exceeds the return on investment of the overall organization.
58. If sales and expenses both rise by $100,000

A. residual income will increase.
B. return on investment will increase.
C. return on investment will be unchanged.
D. asset turnover will decrease
59. Perry Corporation is composed of three operating divisions. Overall, the Perry Corporation has a return on
investment of 20%. Division A has a return on investment of 25%. If Perry Corporation. evaluates its managers
on the basis of return on investment, how would the Division A manager and the Perry Corporation president
react to a new investment that has an estimated return on investment of 23%?
Division A Perry Corporation President

Manager

A. accept accept
B. accept reject
C. reject accept
D. reject reject

60. A company's return on investment is affected by a change in
Profit Margin
Asset Turnover on Sales

A. Yes Yes
B. Yes No
C. No No
D. No Yes

61. The return on investment (ROI) ratio measures

A. only asset turnover.
B. only earnings as a percent of sales.
C. both 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.

62. Return on investment (ROI) is a term most often used to express income earned on assets invested in a
business unit. A company's return on investment would increase if sales
A. increased by the same dollar amount as expenses and total assets increased.
B. remained the same and expenses were reduced by the same dollar amount that total assets increased.
C. decreased by the same dollar amount that expenses increased.
D. and expenses increased by the same percentage that total assets increased.
63. A sub-unit of an organization is evaluated on the basis of its ROI. If this sub-unit's sales and expenses both
increase by $30,000, how will the following measures be affected?
ROI Assert turnover Profit margin

A. increase increase increase
B. indeterminate increase decrease
C. no change increase decrease
D. no change decrease no change

64. Which of the following would be an appropriate alternative to the use of ROI in evaluating the performance
of an investment center?
Residual Net cash Cost and revenue

income flow variance analysis

A. yes yes yes
B. no yes no
C. yes no no
D. yes no yes

65. Return on investment is computed by dividing income by

A. contribution margin.
B. inventory turnover.
C. assets invested.
D. long-term assets.
66. Presently, the Software Division of Bennett Publishing Corporation has a profit margin of 30%. If total sales
rise by $100,000, the net result will be
A. an increase in the profit margin ratio to above 30%.
B. a decrease in the profit margin ratio to below 30%.
C. no change in the profit margin ratio.
D. a change in the profit margin ratio that cannot be determined from this information.

67. Profit margin indicates the portion of sales that
A. covers fixed expenses.
B. is not used to cover expenses.
C. equals contribution margin.
D. equals product contribution margin.
68. Profit margin equals

A. income divided by sales.
B. incomes divided by average inventory.
C. income divided by average assets.
D. income divided by average stockholder's equity.
69. The Du Pont model measures

A. residual income.
B. return on investment.
C. throughput.
D. profit.
70. In the Du Pont model, profit margin is a ratio of

A. income to sales.
B. income to assets.
C. sales to income.
D. sales to assets.
71. The Du Pont model measures ROI as it is affected by

A. contribution margin and asset turnover.
B. profit margin and asset turnover.
C. asset turnover.
D. profit margin.
72. Residual income is used as a performance measure in

A. profit centers.
B. cost centers.
C. investment centers.
D. revenue centers.

73. If a new project generates a positive residual income, the
A. project's return on investment is less than the target rate.
B. project's return on investment is greater than the target rate.
C. project's return on investment is equal to the target rate.
D. relationship between the project's return on investment and the target rate cannot necessarily be determined.
74. A prospective project under consideration by the Internet Division of Communications Corporation. has an
estimated residual income of $(20,000). If the project requires an investment of $400,000, the
A. project generates a negative return on investment.
B. project's return on investment is zero.
C. project's return on investment is 5% less than the company's target rate.
D. company's target rate is 15%
75. Residual income is the

A. contribution margin of an investment center, less the imputed interest on the invested capital used by the
center.
B. contribution margin of an investment center, plus the imputed interest on the invested capital used by the
center.
C. income of an investment center, less the imputed interest on the invested capital used by the center.
D. income of an investment center, plus the imputed interest on the invested capital used by the center.
76. Residual income is an example of a ____ performance measurement.

A. long-term
B. short-term
C. qualitative
D. profit center
77. If a division generates a positive residual income then the division's

A. asset turnover was very high.
B. profitability was greater than that of other divisions in the company.
C. performance was above expectations.
D. actual return on investment exceeds the division's target return.
78. Residual income is determined as

A. income times the asset turnover rate.
B. income times the inventory turnover rate.
C. income minus (asset base times target rate of return).
D. sales minus (asset base times target rate of return).

79. Residual income is used as a performance measure in which of the following types of centers?
Revenue Investment Profit

A. yes no yes
B. yes yes yes
C. no yes yes
D. no yes no

80. An increase in a corporation's target rate would result in a(n)

A. increase in residual income.
B. decrease in return on investment.
C. decrease in residual income.
D. decrease in both residual income and return on investment.
81. All other things being equal, an increase in sales price would increase
A. asset turnover.
B. profit margin.
C. residual income.
82. If sales and expenses both rise by $100,000, profit margin will
A. decrease and asset turnover will decrease.
B. increase and asset turnover will decrease.
C. decrease and asset turnover will increase.
D. increase and asset turnover will increase.
83. Asset turnover equals

A. income divided by average assets.
B. sales divided by assets.
C. sales divided by average assets.
D. assets divided by sales.
84. The information below relates to costs, revenues, and assets anticipated in the Shoe Division of DKY
Footwear Corporation:
Sales $ 4,000,000
Variable costs 75% of sales
Average assets employed $12,000,000
Fixed costs 0
How would each of the following measures be affected if sales rise by $5,000 in the Shoe Division?
ROI Asset turnover Profit margin

B. increase no change increase
C. increase increase no change
D. no change no change increase

85. A division of Shamrock Corporation reported a return on investment of 20% for a recent period. If the
division's asset turnover was 5, its profit margin must have been
A. 100%
B. 4%
C. 25%
D. 2%
86. Which measure is limited by the fact that it uses accounting income?

A. ROI
B. RI
C. EVA
D. All of the above
87. The Dessert Division of Incredible Edibles Corporation has the following segment information:
Assets available for use $1,800,000

Target rate of return 10%
Residual income $ 270,000
What was Dessert Division's return on investment?

A. 15%
B. 10%
C. 25%
D. 20%

88. The Television Division of Electronics Corporation has the following segment information:

What was Television Division's return on investment?
A. 12%
B. 10%
C. 24%
D. 20%

89. Continental Publishing Company
The Magazine Division of Continental Publishing Company had the following financial data for the year:
Assets available for use $1,000,000 Book Value

$1,500,000 Market Value
Residual income $100,000
Return on investment 15%
Refer to Continental Publishing Company. What was the Magazine Division’s segment income?
A. $150,000
B. $100,000
C. $250,000
D. $ 50,000


Refer to Continental Publishing Company. What was the target rate of return for Continental Publishing Company?
A. 10%
B. 15%
C. 25%
D. 5%


Refer to Continental Publishing Company. If the manager of the Magazine Division is evaluated based on return on investment, how much would
she be willing to pay for an investment that promises to increase net segment income by $50,000?
A. $ 50,000
B. $ 333,333
C. $1,000,000
D. $ 500,000


Refer to Continental Publishing Company. If expenses increased by $20,000 in the Magazine Division,
A. return on investment would decrease.
B. residual income would increase.
C. the target rate of return would decrease.
D. asset turnover would decrease.

93. Thunder Sports Enterprises
The Basketball Division of Thunder Sports Enterprises reported the following financial data for the year:

Refer to Thunder Sports Enterprises. What was the Basketball Division’s segment income?
A. $168,000
B. $125,000
C. $269,000
D. $ 19,000


Refer to Thunder Sports Enterprises. What was the target rate of return for Thunder Sports Enterprises?
A. 4%
B. 5%
C. 7%
D. 9%


Refer to Thunder Sports Enterprises. If the manager of the Basketball Division is evaluated based on return on investment, how much would she be
willing to pay for an investment that promises to increase net segment income by $60,000?
A. $ 108,000
B. $ 300,000
C. $ 428,572
D. $1,200,000


Refer to Thunder Sports Enterprises. If expenses increased by $15,000 in the Basketball Division,

97. Michigan Company
Ann Arbor Division of the Michigan Company has the following statistics for its most recent operations:
Assets available for use (Market Value) $3,600,000

Assets available for use (Book Value) $2,000,000
Ann Arbor Division's return on investment 25%
Ann Arbor Division's residual income 200,000
Return on investment (entire Michigan Company) 20%
Refer to Michigan Company. Compute EVA assuming the cost of capital is 10% and the tax rate is 40%.
A. $ 90,000
B. $ 150,000
C. $0
D. $ (60,000)


Refer to Michigan Company. What is the target rate of return in Michigan Company?
A. 25%
B. 20%
C. 15%
D. 10%


Refer to Michigan Company. If Michigan Company evaluates its managers on the basis of return on investment, the manager of Ann Arbor Division
would invest in a project costing $100,000 only if it increased net segment income by at least
A. $10,000.
B. $15,000.
C. $20,000.
D. $25,000.

100. Carter Corporation has a target return of 15%. If a prospective investment has an estimated return on
investment of 20%, and a residual income of $10,000, what is the estimated cost of the investment?
A. $200,000
B. $ 66,667
C. $ 50,000
D. The answer can't be determined from this information.
101. The Jewelry Division of Genuine Gems Company is considering an investment in a new project. The
project has an estimated cost of $1,000,000. If Genuine Gems Company has a target rate of return of 12%, how
large does the return on investment on this project need to be to generate $150,000 of residual income?
A. 15%
B. 12%
C. 25%
D. 27%
102. In the South Division of Occident Company, segment income for the most recent year exceeded residual
income by $15,000. Also, return on investment exceeded the target rate of return by 10%. What was the level of
investment in the South Division for the most recent year?
A. $ 15,000
B. $100,000
C. $150,000
D. An answer can't be determined from this information.

103. Texas Company
Texas Company has established a target rate of return of 16% for all divisions. For the most recent year, San
Marcos Division generated sales of $10,000,000 and expenses of $7,500,000. Total assets at the beginning of
the year were $5,000,000 and total assets at the end of the year were $7,000,000.
Refer to Texas Company. In the most recent year, what was San Marcos Division's residual income?
A. $ 960,000
B. $1,380,000
C. $1,540,000
D. $1,700,000
104. Texas Company
Refer to Texas Company. For the most recent year, what was San Marcos Division's return on investment?
A. 20.83%
B. 35.71%
C. 41.67%
D. 50.00%
105. Austin Company
Austin Company has established a target rate of return of 15% for all divisions. For the most recent year,
Waterloo Division generated sales of $12,000,000 and expenses of $9,000,000. Total assets at the beginning of
Refer to Austin Company. In the most recent year, what was Waterloo Division's residual income?
A. $1,200,000
B. $1,650,000
C. $1,800,000
D. $1,950,000

106. Austin Company
Refer to Austin Company. For the most recent year, what was Waterloo Division's return on investment?
A. 18.75%
B. 33.33%
C. 37.50%
D. 42.86%
107. The Lumber Division
The Lumber Division of Home Innovations Company reported the following results for a recent year
Sales $8,000,000
Expenses 6,250,000
Total assets (1/1) 5,000,000
Total assets (12/31) 5,400,000
Refer to the Lumber Division
What was the profit margin for the Lumber Division?

A. 68%
B. 35%
C. 32%
D. 22%

Sales $8,000,000
Expenses 6,250,000
Total assets (1/1) 5,000,000
Total assets (12/31) 5,400,000
What was the asset turnover ratio of the Lumber Division?

A. 1.538
B. 2.97
C. 0.650
D. 1.20

109. The Appliance Division
The Appliance Division of Electrotech Corporation reported the following results for a recent year
Sales $9,000,000
Expenses 7,500,000
Total assets (1/1) 6,000,000
Total assets (12/31) 6,200,000
Refer to the Appliance Division
What was the profit margin for The Appliance Division?

A. 17%
B. 24%
C. 25%
D. 69%

Sales $9,000,000
Expenses 7,500,000
Total assets (1/1) 6,000,000
Total assets (12/31) 6,200,000
What was the asset turnover ratio of The Appliance Division?

A. 1.475
B. 3.48
C. 0.680
D. 1.23

111. Triumph Division of Traveling Fantasies, is evaluated based on residual income generated. In the most
recent year, the Triumph Division generated a residual income of $2,000,000 and net income of $5,000,000. The
target rate of return for all divisions of Traveling Fantasies is 20%. What was the return on investment for the
Triumph Division?
A. 40%
B. 13%
C. 20%
D. 33%
112. Qualitative non-financial performance measures

A. are usually the most well-received by managers.
B. often reflect long-term organizational goals better than financial performance measures.
C. can only be developed in the production area of an organization.
D. is limited by the number of critical success factors defined by the organization.
113. Relative to qualitative performance measures, quantitative performance measures are less

A. subject to manipulation.
B. dependent on accounting information.
C. effective in the pursuit of organizational goals.
D. subjective.
114. Improved effectiveness and efficiency of a product is considered a ____ performance measurement?

A. subjective
B. financial
C. quantitative
D. qualitative
115. Non-financial performance measures (NFPMs) are better than financial measures in that NFPMs
A. provide a better indication of customer satisfaction.
B. may better predict the direction of future cash flows.
C. directly measure how well an organization does those things that create shareholder value.
D. all of the above
116. In selecting non-financial performance measures managers should choose measures that reflect
A. qualitative characteristics that point out sub-optimization activities and throughput bottlenecks.
B. both short-term and long-term measures related to critical success factors.
C. long-term supplier satisfaction levels.
D. short-term financial viability.

117. Which of the following would be considered a non-financial performance measurement?
A. increase in market share
B. variances from standards
C. number of customer complaints
D. cost of engineering changes
118. Which type of financial measure better predicts the direction of future cash flows?
Non-financial Measures Financial Measures

A. yes yes
B. yes no
C. no no
D. no yes

119. Which of the following would be classified as a non-financial critical success factor?
Technical Manufacturing Manufacturing

Quality Excellence Efficiency Effectiveness

A. no no no yes
B. yes no no no
C. yes yes yes yes
D. yes yes no yes

120. Which of the following is necessary for any valid performance measurement?

A. It must be part of the financial accounting system in use.
B. It must be quantifiable.
C. Goal congruence must be promoted by its use.
D. It must be financial in nature.
121. Process quality yield is used in the measurement of

A. throughput.
B. cash flows.
C. asset turnover.
D. profit margin.

122. An increase in productive processing time will increase
A. throughput.
B. process yield.
C. return on investment.
D. productive capacity.
123. Which of the following is a measure of throughput?

A. Processing time/Total time
B. Good units/Total time
C. Good units/Processing time
D. Total units/Total time
124. Productive capacity is a measure used in computing

A. residual income.
B. net cash flow.
D. throughput.
125. Process quality yield reflects the proportion of

A. good units to bad units.
B. time required to produce a good unit.
C. total units manufactured that are good.
D. total time spent to time available.
126. When inventory sits idle in a department, this would not affect the department's
A. processing time.
B. throughput.
C. process quality yield.
D. dollar days.

A. time it takes to make a good unit.
B. good units to defective units.
C. total time spent to total time available.
D. total units produced that are good units.

128. Holding total production in units constant, as the proportion of defective units to total units declines, all of
the following measures will be affected, except
A. total unit sales.
B. throughput.
D. process productivity.
129. Process productivity is calculated as

A. total units divided by non-value-added processing time.
B. total units divided by value-added processing time.
C. value-added processing time divided by total units.
D. value-added processing divided by total time.
130. Which of the following would not be an appropriate cost driver to measure internal failure?
A. design error
B. product failure
C. machine reliability
D. operator error
131. When assessing performance, one way to compensate for differences among divisions of a multinational
organization would be for the parent company to
A. use different target rates of return to compute residual incomes.
B. 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 whose records are kept in the domestic currency and non-
financial measures for units whose records are kept in a foreign currency.
132. Mobile Company
Mobile Company is a manufacturer of electronic components. The following manufacturing information is

available for the month of May:
Good units manufactured 40,000

Value-added hours of manufacturing time 20,000
Total units manufactured 50,000
Total hours of manufacturing time 30,000
Refer to Mobile Company. What is the throughput per hour?
A. 1.3 units (rounded)
B. 2.0 units
C. 1.8 units
D. .8 units

133. Mobile Company


Refer to Mobile Company. What is the process quality yield?

A. 50%
B. 75%
C. 80%
D. 125%

134. Charlotte Company
Charlotte Company is a manufacturer of electronic components. The following manufacturing information is

available for the month of February:

Refer to Charlotte Company. What is the throughput per hour?

A. .83 units
B. 1.43 units
C. 1.67 units
D. 2.00 units



Refer to Charlotte Company. What is the process quality yield?

A. 60%
B. 70%
C. 83%
D. 143%

136. Buxton Company
One of the products manufactured by Buxton Company is a plastic tray. The information below relates to the
Tray Production Department:
Good units produced 200,000

Units started in production 250,000
Processing time (budgeted hours) 425
Processing time (total hours) 400
Value-added processing time 300
Refer to Buxton Company. What is the process quality yield in the Tray Production Department?
A. 75%
B. 44%
C. 80%
D. 125%

137. Buxton Company

Refer to Buxton Company. What is the throughput per hour in the Tray Production Department?
A. 470 units
B. 500 units
C. 625 units
D. 667 units

138. Buxton Company

Refer to Buxton Company. What is the process productivity in the Tray Production Department?
A. 588
B. 625
C. 667
D. 833

139. Which of the following is not a balanced scorecard category?

A. financial measures
B. environmental measures
C. business process measures
D. personnel measures
140. A primary purpose of a balanced scorecard is to give

A. managers a way to judge past performance.
B. stockholders a way to judge current performance.
C. managers a way to forecast future performance.
D. stockholders a way to tie strategy to profitability.
141. In a balanced scorecard, measurements should be directly linked to

A. organizational strategy and values.
B. the cost management system.
C. current organizational profitability.
D. activity-based management concepts.

142. Customer measures on the balanced scorecard should be
Internal External Monetary Non-monetary

A. yes no no yes
B. no yes yes no
C. no yes no yes
D. yes yes yes yes

143. A balanced scorecard

A. records the variances between budgeted and actual revenues and expenses.
B. can be used at multiple organizational levels by redefining the categories and measurements.
C. is most concerned with organizational financial solvency and business processes.
144. On a balanced scorecard, which of the following would be most appropriate to measure customer service?
A. Rapid time-to-market of new products
B. Corporate financial profits
C. On-time delivery
D. Decrease in reworked products
145. On a balanced scorecard, which of the following would be most appropriate to measure production process
integrity?
C. Low employee turnover
146. On a balanced scorecard, which of the following would be most appropriate to measure innovation:
C. On-time delivery
D. Manufacturing cycle efficiency

147. On a balanced scorecard, which of the following would be most appropriate to measure financial
performance?
A. Market share
B. Customer retention
C. Percentage of sales from new products
D. Investment in intellectual capital
148. A primary characteristic of a performance management system is

A. consistency at all levels in the organization.
B. adaptability to differing situations in the organization.
C. efficiency of application to all individuals in the organization.
D. flexibility to delay rewards although performance objectives have been met.
149. Which of the following would not normally affect the compensation strategy of a firm?
A. organizational goals
B. location of firm
C. competition
D. number of subsidiaries
150. Managers should be paid

A. on a periodic basis.
B. based on results achieved.
C. using ESOPs.
D. on a piece rate basis.
151. Financial incentives are

A. different from monetary rewards
B. the same thing as a salary element
C. provided to all employee groups.
D. available to top management whose performance exceeds targeted objectives
152. Which of the following steps in the performance reward plan model comes before the others listed?
A. set performance rewards
B. identify performance measures
C. determine reward
D. identify critical success factors

153. Objectives for a pay plan
A. are not needed in a performance-based plan.
B. must be stated for a performance-based plan to work.
C. are essential for a periodic compensation plan to be successful.
D. are unnecessary for a merit pay plan.
154. Merit pay is

A. a contingent amount of pay that is earned by managers whose subunits meet a target rate of return.
B. always for a limited period of time and must be re-earned each period.
C. any pay earned when the company is profitable.
D. a pay increment received when a specific performance level is achieved.
155. Contingent pay
A. is always paid in stock options.
B. is the sole source of pay an employee receives from his/her employer.
C. is received in addition to the basic wage and is dependent upon performance exceeding some performance
objective.
D. can only apply to individual performance.
156. Piece rate pay

A. is a suitable pay plan for workers engaged in repetitive and complex tasks.
B. involves a salary plus pay for each unit produced or carried out.
C. encourages quality output.
D. does not encourage workers to look at the company's well being.
157. Which of the following pay plans encourages the improvement of the overall company's well-being?
A. monthly salary
B. cafeteria plan
C. profit sharing
D. pensions
158. Which performance plan is most tied to company objectives?

A. profit sharing
B. pensions
C. piece rate
D. merit pay

159. Which performance plan best promotes quality of the product or service?
A. piece rate
B. health insurance
C. pensions
D. profit sharing
160. Employee stock ownership in the employees' firm

A. will encourage short term earnings growth patterns.
B. will encourage employees to take a longer term perspective regarding their performance in the company.
C. is not suitable for hourly or salaried employees.
D. is common for management in American firms.
161. A pay plan that gives an employee cash or stock equal to the difference between some specified stock price
and the quoted market price at some future time period is
A. stock appreciation rights.
B. an ESOP.
C. profit sharing.
D. merit pay.
162. Which of the following types of employee compensation are tax-exempt?

A. contingent pay
B. profit sharing
C. cafeteria plans
D. stock appreciation rights
163. The traditional compensation package provides

A. fixed monthly or weekly salaries plus performance bonuses.
B. 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.
164. Compensation packages for executives of American firms

A. are beginning to emphasize the long-term commitment executives should have in the firm.
B. are considered comparable to packages earned by European and Asian executives.
C. are shifting towards lower percentages of annual incentives.
D. are shifting away from long-term awards.

165. A pay plan that does not encourage the overall company good is
A. profit sharing.
B. an employee stock option plan.
C. contingent pay.
D. monthly salary.
166. Which performance plan is most motivating?

A. health insurance
B. piece rate
C. hourly wages
D. pensions
167. Expatriate employees
A. should be paid a base comparable to what he/she was earning domestically.
B. will be paid more than corresponding managers in their home country.
C. will always pay taxes in the country in which they are based.
D. should receive retirement benefits based on local currencies.
168. If performance measures are perfect proxies for organizational goals,

A. sub-optimization will be enhanced.
B. sub-unit managers will strive to achieve organizational goals.
C. sub-units can all be decentralized.
D. residual income will rise.
169. Answer the following questions regarding economic value added (EVA):
a. What is it intended to do?

b. How is it measured?
c. How is the measurement different than that of RI?
d. Why is EVA a better performance measure of RI?
e. What is the major problem with using EVA as a long-term performance measure?

170. What items affect comparability of different divisions within the same company on the basis of EVA, ROI
and RI?

171. Why is it likely that a subordinate manager would be more attentive to certain performance measures than
overall corporate objectives to guide his decision making?

172. What are some of the major problems associated with accrual-based accounting performance measures?

173. What distinct advantage does a return on investment measure have over a residual income measure?
Explain.

174. How can return on investment result in sub-optimization when it is used as a performance measure?

175. Define residual income. Evaluate residual income as a measure of performance.

176. What are some common problems encountered in determining ROI?

177. Discuss the ways in which management uses flexible budgets.

178. Identify the steps to follow in establishing the performance reward system for a company.

179. Discuss pay-for-performance plans.

180. Discuss the rethinking taking place regarding the time frame used in American business performance
systems.

181. Deferred compensation techniques are currently used in the American work place. What are they and how
do they benefit the employer and the employee?

182. List the five general criteria that should be considered when designing a performance measurement
system.

183. What are five advantages that nonfinancial performance measures have over financial performance
measures

184. Oil Division
The Oil Division is one of the operating units of Automotive Solutions, Inc. The following operating data of the
division is presented below:
Sales $3,000,000
Profit margin 10%
Target return 15%
Refer to the Oil Division. What was the segment income of the Oil Division for the year?

185. Oil Division
Sales $3,000,000
Profit margin 10%
Target return 15%
Refer to Oil Division. What was the return on investment for the Oil Division?

186. Western Division
The Western Division of Lansing Chemical Co. produced the following operating results for the previous year:
Sales $10,000,000
Segment income 1,500,000
Assets 6,000,000
The Western Division is considering a $1,000,000 investment in a new project. The Western Division estimates that its return on investment (for all
of its operations) would be at 22% with the new investment.
Refer to Western Division. How much net segment income is the new project expected to produce?

Sales $10,000,000
Assets 6,000,000
Refer to Western Division. If the manager of the Western Division is evaluated on return on investment alone, will the manager invest in the new
project? Explain.

188. The manager of the Richmond Division of Brazos River Tours is preparing the budget for the upcoming
year. At this point, he has determined that average total assets for the upcoming year will equal $4,000,000. The
manager is evaluated on the amount of residual income generated by the division. Assume variable costs in the
Richmond Division are expected to equal 60% of total sales and fixed costs are expected to equal $400,000.
a. Compute the sales level that would generate a 20% return on investment.
b. Assuming the rate of return is 15%, determine the level of sales that would generate $200,000 of residual income.

189. The following information is given for the Corn and Oats Divisions of Wholesome Grains Corporation.
Corn Oats
Sales $600,000 $300,000
Var. cost of goods sold 200,000 150,000
Fixed manufacturing costs 50,000 40,000
Variable selling 30,000 5,000
Fixed admin. (50% allocated) 20,000 4,000
Fixed selling (20% allocated) 50,000 30,000
Assets at book value 600,000 500,000
a. If Wholesome Grains Corporation uses income to evaluate division managers, compute net income that should be used for that purpose
given the limited data above.
b. If Wholesome Grains Corporation uses ROI to evaluate division managers and uses historical cost as the investment base, compute the
ROI for the Corn and Oats divisions.

190. Information for two divisions of Superb Entertainment Company is given below:
Compact Disc DVD

Net income $ 60,000 $100,000
Capital investment $400,000 $500,000
a. If Superb Entertainment Company charges each division 12% for capital employed, compute residual income for the Compact Disc and
DVD divisions.
b. Compute the ROI for each division.

191. Office Systems Center (OSC), a division of Edwards Corporation buys and installs modular office
components. For the most recent year, the division had the following performance targets:
Asset turnover 2.5

Profit margin 6%
Target rate of return on investments for RI 13%
Cost of capital 10%
Income tax rate 40%
Actual information concerning the company's performance for last year follows:
Total assets at beginning of year $3,600,000

Total assets at end of year 5,300,000
Total invested capital (annual average) 8,000,000
Sales 9,000,000
Variable operating costs 3,650,000
Direct fixed costs 4,770,000
Allocated fixed costs 675,000
Required:
a. For OSC, compute the segment margin and the average assets for the year.
b. Based on segment margin and average assets, compute the profit margin, asset turnover and ROI.
c. Evaluate the ROI performance of OSC.
d. Using your answers from part b., compute the residual income of OSC.
e. Compute the EVA of OSC. Why are the EVA and RI levels different?
f. Based on the data given in the problem, discuss why ROI, EVA and RI may be inappropriate measures of performance for OSC.

192. The Education Innovations Corporation produces puzzles in its Colorado manufacturing plant. The
company is currently evaluating ways to improve productivity. The accountant of the firm's parent organization
suggested that management implement a new compensation plan based on throughput performance measure as
an incentive to increase productivity. To demonstrate how such a measure might work, the accountant gathered
the following production data for a recent month:
Total units attempted 6,000,000

Good units manufactured 4,800,000
a. How many defective units were produced?

b. Compute manufacturing cycle efficiency.
c. Compute process productivity.
d. Compute process quality yield.
e. Compute hourly throughput.

Chapter 14--Performance Measurement, Balanced Scorecards, and
Performance Rewards Key

1. An organization’s values statement identifies fundamental beliefs about what is important to the
organization.
TRUE
2. An organization typically develops a values statement before developing a mission statement.
FALSE
3. The objectives identified in an organization’s values statement must be objective in nature.

FALSE
4. In order to assure achievement of an organizational goal, performance measures must be established for that
goal.
TRUE
5. Internal performance measures focus on the efficiency and effectiveness of an organization’s production
process.
TRUE
6. External performance measures focus on the efficiency and effectiveness of an organization’s production
process.
FALSE
7. The most common external performance measure used for all organizations is financial in nature.
TRUE

8. Performance measures need not be correlated with the mission of a subunit.
FALSE
9. Benchmarks for performance measures may be monetary or non-monetary.

TRUE
10. The segment margin of a profit or investment center includes allocated common costs.
FALSE
11. The segment margin of a profit or investment center does not include allocated common costs.
TRUE
12. Manipulation of segment expenses may result in the segment margin not being an accurate performance
measure.
TRUE
13. Profit margin indicates management’s efficiency with regard to sales and expenses.
TRUE
14. Asset turnover measures the effective use of assets relative to revenue production.
TRUE
15. Economic value added (EVA) applies the target rate of return to the market value of the capital invested in a
division.
TRUE
16. Economic value added (EVA) applies the target rate of return to the book value of the assets invested in a
division.
FALSE

17. Economic value added (EVA) is a more appropriate performance measure when there is a large difference
between the market value of invested capital and the book value of assets.
TRUE
18. Economic value added (EVA) is focused on short-term performance measurement.

TRUE
19. Financial measures are lagging indicators.

TRUE
20. Speed of delivery is an example of a leading indicator.

TRUE
21. Non-financial measures are generally more indicative of productive activity than are financial performance
measures.
TRUE
22. Non-financial measures are generally less timely than are financial performance measures.
FALSE
23. Non-financial measures are generally more appropriate for gauging teamwork than are financial
performance measures.
TRUE
specified time is referred to as process quality yield.
FALSE
25. Total units produced during the period divided by the value-added processing time is referred to as process
productivity.
TRUE

26. The balanced scorecard approach complements measures of past performance with measures of the drivers
of future performance.
TRUE
27. Hourly compensation provides a definite link between performance and reward.

FALSE
28. In a pay-for-performance plan, defined performance measures must be highly correlated with an
organization’s operational targets.
TRUE
29. Tax deferral is the most desirable form of tax treatment for employee compensation elements.
FALSE
30. Expatriate workers should receive a compensation package that reflects cost of living factors and currency
fluctuations.
TRUE
31. Cultural differences between countries may make performance evaluation in multinational settings more
difficult.
TRUE
32. A statement that identifies fundamental beliefs about what is important to an organization is referred to as a
______________________________.
values statement
33. Performance measures that provide a focus on the efficiency and effectiveness of production processes are
internal
34. Performance measures that reflect an organization’s ability to satisfy customers better than rival firms do are
external

35. The ratio of income to assets invested is referred to as ___________________________________.
return on investment or
ROI
36. The ratio of income to sales is referred to as ______________________________.

profit margin
37. The ratio of sales to assets is referred to as ______________________________.

asset turnover
38. Profit margin ´ Asset Turnover is often referred to as the _________________________.

DuPont Model
39. Profit earned in excess of an amount charged for funds committed to a profit center is referred to as
______________________________.
residual income
40. A measure of profit produced above the cost of capital is referred to as

___________________________________.
economic value added or
EVA
41. An indicator that reflects the results of past decisions is referred to as a(n)
______________________________.
lagging indicator
42. Statistical data about the steps that will create the results desired as referred to as
___________________________________.
leading indicators
specified time is referred to as ____________________.
throughput

44. Total units produced during the period divided by the value-added processing time is referred to as
______________________________.
process productivity
45. The proportion of good units resulting from activities is referred to as

________________________________________.
process quality yield
46. The three components of throughput are _____________________________________________,

______________________________, and ___________________________________.
manufacturing cycle efficiency, process productivity, process quality yield
47. Which of the following statements is true about the values statement of an organization?
A. It is used to formulate the mission statement.
B. It reflects the organization’s culture by identifying beliefs about what is important to the organization.
C. It focuses on long-range plans for the organization.
D. The values contained in the statement must be quantifiable.
48. Which of the following statements about an organization’s mission statement is true?

A. The mission statement should express an organization’s purpose.
B. The mission statement should identify how an organization will meet the needs of its targeted customers.
C. The mission statement must be communicated throughout the organization.
D. All of the statements are true.
49. Variance analysis would be appropriate to measure performance in

A. profit centers.
B. investment centers.
C. cost centers.
50. Which of the following responsibility centers may be evaluated on the basis of residual income?
A. investment center
B. revenue center
C. profit center
D. cost center

51. Net cash flow could be used to measure performance in
A. cost centers and investment centers.
B. revenue centers and profit centers.
C. revenue centers and investment centers.
D. profit and investment centers.
52. Using a single performance evaluation criterion for an investment center

A. is most effective because a manager can concentrate on a single goal.
B. can result in manipulation of the performance measure.
C. allows multinational investment centers' performances to be equitably compared.
D. is only appropriate if the criterion is non-monetary.
53. A company has set a target rate of return of 16% for its investment center. An investment center manager in
this company would
A. acquire assets that would increase divisional income by more than 16%.
B. sell all assets that do not generate divisional income of more than 16%.
C. acquire assets that would increase sales by more than 16%.
D. acquire any technologically advanced assets that would cause costs to be reduced by 16% or more.
54. In evaluating the performance of a profit center manager, the manager

A. and the sub-unit should be evaluated on the basis of the same costs and revenues.
B. should only be evaluated on the basis of variable costs and revenues of the sub-unit.
C. should be evaluated on all costs and revenues that are controllable by the manager
D. should be evaluated on all costs and revenues that can be directly traced to the sub-unit.
55. The Statement of Cash Flows may be superior to the cash budget as a performance evaluation measure
because
A. cash flows are shown on the accrual basis on the cash budget.
B. the cash budget does not include capital investments.
C. cash flows are arranged by activity.
D. of all the above reasons.
56. The Statement of Cash Flows indicates the cash inflows and outflows from
A. investing, financing, and borrowing activities.
B. operating, investing, and sending activities.
C. merchandising, financing, and investing activities.
D. operating, investing, and financing activities.

57. Division A's investment in a new project will raise the overall organization's return on investment if
A. the return on investment on the new project exceeds the target return of the overall organization.
B. the return on investment on the new project exceeds the return on investment of Division A.
C. the return on investment on the new project exceeds the overall organization's return on investment.
D. Division A's return on investment exceeds the return on investment of the overall organization.
58. If sales and expenses both rise by $100,000

A. residual income will increase.
B. return on investment will increase.
C. return on investment will be unchanged.
D. asset turnover will decrease
59. Perry Corporation is composed of three operating divisions. Overall, the Perry Corporation has a return on
investment of 20%. Division A has a return on investment of 25%. If Perry Corporation. evaluates its managers
on the basis of return on investment, how would the Division A manager and the Perry Corporation president
react to a new investment that has an estimated return on investment of 23%?
Division A Perry Corporation President

Manager

A. accept accept
B. accept reject
C. reject accept
D. reject reject

60. A company's return on investment is affected by a change in
Profit Margin
Asset Turnover on Sales

A. Yes Yes
B. Yes No
C. No No
D. No Yes

61. The return on investment (ROI) ratio measures

A. only asset turnover.
B. only earnings as a percent of sales.
C. both 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.

62. Return on investment (ROI) is a term most often used to express income earned on assets invested in a
business unit. A company's return on investment would increase if sales
A. increased by the same dollar amount as expenses and total assets increased.
B. remained the same and expenses were reduced by the same dollar amount that total assets increased.
C. decreased by the same dollar amount that expenses increased.
D. and expenses increased by the same percentage that total assets increased.
63. A sub-unit of an organization is evaluated on the basis of its ROI. If this sub-unit's sales and expenses both
increase by $30,000, how will the following measures be affected?
ROI Assert turnover Profit margin

B. indeterminate increase decrease
C. no change increase decrease
D. no change decrease no change

64. Which of the following would be an appropriate alternative to the use of ROI in evaluating the performance
of an investment center?
Residual Net cash Cost and revenue

income flow variance analysis

A. yes yes yes
B. no yes no
C. yes no no
D. yes no yes

65. Return on investment is computed by dividing income by

A. contribution margin.
B. inventory turnover.
C. assets invested.
D. long-term assets.
66. Presently, the Software Division of Bennett Publishing Corporation has a profit margin of 30%. If total sales
rise by $100,000, the net result will be
A. an increase in the profit margin ratio to above 30%.
B. a decrease in the profit margin ratio to below 30%.
C. no change in the profit margin ratio.
D. a change in the profit margin ratio that cannot be determined from this information.

67. Profit margin indicates the portion of sales that
A. covers fixed expenses.
B. is not used to cover expenses.
C. equals contribution margin.
D. equals product contribution margin.
68. Profit margin equals

A. income divided by sales.
B. incomes divided by average inventory.
C. income divided by average assets.
D. income divided by average stockholder's equity.
69. The Du Pont model measures

A. residual income.
B. return on investment.
C. throughput.
D. profit.
70. In the Du Pont model, profit margin is a ratio of

A. income to sales.
B. income to assets.
C. sales to income.
D. sales to assets.
71. The Du Pont model measures ROI as it is affected by

A. contribution margin and asset turnover.
B. profit margin and asset turnover.
C. asset turnover.
D. profit margin.
72. Residual income is used as a performance measure in

A. profit centers.
B. cost centers.
C. investment centers.
D. revenue centers.

73. If a new project generates a positive residual income, the
A. project's return on investment is less than the target rate.
B. project's return on investment is greater than the target rate.
C. project's return on investment is equal to the target rate.
D. relationship between the project's return on investment and the target rate cannot necessarily be determined.
74. A prospective project under consideration by the Internet Division of Communications Corporation. has an
estimated residual income of $(20,000). If the project requires an investment of $400,000, the
A. project generates a negative return on investment.
B. project's return on investment is zero.
C. project's return on investment is 5% less than the company's target rate.
D. company's target rate is 15%
75. Residual income is the

A. contribution margin of an investment center, less the imputed interest on the invested capital used by the
center.
B. contribution margin of an investment center, plus the imputed interest on the invested capital used by the
center.
C. income of an investment center, less the imputed interest on the invested capital used by the center.
D. income of an investment center, plus the imputed interest on the invested capital used by the center.
76. Residual income is an example of a ____ performance measurement.

A. long-term
B. short-term
C. qualitative
D. profit center
77. If a division generates a positive residual income then the division's

A. asset turnover was very high.
B. profitability was greater than that of other divisions in the company.
C. performance was above expectations.
D. actual return on investment exceeds the division's target return.
78. Residual income is determined as

A. income times the asset turnover rate.
B. income times the inventory turnover rate.
C. income minus (asset base times target rate of return).
D. sales minus (asset base times target rate of return).

79. Residual income is used as a performance measure in which of the following types of centers?
Revenue Investment Profit

A. yes no yes
B. yes yes yes
C. no yes yes
D. no yes no

80. An increase in a corporation's target rate would result in a(n)

A. increase in residual income.
B. decrease in return on investment.
C. decrease in residual income.
D. decrease in both residual income and return on investment.
81. All other things being equal, an increase in sales price would increase
A. asset turnover.
B. profit margin.
C. residual income.
82. If sales and expenses both rise by $100,000, profit margin will
A. decrease and asset turnover will decrease.
B. increase and asset turnover will decrease.
C. decrease and asset turnover will increase.
D. increase and asset turnover will increase.
83. Asset turnover equals

A. income divided by average assets.
B. sales divided by assets.
C. sales divided by average assets.
D. assets divided by sales.
84. The information below relates to costs, revenues, and assets anticipated in the Shoe Division of DKY
Footwear Corporation:
Sales $ 4,000,000
Variable costs 75% of sales
Average assets employed $12,000,000
Fixed costs 0
How would each of the following measures be affected if sales rise by $5,000 in the Shoe Division?
ROI Asset turnover Profit margin

B. increase no change increase
C. increase increase no change
D. no change no change increase

85. A division of Shamrock Corporation reported a return on investment of 20% for a recent period. If the
division's asset turnover was 5, its profit margin must have been
A. 100%
B. 4%
C. 25%
D. 2%
86. Which measure is limited by the fact that it uses accounting income?

A. ROI
B. RI
C. EVA
D. All of the above
87. The Dessert Division of Incredible Edibles Corporation has the following segment information:

What was Dessert Division's return on investment?

A. 15%
B. 10%
C. 25%
D. 20%

88. The Television Division of Electronics Corporation has the following segment information:

What was Television Division's return on investment?
A. 12%
B. 10%
C. 24%
D. 20%


Refer to Continental Publishing Company. What was the Magazine Division’s segment income?
A. $150,000
B. $100,000
C. $250,000
D. $ 50,000


Refer to Continental Publishing Company. What was the target rate of return for Continental Publishing Company?
A. 10%
B. 15%
C. 25%
D. 5%


Refer to Continental Publishing Company. If the manager of the Magazine Division is evaluated based on return on investment, how much would
she be willing to pay for an investment that promises to increase net segment income by $50,000?
A. $ 50,000
B. $ 333,333
C. $1,000,000
D. $ 500,000


Refer to Continental Publishing Company. If expenses increased by $20,000 in the Magazine Division,


Refer to Thunder Sports Enterprises. What was the Basketball Division’s segment income?
A. $168,000
B. $125,000
C. $269,000
D. $ 19,000


Refer to Thunder Sports Enterprises. What was the target rate of return for Thunder Sports Enterprises?
A. 4%
B. 5%
C. 7%
D. 9%


Refer to Thunder Sports Enterprises. If the manager of the Basketball Division is evaluated based on return on investment, how much would she be
willing to pay for an investment that promises to increase net segment income by $60,000?
A. $ 108,000
B. $ 300,000
C. $ 428,572
D. $1,200,000


Refer to Thunder Sports Enterprises. If expenses increased by $15,000 in the Basketball Division,


Refer to Michigan Company. Compute EVA assuming the cost of capital is 10% and the tax rate is 40%.
A. $ 90,000
B. $ 150,000
C. $0
D. $ (60,000)


Refer to Michigan Company. What is the target rate of return in Michigan Company?
A. 25%
B. 20%
C. 15%
D. 10%


Refer to Michigan Company. If Michigan Company evaluates its managers on the basis of return on investment, the manager of Ann Arbor Division
would invest in a project costing $100,000 only if it increased net segment income by at least
A. $10,000.
B. $15,000.
C. $20,000.
D. $25,000.

100. Carter Corporation has a target return of 15%. If a prospective investment has an estimated return on
investment of 20%, and a residual income of $10,000, what is the estimated cost of the investment?
A. $200,000
B. $ 66,667
C. $ 50,000
D. The answer can't be determined from this information.
101. The Jewelry Division of Genuine Gems Company is considering an investment in a new project. The
project has an estimated cost of $1,000,000. If Genuine Gems Company has a target rate of return of 12%, how
large does the return on investment on this project need to be to generate $150,000 of residual income?
A. 15%
B. 12%
C. 25%
D. 27%
102. In the South Division of Occident Company, segment income for the most recent year exceeded residual
income by $15,000. Also, return on investment exceeded the target rate of return by 10%. What was the level of
investment in the South Division for the most recent year?
A. $ 15,000
B. $100,000
C. $150,000
D. An answer can't be determined from this information.

103. Texas Company
Refer to Texas Company. In the most recent year, what was San Marcos Division's residual income?
A. $ 960,000
B. $1,380,000
C. $1,540,000
D. $1,700,000
104. Texas Company
Refer to Texas Company. For the most recent year, what was San Marcos Division's return on investment?
A. 20.83%
B. 35.71%
C. 41.67%
D. 50.00%
105. Austin Company
Refer to Austin Company. In the most recent year, what was Waterloo Division's residual income?
A. $1,200,000
B. $1,650,000
C. $1,800,000
D. $1,950,000

106. Austin Company
Refer to Austin Company. For the most recent year, what was Waterloo Division's return on investment?
A. 18.75%
B. 33.33%
C. 37.50%
D. 42.86%
Sales $8,000,000
Expenses 6,250,000
Total assets (1/1) 5,000,000
Total assets (12/31) 5,400,000
What was the profit margin for the Lumber Division?

A. 68%
B. 35%
C. 32%
D. 22%

Sales $8,000,000
Expenses 6,250,000
Total assets (1/1) 5,000,000
Total assets (12/31) 5,400,000
What was the asset turnover ratio of the Lumber Division?

A. 1.538
B. 2.97
C. 0.650
D. 1.20

Sales $9,000,000
Expenses 7,500,000
Total assets (1/1) 6,000,000
Total assets (12/31) 6,200,000
What was the profit margin for The Appliance Division?

A. 17%
B. 24%
C. 25%
D. 69%

Sales $9,000,000
Expenses 7,500,000
Total assets (1/1) 6,000,000
Total assets (12/31) 6,200,000
What was the asset turnover ratio of The Appliance Division?

A. 1.475
B. 3.48
C. 0.680
D. 1.23

111. Triumph Division of Traveling Fantasies, is evaluated based on residual income generated. In the most
recent year, the Triumph Division generated a residual income of $2,000,000 and net income of $5,000,000. The
target rate of return for all divisions of Traveling Fantasies is 20%. What was the return on investment for the
Triumph Division?
A. 40%
B. 13%
C. 20%
D. 33%
112. Qualitative non-financial performance measures

A. are usually the most well-received by managers.
B. often reflect long-term organizational goals better than financial performance measures.
C. can only be developed in the production area of an organization.
D. is limited by the number of critical success factors defined by the organization.
113. Relative to qualitative performance measures, quantitative performance measures are less

A. subject to manipulation.
B. dependent on accounting information.
C. effective in the pursuit of organizational goals.
D. subjective.
114. Improved effectiveness and efficiency of a product is considered a ____ performance measurement?

A. subjective
B. financial
C. quantitative
D. qualitative
115. Non-financial performance measures (NFPMs) are better than financial measures in that NFPMs
A. provide a better indication of customer satisfaction.
B. may better predict the direction of future cash flows.
C. directly measure how well an organization does those things that create shareholder value.
D. all of the above
116. In selecting non-financial performance measures managers should choose measures that reflect
A. qualitative characteristics that point out sub-optimization activities and throughput bottlenecks.
B. both short-term and long-term measures related to critical success factors.
C. long-term supplier satisfaction levels.
D. short-term financial viability.

117. Which of the following would be considered a non-financial performance measurement?
A. increase in market share
B. variances from standards
C. number of customer complaints
D. cost of engineering changes
118. Which type of financial measure better predicts the direction of future cash flows?
Non-financial Measures Financial Measures

A. yes yes
B. yes no
C. no no
D. no yes

119. Which of the following would be classified as a non-financial critical success factor?
Technical Manufacturing Manufacturing

Quality Excellence Efficiency Effectiveness

A. no no no yes
B. yes no no no
C. yes yes yes yes
D. yes yes no yes

120. Which of the following is necessary for any valid performance measurement?

A. It must be part of the financial accounting system in use.
B. It must be quantifiable.
C. Goal congruence must be promoted by its use.
D. It must be financial in nature.
121. Process quality yield is used in the measurement of

A. throughput.
B. cash flows.
C. asset turnover.
D. profit margin.

122. An increase in productive processing time will increase
A. throughput.
B. process yield.
D. productive capacity.
123. Which of the following is a measure of throughput?

A. Processing time/Total time
B. Good units/Total time
C. Good units/Processing time
D. Total units/Total time
124. Productive capacity is a measure used in computing

A. residual income.
B. net cash flow.
D. throughput.

A. good units to bad units.
B. time required to produce a good unit.
C. total units manufactured that are good.
D. total time spent to time available.
126. When inventory sits idle in a department, this would not affect the department's
A. processing time.
B. throughput.
D. dollar days.

A. time it takes to make a good unit.
B. good units to defective units.
C. total time spent to total time available.
D. total units produced that are good units.

128. Holding total production in units constant, as the proportion of defective units to total units declines, all of
the following measures will be affected, except
A. total unit sales.
B. throughput.
D. process productivity.
129. Process productivity is calculated as

A. total units divided by non-value-added processing time.
B. total units divided by value-added processing time.
C. value-added processing time divided by total units.
D. value-added processing divided by total time.
130. Which of the following would not be an appropriate cost driver to measure internal failure?
A. design error
B. product failure
C. machine reliability
D. operator error
131. When assessing performance, one way to compensate for differences among divisions of a multinational
organization would be for the parent company to
A. use different target rates of return to compute residual incomes.
B. 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 whose records are kept in the domestic currency and non-
financial measures for units whose records are kept in a foreign currency.
132. Mobile Company


Refer to Mobile Company. What is the throughput per hour?
A. 1.3 units (rounded)
B. 2.0 units
C. 1.8 units
D. .8 units

133. Mobile Company


Refer to Mobile Company. What is the process quality yield?

A. 50%
B. 75%
C. 80%
D. 125%



Refer to Charlotte Company. What is the throughput per hour?

A. .83 units
B. 1.43 units
C. 1.67 units
D. 2.00 units



Refer to Charlotte Company. What is the process quality yield?

A. 60%
B. 70%
C. 83%
D. 143%

136. Buxton Company

Refer to Buxton Company. What is the process quality yield in the Tray Production Department?
A. 75%
B. 44%
C. 80%
D. 125%

137. Buxton Company

Refer to Buxton Company. What is the throughput per hour in the Tray Production Department?
A. 470 units
B. 500 units
C. 625 units
D. 667 units

138. Buxton Company

Refer to Buxton Company. What is the process productivity in the Tray Production Department?
A. 588
B. 625
C. 667
D. 833

139. Which of the following is not a balanced scorecard category?

A. financial measures
B. environmental measures
C. business process measures
D. personnel measures
140. A primary purpose of a balanced scorecard is to give

A. managers a way to judge past performance.
B. stockholders a way to judge current performance.
C. managers a way to forecast future performance.
D. stockholders a way to tie strategy to profitability.
141. In a balanced scorecard, measurements should be directly linked to

A. organizational strategy and values.
B. the cost management system.
C. current organizational profitability.
D. activity-based management concepts.

142. Customer measures on the balanced scorecard should be
Internal External Monetary Non-monetary

A. yes no no yes
B. no yes yes no
C. no yes no yes
D. yes yes yes yes

143. A balanced scorecard

A. records the variances between budgeted and actual revenues and expenses.
B. can be used at multiple organizational levels by redefining the categories and measurements.
C. is most concerned with organizational financial solvency and business processes.
144. On a balanced scorecard, which of the following would be most appropriate to measure customer service?
C. On-time delivery
145. On a balanced scorecard, which of the following would be most appropriate to measure production process
integrity?
C. Low employee turnover
146. On a balanced scorecard, which of the following would be most appropriate to measure innovation:
C. On-time delivery
D. Manufacturing cycle efficiency

147. On a balanced scorecard, which of the following would be most appropriate to measure financial
performance?
A. Market share
B. Customer retention
C. Percentage of sales from new products
D. Investment in intellectual capital
148. A primary characteristic of a performance management system is

A. consistency at all levels in the organization.
B. adaptability to differing situations in the organization.
C. efficiency of application to all individuals in the organization.
D. flexibility to delay rewards although performance objectives have been met.
149. Which of the following would not normally affect the compensation strategy of a firm?
A. organizational goals
B. location of firm
C. competition
D. number of subsidiaries
150. Managers should be paid

A. on a periodic basis.
B. based on results achieved.
C. using ESOPs.
D. on a piece rate basis.
151. Financial incentives are

A. different from monetary rewards
B. the same thing as a salary element
C. provided to all employee groups.
D. available to top management whose performance exceeds targeted objectives
152. Which of the following steps in the performance reward plan model comes before the others listed?
A. set performance rewards
B. identify performance measures
C. determine reward
D. identify critical success factors

153. Objectives for a pay plan
A. are not needed in a performance-based plan.
B. must be stated for a performance-based plan to work.
C. are essential for a periodic compensation plan to be successful.
D. are unnecessary for a merit pay plan.
154. Merit pay is

A. a contingent amount of pay that is earned by managers whose subunits meet a target rate of return.
B. always for a limited period of time and must be re-earned each period.
C. any pay earned when the company is profitable.
D. a pay increment received when a specific performance level is achieved.
155. Contingent pay
A. is always paid in stock options.
B. is the sole source of pay an employee receives from his/her employer.
C. is received in addition to the basic wage and is dependent upon performance exceeding some performance
objective.
D. can only apply to individual performance.
156. Piece rate pay

A. is a suitable pay plan for workers engaged in repetitive and complex tasks.
B. involves a salary plus pay for each unit produced or carried out.
C. encourages quality output.
D. does not encourage workers to look at the company's well being.
157. Which of the following pay plans encourages the improvement of the overall company's well-being?
A. monthly salary
B. cafeteria plan
C. profit sharing
D. pensions
158. Which performance plan is most tied to company objectives?

A. profit sharing
B. pensions
C. piece rate
D. merit pay

159. Which performance plan best promotes quality of the product or service?
A. piece rate
B. health insurance
C. pensions
D. profit sharing
160. Employee stock ownership in the employees' firm

A. will encourage short term earnings growth patterns.
B. will encourage employees to take a longer term perspective regarding their performance in the company.
C. is not suitable for hourly or salaried employees.
D. is common for management in American firms.
161. A pay plan that gives an employee cash or stock equal to the difference between some specified stock price
and the quoted market price at some future time period is
A. stock appreciation rights.
B. an ESOP.
C. profit sharing.
D. merit pay.
162. Which of the following types of employee compensation are tax-exempt?

A. contingent pay
B. profit sharing
C. cafeteria plans
D. stock appreciation rights
163. The traditional compensation package provides

A. fixed monthly or weekly salaries plus performance bonuses.
B. 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.
164. Compensation packages for executives of American firms

A. are beginning to emphasize the long-term commitment executives should have in the firm.
B. are considered comparable to packages earned by European and Asian executives.
C. are shifting towards lower percentages of annual incentives.
D. are shifting away from long-term awards.

165. A pay plan that does not encourage the overall company good is
A. profit sharing.
B. an employee stock option plan.
C. contingent pay.
D. monthly salary.
166. Which performance plan is most motivating?

A. health insurance
B. piece rate
C. hourly wages
D. pensions
167. Expatriate employees
A. should be paid a base comparable to what he/she was earning domestically.
B. will be paid more than corresponding managers in their home country.
C. will always pay taxes in the country in which they are based.
D. should receive retirement benefits based on local currencies.
168. If performance measures are perfect proxies for organizational goals,

A. sub-optimization will be enhanced.
B. sub-unit managers will strive to achieve organizational goals.
C. sub-units can all be decentralized.
D. residual income will rise.
169. Answer the following questions regarding economic value added (EVA):
a. What is it intended to do?

b. How is it measured?
c. How is the measurement different than that of RI?
d. Why is EVA a better performance measure of RI?
e. What is the major problem with using EVA as a long-term performance measure?
a. The purpose of EVA is to more directly align the interests of common shareholders and managers.
b. EVA = A/Tax profit - (market value of invested capital ´ cost of capital %).
c. EVA uses after-tax profit, cost of capital and market value of assets invested. RI uses segment income, target rate of return and book value
of assets invested.
d. EVA is a better performance measure than RI, because it recognizes that there may be a significant difference between book value and
market value of assets. The market value of a company is reflected in stock prices which are another measure of performance evaluation.
e. EVA includes the increased investment immediately even though significant income may not occur until sometime in the future. Most
investments will show decreased short-term performance (EVA) and may cause a company to refuse projects that are profitable in the
long-term (similar to shortcomings of the payback method).

170. What items affect comparability of different divisions within the same company on the basis of EVA, ROI
and RI?
a. Each measure is based on accounting income which can be manipulated in the short-term by accounting methods used, which can differ
between investment centers.
b. The measurement of the asset base is affected by the choice of what to include, and may include items that relate to decisions made by
prior managers.
c. All measures focus primarily on how well the segments do in isolation with results compared to prior years for the same segment, rather
than relative company-wide objectives.
171. Why is it likely that a subordinate manager would be more attentive to certain performance measures than
overall corporate objectives to guide his decision making?
Managers are evaluated based on how their actual results compare to specific measures of performance. These
performance measures are intended to be surrogates for the overall corporate goals as they apply to specific
managers. Thus performance measures are selected by the extent to which they are good proxies for corporate
goals (that is the extent to which they operationally define, and are consistent with, corporate goals) and are
intended to be major focal points for managers.
172. What are some of the major problems associated with accrual-based accounting performance measures?
There are two major problems with accrual-based accounting numbers. The first problem is that they can be
easily manipulated by managers. For example, the timing of end of period transactions can be accelerated or
delayed to affect performance measures. Secondly, accounting measures cannot capture all corporate goals.
Accounting measures are particularly inappropriate to measure qualitative changes in the workforce, qualitative
changes in products, and achievement of social and non-monetary objectives. Additionally, accounting
measures reflect only a short-term perspective of operations rather than a long-range goal orientation.
173. What distinct advantage does a return on investment measure have over a residual income measure?
Explain.
The advantage of ROI measure over RI is that ROI facilitates a comparison of organizational sub-units of
differing sizes. Because ROI is a performance measure that automatically scales for size, large and small sub-
units can be compared to each other (subject to all the factors that should be considered when two units in
different industries, different geographical areas, etc. are compared).

174. How can return on investment result in sub-optimization when it is used as a performance measure?
Because performance measures are used to reward performance, managers use them as decision criteria when
they evaluate alternative courses of action. For example, if ROI is the performance criterion, a division manager
will only invest in new projects that will result in an increase in his/her division's ROI. This is sub-optimal if the
overall organization would be better off by the division manager's investment in available projects with lower
ROIs.
175. Define residual income. Evaluate residual income as a measure of performance.
Residual income is the remainder of net profit once a target cost of capital has been taken into consideration.
Residual income is determined by deducting from net income a prescribed or imputed interest charge on assets.
This method allows an organization to use different rates of interest for various organizational assets. A main
advantage of using RI is that it overcomes some limitations of ROI (sub-optimization).
176. What are some common problems encountered in determining ROI?
Net income and investment involved can both be calculated several ways. Multiple calculations are often
presented to show the different factors that affect ROI, changes in sales, expenses, and capital investments.
177. Discuss the ways in which management uses flexible budgets.
Flexible budgets are important to managers in performing a variety of functions. Formulating budgets commits
certain activities agreed to during the planning process to specific monetary amounts. The flexible budget
provides the means to estimate costs at various levels of activity. The control function is undertaken to assure
that actual operations meet planned operations. Through this function, deviations are determined and variances
can be ascertained. Managers also use flexible budgets in performance evaluation. Evaluation is more
meaningful with valid and accurate data to make the process of evaluation beneficial to all involved.
178. Identify the steps to follow in establishing the performance reward system for a company.
The steps are in the following order:
1. set strategic goals

2. identify the critical success factors
3. set the compensation strategy
4. identify performance measures
5. set performance rewards
6. measure/monitor performance
7. determine rewards

179. Discuss pay-for-performance plans.
Employees should be encouraged by compensation plans to perform and be loyal to the organization.
Performance measures should be related to a company's operational targets. These performance measures do not
have to be evenly weighted. Management can assign higher weights to more important performance measures
as they are related to the corporate goals.
180. Discuss the rethinking taking place regarding the time frame used in American business performance
systems.
Historically, American time frames for performance has been short term, often only one year. Presumably
management tries to do what is best for the firm and its owners. Thus, shareholder wealth maximization should
be the primary focus of management. Short term profit maximization does not necessarily result in long-run
shareholder wealth maximization.
To encourage this different attitude, employees and management are being asked to take a longer run
perspective. This is enhanced with employee stock ownership in their firm.
181. Deferred compensation techniques are currently used in the American work place. What are they and how
do they benefit the employer and the employee?
Deferred compensation is pay that was earned on current performance but is paid later to the employee. The
compensation may include profit sharing plans, pensions, and stock-based plans like ESOPs. The payment by
the employer can be deducted currently for tax purposes but the employee does not recognize it as income until
it is received. In stock option plans, earnings in the plan are not taxable to the employee until the plan is
distributed. Size of the plans are affected by the firm's stock value and encourage employees to take a more
positive attitude about the company's future.
182. List the five general criteria that should be considered when designing a performance measurement
system.
1. The measures should be established to assess progress toward the organizational mission and its related goals and objectives.
2. The persons being evaluated should be aware of the measurements used and have some input in developing them.
3. The persons being evaluated should have the appropriate skills, equipment, information, and authority to be successful under the
measurement system.
4. Feedback of accomplishment should be provided in a timely and useful manner.
5. The system should be flexible to adapt to new conditions in the organizational environment.

183. What are five advantages that nonfinancial performance measures have over financial performance
measures
Answers will vary on this. The major advantages are listed below:
Compared to financial measures, nonfinancial performance measures are more:

· relevant to nonmanagement employees who are generally more familiar with nonfinancial items
(such as times and quantities) than financial items (such as costs or profits)
· timely than historical financial data and, thus, more apt to indicate where problems lie or where
benefits can be obtained
· reflective of the leading indicators of activities that create shareholder wealth, such as
manufacturing and delivering quality goods and services and providing service for the customer
· causative of goal-congruent behavior (rather than suboptimization) because they promote
long-term success rather than the short-term success promoted by financial measures
· integrated with organizational effectiveness because they can be designed to focus on
processes rather than simply outputs
· indicative of productive activity and the direction of future cash flows
· appropriate for gauging teamwork because they can focus on outputs that result from
organizational effort (such as quality) rather than inputs (such as costs)
· cross functional than financial measures, which are generally related to one function
· comparable for benchmarking externally than financial measures (which can be dramatically
affected by differences in accounting methods)
· aligned with the reward system because they are more likely to be under the control of
lower-level employees than are financial measures
184. Oil Division
Sales $3,000,000
Profit margin 10%
Target return 15%
Refer to the Oil Division. What was the segment income of the Oil Division for the year?
Segment income = Profit Margin * Sales = .10 * $3,000,000 = $300,000

185. Oil Division
Sales $3,000,000
Profit margin 10%
Target return 15%
Refer to Oil Division. What was the return on investment for the Oil Division?
ROI = Segment Income/Assets

Segment Income = $3,000,000 * .10 = $300,000
Assets = ($300,000 - $60,000)/.15 = $1,600,000
ROI = $300,000/$1,600,000 = 18.75%
Sales $10,000,000
Assets 6,000,000
Refer to Western Division. How much net segment income is the new project expected to produce?
the total of the new segment income = .22($6,000,000+$1,000,000) =

.22($7,000,000) = $1,540,000
the portion of the total segment income that is produced by the new project =
$1,540,000 - $1,500,000 = $40,000
Sales $10,000,000
Assets 6,000,000
Refer to Western Division. If the manager of the Western Division is evaluated on return on investment alone, will the manager invest in the new
project? Explain.
The manager would not invest in the new project because the new project would lower the Division's ROI from
the current 25% ($1,500,000/$6,000,000) to 22%. The new project only generates an ROI of 4%
($40,000/$1,000,000)
188. The manager of the Richmond Division of Brazos River Tours is preparing the budget for the upcoming
year. At this point, he has determined that average total assets for the upcoming year will equal $4,000,000. The
manager is evaluated on the amount of residual income generated by the division. Assume variable costs in the
Richmond Division are expected to equal 60% of total sales and fixed costs are expected to equal $400,000.
a. Compute the sales level that would generate a 20% return on investment.
b. Assuming the rate of return is 15%, determine the level of sales that would generate $200,000 of residual income.
a. The required net income = 20% ´ $4,000,000 = $800,000.
sales = net income + fixed costs + variable costs

sales = $800,000 + $400,000 + (.60 ´ sales)
sales ´ 40% = $1,200,000
sales = $3,000,000
b. sales = fixed costs + variable costs + required return + residual income
sales = $400,000 + (.60 ´ sales) + (.15 ´ sales) + $200,000

sales = $2,400,000
189. The following information is given for the Corn and Oats Divisions of Wholesome Grains Corporation.
Corn Oats
Sales $600,000 $300,000
Var. cost of goods sold 200,000 150,000
Fixed manufacturing costs 50,000 40,000
Variable selling 30,000 5,000
Fixed admin. (50% allocated) 20,000 4,000
Fixed selling (20% allocated) 50,000 30,000
Assets at book value 600,000 500,000
a. If Wholesome Grains Corporation uses income to evaluate division managers, compute net income that should be used for that purpose
given the limited data above.
b. If Wholesome Grains Corporation uses ROI to evaluate division managers and uses historical cost as the investment base, compute the
ROI for the Corn and Oats divisions.

a. Corn Oats
Sales $600,000 $300,000
COGS (250,000) (190,000)
Gross Margin $350,000 $110,000
Variable selling (30,000) (5,000)
Fixed admin (10,000) (2,000)
Fixed selling (40,000) (24,000)
Controllable income $270,000 $ 79,000
b. Corn Oats
$270,000 / $600,000 $79,000 / $500,000
= 45.00% = 15.80%
190. Information for two divisions of Superb Entertainment Company is given below:
Compact Disc DVD

Net income $ 60,000 $100,000
Capital investment $400,000 $500,000
a. If Superb Entertainment Company charges each division 12% for capital employed, compute residual income for the Compact Disc and
DVD divisions.
b. Compute the ROI for each division.
a. Compact Disc DVD

Net income $60,000 $100,000
Interest charge (48,000) (60,000)
Residual income $12,000 $ 40,000
b. ROI $60,000 / $400,000 $100,000 / $500,000

= 15% = 20%
191. Office Systems Center (OSC), a division of Edwards Corporation buys and installs modular office
components. For the most recent year, the division had the following performance targets:
Asset turnover 2.5

Profit margin 6%
Target rate of return on investments for RI 13%
Cost of capital 10%
Income tax rate 40%
Actual information concerning the company's performance for last year follows:
Total assets at beginning of year $3,600,000

Total assets at end of year 5,300,000
Total invested capital (annual average) 8,000,000
Sales 9,000,000
Variable operating costs 3,650,000
Direct fixed costs 4,770,000
Allocated fixed costs 675,000
Required:
a. For OSC, compute the segment margin and the average assets for the year.
b. Based on segment margin and average assets, compute the profit margin, asset turnover and ROI.
c. Evaluate the ROI performance of OSC.
d. Using your answers from part b., compute the residual income of OSC.
e. Compute the EVA of OSC. Why are the EVA and RI levels different?
f. Based on the data given in the problem, discuss why ROI, EVA and RI may be inappropriate measures of performance for OSC.
a. Sales $9,000,000
Variable costs (3,650,000)
Direct fixed costs (4,770,000)
Segment margin $ 580,000
Average assets = ($3,600,000 + $5,300,000) / 2 = $4,450,000
b. Profit margin = $580,000 / $9,000,000 = 6.44%

Asset turnover = $9,000,000 / $4,450,000 = 2.02
ROI = $580,000 / $4,450,000 = 13%
c. The target ROI for the division was 2.5 ´ 6% = 15%. The division generated an ROI of only 13%. Thus the division did not achieve its
target rate of return. The poor performance resulted from the division’s failure to achieve its targeted asset turnover.
d. RI = $580,000 - (13% ´ $4,450,000)
= $580,000 - $578,500 = $1,500
e. After-tax profits = pretax income - taxes
= $580,000 - ($580,000 ´ 40%) = $348,000
EVA = $348,000 - ($8,000,000 ´ 10%) = $(452,000)
EVA and RI differ for three reasons. First, RI is based on pre-tax rather than after-tax income. Second, RI is based on the book value of investment,
whereas EVA is based on the market value of investment. Third, the target rates of return differ between the methods.
f. ROI, RI and EVA are measures of short-term performance. These measures may be particularly inappropriate for divisions that have long-
term missions (such as high growth). In this case, the relatively large growth and assets of IFS from the beginning of the period to the end
of the period may indicate this division is oriented to growth. If so, the ROI, RI and EVA measures will provide an incentive contrary to
the growth mission.

192. The Education Innovations Corporation produces puzzles in its Colorado manufacturing plant. The
company is currently evaluating ways to improve productivity. The accountant of the firm's parent organization
suggested that management implement a new compensation plan based on throughput performance measure as
an incentive to increase productivity. To demonstrate how such a measure might work, the accountant gathered
the following production data for a recent month:
Total units attempted 6,000,000

Good units manufactured 4,800,000
a. How many defective units were produced?

b. Compute manufacturing cycle efficiency.
c. Compute process productivity.
d. Compute process quality yield.
e. Compute hourly throughput.
a. Defective units = 6,000,000 - 4,800,000 = 1,200,000

b. MCE = 600 / 800 = 75%
c. Process productivity = 6,000,000 / 600 = 10,000 units per hour
d. Process quality yield = 4,800,000 / 6,000,000 = 80%
e. Throughput = 10,000 ´ .75 ´ .8 = 6,000 puzzles per hour

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What are some performance measures discussed in the text?

What are some performance measures discussed in the text?

What is the balanced scorecard approach?

What is the balanced scorecard approach?

Chapter 14--Performance Measurement, Balanced Scorecards,

and Performance Rewards

3. The objectives identified in an organization’s values statement must be objective in nature.

9. Benchmarks for performance measures may be monetary or non-monetary.

18. Economic value added (EVA) is focused on short-term performance measurement.

19. Financial measures are lagging indicators.

20. Speed of delivery is an example of a leading indicator.

27. Hourly compensation provides a definite link between performance and reward.

36. The ratio of income to sales is referred to as ______________________________.

37. The ratio of sales to assets is referred to as ______________________________.

38. Profit margin ´ Asset Turnover is often referred to as the _________________________.

40. A measure of profit produced above the cost of capital is referred to as

45. The proportion of good units resulting from activities is referred to as

46. The three components of throughput are _____________________________________________,

48. Which of the following statements about an organization’s mission statement is true?

49. Variance analysis would be appropriate to measure performance in

52. Using a single performance evaluation criterion for an investment center

54. In evaluating the performance of a profit center manager, the manager

58. If sales and expenses both rise by $100,000

Division A Perry Corporation President

60. A company's return on investment is affected by a change in

61. The return on investment (ROI) ratio measures

ROI Assert turnover Profit margin

Residual Net cash Cost and revenue

65. Return on investment is computed by dividing income by

68. Profit margin equals

69. The Du Pont model measures

70. In the Du Pont model, profit margin is a ratio of

71. The Du Pont model measures ROI as it is affected by

72. Residual income is used as a performance measure in

75. Residual income is the

76. Residual income is an example of a ____ performance measurement.

77. If a division generates a positive residual income then the division's

78. Residual income is determined as

Revenue Investment Profit

80. An increase in a corporation's target rate would result in a(n)

83. Asset turnover equals

ROI Asset turnover Profit margin

86. Which measure is limited by the fact that it uses accounting income?

Assets available for use $1,800,000

What was Dessert Division's return on investment?

Assets available for use $2,500,00

89. Continental Publishing Company

Assets available for use $1,000,000 Book Value

90. Continental Publishing Company

Assets available for use $1,000,000 Book Value

91. Continental Publishing Company

Assets available for use $1,000,000 Book Value

92. Continental Publishing Company

Assets available for use $1,000,000 Book Value

93. Thunder Sports Enterprises

Assets available for use $1,200,000 Book Value

Assets available for use $1,200,000 Book Value

95. Thunder Sports Enterprises