45: Performance Measures & Management Techniques
65. In an attempt to improve operations, companies often go through analyses and redesign of the way processes are performed. Which of the following is not considered to be an aspect of a business process that may be focused on to achieve improvement? a. Technology. b. Human performance. c. The interaction between technology and human performance. d. Strategic goals.
Correct Answer: D) Strategic goals. Notes (d) The requirement is to identify the aspect of business process improvement that is not generally a focus. Answer (d) is correct because examination of strategic goals is part of strategic planning, not part of business process management. Answers (a), (b) and (c) are incorrect because they all represent ways to improve business processes.
12. A strategy objective in the balanced scorecard framework is a. A statement of what the strategy must achieve and what is critical to its success. b. Key action programs required to achieve strategic objectives. c. Diagrams of the cause-and-effect relationships between strategic objectives. d. The level of performance or rate of improvement needed in the performance measure.
Correct Answer: A) A statement of what the strategy must achieve and what is critical to its success. Answer (a) is correct because it is the definition of a strategy objective in the balanced scorecard framework. Answer (b) is incorrect because it describes a strategic initiative. Answer (c) is incorrect because it is the definition of a strategy map. Answer (d) is incorrect because it is the definition of a target.
67. At which phase in the business process management life-cycle does management simulate performance of the process in a test environment? a. Design. b. Modeling. c. Execution. d. Optimization.
Correct Answer: B) Modeling. (b) The requirement is to identify the phase that involves simulation of performance of the process in a test environment. Answer (b) is correct because this describes the modeling phase. Answer (a) is incorrect because the design phase involves design of the new process. Answer (c) is incorrect because the execution phase involves implementing the process. Answer (d) is incorrect because optimization involves identifying additional improvements in the process after it is implemented.
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. These questions present several of Depoole's transactions during the year. Assume that total quick assets exceeded total current liabilities both before and after each transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. 51. The issuance of new shares in a five-for-one split of common stock a. Decreases the book value per share of common stock. b. Increases the book value per share of common stock. c. Increases total shareholders' equity. d. Decreases total shareholders' equity.
Correct Answer: A) Decreases the book value per share of common stock. Notes (a) The requirement is to determine the effect of a five-for-one stock split. Answer (a) is correct because a stock split increases the number of shares outstanding and, therefore, reduces the book value per share. Answers (c) and (d) are incorrect because the transaction does not affect total stockholders' equity.
2. Which of the following is not one of the four perspectives of the balanced scorecard? a. Investment in resources perspective. b. Customer perspective. c. Learning and growth perspective. d. Financial perspective.
Correct Answer: A) Investment in resources perspective. Answer (a) is correct because investment in resources is not a perspective of the balanced scorecard. The balanced scorecard deals with performance measurement.
26. The following information pertains to Bala Co. for the year ended December 31, 2012: Sales: $600,000 Net Income: $100,000 Capital Investment: $400,000 Which of the following equations should be used to compute Bala's return on investment? a. (4/6) × (6/1) = ROI b. (6/4) × (1/6) = ROI c. (4/6) × (1/6) = ROI d. (6/4) × (6/1) = ROI
Correct Answer: B) (6/4) × (1/6) = ROI (b) Return on investment (ROI) may be calculated using the following equation: (Sales/Investment) X (NI/Sales) = ROI Thus, the equation that should be used to compute Bala's return on investment is (6/4) × (1/6) = ROI.
64. In the cost of quality, costs incurred in detecting individual units of product that do not conform to specifications are a. Prevention costs. b. Appraisal costs. c. Internal failure costs. d. External failure costs.
Correct Answer: B) Appraisal costs. (b) The requirement is to identify how costs incurred to detect nonconforming units are classified. Answer (b) is correct because appraisal costs are costs associated with quality control and include testing and inspection. Answer (a) is incorrect because prevention costs involve any quality activity designed to do the job right the first time. Answer (c) is incorrect because internal failures occur when substandard products are produced but discovered before shipment to the customer. Answer (d) is incorrect because external failure costs are incurred for products that do not meet requirements of the customer and have been shipped to the customer.
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. These questions present several of Depoole's transactions during the year. Assume that total quick assets exceeded total current liabilities both before and after each transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. 48. The purchase of raw materials for $85,000 on open account would a. Increase the current ratio. b. Decrease the current ratio. c. Increase net working capital. d. Decrease net working capital.
Correct Answer: B) Decrease the current ratio. Notes (b) The requirement is to determine the effect of a purchase of raw materials on account. The correct answer is (b). Since we know that the current ratio is greater than one, an increase in the numerator and the denominator by an equal amount will decrease the ratio. Answers (c) and (d) are incorrect because working capital will not change.
54. Southwest Airlines benchmarked the process of turning around an airplane with the pit stop process for formula racecars. This is an example of a. Internal benchmarking. b. Generic benchmarking. c. Competitor benchmarking. d. Functional benchmarking.
Correct Answer: B) Generic benchmarking. (b) The requirement is to identify the definition of benchmarking outside of the firm's industry. Answer (b) is correct because generic benchmarking involves benchmarking to the best practices regardless of the industry. Answer (a) is incorrect because internal benchmarking involves benchmarking within the firm. Answer (c) is incorrect because competitor benchmarking involves benchmarking against direct competitors. Answer (d) is incorrect because functional benchmarking involves benchmarking within the same broad industry.
30. Which combination of changes in asset turnover and income as a percentage of sales will maximize the return on investment? I. Asset turnover II. Income as a percentage of sales a. I: Increase / II: Decrease b. I: Increase / II: Increase c. I: Decrease / II: Increase d. I: Decrease / II: Decrease
Correct Answer: B) I: Increase / II: Increase Use the DuPont formula.
62. In the cost of quality, which of the following is an example of a "prevention cost"? a. Cost of inspecting products on the production line by quality inspectors. b. Labor cost of product designers whose task is to design components that will not break under extreme temperature conditions. c. Cost of reworking defective parts detected by the quality assurance group. d. Cost of parts returned by customers.
Correct Answer: B) Labor cost of product designers whose task is to design components that will not break under extreme temperature conditions. Notes (b) The requirement is to identify the item which reflects the prevention cost component. A prevention cost is a cost incurred to prevent defects. These costs include the cost to identify the cause of the defect, take corrective action to eliminate the cause, train people, and redesign the product or the production process. Answer (b) is correct because it is an example of a quality activity designed to do the job right the first time. Answer (a) is incorrect because it is an example of an appraisal cost. Answer (c) is incorrect because it is an example of an internal failure cost. Answer (d) is incorrect because it is an example of an external failure cost.
1. What is the most important purpose of a balanced scorecard? a. Develop strategy. b. Measure performance. c. Develop cause-and-effect linkages. d. Set priorities.
Correct Answer: B) Measure performance. Answer (b) is correct because the balanced scorecard uses financial and nonfinancial measures to measure performance. Answer (a) is incorrect because strategic planning is designed to develop strategy. Answer (c) is incorrect because developing cause-and-effect linkages is an important part of developing a balanced scorecard. Answer (d) is incorrect because setting priorities is a part of strategic planning.
74. Which of the following is used to describe the practice of adding resources to shorten selected activity time on the critical path of a project? a. Making adjustments b. Project crashing c. Slack time d. Reengineering
Correct Answer: B) Project crashingAnswer (b) is correct because this describes project crashing.
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. These questions present several of Depoole's transactions during the year. Assume that total quick assets exceeded total current liabilities both before and after each transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. 53. The early liquidation of a long-term note with cash affects the a. Current ratio to a greater degree than the quick ratio. b. Quick ratio to a greater degree than the current ratio. c. Current and quick ratio to the same degree. d. Current ratio but not the quick ratio.
Correct Answer: B) Quick ratio to a greater degree than the current ratio. Notes (b) The requirement is to determine the effect of liquidating a long-term note with cash. Answer (b) is correct. Cash is included in the numerator of both the quick and current ratios. However, a reduction in cash affects the quick ratio more than the current ratio because it is smaller.
34. The following are selected data for Walkin Corporation for the year ended 20X1: Net Operating Profit Before Taxes: $31,250,000 Inventory: $5,000,000 Long-Term Debt: $40,000,000 Depreciation Expense: $9,000,000 Change in net Working Capital: $5,000,000 Capital Expenditures: $8,000,000 Invested Capital (Net Assets): $80,000,000 Weighted Average Cost of Capital: 10% Tax Rate: 20% Which of the following measures the amount of free cash flow for Walkin Corporation for the year? a. $ 7,000,000 b. $ 8,000,000 c. $21,000,000 d. $25,000,000
Correct Answer: C) $21,000,000 Answer (c) is correct because free cash flow is equal to Net operating profit after taxes + Depreciation expense - Change in net working capital - Capital expenditures. Therefore, free cash flow is equal to $21,000,000 ($25,000,000 + $9,000,000 - $5,000,000 - $8,000,000).
37. The following information is available for Armstrong Enterprises for 2012: Net operating profit after taxes: $36,000,000 Depreciation expense: $15,000,000 Change in net working capital: $10,000,000 Capital expenditures: $12,000,000 Invested Capital (total assets - total liabilities): $100,000,000 Weighted-average cost of capital: 10% What is the free cash flow for 2012? a. $36,000,000 b. $30,000,000 c. $29,000,000 d. $26,000,000
Correct Answer: C) $29,000,000 Free cash flow would be computed as follows: NOPAT + Depreciation - Change in net working capital - Capital expenditures = Free cash flow
61. In the cost of quality, which of the following is an example of an "internal failure"? a. Cost of inspecting products on the production line by quality inspectors. b. Labor cost of product designers whose task is to design components that will not break under extreme temperature conditions. c. Cost of reworking defective parts detected by the quality assurance group. d. Cost of parts returned by customers.
Correct Answer: C) Cost of reworking defective parts detected by the quality assurance group. (c) The requirement is to identify the item which reflects the internal failure component. An internal failure cost is a cost incurred when substandard products are produced but discovered before shipment to the customer. Reworking defective parts is an example of an internal failure. Answer (a) is incorrect because it is an example of an appraisal cost. Answer (b) is incorrect because it is an example of a prevention cost. Answer (d) is incorrect because it is an example of an external failure cost.
39. What financial analysis technique would imply benchmarking with other firms? a. Horizontal analysis. b. Vertical analysis. c. Cross-sectional analysis. d. Ratio analysis.
Correct Answer: C) Cross-sectional analysis. Answer (c) is correct because cross-sectional analysis involves comparing results and ratios to those of other firms in the same industry. Answer (a) is incorrect because horizontal analysis involves comparisons of results and ratios for the same firm over time. Answer (b) is incorrect because vertical analysis involves comparisons of relationships in a firm's financial statements for a single year. Answer (d) is incorrect because ratio analysis does not imply any particular comparison.
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. These questions present several of Depoole's transactions during the year. Assume that total quick assets exceeded total current liabilities both before and after each transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. 47. Payment of a trade account payable of $64,500 would a. Increase the current ratio but the quick ratio would not be affected. b. Increase the quick ratio but the current ratio would not be affected. c. Increase both the current and quick ratios. d. Decrease both the current and quick ratios.
Correct Answer: C) Increase both the current and quick ratios. Notes (c) The requirement is to determine the effect of payment of an account payable. Answer (c) is correct. The quick ratio is equal to quick assets divided by current liabilities and the current ratio is equal to current assets divided by current liabilities. Since we are told that quick assets exceed current liabilities, both ratios are greater than one. With a ratio greater than one if you reduce the numerator and denominator by an equal amount, the ratio will increase.
72. Which of the following involves comparing measures of actual progress of a project to planned progress? a. Project planning. b. Project scheduling. c. Project control. d. Project closure.
Correct Answer: C) Project control. Notes (c) The requirement is to identify the stage that involves comparing measures of actual progress to planned progress. Answer (c) is correct because this describes an aspect of project control. Answers (a), (b), and (d) are incorrect because they represent other stages of the project management lifecycle.
73. Which of the following is a detailed listing of the man-hour, equipment, and materials requirements for a project? a. Statement of work. b. Work breakdown structure. c. Project specifications. d. Milestone schedule.
Correct Answer: C) Project specifications. Answer (c) is correct because this is a description of the project specifications. Answer (a) is incorrect because the statement of work is a narrative description of the work to be performed. Answer (b) is incorrect because the work breakdown structure breaks the project into manageable, independent, and measureable elements that can be budgeted and assigned. Answer (d) is incorrect because the milestone schedule sets forth the start date, the end date, and other major milestones involved in completing the project.
66. Management of organizations that engages in business process management view business processes as a. Requirements for good control over the organization. b. Systems that provide information for good management. c. Strategic assets that must be understood, managed and improved. d. Mechanisms that keep employees from shirking.
Correct Answer: C) Strategic assets that must be understood, managed and improved. Notes (c) The requirement is to identify how business process managers view business processes. Answer (c) is correct because business process managers view processes as strategic assets that can create value and competitive advantage. Answers (a), (b) and (d) are incorrect because they all describe very limited views of business processes.
70. Three of the basic measurements used by the Theory of Constraints (TOC) are a. Gross margin (or gross profit), return on assets, and total sales. b. Number of constraints (or subordinates), number of nonconstraints, and operating leverage. c. Throughput (or throughput contribution), inventory (or investments), and operational expense. d. Fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross margin (or gross profit).
Correct Answer: C) Throughput (or throughput contribution), inventory (or investments), and operational expense. (c) The requirement is to identify the three basic measurements used by the Theory of Constraints. Answer (c) is correct because the Theory of Constraints focuses on throughput contribution, investment (or inventory), and operational expense (operating costs).
33. The following are selected data for Walkin Corporation for the year ended 20X1: Net Operating Profit Before Taxes: $31,250,000 Inventory: $5,000,000 Long-Term Debt: $40,000,000 Depreciation Expense: $9,000,000 Change in net Working Capital: $5,000,000 Capital Expenditures: $8,000,000 Invested Capital (Net Assets): $80,000,000 Weighted Average Cost of Capital: 10% Tax Rate: 20% Which of the following measures economic value added for Walkin Corporation for the year? a. $3,000,000 b. $7,000,000 c. $15,000,000 d. $17,000,000
Correct Answer: D) $17,000,000 EVA = NOPAT - [(TA - CL) X WACC]
28. The following selected data pertain to the Darwin Division of Beagle Co. for 2012: Sales: $400,000 Net income: $40,000 Capital Turnover: 4 Imputed Interest Rate: 10% What was Darwin's 2012 residual income? a. $0 b. $ 4,000 c. $10,000 d. $30,000
Correct Answer: D) $30,000 Notes (d) Residual income equals the net income of a division minus imputed interest on the division's assets. In this question, we are given Darwin's operating income and imputed interest rate, but Darwin's assets must be derived using sales and capital turnover, as shown below. Capital Turnover = Sales / Invested Capital 4 = $400,000 / X X = $100,000 RI = $40,000 - ($100,000 X 10%) RI - $30,000
27. Select Co. had the following 2012 financial statement relationships: Asset Turnover = 5 Profit Margin on Sales = 0.02 What was Select's 2012 percentage return on assets? a. 0.1% b. 0.4% c. 2.5% d. 10.0%
Correct Answer: D) 10.0% (d) Return on assets, also referred to as return on investment (ROI), is calculated as follows: ROI = Profit Margin X Asset Turonver ROI = 0.02 X 5 ROI = 0.10 or 10%
4. The balanced scorecard has been adopted by many corporations. Which of the following best describes the balanced scorecard? a. A strategy that meets management's objectives. b. A diagram illustrating cause and effect relationships. c. A table of key actions to achieve strategic objectives. d. A strategic performance measurement and management framework.
Correct Answer: D) A strategic performance measurement and management framework. Notes (d) The requirement is to define the balanced scorecard. Answer (d) is correct because the balanced scorecard is a strategic performance measurement and management framework. Answer (b) is incorrect because it is the definition of a strategy map. Answer (c) is incorrect because it is the definition of a list of strategic initiatives.
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. These questions present several of Depoole's transactions during the year. Assume that total quick assets exceeded total current liabilities both before and after each transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. 52. The issuance of serial bonds in exchange for an office building, with the first installment of the bonds due late this year, a. Decreases net working capital. b. Decreases the current ratio. c. Decreases the quick ratio. d. Affects all of the answers as indicated.
Correct Answer: D) Affects all of the answers as indicated. Notes (d) The requirement is to determine the effect of issuing serial bonds in exchange for an office building. Answer (d) is correct because the first installment is a current liability which affects the quick ratio, the current ratio, and working capital.
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. These questions present several of Depoole's transactions during the year. Assume that total quick assets exceeded total current liabilities both before and after each transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. 50. Obsolete inventory of $125,000 was written off during the year. This transaction a. Decreased the quick ratio. b. Increased the quick ratio. c. Increased net working capital. d. Decreased the current ratio.
Correct Answer: D) Decreased the current ratio. Notes (d) The requirement is to determine the effect of writing off inventory. Answer (d) is correct because a write-off of inventory will decrease the current ratio. Answers (a) and (b) are incorrect because inventory is not used in computing the quick ratio. Answer (c) is incorrect because working capital will be decreased.
75. When a project can be completed in a number of completely different ways that might involve branching after performing activities, the best schedule and control technique would be a. Program Evaluation and Review Technique. b. Gant chart. c. Critical Path Method. d. Graphical Evaluation and Review Technique.
Correct Answer: D) Graphical Evaluation and Review Technique. Notes (d) The requirement is to identify the scheduling and control technique that would be most appropriate when a project can be completed in a number of completely different ways. Answer (d) is correct because the Graphical Evaluation and Review Technique is appropriate for these types of projects. Answers (a), (b), and (c) are incorrect because these scheduling and control techniques do not perform as well under these circumstances.
10. In the balanced scorecard framework, a survey of employee satisfaction is a potential measure in which of the four perspectives? a. Financial. b. Customer. c. Internal business processes. d. Learning and growth.
Correct Answer: D) Learning and growth. Answer (d) is correct because surveys of employee satisfaction would appear in the learning and growth perspective which includes various employee measures including employee turnover. Answer (a) is incorrect because the financial perspective includes measures such as profitability and return on investment. Answer (b) is incorrect because the customer perspective includes measures like customer satisfaction. Answer (c) is incorrect because the internal business processes perspective includes measures related to cost, quality, and time.
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. These questions present several of Depoole's transactions during the year. Assume that total quick assets exceeded total current liabilities both before and after each transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. 49. The collection of a current accounts receivable of $29,000 would a. Increase the current ratio. b. Decrease the current ratio and the quick ratio. c. Increase the quick ratio. d. Not affect the current or quick ratios.
Correct Answer: D) Not affect the current or quick ratios. Notes (d) The requirement is to determine the effect of the collection of accounts receivable. Answer (d) is correct. Collection of accounts receivable has no effect on the quick or current ratio because both cash and accounts receivable are part of the numerator of both ratios.
13. A target in the balanced scorecard framework is a. A statement of what the strategy must achieve and what is critical to its success. b. A key action program required to achieve strategic objectives. c. A diagram of the cause-and-effect relationships between strategic objectives. d. The level of performance or rate of improvement needed in the performance measure.
Correct Answer: D) The level of performance or rate of improvement needed in the performance measure. Notes (d) The requirement is to identify the definition of a target. Answer (d) is correct because it is the definition of a target in the balanced scorecard framework. Answer (a) is incorrect because it is the definition of a strategic objective. Answer (b) is incorrect because it is the definition of strategy initiatives. Answer (c) is incorrect because it is the definition of a strategy map.
