Chapter 10: Performance Management SmartBook

Managers of cost centers are expected to ______.

minimize costs, while providing an acceptable level of service

When a manager accepts a project because the net operating income from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on ______ ______.

residual income

Select all that apply In a decentralized organization ______. decision-making authority is reserved for top management so lower level managers can concentrate on operations. top management can concentrate on issues such as overall strategy lower-level managers are trained for higher positions. lower-level managers have low motivation and job satisfaction due to increased responsibility changes in the operating environment can be responded to rapidly

top management can concentrate on issues such as overall strategy lower-level managers are trained for higher positions. changes in the operating environment can be responded to rapidly

Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $______.

6,000

JPL, Inc. recorded the following information for one of its products. All amounts are in days: Wait time 4.0; Inspection time 0.6; Process time 2.3; Move time 0.7; Queue time 3.1. JPL's throughput (manufacturing cycle) time is ______ days.

6.7

Time spent ensuring that the product is not defective is referred to as ______ time.

inspection

The manager of a(n) ________ center has control over costs, revenue, and investments in operating assets.

investment

ROI is a method used to evaluate ______.

investment centers, but not cost or profit centers

In order to fully understand how a manager's decisions can affect ROI, both ______ and ______ should be computed.

margin; turnover

Macey, Inc.'s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is ______.

20%

Select all that apply Which of the following are disadvantages of decentralization? Decision-making authority is removed from those with the most detailed information about the day-to-day operations. Lower-level managers may have objectives that differ from the objectives of the entire organization. The layers of required approvals and decisions often cause slow customer response time. Coordination among departments may be lacking. Lower-level managers may make decisions without understanding the big picture.

Lower-level managers may have objectives that differ from the objectives of the entire organization. Coordination among departments may be lacking. Lower-level managers may make decisions without understanding the big picture.

In order to increase return on investment (ROI), the company must ______ (increase/decrease) sales, and/or ______ (increase/decrease) operating expenses and/or ______ (increase/decrease) average operating assets.

increase; decrease; decrease

Select all that apply Valid criticisms of evaluating performance based on return on investment (ROI) include managers may ______. take actions that increase ROI in the short-run at the expense of long-term performance affect ROI by increasing sales or decreasing operating expenses for their division be put in charge of a business segment that includes committed costs over which a manager has no control reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI

take actions that increase ROI in the short-run at the expense of long-term performance be put in charge of a business segment that includes committed costs over which a manager has no control reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI

Gavin, Inc. recorded the following information for one of its products. All amounts are in days: Wait time 5.0; Inspection time 0.7; Process time 2.5; Move time 0.4; Queue time 3.0. Gavin's delivery cycle time is ______ days.

11.6

Select all that apply Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true? The project should be rejected by the company because its ROI is lower than the current departmental ROI. The project should be accepted by the company because it increases overall residual income. The project should be accepted because the residual income will help push the project's ROI above the projected 12%. The department manager may not want to accept the project because it will lower the overall ROI for the department.

The project should be accepted by the company because it increases overall residual income. The department manager may not want to accept the project because it will lower the overall ROI for the department.

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000. The equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to ______ (increase/decrease) from the current level of ______% to a new return on investment (ROI) of ______%.

increase; 10%; 12%

Return on investment =

Net operating income ÷ Average operating assets

An integrated set of performance measures that are derived from the company's strategy is ______.

a balanced scorecard

The ROI formula typically uses ______.

average operating assets for the year

Service departments, such as the accounting department, are generally considered ______ centers, while sales offices are often considered ______centers.

cost; profit

Lower-level management goals that are inconsistent with company goals are a possible disadvantage of ________.

decentralization

Residual income is a measure used to evaluate managers of ______ centers.

investment

Select all that apply ROI can be calculated as ______. margin ÷ turnover net operating income ÷ average operating assets average operating assets ÷ net operating income margin × turnover

net operating income ÷ average operating assets margin × turnover

A MCE of less than 1 indicates ______.

non-value added time is present

The manager of a(n) ______ center has control over both costs and revenues, but not over the use of ______ funds.

profit; investment

Time a product spends waiting to be worked on, moved inspected or shipped is referred to as ______ time.

queue

The net operating income that an investment center earns above the minimum required return on its average operating assets is its ______ income.

residual

Net operating income - (Average operating assets × Minimum required rate of return) =

residual income

Quick to Ship Company has a process time of 2 days and a throughput time of 8 days. The manufacturing cycle efficiency is ______.

.25

Net operating income ÷ Average operating assets =

Return on investment

Select all that apply Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers? Standard cost variances Return on investment (ROI) Residual income Actual profits compared to budgeted profits

Return on investment (ROI) Residual income

True or false: Reducing wait time often enables companies to increase customer satisfaction and profits.

True

True or false: When ROI is calculated using the gross cost of assets, replacing a fully depreciated asset with a comparably priced new asset will not adversely affect ROI.

True

Using net book value (instead of gross cost) to calculate average operating assets ______.

increases ROI over time

The inability to compare divisions of different sizes is a major disadvantage of ______.

residual income only

Which of the following is not one of the three primary types of responsibility centers?

sales

Carlos, Inc. requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average operating assets of $200,000 and a net operating income of $24,000. The department's residual income is $______.

4,000

Which of the following statements is correct?

A manager might reject a proposal using ROI that the manager would accept using residual income.

True or false: Adams, Inc. has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book values.

False

Select all that apply Which of the following performance measures are part of the balanced scorecard? Learning and growth Financial Vendor perspective Customer perspective

Learning and growth Financial Customer perspective

Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?

ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.

Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value?

Replacing an existing asset will not automatically decrease ROI

Which of the following business segments would not be considered a cost center?

Retail outlet

Select all that apply Which of the following ratios are part of the ROI formula? Sales ÷ Average operating assets Sales on account ÷ Average accounts receivable Cost of goods sold ÷ Average inventory Net operating income ÷ Sales

Sales ÷ Average operating assets Net operating income ÷ Sales

A disadvantage of the residual income approach is that it ______.

cannot be used to evaluate different sized divisions

Decision-making authority lies mostly with higher-level managers in strongly ______ organizations.

centralized

Decision-making authority lies mostly with higher-level managers in strongly ________ organizations.

centralized

Lower-level managers are empowered to make decisions in a ______ organization, which can ________ motivation and job satisfaction.

decentralized, increase

The time between when an order is placed and when it is delivered is known as the ______ ______ ______.

delivery cycle time

Select all that apply Operating assets include ______. equipment accounts receivable land held for investment investments in bonds inventory

equipment accounts receivable inventory

Select all that apply A company can increase its return on investment (ROI) by ______. increasing sales reducing operating expenses increasing operating assets borrowing additional funds

increasing sales reducing operating expenses

Net operating income is income before ______ and ______.

interest; taxes

Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress ______ and excessive operating assets which can depress ______.

margin; turnover

EBIT is another term for ______.

net operating income

When a manager is evaluated on residual income, an investment is acceptable when ______.

net operating income for the investment is above the minimum required return on average operating assets

Any part of an organization whose manager has control over and is accountable for cost, profit, or investments is a(n) ______ center.

responsibility

Select all that apply A manufacturing cycle efficiency of 40% means that ______. value-added activities are being performed 60% of the time the typical order is being worked on 40% of the time value-added activities are being performed 40% of the time 40% of the company's time is spent on non-value added activities

the typical order is being worked on 40% of the time value-added activities are being performed 40% of the time

The manufacturing cycle efficiency is computed by relating the value-added time to the ______ time.

throughput

The period from which a product begins production as raw materials and ends as a finished product is known as ______ time or manufacturing cycle time.

throughput