SU 16: Performance Measurement and Process Management
What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?
ROI may lead to rejecting projects that yield positive cash flows.
Which one of the following statements pertaining to the return on investment (ROI) as a performance measurement is false?
ROI relies on financial measures that are capable of being independently verified, while other forms of performance measures are subject to manipulation.
Which of the following attributes of a management report has the greatest impact on management's ability to make effective decisions?
Relevance.
REB Service Co. is a computer service center. For the month, REB had the following operating statistics: Sales $450,000 Operating income 25,000 Net profit after taxes 8,000 Total assets 500,000 Shareholders' equity 200,000 Cost of capital 6% Based on the above information, which one of the following statements is true? REB has a
Residual income of $(5,000).
Charlie's Service Co. is an automobile service center. For the month of June, Charlie's had the following operating statistics: Sales $750,000 Operating income 50,000 Net profit after taxes 6,000 Total assets available 700,000 Shareholders' equity 300,000 Cost of capital 8% Charlie's has a
Residual income of $(6,000).
Minon, Inc., purchased a long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income?
Return on Investment: Decrease Residual Income: Decrease
Which of the following ratios should be used to compare the profitability of two electronics companies that differ in size?
Return on assets.
In evaluating an investment center, top management should concentrate on
Return on investment.
Which of the following performance measures may lead a manager of an investment center to forgo investments that could benefit the company as a whole?
Return on investment.
Return on investment (ROI) is a very popular measure employed to evaluate the performance of corporate segments because it incorporates all of the major ingredients of profitability (revenue, cost, investment) into a single measure. Under which one of the following combinations of actions regarding a segment's revenues, costs, and investment would a segment's ROI always increase?
Revenues: Increase Costs: Decrease Investments: Decrease
An example of an internal failure cost is
Rework
Which of the following is a financial measure of success in a balanced scorecard?
Sales growth
Which scenario assumes the lowest maximum cost?
Scenario 1.
Champions, yellow belts, and master black belts are associated with which business process?
Six Sigma
Which of the following methodologies would be most effective for a company that wants to reduce its rate of defective products?
Six Sigma.
A manufacturer mass produces nuts and bolts on its assembly line. The line supervisors sample every nth unit for conformance with specifications. Once a nonconforming part is detected, the machinery is shut down and adjusted. The most appropriate tool for this process is a
Statistical quality control chart.
Which statement best describes total quality management (TQM)?
TQM is the continuous pursuit of quality.
The imputed interest rate used in the residual income approach to performance evaluation can best be described as the
Target return on investment set by the company's management.
One of the main reasons that implementation of a total quality management program works better through the use of teams is
Teams are a natural vehicle for sharing ideas, which leads to process improvement.
In which of the following organizational structures does total quality management (TQM) work best?
Teams of people from different specialties.
SkyBound Airlines provided the following information about its two operating divisions: Passenger Cargo Operating profit $40,000 $50,000 Investment $250,000 $500,000 External borrowing rate 6% 8% Measuring performance using return on investment (ROI), which division performed better?
The Passenger division, with an ROI of 16%.
Fact Pattern: An organization has collected data on the complaints made by computer users and has categorized the complaints in the Pareto diagram below. The chart displays
The absolute frequency of each computer complaint.
Which of the following statements regarding benchmarking is false?
The benchmarked organization against which a firm is comparing itself must be a direct competitor.
Which of the following is a characteristic of business process reengineering?
The bottom-up revision of the way the organization carries out a particular business process.
One of the main reasons total quality management (TQM) can be used as a strategic weapon is that
The cumulative improvement from a company's TQM efforts cannot readily be copied by competitors.
Assume that net operating income was $60,000 and that average invested capital was $600,000. For the year ended December 31, Rho's residual income (loss) was
$(30,000)
Wexford Co. has a subunit that reported the following data for Year 1: Asset (investment) turnover 1.5 times Sales $750,000 Return on sales 8% The imputed interest rate is 12%. What is the division residual income for Year 1?
$0
Which of the following indicates that market-based transfer prices would be preferable to cost-based transfer prices?
The market is perfectly competitive for the intermediate product, and the selling division has no unused capacity.
Fact Pattern: An organization has collected data on the complaints made by computer users and has categorized the complaints in the Pareto diagram below. Using the information collected, the organization should focus on
The number of computer complaints associated with the lack of user knowledge and hardware problems.
Management of a company is attempting to build a reputation as a world-class manufacturer of quality products. Which of the following measures would not be used by the firm to measure quality?
The number of parts shipped per day.
Which of the following statements is not true regarding ISO 9000 standards?
The objective of ISO 9000 standards is to ensure high quality products and services.
An example of an internal nonfinancial benchmark is
The percentage of customer orders delivered on time at the company's most efficient plant.
After investing in a new project, a company discovered that its residual income remained unchanged. Which one of the following must be true about the new project?
The return on investment of the new project must have been equal to the firm's cost of capital.
Increasing the efficiency of all phases of a given process is specifically discouraged by which of the following models?
Theory of constraints.
Which of the following decision-making techniques is most useful to a manager who is attempting to increase the profitability of an area, but who has a problem with limited capacity for operation of a critical machine?
Theory of constraints.
Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs?
Tracking the number of products reworked.
What is Watson's total prevention and appraisal cost for last month?
$1940
If the imputed interest charge is 15% and Webb wants to achieve a residual income target of $2,000,000, what will costs (cost of goods sold and other operating expenses) have to be in order to achieve the target?
$25,150,000
The following selected data pertain to the Darwin Division of Beagle Co. for the year just ended: Sales $400,000 Operating income $ 40,000 Capital turnover 4 Imputed interest rate 10% What was Darwin's residual income for the year?
$30,000
A company uses its fixed assets of $1,000,000 at 95% capacity to generate sales of $2,000,000. The company wishes to generate sales of $3,000,000. What amount of additional fixed assets must be acquired, assuming that all fixed assets will operate at maximum capacity?
$425,000
Galax, Inc., had operating income of $5,000,000 before interest and taxes. Galax's net book value of plant assets at January 1 and December 31 were $22,000,000 and $18,000,000, respectively. Galax achieved a 25% return on investment for the year, with an investment turnover of 2.5. What were Galax's sales for the year?
$50,000,000
What amount is the company's prevention cost for the current month?
$57,000
A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. The company's residual income would be which of the following amounts?
$640
The dollar amount of the costs of quality classified as preventive costs for the manufacturing firm would be
$701,000
What of the following represents Zig's year-end economic value-added amount?
$72,000,000
Avionics Industrials reported at year end that operating income before taxes for the year equaled $2,400,000. The firm's weighted-average cost of capital (WACC) is 7.24%. The carrying amount of debt is $1,300,000, and the carrying amount of equity capital is $8,800,000. The income tax rate for Avionics is 30%. What is the economic value added (EVA)?
$948,760
Which of the following equations should be used to compute Bala's return on investment?
(6/4) × (1/6) = ROI.
Which one of the following formulas generates Andrew's return on investment?
(720,000 ÷ 480,000) × (120,000 ÷ 720,000)
Which of the following formulas should be used to calculate the economic rate of return on common stock?
(Dividends + change in price) divided by beginning price.
The Year 2 return on equity for McKeon Company is
0.221
What percentage amount is the ROI?
10%
For the year ended December 31, Rho's return on average investment was
10.0%
Assuming there are no preferred stock dividends in arrears, Devlin Company's return on common equity for the year ended May 31, Year 2, was
10.5%
Assuming that King Products Corporation's net income for the year ended June 30, Year 2, was $70,000 and there are no preferred stock dividends in arrears, King Products Corporation's return on common equity was
10.6%
Assuming that Lisa, Inc.'s net income for Year 2 was $35,000, and there were no preferred stock dividends in arrears, Lisa's return on common equity for Year 2 was
10.6%
A company's common stock has a market value of $45. The company's most recent annual earnings per share is $3.60 and the company pays an annual dividend of $1.50 per share. What is the company's price-earnings ratio?
12.50
Spear Corp. had sales of $2,000,000, a profit margin of 11%, and assets of $2,500,000. Spear decided to reduce its debt ratio to 0.40 from 0.50 by selling new common stock and using the proceeds to repay principal on some outstanding long-term debt. After the refinancing, what is Spear's return on equity (ROE)?
14.7%
If Hinzel treats the Western Division as an investment center for performance measurement purposes, what is the before-tax return on investment (ROI) for last year?
16.67%
Cinder's residual income was
170,400
Assuming that there are no income taxes, what would be the ROI and RI, respectively, for this equipment, which has an average value of $100,000?
20%, $2,000
Using year-end assets as the average, Dividendosaurus has return on assets of
21.1%
Dayan's return on common equity, rounded to the nearest percentage point, for Year 6 is
22%
Vested, Inc., made some changes in operations and provided the following information: Year 2 Year 3 Operating revenues $ 900,000 $1,100,000 Operating expenses 650,000 700,000 Operating assets 1,200,000 2,000,000 What percentage represents the return on investment for Year 3?
25%
The following information pertains to Quest Co.'s Gold Division for the year just ended: Sales $311,000 Variable cost 250,000 Traceable fixed costs 50,000 Average invested capital 40,000 Imputed interest rate 10% Quest's return on investment was
27.50%
For the year just ended, the company had a rate of return on common equity, rounded to two decimals, of
31.21%
The following data pertain to Canova, Inc., for the year ended December 31: Net sales $ 600,000 Net income 150,000 Total assets, January 1 2,000,000 Total assets, December 31 3,000,000 What was Canova's rate of return on assets for the year?
6%
Devlin Company's rate of return on assets for the year ended May 31, Year 2, was
7.5%
The following is a summarized income statement of Carr Co.'s profit center No. 43 for the month just ended: Which of the following amounts would most likely be subject to the control of the profit center's manager?
70,000
Which one of the following is not a core principle of total quality management (TQM)?
A focus on technological breakthroughs.
Which one of the following best identifies a profit center?
A new car sales division for a large local auto agency.
Company A and company B are subsidiaries of company C, a multinational company. A has a fixed corporate tax rate of 15% and B pays a 25% fixed corporate tax rate. A sells a component to B at a price ranging from $100 to $200 per unit. Which of the following statements is correct regarding the transfer price from A to B?
A transfer price of $200 will maximize after-tax profits of A and C.
Which of the following criteria would be most useful to a sales department manager in evaluating the performance of the manager's customer-service group?
All customer inquiries should be answered within 7 days of receipt.
Which of the following statements regarding the report is most likely correct?
An increase in conformance costs resulted in a decrease in nonconformance costs.
If a company is customer-centered, its customers are defined as
Anyone external to the company and those internal who rely on its product to get their job done.
Product-quality-related costs are part of a total quality control program. A product-quality-related cost incurred in detecting individual products that do not conform to specifications is an example of a(n)
Appraisal cost.
The cost of statistical quality control in a product quality cost system is categorized as a(n)
Appraisal cost.
The costs of quality that are incurred in detecting units of product that do not conform to product specifications are referred to as
Appraisal costs.
A segment of an organization is referred to as an investment center if it has
Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply and significant control over the amount of invested capital.
A segment of an organization is referred to as a profit center if it has
Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply.
Which of the following types of performance measures integrates financial performance, internal operations, learning and growth, and customer satisfaction?
Balanced scorecard
Total quality management (TQM) in a manufacturing environment follows a series of steps in its implementation. Which of the following is the correct order of the steps?
Begin with external customer requirements, identify customer-supplier relationships and requirements, and establish requirements for external suppliers.
The management of a company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts?
Benchmark.
A manufacturer that wants to improve its staging process compares its procedures against the check-in process for a major airline. Which of the following tools is the manufacturer using?
Benchmarking
Which of the following methods involves comparing a company's internal processes that need to be improved to those of external companies identified as being best in class?
Benchmarking
If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return, what will be the preference for taking on the proposed cosmetics line by Edith Carolina and Michael Sanders?
Carolina: Accept Sanders: Accept
If the Deed Corporation evaluates managerial performance using return on investment, what will be the preference for taking on the proposed cosmetics line by Edith Carolina and Michael Sanders?
Carolina: Accept Sanders: Reject
Managers are most likely to accept allocations of common costs based on
Cause and effect.
The balanced scorecard provides an action plan for achieving competitive success by focusing management attention on critical success factors. Which one of the following is not one of the perspectives on the business into which critical success factors are commonly grouped in the balanced scorecard?
Competitor business strategies.
Which of the following is not required when ISO 9000 standards are adopted?
Consistent high quality products.
Which of the following types of responsibility centers include controllable revenues in their performance reports?
Cost Center: No Investment Centers: Yes Profit Centers: Yes
The least complex segment or area of responsibility for which costs are allocated is a(n)
Cost center.
In a highly decentralized organization, the best option for measuring the performance of manufacturing subunits is the establishment of
Cost centers.
Benchmarking compares the current performance of operations to which of the following factors related to competing organizations?
Current performance measures.
Which of the following balanced scorecard perspectives examines a company's success in targeted market segments?
Customer
On a balanced scorecard, which is more of an internal process measure than an external-based measure?
Cycle Time
Rockford Manufacturing Corporation uses a responsibility accounting system in its operations. Which one of the following items is least likely to appear in a performance report for a manager of one of Rockford's assembly lines?
Depreciation on the manufacturing facility.
Total quality management (TQM) in a manufacturing environment is best exemplified by
Designing the product to minimize defects.
Residual income is a better measure for performance evaluation of an investment center manager than return on investment because
Desirable investment decisions will not be neglected by high return divisions.
What is gap analysis in TQM?
Determining what is necessary to bring the practices of the organization closer to the quality leaders in its industry.
Which criterion for allocation of common costs most likely promotes acceptance of the allocation?
Direct cause-and-effect relationship.
One approach to measuring divisional performance is return on investment. Return on investment is expressed as operating income
Divided by average total assets.
The division with the best performance is
Division B
Which statement best describes the emphasis of total quality management (TQM)?
Doing each job right the first time.
On a balanced scorecard, which of the following is not a customer satisfaction measure?
Economic value added.
Which of the following terms refers to a performance measurement that is calculated as an investment center's after-tax operating income minus the product of its total assets multiplied by the company's weighted-average cost of capital (WACC)?
Economic value added.
Which of the following methods is best suited for evaluating the performance of a firm's capital in any given year?
Economic value-added.
Which of the following terms represents the residual income that remains after the cost of all capital, including equity capital, has been deducted?
Economic value-added.
Which of the following is a characteristic of total quality management (TQM)?
Education and self-improvement.
Which of the following quality costs are nonconformance costs?
Environmental costs.
If a manufacturing company uses responsibility centers, which one of the following items is least likely to appear in a performance report for a manager of an assembly line?
Equipment depreciation.
The four categories of costs associated with product quality costs are
External failure, internal failure, prevention, and appraisal.
An automobile parts manufacturer has received complaints about declining quality from customers. After a quick review, management realizes the problem has no single source. To perform a thorough process of problem identification, the most appropriate tool is a(n)
Fishbone diagram.
Which of the following is a key to successful total quality management (TQM)?
Focusing intensely on the customer.
Managerial performance can be measured in many different ways, including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is that
Goal congruence is more likely to be promoted by using residual income.
Jago Co. has two products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the
Greater contribution margin per hour of manufacturing capacity.
The primary reason that We Move You adopted TQM was to achieve
Greater customer satisfaction.
Which of the following ratios would be used to evaluate a company's profitability?
Gross margin ratio.
A company, which has many branch stores, has decided to benchmark one of its stores for the purpose of analyzing the accuracy and reliability of branch store financial reporting. Which one of the following is the most likely measure to be included in a financial benchmark?
High amount of bad debt write-offs.
Nonfinancial performance measures are important to engineering and operations managers in assessing the quality levels of their products. Which of the following indicators can be used to measure product quality? I. Returns and allowances II. Number and types of customer complaints III. Production cycle time
I and II only.
In a quality control program, which of the following is(are) categorized as internal failure costs? Rework Responding to customer complaints Statistical quality control procedures
I only
Which measures would be useful in evaluating the performance of a manufacturing system? I. Throughput time II. Total setup time for machines/total production time III. Number of rework units/total number of units completed
I, II, and III.
Rework costs should be regarded as a cost of quality in a manufacturing company's quality control program when they are Caused by the customer Caused by internal failure
II only
The basic objective of the residual income approach to performance measurement and evaluation is to have a division maximize its
Income in excess of a desired minimum return.
A firm earning a profit can increase its return on investment by
Increasing sales revenues and operating expenses by the same percentage.
Common costs are
Indirect costs.
Which of the following is one of the four perspectives of a balanced scorecard?
Innovation
The cost of scrap, rework, and tooling changes in a product quality cost system are categorized as a(n)
Internal failure cost.
Decentralized firms can delegate authority and yet retain control and monitor managers' performance by structuring the organization into responsibility centers. Which one of the following organizational segments is most like an independent business?
Investment center.
Which of the following conclusions can Blankie draw about its quality program?
It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.
System flexibility, elimination of waste, and elimination of disruptions are characteristic goals of which business process?
Lean operation
Under the balanced scorecard concept, employee satisfaction and retention are measures used under which of the following perspectives?
Learning and growth.
Each of the following will affect a company's return on investment, except
Maintaining the company's cost of capital at current levels.
Under a total quality management (TQM) approach,
Measurement occurs throughout the process, and errors are caught and corrected at the source.
Using the balanced scorecard approach, an organization evaluates managerial performance based on
Multiple financial and nonfinancial measures.
A student aircraft mechanic scored 90% on her midterm exam on electronic systems, but her employer wanted a perfect score on every exam, stating, "Nothing less than perfection works in aviation." Because the mechanic is required to make a test flight in every airplane she repairs, how would the 10% error rate be classified in a cost of quality analysis?
Nonconformance - internal.
In responsibility accounting, a center's performance is measured by controllable costs. Controllable costs are best described as including
Only those costs that the manager can influence in the current time period.
The director of sales asks for a count of customers grouped in descending numerical rank by (1) the number of orders they place during a single year and (2) the dollar amounts of the average order. The visual format of these two pieces of information is most likely to be a(n)
Pareto diagram.
Which of the following performance measures is nonfinancial?
Percentage of defective products.
Quality is achieved more economically if We Move You focuses on
Prevention costs.
The internal audit activity has undertaken an audit of the shipping and receiving department of a department store chain. The best engagement tool for this purpose most likely is
Process benchmarking.
Controllable revenue would be included in a performance report for a
Profit Center: Yes Cost Center: No
