16e GNB CH11 TB final - Chapter 11 Sample questions and answers PDF

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Chapter 11 Sample questions and answers...

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File: 16e_GNB_CH11_TB, Chapter 11, Performance Measurement in Decentralized Organizations

True/False [QUESTION] 1. Return on investment (ROI) equals margin multiplied by sales. Answer: F Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 2. When used in return on investment (ROI) calculations, turnover equals sales divided by average operating assets. Answer: T Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 3. Net operating income is income before interest and taxes. Answer: T Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 4. An advantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income. Answer: T Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 5. All other things the same, an increase in unit sales will normally result in an increase in the return on investment.

Answer: T Difficulty: 2 Medium Learning Objective: 11-01 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 6. The use of return on investment (ROI) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole. Answer: T Difficulty: 2 Medium Learning Objective: 11-01 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 7. Land held for possible plant expansion would be included as an operating asset when computing return on investment (ROI). Answer: F Difficulty: 2 Medium Learning Objective: 11-01 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 8. A change in sales has no effect on margin and turnover. Answer: F Difficulty: 2 Medium Learning Objective: 11-01 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 9. Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is less than 12%. Answer: F Difficulty: 2 Medium Learning Objective: 11-01 Learning Objective: 11-02

Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 10. If a company contains a number of investment centers of differing sizes, return on investment (ROI) should be used rather than residual income to rank the financial performance of the divisions. Answer: T Difficulty: 2 Medium Learning Objective: 11-01 Learning Objective: 11-02 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 11. ROI and residual income are tools used to evaluate managerial performance in investment centers. Answer: T Difficulty: 1 Easy Learning Objective: 11-01 Learning Objective: 11-02 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 12. Residual income should be used to evaluate an investment center rather than a cost or profit center. Answer: T Difficulty: 2 Medium Learning Objective: 11-02 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 13. Residual income can be used most effectively in comparing the performance of divisions of different size. Answer: F Difficulty: 2 Medium Learning Objective: 11-02 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: [QUESTION] 14. Residual income is the difference between net operating income and the product of average operating assets and the minimum rate of return. Answer: T Difficulty: 1 Easy Learning Objective: 11-02 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 15. Move time is considered non-value-added time. Answer: T Difficulty: 1 Easy Learning Objective: 11-03 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 16. If the MCE is equal to 0.6, then 60% of the time a unit is in process is spent on activities that add value to the product. Answer: T Difficulty: 1 Easy Learning Objective: 11-03 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 17. A manager would generally like to see a trend indicating a decrease in setup time. Answer: T Difficulty: 1 Easy Learning Objective: 11-03 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 18. Throughput time is the amount of time required to move a completed unit from the factory floor to the warehouse. Answer: F Difficulty: 1 Easy Learning Objective: 11-03

Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 19. A manufacturing cycle efficiency (MCE) ratio of less than 1.00 is desirable because this is the ratio of non-value-added time to throughput time. Answer: F Difficulty: 2 Medium Learning Objective: 11-03 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 20. A manufacturing cycle efficiency (MCE) of less than one is impossible. Answer: F Difficulty: 2 Medium Learning Objective: 11-03 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 21. Queue time is considered non-value-added time. Answer: T Difficulty: 1 Easy Learning Objective: 11-03 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 22. Inspection Time is generally considered to be value-added time. Answer: F Difficulty: 1 Easy Learning Objective: 11-03 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

[QUESTION] 23. A balanced scorecard consists of a report showing a performance measure such as ROI or residual income for all of the divisions in a company that generate profits. Answer: F Difficulty: 2 Medium Learning Objective: 11-04 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 24. If a strategy is not working, it should become evident on the balanced scorecard when some of the predicted effects don’t occur. Answer: T Difficulty: 1 Easy Learning Objective: 11-04 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 25. Financial measures such as ROI are generally better than nonfinancial measures of key success drivers such as customer satisfaction as leading indicators of future financial performance. Answer: F Difficulty: 1 Easy Learning Objective: 11-04 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 26. In essence, a balanced scorecard lays out a theory of how the company can take concrete actions to attain its desired outcomes. The strategy should seem plausible, but it should be regarded as only a theory. Answer: T Difficulty: 1 Easy Learning Objective: 11-04 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 27. The performance measures on a balanced scorecard tend to fall into four groups: financial measures, customer measures, internal business process measures, and learning and growth measures. Answer: T

Difficulty: 1 Easy Learning Objective: 11-04 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 28. Financial measures such as ROI and residual income as well as operating measures may be included in a balanced scorecard. Answer: T Difficulty: 1 Easy Learning Objective: 11-04 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 29. A balanced scorecard contains both customer and internal business process performance measures because improvements in internal business process should result in improvements in customer satisfaction. Answer: T Difficulty: 2 Medium Learning Objective: 11-04 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 30. Incentive compensation for employees, such as bonuses, should be tied to balanced scorecard performance measures only if managers are confident that the performance measures are easily manipulated by those being evaluated. Answer: F Difficulty: 1 Easy Learning Objective: 11-04 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 31. If the balanced scorecard is correctly constructed, the performance measures should be independent of each other so that bad performance on one measure will not result in bad performance on another performance measure. Answer: F Difficulty: 2 Medium Learning Objective: 11-04 Topic Area:

Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 32. Financial measures tend to be lag indicators that report on the results of past actions. Answer: T Difficulty: 1 Easy Learning Objective: 11-04 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 33. If improvement in a performance measure on a balanced scorecard should lead to improvement in another performance measure, but does not, then employees must work harder. Answer: F Difficulty: 2 Medium Learning Objective: 11-04 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 34. A profit center is responsible for generating revenue, but it is not responsible for controlling costs. Answer: F Difficulty: 2 Medium Learning Objective: Other topics Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 35. A cost center is a responsibility center. Answer: T Difficulty: 1 Easy Learning Objective: Other topics Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION]

36. The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he has control. Answer: T Difficulty: 1 Easy Learning Objective: Other topics Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 37. Under a responsibility accounting system, fewer expenses are charged against managers the higher one moves upward in an organization. Answer: F Difficulty: 2 Medium Learning Objective: Other topics Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Multiple Choice [QUESTION] 38. Which of the following would not be included in operating assets in return on investment calculations? A) Cash. B) Accounts Receivable. C) Equipment D) Factory building rented to (and occupied by) another company. Answer: D Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 39. Which of the following would be an argument for using the gross cost of plant and equipment as part of operating assets in return on investment computations? A) It is consistent with the computation of net operating income, which includes depreciation as an operating expense. B) It is consistent with the balance sheet presentation of plant and equipment. C) It eliminates the age of equipment as a factor in ROI computations. D) It discourages the replacement of old, worn-out equipment because of the dramatic, adverse effect on ROI. Answer: C Difficulty: 2 Medium Learning Objective: 11-01 Topic Area: Bloom’s: Understand

AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 40. Which of the following will not result in an increase in return on investment (ROI), assuming other factors remain the same? A) A reduction in expenses. B) An increase in net operating income. C) An increase in operating assets. D) An increase in sales. Answer: C Difficulty: 2 Medium Learning Objective: 11-01 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 41. Some investment opportunities that should be accepted from the viewpoint of the entire company may be rejected by a manager who is evaluated on the basis of: A) return on investment. B) residual income. C) contribution margin. D) segment margin. Answer: A Difficulty: 2 Medium Learning Objective: 11-01 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 42. Which of the following would be considered an operating asset in return on investment computations? A) Land being held for plant expansion. B) Treasury stock. C) Accounts receivable. D) Common stock. Answer: C Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION]

43. Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment? Return on Investment A) Yes B) No C) Yes D) No Answer: D Difficulty: 3 Hard Learning Objective: 11-01 Learning Objective: 11-02 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Residual Income Yes Yes No No

[QUESTION] 44. Which of the following performance measures will increase if inventory decreases and all else remains the same? Return on Investment A) Yes B) No C) Yes D) No Answer: A Difficulty: 2 Medium Learning Objective: 11-01 Learning Objective: 11-02 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Residual Income Yes Yes No No

[QUESTION] 45. All other things equal, which of the following would increase a division's residual income? A) Increase in expenses. B) Decrease in average operating assets. C) Increase in minimum required return. D) Decrease in net operating income. Answer: B Difficulty: 2 Medium Learning Objective: 11-02 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION]

46. Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets? A) return on investment B) transfer pricing C) the contribution approach D) residual income Answer: D Difficulty: 1 Easy Learning Objective: 11-02 Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 47. Which of the following will increase a company's manufacturing cycle efficiency (MCE)? Decrease in Inspection Time A) Yes B) Yes C ) No D ) No Answer: A Difficulty: 2 Medium Learning Objective: 11-03 Topic Area: Bloom’s: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Decrease in Queue Time Yes No Yes No

[QUESTION] 48. A segment of a business responsible for both revenues and expenses would be called: A) a cost center. B) an investment center. C) a profit center. D) residual income. Answer: C Difficulty: 1 Easy Learning Objective: Other topics Topic Area: Bloom’s: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [QUESTION] 49. Othman Inc. has a $800,000 investment opportunity with the following characteristics: Sales..............................

$2,240,00

Contribution margin ratio Fixed expenses..............

0 50% $1,008,00 0

of sales

The margin for this investment opportunity is closest to: A) 50.0% B) 45.0% C) 5.0% D) 55.0% Answer: C Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Apply AACSB: Analytic AICPA: BB Critical Thinking AICPA: FN Measurement Refer To: CH11-Ref Feedback: Contribution margin (50% × $2,240,000)................ $1,120,000 Fixed expenses....................................................... 1,008,000 Net operating income.............................................. $112,000 Margin = Net operating income ÷ Sales = $112,000 ÷ $2,240,000 = 5.0% [QUESTION] 50. Runyon Inc. reported the following results from last year’s operations: Sales................................ Variable expenses............ Contribution margin.......... Fixed expenses................ Net operating income.......

$16,800,000 12,230,000 4,570,000 3,394,000 $1,176,000

The company’s average operating assets were $7,000,000. Last year's turnover was closest to: A) 0.42 B) 14.29 C) 0.07 D) 2.40 Answer: D Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Apply AACSB: Analytic AICPA: BB Critical Thinking AICPA: FN Measurement Refer To: CH11-Ref Feedback: Turnover = Sales ÷ Average operating assets = $16,800,000 ÷ $7,000,000 = 2.40 [QUESTION] 51. Tennill Inc. has a $1,400,000 investment opportunity with the following characteristics:

Sales.............................. Contribution margin ratio Fixed expenses..............

$4,480,00 0 40% $1,657,60 0

of sales

The ROI for this year's investment opportunity considered alone is closest to: A) 8.1% B) 128.0% C) 3.0% D) 9.6% Answer: D Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Apply AACSB: Analytic AICPA: BB Critical Thinking AICPA: FN Measurement Refer To: CH11-Ref Feedback: Contribution margin (40% × $4,480,000)................ $1,792,000 Fixed expenses....................................................... 1,657,600 Net operating income.............................................. $134,400 ROI = Net operating income ÷ Average operating assets = $134,400 ÷ $1,400,000 = 9.6% [QUESTION] 52. Youns Inc. reported the following results from last year’s operations: Sales................................ Variable expenses............ Contribution margin.......... Fixed expenses................ Net operating income.......

$10,500,000 6,610,000 3,890,000 3,260,000 $630,000

The company’s average operating assets were $5,000,000. At the beginning of this year, the company has a $1,400,000 investment opportunity that involves sales of $2,800,000, fixed expenses of $616,000, and a contribution margin ratio of 30% of sales. If the company pursues the investment opportunity and otherwise performs the same as last year, the combined turnover for the entire company will be closest to: A) 9.50 B) 1.64 C) 2.66 D) 2.08 Answer: D Difficulty: 1 Easy Learning Objective: 11-01 Topic Area: Bloom’s: Apply AACSB: Analytic AICPA: BB Critical Thinking AICPA: FN Measurement

Refer To: CH11-Ref Fee...