set 1

Performance Evaluation and the Balanced Scorecard

12.1-1 Small companies tend to use centralized decision making.

Answer: True LO: 12-1 Diff: 1 EOC: S12-1

12.1-2 Companies that decentralize split their operations into different divisions or operating units.


12.1-3 Decentralization allows top management to concentrate on long-term strategic planning.


12.1-4 Decentralization allows top management to hire workers with expert knowledge for each business unit.


12.1-5 Decentralization helps keep a company’s costs down since each business unit may have its own purchasing department.

Answer: False LO: 12-1 Diff: 2 EOC: S12-1

12.1-6 Which of the following is a potential disadvantage of decentralization?A. BenchmarkingB. Duplication of costs C. Provides feedbackD. Provides training

Answer: B LO: 12-1 Diff: 2 EOC: S12-1

12.1-7 Which of the following is a potential advantage of decentralization?A. BenchmarkingB. Promotes goal congruence and coordinationC. Provides feedbackD. Provides training

Answer: D LO: 12-1 Diff: 2 EOC: S12-1

12.1-8 The Frito-Lay division of PepsiCo is most likely treated as a(n):A. cost center.B. investment center.C. profit center.D. revenue center.


1

12.1-9 The production line at Gateway Computers is most likely treated as a(n):A. cost center.B. investment center.C. profit center.D. revenue center.

Answer: A LO: 12-1 Diff: 2 EOC: S12-2

12.1-10 The central reservation office at American Airlines is most likely treated as a(n):A. cost center.B. investment center.C. profit center.D. revenue center.


12.1-11 A product line at Coca-Cola (such as the Diet Coke product line) is most likely treated as a(n):A. cost center.B. investment center.C. profit center.D. revenue center.

Answer: C LO: 12-1 Diff: 2 EOC: S12-212.1-12 The manager of the Midwest sales region at Pace Food would be in charge of a(n):

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


12.1-13 The manager of the corporate division of Hollister would be in charge of a(n):A. cost center.B. investment center.C. profit center.D. revenue center.


12.1-14 The manager of a local Wal-Mart would be in charge of a(n):A. cost center.B. investment center.C. profit center.D. revenue center.

Answer: C LO: 12-1 Diff: 1 EOC: S12-3

12.1-15 The manager of the accounting department at Nike would be in charge of a(n):A. cost center.B. investment center.C. profit center.D. revenue center.


12.1-16 The manager of the Walt Disney World Resorts ( a corporate division) would be in charge of a(n):A. cost center.B. investment center.C. profit center.D. revenue center.

Answer: B LO: 12-1 Diff: 1 EOC: S12-312.2-1 Performance evaluation systems provide top management with a framework for maintaining

control over the organization.

Answer: True LO: 12-2 Diff: 2 EOC: E12-16

12.2-2 Comparing company results against industry benchmarks is often less useful than comparing actual results against budget amount.

Answer: False LO: 12-2 Diff: 2 EOC: E12-16

12.2-3 Comparing a company’s achievements against best practices in the industry is called benchmarking.


12.2-4 Financial measures are lead indicators for companies.


12.2-5 Companies benchmark their performance against the performance of their competitors and against their own past performance.


12.2-6 Which of the following goals of a performance evaluation system is accomplished when targetsare compared to actual results?A. Communicating company’s expectationsB. Motivating managersC. Promoting goal congruenceD. Providing feedback


12.2-7 Which of the following goals of a performance evaluation system is accomplished when subunit managers are provided with performance targets?A. BenchmarkingB. Communicating company’s expectationsC. Promoting goal congruenceD. Providing feedback


12.2-8 Which of the following goals of a performance evaluation system is accomplished when the company’s actual results are compared to industry standards?A. BenchmarkingB. Motivating unit managersC. Promoting goal congruenceD. Providing feedback


12.2-9 Which of the following goals of a performance evaluation system is accomplished when bonuses are provided to subunit managers who achieve performance targets?A. BenchmarkingB. Motivating unit managersC. Promoting goal congruenceD. Communicating expectations

Answer: B LO: 12-2 Diff: 2 EOC: E12-16

12.2-10 Which of the following goals of a performance evaluation system is accomplished when subunit performance targets are aligned with company strategy?A. BenchmarkingB. Communicating expectationsC. Promoting goal congruenceD. Providing feedback

Answer: C LO: 12-2 Diff: 2 EOC: E12-16

12.2-11 Which of the following goals of a performance evaluation system is accomplished when a company’s actual results are compared to the results of competitors?A. Motivating unit managersB. Promoting goal congruenceC. BenchmarkingD. Communicating expectations


12.2-12 Corrective actions are sometimes taken as a result of which of the following goals of a performance evaluation system?A. BenchmarkingB. Communicating expectationsC. Promoting goal congruenceD. Providing feedback

Answer: D LO: 12-2 Diff: 2 EOC: E12-16

12.2-13 When measuring a company’s performance, which of the following is a lag indicator?A. Operational measuresB. Financial measuresC. Outcome measuresD. Both A and B are correct

Answer: B LO: 12-2 Diff: 2 EOC: E12-1612.2-14 Providing subunit managers with performance results and comparing targets to actual results

would be an example of:A. promoting goal congruence and coordination.B. motivating managers.C. providing feedback.D. benchmarking.

Answer: C LO: 12-2 Diff: 2 EOC: S12-4

12.2-15 Comparing actual results to the results of competitors and comparing actual results to industry standards would be an example of:A. promoting goal congruence and coordination.B. motivating managers.C. providing feedback.D. benchmarking.


12.2-16 Aligning subunit performance targets with company strategy would be an example of:A. promoting goal congruence and coordination.B. motivating managers.C. providing feedback.D. benchmarking.


12.2-17 Providing bonuses to subunit managers who achieve performance targets would be an example of:

A. promoting goal congruence and coordination.B. motivating managers.C. providing feedback.D. none of the above.


12.3-1 The balanced scorecard considers both financial and operational performance measures.


12.3-2 Customer satisfaction, operational efficiency, and employee excellence are often measured as part of the balanced scorecard approach.


12.3-3 The ultimate purpose of the balanced scorecard is to give management a balanced view of the company’s performance.


12.3-4 KPI in the Balanced Scorecard stands for Key Performance Indicator.


12.3-5 Operations is one factor of the internal business perspective of the Balanced Scorecard.


12.3-6 Which of the following is the name given to the approach that recognizes that both financial and operational performance measures should be considered when evaluating company performance?A. The financial and operational approachB. The total approachC. The balanced scorecard approachD. The complete approach


12.3-7 Which of the following perspectives from the balanced scorecard helps managers answer the question, “How do we look to shareholders?”A. Learning and growth perspectiveB. Internal business perspectiveC. Customer perspectiveD. Financial perspective


12.3-8 Which of the following perspectives from the balanced scorecard focuses on continuing to improve and create value?A. Learning and growth perspectiveB. Internal business perspectiveC. Customer perspectiveD. Financial perspective

Answer: A LO: 12-3 Diff: 2 EOC: E12-19

12.3-9 Which of the following perspectives from the balanced scorecard focuses on determining if customers are happy after the sale takes place?A. Learning and growth perspectiveB. Internal business perspectiveC. Customer perspectiveD. Financial perspective


12.3-10 Which of the following perspectives from the balanced scorecard focuses on determining the company’s “climate for action?”A. Learning and growth perspectiveB. Internal business perspectiveC. Customer perspectiveD. Financial perspective


12.3-11 Return on investment and revenue growth would be examples of:A. financial perspective.B. customer perspective.C. internal business perspective.D. learning and growth perspective.


12.3-12 The number of employee suggestions implemented and percentage of the sales force with access to real-time inventory levels would be examples of:

A. financial perspective.B. customer perspective.C. internal business perspective.D. learning and growth perspective.


12.3-13 The number of warranty claims and the number of new products developed would be examples of:

A. financial perspective.B. customer perspective.C. internal business perspective.D. learning and growth perspective.


12.3-14 The percentage of market share and customer satisfaction ratings would be examples of:A. financial perspective.B. customer perspective.C. internal business perspective.D. learning and growth perspective.


12.3-15 Cash flows from operations and gross margin growth would be examples of:A. financial perspective.B. customer perspective.C. internal business perspective.D. learning and growth perspective.


12.3-16 New product development time and the percent of products with on-line help manuals would be examples of:

A. financial perspective.B. customer perspective.C. internal business perspective. D. learning and growth perspective.


12.4-1 Responsibility accounting performance reports capture the financial performance of cost, revenue and profit centers.


12.4-2 The difference between actual results and budgeted amounts is called a variance.


12.4-3 Cost center performance reports typically focus on the static budget variance.


12.4-4 Management by perception is used to determine which variances to investigate.


12.4-5 Revenue center performance reports often highlight both the flexible budget variance and the sales volume variance.


12.4-6 Which of the following responsibility centers use a performance report that compares only actual revenues and budgeted revenues?

A. Cost centerB. Revenue centerC. Investment centerD. All of the above


12.4-7 What is it called when managers look at the size of the variances between actual results and budgeted amounts in order to determine which variances should be investigated?A. Management by varianceB. Management by budgetC. Management by exceptionD. Management by decision


12.4-8 The difference in dollars between amounts in the static budget and the flexible budget is called the:A. flexible budget variance.B. sales volume variance.C. static budget variance.D. actual variance.


12.4-9 The difference between amounts in the static budget and the flexible budget for a revenue center is caused by which of the following?A. The cost of salesB. The selling price per unitC. The number of units sold differs from planned sales levelsD. Both the selling price and the number of units sold


12.4-10 What is the cause of a favorable sales volume variance for revenues?A. Actual net income for the subunit is greater than budgeted net income.B. Actual sales in dollars are greater than the master budget sales in dollars.C. Actual sales in dollars are less than the static budget sales in dollars.D. The flexible budget sales in dollars are greater than the static budget sales in dollars.


12.4-11 The performance evaluation of cost centers is typically based on which of the following?A. Sales volume varianceB. ROIC. Flexible budget varianceD. Static budget variance


12.4-12 The performance evaluation of a cost center is typically based on its:A. static budget variance.B. flexible budget variance.C. return on investment.D. sales volume variance.


12.5-1 The duties of an investment center manager are similar to those of a CFO.


12.5-2 Companies evaluate investment centers the way they evaluate profit centers.

Answer: False LO: 12.5-2 Diff: 2 EOC: S12-8

12.5-3 Return on Investment (ROI) is defined as operating income divided by total assets.

Answer: True LO: 12.5-3 Diff: 2 EOC: S12-9

12.5-4 The sales margin is operating income divided by sales.


12.5-5 Residual Income (RI) equals operating income less minimum acceptable income.


12.5-6 Economic Value Added (EVA. is a special type of Return on Investment (ROI) calculation.


12.5-7 When calculating Economic Value Added (EVA), the weighted average cost of capital replaces the target Return on Investment (ROI) as the expected rate of return.

Answer: True LO: 12-5 Diff: 2 EOC: S12-1312.5-8 Assume division 1 of the XYZ Company had the following results last year (in thousands).

Management’s required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.

Sales $5,000,000Operating Income 1,000,000Total assets 10,000,000Current liabilities 500,000

What is the division’s sales margin?A. 5%B. 10%C. 20%D. 50%

Answer: C LO: 12-5 Diff: 2 EOC: P12-26A

12.5-9 Assume division 1 of the XYZ Company had the following results last year (in thousands). Management’s required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.


What is the division’s capital turnover?A. 5%B. 10%C. 20%D. 50%

Answer: D LO: 12-5 Diff: 2 EOC: P12-26A



What is the division’s Return on Investment (ROI)?A. 5%B. 10%C. 20%D. 50%

Answer: B LO: 12-5 Diff: 2 EOC: P12-26A



What is the division’s Residual Income (RI)?A. $0B. $200,000C. $500,000D. $800,000




What is the division’s Economic Value Added (EVA)?A. $60,000B. $130,000C. $270,000D. $430,000


12.5-13 Assume the Bosc division of the Great Pear Company had the following results last year (in thousands). Managements’ required rate of return is 12% and the weighted average cost of capital is 9%. Its effective tax rate is 30%.

Sales $4,000,000Operating Income 800,000Total assets 5,500,000Current liabilities 700,000

What is Bosc division’s sales margin?A. 14.55%B. 20.00%C. 72.73%D. 87.50%

Answer: B LO: 12-5 Diff: 2 EOC: P12-29B



What is Bosc division’s capital turnover?A. 14.55%B. 20.00%C. 72.73%D. 87.50%

Answer: C LO: 12-5 Diff: 2 EOC: P12-29B



What is Bosc division’s Return on Investment (ROI)?A. 14.55%B. 20.00%C. 72.73%D. 87.50%

Answer: A LO: 12-5 Diff: 2 EOC: P12-29B



What is Bosc division’s Residual Income (RI)?A. $50,000B. $140,000C. $336,000D. $360,000

Answer: B LO: 12-5 Diff: 2 EOC: P12-29B



What is Bosc division’s Economic Value Added (EVA)?A. $50,000B. $128,000C. $140,000D. $336,000


12.5-18 The data for KubbyCo’s Division A is as follows:

Sales $8,500,000Operating Income $1,700,000Total Assets $10,000,000Current Liabilities $500,000Target Rate of Return 10%Cost of Capital 8%

What is KubbyCo’s Division A sales margin?A. 20%B. 85%C. 17%D. 5%

Answer: A LO: 12-5 Diff: 2 EOC: P12-26A



What is Division A’s capital turnover?A. 20%B. 17%C. 85%D.117%




What is Division A’s return on investment?A. 17.00%B. 5.88%C. 17.89% D. 85.00%




What is Division A’s residual income?A. $375,000B. $250,000C. $350,000D. None of the above


12.A1-1 Typically, service department costs are charged equally to each subunit.

Answer: False LO: 12A-1 Diff: 2 EOC: Appendix

12.A2-1 Cost drivers are often used to allocate service department costs to subunits.

Answer: True LO: 12A-2 Diff: 2 EOC: Appendix

12.A3-1 Two service department allocation methods are the step-down and reciprocal methods.

Answer: True LO: 12A-3 Diff: 2 EOC: Appendix

Additional Problems (also available online)

12.4-13 Abba had the following financial results for last month. Which type of responsibility center do these financial results reflect?

Abba Subunit Actual Flexible BudgetFlexible Budget

Variance(U or F)

% of Variance(U or F)

Direct materials $ 30,000 $ 28,000 $ 2,000 U 7.14% UDirect labor 15,000 14,000 1,000 U 7.14% UIndirect labor 25,000 22,000 3,000 U 13.64% UUtilities 12,000 10,000 2,000 U 20.0% UDepreciation 25,000 25,000 0 0Repairs andMaintenance 4,000 5,000 1,000 F 20.00% FTotal $111,000 $104,000 $ 7,000 U 6.73% U

A. Revenue centerB. Profit centerC. Investment center

D. Cost center


12.4-14 Beta had the following financial results for last month. What type of responsibility center do these financial results reflect?

One store Actual Flexible Budget

Flexible BudgetVariance(U or F)

% of Variance(U or F)

Revenues $220,000 $200,000 $ 20,000 F 10.00% FOperating Expenses 80,000 70,000 10,000 U 14.29% UIncome from operations before service dept. charges 140,000 130,000 10,000 F 7.69% FService department charges 40,000 40,000 0 0Income from operations 100,000 90,000 10,000 F 11.11% F

A. Revenue centerB. Profit centerC. Investment centerD. Cost


12.4-15 Dana had the following financial results for last month. What type of responsibility center do these results reflect?

Dana Co. –Subunit XRevenue by Product Actual

FlexibleBudget

VarianceFlexibleBudget

SalesVolumeVariance

Static(Master)Budget

WD-40 $ 630,000 $ 10,000 F $ 620,000 $ 20,000 F $ 600,000WD-60 520,000 30,000 U 550,000 40,000 F 510,000WD-80 125,000 5,000 U 130,000 10,000 U 140,000QD-40 225,000 25,000 F 200,000 40,000 U 240,000QD-60 425,000 5,000 F 420,000 20,000 F 400,000Total $1,925,000 $ 5,000 F $1,920,000 $ 30,000 F $1,890,000

A. Revenue centerB. Profit centerC. Investment center

D. Cost center


12.5-22 Assume division 1 of the ABC Company had the following results last year (in thousands).Management’s required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.

Sales $10,000,000Operating Income 2,000,000Total assets 20,000,000Current liabilities 1,000,000

What is the division’s sales margin?A. 10%B. 20%C. 40%D. 50%

Answer: B 20% ($2,000,000/$10,000,000)

LO: 12-5 Diff: 2 EOC: E12-21, P12-25A

12.5-23 Assume division 1 of the ABC Company had the following results last year (in thousands).Management’s required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.


What is the division’s capital turnover? A. 10% B. 20% C. 40% D. 50%

Answer: D 50% ($10,000,000/$20,000,000)

LO: 12-5 Diff: 2 EOC: E12-21, P12-25ª

12.5-24 Assume division 1 of the ABC Company had the following results last year (in thousands). Management’s required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.


What is the division’s Return on Investment (ROI)? A. 10% B. 20% C. 40% D. 50%

Answer: A 10% ($2,000,000/$20,000,000)

LO: 12-5 Diff: 2 EOC: E12-21, R12-24A



What is the division’s Residual Income (RI)?A. $800,000B. $400,000C. $260,000D. $1,000,000

Answer: B $400,000 ($2,000,000 – [8% x $20,000,000])

LO: 12-5 Diff: 3 EOC: E12-22, P12-24A



What is the division’s Economic Value Added (EVA)?A. $800,000B. $400,000C. $260,000D. $1,000,000

Answer: C $260,000 ($2,000,000 x 70%) – ([$20,000,000 - $1,000,000] x 6%)

LO: 12-5 Diff: 3 EOC: E12-22, P12-24A

12.5-27 Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements’ required rate of return is 10% and the weighted average cost of capital is 8%. Its’ effective tax rate is 30%.


What is Apple division’s sales margin?A. 11.11%B. 16.67%C. 33.34%D. 66.67%

Answer: B 16.67% ($500,000/$3,000,000)

LO: 12-5 Diff: 2 EOC: E12-21, P12-25A



What is Apple division’s capital turnover?A. 11.11%B. 16.67%C. 33.34%D. 66.67%

Answer: D 66.67% ($3,000,000 / $4,500,000)

LO: 12-5 Diff: 2 EOC: E12-21, P12-25A



What is Apple division’s Return on Investment (ROI)?A. 11.11%B. 16.67%C. 33.34%D. 66.67%

Answer: A 11.11% ($500,000/$4,500,000)

LO: 12-5 Diff: 2 EOC: E12-21, R12-24ª



What is Apple division’s Residual Income (RI)?A. $22,500B. $50,000C. $28,000D. $14,000

Answer: B $50,000 ($500,000 – [10% x $4,500,000])

LO: 12-5 Diff: 3 EOC: E12-22, P12-24A



What is Apple division’s Economic Value Added (EVA)?A. $22,500B. $50,000C. $28,000D. $14,000

Answer: D $14,000 ($500,000 x 70%) – ([$4,500,000 - $300,000] x 8%)

LO: 12-5 Diff: 3 EOC: E12-22, P12-24A

12.4-16 The data for the commercial sales division of Biggy Co. is as follows:

Sales: $4,250,000 Target Rate of Return: 10%Operating Income: $850,000 Average Weighted Cost of Capital: 10%Total Assets: $5,000,000Current Liabilities: $250,000

What is the commercial division’s sales margin?A. 5%B. 17%C. 20%D. 85%




What is the commercial division’s capital turnover?A. 117%B. 85%C. 20%D. 17%




What is the commercial division’s return on investment?A. 5.88%B. 17.00%C. 17.89%D. 35.78%




What is the commercial division’s residual income?A. $250,000B. $280,000C. $350,000D. $375,000


set 1

Business

cost center

revenue center

investment center

profit center

feedback answer

training answer

performance evaluation

past performance